A way to provide banking for the masses without mugging them

Simon Mantell

THE spectacular collapse of African Bank Investments Limited (Abil) was predictable and confirmed that any enterprise whose business model is unsustainable will ultimately fail. It has highlighted not only the incompetence of the investment and assetmanagement businesses that held significant positions in Abil, but also their inability to tell the difference between what is “potentially good for their clients” and what is morally indefensible and destructive.

Reasons offered for the bank’s failure are numerous and include its investment in Ellerines, worsening economic conditions, reckless lending and a lack of diversified products and income streams, which, on the face of it, are very plausible. However, the major reason is the exorbitant interest and hidden charges to which the financially illiterate were subjected. The business model is so morally indefensible it can be described only as a systematic mugging of the masses by modern-day highwaymen in suits.

To put this assertion into perspective: a typical loan of R10,000 with a repayment period of 18 months will attract monthly payments of R1,049 a month, leading to a total repayment of R18,882, which is an effective interest rate of more than 90%. The monthly repayments are cunningly built up with all sorts of add-ons and “hidden optional extras”, ranging from life cover at 15 times the normal rate and a raising fee of 10% of the principal debt, to monthly bank charges that are almost 7% of the same principal debt.

It will be argued that the likes of African Bank are deserving of such high returns because of the significant risk associated with “unsecured” loans. I, and all those employers with blue-collar workers subject to emolument attachment orders — the order of court compelling the employer to deduct a determined monthly amount from a worker’s pay packet and transfer directly to the credit provider until liquidation of the debt — will argue that the loans are not unsecured because as long as a borrower is employed, there is legal recourse via an emolument attachment order.

What has made the Abil model unsustainable is that, notwithstanding such recourse, repayments remain unaffordable, to the extent that many workers would rather resign than be subjected to emolument attachment orders.

In its organised chaos and adversity, SA is still pregnant with business opportunity and Abil’s collapse represents a potential tipping pointing at which the large retail banks can, together with the government, form an institution that can offer credit to the masses of blue-collar workers in a controlled, responsible and affordable manner.

Ironically, retail banks manage their more affluent clients with reasonably tight control and will refuse credit to clients whose inability to service a debt repayment could lead to impairment. Yet, for the poor, credit is easily attainable from the microlenders and retailers selling on credit, and there is scant control, notwithstanding the best intentions of the National Credit Act.

The public-private partnership opportunity that could lead to real black economic empowerment raises the following questions:

Can the government amend a fatally flawed system in a way that will be easy to implement and administer?

Can the commercial banks provide profitable but fair credit to the masses?

Can business owners act in their own and their employees’ best interests and protect them from the iniquitous credit industry?

The urgent requirement for equitable lending practices is based on the following:

The government made a compact with the nation in 1994 that the formally disenfranchised majority would share in the fruits of the economy;

Listed credit-providing retailers and microlending banks provide credit only to individuals who are employed;

The ill-effects of these credit providers’ business models pervade the social fabric of blue-collar families, consigning them to a lifetime of debt;

Most blue-collar workers have multiple loans as well as multiple retail accounts;

With hidden charges, the repayment terms of this credit often attract “effective interest charges” of more than 90%;

Emolument attachment orders are easily obtained, which means an unsecured loan is secure in the sense that an employer becomes obligated to make payment on behalf of the indebted employee to the credit provider;

Blue-collar workers, through no fault of their own, are financially illiterate and innumerate;

Conventional commercial retail banks are

This is the kernel of an idea that can be developed by retail banks serious about profits as well as fair play

aware of the profitability of this market but their overhead structure and lack of experience militate against a successful entry into this market in a conventional sense;

Credit is provided to blue-collar workers where they are personally liable for debt and responsible to settle debt, with the key changes being in the methods of approving credit and the facilitation of the monthly repayments; and

Blue-collar workers need credit like all South Africans, and the only way is to manage it through a single line of credit.

From the government’s side, a first requirement would be to register employers that actively manage employees’ debt and applications for credit as “responsible creditmanaging employers” on a national database. Legislation would make it mandatory for any credit provider to ascertain whether a potential client is employed by an employer on the database. Should credit be provided without the approval of such registered employer, all rights to an emolument attachment order in favour of the credit provider would be waived. This would render such a loan unsecured in the true sense of the word — indiscriminate lending would cease overnight.

A business deciding to proactively assist employees in the management of their single credit facility would register as an employer on the database. It would then negotiate with its commercial bankers to consolidate all the debt of “identified employees” into one line of credit per employee at far more attractive rates than are charged at present. The individual employee would still be ultimately liable for his own line of credit, although the employer would facilitate the monthly payment to the commercial bank in much the same way as facilitating an emolument attachment order. The big difference would be that the repayment is affordable due to fair interest rates and no hidden charges.

The framework of this concept benefits all parties involved. Employees can now access affordable credit at the rates more comparable with those offered to middle-class South Africans, with all debt in one loan and with the outstanding balance clearly apparent.

The commercial banks (the employers’ bankers) will gain access to a large market. Risk exposure is managed by the preselection and identification by employers of low-risk employees whose jobs are secure, which means repayments will be met.

While criticism of the microlending industry has become de rigueur, there has been no attempt to offer practical solutions to empower the masses by bringing them into the real economy in a meaningful way.

This is the kernel of an idea that can be developed by retail banks serious about profits but equally serious about fair play and true empowerment for the masses.

Can the government and the private sector afford to procrastinate any longer?

Mantell runs a BEE level 2 biscuit factory in Cape Town.