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South Africa needs rationale for state-owned commercial bank plan

By David Whitehouse
Posted on Tuesday, 3 March 2020 11:01

South Africa's President Cyril Ramaphosa and finance minister Tito Mboweni (AP)

South Africa’s government needs to explain which problem is it trying to fix with its proposal to create a new state-owned commercial bank.

In February, Finance Minister Tito Mboweni said government would proceed set up a new retail bank “operating on commercial principles”.

His deputy David Masondo said the aim was to consolidate existing “quasi” state banks such as Postbank, into a single, deposit-taking institution. No timeframe was given.

  • “Understandably, the banking sector would question whether or not this is necessary at all since South Africa has a well-established, advanced and competitive banking industry,” says Fabian de Beer, director of investments at Mergence Investment Managers in Cape Town. “The role of such a bank does not seem to be entirely clear to them as yet.”

It’s not obvious that there is a need for new commercial lender.

  • South African banks generally display “strong and stable returns, resulting from recurring fee income, low credit costs, and good cost control”, S&P Global Ratings said in a report in February.
  • In the short term they are unlikely to increase lending because of conservatism in weak economic conditions, S&P said.
  • Commercially sound lending in South Africa is only likely to increase once government debt is brought under control.
  • According to S&P a stronger economy and more lending will require a “controlled fiscal trajectory and lower debt levels”.

De Beer says that the government should not be content to leave the status quo intact without considering ways of improving and strengthening the system’s effectiveness.

But “more clarity is needed on the proposed bank’s mission, direction and role.” Only then can it be asked whether the private sector could fulfil that task, he says.

Regulatory Concerns

A submission by the Treasury to the Standing Committee of Finance in February highlighted the dangers of the plan. Experience in South Africa and abroad suggests that state ownership of banks can “undermine prompt corrective action by prudential regulators,” the briefing said.

Regulators, the briefing argues, sometimes fail to play by the book when dealing when failing state banks as they don’t want to appear to be frustrating government policies.

But prudential regulators are “duty-bound to level the playing field.”

  • The briefing points to the use by the South African Post Office of depositors’ funds to finance operational postal losses in the late 1990s as a cautionary tale.
  • Financial inclusion does not offer an obvious justification.  The Treasury notes that 90% of South African adults using some form of financial service, with less than 1% being attributable to Postbank.

A state bank might make sense if it was a “green bank” engaged in the financing of new technology, environmental, or infrastructure projects, says Paul Hollingworth, managing director at Creative Portfolios in London. “But a retail bank has less value as South Africa is well served by top class operations such as FirstBank, Standard, and Nedbank. They are as good as any at what they do.”

Bottom Line: Previous failings at state-owned enterprises in South Africa risk being repeated if the mission of the new bank is not clearly defined.

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