Money-lending in SA

The recent crisis in African Bank, together with the liquidation and business rescue of a host of other smaller institutions, has left many investors asking whether there is an unsecured lending bubble in RSA. The loss of investor money, jobs and damage to the financial sector has inevitably led to a public call for greater regulation of the lending industry. These new laws are in the pipeline and I foresee far more rigorous powers being given to government authorities like the Financial Services Board to give effect to those laws.

There are a number of factors which led to the demise of these lending institutions but there are two which I single out as being most significant. Firstly, somehow the cash flow numbers of the businesses were ignored. Surely, as a lender, you have to know at the most elementary level, that money out the business must correlate to money received back from borrowers. The highly dangerous practise of extending loans creates a huge mismatch in cash flow and distorts the reality of what is actually happening. Secondly I believe there is a mismatch between the agendas of shareholders and management. Investors are compensated by means of dividends but management receive compensation based on short to medium term performance. There is therefore every incentive to evade the truth for as long as management can.

In my own business and in any lending business which we look at, we are first and foremost interested in cash flow. If you have too much money flowing out the business and too little flowing back in, your funds will inevitably dry up and your business will close. Interestingly, a look at the furniture and clothing retailers in RSA bear out the same lesson. Those that concentrated on cash as opposed to credit sales are now well outperforming the credit sale retailers. It brings to mind the golden rule: he who has the gold, makes the rules!

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