There’s trouble ahead for South Africa’s banks as they try to pursue First World banking in a developing economy. Donna Block reports
South African bankers have turned the simple act of squirming into an art. Perhaps it’s all the practice they’ve been getting. They squirmed when United States Treasury Secretary Robert Rubin took them to task last year for failing to lend to poor but creditworthy blacks. They writhed last week at parliamentary hearings into their practices of steep charges, high interest rates and poor service. And now they’re cringing at government plans to force them to disclose details of their loan operations.
But for all their squirming, and heartfelt explanations about the tough environment in which they operate, the fact remains that the way South African banks do business leaves a lot to be desired.
On one hand South Africa can honestly boast a world-class banking and financial infrastructure. On the other, those banks do not readily avail themselves to the vast majority of people in the country. Large banks have historically spurned black business, concentrating solely on the needs of the affluent, minority white population. In the five years since the advent of a new government the banks appear to have found little or no reason to change. But change they must, whether they like it or not.
Rubin told a group of university students in Soweto last year that perhaps US-style legislation that forced American banks to open their loan books to scrutiny, and compelled them to provide credit to poorer borrowers might be worth considering here. It appears the government is taking Rubin’s advice. Draft legislation was tabled this week by the Department of Housing to discourage banks from discriminating against poor people looking to buy a house. If it becomes law, South Africa will be able to monitor banks’ lending practices.
But Tony Twine, an economist at Econometrix, doubts a US-style programme will be enacted here. Part of the success of the US scheme is that the US government underwrites it. In South Africa, Twine said, “there just isn’t the political will or the cash to back up dodgy loans”.
Nick Cairns of Absa also believes legislation is not the answer for South Africa, saying that rather than encouraging banks to expand their loan portfolios, it could force them out of the market altogether. He said big banks had already had some bitter experiences in lending to low- income groups, although this was largely their own fault. The challenge now, Cairns said, is to find profitable ways to make wider lending possible, adding that the market, and not legislation, should determine the methods.
But finding new ways to serve all South Africans is proving difficult because of the way the banks have chosen to conduct their business. Since 1994, South African banks have felt a need to compete with heavy-hitting Swiss, USand British institutions. They made a business choice to pursue First World banking, and were driven to deliver bigger and better returns to their shareholders. This strategy does not allow much in the way of resources for high-risk banking to marginally credit worthy Africans.
While Cairns and others recognise that banks have a social responsibility to “bank South Africa”, they insist that it must be done profitably. Many black South Africans interpret the banks’ arguments as doublespeak masking a strategy of profits over people.
Some banks, however, seem to be rising to the challenge. According to Bob Tucker, CEO of the Banking Council, Standard Bank’s E-Bank has opened up 2,5-million new accounts in low-income areas. Another new venture, Prosperity Bank, is looking at how new technologies like smart cards can bring a new generation of black South Africans into the banking sector.
One USanalyst noted that in Europe, banks fight tooth and nail to attract teenage customers in the belief that one day some of them may be big clients. “Yet in South Africa, a country whose future is undeniably black, virtually nothing is done to attract and nurture a black customer base,” he said.
Until now South African banks have seemed content to leave the inhabitants of townships and rural areas in the hands of microlenders, some of whose rates border on loan-sharking. Among the excuses the banks give for not reaching out to poorer black customers are the high overheads of their branch structure, mounting security costs and vandalism of their automatic teller machines.
Businesspeople in Soweto, however, point out that in a city of four million people, there are few branches and many do not provide the same services as in white areas. One hardware retailer in Dube commented that often banks did not want to send representatives from the head office into the township for loan discussions.
What makes this all so problematic for South African banks is the fact that many people see the banks’ lending practices as representative of their entire attitude towards their customers.
Banks are accused of ripping off their clients with exorbitant fees and high interest rates. Customer service is virtually non-existent and often banking personnel behave as if they’re doing customers a favour by doing their jobs. “The banks have a lot to answer for, and relations between banks and their clients are not sound,” Tucker admitted. He added that South African banks had “failed dismally” to communicate what they had to offer and the costs involved.
While the banks do have a point when they say they are entitled to make money for their shareholders and enter into any kind of business they see fit, if they cannot service their communities adequately, and alienate their existing clientele, sooner or later they will be replaced by new or alternative entrants in the market.
Dr Rob Davies, chair of the parliamentary trade and industry committee probing the banks, said he found the banks’ defence of their practices disturbing. Unless they change, he warned, “there are some worrying signs that large parts of the population are going to be unbankable”. He remarked that perhaps the best way to force change is for churches and the government to close their accounts, which is a real possibility.