A MERCY KILLING
Banking is a game of confidence, so heated calls for VBS to be kept alive, despite a crippling R2bn fraud, were never going to find real support
The Reserve Bank has faced up to the inevitable, approaching the high court to perform a mercy killing on the rotten VBS Mutual Bank. It’ll probably irk those who have been lobbying to keep the flailing carcass on life support. But if you’d pored through advocate Terry Motau’s devastating report on the country’s most audacious bank heist yet, of the small matter of a R2bn swindle, you’d have to conclude there were few other options.
During last week’s medium-term budget speech, some felt that finance minister Tito Mboweni was suggesting there was still something salvageable amid the ashes of VBS Mutual Bank, when he said that we must not “throw the baby out with the bathwater”.
“The model of VBS … before the great heist, was correct,” said Mboweni. But a closer reading of what Mboweni said shows that he wasn’t calling for VBS to be saved. In this analogy, VBS is the bathwater, and it is the mutual banking model that is the baby that could yet be rescued from the soggy mess.
Mboweni’s point, it seems, is that smaller mutual banks are a necessary tool to transform a top-heavy banking sector, particularly as they typically operate in smaller communities, lending locally to people who become shareholders in those banks.
But when it comes to VBS itself, it was always going to be nigh impossible to keep it alive. Historically, it’s been hard enough to keep a bank alive that’s in thrall to a routine liquidity crisis, let alone an existentially crippling fraud. Just ask Lehman Brothers (which collapsed in 2008 after subprime mortgage losses) or closer to home, African Bank (put under curatorship in 2014, thanks to soaring bad debts).
Since then, African Bank has struggled to reignite, even after the bad debts were stripped out. That bank is now under the stewardship of the highly rated Basani Maluleke, a former RMB investment banker. While she has made progress (a R715m profit for the six months to March is evidence), it has come at a cost, as the bank is having to pay up to 10.75% interest on five-year fixed deposits to attract capital,
But when there’s actual fraud at a bank, all bets are off. This was the case with Alpha Bank in 1990, and Regal Treasury Bank, which cratered in 2002. Both were wound up. As VBS will be now.
In the court application for VBS’S liquidation, banking registrar Kuben Naidoo says VBS is “hopelessly insolvent”. In fact, it has been since at least March 2017, when its liabilities exceeded assets by R180m.
Naidoo says it is “objectively impossible for VBS to achieve the purpose of its existence”, and it “cannot ever again conduct business as a bank”.
Motau, in his report, was no kinder, describing VBS as “corrupt and rotten to the core — indeed, there is hardly a person in its employ in any position of authority who is not, in some way or other, complicit”.
In fact, the bank was so ridden with corruption, one insider says, that even the contract to provide bottled water had apparently been given to a friend of a friend. “It ended up as a great washing machine for some people to suck out taxpayer money,” he says.
So, no matter which way you slice it now, there’s a hole of between R1.8bn and R2bn in VBS’S books already, considering what’s been stolen. And that’s only half the story: it would also have needed around R200m in extra cash as a “capital adequacy” buffer, and working capital of maybe R350m just to trade.
Realistically, it probably would need more than R2.4bn — and who would put that into a bank with a shaky future, legal claims, and a crisis of confidence? And anyway, it is understood that curator Anoosh Rooplal has received no serious offers for the bank.
Still, it would be an immense pity if the looting at VBS were to discredit the valuable role that a mutual bank can play in SA society.
Besides VBS, there are only three other existing mutual banks: the 114-year-old GBS in Grahamstown, Finbond, and this week Bank Zero, headed by ex-first National
Bank CEO Michael Jordaan, joined the list.
Speaking to the FM this week, Jordaan said the VBS failure certainly wasn’t a case of the mutual bank model failing. “At VBS, there were serious deficiencies in management, plus the failure of internal audit, plus the failure of external audit, plus the failure of compliance, plus the failure of the board. It wasn’t the mutual bank structure that failed,” he says.
In the mutual banking model, depositors effectively become shareholders in the bank. “So, if we do well, they do well, which leads to lower fees, and a much greater sense of participation,” says Jordaan.
Mboweni is right that the demise of VBS shouldn’t spell the end of the mutual bank model in SA. Perhaps, even though VBS is now destined to die, its (salvageable) loan book could form the basis of a new mutual bank, with new executives, a better-defined mission and proper governance. It’s a crisis that shouldn’t be wasted.
Mboweni is right that the demise of VBS shouldn’t spell the end of the mutual bank model in SA