The South African financial landscape is changing. With the recent downgrades of the country’s sovereign credit rating, as well as the downgrade of several of the country’s financial institutions, we are in the midst of a technical recession. Added to this is a call by the Public Protector to change the mandate of the South African Reserve Bank (SARB), and for Absa to pay back an ‘illegal gift’ to the value of over R1 billion that it benefited from during apartheid. This follows the release of a report looking at the apartheid-era bailout provided to Bankorp Limited.
A media briefing by Public Protector Advocate Busisiwe Mkhwebane, revealed that Absa was the benefactor of an irregular loan provided by SARB to the value of R1.125 billion. It was previously reported in the media as an apartheid-era loan, at the time reportedly to the value of R3.2 billion.
The amount first stated as being provided to Bankorp Limited, which was bought out by Absa Bank in 1992, (R3.2 billion) has been re-examined and a new amount of R1.125 billion has been declared as the correct value granted to Bankorp Limited/Absa Bank. Two investigations have found that this financial aid provided to Bankorp Limited/Absa Bank was irregular, according to the Public Protector.
Absa responds to the claims
Absa has denied any wrong doing. After the release of the provisional report by the Public Protector regarding the loan, Absa responded by highlighting several errors reportedly present in the report.
In a response by Absa to the latest Public Protector report, the bank stated: “In sum, Absa's submission is that the findings in the Provisional Report are legally and factually flawed and inaccurate. As a result, the Public Protector is requested to correct all defects before publishing the final report.”
According to Absa, the office of the Public Protector does not have the necessary jurisdiction to investigate the matter at hand. Furthermore, the bank sought to highlight the errors made with regards to the loan and its repayment.
Absa explained: “The Provisional Report incorrectly sets out the SARB assistance to Bankorp. In particular, the Provisional Report states that interest on a loan accrued to SARB at a rate of 16% per annum and was never repaid by Absa. However, no loan was ever provided to Bankorp or Absa at a 16% interest rate. In simple terms, the SARB assistance consisted of a loan which was provided to Bankorp (interest on this loan was 1% per annum, which was paid, according to Absa). That loan was immediately used mainly to purchase bonds from the SARB; and the yield on those bonds (16% per annum) less the 1% interest on the loan would be used only to set-off certain specified bad debts owed by customers to Bankorp.
“The Provisional Report does not address at all the fact that Absa paid fair value when it acquired Bankorp, which was calculated to take into account the SARB assistance i.e. Absa paid for the SARB assistance to Bankorp and did not benefit therefrom. This was accepted by the Davis Panel,” added Absa.
As Absa denies any wrong doing with regards to the loan, it further does not agree with the remedial action called for by the Public Protector. “The remedies proposed in the Provisional Report are neither practically feasible nor legally competent. In particular, the recovery of any debt allegedly due (which is denied) has long ago prescribed in law. Moreover, we deny any debt is due or payable by Absa,” stated the bank.
The remedial action called for by the Public Protector is to cover the initial loan amount, plus 16% interest on that amount over a five year period.
The effect on the SARB
Following the investigation into the Bankcorp loan incident, the Public Protector has made recommendations to change SARB’s mandate following its involvement.
“The Public Protector yesterday released a report on the Alleged Failure to Recover "Misappropriated Funds" in the erstwhile Bankorp lifeboat investigation. She has ordered remedial action directing Parliament to effect a constitutional amendment to the Reserve Bank’s powers. This had an immediate and negative impact on the markets and the exchange rate of the Rand,” revealed the SARB.
According to the SARB, the amendment to its powers would strip the Reserve Bank of its key competency to protect the value of the currency and the well understood role that central banks play in securing price stability. Furthermore, the SARB stated that the proposed remedial action will have a negative impact on the independence of the Reserve Bank.
NWU School of Business and Governance economist Prof Raymond Parsons has voiced concern over the proposal by the Public Protector to change the mandate of the SARB. “The Public Protector's proposal that the mandate of the SARB should be changed in order to be more 'transformation-led' threatens to open a Pandora's Box of additional risks for markets and rating agencies about SA. While it seems unlikely that any change will happen immediately, the fact that this matter is being raised now is negative for SA at a time when the country is economically vulnerable. It injects an unnecessary additional element of uncertainty into the economic debate when SA can least afford it, and when levels of confidence require to be boosted instead.”
The Public Protector said that SARB must work with and assist the Special Investigating Unit in recovery the misappropriated funds. Furthermore, Mkhwebane has called for the Chairperson of the Portfolio Committee on Justice and Correctional Services to initiate the process of amending Section 224 of the Constitution (the part that relates to SARB). According to Mkhwebane, this section of the Constitution should be amended to say the following:
“The primary object of the South African Reserve Bank is to promote balanced and sustainable economic growth in the Republic, while ensuring that the socio-economic well-being of the citizens are protected.
“The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, while ensuring that there must be regular consultation between the Bank and Parliament to achieve meaningful socio-economic transformation.”
As with Absa stating that the Public Protector’s call for remedial action against it falls outside of the Public Protector’s mandate, the SARB is arguing the same thing. “The Reserve Bank has consulted its legal team and has been advised that the remedial action prescribed by the Public Protector falls outside her powers and is unlawful. The Reserve Bank has been advised to bring urgent review proceedings to have the remedial action set aside. The Reserve Bank has resolved to do so,” noted SARB.
With so many questions and arguments over Mkhwebane overstepping her bounds as the Public Protector, this matter seems far from over.
To help you better understand the Bankorp saga, Absa has compiled a Q&A with the most pertinent information, and their understanding of what has happened and their thoughts on what it all means. Click here.