The Banking Association of South Africa (Basa) fears that if the state-owned bank is not implemented cautiously, the unintended consequences for the country may be dire.
Minister of Finance Tito Mboweni announced in his budget speech on Wednesday that National Treasury is ready to set up the state-owned bank mentioned during President Cyril Ramaphosa’s State of the Nation Address on February 13.
Basa said that although it may not fully understand the necessity for a state-owned bank, it believes that increased competition in the banking industry would benefit South Africans.
Fiercely competitive sector
“However, competition in the banking industry is already fierce and four new banks have recently entered the South African market; 80% of South African adults have access to a transactional bank account and banks are committed to meeting the transformation targets set out in the Financial Sector Code,” it said.
Basa added that government’s plans to consolidate its existing banks – the state already owns and operates several banks, including Ithala and Postbank, a subsidiary of the South African Post Office – will help to maintain investor and consumer confidence in the country’s financial system.
The government entities currently operate under various exemptions of the Banks Act, which was necessary for them to be able to accept deposits. However, they do not have a banking licence and are unable to operate as fully-fledged banks.
The finance minister has indicated that a state bank would be a deposit-taking institution. It would therefore be regulated under the Banks Act by the Prudential Authority.
Fix current challenges
Basa MD Cas Coovadia says a state-owned bank would need to be regulated in the same manner as commercial banks to protect the savings of its depositors.
However, he says Basa is still not clear about the need for a state bank.
“It makes no sense for the government to invest scarce resources now, in a new institution for which there is no need and has no clear distinguishable advantage,” says Coovadia.
Read: Does SA need a state-owned bank? (2017)
He encourages the government to first fix its current institutions.
“We think it would be far more constructive to engage government in a way that the current financial sector is able to make dysfunctional markets functional. The state has not covered that side with glory and now they are forming another state-owned institution and will be collecting deposit from citizens.
“I do not want to use the VBS [Mutual Bank] as an example because some people consciously used it as a platform to loot,” he adds.
Michael Treherne, portfolio manager at Vestact Asset Management, shares these sentiments. The big five traditional banks are already leading the market, with customer bases of between seven million and ten million, he says.
According to Basa’s transformation banking report, a large portion of the population remains unbanked. It says the latest Finscope South Africa survey puts the unbanked population at 23%.
The introduction of a state-owned bank would be a way to facilitate the provision of low-cost banking services and widen financial inclusion in the country.
However, Treherne says the government is entering unfamiliar terrain.
“They are entering a very competitive space because there were already a lot of new entrants last year. The key to banking is that you want to be run properly. It should be independent and you do not want it as another SOE [state-owned enterprise] that is pulled backwards instead of being pushed forward.”
Treherne points out that the banking sector also requires trust.
“Research shows that one of the reasons that some South Africans do not have banking is because of trust. They do not trust that institutions [will] look after their money.
“I do not know if a state-bank solves that problem?” Treherne says.
Political analyst Ralph Mathekga said that though there is a credibility issue in the country concerning how SOEs are managed, President Cyril Ramaphosa is also under pressure to fulfil the ANC’s 54th National Conference policy resolutions adopted in December 2017.
“It is indeed a political revolution. It is one of those things that as a president if you stay away from, you will encounter political headwinds, because you will be evaluated based on the revolutions.
“So, it is just one of those things that you will do even if you do not like it or want to because you must take control of the situation,” Mathekga says.
He advised the [state] to be introspect, saying that there are credibility concerns.
“Can we just do proper due diligence of ourselves as a country – can we just be honest with ourselves?
“Out of the top three political parties in this country, the leaders of two are accused of receiving funds from a looted bank. So really, do we have the moral gravitas to undertake that debate of a state-owned bank where we are? My answer is no.”
He adds that it would not be a bad idea if South Africa had less corruption and was properly run.
“We are trying to solve a problem of cash by establishing a bank, which exposes our ineptitude when it comes to financial management.
So before we establish a bank, why don’t we properly run the funds that we have?”