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Mutual Banks

One of the central aims of a ‘mutual bank’ is to promote savings and one of the ways it does this is to provide ownership in the bank for people who deposit money. Such depositors become entitled to vote at shareholder meetings, for example, and they also receive dividends on shares.

Traditionally, mutual banks have had a conservative approach to investing and lending. This has allowed them to remain relatively unscathed – or, at least, stable – in times of difficulty, such as the 2008 worldwide financial crisis.

There are three mutual banks listed with The Banking Association of South Africa – GBS Mutual Bank, which started out in 1877 as Grahamstown Building Society; FinBond Mutual Bank, which commenced trading in 2003; and VBS Mutual Bank, which is based in Makhado1 and started life in 1982 as Venda Building Society.

Mutual banks, largely speaking, are answerable to the central Reserve Bank, have similar obligations and responsibilities as ordinary commercial banks, and are also subject to the FICA, FAIS and NCA legislation.2 However, the Mutual Banks Act 19933 is a specific statute addressing the particular qualities and characteristics of mutual banks and their trading. It falls under the authority of the Minister of Finance but, for all intents and purposes, is administered by the Registrar of Banks.4

A. Furnishing of information by mutual banks and returns

  1. The Registrar can direct a mutual bank, or the holder of any interest in a mutual bank, to furnish such information (including at specified intervals, and in respect of stipulated periods) as he may require. It is an offence not to comply with such a directive.5

  2. He can also call for a report from a public accountant, or any other person with appropriate professional skill, on any matter or aspect about which he has given a directive; and the bank, or the holder of the interest, must furnish the report – or else it commits a criminal offence.6

  3. The Registrar can also issue directives about deposits, loans, advances and other credit that mutual banks can accept and/or make. It is an offence not to comply with any such directive.7

  4. Any person who makes a statement or furnishes information in any return, statement, questionnaire or other document, in terms of the Act, which is untrue or misleading in a material respect commits an offence.8

  5. Any person who furnishes the Registrar with information which is untrue or misleading in a material respect, in connection with either an application for authorisation to establish a mutual bank, or an application for registration as a mutual bank, is guilty of an offence.9

  6. Within 14 days of any annual or special general meeting, the secretary of the mutual bank must forward a copy of the minutes, certified by himself and two directors, to the Registrar. It is an offence to contravene this provision.10

  7. If the minutes are later altered, the altered minutes, similarly certified, must be transmitted to the Registrar within 14 days.11

  8. Each mutual bank must lodge returns with the Registrar, together with a report by its auditor, in conformity with section 53 of the Act. It is an offence to fail to do so.12

B. Registration and trading styles

  1. No person shall hold himself out to be a mutual bank unless he is registered in terms of the Act. It is an offence to contravene this prohibition.13

  2. An institution that is, for the first time, registered as a mutual bank shall not commence doing business in that capacity until it has furnished proof to the Registrar of its minimum share capital and unimpaired reserve funds.14 It commits an offence if it does otherwise.15

  3. It is a criminal offence for a mutual bank to trade under a name other than the one registered, or a translation or abbreviation thereof approved by the Registrar.16

  4. Any person who, in connection with any business, uses a name, description or symbol likely to lead persons to infer that the business is a mutual bank commits a criminal offence if the business is not registered as a mutual bank in terms of the Act.17

  5. It is an offence to use the term ‘building society’, or any derivative thereof, unless the business concerned is either a bank or a mutual bank.18

  6. Every mutual bank must display, in easily legible letters, its name and the fact that it is registered under the Act, on all corporate stationery, statements, notices, advertisements and letters. It is an offence to contravene this prohibition.19

  7. Whenever the registration of a mutual bank lapses, the Registrar can order the repayment of deposits (with interest) and can also order the bank to change its name and articles. Failure to comply with such order constitutes a criminal offence.20

C. Doing business

  1. All mutual banks must get an annual licence from the Registrar and it is an offence to fail to do so.21

  2. Every mutual bank must have its Head Office in the Republic. If it moves the location of the Head Office, it must notify the Registrar within 14 days. Failure to do this constitutes a criminal offence.22

  3. A mutual bank may not issue negotiable certificates of deposit, otherwise than in accordance with such conditions as may be prescribed. Doing so is a criminal offence.23

  4. A mutual bank may not invest money in immovable property, or in shares, (or lend money to a subsidiary to do so) to the extent that the aggregate investment exceeds the amount prescribed by regulation.24

  5. Paying dividends, or any bonus on the shares issued by a mutual bank, is a criminal offence unless it comes from the available profits of a mutual bank.25

  6. A mutual bank:
    • shall not effect any transaction as an undisclosed principal;
    • shall not effect any transaction in any other manner otherwise than in its own name;
    • shall hold all its assets in its own name;26
    • shall not show, in its annual financial statements or in any return of assets and liabilities, as an asset any amount representing the cost of organisation, or extension, or the purchase of a business, or a loss, or bad debts;
    • shall not, before provision has been made out of profits for such items:
      • open any branch or agency, or any further branch or agency; or
      • pay out dividends on its shares;
    • shall not, in its accounting records, record any asset at a value increased by the amount of a loss incurred upon the realisation of another asset;
    • shall not conclude a repurchase agreement in respect of a fictitious asset or an asset created by means of a simulated transaction; and
    • shall not purport to have concluded a repurchase agreement without:
      • such agreement being substantiated by a written document signed by the other party thereto; and
      • the details of such agreement being recorded in the accounts of the mutual bank as well as in the accounts, if any, kept by the mutual bank in the name of such other party,

    and it is an offence to contravene any of these provisions.27

  7. The Registrar may notify a mutual bank that a practice it employs constitutes an undesirable practice. He may also, by notice in the Gazette, declare a practice to be an undesirable practice for the mutual banks specified in the notice, or for all mutual banks in general. Any mutual bank that, after 21 days from the notice, continues to employ the practice shall be guilty of an offence.28

