14 April 2024 | 04:24 AM

Zambian politics trip up FirstRand

Key Takeaways

South Africa’s FirstRand Bank was taught the harsh reality of doing business in politically polarised Zambia when it attempted to expand its portfolio by acquiring one of the country’s major commercial banks, Finance Bank Zambia Limited.

FirstRand was pushed out of Zambia by President Michael Sata in 2011 — just nine months into the venture — in a major setback to its African expansion plans that has not previously been reported in South Africa.

At a media conference in Johannesburg earlier this month, a delegation of the Zambian opposition complained of the president’s “rushed decision to repossess Finance Bank” and hand it back to its former owners, “one of Sata’s largest supporters”.

The Coalition for the Defence of Democratic Rights said the move had caused “a crisis of confidence”.

FirstRand was to have merged Finance Bank’s 34 branches with the five Zambian branches of its subsidiary, FNB, to create one of the country’s largest financial institutions. Instead, it now faces legal action from Finance Bank’s shareholders.

Takeover reversed

Finance Bank was taken over by the Zambian reserve bank, the Bank of Zambia, in December 2010 and then handed to FirstRand to manage, with the longer-term prospect of an outright purchase.

However, Sata reversed the highly contested acquisition a few days after he assumed office in October 2011, saying that FirstRand did not have the mandate to run or own the bank and giving it 24 hours to vacate its premises.

Finance Bank is politically sensitive because its executive chairperson, Rajan Mahtani, is a close ally of Sata — a kingmaker who mixes business with politics, which often lands him in legal battles after changes in leadership.

“There is nothing on paper, no document of sale for Finance Bank and I am directing the ministry of finance to take the bank back to its owners immediately,” Sata said when he fired the central bank governor, Caleb Fundanga, who had presided over the repossession and sale of the bank.

Representatives of FirstRand and the central bank insisted to the Mail & Guardian that there were agreements that mandated the takeover by FirstRand after a tender process. But neither bank would state the exact nature of the agreements or provide proof that they existed.

FirstRand spokesperson Sam Moss said the Bank of Zambia had approached FNB South Africa to provide staff to assist in managing Finance Bank’s operations to secure the bank’s long-term future.


“We had the necessary agreements with the Bank of Zambia to facilitate the provision of FNB’s services. All these agreements were in accordance with Zambian law,” she said in an emailed response to the M&G.

The Bank of Zambia and FirstRand declined to explain why, if a valid contract was in place, Sata’s removal of FirstRand went uncontested.

An official at FirstRand who declined to be named said it might be because the bank’s subsidiary, First National Bank, was still operating in Zambia.

“At the end of the day, all banks report to and are regulated by the Bank of Zambia,” the official said. “Engaging in a legal tussle might mean conflict and that could harm our existing operation as FNB.”

Ex-governor Fundanga, a renowned economist, refused to discuss the deal, saying only that the bank had acted within its mandate in order to protect the interests of depositors and creditors and to ensure the stability of the banking sector as a whole.

In a government gazette notice of December 31 2010 announcing the takeover, the Bank of Zambia cited weak corporate governance and risky management systems that “perpetuated the wanton violation” of Zambia’s Banking and Financial Services Act and compromised Finance Bank’s solvency.


It said that Mahtani, using his family’s company Finsbury Investments, illegally controlled 56.5% of Finance Bank’s shares through dubious proxy arrangements in contravention of a statutory 25% limit and had engaged in a series of “insider lending” deals. Mahtani has described these claims as “nonsense”.

The interests of all the shareholders, including Finsbury Investments and Credit Suisse, which owned 41%, were terminated.

However, the Bank of Zambia has refused to explain why it has now restored the bank to the same shareholders it had earlier vilified. In addition, the statutory order legitimising the takeover remains in force.

Observers close to the sale negotiations said that FirstRand acted hastily in moving to purchase Finance Bank and had relied on its “cordial” relationship with Zambia’s previous government, headed by Rupiah Banda.

