Microlenders Feeling the Pinch after African Bank Folds

Sep 1, 2015 RainFin In the news  News
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Recently, RainFin CEO Sean Emery was asked to comment on the collapse of African Bank and what effects it has had on the microlending market. Take a look at this article published on Rainbow FM

Microlending industry picks up the pieces

Sept 1 – Written by Scott Congdon

The collapse of African Bank, which provided 40% of South Africa’ s unsecured loans, has sent aftershocks throughout the microlending sector.

Hennie Ferreira, CEO of Microfinance South Africa (MFSA), which represents providers of small loans, said the ramifications were “huge and very serious on many levels”.

Picture: MICHAEL ETTERSHANK

African Bank used the same databases as many microfinance companies. This enabled Leon Kirkinis’s failed Midrand-based bank to pick and choose the best customers — clients that hada good track record of repaying loans. Mr Ferreira said the bank’s reckless lending had severe repercussions, with many people now over their heads in debt.

“Those individuals will not be allowed to access credit. That has a ripple effect on the guyswho provide short-term loans,” Mr Ferreira said.

Sean Emery, CEO of Rainfin, an online lending platform that processes about 18 loans a day, said that lenders had become reluctant. “There is structural change because of African Bank,” he said. Lenders had tightened their lending criteria. Rainfin, for example, was demanding that borrowers had zero defaults, judgments or outstanding loans.

It remains to be seen which lender can grab African Bank’s customers, but Capitec is probably at the front of the queue.

Neil Grobbelaar, CEO of Real People Investments, said that investors were understandably “nervous and concerned” about the industry because most of them had been exposed to African Bank. He said access to capital funding would be more difficult until investors regained confidence. Real People Investment has a loan book of about R2bn and 350,000 customers. The flip side is that as the more upright operators tighten up, loan sharks with less scruples may get a boost.

To prevent this, microfinance organisations are asking the National Credit Regulator to increase the cap on interest rates and fees beyond the current 32%.

Intuitively, this would seem to be a licence to rip customers off further because lenders could just charge more, allowing people to sink deeper into debt. But a study by Econometrix — commissioned by MFSA — shows that the current cap has in fact acted as a form of “price control”, affecting borrowers negatively. In the past 18 months, more than 30% of MFSA members closed down, Mr Ferreira said.

Econometrix MD Rob Jeffrey said: “Caps are not an effective way of addressing the real or alleged problems with regard to reckless lending, and they also potentially serve to encourage excessive and misinformed borrowing.”

But borrowers mired in debt thanks to the likes of African Bank might disagree. Allowing lenders to charge higher fees will not help.

This article was first published in Sunday Times: Business Times

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