Grameen bank founder Muhammad Yunus. Picture: ARNOLD PRONTO
Grameen bank founder Muhammad Yunus speaks at the Gordon Institute of Business Science this week. Picture: ARNOLD PRONTO

GRAMEEN bank founder Muhammad Yunus, widely considered the father of modern microcredit, issued a stern warning on Friday about how microlending could become “abusive” and be misused by lenders.

This came in a week when Futuregrowth Asset Management said it would “wind down” its exposure to microlenders, including Capitec, African Bank and other unsecured lenders, on “moral grounds”.

This move is likely to invite greater scrutiny of the role these banks have played in granting credit to poorer South Africans already trapped in a debt spiral.

With South Africa failing to create a meaningful number of jobs while cash-strapped consumers continue to struggle to repay loans, some experts have warned that the microcredit bubble could pop, raising the risk of social unrest.

Futuregrowth Asset Management CEO Andrew Canter said that after 20 years of seeing personal unsecured lending as a “net social good” because it provided people with access to finance, his company had concluded after much soul-searching that the industry was no longer developmental.

“There are some areas that are de facto developmental such as water, power, health-care — and some that are not, such as tobacco and gambling.

“In the grey area are other sectors where we exercise judgment; and among those is microfinance,” he said.

Mr Canter said the evolution of the microfinance industry and its practices led the fund manager to the point where the industry was no longer considered a developmental investment, even though some of the players were responsible and relatively fair.

“We have always backed the responsible firms, but the industry structure has provoked industry behaviours that are not good for consumers, or in our view, the nation.”

Mr Canter, who helps oversee R128bn in investors’ funds, said this was not a “panic exit”.

Futuregrowth intended to wind down its exposure to bonds issued by microlenders in its developmental funds by not rolling over existing loans.

In Futuregrowth’s wider suite of bond and money market funds, however, microlenders would still be included.

“If industry practices improve, or particular players create more sustainable lending products, we will look to back them,” he said.

Mr Canter said that in the old days there were loan sharks, so it was good to back legitimate lenders, but now the National Credit Act had created a level playing field.

“The industry seems to be pumping debt down peoples’ throats. It is no longer socially responsible and does not belong in developmental funds.”

A fund manager, with over R30bn under management, agreed that the business model of the unsecured lenders was not sustainable on moral grounds, let alone on economic grounds. “And you can’t invest pensioners’ money in this stock or its peers.

“The fundamentals are blown and the business model is unsustainable; 70% to 80% of ‘new business’ is to existing clients.

“So the trick is to keep them on an indefinite treadmill, always reoffering them a new loan, or reschedule but by lengthening the term to reduce the instalment,” he said.

While the fund manager said that total unsecured lending was now officially about R140bn, this meant that the total repayments on this amount would be more than R360bn, taking into account the 30% interest rate as well as fees that people would repay over three to four years.

Prof Yunus, who spoke at the Gordon Institute of Business Science, said: “We don’t lend money for consumption.

“Your consumption should come from income. When you create a consumption loan, there’s no end to it.” Instead, Grameen focused on lending money to people who would use it to generate income.

• This article was first published in Sunday Times: Business Times