Barko Financial Services’ ambitions to obtain a mutual bank licence have been dealt a blow by the Prudential Authority (PA), which declined its application.
This after Barko founder and CEO Jacobus de Wet’s costly divorce settlement, funded through the company’s coffers, came back to bite it.
The PA declined the microlender’s application, deeming De Wet as not being a fit and proper person to lead a bank in SA.
The regulator’s concerns related to potential detriment to depositors and borrowers as it found that De Wet, who founded the company in 1996, breached certain provisions of the Companies Act by allowing Barko Developments, another outfit of which he was the sole shareholder and director, to make shareholder loans to him while the company was insolvent.
The loans, which were on favourable terms to De Wet, went to settling his multimillion-rand divorce.
The two entities, though related, are distinct in their areas of operations, with Barko being a microlender under the National Credit Act, while Barko Developments is in the business of citrus farming and property letting.
The loans Barko Developments extended stretch back to 2018, when De Wet had to pay his former wife a settlement of R166.5m, according to information before the Financial Services Tribunal.
Barko and De Wet approached the tribunal to set aside the PA’s decision to decline the company’s application for a mutual bank licence.
To obtain the loan, Barko and Barko Developments adopted resolutions to authorise loans from Barko to Barko Developments, and from Barko Developments to De Wet.
To fulfil this agreement, Barko penned an unsecured credit facility for Barko Developments to the tune of R500m and it advanced an initial amount of R223m at 7.5% per annum.
In turn, Barko Developments and De Wet entered into a shareholder loan agreement for R100m. A 2020 addendum to the agreement increased the loan to R270m and the interest rate was reduced to 6%.
At the time of the first loan, Barko Developments was technically insolvent with its total liabilities of R521m more than its assets of R498m, according to its financial statements.
The situation worsened in 2020 when the loan was increased, with Barko Development’s liabilities exceeding its assets by R39m.
Barko disputes that Barko Developments was in an insolvent position when the agreements were concluded. The company argued before the tribunal that the fair value of the biological assets of Barko Developments was not reflected in the financial statements and if this value was added, the solvency test was satisfied.
The tribunal dismissed this argument, upholding the PA’s decision to decline Barko a mutual banking licence.
“The fact that Barko did not disclose the indirect loans to Mr De Wet when it filed its application for registration is telling. To say, as was argued, that the PA could have asked for the information is somewhat cynical because one cannot ask for something that one does not know exists,” the tribunal found last week.
“In a document signed on December 1 2023 by Mr De Wet, the companies confirmed that their transactions were not at arm’s length. There was no security, and the interest rate varied (sometimes as low as 0%) and was less than the rate Barko Developments or Barko had to pay its banker,” it said.
“The repayment of capital and interest was exclusively dependent on a decision by Mr De Wet either on behalf of Barko or Barko Developments. And through addenda, no interest or capital has been repaid by Mr De Wet to Barko Developments or by Barko Developments to Barko. This problem Mr De Wet wishes to address through restructuring if a banking licence is obtained.”
Being a mutual bank would have expanded Barko’s activities and revenue streams. Mutual banks focus on savings, investments, and may accept deposits and grant loans, advances or other credit in SA.
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