Ellerine drops bottom out of interest rates

Ellerine drops bottom out of interest rates by Lans

May 30, 2008, 6:17 am
Filed under: Retail

African Bank Investments Limited (Abil) is now applying its low-cost borrowing model to its Ellerine furniture acquisition, offering an interest rate of 15 percent to its least risky customers.

May 28, 2008

By Tom Robbins

Cape Town – African Bank Investments Limited (Abil) is now applying its low-cost borrowing model to its Ellerine furniture acquisition, offering an interest rate of 15 percent to its least risky customers.

This compares with the 25 percent offered by rival the JD Group.

Prior to the Ellerine acquisition, Abil cut the borrowing cost to its lowest risk customers, leading to a 13 percent quarterly rise in microloans granted, Bloomberg reported. Loans amounted to R12.3 billion in the quarter to December.

JD Group’s executive chairman, David Sussman, said yesterday that it would “not turn a blind eye” to cheaper financing and insurance from Ellerine, but added that a 15 percent interest rate on unsecured debt was unsustainable.

This is the same rate as the prime interest rate banks use to base secured home loans.

“I would love to know how many Ellerine customers actually qualify for a 15 percent interest rate,” Sussman said.

The JD Group’s average interest rate was 27 percent.

“If the market forces us, we will not ignore competitive forces and will respond, but not at unsustainable levels,” Sussman said.

Sussman said he had traded through numerous downturns and would not expose the JD Group to undue risk at a time when risk was rising.

“I have the utmost respect for Abil, they are most able and we have a long way to go towards achieving the efficiency they have in financial services,” he said.

Abil said it intended to use its expertise in offering unsecured loans in bringing down the costs of borrowing at Ellerine. Abil was not available to comment on its interest rates.

Jeanine van Zyl, a retail analyst at Old Mutual Investment Group SA, said the 15 percent rate was being offered to very few Ellerine customers.

But Van Zyl said that following Abil’s purchase of Ellerine there would be long-term downward pressure in the industry on interest rates offered to the bulk of customers.

Cheaper interest rates would give Ellerine a competitive advantage, but this needed to be combined with a good product. A 1 percentage point drop in the highest rates offered by Ellerine, assuming competitors followed suit, “will reduce yields and I hope the JD Group are prepared for that”, said Van Zyl.

Van Zyl said the JD Group’s ability to compete on interest rates would depend, in part, on how quickly it was able to gear up its consumer finance business, or borrow in order to fund its debtors book.

But most customers still made purchases based on the product and the advertised cash price, as opposed to interest rates. This would give some protection to those that offered less competitive rates.

Abil also faced the challenge of bringing down the high cost base at Ellerine stores.

Abil’s preference for collecting debt through debit orders was efficient, but the Lewis model, where customers came into stores to make payments, gave the opportunity to make another sale at the same time.

Abil traded 1.08 percent lower at R24.03 on the JSE yesterday, while the JD Group’s shares fell 1.31 percent to R30.20. The general retailers sector fell 0.03 percent.

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