Red Alert: African Bank and credit for consumerism: The collapse of a model

'...what appears as a crisis on the money-market is in reality an expression of abnormal conditions in the very process of production and reproduction' (Karl Marx, Capital, Vol. II)

This is the point various news reports and analyses have missed on the collapse of the African Bank. The crisis levels of inequality, unemployment and poverty persistent in SA are a part of, and indicative of, the 'abnormal conditions in production and reproduction'. Amassing more and more commodities on an immense scale, which is what capitalists do to accumulate wealth on a private basis, is also one of the driving forces of consumerism - the bling mentality.

This is a product created by the conditions of inequality. In the last two decades, it has been reinforced by the neoliberal notion of individualism and became the mind-set of its victims. The mentality mainly, but not exclusively, spread from the U.S., and was fuelled by the rise of neoliberalism in the 1970s. In SA, our transition to democracy in 1994 occurred in the aftermath of the rise, and the growing dominance, of neoliberal globalisation.

A tendency emerged in which sections of our society wanted to possess belongings which they had never had before, and to live a lifestyle which they had only seen on television. But with the accumulation of possessions came the accumulation of debt. This is what the African Bank was modelled to finance, not production, not development.

The collapse of the bank must be taken seriously. This is because it appears to be the collapse of the model it was based on, as was the case with the sub-prime lending crisis in the U.S. This problem, like a disease, became contagious. Through the links it had with other bad banking practices, interactions with other toxic financial products and all sorts of dealings that were not backed by production, the contagion caused the biggest global economic crisis since the Great Depression of the 1930s.

Marx states in Capital that interest rates, that is the price charged for money based on loans, are irrational because by and large they bear no relation to any underlying production conditions. It must be added that the irrationality becomes worse with exorbitant interest rates on short-term loans, which is the space the African Bank has occupied in SA. In its website the African Bank states that it had about 2.6 million customers.

The South African Communist Party (SACP) and Financial Sector Coalition Campaign (FSCC) have been leading a campaign for the transformation of the financial sector to serve the people, rather than rip them off through, among other things, exorbitant bank charges, high interest rates and expropriation of their houses through repossessions and evictions - which are frequently fraudulent. The campaign is also against reckless and unsecured lending practices that lead to people becoming indebted. The National Credit Regulator (NCR) was actually called upon and had investigate the African Bank.

The regulator followed up by referring a case of reckless lending committed by the bank to the National Consumer Tribunal, and called for a fine of R300 million with the final settlement being R20 million. When people take loans without proper information, without capacity to repay the loan plus interest, and when these loans are used for consumption and not to generate additional income, then those people become over-indebted and will obviously default.

In addition, we have a problem in the structure of production in SA. We are importing finished goods, while raw materials are a significant proportion of our exports. We have a huge trade deficit. By the way most African Bank loans were made to finance the consumption of luxury imported goods. This does not help drive local production and enterprise development. In Confronting Finance,Milford Bateman in his chapter titled 'The Microfinance Delusion', shows that you cannot build an economy on microfinance. He presents evidence conclusively underlining the fact that microfinance does not help drive enterprise development.

Another general problem is unsecured lending which is not wrong in itself but can have unintended consequences, depending on how it is being managed and under what conditions it takes place. This involves issuing out loans without security except for the incomes of the customers. Such loans are vulnerable to interruptions in income conditions. As Marx states in Capital, when their incomes are interrupted, consumers' spending is interrupted too.

When they are over-indebted, the interruption in spending also affects loan plus interest repayments. In addition, the methods of debt collection do not do any good. Once the debt collectors are brought in, the amount customers owe increase exponentially due to the new charges imposed for collection. People end up owing more and sinking deeper into debt, in addition to the irrational interest rates that they suffer. How the Reserve Bank of SA will manage collections after bailing out the African Bank will therefore be interesting.

Meanwhile, there is this argument that the bailout is in the interest of all. In class terms, those people who are indebted or over-indebted as a result of loans - the lower middle class professionals, teachers, nurses, etc., the workers and poor, are not being bailed out.

They, according to the deal, must continue to pay. Liberty Life, African Bank's second largest investor, along with others, are the ones who are actually being bailed out. After all, the African Bank functions like a middleman standing between these investors and the indebted customers. Basically, the bank obtains money from investors, passes it on to customers through loans, collects it back with interest, keeps its cut and pays back the investors.

The Government Employees' Pension Fund managed by the Public Investment Corporation is African Bank's largest investor. Only in this sense do public servants stand to benefit from the bailout, even if indirectly. Another class question: the Reserve Bank is buying ("nationalising") the bad book, while the good book is left in private hands.

But what do the major banks that have underwritten African Bank's bailout stand to benefit?

This question must be understood in the context where, in addition, as shown from Marx's Capital, the money used by banks as 'interest bearing capital' 'draws upon the money capital accumulated through the sale of commodity capital, as well as the hoards ["money held for future purposes"] of temporarily idle money of the industrial and commercial capitalists, workers, the state or anyone else.

These hoards and savings are collected and centralised in the financial institutions, and transformed into potential money capital on behalf of capital as a whole' (Marx's Capital, 5th ed., Ben Fine and Alfredo Saad-Filho). As Fine and Saad-Filho correctly put it, this money 'is not, however the juridical property of these institutions, and depositors are entitled to withdraw their funds (however, different types of financial investment may incur temporary restrictions on the ability to make withdrawals)'. And, indeed, as the authors further underline, 'Banks normally extend credit over and above the levels of deposits...' and, in addition still charge interest on loans issued from this to make money out of nothing - the money they do not have.

Let us make a point in passing. The workers and the poor often receive far less for their savings and investments with the banks than the banks make from them in interest rates and bank charges through loans. In addition, debt has been converted into a commodity. It is also being sold from hands to hands through new financial instruments (such as securitisation). Those who buy benefit in varying degrees. Interest rates adjustments and collection charges play their role in this accumulation scheme.

There is no transparency on the question what the major banks that underwritten African Bank's bailout stand to benefit. But one thing is certain. There is something they stand to benefit - otherwise they are exposed as a result of the problem, and are acting pre-emptively in self-interest. We need the details.

It is also clear that the collapse of the African Bank is a result of weak regulation in respect of reckless and unsecure lending practices if not interference in implementing existing regulations. A joint statement issued by the SACP and FSCC on Sunday calls on the NCR to perform its functions without fear or favour and the National Treasury and Reserve Bank to stop interfering in its work - particularly the curtailing of NCR's powers is isolated. The two regulatory institutions are then called upon to strengthen their regulatory hands. Meanwhile, the Reserve Bank said it was engaging with the African Bank for almost a year if not more. The African Bank's demise was foreseeable. Therefore we must ask: What role did the engagement play to stop the crisis?

Alex Mashilo is SACP Spokesperson.

This article first appeared in Umsebenzi Online, the online journal of the SACP.

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