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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 components. Short-term loans Maximum term = 4 months Maximum loan size = R 5 000 Maximum effective interest rate = 48%

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

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  1. Limitations on interest and fees Overview of likely impact on ABIL business March 2006 Leon Kirkinis

  2. Price 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

  3. Price 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

  4. Price ceilings for short-term loans TCOC% = Effective yield on interest and fees (excl. insurance)

  5. Price ceilings for unsecured loans TCOC% = Effective yield on interest and fees (excl. insurance)

  6. ABIL’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

  7. ABIL’s position relative to price ceilings ±17% of customers potentially affected Offering to be restructured for 11% Unable to service ± 6%

  8. 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

  9. Shift in sales distribution Indicative future shift It is expected that the introduction of the new pricing ceilings will accelerate the shift in sales volumes towards lower-risk customers

  10. Strategies to accommodate high risk clients Strategy 1 – reduce term and value for higher risk customers % X Value Price ceilings Cost Risk One way to accommodate clients that fall outside of the current price ceilings is to offer smaller loans for shorter terms.

  11. Strategies to accommodate high risk clients Strategy 2 – reduce costs further % Value Price ceilings Cost Risk A further reduction in costs will allow ABIL additional space to take on more risk, ie accommodate a greater proportion of higher risk clients.

  12. Opportunities 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

  13. Opportunities 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

  14. Medium-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

  15. 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

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