  8. A mutual bank shall, upon receipt from the Registrar of a written request to that effect, discontinue the publication or issue of any advertisement, brochure, prospectus or similar document which contains incorrect information, or which is not (in the opinion of the Registrar) in the public interest. Failure to do so results in a criminal offence.29

  9. A director of a mutual bank (or any employee, for that matter) who accepts from any person any benefit in connection with any advance granted by that bank commits a criminal offence.30

  10. It is also an offence for a director or employee to purchase any immovable property owned by or mortgaged to that mutual bank, except if it is at a duly advertised public auction, or he has written consent of the Registrar.31

  11. Any mutual bank which pays out a dividend whilst there is a shortfall in its prudential requirements commits a criminal offence.32

  12. No mutual bank may hold more than 49% of the issued shares of any insurer, and commits a criminal offence if it does so, unless it has the prior written approval of the Registrar.33

D. Prudential requirements34

  1. Mutual banks must always have accumulated share capital and unimpaired reserve funds totalling at least R10 million (or, an amount calculated on the basis of 10%35 of asset values and risk exposures). It is an offence not to meet this requirement.36

  2. Moreover, liquid assets to a value not less than its aggregated liabilities must be held at all times.37

  3. It is an offence to encumber or pledge any of those liquid assets.38

  4. No investments, loans or advances may be made by a mutual bank which exceed (in aggregate) an amount representing a prescribed percentage39 of its capital and reserves, unless the permission of its board (or a specially appointed committee) has first been obtained. It is a criminal offence to contravene this prohibition.40

  5. All investments, loans, advances or credit grants which accumulatively exceed the prescribed minimum percentage of capital and reserves must be reported to the Registrar. It is an offence to fail to do so.41

E. Inspectors

The Registrar may appoint inspectors to investigate the affairs of a mutual bank. These inspectors, as to be expected, have wide powers of search, interrogation, examination of books, and so forth.

  1. It is an offence for any current or former officer, auditor, member or agent of a mutual bank to:
    • refuse to be sworn in to give evidence;
    • refuse to produce securities, books, accounts and documents; and
    • answer any question put to him by the inspector relating to the affairs of the bank.42
  2. It is, of course, a criminal offence knowingly to make any false statement to an inspector.43
  1. Formerly Louis Trichardt. 

  2. Financial Intelligence Centre Act 2001; Financial Advisory and Intermediary Services Act 2002; National Credit Act 2005. 

  3. As amended; the latest amendment was effected by Act 54 of 1999. 

  4. The office of the Registrar of Banks is at the South African Reserve Bank, 370 Helen Joseph Street, Pretoria, 0002. 

  5. Section 5(1) read together with section 92(1)(a). 

  6. Section 5(1) read together with section 92(1)(a). 

  7. Section 54(1) read together with section 92(1)(a). 

  8. Section 92(1)(c). 

  9. Section 18. 

  10. Section 44(8) read together with section 92(1)(b). 

  11. Section 44(8) read together with section 92(1)(b). 

  12. Section 53 read together with section 92(1)(b). 

  13. Section 9. 

  14. As required by section 48 of the Act. 

  15. Section 14(6). 

  16. Section 20(1) and (3). 

  17. Section 20(4). 

  18. Section 20 (5) and (6). 

  19. Section 20 (7) read together with section 92(1)(b). 

  20. Section 29(1) and (4). 

  21. Section 31 read together with section 92(1)(b). 

  22. Section 40(2) read together with section 92(1)(b). 

  23. Section 54(2) read together with section 92(1)(b). 

  24. Section 51 read together with section 92(1)(b). 

  25. Section 58(1) read together with section 92(1)(b). 

  26. There are certain asset classes excluded. 

  27. Section 59(1) read together with section 92(1)(b). 

  28. Section 59(2). 

  29. Section 59(3) read together with section 92(1)(b). 

  30. Section 92(2). 

  31. Section 92(2). 

  32. Section 92(3). 

  33. Section 60 read together with section 92(1)(b). 

  34. What is listed here constitutes a simplification of some rather esoteric provisions. 

  35. See Government Gazette Notice R1007 dated 5 October 2001. 

  36. Section 48(2) read together with section 92(1)(b). 

  37. Section 50(1) read together with section 92(1)(b). 

  38. Section 50(3) read together with section 92(1)(b). 

  39. This percentage is presumably prescribed by regulation, but it is not apparent from Government Notice R2508 of 8 December 1993, and there is no other relevant regulation – unless it is the 10% referenced by Regulation 1007. See reference 8 above. 

  40. Section 51(1) read together with section 92(1)(b). 

  41. Section 51(2) read together with section 92(1)(b). 

  42. Section 84(2). 

  43. Section 84(3).