Unsecured lending is big business giving the bank's investors high returns over the past 10 years. Abil lead the charge on this front.
An €unsecured€ means that loan is risky because money is lent without assets as collateral against the loan. The debtor simply needs to provide proof of an income and a list of expenses and the bank hands over a loan ranging from R500 - R130,000.
Abil made many loans to people that could not, or would not, be able to pay back in the long-term. In bank speak this is called €servicing the loan€. Some loans were at rates as high as 60% per annum. This is unserviceable and often ending in the debtor taking out further loans to pay back existing loans. A vicious cycle.
For example, a middle aged secretary who was granted a loan of R120,000 with monthly repayments of R3,875. She said that her monthly expenses were a mere R750, but in reality they were nearly ten times that on a salary of just R8,000 pm.
The collapse of Abil might have appeared to besudden but in reality, it had been coming for some time. Internationally, unsecured lenders have had a bad debit write-off of 13% annually. In 2004, Abil's loans were under performing by nearly 50% it reported. This should have been the warning sign for the banking industry, yet no action was taken, and its share price kept climbing.
The protracted Marikana strike appears to have been the tipping point for the bank as miners and their families either took or already had loans from the bank.Loans that could not be repaid in large numbers, the straw that broke the camel's back.
The knock- on effect
One of Abil's biggest clients and lenders was Ellerines the furniture retailer. The retailer during the strikes was not selling and filed major losses over the strike period. The furniture retailer was denied credit from the Bank as it cut lending to the subsidiary. The retailer filed for business rescue on August 7th under chapter 11.
The knock on effect of this is that nearly 9000 workers with over 18 years of service to the furniture store chain have a very uncertain future now as many store will be forced to close their doors.
The Central Bank appointed Barclays Africa, FirstRand and fund administrator Public Investment Corporation (PIC) to find ten invertors for a R10 billion-capital raising for Abil. The South African Reserve Bank appointed a PwC executive, Tom Winterboer, as Abil's curator, with the task of bringing life bank to the bank.
The credit regulator defended its oversight of Abil. Against a backdrop of labour unrest in the mining industry and rising fuel and food prices, the regulator said some problems were beyond the bank's control.
The biggest loser of the investors surely is the South the Government Employees Pension Fund (GEPF), managed by the PIC, which holds 186 million shares. The shares were worth R102 million before the crash and after the crash sat at R52 million.