African Bank forges ahead with unsecured loans

2014-05-04 06:00

African Bank is clearly not fazed by the trouble it ran into with unsecured lending last year, judging by a recent announcement about a possible deal with retailer Edcon, which owns brands such as Edgars, Red Square and Boardmans.

African Bank is a mass-market provider of unsecured loans – which means its low-income clients don’t need collateral.

Edcon and African Bank have announced a nonbinding agreement, which will be the basis of negotiations to make African Bank a secondary credit provider in a long-term strategic relationship.

According to Edcon, if the deal goes through, African Bank would provide credit to Edcon customers who do not fit the criteria of primary credit provider Absa.

This could mean that African Bank is growing its unsecured lending base, which has caused it headaches in the past.

In October last year, African Bank was fined R20 million by the National Credit Regulator (NCR) for reckless lending and also reported a dip in profit because of pressure on its customers.

In a trading statement released today, African Bank said it expected a loss of between R3.1 billion and R3.3 billion as the number of nonperforming loans increased.

Nonperforming loans are when debtors do not pay on time.

The number of nonperforming loans was R6 billion, which is about R600 million more than what was anticipated.

The trading environment has been tough in the unsecured lending market as consumers are under financial pressure. And the unsecured credit lending market has grown rapidly.

Data from the NCR showed that the value of total outstanding unsecured credit increased from R41 billion in 2007 to R159 billion in December 2012.

It is in this environment that African Bank is looking to conclude its deal with Edcon.

Patrice Rassou, an analyst at Sanlam Investment Management, said he doesn’t think the opportunity is as vast as many think, as many customers already have debt.

He said the deal would depend on “how many of these customers don’t already have African Bank or other unsecured loans”.

For Edcon, it’s a win-win situation. They don’t have to rely just on Absa and will be able to grant more credit opportunities to potential customers

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