The proposed change to the Constitution to allow expropriation without compensation (EWC) that is set to serve before Parliament in the current sitting, is bound to have a huge impact on banks, the financial system in general and the economy overall.
It will hit the very foundation on which any successful economy is built: that of private property rights.
While most people believe that economic debate is the domain for economists to talk about figures, percentages and ratios and produce incomprehensible graphs, the current debate will quickly prove the reality of how economic principles affect people.
We can sum up the impact of the proposed Draft Constitutional Eighteenth Amendment Bill of 2019 that will legalise EWC in three questions:
- Will anybody keep paying their mortgage bonds if government takes their property without any payment?
- How can banks enforce payment of a bond if the underlying property is taken?
- How will it affect people?
Banks are caught in the middle of this disaster and they have no way out.
On the one hand, bankers realise that it is unreasonable and unfair to expect borrowers to keep paying bonds if government takes away what usually is a lender’s biggest capital asset. On the other, banks have a responsibility towards their depositors.
In the case of a successful farm – where the seed of EWC was originally planted – the suddenly-unemployed farmer will not have the ability to repay the bond or any other debt associated with his farming business, or to pay his credit card. The farmer will be rendered bankrupt when he still owes the debt intact, but no longer owns the asset.
The same goes for any other business owner or household, because the current draft legislation to change the Constitution to enable EWC has changed significantly in a few key aspects. Early talks of EWC referred to the redistribution of land, with the focus on agricultural land.
The draft bill now refers to property, which includes any improvements and buildings on a farm.
The draft bill also paves the way to effectively wipe off the table the possibility that farmers, or anybody else, will be compensated for millions of rands worth of improvements and infrastructure on land.
The Institute of Race Relation says in an analysis of the draft legislation that the reference to “property” would also include improvements such as houses, office blocks, shopping centres, factories, hotels, schools and hospitals. “EWC will allow government to take away your property and leave SA poorer and hungrier,” says the IRR.
Government is pushing for more power to decide the extent of EWC. Previously, a clause in the draft bill would have let let courts decide in which instances EWC would be enacted. The court had to decide in what instances property and any improve thereon could be expropriated without payment.
The IRR says the bill now makes provision for six instances in which no compensation is necessary, as well as a new proposal that new instances can be added by way of new statutes to the bill. Any new statute would only require a simple majority in Parliament to be enacted.
“The ANC has now further undermined the public participation process by declaring that the draft bill must be amended to give the power to decide on compensation to the executive, rather than the courts,” according to the IRR analysis.
The banks are fully aware of the situation, and scared.
Silence from banks
None of the commercial banks were willing to answer Moneyweb’s straight question of what they will do if government takes away properties and owners refuse to pay the outstanding bonds. They were not even willing to discuss the simpler question of the current procedure when dealing with mortgage bond arrears.
Absa ignored Moneyweb’s specific questions and responded by way of its media relations department with a short statement: “The parliamentary process to amend Section 25 of the Constitution is an on-going process. We cannot comment at this stage on the matter. We will focus our attention on making our contribution to parliament when the opportunity arises”.
Other banks did not answer the questions, referring Moneyweb to the Banking Association of South Africa (Basa). Bongane Sibanyoni, head of regulatory advocacy and policy at Nedbank, says that it’s currently participating in a process to comment through Basa and other business forums on the draft amendments to the Constitution.
“Until there’s further clarity on this process, it is business as usual at Nedbank. We continue to assess and grant new mortgage loans as per our usual rules and processes. Bond repayments, which are the subject of a contractual agreement, remain due and payable,” says Sibanyoni.
Basa promised answers as soon as its executives all had an input. Ironically, Basa’s executive committee comprises individual bank executives. A few days passed and no response was received.
Nobody can really blame the banks for their reluctance to take a hard stand. Banks get a lot of business from the different levels of government and parastatals. Government uses bank accounts, makes loans and deposits cash. Government, to a large extend, issues bank licences and makes the rules for banking in SA.
Government is also the single largest employer in SA and all its employees have bank accounts, hire purchase agreements and even bonds – without suggesting that a delay of one or two days in salary payments to a specific bank might entice employees to move to a friendlier bank or that such a delay is even possible if a bank gets too critical.
FNB says that it continues to monitor the developments on land reform. “The bank is actively participating in the ongoing constitutional review process through Basa as part of the broader industry.
“The SA government has assured the country that the implementation of land reform will consider the impact on the economy, property rights and job and food security. Therefore, we remain optimistic that the process will be managed in a responsible [way],” says FNB.
Unfortunately, there is no guarantee that the majority of politicians understand basic economic principles and the effect of land grabs on banks and the economy.
Reserve Bank figures – based on compulsory monthly reports from all registered banks doing business in SA – show that total mortgage bonds amounted to R1 397 billion at the end of January. It includes farms and commercial, industrial and residential properties. Commercial banks has extended another R1 billion to the Land Bank, shown separately in the Reserve Bank’s figures.
If only 5% of the underlying properties are affected by EWC, capital to the value of nearly R70 billion simply disappears. After setting a precedent, it can be argued that the total value of all the outstanding bonds reverts to zero.
The effect on individual banks is equally devastating. As an example, FirstRand’s latest interim results shows that FNB had outstanding mortgage bonds of R217 billion at the end of June 2019. This compares with FirstRand group’s total shareholders capital of R145 billion at the end of June.
Note than there are more mortgages in its Rand Merchant Bank division.
FirstRand has huge assets, but also huge liabilities. The same goes for all the other banks. The biggest of all banks’ liabilities is money owned to depositors, as banks are in the business of taking in deposits and lending out the exact same money to borrowers.
The walking trail is fairly straight from people refusing or unable to pay mortgages to depositors losing their money.
The current system of long-term loans secured by mortgage bonds on property works well, if brutally painful to someone who falls behind with their bond repayments. In short, the bank starts legal action to attach the property and sells it to somebody else to recover its depositors’ money.
The pending EWC legislation might render this procedure obsolete. Courts are mandated to be just and fair and the contractual obligation in terms of the bond agreement of the original property owner must be considered against the unfairness of expropriation in a court ruling.
EWC is bound to leave banks in the middle of the mess.
Politicians don’t realise that the economy is actually about people, where expectations and confidence shape the future.
Some people will hold back a few months before buying a new house or car; a few developers might hold back on planning a new development; and a few farmers might decide to forgo the cost of planting a bigger crop or raising more chickens. A foreign firm might delay investment in SA.
A little makes a big difference when planning any economic activity, as the difference between a GDP growth of 0.5% per annum and 1.5% illustrates when people reduced their spending and production plans by a mere 1%.
# To get to the crux of EWC, here are the questions set to banks:
- If government takes my farm, small holding, house or factory, do I need to keep paying my bond, even if legally obliged?
- What will the bank do if I stop paying, seeing that I do not own the property any more?
- The property is security for the bond and the bank holds the title dead until the mortgage is paid in full. How does this change when EWC is legislated?
- What are the steps the bank can take currently when somebody defaults on their bond?
- Can the bank attach other property, such as my car, another house or other movable property to settle the debt on the outstanding loan when I refuse to pay when losing my property?
- What is the total value of the bank’s mortgage bond book?
- If my property is targeted, I will be tempted to max out my bond to reduce my loss. Maybe even my credit card, overdraft and personal loan, moving the loss to the bank. If my credit score is shot, why would it make a difference? How can the bank prevent it?
- What is your opinion on the effect of EWC on the financial sector and economy?