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Providing unsecured, short-term credit can be a messy business. Not only is a company required to navigate the ethical minefield of providing quick finance to the economically marginalised (arguably those least able to afford it); it also demands a particularly audacious approach to risk.
It’s surprising, then, that the word “conservative” is used most frequently by micro-lender Finbond’s CEO Dr Willem van Aardt to describe the mutual bank’s approach to lending.
Van Aardt founded Finbond in 2003 as a bond originating, debt consolidation and bridging finance company offering savings and credit solutions tailored around depositor and borrower requirements rather than the “outdated” institutionalised policies and practices of the big four banks.
With a current market capitalisation of over R2.8bn, a ballsy expansion into the North American loan market and an increase in share value from 44c five years ago to around 400c today, making it one of the top performers on the JSE over the period, Van Aardt's initially self-funded venture has arguably done pretty well.
“The key for us was to understand the one thing that Finbond should focus on and what we could be the best in the world at, and equally importantly, what we cannot be the best at,” he tells finweek.
“We believe that we can be the best focused short-term unsecured lender in the world. Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”
Micro focus
Finbond’s evolution to a narrowly focused microfinance lender was a surprisingly accidental one, Van Aardt adds.
He sold his shares in the JSE-listed micro-lender Thuthukani Group and founded Finbond in 2003, after which the group enjoyed rapid growth over the next four years. Then the global sub-prime mortgage crisis of 2007 hit.
“After this, the South African mortgage origination market declined rapidly as the four major banks lost its appetite for mortgages.
“Our mortgage origination volumes declined by more than 80% in a six-month period and, in order to survive, Finbond had to, for all practical purposes, start a new business in 2008,” he explains.
The company decided at the time to reinvest in the microfinance industry through the 50% acquisition of Blue Chip Finance No.1 – formerly part of Thuthukani – which boasted a network of 57 local branches and owned 100% of Blue Chip Finance Western Cape.
Finbond’s biggest hurdle was to source the appropriate funding to expand. Van Aardt says it was “basically impossible” for a business such as Finbond to raise funding from South African banks and institutions at the time.
It eventually obtained offshore capital from the Dutch Development Finance Corporation (FMO) and Standard Chartered Bank to fund and expand its microfinance operations, leading to the creation of Finbond as it stands today.
Today, Finbond describes its microcredit products as servicing the underbanked and underserved portion of the market that is actively seeking credit solutions but which remains largely underserviced due to traditional banks’ concentration on the higher income population brackets.
According to Van Aardt, several factors differentiate Finbond from its domestic peers in the loans market.
It remains an owner-managed business, posts the majority of its earnings in dollars – 53% to be exact – enjoys a surplus cash position, has access to US-based funding and employs conservative credit and liquidity risk management.
“Finbond’s lending practices have been consistently conservative over the past number of years and our rejection or decline rates remain higher than that of our major competitors.
“Detailed affordability calculations are also performed prior to extending any loans in order to determine whether clients can, in fact, afford the loan repayments.
“In line with our conservative approach, additional expense buffers were again included in all affordability assessments,” he tells finweek.
Coming to America
Conservative does not, however, describe the group’s rapidly scaling North American expansion strategy.
Late last year, it fully acquired US-based short-term lender America’s Financial Choice for R99.6m, bringing Finbond’s North American branch network to 247 across 16 states. (It has 408 branches in SA.)
With the acquisition, Finbond’s North American short-term lending division is expected to advance around R3.84bn a year in loans.
At $46bn a year, the alternative financial services market in the US is significantly bigger than the South African market, offering substantial opportunities for the lender.
“The rationale for the North American expansion includes significant growth and consolidation opportunity in the North American short-term lending industry, the diversification of country and political risk, the provision of an effective rand hedge and economies of scale.
“Most of all, it increases our core short-term lending competency,” says Van Aardt.
“Our strategy is to transform Finbond into a focused multinational business diversified across geographies, market segments and products. We want to grow our dollar earnings to about 80% of overall earnings.
Finbond’s strategy is by no means unique, with many other international financial services groups following a similar approach, but our ability to effectively execute strategy is the key differentiator.”
Commenting on the differences between the domestic and the US regulatory environments, Van Aardt observes that, in North America, the rights of both the credit provider and the consumer are more equally balanced, whereas in SA, the regulatory environment is “decidedly pro-consumer”.
In addition, business sentiment in the US is “far more positive” than in SA.
Says Van Aardt: “In the US, we are seeing improved business confidence, job creation, a strong dollar and a business-friendly, robust free market economy.
“SA is experiencing almost the exact opposite with deteriorating business confidence, job losses and declining employment levels, a weakening currency, credit downgrades and no economic growth.”
Along with its US ambitions, the lender indicated its intention to convert its mutual banking licence to a commercial banking licence, transforming the group into a focused mass-market retail bank in SA on the back of its domestic short-term loans business.
Global Credit Ratings’ (GCR’s) recent upgrading of Finbond’s investment-grade ratings is thus a welcome endorsement.
“Credit ratings are important because they communicate the risk associated with a company to customers and investors. An investment-grade credit rating such as Finbond’s indicates a low risk of a credit default, making it an attractive investment,” says Van Aardt.
ABOUT WILLEM VAN AARDT
Best business advice you’ve ever received?
To have faith in God and to believe that you can achieve great things! (Irrespective of what the naysayers and armchair critics say.) Henry Ford said: “If you think you can you can! If you think you can’t you can’t!”
How do you maintain a work/life balance?
I thoroughly enjoy what I do at Finbond. It is now a priority for me to make time for my family and I am disciplined to read and to exercise regularly.
What book are you currently reading?
The Leadership Playbook by Nathan Jamail.
Business books which had the biggest impact on my business philosophy are Good to Great by Jim Collins, Failing Forward by John C. Maxwell, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William N. Thorndike, Winning by Jack Welch, and Today Matters by John C. Maxwell.
What is your favourite meal?
Fillet steak at Gibson’s Steakhouse in Chicago.
Favourite holiday destination?
The Courchevel ski resort in the French Alps.
This article originally appeared in the 1 February edition of finweek. Buy and download the magazine here.
