JOHANNESBURG – Abacus Financial Services, a subsidiary of boutique investment manager Musa Capital, has secured a R100 million facility from Absa to grow pension backed housing loans (PBHL) in the lower- to middle-income market.
Absa awarded an initial facility to Abacus of R60 million in 2012 and, according to co-founder of Musa Capital Will Jimerson, this second award signals the untapped potential in the PBHL market.
“There is well over R1 trillion in pension funding available, yet the PBHL market is currently worth less than R10 billion,” Jimerson highlights.
By way of illustration, Abacus has fewer than 7 000 (mainly low-income) loan holders, despite servicing about 25 different pension funds, one of which, the South African Commercial, Catering and Allied Workers Union (SACAWU), has 8 500 members and is exclusively serviced by Abacus. “The potential is tremendous, especially considering that SACAWU is only the ninth or tenth largest union in COSATU, which has close to three million members,” says Jimerson.
“The irony is that PBHLs are the most affordable finance available in all consumer categories, including vehicle finance,” he adds.
But banks and non-bank financial institutions have instead offered microloans to low-income consumers as proxies for conventional home loans, Jimerson points out. According to Abacus, some 60% of all microloans are used for home improvements.
“Where a PBHL would be serviced at 8.5% to 9% interest, a microloan would charge interest of 60% to 80% on the size of the loan,” Jimerson says.
How a PBHL works
PBHLs are granted on the basis of affordability and your retirement age. They are repaid using an employer payroll deduction facility and the security for PBHLs is derived from the savings in your retirement fund. If you reach retirement age and have not yet paid back the loan, the remaining balance would be deducted from your pension payout.
Where Abacus loan holders miss installments that have a material impact on the loan term, loans are restructured so as not to extend beyond retirement age. Jimerson says that once three monthly instalments are missed, the loan would be called up with the pension fund, which could take up to an additional three months.
Around 60 Abacus loans (1%) are settled by drawing funds from pensions each month. “In the vast majority of cases, the need to draw on the pension for outstanding payments is avoided because a credit life product that covers the life of the member for death, disability and retrenchment is offered on the loans,” according to Jimerson.
Abacus’s loan book has more than doubled in the last two years and currently stands above R200 million.
But Jimerson admits that access to capital remains a challenge, as well as keeping the cost of funding low so that competitive interest rates can be offered to loan holders. “For PBHLs to remain affordable, they have to be done at scale.”
This requires further funding and Jimerson says that large asset managers are beginning to appreciate the non-financial returns yielded by the product, which centres on providing affordable housing to the vast majority of South Africans. “PBHLs could be a major contributor to development in this country. It’s a matter of making people aware that it is available,” he says.
By August, Musa Capital expects to close facilities with a new round of institutional investors for up to an additional R200 million in funding. “All engagements are currently in a due diligence process,” Jimerson says.
Author: Hanna Barry | 23 June 2014 00:17