By: Malose Kekana
There are four major reasons why we need a state bank(s). Firstly, we need to reduce the concentration by the major banks and improve competitiveness. With increased competition, pricing and customer treatment will improve. The oligopoly that exists today has created a dominance by few private banks that is not benefiting neither the country nor 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 and yet price for high risk. Competition will improve intermediation.
Secondly, bank services are not accessible to the majority of poor customers or are made unaffordable. Whilst banks introduced the Msanzi account, this initiative was largely supported by the Post Bank because it was unprofitable for the major banks to focus on it. Capitec has reduced the cost of their bank accounts but did so in order to win market share and is compensated by the super-abnormal profits they earn under their 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 and yet the concentration of access points is in urban areas serving well-off communities. My township has twice the population of our town and 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), like the National Empowerment Fund and Industrial Development Corporation, but this system is inefficient and too small to move the needle. Private Banks have made a small contribution to the development of SMMEs relative to the capital they hold. They deem SMMEs to be too risky. Private Banks are quite happy to source cheap deposits from townships and rural areas but scant bear a thought as to how they can sustain and 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 and 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. 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 is often sighted as a reason why state banks are too risky. BNDES has a 2,2% NPL ratio and China Development Bank sits at 1,2%. One of the mechanisms employed by Barack Obama to stimulate the 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 and is expected to pass around the good risk. A state bank by competing for good government business 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. 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 a businessman and former head of yesteryear youth enterprise development initiative Umsobomvu. The entity, Umsobomvu Youth Fund, was merged with the National Youth Commission to form the National Youth Development Agency (NYDA).