From Bloomberg.

As African Bank Investments Ltd. (ABIL) spiraled toward collapse, South Africa’s Reserve Bank fought to save the institution which lends to the nation’s poor, ultimately relying on firms with wealthier clients to come to the rescue.

Central Bank Governor Gill Marcus’s plan, announced Aug.
10, enlists underwriters including Barclays Africa Group
Ltd., FirstRand Ltd. and fund administrator Public
Investment Corp. for a 10 billion-rand ($940 million US)
capital raising for ABIL.

ABIL provides loans at interest rates that can reach 60 percent annually to people who lack assets required to secure credit at other banks.

The rescue, after a week in which ABIL’s stock plunged
95 percent, is needed to maintain banking services and
credit to 3.2 million of the country’s low-income citizens, Marcus said.

Africa’s second-largest economy is battling 25-percent unemployment, rising inflation and strikes in the mining industry that have sapped investor confidence.

“ABIL is an important symbol of the country’s ability to lend to poorer people,” said Azar Jammine, chief economist at Econometrix, in a phone interview from Johannesburg. “A lot of ABIL’s book was lent out to the working class, and you don’t want that to implode.”

The central bank’s package called for ABIL to be split into a “good bank,” which will get the capital infusion, and a “bad bank,” through which the central bank would take over bad loans for 7 billion rand ($659 million). The regulator also put the firm under creditor protection and imposed losses on senior bondholders.

ABIL was created to lend to the country’s least-affluent citizens. Its loans range from 500 rand to 130,000 rand and it can charge interest of as much as 5 percent a month on a rolling basis, according to the bank’s website.

“African Bank continues to be open for business,” Marcus told reporters in Pretoria Aug. 10. “Clients must be able to access their finance and able to afford and use the loans that they get. Otherwise that simply disappears.”

Prolonged strikes in the mining industry, where ABIL has many customers, hurt the bank as workers either weren’t paid or lost their jobs. The lender’s Ellerine Holdings furniture unit sold fewer goods and suffered bigger losses during the strikes, with the retailer forced into a business rescue, akin to Chapter 11,
after ABIL severed funding to the subsidiary Aug. 7.

“There was severe deterioration in ABIL’s target market with the ongoing strikes and the economy shrinking,” said Kokkie Kooyman, head of Cape Town-based Sanlam Global Investments, which has $900 million under management, according to an Aug. 8 interview. “All of it maybe never would have happened if it hadn’t been for the strikes.”

Nicolette Lloyd, 39, is among 8,000 Ellerine employees facing an uncertain future after 18 years with the company selling sofas and cabinets at an outlet in Pietermaritzburg near Durban. She’s just been informed that the store is set to close within the next 50 days.

“The letter says that only staff not finding employment at any of the other branches in the group will be given a retrenchment,” Lloyd said, speaking underneath a painted “40 percent off, closing down sale” notice. “But I know 100 percent there’s no jobs for me as a credit and cash clerk.”

Ellerines required funding support of at least 70 million rand ($6.59 million US) per month before it applied for receivership, according to the central bank.

While Ellerine and ABIL employees weigh future job cuts, African Bank investors are nursing their losses. Senior debt instruments will be transferred to the new bank at 90 percent face value, while subordinated debt and shareholders “will be
afforded the opportunity to participate in the good bank,” according to the central bank.

“Who’s taking the hit here? It happens to be the shareholders,” Marcus said.

Money-market funds overseeing about 270 billion rand ($25.4 billion US) have 1.3 percent exposure to African Bank debt, according to a statement by FSB, which regulates financial services companies excluding banks.

Read more at Bloomberg.