by Jennifer Shevock - Africa -

MICROCAPITAL BRIEF: South African Microfinance Institution Blue Financial Services Reports Significant Year-End Loss and Recapitalization, Loses Operating License in Rwanda

Blue Financial Services, a South African microfinance institution reporting total reviewed assets equivalent to USD 343 million, has lost its operating license in Rwanda and expects to announce a year-end loss of up to USD 194 million for its fiscal period ended February 28, 2010. Blue attributes the negative results mainly to goodwill and deferred tax asset valuation impairments, an increase in loan loss reserves, reduced funding, early rapid expansion of the business and the weakening of African currencies.  The company has entered into an agreement with Mayibuye (Pty) Ltd to provide equity and debt financing.  As a result of the recapitalization, Mayibuye will become the majority shareholder.

Additionally, the company’s subsidiary in Rwanda, Blue Financial Services Rwanda, recently had its operating license suspended by the Central Bank. According to a Trading Markets report, the suspension was due to alleged fiscal fraud. The company denies the allegation and counters that a mutual decision was reached by the company and the Central Bank to suspend operations due to a capitalization shortfall. The effect of the license suspension on day-to-day operations is not known as of this writing.

By Jennifer Shevock, Research Associate

About Blue Financial Services:
Blue Financial Services is a South African microfinance institution operating in 14 African countries. It serves the formally employed yet underbanked populations.

About Mayibuye (Pty) Ltd:
Mayibuye is a South African private equity company which focuses primarily on equity acquisitions in the credit environment.

Sources and Additional Resources:
MICROCAPITAL STORY: “Blue Financial Services in South Africa to Continue Microfinance Growth in Africa But Lessens Pace” July 29, 2009. https://www.microcapital.org/microcapital-story-blue-financial-services-in-south-africa-to-continue-microfinance-growth-in-africa-but-lessens-pace/

“Blue ‘Financial Services’ Loses Operating License” June 8, 2010. http://www.tradingmarkets.com/news/stock-alert/bfnlf_blue-financial-services-loses-operating-license-970536.html

Press Release:  http://www.blue.co.za/pdf/Blue%20Announces%20Recapitilisation.pdf

Blue Financial Services: http://www.blue.co.za/

Mayibuye (Pty) Ltd:  http://www.mgroup.co.za/index.html

Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/

According to a press release submitted to MicroCapital:

Blue reports significant year-end loss

Blue Financial Services today released a trading update advising shareholders of an expected loss for the year ending 28 February 2010 not exceeding R1.50 billion. This translates to an expected basic loss not exceeding 191.97 cents per share and an expected headline loss not exceeding 149.31 cents per share.

These results were largely due to:

  • Write-off of goodwill;
  • Deferred tax;
  • Increase in loan book provisioning;
  • Reduced levels of funding which impacted business growth;
  • Earlier rapid expansion of the business including the acquisition of South African based Credit U, which resulted in disproportionately higher operating expense levels compared to current trading levels;
  • The weakening of African currencies, adversely impacting on the Rand-based results of many of the subsidiaries outside South Africa.

The pan-African micro-financier reported significant challenges in the last operating period, necessitating impairments of loan advances, goodwill and deferred tax assets in excess of R850 million. The Company reported that the increase in loan book provisions were largely as a result of a slow-down in portfolio growth during the reporting period. A contributing factor is the alignment of provisioning methodologies for operations where deductions are mainly from source with that of South Africa.

The Board has for some months been implementing a number of key strategic actions aimed at restoring the Group’s profitability in the medium-term. Key to this is the conclusion of the corporate action negotiations, which will introduce a new strategic shareholder to the business.

Corporate governance improvements include the separation of CEO and chairman duties, with the appointment of Mr. Sipho Twala as independent non-executive director earlier this year. Operational initiatives that are underway include aggressive cost rationalisation, improvement in operating model efficiencies, the disposal or closure of unprofitable business segments and product lines, as well as amending the Group’s product mix to restore profitability in the short-term.

Blue is also working towards increasing the Groups liquidity in the short-term, and has delayed any further expansion opportunities whilst focusing on organic growth and scalability of existing operations.

The Company’s securities have resumed trading on both the JSE and the Botswana Stock Exchange. Blue’s reviewed financial results for the year ended 28 February 2010 will be released during the week of the 7th of June 2010.

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