New legislation aimed at bringing financial services within the reach of South Africa’s estimated 17-million “unbanked” adult citizens is in the pipeline.
The Dedicated Banks Bill is currently being fast-tracked by the government and could be on the statute books as early as next year. It follows hard on the heels of the Financial Sector Charter, which commits signatories to providing banking services within 20km of every South African.
Arguably one of the most important pieces of financial legislation since 1994, the Bill seeks to strengthen the country’s economic infrastructure. The absence of basic financial services has been a major obstacle to the growth of small business in rural areas.
It has the potential to revamp the financial sector and get to the heart of many of the challenges facing the financial system. These include:
• extending savings facilities to a broader section of the population, with far greater geographical spread;
• providing transmission facilities to lower- and middle-income groups;
• providing, at minimal cost, credit facilities and housing finance for low-income individuals, and loans for small, medium and micro-enterprises;
• ensuring that low- and middle-income savers can earn a real rate of return on their savings despite the fact that these are often small amounts.
The Bill seeks to achieve this by simplifying the regulatory framework for banks and other financial entities as they move into the “mass-banking” market. The idea is to limit the risks for operators and consumers.
The proposed legislation, which, according to Reserve Bank registrar of banks Errol Kruger, is in the pre-consultation phase, covers what it calls “core” and “narrow” banks. Kruger explained: “What is envisaged is that narrow banks will take deposits from the public and invest in risk-free assets, thereby giving the depositors appropriate security.
“We believe that core banks will, to some extent, resemble the old building societies. We envisage that they will take deposits from the public and make loans, but only for a limited range of purposes. One of these reasons could be for the purchase of a house.”
On the investment side, he said that core banks would have to keep “a fairly liquid portfolio. As was the case with the old building societies, customer loans and deposits should be fairly closely matched.”
The implication is that core banks specialise in deposit-taking and lending activities. They will not, however, be allowed to undertake more sophisticated banking activities such as cheque accounts, trust accounts and money-market deposits.
Narrow banks will specialise in deposit-taking and credit-payment activities, but will not be allowed to provide debit orders. They will be required to invest all their deposit liabilities in risk-free central government policy with a similar maturity profile.
In some emerging economies where there is no established and mature banking system, narrow banks are discouraged. However, in South Africa, the reverse applies. The country has a strong and sophisticated formal financial sector, but an almost complete absence of smaller, simpler entities dedicated to providing affordable financial services to the lower-income groups — especially in rural areas.
The advantage of both narrow and core banks is that, at minimal cost, they will provide a safe haven where the general public can keep their money. They will eliminate the current situation where less informed depositors are discriminated against.
Core banks, in particular, will offer non-banks, such as credit institutions, an opportunity to secure a banking licence. The lowering of entry standards is designed to promote innovation in banking.
The proposed legislation could bring the under-regulated micro-lending industry, as well as Postbank, into mainstream banking. It will enable them to operate without the burden of the risks and costs associated with conventional banks.
Risk will be reduced for both the dedicated bank and depositors by the need for each to meet appropriate Reserve Bank requirements.
If Postbank is upgraded to a “narrow” bank, it will become a true public sector retail institution, taking deposits and serving as a full credit-payment member of the national payment system under “level playing-field” legislation that makes banking more accessible to all.
In addition, savers’ funds would be an income source for the government. Narrow banks would be required to maintain reserves in the form of government bonds such as treasury bills.
There is also potential for telephone companies to become electronic narrow banks. In South Africa, where many families are split into rural and urban elements, the safe transmission of funds between family members is a huge demand. Many people currently use money-runners (often bus and taxi drivers) for this purpose.
The proposed legislation will enable the authorities to regulate micro-lenders, as well as encourage the micro-lending industry to diversify its activities beyond short-term consumer lending.
Other institutions that could benefit from being a core bank include retailers with large branch net-works, retail-credit providers, non- government finance organisations and finance cooperatives.
Shoprite-Checkers is already nibbling at these core bank activities through its overnight “voucher” service to traders. Under this system, a trader can place money with the supermarket for safe-keeping overnight, redeeming the money the following night on production of a voucher. Traders gain a much cheaper safe-keeping service during more trader-friendly hours than that offered by the banks.
The Reserve Bank’s Michael Blackbeard, the mastermind behind the drafting of the proposed new Bill, cautioned that it is still in “very rough” form.
He added that it is partially based on 1991 International Monetary Fund research into the provision of affordable access to finance.