The African Bank crisis should make investors ask more pressing questions

african-bankBy John Field, FedGroup CEO

The current crisis enveloping African Bank brings to mind the 2002 banking crisis that crippled Saambou – similarly hobbled by risky micro-lending practices. Despite African Bank performing well through previously trying periods, its performance more recently, notably following the resignation of founder and CEO Leon Kirkinis, has seen the flailing organisation placed under curatorship by the South African Reserve Bank.

The unsteady performance of any financial institution rightly places investors on high alert. They would be wise to question the security of funds placed in such institutions. Are their investments, deemed “guaranteed”, indeed as safe as houses?

It is a fitting analogy, as unlike a secure investment, the term “guarantee” is a very loose one. Furthermore, investors rarely question the conditions of the guarantee. Generally speaking, the public confuses a guarantee with security. For example, does the guarantee maintain that an investor will get the full investment back, or that the investment will benefit from interest if it makes profit?

By contrast, secured investments are secured against an asset (property, in the case of participation mortgage bonds). Part bonds are secured by a registered bond in favour of the investor, and as such are safe from other claims. A guaranteed investment could be an investment in a bank, for example. Should the institution collapse, as in Saambou’s case, investors will not receive money until the secured creditors receive their money in full.

Banks are lending to the lower end of the market, which places them at higher risk. That risk is passed proportionately back to the investors who invest money either through shares or direct loans to the bank.

Often it is the public’s misunderstanding of the terms “guaranteed” and “secured” that results in a guaranteed investment, which places the funds in jeopardy. The investing public needs to be educated regarding the difference between guaranteed and secured, as well as regulated and unregulated entities.

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