Half of the country’s population does not participate in the economy because they cannot afford the hefty bank charges to run a savings account — built-in insurance against ”high-risk” clients.
The combination of negligible returns on deposits and high charges for deposits and withdrawals means that saving for South Africa’s poorest is a pipe dream. The effective returns in all except one of the banks that offer entry-level savings accounts are negative — you end up with less money than you banked (see table).
A wide-ranging report, Concentration in South African Banking, released for public comment this month by a National Treasury and South African Reserve Bank task team highlights the lack of competition in the banking sector.
”Disclosure of the cost of banking services is weak, as is the disclosure of the return on savings accounts, both of which undermine the consumer’s ability to compare the products of different institutions and thus competition,” says the report.
”Banks generally speak in terms that the guys at the bottom really find bewildering,” said advocate Neville Melville, the ombudsman for banking services. ”I don’t think the people at the banks are really skilled at explaining so they get frustrated and just tell the consumers: this is the way it is. They are therefore left with very little choice.”
Minister of Finance Trevor Manuel, who is currently reviewing the report, appears to have put his pen down to listen. Last month he said new laws will soon be on the table to create a second tier of commercial banks better equipped to include the millions of South Africans now excluded from banking services.
Until then, however, banks will remain out of the reach of the poor. Conservatively estimated, 80% of the lowest income group (those who earn up to R1 500) and 60% of low-income groups (those who earn between R1 500 and R3 000) are unbanked, partly because of exorbitantly high bank charges.
South African banks have been able to cherry-pick their clients because four of the country’s 22 registered banks — Absa, Nedcor, FirstRand and Standard Bank — control 80% of the market. The power of this dominance enabled them to increase the average service fee charged for current accounts by 29% between 1999 and 2003, notes the report.
There are 15 local branches of foreign banks and two mutual banks, but no building societies in South Africa. Postbank, an arm of the South African Post Office that acts as a saving institution, and village banks, which operate on a similar basis to stokvels, account for less than 0,005% of the deposit base in the banking industry.
Some analysts argue that greater international competition could lead to reduced bank charges here. But the international banks and the niche merchant banks have remained out of retail banking because of low volumes of business.
Dr Hans Falkena, a consultant for the Reserve Bank and the chair- person of the task team, said the government should investigate the existence of a ”complex monopoly” between the four major banks.
A complex monopoly exists if at least 25% of the market is serviced by companies who are unconnected but who conduct their business through agreements among themselves that prevent or restrict competition.
Currently only entities that are authorised by the Registrar of Banks can take on the business of a bank. The required level of capital to register is a minimum of R250-million.
”For this reason [the high costs], you are unlikely to see new and local players popping up,” said Melville.
Falkena said the only way to break the back of this undiluted banking system is to introduce second- and third-tier banks — a need Manuel has acknowledged.
The Dedicated Banks Bill and the Co-operatives Banks Bill will soon emerge from the Treasury. These will allow for a wider range of participants — such as retail companies, telecoms companies and micro lenders — in the industry by granting them banking licences for restricted banking operations.
Their entry requirements in terms of capital will be much lower, but in return the scope of their operations will be narrower and restricted to liquid assets.
However, the Congress of South African Trade Unions (Cosatu) is sceptical. ”They [the government] promised us this legislation two years ago — they say yes, they support lower banks charges, but they can never get the damn laws in place,” said Neva Makgetla, Cosatu economist.
The Banking Council of South Africa is currently working on a national bank account. This will meet a key Financial Services Charter aim of redressing market failures in supplying basic financial services to the majority.
”The logic is that we intend to launch, as a collective of banks, an account aimed at lower-income people, which would be significantly lower priced than existing offerings,” said Charles Chenel, the coordinator for implementing the financial charter initiatives.
Falkena expressed concern that this national bank account could result in price-fixing and collusion because the banks are in cahoots to form this lower-income account.
But for Chenel: ”The point about the national bank account is that it isn’t going to make any extra money for the banks, they are coming together to serve the lower-end of the market. They can do this together because banks don’t compete to make losses.”
In the concentrated banking sector low- and middle-income consumers in South Africa are cross-subsidising the more prosperous. ”South Africa is quite unusual in the structure of bank interest rates and charges,” the report says. ”In the United Kingdom, for example, the lending business tends to subsidise payment and transmission facilities; in South Africa, the payment and transmission services dominate and appear to cross-subsidise lending.”
The banking sector impinges not only on the general efficiency of the economy but on the economic development of the country.