A damning report into the collapse of unsecured lender African Bank has found that the boards of both the bank and its holding company African Bank Investments Limited (Abil) acted negligently and conducted the business of the bank recklessly.
The report, which was released on Thursday evening by the South African Reserve Bank (Sarb), follows the investigation led by advocate John Myburgh, into the collapse of the lender in 2014. But a consumer advocate has argued that although the report was not a “white wash”, it raises serious questions about actions of other players in the bank’s demise, including the South African Reserve Bank and highlighted governance failures at “multiple levels”. And opposition parties have already questioned why the report’s findings have not been referred to the National Director of Public Prosecutions (NPA).
The Myburgh commission found that there was “no evidence that the business of the bank was conducted with the intent to defraud depositors or other creditors” of the bank. But it found that the “boards of Abil and the bank, generally” were party to conduct that included the “breach of their fiduciary and other duties to the bank” and conducting the bank’s business negligently and recklessly.
The board was found to have acted negligently, for, among other things: appointing Tami Sokutu as the chief risk officer; not making “prudent, appropriate provisions from time to time”; aggressively growing the bank’s loan book and for allowing themselves to be dominated by founder and chief executive Leon Kirkinis.
The board was also party to the bank trading recklessly when it permitted it to make loans of R1,4-billion to another Abil subsidiary – defunct furniture retailer Ellerines – without security or any reasonable prospect that the loans would be repaid. The report also found that both Abil and the bank acted negligently in “underestimating the financial implications of issues such as bad debts; impairments; the cost of funding Ellerines; the risk of the market losing confidence in Abil and the bank and the funders failing to continue to support Abil and the bank” Myburgh did not make a finding that all board members were responsible on an individual basis – as the commission did not have the time or capacity to ascribe individual responsibility.
“But it must be borne in mind that in terms of section 66 of the Companies Act, the business and affairs of the bank had to be managed by or under the direction of its board, which had the authority to exercise the powers and perform any of the functions of the bank,” he said. The board members for both Abil and African Bank, during the bank’s “crisis years” of 2012, 2013 and 2014 included executive directors Kirkinis and Sokutu, Abil financial director Nithia Nalliah, Ellerines chief executive Toni Fourie.
The overlap of the boards itself was identified as a problem from the moment the bank began providing financial assistance to the ailing Ellerines business.
Drunk on bad debt and hubris
African Bank collapsed under a weight of bad debt in August 2014. The Sarb governor at the time, Gill Marcus put the bank into curatorship and initiated the Myburgh investigation to determine whether any fraud had taken place and whether any business had been “conducted recklessly or negligently”.
Although the probe began in 2014 and was completed in 2015, it was only made public on Thursday.
The Myburgh report shed light on the contribution the acquisition of Ellerines, and the financial support it gave the furniture retailer, played in the bank’s collapse. In approving loans, which grew from R450-million in 2012 to R1,4-billion by 2014, from African Bank to prop up the floundering Ellerines, Myburgh found the board had failed on multiple levels. It also questioned the acquisition of the Ellerines in 2007, which was driven by Kirkinis and permitted without sufficient due diligence by the then board.
“No reasonable banker would have lent R450-million or R900-million or R1,4-billion to a furniture business which was unprofitable or barely profitable in an industry which was struggling, without security: and no security was given,” he said.
Myburgh used the word “hubris” to describe Kirkinis’ leadership particularly when it came to his unwillingness, against advice, to align the bank’s impairment practices and how it accounted for them, with the rest of the local banking industry. Rather than pursuing “prudent” accounting policies, Kirkinis had driven “aggressive” policies at an unsecured lender where the opposite should have been true. But the board had allowed itself to be dominated by Kirkinis, the company’s founder and chief executive, where until August 2014 “no material decision … was taken which did not carry his support”.
The board had also been negligent in the appointment of Tami Sokutu, as the bank’s chief risk officer. Although he held the position for 10 years, he did not have the requisite qualifications despite African Bank’s risk heavy business model being “the bank which needed an experienced, qualified, person to occupy that position”. The report also identified Sokutu’s severe drinking problem, and the now famous “fuck the poor” article in the Sunday Times, which painted Sokutu “as a drunk fat cat who had made a pile of money when many thousands of investors had lost money”. “And to crown it all, Mr Sokutu appeared to be under the influence of liquor when he was interviewed by the Commission,” Myburgh said and “even admitted to having been drinking before the interview”.
Failure of governance at multiple levels
The report noted that the Sarb had been monitoring the growing financial crisis at African Bank from May 2013. The Reserve Bank was not immediately available to respond to questions, including why it did not take steps to intervene then.
Consumer advocate and founder of Fair Credit Stephen Logan said that the findings were an indictment on the board but also raised questions about the role played by other actors, including the Sarb, which is the banking sector’s regulator. The “recklessness and negligence of extreme magnitude” by the board was mirrored by the failure of supervision by the Reserve Bank, said Logan. “This shows, at multiple levels, a failure of governance,” he said. As the regulator the Reserve Bank should have “followed up on the due diligence pursuant to African Bank’s acquisition of a furniture retailer,” Logan argued.
But Myburgh did state that when Abil applied to the registrar of banks to buy Ellerines, as required by the Banks Act, Kirkinis failed to make important disclosures. Notably he failed to disclose the overstatement of profits by Ellerines, to the tune of R1-billion. It also found that although the application was made in Abil’s name there was no evidence that the board had approved or been able to properly consider the acquisition, when the application was made to the registrar.
Logan was also concerned that the report spoke more to the manner in which African Bank accounted for the impairments on its loan book, than it did to the bank’s lending practices. The levels of impairments at African Bank suggested its lending practices were questionable and pointed to reckless lending he argued. The report “apportioned no blame, for the millions of distressed African Bank customers who should never have been granted [loans],” he argued.
Pathway to prosecution?
The release of the report may potentially open the way for prosecution by aggrieved parties such as shareholders, Logan said. The Democratic Alliance’s spokesperson on finance David Maynier questioned why the report had not been referred to the National Director of Public Prosecutions (NPA) “The Banks Act is clear: if it appeared that any business of the bank was carried on recklessly and/or negligently, the report should have been referred directly to the National Director of Public Prosecutions,” he said in a statement.
Maynier said he would write to the Reserve Bank governor Lesetja Kganyago, asking him to explain why it had not been referred to the NPA; and whether, given the findings, the Sarb would do so now. The fact that the final report of the independent investigation found that the business of the bank was conducted negligently and recklessly, raises the question why the final report was not referred directly to the National Director of Public Prosecutions, at the time it was completed in 2015.