African Bank under scrutiny after regulator finds 'kite-flying' attempt to boost capital levels

African Bank has been dealt a blow after the Financial Services Tribunal backed a finding by the Reserve Bank's Prudential Authority, that the bank tried to artificially inflate its capital position.

The Tribunal likened its actions to the outdated and frowned upon practice of “kite-flying.”

The disputed transaction is explained in very technical terms, but essentially boils down to a complex series of interrelated steps aimed at recapitalising the bank by artificially inflating its financial adequacy ratio through intra-group loans, dividends and share subscription.

The Tribunal finding follows the resignation of African Bank CEO Kennedy Bungane in March.

The institution has been rebuilding its reputation in the sector and among consumers since 2014, when the original African Bank Limited was placed under curatorship by the Reserve Bank.

The scale of African Bank's current trouble is difficult to explain because the main issue is actually how it ended up under this intense scrutiny by regulatory authorities in the first place, comments analyst and chartered accountant Khaya Sithole.

"In simple terms, the biggest issue any bank has to monitor is its ability to maintain the capital adequacy ratio determined from time to time. In this instance, it looks like when they foresaw that they were about to experience a shortfall, they entered into a scheme with the aim of simply ending up with the bank's balance sheet being reflected more positively than it would otherwise have been."

Sithole says this kind of practice is viewed negatively particularly because when regulators see it happening, they have to worry about what if means for the sustainability and viability of the particular regulated institution.

"When a story like this emerges, it does create anxiety across the board because people naturally will end up asking, are we heading towards the same problems that we saw a decade ago, and of course it is now the responsibility of the regulators to explain exactly what the position is."

For more detail, listen to the interview audio at the top of the article