Today's global financial systems are kept honest by a large network of local and global regulators who set rules and monitor compliance with such rules. Such regulators - when the job is done well - rarely make it into the spotlight. When they do, it is usually because something has gone wrong in the system.
This week, the South African Reserve Bank had to account to parliament on two key matters: VBS and Capitec.
Both banks have been in the news recently for different but complementary reasons. Capitec was subject to a storm initiated by a Viceroy report that cast doubt on the operational policies of the bank and suggested that its lending practices were so dangerous that the treasury should put the bank under curatorship. The regulators immediately responded and declared that all was well with the bank.
Weeks later, the regulators did put a bank under curatorship - not Capitec, but a mutual bank called VBS, known more for lending money to former president Jacob Zuma than its banking prowess.
The basis for the VBS curatorship is a liquidity crisis precipitated by a reliance on short-dated municipal deposits to fund operations and longer-dated advances. As a mutual bank, VBS had no legal authority to hold municipal deposits simply because the Municipal Finance Management Act prohibits this. As banks submit reports to the regulators on a regular basis, it remains unclear how even the first municipal deposit was allowed by the regulators to remain on the books of the bank.
In explaining the events in parliament, the regulators indicated that they started warning the bank long ago about the illegality of such a practice. The odd thing about such a response from the regulators is that it suggests some level of illegality was deemed acceptable at some point, otherwise why the warning?
Alternatively, it suggests the regulators' monitoring framework failed to pick this up either due to their own incompetence or misrepresentation by VBS. Either of these should make us uncomfortable.
The integrity of the banking system depends on our unquestioned faith in monitoring and compliance processes. Due to the very complex nature of counter-party relationships that the system hinges on and the centrality of financial services for any country, misses in regulations can bring an entire economy to its knees.
So whether you are black or white, if you are in financial services you better be on the right side of regulation. The single most important hurdle to beat in this sector is capital adequacy. I don't want to believe that the owners of VBS, or at least its management, did not appreciate this. If I'm right, then why did they not secure adequate capital to run the bank instead of relying on illegal deposits from municipalities? What did they think was going to happen?
It is evident that VBS may have been negligent in their running of the bank if something as basic as capital adequacy has led to their undoing. This should lead to a detailed forensic report to identify exactly how the bank got here in the first place.
It does appear that VBS grew the business very fast and may have lost track of the risks involved.
Business leaders and entrepreneurs who create great businesses tend to be adventurous and ambitious, and that's not a bad thing per se. But to create a great business requires an ability to navigate market barriers and master the existing regulatory environment. Inevitably, this is easier for those with access to deep capital and resources.
For black entrepreneurs, this remains an ongoing challenge, but we should be aware of it and thus secure such capital even if it means giving up equity to ensure we have a chance to challenge the status quo.
When one considers that VBS was founded in 1982 and Capitec in 2001, the comparison gets even more interesting. For us to lose what looked like a thriving black business in a key sector on the basis that it simply failed to comply with regulations is very disappointing and, frankly, a "schoolboy" error.
If VBS fails to survive curatorship and is eventually liquidated, it will bring us to a period of introspection about the ability of our country to facilitate the entrance of black players in key sectors. Perhaps more importantly, it must remind us that regulation exists for a reason, and breaching it will land you in hot water.
• Khumalo is chief operating officer of MSG Afrika
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