Monday, August 25, 2014

Sincerely yours: African Bank

How sincerity of purpose could have prevented the demise of a bank.

African Bank had a laudable purpose. It was supposed to have empowered and enabled millions of people excluded from basic financial services in South Africa, especially those having no access to credit.

As the old folks used to tell us, debt can be either empowering or debilitating, a slave or a master. If you use it productively to enhance your capacity to add value to people’s lives, it will become one of the most liberating and self-enabling things you could have done. If you use it purely for consumption and immediate self-gratification it will crush you, enslave you, and rob you of your serenity.

To that the old folks added a simple rule: the repayment term of the debt should never exceed the life or usefulness of the product you bought with it. Like health warnings on tobacco, any peddler of debt should clearly display this advice. It should be included in big bold letters on all contracts and agreements. Indeed, it should be a condition for the granting of a loan.

So old folks will shudder in their graves, wheelchairs and frail care beds, when they see what debt has become today; the crushing levels it has reached among individuals. It has become the basis of money; the playground of traders; the generator of enormous wealth for a handful; the black pudding of carnivorous banks and the manipulative tool of politicians and governments who simply rewrite the criteria of prudence to postpone the day of reckoning to some future generation. In this environment, it becomes extreme hypocrisy and outrageous self-righteousness, when it is said of the clients (or victims?) of reckless lenders, that “they should have known better”; or “you cannot save people from themselves.”

You could, you should, and you would: if you were sincere in your purpose.

African bank had such a purpose. When it was first launched in the 70’s, its founder, Sam Motsuenyane saw it as a vehicle to support fledging and highly disadvantaged black business. Then, at the turn of the century, it took huge leaps into the “unsecured” lending market, and still today its vision professes “to improve quality of life through affordable, convenient and responsible credit.”

Its spin goes on: “African Bank understands you as an individual, believe (sic) in you and empowers you to create more with your life. African Bank enables you to achieve your goals and improve your standard of living”.

If the investors in Abil, those much admired abstracts of asset managers, investment funds, financial institutions, pension custodians and other “safe-houses” of our money, simply took their eyes off their shareholder value spreadsheets they would have got it. The real story was never in the spread-sheets, the metrics, the bonds, the mergers and the acquisitions. It was in the human events that were unfolding long before the others took place. It was in behaviour, not measurements.

It was not Abil’s business model that failed but its behavioural model.

Without the latter, the former is nothing but an empty shell of meaninglessness. But then, the assessors of financial value, from credit rating agencies to portfolio peddlers have long since dehumanised business into abstracts and calculations, into pretty graphs and Power-point pictures.

I have hypothesised previously that one can identify two kinds of business behavioural models: empathy and survival. Applying strictly the criteria of each to African Bank leads to an interesting conclusion: either would likely have prevented the bank’s demise.

In the survival model, one which is driven by profit maximisation and shareholder value, those involved would have quickly realised that their revenue streams were becoming increasingly insecure, their lending increasingly “reckless”, their funding unstable, and ultimately the simple and common assessment of future returns on investment highly risky. They would no doubt have curtailed those practices.

The smart boys missed it with their I-pads, spreadsheets and designer suits (do they still wear them these days?) because of the fundamental flaw in the survival model -- a rampant virus of maximising returns in the shortest time possible – or short-termism that is always flirting with unbridled greed. That virus is strongly incubated and replicated by parasitic institutions with their own capital supremacy, demanding maximum returns from their hosts, seeing that as the sole purpose of the business and indeed seldom knowing what the true purpose of the business is.

The empathy model, one which is based on service to customers, adding value to people’s lives, maximum wealth creation and optimum wealth distribution which meets the legitimate expectations of all of its contributors, would likely have stopped the rot much earlier on. It would have identified that it is not meeting its purpose by reckless lending and by having clients fall deeper into a debt trap. It would have adopted as part of its approach to clients those sound principles of lending that the old folks spoke of.

The empathy model too, has its flaws. The first is a misunderstanding of empathy itself (which I dealt with in this article). It is not emotional, soft and cheesy. It does not encourage mediocrity and self-destructive behaviour. At the very least it has to adhere to fundamental laws of transaction. All legitimate transactions should be mutually empowering. If not that, then at least neutral and not harmful. And even when society allows the latter, that harm should be obvious and fully understood by both seller and buyer.

The other flaw in the empathy model is that it is so easily feigned by the survival model, with its battery of spin doctors, media dominance, public relations, branding specialists and advertising. But it says a great deal for the empathy model that all companies try to emulate or fake it. Interestingly too, prudent and authentic empathy companies seldom fail. It is the modern predatory survival model that most often hits the wall.

What finally distinguishes the two is sincerity. Ask African Bank.

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