SIMON BROWN: I’m chatting now with Redge Nkosi, executive director at Firstsource Money. Redge, I appreciate the early morning time. [That was] a great piece that you wrote earlier in the week around banks and where they fit within the economy. You make the argument, compellingly in my mind, that banks are institutions, they’re not firms; they’re an important underpin to the health of the economy and in essence they set the interest rates guided by the Reserve Bank. More importantly, they turn on or off the taps of credit flowing into an economy and perhaps need to be viewed differently from how we typically do so.
REDGE NKOSI: Absolutely. South Africans have always thought – in fact many people around the world think – that banks are ordinarily friends and therefore they pass on savings which you and I put in them and then pass them over to someone who wants to borrow. That’s not really the case. Of course this idea of banks being hoarders of people’s savings is an old one, given by a theory in 19′ economics, which theory has been proven to be wrong. But banks are indeed the creators of the money that we use. In fact, in South Africa, 95% of all the money that is in circulation is created by commercial banks, to the extent that if they do create 95% obviously, and allocate this money, they can choose whom to allocate to and therefore turn on and off as they wish.
SIMON BROWN: It’s that allocation. We look at the capital adequacy ratios of our banks in South Africa and we say, ah, they’re so strong, they are over-capitalised. There’s another way of looking at that, which is saying that they’re not lending aggressively enough. The ‘public good’ doctrine could apply and we could say to them you’ve got capacity for more lending and you’re not doing it.
REDGE NKOSI: They have a lot of capacity to lend. In fact, [Simon], to be honest, even a single bank, if there was only one bank – call it whatever, the Red or the Brown Bank – it can lend to the entire population of South Africa for as long as it has a branch network that connects to every single citizen in the economy. Now we have all these banks that are here – the ‘big five’, if you want – and their lending practices are completely atrocious.
SIMON BROWN: Yes.
REDGE NKOSI: As Stellenbosch University reveals, only one out of 20 SMMEs (small, micro and medium-sized entities) that go to banks get financed – one out of 20. So 19 of them get refused. Yet we hear time and time again SMMEs are the backbone of an economy, SMMEs are the firms that employ. How on earth would it be possible for SMMEs to thrive in a place where they’re never given lending?
SIMON BROWN: Our biggest problem is the mindset, as you say, which goes back literally centuries to when banks were deposit-takers; that’s what they did. That was their business and we viewed them as firms. How do we shift it? Obviously the debate’s important. Is this a regulatory environment? We don’t want them to be reckless, but we want them to be more cognisant of their role.
REDGE NKOSI: Absolutely, absolutely. We don’t want them indeed to be reckless, but to understand that they underpin the economy. Now, how do we go about shifting this pin? A regulatory reform. In my 2017 presentation to parliament I said that unless we shift this way towards allowing the banks to lend to as large a population as possible – of course meaningfully – it’s impossible to remove this poverty that we have.
Capital accumulation is the primary way in which people are going to have to move out of poverty. How are they going to accumulate proper capital when there are no banks to give them money? So I called for the Reserve Bank Act to change, I called for the Banks Act to change and ensure that the banks behave differently.
They should behave as institutions, not as firms who talk to their shareholder interests only. Their interests go beyond the shareholder.
In fact, shareholder interests are minimised because we must remember that banks are supported quite heavily by the state itself. You and I guarantee the banks’ solvency and liquidity to the extent that … they cannot fall anyhow. It’s not like Nando’s and so on which can close any day. Banks cannot, because you and I guarantee the solvency. To the extent that we do guarantee the solvency, we therefore deserve to be assisted in the manner we should, which unfortunately is not the case in South Africa.
We need, to me, an overhaul of the regulatory environment in this country. But also I’ll give you an example. In Germany before, they could not lend against property because people do not have property. They understood that you and I may be poor enough not to own property. We could have one small house, a tin shack here, but we need money.
So in the Germanic system, what they did was they created a lot of community banks – and there are today a lot of community banks in Germany, by the way. A community bank will know who is within the community. So if they know who is within the community, they’re able to assist a person within that community, whether you have collateral or not.
SIMON BROWN: Yes.
REDGE NKOSI: So collateral therefore was not the primary issue in Germany as they were developing. Maybe now.
So the issue of collateral must be revisited to saying if you have a lot of community banks, we know each other within our community, we can say ‘But [Simon] and Redge are a bit poor. They don’t have anything; please assist them.’ Those community banks will go all the way to assisting, and therefore, the growth and development of the citizens.
SIMON BROWN: That goes back again to the core of banking – which was community. I remember chatting with Kaap Agri [about] their lending, which was community-driven. Their impairment rate is 0.07%, which any bank in the country would absolutely love.
Redge Nkosi, executive director at Firstsource Money, I appreciate the time and the thoughts.