It’s business as usual at the Community Bank, despite reports of a solvency crisis. But potential investors may take more convincing, reports Madeleine Wackernagel
Reassurances have been flowing thick and fast that all is well at the Community Bank (CB). Drawing on the lessons of the African Bank debacle, the government took rapid action.
The Deputy Minister of Finance, Alec Erwin, issued a statement two weeks ago, underlining the ministry’s support for the bank and denying reports of a solvency problem.
But that still leaves the bank with a liquidity problem that is proving more difficult to staunch than the rumours.
Part of the confusion is that the CB is the first of its kind. With no historical precedent or comparable operation it is difficult to judge whether the current cash crisis is a hiccup or presages the bank’s demise.
The CB has not had an easy ride; even the best laid plans can go awry. From planning to implementation took two years; the first branch opened in August 1994, with 17 in place today. But lending didn’t begin as hoped because the government’s housing programme was delayed; deposits didn’t roll in as anticipated, and initial start-up costs mushroomed.
Provision had been made for losses in the first two years of operation —but in reality they have almost doubled. For the 15 months to end-March 1995, the bank declared a loss of R21-million, against a predicted R12- million; estimates for this year are up from R15-million to R25-million. Out of the total R46-million loss, R18-million is down to interest costs and R9-million went on setting up the branches.
Deposits of R51-million were projected for 1995/96 — R20-million was collected. Deals with unions and stokvels suddenly dissipated when the African Bank saga unfolded.
Cas Coovadia, executive trustee, says the South African Clothing and Textile Workers’ Union, for one, is still interested, but needs to win approval from the Industrial Council.
Coovadia insists the problems are better described as a challenge. Indeed, Christo Wiese, the Reserve Bank’s registrar of banks, says the CB doesn’t have a liquidity problem, only a credibility problem.
“The concept is a good one,” says Wiese, “but the bank lacks support. It needs strong backing, then it stands a good chance of success.”
In the past two weeks, Coovadia has been looking at options. He faces a Catch 22 situation: the Development Bank of South Africa (DBSA) will not lend any more money (it pledged R110-million, of which R60-million has been drawn down) until other investors step in, while the Industrial Development Corporation (IDC), with R40-million, is now concentrating on industry only.
But potential new investors require assurances of DBSA support and the DBSA’s brief, too, has changed. It recommends that the CB find other backers.
Government should step in, says Coovadia, with an unequivocal statement of support. Only then would the private sector get the message. The African Bank debacle has made many investors wary.
Pressure is growing on the bank to seek a tie- up, with the South African Housing Trust most frequently mentioned. But Coovadia insists their modus operandi are very different and, besides, the bank has many options; a merger is not the only solution.
One argument against a link-up with the Housing Trust is the need to have different institutions performing different functions. The Housing Trust is very specialised, while the bank provides a wide range of financial services to the low-income market. But other sources say a merger could only benefit both parties.
Another route is for the CB to change its status from a mutual bank to one that is equity-based. It had been mooted once before, says Coovadia, but because the DBSA and IDC were the biggest investors, it would in effect then have become government-owned. The Reserve Bank panned the idea.
“Now, however, it would be possible to get the unions and other interested parties on board, so the potential is greater,” adds Coovadia.
But it is early days yet. Changes are in the offing, not least with the establishment of the National Housing Finance Corporation. (See page B3)
Coovadia is optimistic; accusations that the bank’s problems go deeper than a temporary cash crisis are unfounded, he says. And while he considers the options, the bank will get on with the job of lending money. “It’s business as usual,” he says.