/ 16 October 2014

The taxing issue of a state bank

The Reserve Bank has been processing Postbank's application for a year.
The Reserve Bank has been processing Postbank's application for a year.

Calls for the creation of a state-owned bank have resurfaced at a time when the existing South African Postbank, lauded as a state-led alternative to the commercial banks and to serve the unbanked, is still waiting for a banking licence.

Last week the Gauteng government said it planned to launch a state-owned bank to support township entrepreneurs. This has been bolstered by the apparent support of Deputy President Cyril Ramaphosa and a declaration by the Gauteng ANC supporting “the establishment of a state bank aimed at investing and financing our developmental agenda”.

Postbank reportedly submitted an application for a banking licence to the South African Reserve Bank late last year. Postbank’s acting managing director, Shaheen Adam, said the application was still being processed but a licence to establish a bank “is extremely complex and time-consuming”.

The Reserve Bank did not respond to questions about the application.

Postbank is exempt from the requirements of the Banks Act, which regulates commercial banks. The Postal Services Act gives it the legal right to take deposits, offer transactional and savings products and provide money transfer services. A banking licence would allow it to extend lending services to its five million account holders, Adam said.

But Postbank’s parent company, the South African Post Office (Sapo), is in a financial crisis and waging an ongoing battle with striking postal workers.

Minister for Telecommunications and Postal Services Siyabonga Cwele wrote to Parliament last week requesting a postponement of the tabling of the post office’s financial results, because its audit was not complete.

“This is due to the ongoing challenges at Sapo that we are still engaging the minister of finance on, and that needs to be addressed prior to the conclusion of the audit,” Cwele wrote.

According to the post office’s latest available annual results, it suffered a pre-tax loss of more than R206-million last year, driven by, among other things, lower mail and courier volumes and labour unrest.

‘Sound balance sheet’
Adam said Postbank’s assets were ring-fenced and not affected by the post office’s financial position. Postbank had a “very healthy and sound balance sheet” and, “to the best of our knowledge”, the post office’s financial woes had not affected its licence application.

As of March 31, Postbank held deposits of R4.7-billion, with investments of R6.6-billion, a surplus of R1.9-billion, Adam said. “This capital ratio is way in excess of the minimum capital requirements specified in the Banks Act and supporting regulations,” he said.

Profit before internal charges for 2014 was R654-million, compared with R682-million in 2013, he said. The decline was as a result of investment in the Postbank’s corporatisation programme.

The complexities of establishing and funding one state-owned bank aside, academic Patrick Bond said that, given the mismanagement of South Africa’s savings and credit by private banks, and the many crises experienced in the corporate sector, the need for a state-owned bank was evident. Its role should be “as ambitious as the balance of power at the time will permit”, he said.

For true democratisation of the economy to be on the agenda, “substantial nationalisation” of the country’s financial assets was needed. But, if the balance of forces in favour of socialist banking remained weak, then “a more limited role for a state bank, working within the existing system of a half-dozen much larger for-profit banks, would logically be to offer simple lifeline banking services, as in the case of a public utility”, he said.

‘Predatory mentality’
South Africa has seen a soaring stock market and property prices, “inappropriate credit products with far too high an interest spread” and a “predatory mentality” not confined to lenders such as African Bank, Bond said.

“According to reputable studies, we suffer among the world’s highest interest rates, world’s highest banking profits, world’s highest corporate profits, the world’s highest share market rallies since 2008 and the world’s lowest fixed investment rates when it comes to productive investments,” he said.

The services of a state-owned bank could be offered in townships and low-income rural areas and, like the sophisticated post office savings banks in many other countries, also serve as the payment point for state grants, Bond said.

But the tendency to use such banks to court favouritism was a deterrent, he warned, giving the beleaguered state lender Ithala Bank in KwaZulu-Natal as an example. The provincially funded lender has been mired in accusations of suspicious loans to politically connected individuals.

But Kokkie Kooyman, the global fund manager of Sanlam Investment Management Global, said the creation of a state-owned bank was a complex issue and depended both on the economic situation of a country and the available alternatives.

Government capital
There were examples of well-managed state-owned banks, he said, but those were “normally against a background that the private sector had failed and the government provided capital, or capital was lacking, or that special expertise was required”.

There was a danger that government-controlled banks could be used for political purposes.

This was exacerbated by the government’s inability to attract those with the required skills and, at worst, creating the risk that taxpayers would have to foot the bill directly, or indirectly through growing government debt.

“The ‘need’ for such a bank seems to be born of frustration in certain circles that the private sector banks are not prepared to lend where these circles think it necessary,” he said.

This appeared to be both in terms of lending to the poor and in funding state projects of the parastatals, such as Eskom and SAA.

These two issues differed widely in scope and the expertise required, he said. It was vital that the goal was clearly defined, as was the question of where a state-owned bank would succeed in doing what the private sector was not.

Skewed focus
It was unlikely to function differently from the many state-owned financial institutions, including the Industrial Development Corporation, the Development Bank of Southern Africa, the National Empowerment Fund and the Small Enterprise Development Agency.

“It would be much better if the government focused on getting those institutions to function per their mandates” Kooyman said.

ANC leaders such as Tito Mboweni have suggested that the defunct African Bank should become a state-owned bank. But Kooyman said the African Bank clearly highlighted the problem “that to lend profitably to the poor needs high interest rates”, which was, in turn, detrimental to the poor.

“However, were a government bank to lend at low rates to this sector, the government (and hence the taxpayer) would foot the bill of high bad debts,” he said.

The main objective was to create jobs but funding consumer lending did not do this, he said.

The government could also follow the route of countries such as Korea, where banks were rewarded or subsidised for lending to small businesses and the lower end of the market.

The deputy president’s office did not respond to questions.