When banking and retail collide
QUESTION: ????? How do you eat an elephant? ANSWER: One bite at a time. That’s a lesson that executives at African Bank Investments Limited (Abil) would be wise to remember. Not that Abil has necessarily bitten off more than it can chew. However, it may just be dealing with a bout of indigestion after consuming the furniture retailer Ellerine 12 months ago. Integration is proceeding apace, according to its latest annual report, which also illustrates some of the considerable challenges the deal presents the enlarged group.
Top priority has been to separate the financial services and retail businesses of Ellerine to eradicate cross subsidisation and to introduce Abil standards across the board. It would seem they’re necessary.
Abil has, since its inception, developed a solid business model catering to the borrowing needs of the middle mass market defined as LSM 3-8. That gives it an estimated market segment worth R96bn. Ellerine has traditionally been less discerning and has targeted a broader market, which means Abil’s potential lending universe has swollen to more than R160bn.
It’s a great opportunity. But there’s a lot to learn. “African Bank has substantially more competencies and ability to service the higher LSM clients that Ellerine brings with it, but it has fewer competencies to service the unbanked or informally employed base. As a result, credit extension and sales to the lower segment brands that typically service the informally employed and unbanked clients are under severe pressure due to the over liberal credit extension that occurred prior to Abil taking control of Ellerine and Abil’s resultant tightening of credit criteria,” reads the annual report.
It’s a warning in tighter global credit markets that investors need to heed as the group scrambles to address the weaknesses in credit granting policies in the lower customer segments of Ellerine.