The governor of the Reserve Bank Lesetja Kganyago has criticised calls for a state-owned bank saying the government is already the “biggest financial conglomerate in SA”.
SA’s financial services sector is increasingly under fire for being too concentrated and dominated by an oligopoly consisting of FirstRand, Absa, Standard Bank, Barclays and Nedbank.
The oligopoly has seen heightened calls for a state-owned bank that would transform SA’s banking sector – addressing concentration and promote inclusive banking.
Speaking at parliament’s Standing Committee on Finance on Tuesday about the role of the bank, Kganyago defended the state saying it already focuses on the agricultural, industrial development, retail and national housing banking sectors.
Institutions including the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC), the South African Post Office Bank and the National Housing Finance Corporation already fulfil the mandate of banking across various sectors, he said.
“Why does the central bank need to get involved in a development bank? If we say the central bank must be in development, then why did we create DBSA? Are we suggesting the central bank must take over DBSA and IDC?,” Kganyago asked.
He defended the independence of development banking institutions from the Reserve Bank. “Our forebears were correct in separating these institutions from the central bank to deal with the particular challenges.”
He told the committee that the state is the biggest financial conglomerate in SA, saying the state owns the biggest asset manager the Public Investment Corporation, which manages assets over R1 trillion and owns the biggest pension fund the Government Employees Pension Fund, with more than 1.2 million active members.
The big four banks have been criticised for wielding an inordinate level of power and having a negative influence on economic activity in SA. A state-owned bank, it has been argued, would transform the financial services sector, making access to loans by corporations and retail clients easier and at affordable interest rates. This is expected to support production development, economic activity and employment growth in SA. The model for a state-owned bank would imply that it would have a mandate of development rather than being profit-driven.
Kganyago reiterated the Reserve Bank’s mandate of promoting economic growth and protection of the currency – as enshrined in the constitution – and not interfering in the independence of institutions.
Kganyago was quizzed by members of parliament including the Economic Freedom Fighters Floyd Shivambu and the DA’s David Maynier on the reason for concentration in the banking sector, which he said is a historical issue.
“Every banking crisis leads to a concentration in SA. What does Absa stand for? Amalgamated Banks of South Africa. There was a group of banks put together to solve a banking situation that we had in the aftermath of Bankorp. Nedbank includes the old Board of Executors (BoE).
“Every banking crisis leads to concentration because the preferred resolution tool for when a bank fails is for another bank to buy it because you don’t want to use public resources to bail it,” said Kganyago.
He added that the Reserve Bank will pursue a four pillar model, which wouldn’t allow for the big four banks to merge, resulting in few players in the market.
“It doesn’t mean we don’t allow others [players] to come in but it’s difficult for others to come in. If anyone thinks that a new bank could come in and could take on existing ones, they couldn’t succeed as the market is competitive.”
Reserve Bank deputy governor Kuben Naidoo said more banking players are attempting to enter the market, as it received three applications for banking licences – for the first time in 11 years. The three applications under section 13 of the Banks Act are from Discovery (which is setting up a bank), the South African Post Office Bank (which has been targeted to take over social grant payments by April 2018) and the Commonwealth Bank of Australia.
On the latter, Kganyago said the Commonwealth Bank of Australia recently bought a financial technology company in SA and applied for a banking license.
“The competition in the banking sector will come from alternative systems coming from technology, such as banks using technologies such as apps,” he said.