Mahtani’s sour relationship with Banda dates to the early 1980s, when Finance Bank repossessed Banda’s home. Unlike his predecessors, Banda is believed to have spurned Mahtani’s hand of friendship when he became president in 2008.

FirstRand ignored the flurry of court actions from the dispossessed shareholders and concerns by civil society and opposition parties’ about the sale, which they argued was politically motivated, arbitrary and unnecessary.

They contended the bank was not at risk of collapse, as the balance sheet appeared to show, and cited Credit Suisse’s stake as evidence that the institution was solid.

“The Swiss bank would not have staked its reputation on a failing bank,” one said.


In papers submitted in court, the shareholders said the Bank of Zambia had violated its own governing legislation by acquiring shares in a commercial bank and assuming the responsibility of selling it, when it was only a regulator.

“It should have imposed fines or changed the management if it felt the bank was being mismanaged,” they contended. “It also erred in taking away shares without compensation.”

One former Finance Bank senior employee who was fired after the takeover said: “FirstRand is a huge company listed on the stock exchange. It should have been able to read the underlying political currents and the very evident tension between Mahtani and Banda.

“The purchase was only good for as long as Banda’s MMD [Movement for Multiparty Democracy] party was in power. This is why other large banks, such as Barclays or Standard Chartered, avoided tendering to purchase Finance Bank,” he said. FirstRand declined to comment on the criticism.

Sources who had worked in Banda’s office said FirstRand’s involvement was “aided and abetted” by people close to him and every assurance was given that the president and his party would continue to rule Zambia and their investment was safe.

The Bank of Zambia guaranteed all Finance Bank’s deposits and liabilities.


Much of the criticism stems from how the deal was brokered. Documents suggest that the decision to sell Finance Bank to FirstRand had been made before the takeover.

A brief to former Zambian finance minister Sitembeko Muso from the Bank of Zambia in November 2010 said that “a preferred option for the government in divesting its 100% equity interest in [Finance Bank] is to sell off about 75% to FirstRand bank and the remaining 25% to be offloaded on the Lusaka Stock Exchange”.

The call for applications to purchase the bank was made only in 2011. Moss said FirstRand did not buy Finance Bank, but there was evidence that a tender to purchase was advertised and five financial institutions applied: First Alliance Zambia; Exim Bank Tanzania; I and M of Kenya; and JM Capital, Quantile and FirstRand of South Africa. FirstRand, which was already managing Finance Bank, won the tender.

A press release from FNB spokesperson Sarel van Zyl at the time said that the Bank of Zambia had accepted FNB’s $5.4-million offer to buy the bank, adding that it would take nine months for the transfer to be completed and there would be no job losses.

However, shortly afterwards, employees were given letters asking them to re-apply for their positions.

The Bank of Zambia, which has since undergone a change of management, says it is now reviewing the transaction to obtain clarity on what exactly transpired.


Meanwhile, Mahtani, acting on behalf of the other shareholders, has filed a lawsuit in Zambia contesting the legality and constitutionality of the takeover of Finance Bank and divesting its shareholders of shares without compensation, contrary to the Bank of Zambia Act.

Mahtani is also claiming damages, alleging FNB siphoned 27-billion kwacha from the bank, a claim Moss has dismissed as “spurious”.

In South Africa, Mahtani has instructed Johannesburg attorney Darryl Ackerman to look into possible claims against FNB.

“We’re looking at the best possible route to take and a decision will be taken next week, ” a source at the firm said.

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The M&G Centre for Investigative Journalism, a non-profit initiative to develop investigative journalism in the public interest, produced this story. All views are ours. See www.amabhungane.co.za for all our stories, activities and sources of funding.

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Before joining the amaBhungane team in 2017, Micah was the national coordinator for media freedom and diversity at the Right2Know Campaign. He holds a Masters in African Studies from Oxford University and a BA Honours in History from Wits University.

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