VBS Bank's problems cause scare among customers

The embattled VBS Mutual Bank had to try and put out several fires over the past week amid fears of clients that the money will run out and they will be unable to withdraw their savings. The bank was placed under curatorship last week.

On Sunday, the SA Reserve Bank’s deputy governor, Kuben Naidoo, announced that they had no other option than to place VBS under curatorship to try and safeguard the interests of all concerned. He said that the Reserve Bank had approached VBS to try and implement a rescue plan to manage the liquidity situation, but after engaging the management, the VBS board and shareholders, it had become clear that curatorship was the only option.

National Treasury confirmed this the following day, saying that curatorship was a better option than liquidation. “The aim of curatorship is ultimately to turn the mutual bank around. This is in contrast with liquidation, where the mutual bank is closed down,” said Treasury.

Clients of the bank were assured that their money was safe, but limits were put on withdrawals. Bank governor Lesetja Kganyago said all deposits under R50 000 were available and accessible immediately. Withdrawals bigger than this amount would still take some time to be processed.

One of the contributing factors to VBS Mutual’s problems seems to be the deposits the bank received from municipalities. This practice started about three years ago, when VBS started using short-term municipal deposits to support rapid growth in its lending book. The bank’s balance sheet grew from a modest R150 million to over R2 billion. Whereas the bank had previously focused on giving loans to home owners in rural areas, it then expanded to small businesses.

“It was highly risky for VBS to take sizeable municipal deposits that were short-term and lend them out long-term,” Kganyago said.

Treasury also warned the municipalities that, in terms of the Municipal Finance Management Act, it was illegal to bank with mutual banks. Mutual banks have limited licences, which do not have similar safeguards as full banking licences. These warnings prompted a number of municipalities to withdraw their money from VBS, which subsequently caused cash-flow problems for the bank. In mid-February, the bank no longer had enough cash to meet its payment obligations, which caused the Reserve Bank to step in.

Reckless trading?

VBS Mutual Bank came under fire on several occasions over the past few years for the manner in which it conducted its business. The bank has also been accused of being used as a political playball, while disregarding basic economic principles.

In a case that is currently heading for the Supreme Court of Appeal, VBS Mutual is accused of being used as an instrument to influence the outcome of the kingship battle in Venda. The applicants have requested permission from the court to file new evidence, which they regard as important.

In documents filed, a contender for the throne, Masindi Clementine Mphephu, alleges that Toni Mphephu Ramabulana used his position as “leader” of Dyambeu Investments to influence VBS Mutual to lend a substantial amount of money to former president Jacob Zuma. Dyambeu Investments holds 25,22% shareholding in VBS Mutual and is, along with the Public Investment Corporation (25,26%), the majority shareholder in the bank.

Masindi Mphephu’s legal representatives argue that the loan granted in 2016 to Zuma may have influenced his decision to recognise Toni Mphephu Ramabulana as the rightful king of the Vhavenda.

In replying responses, these allegations are strongly denied, and the respondents argue that Ramabulana does not hold shares in his personal capacity in VBS Mutual Bank. An entity known as Vhavenda Heritage Trust, comprising the King and other senior traditional leaders, owns 51% of Dyambeu’s shares, it is argued. The respondents also deny that Ramabulana exercised any influence on the decision-making process at VBS Mutual.

The details of the Zuma loan that transpire from the court documents are, however, interesting. The applicant’s arguments are partly based on the mortgage registered on the properties leased by Zuma. “It accordingly appears that the VBS Mutual Bank granted (then) President Zuma a R8 581 854 mortgage loan facility on unusually favourable terms, based on a form of security provided some nine months late and not really amounting to security at all,” Mphephu argues.

In the court papers, the lease agreement between former President Jacob Zuma and the Ingonyama Trust is highlighted, as well as the applicable legislation that would make it near impossible for VBS Mutual to use the property as security, should Zuma default on payments.

Where did it go wrong?

VBS Mutual Bank was established in 1982 and initially operated as the Venda Building Society. Mutual banks are much smaller than commercial banks and are not regulated according to the same standard. Some types of deposits in mutual banks also qualify as ownership stakes in that bank. VBS Mutual currently has about 30 000 clients.

