Limitations on interest and fees Overview of likely impact on ABIL business

Limitations on interest and fees Overview of likely impact on ABIL business

March 2006

Leon Kirkinis

Price cap componentsPrice cap components

Short-term loans

Maximum term = 4 months

Maximum loan size = R 5 000

Maximum effective interest rate = 48%

Maximum origination fee = R150 + 5% of loan amount > R1 000

with maximum limit of R 350 + VAT

Maximum monthly servicing fee = R 50 per month + VAT

Price cap componentsPrice cap components

Unsecured loans

Maximum effective interest rate = Repo rate x 2.2 + 20%

= 7% x 2.2 + 20%

= 35.4%

Maximum origination fee = R150 + 5% of loan amount > R1 000 with maximum limit of R 500 + VAT

Maximum monthly servicing fee = R 50 per month + VAT

Price ceilings for short-term loansPrice ceilings for short-term loans

TCOC% = Effective yield on interest and fees (excl. insurance)

Short-term loansPrice caps (VAT inclusive)

75%

100%

125%

150%

175%

200%

225%

250%

275%

300%

325%

350%

- 1 000 2 000 3 000 4 000 5 000 6 000

Loan Amount

TC

OC

% (

An

nu

al)

Cap - 1M Cap - 2M Cap - 3M Cap - 4M

Price ceilings for unsecured loansPrice ceilings for unsecured loans

TCOC% = Effective yield on interest and fees (excl. insurance)

Long-term loansPrice caps - VAT Inclusive

25%

50%

75%

100%

125%

150%

175%

200%

- 1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

10 000

11 000

12 000

13 000

14 000

15 000

Loan Amount

TC

OC

% (

An

nu

al)

Cap - 6M Cap - 9M Cap - 12M Cap - 15M Cap - 18M Cap - 24M Cap - 30M Cap - 35M Cap - 60M

ABIL’s strategic positioning 2004ABIL’s strategic positioning 2004

• Price caps were inevitable

• Margins would come under pressure through a combination of

competition and regulation

As a result, the group

• Initiated risk-based pricing segmentation work in January 2004

• Implemented the models fully in August 2005

ABIL's position vs. price caps (VAT Inclusive)

25%

50%

75%

100%

125%

150%

175%

200%

225%

250%

275%

300%

- 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 9 000 10 000 11 000 12 000 13 000 14 000 15 000

Loan Amount

TC

OC

% (

An

nu

al)

Cap - 1M Cap - 2M Cap - 3M Cap - 4M Cap - 6M Cap - 9M Cap - 12M Cap - 15M Cap - 18M

Cap - 24M Cap - 30M Cap - 35M Cap - 60M ABIL

ABIL’s position relative to price ceilingsABIL’s position relative to price ceilings

±17% of customers potentially affected

Offering to be restructured for 11%

Unable to service ± 6%

Shift in sales distribution Shift in sales distribution

New pricing introduced in August 2005 has caused the sales volumes to shift towards the lower risk end of our customer base

Debit order sales by risk grouping

0

50

100

150

200

High Medium Low

Rm

Risk grouping

200412 200512

Shift in sales distribution Shift in sales distribution

It is expected that the introduction of the new pricing ceilings will accelerate the shift in sales volumes towards lower-risk customers

Debit order sales by risk grouping

15%

25%

35%

45%

55%

High Medium Low

Risk grouping

Sal

es D

istr

ibu

tio

n

200412

200512

Shift

Indicative future shift

Strategies to accommodate high risk clients Strategies to accommodate high risk clients

X

Value

%

Price ceilings Cost Risk

Strategy 1 – reduce term and value for higher risk customers

One way to accommodate clients that fall outside of the current price ceilings is to offer smaller loans for shorter terms.

Strategies to accommodate high risk clients Strategies to accommodate high risk clients

Value

%

Price ceilings Cost Risk

Strategy 2 – reduce costs further

A further reduction in costs will allow ABIL additional space to take on more risk, ie accommodate a greater proportion of higher risk clients.

Opportunities created by the BillOpportunities created by the Bill

Card

• Client retention and extension

• Client flexibility (budget and revolve)

• Easy redisbursement

• Lower ongoing client acquisition cost (multiple loans per same client)

• Multiple transactions, leading to increased revenue generation opportunities

• Reduction in in-branch cash holding, (lower risk and associated costs)

• Pilot currently 5 000 cards providing R20 million in facilities

Cash loans market

• Volume opportunity at lower average term and loan size

• Optimise price/risk relationships at lower end of client risk bands

Opportunities created by the BillOpportunities created by the Bill

Removal of R10 000 loan size and 36 months term limit• 2 growth opportunities

– New client base (previously unserviced)– Extend average sizes and term to better (lower risk) existing clients

• Size of the opportunity– Pricing in lowest risk band has fallen from 59% to 32% - average instalment on

R9 000, 35 month loan down from R705 to R490.– 12% of January 2006 clients have loans of 35 months– 17% of January 2006 clients have loans of R10 000 – Vintages in lowest risk groupings ranging between 1.5% and 7% depending on

term

• More flexibility in pricing to mitigate risk

Medium-term effects of ABIL’s pricing strategyMedium-term effects of ABIL’s pricing strategy

Shift in the portfolio towards lower risk spectrum• Lower average yields

• Higher average loan values

• Lower defaults

• Better cost absorption

New price caps will accelerate the portfolio shift

that ABIL initiated in 2005

Preparation status…Preparation status…

In place• Risk-based pricing constructs• Monthly administration fees• Monthly insurance fees• Affordability tests• No consitutional discrimination • Collections processes largely in place

To implement over the next twelve months• Minor adjustments to documentation and marketing material• Minor adjustments to market conduct procedures• Adjustments to IT systems• Finer differentiation of risk groupings• Migration of risk portfolio in a measured way• Continue to drive costs down• Adapt to changes in payment platforms