ANALYSIS OF ENVIRONMENT

In this section, the external and internal environments in which a provider of asset-backed short-term finance operates, are discussed. The function of this discussion is to show the strategic position which informed subsequent deliberation.

Political instability and low growth rate are the most important downward drivers in the rating by credit ratings agencies of South Africa's sovereign credit rating, while ‘deep local capital markets’, strong policy institutions and a favourable government debt structure are the positive factors (Staff Reporter, 2016).

5.2.1 External environment

The external environment influencing a framework for the implementation of asset-backed short-term finance is discussed in this section, referring to the macro-environment and regulatory requirements.

5.2.1.1 Macro-economic environment

The macro environment for asset-backed short-term finance was described in Chapter 2 (credit in a modern monetary economy) and Chapter 3 (credit provisioning in South Africa). These findings were summarised in section 4.3 (market position of asset-backed short-term finance), 4.5 (regulatory requirements) and 4.7 (risk). The most important finding was that global regulatory requirements compel banks to implement

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time-consuming processes before non-standard loan applications can be decided upon, and that South Africa is no exception. This created a market for asset-backed short-term finance as a legitimate and growing financial industry.

In creating a framework for prospective providers of asset-backed short-term finance, the general business environment in South Africa is part of the external environment.

The country’s credit rating had by 2016 been downgraded to just above junk status by the major credit-rating agencies, with political instability and a low growth rate reported to be the most important downward drivers in this regard (Staff Reporter, 2016). In April 2017 two rating agencies (Fitch and Standard & Poor) downgraded South Africa to junk status, while Moody’s kept the country above junk status, but with a negative outlook (Van Wyk, 2017).

In the 2016–2017 GCR, South Africa’s shortcomings are identified as:

 stalled infrastructure development;

 power shortages;

 diminishing institutional quality;

 increased political uncertainty;

 less transparency in terms of governance;

 security concerns;

 business leaders having less trust in politicians;

 slowdown of Chinese economy (as South Africa supplies commodities to China);

 exchange rate volatility; and

 unlikeliness of improvement in the high unemployment rate (Schwab, 2016, p. 30).

Any of these negative indicators might cause a serious downturn in the South African economy, in which case collateral provides superior guarantee to an emolument attachment order, which is a common alternative for collateral (Cairns, 2014).

While banks lend depositors’ money and have access to central banks in times of credit crisis, the independent credit provider is fully responsible for all unrecoverable loans. Therefore banks take a long-term view on credit provisioning, which may be regarded as imprudent for the independent credit provider. This is important, because

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this type of credit provider may tend to focus on acquiring assets (repossessed collateral) if focus on the short term becomes blurred. This may even put the lender in the predicament of its customers, of having valuable assets, but insufficient liquidity.

The next section reflects regulatory requirements for independent credit providers.

5.2.1.2 Regulatory requirements

While every business is subject to the laws of South Africa, the financial sector is regulated according to sector-specific legislation, as described in section 3.2.2.

The only institutions legally entitled to receive deposits, are banks. This excludes independent providers of asset-backed short-term finance (Banks Act, no. 94 1990) (RSA, 1990).

The National Credit Act of 2005 (no. 34 of 2005, section 4) requires every provider of credit “at arm’s length” to register with the NCR. Credit providers who lend out less than R500 000 per year had been exempt from this provision, but this exception had effectively been repealed, when a government notice in 2016 determined the lower limit for compulsory registration as R0 (dti, 2016).

The Financial Intelligence Centre and Counter-Money Laundering Advisory Council (see Hendricks, 2015) was established by the FICA (Act no. 38 of 2001) (RSA, 2001) (Preamble to the Act) and is supported by the Money Laundering and Terrorist Financing Control Regulations (FIC, 2012, pp. 71–108). This is qualified by a policy statement, Exemptions in terms of the FIC Act (no. 38 of 2001) (FIC, 2012, pp. 109–

127), and affirmed by the Prevention of Organised Crime Act (no. XX of 1998) (FIC, 2012, pp. 128–209), and the Protection of Constitutional Democracy against Terrorist and Related Activities Act (no. XX of 2004) (FIC, 2012, pp. 210–254).

All accountable financial institutions are obliged to register with the FIC and to adhere to the following:

 verifying the identity of persons with whom they do business;

 keeping records of all transactions for five years;

 providing this information to an authorised representative of the FIC when requested to do so;

 reporting any cash transaction above a prescribed limit to the FIC;

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 reporting any transaction with an entity which has committed or attempted to commit acts of terrorism; and

 reporting any other suspicious and unusual transactions (FIC, 2012, pp. 22–

26).

The prescribed limit above which cash transactions must be reported (the so-called

‘cash threshold report’ [CTR]) is R24 999.99 (FIC, 2016). Independent providers of asset-backed short-term finance are accountable financial institutions and need to comply with this legislation.

Regulatory requirements for asset-backed short-term finance can be summarised as not receiving any deposits, registering with the NCR and adhering to the provisions of the FICA and related legislation.

5.2.2 Internal environment

The internal environment of a business is highly individual. Considering the risks relevant to this industry, as described in section 4.7, certain guidelines can be presented.

Credit provisioning requires intensive management to prevent any credit, legal, operational, reputation, liquidity and/or strategic risks. A prospective credit provider must therefore be committed to the time-consuming and demanding tasks of evaluating each loan agreement and associated collateral, to monitor payments and to act decisively on customers’ failure to pay. It could be quipped that nothing focuses the mind like the prospect of losing one’s own money.

To lend money, means to share in the risks of others (Holton, 2015). This highlights the importance of having sufficient funds to stay in operation, even when delays in repayments are experienced. As can be observed in the case study in section 4.8, lending out borrowed money is an intolerable risk.

Another aspect of the internal environment is the business architecture, which may be designed with higher or lower fixed costs. This involves the decision either to employ or to outsource staff for essential business roles, as well as the choice of premises and other physical facilities. The continuous rule is to keep fixed costs as low as possible in order to enhance the resilience of the enterprise (Investopedia, 2017).

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The case study in section 4.7 can again be referred to as an example where high margins hid the focus of management from a high cost structure and the risks posed by borrowers’ risks. An appropriate strategic response to the external and internal environment is provided in the next section.

5.2.3 A structuralist strategic approach

In section 4.10.2, the features of a structuralist strategic approach were contrasted with a reconstructionist approach. A reconstructionist approach is appropriate for an enterprise which can alter the entire environment in which it operates, while a structuralist approach subdues itself to its own limitations, given the structure of the market (section 1.4.1). This leads to a decision on market position, which is discussed in section 5.3.1. Suffice here to state that, as indicated in section 4.4 and repeated in section 5.2.1, the market for asset-backed short-term finance was created by changes in the market structure. The aim of this industry can therefore be seen as not to recreate the credit industry, but to utilise an opportunity created by it.

From the discussion above follows that it is strategically important for providers of asset-backed short-term finance to follow a structuralist approach, inhabiting a clearly defined niche in the credit market with emphasis on a lean business structure, prudent in the choice of premises and keeping permanent staff as low as possible. As will be indicated in section 5.4, this staff policy must be balanced by close co-operation with independent professional service providers.

In the following sections, the value proposition (the viewpoint of customers) offered by a provider of asset-backed short-term finance will be followed by the profit proposition (the viewpoint of the enterprise itself) and people proposition are discussed.