South African Banks: Payday Mayday

Perhaps because they had no access to banking during apartheid, poor South Africans have been gorging themselves on credit ever since. A glut of consumers impatient to enjoy a middle-class lifestyle has made the fortunes of payday lenders, which charge sky-high interest rates for smallish unsecured loans. Yet, after weeks on the ropes, African Bank, the biggest purveyor of such loans, has had to be rescued from near-bankruptcy, The Economist reported. South Africa’s authorities insist there is no broader rot in the financial system. The problems at African Bank, they say, stem from its “unique business model”. This is partly true: unlike most lenders, which use deposits to fund loans, African Bank raised money from financial markets instead. Its 2.4m customers were disproportionately poor and had little in the way of assets, such as homes, to put up as collateral. Nearly a third of its loans were in arrears, leading to crippling losses. But although its lending standards may have been especially lax, the strains its customers are suffering from—unemployment is high and fuel and food prices have been rising—are being felt by those of other banks, too. The central bank has found a way to spread the pain. African Bank’s shareholders and subordinated bondholders will lose almost everything. Read more.