Ticking time bomb: unsecured debt is a major risk – Alec Hogg, Dave Woollam

In an article warning that the United Nations has unsecured lending on its list of concerns, Malcolm Rees points out that there is much as R208bn in outstanding unsecured and short-term credit in South Africa, accounting for 11% of all outstanding credit. "To put that in context, the nominal value of outstanding unsecured credit has grown near six-fold since the start of the lending boom in 2008. In that year, it represented just 3% of all outstanding credit," Rees writes. BizNews editor-in-chief Alec Hogg picks up the threads of this story with micro-lending expert Dave Woollam. In this podcast, Hogg and Woollam discuss how unsecured debt is a major risk to the economy. – Jackie Cameron.There is a R450bn pile of unsecured debt that might come back and really bite the South African economy. This is the warning from BizNews editor-in-chief Alec Hogg and his guest Dave Woollam, a financial services fundi who has worked in the banking sector and blew the whistle that there was danger brewing in African Bank Investments Limited (Abil). The latter was put into curatorship in 2014..Microlender Abil was one of the hottest Johannesburg-listed stocks in the early part of this century, paying steady dividends and enjoying a rising share price on the back of unsecured lending..In this podcast, Hogg and Woollam explore the continued growth of unsecured lending in South Africa, which taps lower-income earners for high interest debt. .___STEADY_PAYWALL___.always felt it's a sector that hasn't had a lot of scrutiny in terms of policy". What's more: "It's an area of the market that will from time to time cause difficulties and I see a period like that coming up soon.".As Hogg notes, the world has shifted from an era in which shareholders interests come first to taking into account all the stakeholders in a business. In particular, "you have to have a social licence".."Unsecured lending feels as though not enough attention is given to what happens once the loan has been made. Are those taking the loans being abused or victimised in the name of profit?".In response, Woollam sets out the "complicated environment" including that "unsecured lending hasn't really benefited from clear policy" and only government can address this. "When you are a company and your objective is to make a profit it is hard to constrain yourself," he says..In addition, says Woollam: "There's a broader problem in South Africa. We came out of an era in which the vast majority were financially excluded and had very little access to financial services and assets.."Since democratisation, there has been a clear objective of financial inclusion. But, there hasn't been a growth of assets among the lower working classes.".Looking at credit data, you see a significant reduction in mortgage and vehicle finance over the past 12 years, he points out. ."Post-2008 we've seen a large number of the working classes – people earning R20,000 a month and less – being pushed into unsecured lending.".In other words, money being accessed through unsecured lending is used for consumption and to sustain lifestyles. .If you price high enough for it – and putting aside morality aspects – "as long as aggregate pricing is sufficient to cover bad debts you keep rolling forward", says Woollam of why the model still works for micro-lenders..He sees similarities to 2014, when there was a significant bubble that ultimately led to Abil's decline..Mortgage and vehicle finance books haven't grown in real terms, while unsecured credit has grown six-fold over 12 years. "That's where the margins are and much higher interest rates," says Woollam..The cost to society is that 10m of 25m people have impaired credit records, while there are laws that "treat the outcome not symptom" by allowing people to apply to have debt expunged..It worries me that we are "re-entrenching inequality". People really can't survive and you are seeing debt consolidation and debt servicing costs spiral, says the bank expert..A hedge fund short on Capitec recently sponsored the Rees piece on micro-lending and its involvement, it could be argued, is an indication from the fund managers that they believe that Capitec is not doing the right thing. Capitec's argument, notes Hogg, is that their offering is better than the loan shark offering..Woollam says this is a common argument and in the past he might have used it when defending African Bank.."It is true that if you create an outlaw environment you get worse abuse. Think about prohibition. It didn't solve the problem; it created a new one.."The mashonishas are there but they don't have access to funds. So the R33bn in short-term credit would not have been given by mashonishas," he says..Hogg says that Malcom Rees's story "raised the issue of the United Nations' Human Rights Commission getting involved in this area… when the UN gets involved, you'd better pay attention.".He asks: Is this like the canary in the coal mine?."This is a globalised issue," responds Woollam, with 1990 to 2020 representing a period of extraordinary debt growth. .Over-gearing has had tremendous pain on corporate market, with debt hammering Tongaat Hulett and others, he continues..People "used to use debt cautiously and now use it freely", with concerns this is "entrenching inequality?" .Using it for education or investing in your own business is "great because you are lifting people out of the poverty trap" but debt for consumption is highly problematic, adds Woollam.

Ticking time bomb: unsecured debt is a major risk – Alec Hogg, Dave Woollam

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