Until recently, millions of South Africans have been given short shrift and have for years been unbanked or under-banked. Without a certain income level or sufficient collateral, they do not stand a chance of accessing credit. This has been the case historically before democracy was ushered in 1994. To jog people's memory, the inadequate banking services, particularly to black people historically led to the establishment of a black owned bank by black entrepreneurs for black people. Whether this is a good idea or not is a subject for another debate. The fact is there are still millions of South Africans who do not have access to credit.
They have not been able to access funding to buy or renovate a home, obtain a car or furniture, or secure a decent education for their children, effectively trapping them and their families in their current circumstances.
Loan sharks still cruising
So what do people do when they want to improve their lives, but do not have savings or capital to achieve this goal? It is quite simple: they go to the bank and access credit. Well, in an ideal world that would be the case, but in a country like ours it is often not that easy.
What they have historically done is turn to loan sharks. That sector is now more regulated, but it's a given that borrowers - already financially marginalised by the banks - have been exploited and ripped off by unscrupulous lenders, adding to their economic oppression instead of alleviating it but what else could they do, if they wanted funds?
In recent years, we have seen a change happening in our banking arena. As South Africans' lot improves, so they need greater access to formal banking services and capital - but still, many have been excluded by the mainstream banks, which, unsurprisingly, have been less inclined to extend credit in the current global economic climate.
Unsecured lending small proportion of debt
This has contributed to the meteoric rise of unsecured lenders like African Bank. Official Reserve Bank figures state that unsecured lending to households shot up by 35% in February, compared with February 2011. This dwarfed credit lending growth overall, which was at a modest 8%.
Moreover, we have been lending money to those people who need it. In the past we picked up a lot of repeat business from existing customers, now we are seeing many more first-timers than we have historically.
We also ask our customers what they intend to do with their loans, and in the vast majority of cases they need the money for things such as housing (nearly 40%), education (around 26%) or furniture (around 13%). About 15% use their loans for consumption, which is not a desirable state of affairs and does contribute to the concern about the development of a so-called credit bubble.
This explosion in South Africa of unsecured lending - also by the major banks, which have recognised the potential of this form of credit - has caused fears of a credit bubble, and that eventually the extension of even larger pockets of credit to higher-risk customers will result in the destabilisation of this country's banking system.
I was glad to learn a few weeks ago that the Reserve Bank disagrees with these fear-mongers, saying that unsecured lending is not creating a credit bubble and is not a threat to banks. In fact, the Bank points out that unsecured credit comprises only 8% of banks' total gross exposure.
What is perhaps more worrying are claims that unsecured lending is reckless and exploitative of poorer people but what else can people do if they need access to credit? It might be that critics confuse unsecured lending with loan-sharking. However, while both are higher-risk forms of lending, that is where the similarity ends.
The most important consideration in the unsecured lending sector is responsibility: banks must be responsible lenders and customers responsible borrowers. The law, the National Credit Act in particular, requires this. Otherwise, defaulting customers stand to lose any gains they have made, and banks will go out of business. However, responsibility can be a tall order in the unsecured sector, where so many new customers do not understand the benefits and pitfalls of credit. In fact, it can be argued that even the most sophisticated customers do not fully understand what they can get themselves into when they sign a credit agreement.
What is crucial - particularly to avoid a credit bubble - is that unsecured lenders do much more than simply hand out credit to lower-end customers, and leave them to their own devices. That, simply, is a recipe for disaster.
For starters, banks should properly assess not only the amount for which their customers qualify, but also what they really need. While there is obviously more to be made in terms of fees and interest from bigger loans, there really is nothing to be made but a loss when an overburdened customer inevitably defaults. In fact, we severely penalise employees who approve unsustainable loans, in order to prevent this exact situation.
Secondly, it is necessary to educate and support customers about their banking options and repayment responsibilities. I do not think that anyone will argue that a well-informed customer, who understands the ramifications of taking out a loan, will be a more responsible customer. In addition, the more people access unsecured credit, the more necessary customer education becomes.
Finally, banks should be less eager to take punitive action against defaulters. A non-paying customer who is summarily stripped of assets rapidly becomes no customer at all, but rather a liability with a bad credit rating; by contrast, a customer who is struggling to make repayments but reaches an agreement with the bank will most likely pay off the loan - and remains a customer in good standing.
Most customers are inherently good people, who intend to repay their loans. Nevertheless, things beyond their control happen to even the best people: they lose their job, they have a large unforeseen expense or they lose a breadwinner. It is incumbent on them to approach their lender to make an alternative arrangement but in many cases, they are too afraid or intimidated to ask their bank for support and end up in even bigger trouble?
We have found that proactively engaging with our customers removes that fear and they are more inclined to come to us when there is a problem. We have also started to re-score our customer base on a bi-weekly basis, which has multiple benefits for both parties. These include flagging customers with early indications of financial distress, with whom we then find solutions before it is too late.
To the best of my knowledge, this is not a common practice in the banking sector. Why not, if we as banks are the responsible operators we claim to be? It makes perfect sense to help keep everyone - including bank staff - on the straight and narrow, and obviate any challenges well before they become unmanageable.
However, that requires a shift in attitudes, particularly by the banks. For example, a bank should not just be accessible to a customer, but always there for him or her; not just be a responsible lender, but its customers' good-faith friend (in good times and bad); its offerings should not just be affordable, but the best deals available; and credit should not just be about lending money, but the creation of credit products that work for customers.
At the end of the day, banks are profit-making institutions that are responsible (there's that word again) to their shareholders and backers; there's no argument about that. Nevertheless, more than money, their currency is people - their existing, new and future customers - and the best returns will always be derived from happy, well-managed, supported customers.
In addition, those people will keep coming back for credit, sustainably and responsibly improve their lives and grow their personal assets and become better, less risky customers. Then everyone is a winner, including our economy, which is driven by consumer spending.
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