home Featured, Politics The case of VBS Bank – an analysis and proposed solutions

The case of VBS Bank – an analysis and proposed solutions

By Yamkela F Spengane

14 March 2018

So, on Sunday evening the South African Reserve Bank (SARB) placed VBS Mutual Bank under curatorship effective from 17:00 of that evening, 11 March 2018. SizweNtsalubaGobodo (SNG) Advisory Services was appointed as curator of the bank, effectively dissolving the existing board of the bank and taking custodianship of the bank.

This action by the SARB has caused an uproar, and is widely seen as an attack on the bank because it is a black bank and there is also a widely held view, raised also by the EFF, that the bank is being punished for having lent money to former state president, Jacob Zuma, to repay for non-security upgrades made to his Nkandla home as per the now famous former Public Protector, Thuli Madonsela’s recommendations when she addressed the Nkandla matter.

Herein, we will briefly discuss VBS and the background of the plight it now finds itself in. There will also be a proposed solution to dealing with the saving of VBS Mutual Bank through recapitalisation.

1. BACKGROUND

As many people know by now VBS Mutual Bank traces its humble origins to the former homeland/Bantustan of Venda, where it was established as Venda Building Society in 1982. A building society is a Stokvel like financial institution, that offers straightforward financial services like savings and mortgage lending – you could say it is a precursor to a mutual bank as outlined by the Mutual Banks Act, 1993 (Act No. 124 of 1993). It is the Venda Building Society that is responsible for the beautiful houses you witness across villages in the former Venda homeland; and under the tough times of black financial services participation under apartheid, it was a prudent move to establish the entity and see it through with stealth. On 11 October 2000, VBS was officially licensed to become a mutual bank as per the aforementioned act, and maintained its operations almost solely within Venda until 2015. There was a time when the bank struggled a lot and failed to post profits. In 2015 the bank got itself a corporate office in Rivonia, Johannesburg, the financial centre of the country, and later on opened a fourth branch of the bank in the Johannesburg CBD (the other three branches are in Thohoyandou, Sibasa and Makhado). 2015 was the year VBS Mutual Bank reported a profit of just over R1 million according to the annual report of that year, down from the previous year (which was the first major turnaround year after Dyambeu Investments took over in 2012), but the expenditure justified it – this profit was in contrast to the R200 million-a-day profit collectively made by the big 4 banks in the second half of 2015 according to PwC’s Major Banks Analysis, simply because of the product lines available to major banks and the financial muscle to do whatever and expand however.

2016 was the year that put VBS Mutual Bank on the map, for reasons already highlighted; and because of this new-found popularity, the phone started to ring much more as VBS had new business enquiries from everyone who was excited about a black bank. Municipalities had interest too, and they were an attractive client base because unlike you and me, their deposits were in the tens of millions in the low end of the scale, and hundreds of millions in high end. So, from late 2016 right through 2017, about 21 municipalities took deposits to VBS Mutual bank, which saw the assets of VBS grow from R350 million in 2015 to over R2 billion at the time. This was good for the bank, except there was an Achilles tendon to the story – the Municipal Finance Management Act, (act no. 56 of 2003), known as the MFMA. Section 7 (3) (b) of the MFMA explicitly states that municipalities may not open a bank account with an institution not registered as a bank in terms of the Banks Act, 1990 (Act No. 94 of 1990); VBS is registered with the Mutual Banks Act,1993 and not the Banks Act,1990 – problems. Municipal accounting officers were in contravention of the law governing municipal finance by depositing the municipal money with VBS, and VBS was also in contravention of the law for accepting the deposits. And so VBS’s troubles commenced, a collision course had been set, and the accident was waiting to happen…

2. IN THE THICK OF THINGS

VBS beginning to take those deposits saw it turn the bank’s entire history up to that point on its head. The bank was growing at such a rapid rate that it had to seriously consider registration under the Bank Act, 1990, in order to become a commercial bank. The MFMA story however presents two sides, where correct and incorrect things were done on both sides; and then there is a third, draconian, side which was at play in the background:

a) VBS and the Municipalities

The moment VBS took those deposits, there was a contravention of an explicit law; therefore, if we are being truthful we have to admit this part. However, the PFMA and MFMA have been called out by so many black business organisations as being anti-black business for a very long time. Simply put, they do very little for empowerment and ensure that it is those who are privileged who will end up doing business with government and state-owned entities. The MFMA excluding Mutual Banks completely from having municipal deposits can be highlighted as one element where these two pieces of legislation barricade progress for black businesses within the historical context of having been disadvantaged and made to play on an explicitly tilted field. This is because Mutual Banks are probably the most relatively attainable banks that most black people – within their current economic context, informed by historical deprivation and dispossession – will be able to start if they speak about participating within the largely monopolised banking sector and to an extent the greater financial services industry. Now if the government, whom the people entrust with championing transformation to correct historical disparities, refuses the most accessible arm of government – local government – to bank with a local bank that is owned by a larger pull of shareholders who will in the most part be black and ordinary people, how are they saying this bank must grow? It simply cannot, because municipalities take the billions that they extract of the back of ordinary people by way of taxes and deposit them with banks that are historical beneficiaries of injustice, and are big today because of those blatant injustices. Starting a commercial bank from scratch is a truly capital-intensive task, that puts it at near impossible for average black people even in this current dispensation – and it would require the financial contributions of a sizeable amount of people as there is a trust deficit between institutional investors and black business.

