Here’s how micro-lending in SA compares with the US – where customers pay just a fraction of the fees
- Short-term micro-lender Finbond says changes that blocked it from directly debiting the accounts of social grant recipients is biting into business.
- Finbond has been in a long-running battle with a regulator on the fees it charges around its loans.
- A comparison between its operations in the USA and South Africa show that Americans pay a fraction of the fees around loans that South Africans do.
In its last half year it made a respectable R141 million profit, the listed mutual bank and micro-lender Finbond told shareholders this week – but lack of access to the bank accounts of social grant recipients is causing it some trouble.
"Business volumes have been under severe pressure due to a large portion of Finbond’s South African client base transitioning to the new ‘SASSA’ card resulted in more than 50% reduction in our SASSA customer base," the company said, referring to beneficiaries of the SA Social Security Agency (Sassa), which handles childcare, old-age, and disability grants.
The card introduced by the Post Office in May does not allow it to create repayment stop-orders or electronic fund transfer (EFT) debits for social grant recipients, Finbond said, "which limited our ability to extend credit to this segment of the market."
See also: Wonga faced collapse in the UK, but says its 3 million loans in South Africa are unaffected
It had already seen a decline in early debt collection, the company said.
Finbond offers loans out of 427 branches in South Africa, and 257 branches across more than a dozen states in the USA and in Ontario, Canada. Here is what its unaudited results for the six months to the end of August show as the difference between short term micro-loans in South Africa and in America.
South Africans pay a lot more in fees
In South Africa Finbond made more money out of fees than from interest; its ratio of interest income to fees is 1:1.64, which means it earns R1.64 in fees for every R1 its customers pay in interest.
In North America that ratio is 12.5:1 – customers are charged R1 in fees for every R12.50 they pay in interest charges.
Finbond has been engaged in a long-running battle with the National Credit Regulator (NCR), which accused it of charging unreasonable premiums for credit life cover. The NCR lost that complaint at the National Consumer Tribunal, and Finbond this week said its counsel expects it to win again after a June hearing where the NCR appealed that decision. Judgement was reserved.
"The ratio of interest income to fee income is influenced and affected by the applicable legislation in South Africa, the United State of America and Canada," said Finbond CEO Willem van Aardt when Business Insider South Africa asked him about the difference. "We offer different products in the various jurisdictions."
South African loans are shorter, and smaller
Finbond advertises loans of up to two years in duration, but most of its loans have terms a lot shorter than that, and they are even shorter in South Africa.
The average American loan ran for 6.2 months, its results show. In South Africa the average length was 3.97 months, more than a third shorter.
The average American loan value for the period was $352, or around R5,000. The average South African loan was R1,572.
South Africans are less likely to repay promptly than Americans – but still pretty likely
Finbond reported that its "first strike" collection rate, which it uses to measure the ease of securing repayments, was 96% in the United States. In South Africa – after the Sassa changes it said negatively impacted its ability to secure payments – that rate was down to 85%.
Even so, the difference in provision for bad debts are not hugely different between the two countries. For its US unsecured lending business, Finbond recorded an impairment of 25.6% on the money it had loaned out; in South Africa the impairment represented 26.8% of its unsecured book.
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