Reserve Bank and its reputation are a crucial bulwark against Gupta Inc
SA’s banking sector is rightly recognised worldwide for the quality of its regulation and systems. That’s easy to forget in light of the bizarre cloud of conspiracies and accusations that shroud it. On the one hand, close associates of the Guptas are trying to buy control of a bank. On the other, Finance Minister Pravin Gordhan, now with the support of several banks, wants the high court to order that he is not legally allowed to interfere with client banking relationships. Then the old Bankorp skeleton was dragged out of the closet through a leaked report from the public protector.
One thing is clear: the Guptas want to be able to operate bank accounts in SA. When their accounts at the big four banks were shut down amid concerns over money laundering, they yoked their political supporters to the task of forcing the banks to change course. So in 2016 we were treated to the bizarre spectacle of the mining minister threatening banks with court action, while lying that the Cabinet had decided to appoint a judicial inquiry into the banks.
To close off that line of attack, Gordhan approached the courts for an order that he is not legally permitted to interfere in banks’ relationships with their clients. In late December, Standard Bank furthered the application, asking for an order that no minister may interfere in banks’ private commercial relationships.
The Standard Bank affidavit is a good read, making clear how the Guptas’ actions risk catapulting SA out of the global financial system, a fate that other African countries face because of weak antimoney-laundering controls. Such an eventuality would be vastly more devastating to the economy than a ratings downgrade.
In the midst of all this, close Gupta associate Salim Essa and Hamza Farooqui offered R450m to buy control of Habib Overseas Bank, a small foreign-controlled bank that made a profit of R29m in 2016. The acquisition of Habib is going to require approval from both the Reserve Bank and the minister of finance. Essa, as the 60% owner of Trillion Capital, is embroiled in allegations that Trillion improperly received millions of rand in advisory contracts from Transnet and had advance knowledge of the firing of Nhlanhla Nene as finance minister. Essa is also the owner of VR Laser, which is alleged to have illegally formed a joint venture with Denel.
The Reserve Bank, which must satisfy itself that all bank directors are “fit and proper”, is going to have a hard time finding that sort of comfort about Essa. It is also hard to imagine that the finance minister will give the change of control his blessing.
Then the public protector’s preliminary report on the Bankorp lifeboat was leaked. This has been used to cast aspersions on the Reserve Bank, Absa and Johann Rupert. Much of the commentary has been deeply confused, as is the public protector’s report itself.
The Bankorp lifeboat was, to be sure, an improper effort to rescue a bank. It began in 1985, a year of major crisis for the banking sector, which was reeling from the collapse in the rand and the withdrawal of international banking relationships. Several banks were in trouble, including Nedbank and Cape Investment Bank. Nedbank was rescued by Old Mutual, but it was much harder to deal with Bankorp. The Reserve Bank came up with a scheme that, over several years, lent the bank R1.5bn. Bankorp used R1.1bn to buy government bonds, which it then gave the Reserve Bank as security, and put R400m on deposit with the Bank. The loans had an interest rate of about 1%, depending on the tranche, while the deposit and bonds paid up to 16%. The difference was a free cash injection into Bankorp, which allowed it to get into shape for Absa to buy it in 1992. The capital amounts were paid back to the Bank though the interest differential never was, but that was precisely the idea.
Bankorp was not unique. Cape Investment Bank was rescued through a vaguely similar process at the same time.
It was done with the lack of transparency typical of the apartheid era, and two judges have found it to be illegal. The beneficiaries of the money were Sanlam policyholders, who held most of Bankorp shares. Even if they were found liable to repay the benefit, it would be impossible to recover the money.
Approaches to bank rescues have changed dramatically since. The most expensive was Saambou, which cost taxpayers more than R7bn in the years after 2002 when it collapsed. The Bank issued a solvency guarantee to FirstRand, which bought most of Saambou’s assets, and then had to write a big cheque when the extent of insolvency became clear.
Since the financial crisis, bank rescue thinking has changed dramatically. It is now considered optimal to take equity in return for support. As a result, the Reserve Bank owns 50% of African Bank, which it rescued in 2016. That scheme has the potential of not costing taxpayers anything in the end.
For the Guptas, both the Bank and the finance minister stand squarely in the way of their ambitions. The only strategy open to them is to try to get them out of the way.
That might be achievable in the case of the finance minister, though the consequences of his being fired would be devastating. But it is far harder in the case of the Bank, which may well end up being the last pillar of the banking sector’s international reputation.