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VBS: The story of a good project gone bad

2018-07-11 11:53

On the eve of the August 2016 municipal polls, right at the climax of political campaigns, City Press broke the news that VBS Mutual bank would be funding former president Jacob Zuma’s Nkandla debt.

Since then the name VBS spread like wildfire as observers and critics alike sought to gain insight into the new player in South Africa’s banking industry.

It is actually surprising, with all the attention the bank received, that it was seemingly not enough to foster strict and disciplined management of affairs among all those involved in this black-owned specialist corporate finance and retail bank.

That it was the first wholly black-owned bank in the country would have caught the attention of politicians, particularly in the Zuma-led ANC that spoke the language of radical economic transformation.

But even before Zuma – or any of the so-called Nkosazana Dlamini-Zuma aligned politicians for that matter – VBS already boasted on its list of clients the likes of Eskom, the Makhado municipality, the West Rand local municipality, MTN, the Vhembe District Municipality, the University of Venda and Capricorn District Municipality.

VBS Mutual Bank's chief executive Andile Ramavhunga. Picture: Lucky Morajane

So the notion that municipal money started flowing into VBS post the Nkandla loan might be a bit of a stretch. At the least, Zuma and the ANC’s noise on radical economic transformation would have buoyed the municipalities to take the risk with VBS.

The idea of a black bank becoming a serious player in the economy became irresistible to politicians despite that the law in this case had a different view about what can or cannot be done.

It was actually at the Capricorn District Municipality, where VBS’s potential to become a development partner with government was demonstrated – although not everyone was happy with the arrangement and the challenges that came with it.

Then mayor Gilbert Kganyago and staunch communist and local worker leader championed VBS. Kganyago clashed with acting chief financial officer Mariette Venter over the R63-million short-term loan put in VBS.

According to an internal document Kganyago told Venter that, as mayor, he was “tasked to promote black economic empowerment” and investing in VBS was “part of achieving his goal”.

While there are differing views about the posture taken by VBS, the affair has made one thing clear. The best chance of realising the black bank ambition does not live inside the big bang black economic empowerment theories.
Moeketsi Nchoba

Kganyago had forged a close relationship with the bank, which had also committed to sponsor one of his special mayoral projects.

Venter had wanted to withdraw pull the investment because VBS did not have BBB credit rating or more in line council policy. That is, neither S&P or Fitch or Moody’s rated VBS so it was a risk.

Venter’s detractors accused of targeting VBS to advance the interests of the big banks. Alongside VBS, Investec then had a R43-million investment from the municipality, FNB had R300 000 and Nedbank had R109 million. But VBS offered the interest at 7.25%, followed by Nedbank at 7.23% and FNB offering a paltry 5.40%.

Allegations against Venter aside, it goes without saying that a new player coming into an established market would always rattle the cage, not least an outsider not willing to completely play by the rules like VBS.

VBS approached Capricorn in October 2015, and in return for opening an investment account the municipality got an overdraft account facility, a deal to finance suppliers to the municipality “under a controlled programme” partnership on corporate social investment programmes and a dedicated banker.

What stood out here was the agreement to finance suppliers to the municipality because small businesses do not have a strong balance sheet, little or no collateral, lack business skills and expertise.

So VBS committed to come through for a constituency that most commercial banks saw as high risk with high chance of failure. Such innovative measures to create access to capital for the underprivileged where commercial banks shun them should be applauded.

Then there was Vhembe municipality, which VBS had allegedly rescued when it was on the verge of failing to pay workers. Municipalities like Vhembe, which do not generate sufficient cash revenue and depend on state grants, often struggle with funds. Commercial banks would be reluctant to touch these rural municipalities.

Vhembe has invested more than R300 million in VBS, of course, in violation of the regulations. The Municipal Finance Management Act makes it unlawful for municipalities to invest in VBS because it is a mutual bank and therefore a small operation with little cash reserves and not subjected to stringent regulations. But others would say the bar is set so high in the name of protecting the poor but in practice it also secures an unfettered monopoly for the filthy rich.

Other noteworthy achievements for VBS include the financing of black industrialists involved in the digital broadcast migration project through a partnership with the state-owned Universal Service and Access Agency of South Africa, extending up to R550 million in finance.

The bank also made a significant impact in the funding of energy suppliers who provide services to large corporations such as Eskom, which contributed in minimising the load-shedding pressures.

It would be fair to say that in its philosophical approach, VBS saw itself as a partner to government in fostering local economic development.

In September 2016, just over a month after City Press broke the Zuma story, a group of young black professionals met at Wits University to consider one critical question: What will it take to realise the long lost ambition of establishing a “black bank” in South Africa and what role should this type of a bank come to play?

The organisers conceded that the debate was animated by the emergence of VBS.

“While there are differing views about the posture taken by VBS, the affair has made one thing clear,” said Moeketsi Nchoba, one of the convenors. “The best chance of realising the black bank ambition does not live inside the big bang black economic empowerment theories.”

VBS committed to come through for a constituency that most commercial banks saw as high risk with high chance of failure. Such innovative measures to create access to capital for the underprivileged where commercial banks shun them should be applauded.

Nchoba noted that the big banks did “deliver the sham called Mzansi Account”, devised as a pathway for the previously unbanked black masses that should lead into richer financial products.

“But the Mzansi Account proved to be dead-ended at the beginning and thing it has not failed to do is to expose multitudes of black people to exploitative products like the expensive and unsound funeral insurance schemes.”

He concluded that “the mainstream banks are more than happy to dish out huge fanciful lifestyle funding credit facilities but they will not embrace the low to middle income housing markets”.

VBS will go down in history as a bank that tried to address these challenges, especially in its efforts to grants home loans to the country’s rural citizens. If anything, all of the above tells the story of a good project gone bad.

As a result of the mess and corruption allegations involving politicians, the big question going forward is whether the next black bank, if any, would enjoy the level of political support that VBS got and squandered.

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November 18 2018