South Africa’s smallest lender VBS mutual Bank put under curatorship

South Africa’s VBS Mutual Bank has been put under curatorship by the South African Reserve Bank for failure to repay loans owed to municipalities, noted the country’s central bank.

VBS Mutual Bank, one of South Africa’s smallest lenders, ran into severe liquidity after it ignored repeated warnings on its over dependence on unlawful municipal deposits.

In a statement on Bloomberg, South Africa’s banking regulator Kuben Naidoo,  stated that “Eighteen months ago there was a significant increase in municipal deposits” adding that “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.”

Famous for the 7.8-million-rand housing loan granted to former president Jacob Zuma in 2017, VBS ignored the Treasury’s warning and continued to take deposits from municipalities. In August 2017, the state Treasury warned six municipalities in relation to the Municipal Finance Management Act, that it was illegal to bank with mutual banks because of their limited licenses as against commercial banks with full banking licenses.

Due to warnings from the treasury, some municipalities opted to withdraw their money from VBS which was already facing a run on its deposits. With these withdrawals, the mutual bank no longer had sufficient money to meet its payment obligations hence it was put into curatorship.

The management team on Sunday was relieved of their duties and director Anoosh Rooplal, a curator from Sizwe Ntsaluba Gobodo auditing firm was put to take charge. The bank will continue to transact and collect on its loans, though deposits will be frozen, except for those of retail depositors under 50,000 rand which are guaranteed noted Lesetja Kganyago, governor of the South Africa Reserve Bank.

According to the Treasury, the rationale for restricting municipalities from placing funds into mutual banks was consistent with the objective of ensuring funds meant for service delivery were managed as responsibly as possible. The treasury plans to work with affected municipalities to determine the extent of their potential loss.

With a total of 2.4billion-rand assets and six branches in South Africa, VBS calls itself a black-owned specialist corporate-finance and retail bank that has been licenced and funded by its members for 25 years.