In the past few weeks, we’ve seen one of South Africa’s well-known banks – African Bank – reach crisis as their market value was almost wiped out.
The collapse comes as a result of African Bank’s unsecured lending in recent years. As the rumour mill churned, investors began pulling out as the bank’s share price tanked to an all time low.
African Bank is a micro-lender, which simply means that they provide loans to majority poor and unbanked who often are unable to put up surety against those loans. In a country that is battling unemployment and facing a never-ending wave of strikes, it comes as no shock to find that there are people who are struggling to pay their debts.
African Bank was also dealt another blow when their subsidiary Ellerines (a furniture selling business) incurred major debt after majority of its low-income customers were no longer able to pay their furniture debt. *ABIL(African Bank Investment Limited) a publicly owned holding company listed on the JSE Limited, bought Ellerines in 2007 for R10.6bn to increase their product offering and also so that they could include furniture sold on credit and cater to their low-income customers. Ellerines have since applied for temporary protection from creditors.
The Reserve Bank did however come to the aid of African Bank to continue lending and to protect its retail deposits.
The Reserve Bank bailed out African Bank and committed to paying R7bn to keep it going. This occurred under the condition that African Bank be placed under curatorship.
According to the Reserve Bank Governor, Gill Marcus the curatorship and resolution procedure will ensure that the constant operations and collections of ABIL continue effectively and efficiently. The curatorship will also give the shareholders the platform to recover some of their lost investments through participating in the arranged R10bn capital-raising.
The proposed bail out plan from the SARB included financial aid from Standard Bank, FirstRand, Absa, Nedbank, Investec, and the Public Investment Corporation (PIC) who had an agreement to underwrite the capital raising. In simpler terms placing African bank under Curatorship means the banks business will be conducted or managed over by the affiliated banks mentioned above including the PIC.
Like many people, the thought that crossed to mind when I read about African Bank’s battle was the state of the employees – were they going to lose their jobs? As it stands, not only is the capital structure of the bank under review but the entire management and employment structures but despite being place under curatorship African bank is still in business.
The collapse of African Bank definitely has exposed vulnerabilities in South Africa’s financial system, the failure of the financial institution simply indicates that more stringent measures should be taken in ensuring a secure banking industry that will take into consideration the poor and unbanked in a responsible way.
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