The collapse of VBS has put mutual banks in the spotlight and with the launch of the newly established YWBN mutual bank – riddled with electronic problems and a lack of structure – investors were left questioning whether buying shares in the mutual bank would be a sound investment.
Questions asked by the general public include: Why the need to include a non-refundable membership fee? What the actual business model would be? Whether it would be risky for individuals to put money into an organisation that is yet to receive the licence to operate as a mutual bank? How the value of the shares came about?
What is the Young Women Business Network (YWBN)?
YWBN established the “Nthabeleng Likotsi” NL bank with the aim to service the needs of the previously disadvantaged, those unbanked, underbanked and underserved; with a focus on meeting the needs of small, micro and medium businesses forced to liquidate due to a lack of funding. The bank seeks to be purely digital – available as an app on cell phones which will not rely on branch infrastructure.
As it stands, the bank is recognised as a cooperative with 589 members and has managed to collect R21 million deposits with an average revenue generation of R195 000 per month in the last financial year. Whilst these stats have been provided, no financial statements are provided for the cooperative to enable investors to assess the historic performance and verify any balance sheet items.
What is a mutual bank?
The Prudential Authority at the Reserve Bank currently makes provision for three types of banking licences: cooperative, mutual, and commercial bank, with each license granted based on differences regarding the corporate structure and capital requirements. The main differences are shown below:
| Co-Operative Banks | Mutual Banks | Commercial Banks |
|---|---|---|
| Min 200 members | Min 7 members | No requirement (CIPS – Companies Act) |
| R1 million deposits | R10 million share capital | R250 million Share Capital |
| Constitution | Articles of Association | Articles of Association |
| Common Bond | No common bond | No common bond |
| Members only | Members and clients | Shareholders and clients |
Mutual banks are first required to apply for authorisation to establish the bank and are then granted 12 months at which point the reserve bank will decide whether a licence is granted. YWBN has received the authority to establish the mutual bank but would still need to meet the extensive conditions to make submission in terms of the Mutual Banks Act.
Membership
The NL bank share scheme is available to all members of the public including but not limited to individuals, companies, stokvels and non-SA residents. Each member would need to pay a non-refundable fee of R100. Shares are then sold at a nominal value of R10 each, but a minimum amount of 100 shares is required to participate in the establishment of this bank. Shareholders are not entitled to demand redemption of the shares and only at the end of a minimum period of 6 years can the shareholders reinvest or sell their stake.
All shareholders would form part of what is titled the “Own the Bank Share Scheme” which would effectively be housed under a special purpose vehicle that would own 19% of the NL Mutual Bank. This effectively is an opportunity to own ninety-five million shares at R10 each, implying a NL bank valuation of R5 billion.
What is an investor essentially paying for?
Investors are effectively offering pre-seed funding for the purpose of lending, licensing, regulatory capital, human resources, technology systems and marketing; and should the licence be rejected by the SARB, investors will be members of the YWBN CFI (Cooperative Financial Institution). Total Net Asset Value forecasts currently show 2022 assets at R5bn with a R5bn share capital and no liabilities. No indication in the prospectus of how the share capital of R5bn will raised in 2022 as the public contributions (19%) together with the institutional funding (26%) make up R2.25bn. The prospectus also shows a 2029 asset target of R12bn funded with only R663m of liabilities - which suggests majority of the retained earnings ploughed into reinvestment and very little prospect of dividends.
Whilst the prospectus issued by the bank does aim to provide key differentiators versus other traditional banks and talks to value propositions that would ultimately build the economy: diversity, financial inclusion, health care inclusion and job creation, the prospectus is scant on detail and makes no mention of any capital contribution by the founders, whereas founders indirectly obtain 44% of the bank implying a founder valuation of R2.2bn (reflective of sweat equity).
Ignoring the technical issues encountered at the launch and the sceptics questioning the professionalism and execution of management at the press conference – one thing is clear – this investment is certainly not for the faint-hearted.