The recent collapse of African Bank Investments Ltd (ABIL) and subsequent down-grading of our top banks have raised questions about the lending industry in South Africa.
South Africa is often praised for its protective consumer legislations (National Credit Act 34 of 2005 and Consumer Protection Act 68 of 2008) intended to prevent the consumers over-extending debt obligations that cannot be serviced. The National Credit Regulator (NCR) was established as the regulator under the National Credit Act and is responsible for the regulation of the South African credit industry.
So what went wrong?
Should ABIL be held 100% accountable by the South African Reserve Bank (SARB)? What was the consumer’s role in the demise of ABIL? Should the consumer not assume responsibility for knowingly over-extending itself? Or has NCR failed our financial sector?
What went down at ABIL?
What transpired at ABIL was significant over-lending in the micro-lending market, where bigger loans over longer terms were extended to consumers (some already over-extended in debt). This was viewed by many industry experts as reckless lending, which in theory is contrary to the provisions of the National Credit Act.
Though regulation in terms of lending explains that credit should be accessible to consumers it also sets out clearly as follows.
• A consumer must be able to afford the credit being undertaken.
• Should a consumer be over-indebted debt counselling and debt re-organisation services should be provided for.
In August ABIL was placed under curatorship (business rescue as provided for under the Banks Act 94 of 1990) and in September it is confirmed that it will investigated by SARB under the following premise: should a bank not be in a position to deliver on its obligation and/or not be able to pay deposits made with it, when it is legally obliged to do so, then the Minister with the consent from the CEO and chairperson of the board of directors of the identified bank will place the bank under curatorship, more so for the interest of the public.
“What is apparent from this process is that both the bank and the consumer acted in a possible reckless manner”
The bank, the consumer or the regulator?
At ABIL, consumers were already heavily indebted, and unable to make regular payment towards their current credit obligations, would make additional applications to borrow from ABIL. These applications were approved and loans granted, which led to high rise in bad debts and write-offs from ABIL, from both their unsecured lending and retail arm furniture space.
What is apparent from this process is that both the bank and the consumer acted in a possible reckless manner. And despite probes by SARB and the NCR, was it a case of too little too late?
So what are the lessons?
Clearly all actors play a role. The consumer has the responsibility to borrow with caution just as much as the lender to lend with caution. The NCR to play its role as watch-dog, curator and even educator.
Clearly regulation needs to be adhered to, as business management decisions alone cannot substitute the fiduciary role that both banks and the National Regulators play.
About the author: Monisha Prem (BA MBA) is the CEO and senior legal practitioner at Excelsur Legal Services. Monisha is an admitted attorney with over 10 years post-article experience in law.
