The Financial Services Tribunal published a ruling last week that received some coverage but deserves more analytical attention. The case ― African Bank versus the Prudential Authority ― reads on the surface as a routine compliance dispute. It is not. It raises substantive questions about circular capital, depositor protection and an unresolved structural conflict at the heart of South African banking regulation that this episode has made harder to ignore.
Briefly, the facts are as follows. African Bank’s capital adequacy ratios fell sharply in the final quarter of 2024 after several acquisitions, leaving it short of regulatory requirements. Its management devised a solution: the bank lent R725m to its fellow African Bank Holdings subsidiary, African Insurance Group (AIG), which declared a dividend of R685m to its common parent.
Holdings subscribed for one new share in the bank using that R685m. The capital shortfall disappeared. But the Prudential Authority found the three transactions indivisible and in violation of both the Companies Act and banking regulations, instructed reversal, and the bank grudgingly complied, this time using an arm’s-length loan to AIG to achieve the same economic outcome through a cleaner structure.
African Bank then contested the original ruling at the tribunal. The tribunal rejected its application, finding the original transaction a classic simulation not conducted in the ordinary course of business. But what has received less attention is what the episode actually illustrates and why it matters beyond this particular bank.
To understand the significance, it helps to recall Regal Treasury Private Bank, which attempted something conceptually similar in the early 2000s. Regal took depositors’ money, lent it through preference shares to an intermediary created for the purpose and used that company to buy shares in itself — manufacturing both an asset and capital from the same funds.
When the share price collapsed, so did the illusion. CEO Jeff Levenstein eventually went to jail for those transactions and related crimes. I raise Regal not to suggest criminal equivalence ― the African Bank case involved no such intent ― but because it clarifies what circular capital actually is and why regulators treat it with such seriousness.
Banks must hold capital against every loan they make because that capital is the buffer absorbing bad loans before depositors are exposed. Capital conjured from the bank’s own balance sheet is the same money appearing twice, protecting no-one.
African Bank’s transaction left the balance sheet holding a loan to AIG as an asset and new equity capital on the other side, both derived from the same original sum. The Prudential Authority was right to see through the structure to the substance.
Banks must hold capital against every loan they make because that capital is the buffer absorbing bad loans before depositors are exposed. Capital conjured from the bank’s own balance sheet is the same money appearing twice, protecting no-one.
African Bank’s argument to the tribunal ― that AIG held genuine retained earnings that were merely illiquid and that the intragroup loan was simply a liquidity mechanism ― was not entirely without logic. If real value was trapped in AIG, there is a case that the form of the transaction was the problem rather than its substance.
The availability of a straightforward arm’s-length solution, which the bank itself used to remedy the position, makes that argument difficult to sustain. But the more revealing question is why the bank chose to make it public at all.
The decision to take the Prudential Authority to the tribunal achieved nothing practically: the capital position had already been corrected. It succeeded only in drawing sustained attention to the bank’s difficulty managing its capital ratios and in placing on public record a confrontation between African Bank and its regulator. That is a peculiar set of outcomes to have sought deliberately.
Which brings us to the structural issue this case exposes. When African Bank was recapitalised after its collapse in 2016, the South African Reserve Bank injected R5bn and took a 50% shareholding, subsequently diluted to about 45% through an empowerment transaction.
The Prudential Authority is operationally independent from the rest of the Bank; the walls between the two functions are real. But the underlying tension is also real: the Reserve Bank is simultaneously responsible for the safety and soundness of African Bank and a substantial shareholder with a financial interest in its performance and valuation. Those roles are not easily reconciled.
One might have expected this unusual ownership structure to produce, if anything, a more co-operative and frank relationship between the bank and its regulator — the kind of early, informal engagement that resolves capital concerns before they reach the point of formal instruction and tribunal proceedings. That is not what happened. Instead, a dispute that should have remained a supervisory conversation became a public ruling.
There have been various attempts over the years to resolve the Bank’s position: an outright sale, a JSE listing, and other structural options. None has materialised. This episode does not make the path easier. It adds an awkward chapter to an already complicated relationship, raises fresh questions about African Bank’s governance while the Bank would benefit from flexibility, and illustrates concretely what the tension between regulatory and commercial interests in the same institution looks like when it surfaces.
The case for resolving that ownership question has just become more urgent.
• Dr Theobald is founder and chair of research-led consultancy Krutham.
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