Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We seek to manage our exposure to currency exchange, translation, interest rate, credit, microlending credit and equity price and
liquidity risks as discussed below.
Currency Exchange Risk
We
are subject
to currency
exchange risk
because we
purchase components
for safe
assets, that
we assemble,
and inventories
that we
are required
to settle
in other
currencies, primarily
the euro,
renminbi, and
U.S. dollar.
We
have used
forward contracts
in
order to limit our exposure in these transactions to
fluctuations in exchange rates between the South African rand (“ZAR”), on the one
hand, and the U.S. dollar and the euro, on the other hand.
We
had no outstanding foreign exchange contracts as of June 30,
2023 and 2022.
Translation Risk
Translation risk relates to the risk that our
results of operations will vary significantly as
the U.S. dollar is our
reporting currency,
but we earn a significant amount of our revenues and
incur a significant amount of our expenses in ZAR. The U.S. dollar
to the ZAR
exchange rate has
fluctuated significantly over
the past three
years. As exchange rates
are outside our
control, there can
be no assurance
that future fluctuations will not adversely affect our results
of operations and financial condition.
Interest Rate Risk
As a result
of our normal borrowing
activities, our operating results
are exposed to fluctuations
in interest rates,
which we manage
primarily through regular
financing activities. Interest
rates in South
Africa are trending upwards
and we expect higher
interest rates
in the foreseeable future which will increase our cost of
borrowing. We periodically evaluate the cost and effectiveness of interest rate
hedging strategies
to manage this
risk. We
generally maintain
investments in
cash equivalents and
held to maturity
investments and
have occasionally invested in marketable securities.
We have
short and long-term borrowings in South
Africa as described in Note 12
to our consolidated financial statements which
attract interest
at rates
that fluctuate
based on
changes in
the South
African prime
and 3-month
JIBAR interest
rates. The
following
table illustrates the effect on
our annual expected interest charge,
translated at exchange rates
applicable as of June 30,
2023, as a result
of changes in the South African prime and 3-month JIBAR interest
rates, using our outstanding short and long-term borrowings
as of
June 30, 2023. The effect of a hypothetical 1% (i.e. 100 basis points) increase and a 1% decrease in the interest rates applicable to the
borrowings as of June 30,
2023, are shown. The
selected 1% hypothetical change does
not reflect what could be considered
the best-
or worst-case scenarios.
Table 19
As of June 30, 2023
Annual expected
interest charge
($ ’000)
Hypothetical
change in
interest rates
Impact of
hypothetical
change in
interest rates
($ ’000)
Estimated annual
expected interest
charge after
hypothetical change
in interest rates
($ ’000)
Interest on South Africa borrowings
21,111
1%
1,663
22,774
(1%)
(1,660)
19,451
Credit Risk
Credit risk
relates to
the risk of
loss that we
would incur
as a
result of non-performance
by counterparties.
We
maintain credit
risk
policies
in
respect
of
our
counterparties
to
minimize
overall
credit
risk.
These
policies
include
an
evaluation
of
a
potential
counterparty’s
financial
condition,
credit
rating,
and
other
credit
criteria
and
risk
mitigation
tools
as
our
management
deems
appropriate.
With
respect to
credit risk
on financial
instruments,
we maintain
a policy
of entering
into such
transactions only
with
South African and European financial institutions that have a credit rating
of “B” (or its equivalent) or better, as determined
by credit
rating agencies such as Standard & Poor’s, Moody’s
and Fitch Ratings.
51
Consumer microlending credit risk
We are exposed
to credit risk in our Consumer microlending activities, which provides unsecured short-term loans
to qualifying
customers. Credit bureau checks as well as an affordability test are conducted as part of the origination process, both of
which are line
with local regulations.
We
consider this policy to be appropriate because the affordability test we perform takes into account a variety
of
factors
such
as
other
debts
and
total
expenditures
on
normal
household
and
lifestyle
expenses.
Additional
allowances
may
be
required should the
ability of our customers
to make payments when
due deteriorate in
the future. A significant
amount of judgment
is required to assess the ultimate recoverability of these
finance loan receivables, including ongoing evaluation of the creditworthiness
of each customer.
Merchant lending
We
maintain an allowance
for doubtful finance
loans receivable related
to its Merchant
services segment with
respect to short-
term loans
to qualifying
merchant customers.
Our risk
management procedures
include adhering
to our
proprietary lending
criteria
which uses an online-system loan
application process, obtaining necessary customer transaction-history data and
credit bureau checks.
We
consider these procedures to be appropriate because it
takes into account a variety of
factors such as the customer’s credit capacity
and customer-specific risk factors when originating a loan.
Equity Securities Price Risk
Equity price risk relates to the risk
of loss that we would incur as
a result of the volatility in the exchange
-traded price of equity
securities that we hold. As of June 30, 2023, we did not have any equity securities that
were exchange-traded and held as available for
sale. Historically, exchange
-traded equity securities held as available for sale were expected to be held for an extended period of time
and we were
not concerned with
short-term equity price volatility
with respect to
these securities provided that
the underlying business,
economic and management characteristics of the company remained
sound.
The market price of these exchange-traded equity securities may fluctuate for a variety of reasons
and, consequently, the amount
we may obtain in a subsequent sale of these securities may significantly differ
from the reported market value.
Equity Securities Liquidity Risk
Equity liquidity risk
relates to the
risk of loss
that we would
incur as a
result of the
lack of liquidity
on the exchange
on which
those securities are
listed.
We
may not
be able to
sell some or
all of these
securities at one
time, or over
an extended period
of time
without influencing the exchange-traded price, or at all.
We monitor these investments for impairment and make appropriate reductions in carrying value when an impairment is deemed
to be other-than-temporary.
We hold approximately 27.8% of the issued share capital
of Finbond which are exchange-traded equity
securities, however, from
April 1, 2016,
we have accounted
for them using
the equity method.
The fair value
of these securities
of $4.6 million
as of June
30,
2023,
represented approximately 0.8% of our total assets, including these securities.
52
ITEM 8.
FINANCIAL STATEMENTS
AND SUPPLEMENTARY
DATA
Our
audited
consolidated
financial
statements,
together
with the
report of
our
independent
registered
public
accounting
firm,
appear on pages F-1 through F-72 of this Annual Report on Form 10-K.
53
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.