In Africa a Bright Idea in Banking Leaves a Trail of Ruin

Leon Kirkinis, described as one of the sharpest minds in banking, changed South Africa by expanding credit to the poor. He also underestimated the risks, wrecked his company, rattled financial markets and left many of his 3.2 million clients drowning in debt.

Kirkinis, 54, co-founded African Bank Investments Ltd. in 1999 and built it into the country’s largest maker of loans not backed by collateral. He resigned Aug. 6, the same day the company said it would post a record loss and need 8.5 billion rand ($790 million) to survive. The South African Reserve Bank stepped in four days later to salvage what it could.

“He was one of banking’s brightest brains,” David Bullard, who worked with Kirkinis at UAL Merchant Bank in the 1980s, said in a phone interview. “Before creating African Bank, he did his research and for a long time it worked.”

He pursued a path to riches that led through some of South Africa’s poorest provinces, and won the confidence of investors along the way. Styling himself a visionary for lending to South Africans ignored or deemed too risky by conventional banks, Kirkinis fueled profits making loans at annual interest rates as high as 60 percent. Like U.S. subprime lenders half a world away, he overestimated his customers’ ability to repay their loans when the economy soured.

Kirkinis left Johannesburg with his wife for a game farm far from the city shortly after stepping down, a person with knowledge of the matter said. He didn’t respond to phone calls from Bloomberg News.

‘Stupidest Mistake’

African Bank’s “inherent flaw” was that it didn’t provision enough for bad debts, said Kokkie Kooyman, head of Cape Town-based Sanlam Global Investments, which oversees about $900 million. That left the lender, commonly known as Abil, vulnerable when its target market suffered “severe deterioration” from protracted mining strikes that began in 2012, he said.

Beyond that, the “stupidest mistake” was buying the country’s second-largest furniture retailer, Ellerine Holdings Ltd., in 2008, according to Kooyman, who said he argued about it with management at the time.

The consequences of the failure reverberated through the nation’s financial industry and beyond. Moody’s Investors Service lowered its credit ratings on South Africa’s four largest banks, cutting billions of rand from their market value. The bank’s demise may also bring closer a ratings downgrade of South Africa itself, Standard Bank said in a note on Aug. 20.

Money-market funds, including those run by Cadiz Asset Management, Stanlib Ltd. and Barclays Plc’s South African unit, imposed losses on investors. Toyota South Africa (Pty.) Ltd., the nation’s top automobile dealer, was among companies that canceled bond sales as investors shied away.

Unconventional Banker

Kirkinis projected an everyman image, eschewing the typical banker’s attire of suits and ties in favor of jeans, sport shirts and sneakers. He drove a yellow Jeep Wrangler to work, often with the roof off and music blaring.

While some South African CEOs spend their leisure time in Plettenberg Bay, an upmarket seaside town in South Africa’s Western Cape, Kirkinis preferred to be in nature and away from people, he said in a Jan. 29 interview. He spent part of his December holidays last year at the Vaal Dam, a lake about 80 kilometers (50 miles) south of Johannesburg where he has a boat and sometimes goes wakeboarding.

“I’m not one of these high-profile dudes,” he said. “Plett is the last place you would find me. I just like hanging out in my shorts and barefoot.”

Rich List

He projected confidence and ease in conversation with the press. Employees at the bank’s 1,000-seat call center in Johannesburg yelled his name and erupted into song when he visited with two Bloomberg journalists in January 2013.

“He told a compelling story with conviction and that obviously would have swayed people into trusting his judgment,” said Royce Long, a fund manager at Obsidian Capital, which sold all of its shares in the lender after it published a profit warning in January of last year.

As the company prospered, so did Kirkinis. In 2012, he was ranked the 37th wealthiest person in South Africa in the annual Sunday Times Rich List, with his holding in the lender valued at an estimated 660 million rand. That same year, African Bank paid an annual dividend of 1.95 rand a share.

By last November, when the company held a rights offer, the stake’s value had shrunk to 274.1 million rand. Following the rescue, shareholders will probably be wiped out. He hasn’t sold Abil shares in about seven years, based on stock exchange statements.

‘Robust’ Business

The lender’s origins go back more than 20 years to when Kirkinis, who had risen to become a general manager of UAL, set up Theta Securities with business partner Gordon Schachat in

1993. Theta, which initially financed and structured deals, bought the failed African Bank’s trading license in 1998 and changed its name to African Bank Investments Ltd. a year later, following a combination with three small lenders.

