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Unsecured lending: SA sitting on another Steinhoff bubble - expert

Jan 26 2018 06:23
Carin Smith

Cape Town - South Africa is rushing headlong into another major corporate collapse in the near future, according to Glen Jordan, director of IMB Financial Services.

In his view, reckless credit in the unsecured lending sector was at the centre of the major business failures in the former African Bank and Steinhoff. He thinks it is just a matter of time until the next big player’s bubble bursts.

"While unsecured lending bore fantastic results for companies such as Steinhoff and [former] African Bank (Abil) in the short term, it should be plainly apparent that this model is unsustainable and inevitably leads to collapse," warned Jordan.

"One doesn’t have to look too hard in SA to find other companies making almost obscene returns from unsecured lending and it is just a matter of time before they join Steinhoff and [former] African Bank as 'case studies in corporate greed'."

He is basing his argument on data released by the National Credit Regulator (NCR) in December 2017.

Alarming picture

"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, an entirely different and alarming picture emerges," explained Jordan.

According to NCR data, the amount of credit and store card debt in deep arrears - that is payments that have been due for 120 days or more - is rapidly approaching R18bn.

"Considering that gross domestic product (economic growth) remains almost stagnant, while 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," cautioned Jordan.

In his view, the "lessons of the past" are being ignored or "conveniently forgotten in the pursuit of short-term profit for the books".

"As in all things, the law intended to protect consumers is one aspect, but it is really about the implementation thereof. The law creates 'box ticking' as opposed to a fundamental approach," Jordan told Fin24 on Thursday.

"There needs to be an approach of treating a customer fairly. At the moment there are still legal loopholes, and the way some of the rates and fees are structured enable lenders to get around it. We deal with the 'feet on the ground' and I still see consumers not coping."

To him the approach companies have to unsecured lending ends up being like a golden statue, but with feet of clay.

"The fundamental process of [unsecured] lending works 'brilliantly' when they start, because the margins are spectacular. That is why many companies pile into the sector. This approach, however, has a risky bottom and can only hold up for a certain period before it has to give way," he explained.

Steinhoff

As for Steinhoff, Jordan said, although its collapse is "euphemistically" attributed to "accounting irregularities", a research report by the Viceroy Group indicates that 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," said Jordan.

He told Fin24 that, although it is hidden how big a part unsecured lending was in Steinhoff, judging by what the situation turned out to be at African Bank, he would not be surprised if it was a "sizeable chunk".

"Of course [unsecured lending] would not have be the only reason for Steinhoff's collapse, but I think it did play a part. Otherwise, why did they take [these entities] off the balance sheet and hide it?" he asked.

African Bank

Jordan explained that, by aggressively pursuing micro lending and unsecured loans, African Bank (Abil) managed to double its annual profits from R660m in 2003 to R1.56bn in 2008.

Yet, by August 2014, Abil’s shares were suspended from the JSE and the business was placed into curatorship by the SA Reserve Bank (SARB), which bought Abil’s bad book for R7bn 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," said Jordan.

City Press reported in November last year that African Bank is trying to get back on its feet amid tough competition. New CEO Basani Maluleke told the Sunday paper she is looking forward to leading the bank "in disrupting the local market and providing a value offering that doesn’t yet exist".

READ:New African Bank CEO looks to disrupt banking

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 Jordan's view. He claims the unsecured loans sector in SA still seems to be booming.

"It seems that many companies are blindly repeating the mistakes of the past...and recent history has shown just how unsustainable these returns are in the long-term when built on the shaky foundation of reckless lending," Jordan concluded.

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steinhoff  |  african bank  |  credit  |  money  |  sa economy
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