Real Estate Investor Magazine South Africa October 2014 | Page 18

COVER STORY

at 23 other applications. Once all had been approved,
the value of the African Bank debt that would be “sidepocketed” was about R4.3bn.
SARB has decided to split the bank into “good” and
“bad” banks. It will impose a 10% “haircut” on those
who hold African Bank’s bonds and its money market
instruments, as well as its wholesale depositors. A
full 90% of what they hold will be transferred over to
the “good bank” that the curator will create to house
African Bank’s better loan book. It has also roped in
SA’s big five banks, along with the Public Investment
Corporation (PIC) and Capitec, to underwrite a R10bn
rights issue to recapitalise the “good bank”. SARB will
then pay R7bn to buy the African Bank loans that are
going into the “bad bank”.
What really happened...
As a lender that does not take deposits, African Bank
did not offer full service offerings found at other
banks. While many South African banks offer similar
“non-secured” loans, they have other profitable lines
of business that should cover any losses. SARB said
the challenges with African Bank were largely due
to its model, which did not include “a diversified set
of products and income streams”, and this made it
vulnerable to a changing or challenging environment.
But, as founder of The Debt Counselling Industry
Portal (theDCI.co.za), Deborah Solomon notes,
18

October 2014 SA Real Estate Investor

it appeared that African Bank relied on continued
cash injections for its survival, which is exactly how a
pyramid scheme survives. “Is African Bank’s business
model perhaps relying on a pyramid scheme where
it requires repeated loans for new investors to sustain
itself ?”
While experts have for years been warning the
market of the dangers of high levels of unsecured
lending, Abil continued to hand out unsecured loans to
people who would never be able to repay them, often
the most vulnerable of South Africans. Its clients are
lower income earners would probably not get a loan
at one of the bigger banks, and approached African
Bank out of desperation. It is chillingly similar to the
NINJa (No Income, No Job) loans that brought about
the sub-prime crisis that sent the global economy into
turmoil. At the time of the bank’s collapse, there were
rumours that clients of the bank did not only have one
loan at a time, but sometimes three or four loans with
the second, third and fourth loans being taken out to
pay off the other loans with the same bank.
But perhaps the most important issue is the interest
rate the bank was charging clients. And that is what
really brought African Bank down. In charging
ludicrous interest on their loans, they cannibilised their
own clients, who defaulted en masse because they were
being financially crippled by the interest rate they were
being charged.
The interest rates charged in South Africa are highly
questionable. The repo rate stands at 5.75% - the
rate at which commercial banks borrow money from
the South African Reserve Bank. However, this is
not the interest South Africa