On the other hand, however, it was not prudent for VBS to take short term deposits – like how municipal deposits usually are because the money must be used for service delivery – and lend them out long-term; furthermore, also taking large deposits that would mature at roughly the same time. That was putting a land mine in one’s own path, hoping it doesn’t trigger when you step on it. Well it triggered, when one municipality came looking for their money and could not receive the total amount at the time they had requested it. This was a liquidity issue that signalled the bank was in a position to possibly not be able to meet payment obligations in the national payment system and this meant that the Reserve Bank had to intervene as a regulator, because you must as a bank be able to meet all obligations timeously or the entire system can get affected. The taking of these large deposits from municipalities required prudence, and there needed to be foresight on the part of management on the possible pitfalls and how to navigate them, which among other things was increasing cash reserves and liquid cash through capital injection from Investors they would have negotiated with. It was also important that the long-term credit book be kept in check versus obligations of maturing deposits. Another important thing is that the banking license under the Banks Act 1993, should have perhaps been applied for a bit earlier – although this has its own difficulties they should have done a little bit better in my opinion. There are other lapses in management that exist, but will be ironed out without hanging people unnecessarily because we must appreciate a plethora of factors, including the growth of VBS under this management.

b) South African Reserve Bank and National Treasury

As a point of departure, the Reserve Bank and National Treasury are custodians and regulators of banks and government finance respectively, and thus from that point of view they are compelled to intervene when there are contraventions by banks in the case of the Reserve Bank, and municipalities and other government entities in the case of National Treasury – we cannot fault them on that front. As already mentioned, both VBS and the Municipalities were on the wrong side of MFMA from the onset, since this piece of legislation was accessible to all entities to review prior to beginning the relationship. Secondly, these laws are passed by parliament and can be changed by parliament; as to why we have a piece of legislation that excludes the participation of small banks in government banking is solely at the doorstep of the elected representatives whom the citizenry has bestowed upon the power to make favourable laws on their behalf. And whether we should call the PFMA and MFMA favourable to black people, disadvantaged from economic participation by a nefarious system, is a debate for another day. So, when the treasury instructed municipalities to stop depositing with VBS or to withdraw their deposits, they were merely operating within the prescripts of the law they are a custodian of. Similarly, within the context of the current mandate of the Reserve Bank, it will take the steps that it has taken with VBS ordinarily (although history tells us that this strictness is malleable and depends on who it is that falls into trouble – as in the case of Bankorp in 1990)

We would have ideally had the Treasury and the Reserve Bank, in the name of building a black bank, treating this matter with softer gloves. Not to say they should have not reproached VBS when anomalies were found, but to within the greater context of where we come from as a nation, found a way to make the matter lead to a softer landing for the VBS Mutual Bank. For instance, a grace window period for VBS to convert its licence to that of a commercial bank while continuing to take deposit under the strict supervision of both the SARB and Treasury could have been established between VBS, SARB and Treasury. Within this established understanding, the Reserve Bank could then loan VBS money that it needs to meet liquidity obligations and charge whatever interests all parties; VBS would then go out and seek further investment from PIC, or external investors in order to meet its loan obligation to the SARB and recapitalise itself for the long term – it could have considered an IPO at the JSE and explained its situation. The Reserve Bank, in its wisdom, found it was prudent on its side to recapitalise African Bank with R5 billion and take 50% ownership in the new entity in 2016, after former African Bank went bust in 2014 and was placed under curatorship for about 20 months (something I disagreed with because where is the line between being a shareholder and a regulator? I would much rather have had it being a loan that placed responsibility of repayment on the shareholders in case the entity defaults. But hey, what do I know); so, getting money from the Reserve Bank is not unheard of in cases of having to save a bank.

