Fund manager Charlie Graham is back on his unsecured lending hobby horse. But this time he is asking serious questions about the schitzophrenia of the public sector. Why, he asks, are the pensions of Government Employees being used to finance a structure that causes so much misery for so many citizens? His open letter to the head of the Government Employees Pension Funs highlights some very interesting issues. We look forward to the response. – AH
By Charlie Graham*
Dear Dr Matjila,
RE: The Government Employees Pension Fund should reconsider its investment in companies that make profits from unsecured lending.
Last week Futuregrowth Asset Management announced that its developmental funds will wind down their approximately R1 billion investment in South Africa’s unsecured personal lenders. We challenge all other investors to follow suit and evaluate the role unsecured personal lending is playing in the development of South Africa and its part in meeting long term economic, social and environmental outcomes.
The Government Employees Pension Fund (GEPF) is by far the largest investor in South Africa’s unsecured personal lenders, holding 15.163% of African Bank’s shares worth R2.35 billion and being Capitec’s largest outside shareholder – holding 12.16% of issued shares worth R3.1 billion. How can the Government Employees’ Pension Fund continue to justify these investments in the face of a growing body of evidence that unsecured personal lending is no longer considered developmental?
What is critical is the social and economic impact unsecured personal lending is having on our country.
The investment policy statement of the GEPF (fig 1), clearly states that a portion of the fund’s assets will be invested in accordance with the fund’s developmental investment policy, whose objectives are to earn good returns for the fund while supporting positive, long term economic, social and environmental outcomes for South Africa.
Fig 1 – Extract from GEPF investment policy statement
There are significant social implications for this country – the poorest of the poor are paying the highest rates in the market, suppressing their income and ability to raise themselves up and build their own wealth. These personal unsecured lenders charges include loan fees that are close to 40% per annum. This is a tax on the poor and vulnerable.
These personal unsecured lenders are aggressively extending the duration of these loans and locking the vulnerable into long dated loans with maturities greater than 5 years. What we are seeing is that there seems to be far more concern to advance and extend the maturity of debt rather than in the actual use of that debt by the borrower, or the impact of that debt on the borrowers’ circumstances. As a rule, the appropriate use of debt is to fund capital assets (which retain or grow in value) or to provide working capital for small businesses, homes or education.
A secondary use of debt may be to fund long-lived (but depreciating) assets such as cars, furniture and appliances. In its most outrageous use – and most unsustainable – this long term debt is being used to balance short term cash flows to buy consumer goods such as clothes or (e.g. clothes and even food). This is not sustainable. For example Capitec Bank had 0% of their customers with 60 month loans in February 2012, by February 2013 nearly 40% of their customer’s loans had 60 to 84 months maturity dates
A large proportion of the customers of these unsecured personal lenders are in fact the very same government employees whose pension monies you invest in these companies. How can the GEPF continue to invest hard earned pension monies in companies that are crippling its very own members? Surely post the Marikana tragedy the GEPF should be questioning if their investments in personal unsecured lenders are a social good? We would challenge Capitec’s opinion as stated in their 2013 annual report that their model is a “policy triumph” and that “this phenomenal growth has been a huge boon to South Africans”.
There is growing evidence that supports the view that an attack on the human dignity of a person occurs when they take an unsecured loan for consumption purposes, not realising the true costs of this loan which is very expensive. Typically a customer borrows R10,000 and is required to repay at least R30,000 over three years.
The following are just a few comments made in the media this week:
“From having the view that micro-lending was always a social good, now we’re shifting and saying maybe not, maybe there’s damage being done,” Andrew Canter,CIO of Futuregrowth, who has 128 billion under management, said in an interview in Cape Town on 03/10/2013.
“Nobody says it’s their intention to cripple people, but de facto, that’s what’s happening.” Andrew Canter, CIO of Futuregrowth
“Consolidating borrower’s debt into a five year, R 50,000, 32% loan plus fees to him is a form of financial enslavement.” Andrew Canter, CIO of Futuregrowth.
“Borrowing money for five years in the personal unsecured lending space to pay for consumer goods is impoverishing and not developmental.” Andrew Canter, CIO of Futuregrowth
“What is more concerning, however, is that the debt capacity that might otherwise have been used as working-capital for start-up businesses, or to buy a house, or to fund a child’s education is used up prematurely.” Andrew Canter, CIO of Futuregrowth
“Unsecured lending is a significant factor in unprecedented demands for a 100% wage hike”, Minister in the Presidency Trevor Manuel said in June 2013
Mr Manuel further said “most employees at Lonmin’s Marikana mine had garnishee orders in place and never saw their salaries. He said one microlender had been charging interest of 30% a month and that the amount of borrowing needs to be reduced”
“Micro-lending to the poor to finance consumption creates a huge debt burden and entrenches poverty. Instead Microloans should be extended to the poor only to promote income generation” – Grameen Bank founder and Nobel Laurette, Muhammad Yunus, Cape Town 04/10/ 2013
Muhammed Yunus won the Nobel Peace Prize in 2006 based upon the premise that Grameen had developed micro0credit into an important instrument in the struggle against poverty. In this context we need to question whether the Nobel society would approve of current personal unsecured lending practices in South Africa.
We challenge the GEPF, along with other investors, to question whether their continued investment in companies that make their profits from unsecured lenders is aligned with their stated policy goals of positive long term economic, social and environmental outcomes for South Africa.
* Charlie Graham is a leading investment manager. He prefers to write under a nom de plume.
