Insider’s view of what went wrong at Abil, ways to fix the unsecured lending problem – Abil’s former CFO Dave Woollam
Dave Woollam had a 25 year career in financial services, moving from Tom Boardman's BOE through to the boom times at African Bank (Abil). But a serious disagreement over strategy with Abil's CEO Leon Kirkinis caused him to leave the now beleaguered micro-lender three years ago (although it was spun rather differently at the time – see official statement at end of transcript). Woollam serves on the board of Mark Lamberti's Transaction Capital and will be chairman of that group's recently sold Bayport Financial Services. After leaving Abil he moved to Gowrie Village in Nottingham Road and now spends a lot of time thinking. Especially about his old world where Woollam believes it's time for the players to get together and self-regulate. To find a sensible, sustainable path forward before it gets imposed on them by the politically motivated. In this wide ranging interview he revisits what went wrong at Abil and offers some ideas on how to reduce pain caused to so many through indiscriminate unsecured lending which, his own experience shows, continues apace. – AH
ALEC HOGG: Dave Woollam, former Chief Financial Officer of Abil, left the company in 2010 partially due to the disagreements about the company's growth strategy. He joins us now as we discuss driving change in financial services. Well Dave, it's good to have you up here from Nottingham Road where you now live. You haven't left the business community totally, but you must be looking on it at Abil – maybe scratching your head a little. Did you keep any shares?
DAVID WOOLLAM: Alec no, I sold my shares when I left, but I have looked on it with a degree of sadness and frustration. There were many reasons why I left the business and one of them was a sense that the company was growing too fast. There was this really strong push after the introduction of the NCA for lenders to extend the term and to increase loan sizes. Whilst that was a natural thing to do, I felt that it needed to be done in steps. We were entering into really new areas of risk that hadn't been understood properly yet, and taking people from a R10 000/36-month loan to one of a R100 000/84-month loan… I just didn't believe that those would behave in a linear fashion and that they would introduce new dynamics and new types of risks that we didn't understand yet. That was something that concerned me at the time. There were other reasons why I decided to leave the industry. So it is with a lot of frustration and sadness that I look back now, wondering if I could have influenced it on the one hand, and also knowing that I made my choices and the business made its choices to follow its own strategic path.
ALEC HOGG: Have those chickens now come home to roost?
DAVID WOOLLAM: I think – sadly – they have. I don't want to spend a huge amount of time focusing on Abil, but Abil is a very big player in this industry. I think what happened if one looks back, is that the introduction of the National Credit Act took away this almost bifurcated industry where you had small unsecured lenders limited to R10 000 over 36 months, very small parcels of loan, very tightly controlled, short-term, but with unlimited pricing capacity. Then you had the Usury Act, which allowed very large loans and very broad parameters of loan terms and size, but very restrictive pricing controls. The National Credit Act brought those two together and the aim was to harmonise the markets into a single unified market. What happened is that the unsecured lenders moved up too quickly and started to move into the territory of the bigger lenders. And the big lenders moved down too quickly and came into the unsecured space. They collided in this space where suddenly, people were being offered 40/50/60/80/100 thousand rand loans, and I don't think there was ever a real understanding of 'what are these people borrowing this money for?' When you're lending someone R100 000 for a house, it's a very real and logical thing to do. When you're offering someone R100 000 without asking a question – I wonder whether there needed to have been more responsibility by lenders to understand what the uses of this credit are. I, this weekend, went into a lender and asked for a R10 000 loan. I pretended I was a farm manager and dressed a bit scruffy – in Nottingham Road you can get away with that. After five minutes they offered me R105 000, and I'd said I wanted R10 000. I said 'but I only want ten thousand', and they said 'no, but you qualify for 105 thousand' and that tells me what's happening in the industry. There's just too much supply coming out too fast. People who suddenly see with bright stars in their eyes what they can do with this money: they wake up with a hangover.
ALEC HOGG: The problem with all of this is that debt has to be repaid and when you have high interest rates, as happens in the unsecured lending market, you can get into a debt trap very quickly. Where does it all end?
DAVID WOOLLAM: What happened in the past is there was always a fairly high amount of a person's disposable income allocated to debt, but for relatively short loans. There was – almost a discipline – that it had to be held for 12 or 24 months. If you wanted something important, like to borrowR10 000 to send your kids to school, that would have been a very sensible and a very selfless thing to do as a parent. You paid the price through having to be very disciplined and conservative in your household spending for maybe 12 or 18 months. When the same situation arises where you're now borrowing R100 000 or R120 000 , committing the same proportion – 50/60/70 percent of your income – to loan repayments over ten years, you wonder whether loan fatigue starts to come in. It's one thing to pay 70/80 percent of your income for one, two, six or 12 months But to do that for eight years? Eventually you have to understand the psychology of a person. They'll have long forgotten the utility of that loan, and they now have this burden of these loan repayments. You and I have house mortgages and we pay our mortgages over 20 years. But every night we walk into that house and we're reminded of how important that loan was. It gave us a roof and something we could be proud of – a home. In many cases, I don't think we're seeing the use of the debt linked to an asset and an investment or a cause which is going to lift and improve people's lives. It does undoubtedly happen, but I don't think there's enough linkage between lenders trying to understand what the use of this debt is, especially on these big and long-term loans.
