South African Bank Crises
When one thinks about banks in South Africa, a few names come to mind: Absa, Standard Bank, FNB, and Nedbank. These four banks are colloquially known as the Big Four. But prior to them establishing significant market shares in the banking industry, there was more competition for depositor funds. Some of the banks which used to form part of the industry, but failed due to reasons related to liquidity, are Sechold Bank and Prima Bank. Banks that have gone under because of fraud would be Alpha Bank and Cape Investment Bank.
Some banks ceased operations not because of maladministrative reasons but rather because of mergers and acquisitions. Such banks would be Old Mutual Bank and African Merchant Bank but to name a two instituitions. In this article I will discuss two banks that have gone under in South Africa, and what can be learned from those failures. The two banks to be discussed are Saambou Bank and African Bank.
History and Rise of Saambou Bank
Much like Capitec Bank today, Saambou Bank viewed itself is a trailblazing bank with anapproachable and friendly style to banking. Founded in 1942, it originally had the name of Union Building Society, which was subsequently changed to Saambou Building Society shortly thereafter. In the 70’s the company merged with the National Building Society, and the resulting combination of the two instituitions was Saambou National Building Society. This company eventually listed on the Johannesburg Stock Exchange in 1987. Saambou Banking Limited was a result of the consolidation between the banking and building divisions of Saambou National Building Society. This final name change occured in 1991.
According to Dr John Chibaya Mbuya, Saambou Bank’s vision was “to become the preferred retail financial services provider for the middle market”. It is for this reason that I juxtopsed Saambou’s approach to business to Capitec’s way of business.
Fall of Saambou Bank
The 1990s was an interesting time for South Africa. There was the fall of the Apartheid regime. In addition, a lot of businesses had strong interest in moving some of their business to the Internet. It was during this time where Mark Shuttleworth founded Thawte Consulting. The acquisition of Thawte by VeriSign earned Mr. Shuttleworth billionaire status, and he is famous for being the first South African to visit space as a space tourist. Saambou also had a strong interest in the internet and spent a substantial amount of money to move their business there.
Saambou entered into an online business venture with 20Twenty bank, an online retail bank founded by Chriesto Davel. Because of the difficulty and the lengthy process required to set up a bank in South Africa, Mr Davel decided that a partnership with Saambou bank would be the best step to take in order to launch his venture. He was right, and 20Twenty bank launched in July 2001. As interesting side note, 20Twenty was founded around the peak of the Dot-com bubble, which popped in early in October 2002.
Saambou was heavily invested in the 20Twenty, with an ownership stake of 65% in the venture. From the beginning of 2002 up until February Saambou experienced a variety of shots to its reputation, these shots coming in the form of downgrades from Fitch. This frightened depositors and the eventual result was a bank run which culminated in the withdrawal of around R1 Billion rand in about two days. This is still, by far, the largest bank run in South Africa’s history. At the time of this particular bank run, Saambou was the sixth
largest bank in South.
History and Rise of Africa Bank Limited
African Bank was established by Dr Samuel Motsuenyane in 1964. The funds were put together my members of the National African Federated Chamber of Commere and Industry, most commonly known as NAFCOC. Other prominent member of NAFCOC include Mr Archie Nkonyeni and Mr Patrice Motsepe but to name a few.
NAFCOC had its inaugural conference in 1964, with the aim of uniting black business people within the country. The intention of the meeting was to discuss the development of all businesses in attendance. The meeting was called by Dr. Richard Maponya, who at the time, was the head of the Johannesburg African Chamber of Commerce.
The meeting was success but for the amount of equity raised for the African Bank venture. At that particular NAFCOC meeting in 1964, the capital raised for African Bank amounted to only R70! The minimum required amount to establish a bank was R1 million, and Dr. Motsuenyane went on an extensive capital raising project to meet this goal.
The most significant impediment of fund raising for establishing the bank was the amount of capital required. According to Dr. Motsuenyane, “We could not get sufficient support from banks at that time”. However, he was not to be discouraged by this lack of funding. Inspired by black owned banks in America like Citizen Trust Bank and Industrial Bank, he
embarked on a journey to achieve this goal.
After raising part of the funds from South Africans willing to contribute to the establishment of the bank, he thereafter went to London to secure additional funds. In 1972 he met with the chairman of Barclays Bank, Anthony Keith, and with the funds secured from this encounter, more South Africans were encouraged to contribute capital for the establishment of African Bank.
Other considerable capital contributions came from the Zululand government, who at the time was led by Chief Mongosuthu Buthelezi. The contribution from KwaZulu amounted to R25000 and in 1975, the first branch of African Bank was open in Ga-Rankua.
Fall of African Bank Limited
For a significant portion of the first decade of the 21st century, African Bank experienced substantial growth in its share price. From 2003 to 2008, the share price of African Bank Limited more than doubled, growing from R5.25 to R22.50! Now under the leadership of Leon Kirkinis, the bank was making huge strides in the micro-lending sector, and the resulting profits from this move seemed to merit the expansion in this industry. However, in August of 2014, the bank was placed under curatorship, and the gains made in the last decade now seemed to placed on the wrong fundamentals.
Leon Kirkinis was a charismatic leader who had led the company through tough economic times. In 1999 the bank had went through a tough time, and not so long thereafter, Saambou bank collapsed around 2002. Kirkinis believed in the value that credit could provide to individuals with small capital bases. He believed that the credit could aid them in securing education, establishing businesses, and buying homes, amongst other reasons.
But it seems that he failed to acknowledge the predatory lending practices used by African Bank Limited. The problem might not necessarily be in the message that he provided, but rather the fact that neither the board of directors, or investors, questioned the fundamentals of the business models that he was spearheading.
In March of 2013, the National Credit Regulator probed and accused the bank of reckless lending practices. The report released by the National Credit Regulator must have affected the sentiment around the company, amongst other factors, and this can be seen in the decline of African Bank Limited’s market capitalization, which declined from R13.6 billion on 30 April 2014, to R340 million on August 8th of the same year.
Concluding Remarks
The most significant problem faced by both of these banks is, without a shadow of a doubt, their lack of diversification regarding business operations. African Bank focused mainly on lending and this is what led to its eventual curatorship; Saambou was overly invested in the Twenty20 Venture and did not have enough capital to properly fund the venture.
The main lesson would therefore be to diversify income streams, and this can be seen in the business models of some of bigger banks in South Africa, like Absa and FNB.
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