Unsecured lending market

The latest African Bank update has really brought matters in the unsecured lending market to a head. In July last year it started becoming apparent that the loan advances had reached a dangerous level. As a percentage of debtors in SA it had grown from 5% in 2007 to 10% in July last year and was contributing 40% of new credit granted at that time.


I went to an African Bank presentation last year and learned that the reason for this growth was not new demand (the demand is always there), it was coming from the supply side. After the financial crisis of 2008-09, tough new banking regulations were introduced which made secured lending less attractive to banks. Strange, but true. This pushed the big four banks in SA into the unsecured market in search of yield and easy profits.


On the 27th of August 2012, the RSA Treasury released a statement after a meeting with the CEOs and Chairs of local banks. The meeting was about the role banks could play in meeting the South Africa's socio-economic objectives. It also looked at the unsecured lending environment. This is what they concluded:


"While there are currently no systemic risks, the meeting noted and supported the close attention that unsecured lending is receiving from the SA Reserve Bank's Bank Supervision Department. There will be further engagement with financial and non-financial institutions on this issue so that South Africans are not over-indebted."


Basically, everyone was well aware of the situation and planned to deal with it accordingly. Normally, the definition of a bubble (like the one that we saw with the sub-prime mortgage crisis in the USA) is when something creeps up without people realising it and then pop, it explodes and it is all too late. In this situation, it is clear that the authorities and the banks are co-operating to avoid an explosion.

However, when a market triples in five years, one must ask such questions. Consider the history and dynamics of this country. In Transaction Capital's latest results Mark Lamberti mentioned that 94% of people in South Africa do not have a home loan. That is huge. Especially if you consider that a large portion of this country actually own their homes, especially in the rural areas. In African Bank's latest results presentation they mention that over 50% of their loans are used for education and housing and house improvement. So basically for a huge part of our population unsecured lending is actually the only way to buy a home. That sounds silly because you pay higher rates but it is so hard to get a home loan these days this is what people are resorting to.


Historically unsecured lending was not a big part of credit in South Africa. The legislation was too strict. The National Credit Act of 2006 changed this by shifting lending away from the loan sharks and towards the people who do it properly, i.e the big banks. This is where the huge growth in this sector started.


In recent months, everyone has been pressing on the brakes. African Bank mentioned that loan approval ratios had reached 69% at last year, and are now lower. We will have to wait and see what they are now when results are out in the next few weeks but I can guarantee that it has decreased.


To conclude, I do not believe we are in a lending bubble. The growth of recent years was a natural move to a more appropriate level. In aggregate, our banks perhaps took it too far and now we are seeing a necessary pull back. It is a controlled pull back, certainly not a collapse.