Alec Hogg
boardroom talk
The brave face South Africa’s micro-lenders put on to last year’s changes in
legislation affecting them has started to crack.
The naked reality was apparent in financial results released during the past
fortnight by three listed micro-lenders Abil, Unifer and Thuthukani which
showed that what was once a licence to print money has turned into an extremely
tough business indeed.
Two years ago Abil (or African Bank Investments Limited to use its full name)
was the most popular of any individual share owned by the country’s unit trusts.
The shares peaked at more than R30 each, with investor expectations reflected
through the stock’s price rated as worth more than 200 times the most recent
year’s profits.
Today you can pick up as many Abil shares as you want at less than a third of
the previous price level and the rating has fallen to just 6,5 times last year’s
earnings. It is now ranked a modest 39th on the list of unit trust holdings.
Smaller competitors Unifer and Thuthukani never quite caught the institutional
investors’ imagination the way Abil did. Nor are they ever likely to after analysts assess the real message in their latest financial results. Much as the
micro-lenders have tried to be up beat about the future, it’s now clear this is
an industry whose structure has altered.
It’s now apparent just how much the business altered after the government put a halt to the system where micro-lenders had first call on the salaries of public
servants, claiming the loan repayment as a monthly salary deduction ranking just
behind tax and pensions.
This early call on the monthly salary cheque made lending out money extremely
low-risk propositions, yet most borrowers were charged a hefty 36% interest
the then maximum rate permissible under the Usury Act.
That changed after the government’s decree that micro-lenders would no longer be allowed to link their repayments to the state’s PERsonnel SALary (Persal) computer system. Logic tells you it will be a lot more difficult for micro- lenders to collect what borrowers owe, with a predictable impact on bad debts.
The government has also adjusted the Usury Act, reducing the maximum interest
rate that can be charged by 11 percentage points to 25%.
This pincer movement of higher bad debts and lower interest returns is starkly
apparent in, particularly, the latest financial results of the two smaller micro-lenders. In its most recent 12 months, Unifer’s bad debt write-off rocketed from R192-million to R313-million. Thuthukani’s went from R14,6-million
to R43-million. Abil’s results, for the first half of the financial year, are
more difficult to assess because of warranties recouped from BoE on a large part
of its loans. But it would be a major surprise if the trend were any different
when the audited results to end September are published. Like the other two,
Abil’s loss provisions are based on estimates that one in 10 loans will not be
repaid; traditional banks work at less than three in 100.
However, Abil CEO Leon Kirkinis believes that changes to the Persal system, as
well as an improved regulatory framework, will most likely mean greater consolidation in the industry and, therefore, an improvement in the growth prospects of the major players.
But for the micro-lending industry the good old days of super profits, which saw
Abil’s share price rise more than 100-fold, are no more than a distant memory.
Potential investors in the shares of companies that operate in this sector should be extremely wary.
Last week’s column, which launched into 27-year-old technology whizz-kid Mark
Shuttleworth, touched some raw nerves. The reaction was more heated than to any
piece of my work in more than two decades in financial journalism.
Dozens of opinions were posted in the comments section under the original story
on the Moneyweb site. These included outright rejection of my arguments from
self-proclaimed racists and “financial prisoners” to others who dismissed my
motive as common jealousy. But many were well-considered, some supportive of
Shuttleworth, others highly critical.
Judging from the reactions Shuttleworth still has plenty of fans. A popular reaction to his 180 mindset shift was to blame it on his youth, others said it
was all the government’s fault. But Shuttleworth’s move to the United Kingdom
also disappointed many who had taken hope from the promise to use his $575- million windfall to create a South African equivalent of the United States’s
Silicon Valley.
I get the feeling there’s a lot more to come in the Shuttleworth saga, but for
now the last word goes to Pick ‘n Pay chairperson Raymond Ackerman. Putting naysayers to the sword in his usual swashbuckling fashion in his company’s 2001
annual report, Ackerman (70) writes: “I do not share the view of many South Africans who seem to delight in predicting doom and gloom. Like any other country, we have our share of problems, some more challenging than others. But
we are also a new democracy, with energy, commitment and a real sense of urgency. We need to give all our people, particularly the youth, every confidence in the future of our country.”
And no, I didn’t put those words in his mouth.