Microfinance Practice: [MFP] Re: South Africa's largest microcredit bank collapses

Some of you will be aware that African Bank (ABIL) collapsed at the weekend. Having worked there a little on local finance and SME policy in the last few years, I made contacts with several South African media outlets adn they got in touch earlier this week for interviews and comment. For one radio interview I was asked to prepare a one page summary of my views, which I then took to sending out to anyone else asking for a comment. I paste it below in case anyone is interested in the key issues, so far as I see them at least. Sad story indeed. I was recently invited to guest edit a special edition of the international journal Forum for Social Economics which will be on the topic of microfinance, and my individual contribution will be on 'Microcredit control fraud in South Africa', so if anyone has any comments/corrections or further inside data/info I'm more than happy to correspond privately on this.

Milford Bateman

South Africa's largest microcredit bank – African Bank (ABIL) - collapsed at the weekend

African Bank has its origins in the formation of Baobab Solid Growth in 1994. This company focused on the microfinance market for new black community clients and it quickly grew through the acquisition of a number of businesses operating in this market. It bought a small bank - African Bank - in 1999 and the group opted to change its name to African Bank Investments Limited (ABIL). The group subsequently bought the microloan portfolios of Boland and Saambou banks. African Bank has always paid its senior managers very well, especially its long-time CEO, Leon Kilkiris, who became a multimillionaire and one of the highest profile bankers in South Africa. Awkwardly, the senior managers of African Bank were all from the white, and mainly Afrikaner, community (as at its equally aggressive microcredit bank competitor, Capitec) and they opted to generate the big profits needed to fund and justify their high salaries and bonuses by providing microcredit to the poor black communities at high rates of interest, from 40% up to 60% over one year. But it must be noted that these interest rates and other microloan conditions are considered quite standard in the global microfinance industry today. What this means, importantly, is that African Bank is NOT a payday lender, which is the false idea some senior microfinance practitioners and advocates in South Africa, and elsewhere, have been circulating for some time to try to limit the obvious reputational damage to the failing microfinance model.

African Bank's dividend has been one of the highest in the corporate sector and shareholders – many local and international banking and investment groups – have been very well rewarded. African Bank's dividend yield reached as high as 9.3% in 2008, for example, when it paid out a total dividend (interim plus final dividend) of R2.10 per share. The dividend however slipped to R1.85 in 2009 and remained unchanged at that level for September 2010. More recently, losses were incurred and this threw the business model into reverse, requiring it to raise funds from shareholders and the market. African Bank also began to attract more criticism for its 'continuing white on black' exploitation angle, which seemed wrong when set against a faltering South African economy that somehow seems perfectly capable of spectacularly rewarding/protecting the elite white community of old as much as it is quite unable to assist the wider black community in any meaningful way (unemployment and poverty are higher today than under apartheid).

One of the responses from African Bank to its mounting problems in recent years was to go further than just encouraging millions of poor black South Africans to go into serious and expensive debt, usually to buy needed household goods, clothes and even just food. African Bank began to encourage the poorest clients in the most difficulty to take out new, larger and longer maturity microloans to repay their earlier microloan, leaving a little left over to repay the first couple of new repayments. The client seemed to be out of the debt hole, temporarily at least, but this was not the reason for adopting such a tactic. First, it allowed African Bank's managers to book down another 'new' microloan, so they were happy at being able to meet their bonus targets in spite of the deteriorating situation. Second, it also artificially kept up the repayment rate, which potential investors always like to see. However, the third reason, and the downside faced by society as a result of this deformed Ponzi-style tactic, was that it pushed the structural problem of over-indebtedness into the far future for someone else to deal with, usually the state (like now). So, just as much as on Wall Street, where senior bankers widely deployed this dangerous and unethical form of 'extend and pretend' in the mid 2000s, and which turned out to be a factor in precipitating the 2008 financial crash and state bail-outs into the trillions of dollars, many MFIs in South Africa have bought into the same unethical tactics. This includes not just African Bank, but Capitec is also involved in this too. 'Extend and pretend' is actually rife not just in South Africa, but in many other developing countries where World Bank-mandated deregulated financial systems have taken root, notably in Peru with MiBanco, in Mexico with Banco Compartamos, and in Bangladesh with Grameen Bank, BRAC and their main competitors.

African Bank was once touted in the international development community and global media as the brilliant 'future' of the microcredit movement in South Africa, and across Africa too. It was reflexively praised by the World Bank, DFID, USAID, AfDB, Dambisa Moyo and Muhammad Yunus on the grounds of it turning out millions of thriving micro-entrepreneurs and self-employment ventures. But this uplifting De Soto-esque scenario was found not to exist in practise, as it does not exist anywhere else around the world; after initially funding income-generating micro-projects, for-profit African Bank quickly shifted into disbursing only ultra-high-profit consumption loans. The reaction from the microfinance movement, however, was not to demand real change to reflect an obvious market-driven policy failure, but simply to change the narrative by shifting the goal posts. With apparently similar levels of 'passion' and 'concern for the poor' as before, the microfinance industry began to hold up African Bank as the poster child for a fantastic new movement called 'financial inclusion'. This 'movement', in fact, is largely empty: it is nothing more than a fallback PR effort run from the World Bank that exists mainly to try to save the bloated and developmentally ineffective, but politically and ideologically extremely valuable, global microfinance sector.

African Bank has now collapsed. Fearing the wider systemic consequences, the South African government had no other option but to step in to bail it out. Nearly a billion dollars will now be spent taking over its defaulting microloan portfolio. The plan is that good microloans will be packaged up and sold very cheaply to a consortia of other microcredit banks (good for them). Bad microloans go into a new 'bad bank' owned by the government, which will be run down/sold off over time. South Africa's poor will largely pay for this bail-out, either directly (though their taxes) or indirectly (through further cuts to important basic services), so they got little on the upside but expense microcredit and will now get stuck with the bill for the whole party on the downside.

Since African Bank's founding, and because of extensive deregulation pushed hard by the World Bank, the key stakeholders have been able to enjoy stratospheric returns through high salaries/big bonuses/large dividends/lucrative share and share option sales. Now, after having extracted every possible ounce of value from the institution they expanded into such a large and clearly unsustainable microlender, they were not too worried about passing on what is now nothing more than a stripped carcass to the government to support through the $1 billion bail-out. This is as bad a case as you can find anywhere in the 'new world' of microfinance of what William K Black - the world's leading systematic analyst of the relationship between financial crime, financial structures and incentive mechanisms - calls 'control fraud'. Further details if you want them are here:

http://www.bbc.com/news/business-28741084

http://uk.investing.com/news/economy-news/south-african-central-bank-to-oversee-$940-million-abil-rescue-10481

http://online.wsj.com/articles/south-africa-organizes-capital-injection-for-african-bank-1407685914

http://www.bdlive.co.za/businesstimes/2014/08/10/rants-and-sense-african-bank-s-demise-entirely-predictable

Finally, in the last link you will find a sentence to the effect that ".....microlending has evolved into what Adrian Saville, chief investment officer at Cannon Asset Managers, describes as a "crime against the poor"." Coming from one of South Africa's largest investment companies, not from a known critic of microfinance, this is very heavy stuff indeed.