South African lender goes into administration amid 'liquidity crisis'

VBS Mutual Bank failed to repay money owed to the municipalities

Lesetja Kganyago, governor of South Africa's reserve bank, poses for photograph following a Bloomberg Television interview in London, U.K., on Thursday, March 1, 2018. South Africa's new political leadership under President Cyril Ramaphosa sets a solid and credible policy trajectory, Kganyago said during the interview. Photographer: Luke MacGregor/Bloomberg
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VBS Mutual Bank, one of South Africa’s smallest lenders, has been put into administration after it was unable to repay money owed to municipalities, according to the country’s central bank.

The management team has been relieved of its duties and a curator from the auditing firm SizweNtsalubaGobodo put in place following a “severe liquidity crisis”, Lesetja Kganyago, governor of the South African Reserve Bank, told reporters. Retail depositors’ money is guaranteed and VBS will stay open, he said.

VBS has operated as a licensed mutual bank, funded by its members, for 25 years, according to its website. The lender, which isn’t listed, gained attention in 2016 when it gave former President Jacob Zuma a mortgage to settle a Constitutional Court order to repay taxpayers some of the money spent upgrading his private residence. The bank was fined 500,000 rand (Dh155,416) last year because of weaknesses in its control measures to prevent money laundering and combat the financing of terrorism.

“Eighteen months ago there was a significant increase in municipal deposits” at VBS, Kuben Naidoo, South Africa’s banking regulator, said in the same presentation. “It’s quite a risky strategy to take that money and lend it long term. When the municipalities came asking for that money, the bank wasn’t able to pay.”

The trigger that sent the bank into administration was its inability to honour an obligation to a municipality on February 16, Mr Naidoo said, without identifying the municipality. Although VBS was asked to develop a plan, it became clear that its major shareholders would not be able to provide the amount of money the bank needed within a short space of time, he said.

VBS operates six branches across the country and calls itself a black-owned specialist corporate finance and retail bank. VBS’s total assets were 2.4 billion rand at the end of December, according to the most recent central bank data. One of the biggest shareholders is the Public Investment Corporation, Africa’s largest fund manager.


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“We don’t see a solution to the liquidity problems other than the solution of curatorship,” Mr Naidoo said. “Small depositors with less than 50,000 rand should be able to access their money overnight. It’s quite likely that all depositors won’t be able to get their money immediately.”

South Africa’s National Treasury said it would engage with affected municipalities to determine the extent of their potential loss and ensure service delivery isn’t affected. Treasury worked closely with the central bank in the past few weeks to try and save VBS to protect ordinary depositors, it said in a statement.

“It is never the intention of Treasury for any bank to be liquidated, particularly a small black-owned bank,” it said. “National Treasury’s actions are trying to balance the need for a more diversified small banking sector against the need for well-run and well-governed municipalities.”

South Africa’s previous bank failure was in 2014, when African Bank Investments’s lending unit collapsed after bad debts soared and it wasn’t able to raise funding. African Bank is still operating after the central bank stepped in to rescue the viable assets.

South Africa’s gross domestic product expanded 1.3 per cent in 2017, showing economic growth for the first time in four years even as ongoing political instability hurt investor confidence. All four of South Africa’s biggest lenders reported profit growth in the second half of 2017 and the banks’ index has climbed 6.6 percent this year, reaching a record high on Tuesday.