A chartered accountant, Kirkinis studied at the University of the Witwatersrand, rated No. 2 in South Africa in the most recent Times Higher Education World University Rankings.

Until recently, Abil didn’t take deposits, relying instead on stock and bond markets to fund its lending and Ellerine’s ensuing losses. The company increased net revenue every year for the past decade.

In a 2012 statement, he attributed the company’s fortunes to having “built a robust, well capitalized and flexible business to position us as the market leader in a larger, more competitive unsecured credit market.”

Platinum Strikes

Fault lines in the business began appearing that year. As strikes crippled South Africa’s platinum industry, miners began to default on loans. Schachat, who had reached the retirement age of 60, left the company.

The bank delayed a debt sale in February 2013 amid charges of reckless lending from the credit regulator. In October, Abil paid 20 million rand to settle the case after the investigation found the bank advanced at least 700 loans without first carrying out affordability assessments.

The company was forced to raise 5.5 billion rand in a rights offer last November. The central bank said in an Aug. 10 statement that it had told Abil in December to sell Ellerine, which was losing at least 70 million rand a month.

Kirkinis had other plans. Abil wanted to keep Ellerine and the distribution network the retailer provided for loans, he said in the interview in January. After the furniture seller suffered six years of declining sales, Abil was still trying to fix it and searching for a retail partner, he said. A partner was never found, and Ellerine applied for business rescue, akin to Chapter 11 bankruptcy, this month.

‘Responsible Credit’

As recently as February, Kirkinis was talking up Abil’s prospects.

“Our strategic actions undertaken in 2013, and the improvement in the quality of new business written, are expected to produce improved results in the second half,” he said in a Feb. 5 statement. “Abil and its people are refocused and reenergized, committed to its purpose of improving the lives of millions of ordinary South Africans by providing access to affordable financial services and responsible credit.”

By May, it became clear the optimism had been misplaced. The lender posted a record fiscal first-half loss of 4.38 billion rand as bad debts jumped. On May 30, Moody’s downgraded its foreign credit rating to junk.

It had also become evident to some investors that the lender’s self-professed goal of improving the lives of its clients had gone awry.

Crippling Debt

Andrew Canter, the chief investment officer of Futuregrowth Asset Management, said in October that high-interest loans had begun to “cripple” people. The Cape Town-based bond investor started exiting Abil last year, after its funds focusing on social development stopped buying debt from unsecured lenders.

By the end of June, almost one in every three loans was going bad, according to Abil’s Aug. 6 statement.

“The only weakness that Leon has is that he believes too much in himself and very little in people giving him advice,” said Tami Sokutu, the former head of risk for Abil, who said his African Bank shares were once worth 150 million rand. “He had faults and in the end that’s probably what brought African Bank down. He was convinced that he was going to turn it around.”

2009 Warning

Sokutu, who quit in February after 12 years as chief risk officer, said in an interview that he warned Kirkinis in 2009 the bank needed to provide new services, such as deposit taking, to reduce its reliance on unsecured lending. Kirkinis was also encouraged by executives to diversify Abil’s business in 2010, according to a person familiar with the matter who asked not to be identified because the discussions were private.

Sokutu has also come under criticism. South Africa’s Sunday Times reported on Aug. 17 that he said in an interview he didn’t care if poor people were over-indebted. Sokutu declined to comment on the report when contacted by phone on Aug. 21.

When the central bank stepped in, it split off Abil’s bad loans from the “good bank,” buying the book of soured debt for 7 billion rand with plans to recoup the money by collecting on the loans. The good bank was assigned a curator and seven financial institutions were appointed to underwrite a 10 billion-rand capital increase. Abil’s shares and its bonds were suspended the next day.

Holders of ordinary shares, preference shares and subordinated debt may lose everything, while senior debtholders stand to lose 10 cents on the rand.

Big Dream

South African authorities are still sorting through the mess. Hlengani Mathebula, a Reserve Bank spokesman, said the regulator is determining what further steps it may take. The National Credit Regulator will work with the curator to ensure the bank serves clients fairly, CEO Nomsa Motshegare said in a statement on Aug. 13. The National Prosecutions Authority and South Africa’s anti-corruption police unit, known as the Hawks, didn’t respond to e-mails seeking comment.

Sokutu said that even as the bank was crumbling, Kirkinis texted him on Aug. 6, after he quit: “Tami, this is too big a dream for the people of South Africa, we can’t give up on it,” the message said, according to Sokutu. “There are lots of people who need access to credit in South Africa to improve their quality of life.”

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