While the industry licked its wounds, the ashes of Abil’s phoenix began to glow anew. Although the bank that was too big to fail had gone down in flames, rescuers were quickly on the scene and it wasn’t long before the inferno was contained with aid of a few billion rands in liquid cash. The plan is for the bank to go public in the first quarter of next year with a first offering on the Johannesburg Securities Exchange.
The crash exposed other serious shortcomings in the money industry as well. It showed there was no ‘sure thing’ in the investment business and the systemic and structural weaknesses in the sector’s regulatory were paraded for all to see.
In essence, Abil was too big to be allowed to fail completely. Had it been tested on the anvil of hard commerce, it would no doubt have folded. As it transpired, a Good Samaritan in the form of the South African Reserve Bank (SARB) appeared and took measures that, in the words of the SARB governor, Gill Marcus, “are in the best interest of all stakeholders, whether depositors, shareholders, creditors or clients”.
Marcus went on to stress that African Bank would continue to operate during the curatorship and that curators would decide on the continued granting of loans and sound banking activities generally.
“African Bank continues to be open for business,” she said.
The rescue package is a public-private undertaking and presents “an unequivocal commitment to all existing retail depositors that their money is safe, and that they can continue with African Bank as their bank without fear that their deposits will be frozen or lost,” declared the SARB governor. “They will have full access to their money in the ordinary course of business.”
The curatorship is a protection procedure which gives the SARB the legal means to create the necessary space to implement a resolution plan capable of ensuring that the business of African Bank gains a secure perspective for the future as a lending institution with a transformed business model.
The curatorship and resolution process will ensure that the bank’s regular operations and collections continue effectively and efficiently. It will also identify performing loans and assets to be maintained in a good bank and involve the purchase, by the SARB, of a substantial portion of the non- and underperforming assets and other high-risk loans in order to separate them from the good bank.
So on the one hand, a recapitalised good bank has emerged with a book value of R26bn ($2.3bn) net of portfolio impairments. On the other hand, the bad book, which comprises a substantial portion of the non- and under-performing assets, will be housed in a vehicle with the support of the Reserve Bank as a means of separating it from the good bank. This means the bad book will no longer form part of African Bank.
“The bad book has a book value net of specific impairments of R17bn ($1.6bn) for which the SARB will pay R7bn ($628m),” announced Marcus. “Collection against the bad book will be both continued and strengthened. There would be no payment holiday for those owing on loans from African Bank. Every effort will be made to ensure that collections continue with the goal of avoiding any cost to the taxpayer arising out of this measure. A claw-back arrangement will be put in place for the bad book to the extent that performance exceeds expectations.”
Afribank rose nobly fuelled by sincerity of purpose and fell, ultimately, on the veracity of business’s oldest principle: There’s no such thing as a free lunch. Could its demise have been avoided?