Banks are unarguably the most popular financial institutions. The reason for this is not hard to fathom; they serve as reservoirs for most people’s savings. They do this by pooling funds from savers and channeling them to borrowers with mainly business concerns. This process is described as financial intermediation. And though banks do not perform it exclusively, they are usually assigned the most extensive intermediation role. South African banks, however, engage in disintermediation.
With the policy focus now on the 6% growth rate and the government implementing its strategic investment plans, it would be very dangerous not to bring the role of the financial system within the purview of policy discussion.
Does the South African banking industry perform its intermediation function effectively and efficiently? And if not, the obvious outcome would be a waste of resources and the subsequent stifling of the potential of the economy to grow, particularly as the current intermediation function largely leaves out small to medium enterprises (SMEs), which are best at providing incremental output and jobs in most economies, including South Africa’s.
Given the popularity of banks, one may be led to believe that banks are the dominant financial intermediaries. However, in South Africa this is not the case. Insurance companies and pension funds have become the major repositories of people’s savings as noted by Graham Barr and Brian Kantor, professors at the University of Cape Town. In a recent report, Kantor identifies as “another important feature of the South African corporate landscape” the fact that “the majority of shares in the large JSE-listed companies are owned by some form of long-term savings vehicle, generally a retirement or insurance fund”.
He proceeds to estimate that about “90% or more of the value of the JSE-listed shares are held in this way”. According to him, “this situation has resulted from the tendency of most of the savings of South African households to flow through pension funds and other private-sector retirement funds rather than the banks…”. He attributes this trend to tax law.
The professors analysis of this twist leaves out a few salient points: the prohibitive costs, lack of competition, their less-than-exemplary approach to customer service, and the “exclusionary tendency”, to the detriment of SMEs, of the ownership links between large industrial firms, insurance/pension firms and banks.
In her recent appraisal of the performance of SA’s financial sector for the last 10 years, Penelope Hawkins, MD of FEASibility, notes that the cost structure of SA banks is so draconian that it discourages most potential depositors from dealing with banks.
Now consider Hawkins’s summation of the state of competitiveness of the South African banking industry: “The top four still control about 70% of the industry’s assets, though it understates their dominance in terms of certain market segments… This shift towards the niche players has occurred mainly in the corporate and high-worth individual market segments, with none of the foreign or niche banks targeting the mass retail market clientele.”
So, the five major banks that control 70-90% of the South African banking industry are essentially owned by the insurance and pension funds that have largely usurped banks’ intermediation roles, while in turn channelling the pooled retirement-driven savings in their custody to industrial corporations largely owned by the insurance companies. These corporations then lodge some of their cheap capital-funds-aided monopoly profits in the banks that they also own. And it all sits well with everyone concerned, leaving SMEs out of the picture.
Would a bank in such a cosy arrangement be scouring the land, competing for the pittance of savings? Disintermediation is alive and growing like a festering sore in the country’s financial system.Correcting this anomalous trend in financial intermediation will offer South Africa a rare opportunity to tackle the inherited unemployment and underemployment that may otherwise persist and increase an unhealthy income distribution. Addressing the appropriateness of banks as the main locus of financial intermediation will be a significant step towards averting the potential systemic problems that have been highlighted here. The most appropriate adage here should be: “A stitch in time saves nine.”
Kalu Ojah is a professor of finance at Wits University