Finance

State bank can reduce dominance of private banks and drive SA’s development

Malose Kekana, chairman of Ithala Bank, says privately-owned banks have moved down the risk curve, yet they price for high risk. Photo: Supplied

There are four major reasons why we need a state bank(s) in South Africa.

Firstly, we need to reduce the concentration by a few major banks and improve competition by bringing new players in our banking industry. With increased competition, pricing and customer treatment will improve significantly.

The banking oligopoly that exists today has created dominance of the sector by a few commercial banks, an outcome that is not benefitting the country and the public. For example, banks are sometimes unnecessarily risk averse and at times activities that are viable are simply not supported because currently they can pick and choose.

So banks have moved down the risk curve, yet price for high risk. Competition will improve intermediation.

Secondly, banking services are not accessible to the majority of poor customers or are made unaffordable. Whilst banks introduced the Mzansi account, this initiative was largely supported by the Post Bank because it was unprofitable for the major banks to focus on it.

Capitec Bank has reduced the cost of its bank accounts but did so in order to win market share and is compensated by the super-abnormal profits it earns under its micro-lending business.

State banks will not be driven by a focus on only Profits or Return on Equity and therefore will have a higher appetite to bank poor people in townships and rural areas. The population of South Africa is largely in townships and rural areas, yet the concentration of access points is in urban areas serving well-off communities.

My township has twice the population of our town, yet has only 1 ATM compared to about 50 in town. State banks will fill this void.

Thirdly, access to finance to Small Medium and Micro Enterprises (SMMEs) has been a rallying cry since the advent of our democracy. Currently, there is major reliance on Development Funding Institutions (DFIs) but this system is inefficient and too small to move the needle.

So banks have moved down the risk curve, yet price for high risk. Competition will improve intermediation. 

Privately-owned banks have made a small contribution to the development of SMMEs relative to the capital they hold. They deem SMMEs to be too risky. Furthermore, they are quite happy to source cheap deposits from the townships and rural areas, but are not willing to invest in those communities which ultimately will also benefit them.

What South Africa needs is a model akin to Brazilian Development Bank (BNDES), a large state-owned industrial bank that takes deposits and funds large industrial projects. BNDES also has intermediaries that focus on SMMEs.

A state bank will be able to fund the DFIs (by buying their good loan books – through securitisation) and thus create liquidity for DFIs to advance additional loans without relying on the state budget.

The government could guarantee that exposure to protect deposits from the public. This will create a welcome boost to growth in South Africa, which is currently stunted because private institutions are holding back the capital under their control.

Non-performing loans (NPL) under Chinese state banks are often cited as a reason why state banks are too risky. BNDES has a 2,2% NPL ratio and China Development Bank’s NPL ratio sits at 1,2%.

One of the mechanisms employed by former US President Barack Obama to stimulate the US economy was to inject a lot of cash into community banks that support local small businesses. And this is partly what accounted for increasing employment in the United States.

Lastly, government has been positioned such that it assumes responsibility for the risky or unprofitable business, but is expected to pass around the good risk. By competing for good government business, a state bank will be able to create a “subsidy” or headroom for government to focus on the unprofitable business.

That is, if fees and interest paid to the state bank by the public sector and private sector customers is managed wisely, it would create a more sustainable fiscal environment by reducing the demand on the public purse.

By competing for good government business, a state bank will be able to create a “subsidy” or headroom for government to focus on the unprofitable business. 

Currently government has to fund public services (health, education, etc – unprofitable business) and also fund private individuals (black people in the main) for business initiatives out of the same pot.

Through a state bank a third pot (the pots being the budget, private financial institutions and state bank) will be created based on market practices. The state budget that finances DFIs and other projects (e.g. by Transnet, Eskom, etc) can now be sourced from savings in the state bank.

 This will reduce the debt that government has to raise and thus lower the interest burden in our budget. All citizens will benefit under this scenario.

I also don't think a state bank will displace private banks by having an unfair monopoly.

Risk management would dictate that there is limited concentration in any one exposure group and therefore, the state bank will inevitably have to partner with private banks to syndicate/ spread its risk. Arguments against a state bank are based on a fear hypothesis and not on the balance of evidence.

The country needs to make progress and everyone, including the banks, agree that the status quo in the banking sector is not workable. And yet they don't want to come up with useful solutions to the development challenges that we face as a country. The state bank idea is at least creating a dynamic which can’t be doomed to fail before it even starts.

 

  • Malose Kekana is an investment professional and chairman of Ithala Bank

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