The wake-up call that was overdue…….
The fundamental meltdown of African Bank in the past week has been a “rude awakening!”
It was almost an assault on South Africa’s pride of a relatively strong financial system.
Nhlanhla Nene was quick to acknowledge, correctly so, that he cannot possibly ensure no financial institution will have problems.
Economist and editors of financial media, whose credibility is always compromised by the obvious fact that they run neither, are hardly the owners and are unlikely to have any significant financial exposure, were quick to accuse Gill Marcus for her swift move to stop the assault, and the question was asked:”why did she move so quickly to protect the Bank?” Was it because its stakeholders were other big players in the industry, or what is a political, part-nationalization and part government longtime looming process of buying equity in banks.
The truth is that, when everyone is making money, stakeholders getting their yield, clients getting their loans, the government getting its tax portion and auditors coming back next year on a renewed contract, everyone becomes lax about holding a healthy debt/equity ratio and other sound financial measures.
The collapse of value of a financial institution of African Bank’s size does not happen overnight.
Too many decisions, some made and others not, by various people and units, the wrong predictions and probabilities, the hope that things will turn around even when they have not been great for a long time, all these add onto the time bomb that exploded last week.
The indisputable fact is that there is a large demand for small unsecured loans, hence the matching supply.
It is a gap that has been opened by the top four mainstream banks that have deliberately refused to give the working class a shot at a better life.
This is exactly why Capitec has grown at such rapid pace, moving some of the mainstream banks from coveted, favourable top positions.
The same principle that caused millions of people in the United States of America to finally call themselves homeowners for the first time in generations.
Unfortunately, that process was accompanied by the realization of how much can be made in such a market, excess, putting great suspicion to this noble principle, people who could barely afford a single home loan now having qualified for two or three home loans, the greed fed by short-term gains that could be made off poor people, not least comforted by that old assertion that as long as you can service the interest on any debt, you can get as much debt as you can, because in the long run, when capital of the debt is due, we are not here.
But guess what, we are still here.
South Africans, who for long have been rejected and excluded by mainstream banks, despite having jobs, despite having and income, found African Bank and Capitec Bank the only banks that could provide them with a chance to build a home, extend an existing home, send a child to school, even to own a care for the first time, without the insulting demands of collateral.
Unfortunately, this market soon becomes more than a noble cause of not punishing the previously disadvantaged for being previously disadvantaged, into a market of potentially great gains to be made, excess greed and ultimately an overburdened customer with much more debt that he or she can afford.
Ultimately though, when an institution of this magnitude fails, there is always a sense of shared responsibility, hence when the government steps is, there is something natural and necessary about it; the people who sit on boards of these institutions come from among us.
The auditors who are supposed to ratify financial management activities, revenue service’s who are supposed to check whether tax is paid from a correct base, the Reserve Bank that is supposed to check if correct financial balances are adhered to, have all played a part in this institutions fall.
The lesson we have refused to learn since the beginning of the last decade is that there are no short cuts to wealth creation.
Everyone must play by the rules; everyone must play his part honestly and fairly.
Without integrating this reality into our business culture, we are still going to see other giants fall.
This race to the bottom of luring and attempting to retain clients with ridiculous loans and unaffordable debt, extensions with lax rules and loose affordability assessments, can only lead to one eventuality and that is not wealth creation but is destruction.
The blame on this occasion must be shared by all.