GUGULETHU MFUPHI: How do we solve the problem then, David? It seems as though on the one hand there's financial illiteracy and on the other hand, you have financial institutions not following up on where this money is going.
DAVID WOOLLAM: Without doing a plug, I'm very involved in a company called Summit Financial Partners and we are looking very extensively at how to address some of these issues. We do believe that one of them is to raise awareness. Sadly, the economic and political history of our country is that mass literacy – firstly – is very low and with mass literacy being low, financial literacy is going to be even lower. We have inherited a very poor level of financial literacy amongst our working population. Many of these people have now come into the work stream. They have good jobs and good income, but really don't understand how to manage the trade-offs, the choice between needs and wants, and to have financial disciplines. We're working with Lonmin on an extensive program after the Marikana incidents. They appointed us to do a very extensive financial wellbeing program. The insights out of there have been extraordinary in trying to understand some of the root causes of people's frustration and people's sense of despair when they're going home with R100 in their pay check trying to pay off every insurance policy, every loan, and every other requirement. It's very hard. You go home and you have no money to spend on the basic bills.
ALEC HOGG: In a way, you have to believe that they were sucked into that by people who said 'let's go on strike. Don't worry. We'll go on strike for six weeks' or whatever the case might be, and the 'Mashonisa's' got in and you now have all of those debts to repay. Of course, the strike did not deliver on its promise….
DAVID WOOLLAM: Absolutely. There are two sides – and I'm not here to say the industry has to take all the responsibility. Consumers have to take a great deal more responsibility. One of the things we're trying to do at Summit is equip people with tools to take more responsibility, to be more careful when they're considering the choices when using debt. Maybe they should be taking out insurance policies instead of borrowing money for things like funerals. We're trying to help people make the right choices, but our experience is that will be a very long and slow process. What we need right now is for the industry to take a greater level of responsibility. It's going to be too slow to educate the population.
ALEC HOGG: Dave, you know what happened in this continent – in Africa. There was a lot of lending that took place, money was wasted, and about ten to 15 years ago, there was debt forgiveness for many countries. Nigeria today is booming as a consequence of the debt forgiveness that was implemented back then. Is there not a case for this? Is there not a case to say okay, we know that everybody screwed up in this, the education was not there; the industry lent money that it shouldn't have been lending to people. Let's get back to ground zero. Let's wipe out a lot of debt and move forward.?
DAVID WOOLLAM: It's too big and complicated to contemplate something like that now. The government is looking at miniature versions of that, like the amnesty where they're saying take certain pockets of people and wipe their credit record clean so that they can come back into the system. You can have a long debate about the pros and cons of that. I think there are some merits and some logical reasons why that makes sense. I think debt forgiveness has a lot of potential unintended consequences. We have something like R150 billion worth of funding in this sector. This money belongs to pensioners who have been invested… Remember, this industry is almost entirely wholesale-funded, so you have money funded by Pension Funds supporting these businesses. I think it needs to be slowly reengineered and slowly reorganised. The other side of it is that I believe very strongly that credit is a critically important tool in the economic transformation of our country – access to credit – but it has to be responsible credit.
ALEC HOGG: It's the same with any economic structure as in the African continent as well. However, people like David Woollam are bringing new ideas and innovative thinking to a very serious problem that I'm not sure we have all grasped in our country yet. Certainly, the share market is reflecting it in the share prices, particularly of his old company Abil. One wonders: if David had remained there, what would have happened? That was David Woollam, the former CFO of Abil.
* In the November 2010 annual results announcement, Abil described Woollam's departure as follows:
CHANGES TO THE BOARD Dave Woollam, who has been on a leave of absence for much of this year, has requested that upon his return to the group, he change his role from that of a full time executive, to one that would allow him to act as an advisor to ABIL. His reasons for this are based on a personal lifestyle choice, which we respect. Accordingly, Dave Woollam, will resign from the boards of both ABIL and African Bank with effect from 31 December 2010 and will rejoin ABIL in his new capacity in the new year. Dave will work closely with Leon Kirkinis and the other ABIL executives, and we believe will continue to bring his considerable insight and knowledge of the business to bear on various strategic opportunities and challenges.