South African banks are trying to cater for two opposite worlds, reports Donna Block
South African banking could be called an oxymoron. It’s like two worlds colliding -the rich and the poor, the developed and the undeveloped.
The country boasts a world-class banking and financial system, however, the majority of the population remains unbankable.
South Africa is in a difficult position, says Nick Cairns of Absa Bank. ”Traditionally, white South Africa compares itself with Britain and the United States and wants the same service that’s provided in those countries. Black South Africa … compares itself with the rest of Africa and somewhere between the two is the truth.”
The truth is South African retail banking is not prepared to lose money on ”low-value” markets. They argue they are in the business of making money and to do this they have to be able to compete internationally. Which means taking on US and European heavy- hitters.
But to stop providing ”low-value banking” would brand them socially irresponsible. So banks are now more than ever willing to let new and alternative entrants fill the gaps.
At the launch of The South African Banking Review last week Bob Tucker, CEO of the Banking Council, said retail banking in the country is under pressure and if the major banks cannot produce satisfactory returns on money invested in low-value markets they will have no choice but to pull out.
The banking review says retail banking and in particular the big four – Absa, FNB, Standard and Nedcor – were laid open to criticism with respect to their relations with customers, and to persistent demands that they extend banking services to low-income earners.
According to the Banking Council, the banks are well aware of the problems experienced by people who are unable to open bank accounts, or afford the associatedcharges, or the costs for borrowing from formal lenders. Tucker acknowledged that the formal banking sector was ”neither appropriate nor affordable for large numbers of people”.
To help this segment of the market along, the industry had consulted various bodies, including informal savings institutions, ”transaction handlers, the Registrar and other organisations” to work out ways to provide alternative safe, competitive and good quality services to fill the existing gaps in the market.
Tucker says that while one major bank (Nedcor) has closed down 100 branches with 800 000 accounts, another (Standard’s E-Bank) has opened 2,5-million low-value accounts.
He says the banking industry has also made proposals which will impose greater accountability on the banks and promote the development of deposit-taking, lending and transaction-handling services in the low- value markets.
Proposals include the repeal of the Usury Act and the introduction of a new National Consumer Credit Act to protect consumers. ”This Act,” says the council, ”will protect the public against the worst of abuses while not frustrating access to credit.”
Tucker says he is ”really worried” about micro-lending. There have been cases of people being charged 40% interest a month by ”loan sharks” and having to jump from moneylender to moneylender to try to keep their creditors at bay.
He added that while self-regulatory conditions being implemented by micro-lenders would reduce the amount of interest charged to about 9% a month, thousands of people had been caught on a ”treadmill of debt”.
He says banks are also concerned about their image and admits: ”Even our own code of conduct is no panacea.”
Tucker and a number of economists said customer education is critical to the local banking industry and commented: ”There are people coming out of schools without any comprehension of the basics of finance.”
One economist said:.”It doesn’t matter if interest rates are high or low if the customer doesn’t understand why he has to pay it.”
In an attempt to correct this, the council has published 1,2-million educational booklets, Looking after Your Money, in the 11 official languages. These are being distributed to schools, trade unions and disadvantaged communities.
The banks are responding to the enormous political and public pressure, according to Dr Rob Davies, chair of the parliamentary trade and industry committee. A task team will be appointed to look at bank performance, legislative intervention and the Usury Act. The hope is that the banking industry will adapt and change.