It is fashionable to point to the growth in SA’s public sector as a chief cause of our economic misery, but far less attention is paid to the finance sector, which includes banks, insurers, and pension and mutual funds.
Counting the massive financial transactions from this sector as a contribution to economic growth is dangerously misleading. What’s being counted for the most part is investment in already-existing assets rather than the creation of new ones.
Banks lend money for the purchase of residential homes, mutual funds invest in stocks being sold by someone else. It’s the same with pension funds. Already-existing assets are being traded and recycled at ever more bulbous prices.
SA’s finance sector has come to dominate the economy over the last two decades, accounting for 23% of total GDP. That compares with 15% in 1995.
How finance has taken over the economy
Despite its economic dominance, finance is not contributing much to economic growth, according to a paper on finance and human rights prepared by the Centre for Human Rights at the University of Pretoria and the Institute for Economic Justice.
About 85% of the business of banking in the US involves the buying and selling of existing assets rather than the development of new assets. About 65% of bank lending in the UK is for residential property, with another 14% going to commercial properties – much of which is for already-existing assets.
Banks moving away from the ‘real’ economy
SA Reserve Bank figures show that despite steadily rising personal debt levels, 34.5% of total bank credit in 2018 went to households. Less than 1% went to construction. Banks have moved away from their traditional function of lending to the ‘real’ economy – such as construction and manufacturing – to lending to households in an “exploitative and discriminatory” manner, according to the study. That is explained away as risk avoidance and this is true, but it’s not the whole story.
Household debt as a share of disposable income grew from an average of 44% in the 1970s to a peak of 86% in 2008. Meanwhile, investment in fixed capital has dropped to 13% of GDP in 2017 from 19.3% in 2010.
In other words, GDP growth includes a hefty dose of asset price inflation, fuelled by the finance sector.
If finance has come to dominate the economy, where has all that ‘wealth’ created gone?
Much of it has gone into the pockets of finance executives and shareholders. US economist Michael Hudson, in his book J is for Junk Economics, highlights the dangers of money printing (quantitative easing) and fire-hosing this money into non-productive assets such as bonds, stocks and real estate. The end result is a bubble economy calculated to redistribute wealth upwards. He argues that the way we measure GDP is fictionalised by the inclusion of unearned income such as interest and rent paid to the ‘Fire’ sector – finance, insurance and real estate. Strip these figures out of the calculation, and our economy shrinks to a fraction of what is claimed.
The new rentier class
Hudson points out that banks have become the new rentier class – earning income from rising property and asset values they had no part in creating. For example, the building of a new highway increases the value of nearby properties, and banks automatically benefit through mortgage lending in the area. He recommends taxing that ‘unearned rent’ (or value) and using that revenue to further enhance services and productive capacity in the area, rather than hand it over to the banks.
SA has a sophisticated finance sector that displays a far greater level of financial openness than is the norm for middle-income countries, according to a PhD study by Gilad Isaacs entitled ‘Financialisation in post-apartheid SA’.
The problem is that millions of South Africans are unable to access credit of any kind, and that inequality poses a human rights problem. The conventional banking model deems the poor too risky for lending. Their credit processes require borrowers to show formal sector employment with payslips, collateral and a clean credit record. Those in the informal sector are therefore unable to acquire loans.
A model that is working
Yet one organisation, the Small Enterprise Foundation (SEF), lends exclusively to the poorest of the poor to help them establish small businesses, and has a bad debt record that is a fraction of that of the banks. Its bad debt profile is so small as to be negligible. SEF was able to achieve this by adopting a different lending model, based on peer pressure. All its borrowers must be introduced by an existing client, and they form part of a group or cell where all members of the cell take responsibility for the loan repayments of everyone else.
That’s a model that surely needs greater exploration. Banks are terrified that the kind of unsecured lending frenzy that put African Bank into administration will wash up on their shores if they are compelled to extend lending to the poor. The alternative is ‘safer’ lending for the trading of already-existing assets, and that does little to boost the economy.
The over-financialisation of the SA economy has jumped the fence to the productive sector. Companies such as Tongaat and Steinhoff decided to game the financial system for the benefit of executive bonuses and hubris. Land sales were apparently counted before there was any sign of cash, liabilities were bundled into special purpose vehicles and buried away from view.
Emasculating local labour
There is another aspect to financialisation of the economy that is subtle but more destructive than open warfare: shifting production offshore and then pressuring suppliers to reduce costs. That emasculates the bargaining power of local labour and pits them against the Chinese and Vietnamese in a highly distorted global bazaar where banks are effectively agents of state economic policy.
The inequality of SA is in large measure a product of the financial biases built into the system. The big financial players have written the rules of the game.
Back in 1990, the government amended the Usury Act and introduced a R5 a month admin charge to compensate banks for opening their lending spigots to the poor (black) customers. That was bumped up to R50 a month when the National Credit Act came into force in 2007. Yet there seems little appetite from banks to venture into the very low-income market. They’ve all tried it to a greater or lesser extent and then largely abandoned it.
This is raising pressure for the state to launch its own bank and nationalise the Reserve Bank. If that happens, expect artificially low-interest rates, credit expansion and taxpayer-funded bailouts.
The finance sector is leaving the have-nots behind. Their risk models seem incapable of lending of the kind done by SEF or, on a far larger scale, by Grameen Bank in Bangladesh.