Mutual Banks Amendment Bill: briefing

There are different types of shares issued by mutual banks, however, only the permanent interest bearing shares (PIBS) are freely transferable and have been transferred between persons. Nevertheless, PIBS are not listed or traded on the JSE.

At present there are only three mutual banks in South Africa: these include GBS Mutual Bank in Grahamstown, TNBS Mutual Bank in Umtata and a third bank situated in Louis Trichardt. There was a fourth one, namely Credit and Savings Help Bank in Roggebaai, which was the largest of the four, but it is currently in the process of being converted into an ordinary bank. The three mutual banks together have capital totalling 1.1 billion rand.

De Jager stated that the purpose of the amendment bill was to bring the Mutual Banks Act on par with the Banks Act.

He commenced with an analysis of various sections of the Mutual Bank Amendment Bill by comparing it to the Banks Act.

Section 2
This relates to powers of supervision. It was proposed that a new kind of supervision be implemented by extending supervisory powers to the CEO as well as persons designated by the CEO. According to De Jager, this type of supervision was successfully accomplished by the amendments to the Bank Act and he expects the same success with a similar amendment to the Mutual Banks Act.

Section 3 - 21
According to the Mutual Banks Act of 1993 registration of mutual banks had two stages. Firstly, they had to be provisionally registered. Thereafter, they had to qualify for final registration within a maximum period of five years. Any such bank failing to get final registration within that period faced de-registration.

The problem in this regard is that the public is more hesitant to do business with a provisionally registered bank than with a finally registered one. This is simply because of the scepticism and stigma attached to the term "provisionally registered bank". Its management is considered to be of an inferior quality even though this may not be so. According to De Jager it is true that there are provisionally registered banks more capable of risk management than finally registered banks.

Section 25
The type of supervision as discussed under 'Section 2' also applies to associates of corporate governance. The Mutual Bank Bill defines 'associates of banks' broadly. Thus, Section 25 which is an amendment of Section 45 (relating to auditors) states that an auditor must be an accountant and auditor registered in terms of the Public Accountants' and Auditors' act 1991 who is not an officer of a mutual bank or of any of its associates.

Section 26
This amends Section 46 of the principal act. It provides that the auditor must report anything that will endanger or impair the funds of the mutual bank.

Adv De Jager discussed a few other sections of the Bill, the clarity of which will emerge from the answers to the questions posed by the members:

Questions by committee members
Dr L Luyt asked whether the amendment of Section 51 which refers to grant loans and advances related to natural or juristic persons or both.

De Jager responded by saying that it is a good banking principle to spread your risk over a wide field. This results in the risk of losing investments being decreased. He continued that Section 51 includes natural and juristic persons and it is not prescribed by the Reserve Bank how banking institutions manage their money, it simply ask for reports. If such institution invests in excess of 24% of the qualifying capital in one investment then the Registrar should be consulted.

Dr Luyt noted that in the past banks could not lend more than 5% of the reserve capital to one person and asked if this still applied.

De Jager responded that this no longer applied as it was too prescriptive. However, if an excess of 10% of the qualifying capital was loaned to one person the approval of the Board would be needed. Where an excess of 24% was loaned it would have to be reported to the Registrar.

When asked about the financial implications of the Bill, he replied that it would not have any new financial implications for mutual banks or for the State. Further, it would be regulated by the South African Reserve Bank.

Prof B Turok made reference to the collapse of the Asian banks a few years ago and wondered whether the requirement of provisional registration was not a safeguard in ensuring that this does not happen here.

De Jager said that the Asian crisis could not have been prevented by imposing the requirement of provisional before final registration. He noted that bad management and insufficient supervision was the cause of the collapse.

It was noted that the minimum reserve balance is a method of controlling the cash in the market and not creditors measures. The liquid assets in the bank must be at least 25% of the total liabilities owed to the general public.

He explained, in reply to a question, that the relationship between the audit committee and the auditors as such is that the committee serves as a plank between the executive and the non-executive directors. It has a very important function in the management of the banks in that it ensures that there are a certain number of non-executive members involved with management supervision.

In response to a question by Dr G Woods, Adv De Jager stated that the amendments were desired for in-house reasons; that the Department of Finance had no objection to it and that the amendments would enhance the registration process for banks.

Mr S Leeuw (ANC) wanted to know in which capacity the bank would be acting. It was stated that when dealing with insurance or investments the bank was acting as an agent and therefore was not liable for loss incurred. The notion that the bank was not holding capital as a bank but as an agent is in accordance with our common law.

Mr B Nair (ANC) questioned whether the amendments enhanced the position of the mutual banks. De Jager replied that there were not many mutual banks in South Africa and that he did not know why they had not taken off well here. He noted that a mutual bank required a capital of 10 million rand whereas an ordinary bank required a capital of 50 million rand to start. However, in practice, the Registrar requires at least 150 million rand.

There was a small glitch with regard to the tabled bill in that Mr De Jager's copy did not correspond with the printed copies handed out to the members. There was a printing error in respect of the numbering of one of the clauses. Apparently, the printers had omitted to insert section 21 which refers to the change relating to provisional registration. It later appeared that the clause had been inserted into the printed version of the bill under a different section number.

The chairperson directed that Adv De Jager meet with her in private to iron out the problem.

The chairperson concluded the briefing by stating that the bill would not be passed today as she wanted the three mutual banks to be consulted as their rights were being affected. It was felt that they should have the opportunity to air their views. Further, the bill had to be revised with the alteration regarding section 21.