AFRICAN BANK: Who is to blame for the African Bank mess?

BY EDITORIAL - AUGUST 12, 2014

The South African Reserve Bank’s strong action to place African Bank Investments Ltd (Abil) under curatorship and rounding up support from other big banks to guarantee a capital injection for the bank’s “good” book while it took over the “bad” one is highly commendable.

But who is to blame for the mess at African Bank, which went from being valued at more than R10 billion to under R1 billion in just a couple of days of trading.

Some are pointing to regulators such as the Office of Banks in the Reserve Bank, the Financial Services Board, the Treasury and South Africa’s National Credit Regulator (NCR) for sleeping at the switch.

On 11 August, the Debt Counselling Industry (DCI) said the NCR must be investigated for failing to properly review African Bank’s reckless lending practices which led to a shortfall of R8.5 billion in the banks finances.

“Over the past few years, debt counsellors have lodged thousands of complaints, many relating to reckless lending… against the country’s major credit providers, including African Bank,” Deborah Solomon, founder of DCI, was quoted to have said in a statement.

“These complaints have repeatedly been sent to the regulator who has chosen to ignore them and the plight of desperate consumers.”

The NCR has not commented to this yet.

Was the NCR sleeping at the switch?

In February 2013, the NCR referred two separate cases of reckless lending by African Bank Limited to the National Consumer Tribunal proposed that the tribunal impose a fine of R300 million on Abil following complaints received from consumers against African Bank.

In October 2013, African Bank and the NCR eventually settled the matter, after fighting over the proposed fine for quite some time at the NCT. African Bank finally paid a R20 million fine and ‘wrote off’ the reckless loans, refunded consumers and rescinded any judgments that had subsequently been taken against consumers. They also had to remove judgment and adverse information listings from the credit records of the effected consumers.

Did the NCR miss the tell-tell signs and an opportunity to properly examine Abil then – which could have perhaps averted the events of last week?

Must we blame the management at Abil?

Now that things went sour at African Bank, it is easy to forget that it had one a business model that was once celebrated as highly innovative and appropriate to its market. However, things had become increasingly risky after more players muscled into the unsecured lending space while Abil’s target market became less likely to service their multiple debts.

However innovative and appropriate Abil’s business model was it is its funding model that was risky as it relied on the wholesale market rather than on deposits from the public.

Observers have criticised Abil’s management for failing to see the vulnerabilities increase and taken early and decisive action to review the company’s business model – more so after December’s R5.5 billion rights issue which was a loud warning signal. The role of the board of directors is precisely to ask questions and to push management to act or shift out when things start going wrong. They say the Abil tragedy reflects a failure of governance on a grand scale.

While CE Leon Kirkinis finally resigned last week, there has so far been no suggestion of any other resignations – everyone should ask why?

Shareholders to blame too?

Abil’s large shareholders, led by Coronation and the Public Investment Corporation, have been blamed for the mess as well. They are seasoned fund managers and did not properly scrutinise Abil nor did they foresee the impending disaster – or if they did, why they decided to do nothing, one should wonder.

However, there is nothing anyone could have done…

Speaking at the Southern African Internal Audit Conference yesterday, Finance Minister Nhlanhla Nene said; “No financial sector regulatory regime can prevent failure of all financial institutions. Indeed, effective policy includes the resolution of financial firms in trouble in a way that imposes losses on those investors who profited from that firm’s activities, and who were in a position to exercise influence over that firm’s management. In this regard, the role auditors play in providing transparency to financial markets is vital.

One thing is obvious though; after the immediate problems at African Bank are sorted, a public inquiry must be set up effectively look into the causes at Abil and the state of South Africa’s unsecured lending sector.

“Having said that, National Treasury had already, in 2012, begun the process of further strengthening financial sector oversight and the events that culminated in curatorship of African Bank are a powerful reminder of the urgency of this work,” Nene said.

 

Photo caption: NOW UNDER CURATORSHIP... But who is to blame for the mess that befell African Bank? Photo courtesy of Tygervalley Centre.