I have followed the recent collapse of African Bank Investments Limited (Abil) and I think there are some excellent lessons, and positive outcomes – which can be derived from this saga. It can become a great test case for many small businesses.
Some positive things to keep in mind on Abil:
- If we start with a positive, we need to remember that Leon Kirkinis built enormous personal wealth for himself and Abil shareholders between the time it listed in 1998 and the crash this week. A couple of weeks back, Kirkinis was “worth” half a billion rand and he was head of a business which employed 13 000+ people. Make no mistake, Kirkinis is somebody we should be celebrating and we shouldn’t forget that entrepreneurs like him benefit from the fruits of their labour.
- In 2001, Abil was paying R543 million in taxes, in the last fiscal it paid nearly R1.6 billion. This is a business which contributed to the changing face of South Africa in a positive context as well.
- Investec CEO Stephen Koseff, regularly reminds shareholders and analysts that Investec is one of the few banks in the UK that didn’t require a bailout during the tumultuous 2008 – 2010 period where the global financial system appeared to be on the brink of collapse. Giving credit where credit should be due (excuse the pun), Kirkinis managed arguably South Africa’s highest risk financial institution through this period.
These are some of the lessons I have picked up; I would love to hear from the Moneyweb community if they have others:
- The first and most obvious learning that all entrepreneurs can take away from the Abil saga is that while cash is king, cheap cash is the ace. If you read Abil’s consolidated cash flow statement last year, the company was very cash generative and had ended the year with R4.4 billion in the bank, up roughly roughly R400 million from the previous year. Healthy business right? Except that African Bank had told shareholders that it had needed R25 billion in funding facilities to get back on the growth path. In September last year, it issued two bonds for R510 million and R490 million for which it had to pay 285 and 400 basis points above JIBAR (Johannesburg Interbank Agreed Rate). For the layman, this is a bit like prime plus 2.85% or prime plus 4% on your bond or car. What do they say about a banker, an umbrella and a rainy day?
- At the end of 2013, Abil was already scrambling for cash issuing local notes, rights issues, Swiss Franc denominated bonds and shares to the International Finance Corporation. The key lesson here is not to go to the market for R8 billion when you actually need R20 billion. The same lesson applies to any size business: you will enter a death spiral if you are undercapitalised.
- This is probably going to be the most contentious comment in this particular column, but Abil lost sight of its customers – they simply became numbers to sell “stuff” to. I’ve read through the annual reports from 2001 to 2013 and I get the sense of a subtle shift in the language of the reports. If you go to a Capitec branch, they have an in-house rule, that if they can’t take a picture of you, you can’t be a client. The language in the Abil report is interesting when you read the column that says “Deliver Value to Customers” – their idea of adding value is to add eight new products / initiatives to sell to clients. Micro-lending at its core is not bad, but when you tack on a whole lot of other products to desperate clients, you can quickly forget the integrity of what you are offering.
- Entrepreneurship expert Allon Raiz from Raizcorp often speaks about “Shift Questions” which are in effect “Big Picture” questions which entrepreneurs should be asking themselves about their businesses. In 2012, the main discussion which was happening within Abil was “how do we get cheaper funding?”
Abil actually has very attractive deposit products, which are likely to be the cornerstone of the proposed “Good Bank” strategy Abil is talking about rolling out when it resurfaces, In 2013, the company half-heartedly went after the depositor market. However it was easier for it to continue to focus on lending and selling products than dealing with the core issue of cost of funding.
To contextualise this, in 2011 Abil had short-term deposits of R2.9 billion and short-term funding commitments of R1.6 billion. In 2012 it was R2.8 billion in deposits and R4.5 billion in funding. In 2013 that number went from R3 billion in deposits to R8 billion in funding commitments. If you read the notes to the financial statements for the 2013 year, Abil had just R59 million in current account deposits and fixed deposits had actually dropped by nearly 30% from R1.3 billion to R1.08 billion in the year.
A fascinating hindsight number is that for a business that called itself a ‘bank,’ Abil had 2.7 million customers. But, based on these numbers, a customer provided less than R1 100 of funds in a year of depositor capital.
It is so important to know what your “Shift Question” is and not to deflect but rather to answer it.
- A strong board is imperative. Great entrepreneurs build great wealth but a strong board will protect shareholder capital. The man who was responsible for setting the accounting treatment for Abil’s credit vintages – Nithia Nalliah – has been group Chief Financial Officer since October 2006 and is now sitting in the capacity of acting Chief Executive. I don’t know him at all but he has been in a critical role for eight years and the question needs to be asked whether he was a “yes man” to Kirkinis or whether he believed that his accounting treatment of the business was correct. Both will provide insights into the new proposed “Good Bank’ if he remains in the CEO role.
Combined with the fact that Abil’s chief risk officer – Tami Sokutu – went on extended sick leave from September 2013 to January 2014, speaks to the influence that Kirkinis appears to have had within Abil. It’s the entrepreneurship mindset and this is a perfect example of where a board should have stepped in and made sure there was a risk officer in place.
A strong board and a strong CFO are imperative to growing quality sustainable businesses in the long run.
The reality is that hindsight is always going to be a perfect science and I for one will stick my hand up saying that I thought Abil was actually worth a punt at R10 after its rights issue. I called it wrong, but did subsequently publish my views that I thought it was in some trouble.
When all is said and done, we can only learn from these mistakes and hopefully carry the learnings into our own businesses.