Glen Jordan, Director of IMB Financial Services, discusses how reckless credit in the unsecured loan sector is at the centre of the major business failures in African Bank and Steinhoff, and how it is just a matter of time until the next big player’s bubble bursts.
A cursory glance at credit bureau data released by the National Credit Regulator (NCR) in December 2017 paints a somewhat rosy picture. The proportion of South Africans with impaired credit records is 39.1% – the lowest level it has been at in several years.
However, dig a little deeper into NCR’s aggregate data by separating the relatively healthy debt of the so-called wealthy, in areas such as mortgages from the distressed credit situation in unsecured lending where the poor majority battle, and an entirely different and alarming picture emerges. South Africa is rushing headlong into another major corporate collapse in the near future.
According to NCR’s data, the amount of credit and store card debt in deep arrears (payments that have been due for 120 days or more) is rapidly approaching R18 billion. Considering that gross domestic product, or economic, growth remains almost stagnant at the same time unemployment levels are on the rise, any company that has a major exposure in the unsecured lending sector is in real danger of going the same way as African Bank and Steinhoff.
The lessons of the past are being roundly ignored, or conveniently forgotten, in the pursuit of short-term profit for the books. African Bank Investments Limited’s (Abil) fall from one of the darlings in the South African banking industry to a well-publicised collapse into curatorship has been well documented. By aggressively pursuing micro lending and unsecured loans, Abil managed to double its annual profits from R660 million in 2003 to R1.56 billion in 2008. But, by August 2014, Abil’s shares were suspended from the JSE and the business was placed into curatorship by the South African Reserve Bank (SARB), which bought Abil’s bad book for R7 billion in efforts to save the unsecured lender.
The Myburg Report, commissioned to investigate Abil’s demise, attributes the collapse to the Bank’s unsustainable lending practises in unsecured loans and insufficient provision for bad debt. Although the NCR subsequently introduced more stringent criteria for unsecured loans, these criteria merely operate as a box-ticking exercise, with little regard to the growing mountain of bad debt. In fact, in the absence of African Bank, the unsecured loans business seems to be booming, with many other lenders in the financial sector aggressively moving into the space and reaping exceptional returns through unsecured loans to the poor. It seems that many of these companies are blindly repeating the mistakes of the past in their efforts to ensure the poor remain indebted for life, and recent history has shown just how unsustainable these returns are in the long-term when built on the shaky foundation of reckless lending.
The more recent collapse of Steinhoff’s shareholder value late last year is widely regarded as the largest corporate failure on the JSE. Attributed to euphemistically termed “accounting irregularities”, a research report released by the Viceroy Group outlines Steinhoff’s murky business dealings, corporate greed and an obfuscated structure. According to the Viceroy Report, at least two of these “accounting irregularities” relate to when Steinhoff moved two loss making loan providers to off balance-sheet entities, namely JD consumer finance and Capfin.
Through a number of creative and complex internal business transactions, Steinhoff was able to hide these losses from its shareholders and business analysts for a while, but the thread of deceit eventually had to start unravelling and today all can see just how naked this Emperor really is.
I can’t help but think of the oft quoted saying – insanity is repeating the same mistakes and expecting different results. While unsecured lending bore fantastic results for companies such as Steinhoff and African Bank in the short term, it should be plainly apparent that this model is unsustainable and inevitably leads to collapse. One doesn’t have to look too hard in South Africa to find other companies making almost obscene returns from unsecured lending and it is just a matter of time before they join Steinhoff and African Bank as case studies in corporate greed.