In 2013, the bank announced that it had embarked on a turn-around strategy. The bank’s CEO, Andile Ramavhunga, announced in the 2015 report that “the bank (had) introduced new lending products which are aimed at small and medium enterprises (SMEs).” He talked about the three main products that the bank would be focusing on, namely fuel guarantees, bridging finance/contract finance and invoice discounting. He also explained the new funding model of the bank. “Due to the limited savings that are available from the general public, the bank changed its strategy of sourcing deposits and funding. A focus was placed on sourcing funding from institutions and municipalities.”

The turn-around strategy seemed to have worked, and in 2016 the bank recorded a R4,9 million profit. During that year, R280 million was raised from municipalities and institutions and the bank drew just under R300 million from its PIC facility. “Lending to corporates (SMEs) currently comprises 53% of the total lending book, which is a shift from a 100% retail lending book of 2013,” Ramavhunga said.

The revenue model of the bank clearly shifted from being primarily interest driven to other sources, such as fees charged for contract-financing business. The bank’s chief financial officer, Mr PN Truter, referred to this in his report. “Due to the renewed focus that has been placed on correcting the revenue mix between interest and non-interest income, the non-interest revenue has increased significantly with 167% or R15 million.”

It may, however, be that not all internal control mechanisms instituted were up to scratch. Media reports state that the bank was fined R500,000 ($42,319) last year because of weaknesses in its control measures to prevent money laundering and combating the financing of terrorism.

Biting off more than you can chew?

The lobbying of, among others, municipalities to place deposits at VBS Mutual seemed to have worked well and in 2017, the amount of money being held by the bank grew to R2,4 billion. The municipalities that had done so are in the North West, Limpopo and the Free State.

National Treasury seemingly became aware last year that municipalities were depositing money at a mutual bank and instructed them to stop doing so. The Municipal Finance Management Act requires that municipalities may only deposit their money at registered banks. This resulted in withdrawals of more than R1 billion, causing serious liquidity problems for VBS.

On February 16 this year, the Reserve Bank’s monitoring system showed that VBS had failed to honour a payment obligation on the national payment system. According to the deputy governor, Kuben Naidoo, the bank had to step in. A curator, SizweNtsalubaGobodo’s director, Anoosh Rooplal, was appointed.

On Monday, VBS’s board chairman, Tshifhiwa Matodzi, resigned. He had previously accused the Reserve Bank and National Treasury of not welcoming “a black bank” and believing that “black management is incompetent and noncompliant”.

Naidoo denied these allegations. “As a regulator, we have to go out of our way to ensure that we can support black businesses and the transformation of the financial sector. We cannot look the other way if the law is breached.”

Who are at risk?

National Treasury said that it would engage with affected municipalities to determine the extent of their potential losses and to ensure service delivery was not affected. It did not disclose the names of the municipalities still at risk.

In the Vhembe District the municipalities were asked this week whether they had any dealings with VBS Mutual. The Vhembe District Municipality’s spokesperson, Matodzi Ralushai, confirmed that they have an account with the bank, but did not disclose how much was deposited. Thulamela Municipality’s spokesperson, Ndwamato Tshiila, said that they had no dealings with the bank. The Makhado Municipality’s Louis Bobodi confirmed that they made use of VBS, but also declined to say how much. Musina municipality did not respond to questions in this regard.

The bank’s main shareholders are probably the ones standing to lose the most, should the rescue attempt not work. The biggest shareholders are the PIC and Dyambeu Investment.

On Wednesday, Business Day reported that the Bophelo Beneficiary Fund, which has the children of deceased mine workers as beneficiaries, has about R385m on deposit with VBS Mutual Bank.

National Treasury was, however, confident that the situation could improve. “The curator is given the legal means to create the necessary mechanisms to implement a resolution plan that will ensure the long-run sustainability of VBS,” it said. Treasury also referred to the recent example of African Bank, which had emerged as a stronger bank after curatorship.

Date:17 March 2018

By: Anton van Zyl

Anton van Zyl has been with the Zoutpansberger and Limpopo Mirror since 1990. He graduated from the Rand Afrikaans University (now University of Johannesburg) and obtained a BA Communications degree. He is a founder member of the Association of Independent Publishers.

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