c) Big banks and anti-competitiveness

You see monopolies are relentless about hogging the market share to themselves, and the banking monopoly is no different from this general rule that governs monopolies. As VBS, and the brokers it worked with, continued with these deposits from municipalities and other entities, they were effectively taking clientele that belonged to the big boys’ club and giving them better returns on their deposits; this was effectively stepping on toes. In the latter half of 2017, a trade union that had most if not all its money and investments with one of the big banks worked with a certain broker to take the money and investments away from the big bank to VBS, everything (note that a trade union doesn’t have MFMA to subscribe to). The news of this fell like the Hiroshima atom bomb on the big bank, because we were talking money well in excess of R100 million that was to be taken from them just like that; within no time high ranking execs were at the broker’s offices trying to find a way to salvage the situation and create some sort of relationship with this said broker. When the broker did not budge, it was almost a no-brainer that there would be repercussions as the big bank would not stand and leak big clientele without finding a way to patch the source of leakage. What could have been done is speculative at best, and clutching at straws at worst; and I will leave the possible links to the VBS outcome solely to your imaginations. However, departing from this, I leave you with these questions: why do the big banks not want SARB to be nationalised if it really doesn’t matter? Why not let the people of South Africa nationalise it to feel good if for any reason since it is of no great importance? Lastly, what sort of influence do the big banks wield in the regulatory framework of banking and greater financial services?

3. VBS MUTUAL BANK IS NOW UNDER CURATORSHIP, WHAT MUST HAPPEN?

As black people, we must accept that the decision to place VBS under curatorship has gone through and is irreversible; we have no power over that. What we do have power over is controlling who will ultimately own VBS at the end of its curatorship.

The last bank to be placed under curatorship was the African Bank. Unbeknownst to many, African Bank started as a 100% black-owned bank in 1975; but its birth was in 1964 when the then chairperson of the National African Federated Chamber of Commerce (NAFCOC), Dr Sam Motsoenyane, tasked the conference to raise R1 million (then the minimum required to establish a bank) and put R70 on the table. What followed in the subsequent 11 years was NAFCOC traversing the country to raise the R1 million needed, this included getting households to donate R10 and getting the then Bantustan leaders to also contribute – it is said that Dr Mangosuthu Buthelezi got the Zululand government to donate R25 000 towards the cause. By 1975, the money had been raised and the first African Bank branch was launched in Ga-Rankua that year, with Dr Motsoenyane as the chairperson. In 1995, however, the bank ran into serious financial troubles; and without friends like Chris Stals at the Reserve Bank to give it a bailout, it had to be sold. Its new owners turned it into a loan shark that participated in unsecure lending, which led to its demise in 2014. What came out in 2016 was a creature that was owned by the SARB (50%), PIC (25%) and a consortium of the banks (ABSA, FNB, Nedbank, Standard Bank, Investec and Capitec) (25%). As much as I was in objection of the SARB holding shares in a bank, I was from the onset against the big banks holding shares in an entity that is meant to be a competitor to all of them, at least in certain product lines like loans and micro-finance. It is rigging the playing field if you ask me, especially such a large fraction of total shares.

Above we illustrate that will power can move mountains. At a time when it was near impossible for a black bank to exist, NAFCOC stood up and made it happen. If we as black people are willing, we can ensure that we own VBS once it comes out of curatorship. It is all up to our collective will. If we leave it, it will either be winded up and closed, or receive shareholders who will do whatever they will with it. This is to say that yes, the playing field is not level but despondency is not going to help us either – we need to organise!

4. A PROPOSED WAY FORWARD

After considering the matter, I propose that we create an Investment Holding Company that will be used as a vehicle to invest in and recapitalise VBS to the point of sound liquidity and beyond that into expansion. It is sort of a crowdfunding campaign if you will.

The Investment Holding Company will have different classes of shares that it will issue, and list on the JSE in a few months. The target capital is R2 billion first up, and this will recapitalise VBS Mutual Bank in exchange for equity. How the share structure will work is that we will start off with ordinary shares divided into A and B, where A shares will be institutional and large investors who can invest large amounts at a go like churches and stockvels, and B shares will be ordinary people who can start buying a share at an arbitrary amount of R100 for instance. The purpose of listing will be to hold this vehicle accountable to the highest standards of governance and compliance like King IV and preparing public reports, and it will further ensure capital can be raised through the stock market. This Investment Holding Company should be the vehicle we use to fetch African Bank a well, and I believe a nationalised Reserve Bank will have no qualms selling those shares and being a regulator without majority ownership in bodies it regulates. Dividends will of course be distributed accordingly when profits begin to flow in.

Thus, a clarion call is made to black business groupings, black professional bodies, black churches, stokvels and ordinary black people from all walks of life to participate in this project that can save a black bank, claim back another one and expand investment into territories that previously excluded black people so we can be our own insurance underwriters, we can own our own schools, create our own cars, electronics, and the list is endless.

A few business leaders have put their hands up in their willingness to Save VBS, thus if this proposition is a vehicle of choice, further consultation with people who can champion this will be done and something solid will be presented in a few weeks.

Curatorship takes 12 to 24 months normally, additionally a banking licence also takes this long. At the end of the curatorship and the issuance of VBS’s commercial banking licence, we should long be ready and waiting on directions to put money into VBS, and it is possible that capitalisation will be required even before this time.

I shall pause here for now. Critique is open, I don’t claim monopoly over this matter and how it should be done, rather I am proposing but one way we can go about it.

I thank you

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