Strange transactions put African Bank in hot water after CEO resigns

African Bank has found itself under renewed regulator scrutiny after the Financial Services Tribunal (FST) ruled in favour of the Prudential Authority (PA), which flagged strange transactions used to boost the lender’s capital adequacy ratio. 

This scrutiny comes after the bank’s CEO, Kennedy Bungane, abruptly resigned at the beginning of March amid poor performance and a regulatory reporting mistake. 

The bank’s board has come out to say that it has an established governance framework which ensures it is compliant with all relevant legislation and regulations. 

This will be put to the test as the PA ratchets up scrutiny of African Bank’s attempts to boost its capital adequacy ratio, which is used to ensure banks have sufficient capital to absorb losses and protect depositors. 

African Bank had boosted its capital adequacy ratio by issuing a R720 million loan to African Insurance Group (AIG), which is owned by African Bank Holdings. 

African Bank Holdings is the parent company of African Bank and AIG. 

AIG transferred R685 million in dividends to the holdings company, which then used it to buy one share in African Bank and boost its capital adequacy ratio. 

The PA ordered the bank to reverse the transaction, which it did before taking the matter to the FST and asking it to reconsider the PA’s order. 

African Bank explained that the purpose of the loan was to recapitalise AIG. However, none of the funds stayed with the insurer, with it all flowing to the holdings company or the bank. 

Ultimately, the FST ruled in the PA’s favour, with the regulator’s evidence going uncontested. 

Independent analyst and CA Khaya Sithole explained that a well-functioning bank should not be in a situation where it has to engage in such tactics to meet minimum capital adequacy ratios. 

“In simple terms, the most important issue any bank has to monitor is its ability to maintain the capital adequacy ratio determined by regulators,” Sithole told 702. 

“In this instance, it looks like when the bank saw it was going to experience a shortfall, it then entered into a scheme to ultimately end up with its balance sheet looking better than it would have been otherwise.” 

Such practices, as noted in the FST’s ruling, are highly frowned upon and have resulted in South African banks in the past getting into significant regulatory and legal trouble. 

The practice, termed “kite-flying”, effectively masks the true capital position of a bank, covering up its poor financial standing. 

“When the regulators see actions of this nature, they then have to start worrying about what it means about the viability and sustainability of the bank itself,” Sithole explained. 

Putting out fires

African Bank is no stranger to intense regulatory scrutiny, with the bank’s reputation being marred by its 2014 collapse and curatorship. 

The bank has historically lent to low-income individuals through high-interest, unsecured loans, which proved profitable when the going was good. However, its performance was built on fragile foundations. 

In the early 2010s, the bank was hit by a perfect storm amid a broader economic slowdown in South Africa. 

In particular, African Bank’s asset quality decayed as the South African economy slowed, with many low-income borrowers defaulting on their loans and forcing the bank to post huge impairments. 

Simultaneously, African Bank’s parent company had acquired the furniture retailer Elleriens, with the bank using its capital to keep the retailer afloat. 

All the while, the bank’s funding model came under immense pressure as it was reliant on wholesale funding from institutional investors rather than a stable retail deposit base. 

As investors lost confidence in the bank and the South African market broadly, African Bank found its liquidity drying up. 

This resulted in the bank effectively collapsing, with the Reserve Bank stepping in through a curatorship programme where it would split the “Good Bank” from the “Bad Bank”. 

The current African Bank was separated out with its healthy assets and was given a R10 billion capital injection from a consortium of commercial banks and the Public Investment Corporation. 

The Bad Bank was wound down gradually over time, with senior debt holders taking a 10% haircut on their investments. 

This move by the Reserve Bank was broadly praised, as it prevented a wider collapse and contagion, while showing a firm regulatory stance on risk and responsibility. 

The investigation into African Bank’s transactions to boost its capital adequacy ratio, more recently, has led some to re-examine its history. 

“These issues do not help the bank on its path back to consumer trust through a process of stabilisation and revival, which was closely supported by the Reserve Bank,” Sithole said. 

“They took the view that it was not in anyone’s interest for a bank to fail. That process resulted in what I think, or at least believe, is a stable institution that is aware of its history.” 

“When a story like this emerges, it does create anxiety across the board, because people will naturally ask if we are headed back to the problems we saw a decade ago.” 

The board of African Bank has issued a statement responding to governance issues at the institution, saying it has an established framework to ensure it is compliant with all relevant legislation and regulations. 

“The board of African Bank, as a collective, has a fiduciary responsibility to the institution and its stakeholders. The board always strives to act in accordance with its fiduciary responsibility and in line with established and accepted regulatory compliance standards,” it said. 

“African Bank, being a regulated entity, has established a governance framework which ensures that it is compliant with all relevant legislation and regulations.”