The leadership of JSE-hopeful African Bank has been thrown into further question after the Financial Services Tribunal likened its attempt to artificially boost its capital adequacy ratio to “kite-flying”, siding with the position adopted by the Prudential Authority (PA).
The ruling comes as the lender faces increasingly frequent run-ins with the regulator.
Kite-flying in banking involves creating artificial balances by writing cheques between accounts at different banks, effectively obtaining unauthorised credit.
The PA relies on information provided in form BA 700, which allows it to monitor banks that maintain sufficient capital to absorb losses, including specific capital add-ons and buffer requirements.
The regulator took issue with the BA 700 from African Bank submitted for January and February 2025, which reported its capital position.
According to uncontested evidence before the tribunal, the lender — faced with a shortfall — devised a scheme in which it issued a multimillion-rand intercompany loan to African Insurance Group (AIG).
AIG then distributed the funds to African Bank Holdings, the parent company of African Bank, AIG and the Ikamva Lethu Trust.
The group, through AIG’s investment in a cell captive, is able to sell insurance (credit life and funeral cover insurance products) under its own brand. These products are provided to the bank’s personal banking customers.
The transaction culminated in African Bank Holdings utilising the proceeds of the dividends to subscribe to one [ordinary] share [at R685m] in the bank to recapitalise the bank and improve its capital adequacy ratio.
The PA would have none of this and ordered the bank to reverse the transaction, which it did under protest. It then approached the Financial Services Tribunal for reconsideration of the PA’s order.
The PA argued that despite the stated purpose of the loan being to unlock AIG’s illiquidity, not a single rand remained with AIG, as every cent flowed straight to African Bank Holdings and back into the bank.
The tribunal last week found transactions were conceived together at a single committee meeting as one composite plan to improve the capital adequacy ratio. No independent existence was contemplated, and no genuine liquidity was unlocked for AIG — unmasking the real intention of the transaction, to improve the capital adequacy ratio of the group.
The transaction was given the green light by the special projects and large exposure committee, which has board chair Thabo Dloti and key executives as members.
“We may add that the subscription price of one ordinary share of R685m in a bank that is undercapitalised is remarkable considering that Holdings holds all the shares in the bank.
“It must mean that each issued share was valued at about that amount. This was raised with counsel during argument, and we did not receive an explanation,” the tribunal ruled.
“To evade the problem [of shortfall in capital adequacy], the bank issued an intercompany loan to AIG, which had to distribute the loan funds to Holdings as a dividend to enable Holdings to subscribe for one share in the bank for the same amount as advanced by the bank.
“By means of simultaneous electronic entries the amount that left the bank returned to it under another name, rather reminiscent of kite-flying when we still had cheques.”
African Bank told Business Day that it respected the tribunal’s decision.
“It is important to note that the tribunal’s ruling and resultant outcome relate to the specific facts and nature of the transaction and resulting capital treatment under consideration involving one of the bank’s subsidiary companies, AIG,” it said.
“At the time, African Bank and the PA held different views regarding the nature of the transaction and the associated capital treatment. The board obtained independent legal advice and, accordingly, resolved to refer the matter for reconsideration to the tribunal.
“Notwithstanding the referral to the tribunal, African Bank complied fully with the PA’s directive at the time. It was transparent regarding its engagement with the PA during investor engagements following the interim financial results for the six months ended March 31 2025, announced in May 2025, and included a disclosure in the interim financial statements.”
The lender recently showed its CEO, Kennedy Bungane, the door in an acrimonious separation, which involved a separation PA filing and the group’s poor first-quarter performance.
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