Bringing new black entrants into banking would enhance the diversity of ownership in the sector and they would be more likely to extend financing to black customers, research firm Intellidex has told Parliament in a submission.
It said in the 1990s new players were encouraged to enter the banking sector, in a bid to promote increased competition and attract black-owned entrants.
The concentration of power in the financial sector, as identified in the ANC’s Reconstruction and Development Plan, led to looser access to banking licences – which was consistent with international trends at the time, the firm’s submission said.
But in 1998 several smaller banks were trading, including black-owned banks such as FBC Fidelity and African Merchant Bank.
But the emerging markets crisis of that year – during which interest rates in South Africa peaked at 26% to stem the outflow of foreign capital and the resulting collapse of the rand – saw almost all the smaller banks exit the market by 2001.
“No new institution funded by deposits from the start has entered the market since the small banks crisis. This is in part because of economic realities of trying to build a bank but also because of regulator caution in licensing new banks,” Intellidex said. “Reluctant entrants and regulators both seem persuaded that entry into the banking market is difficult, requiring a persuasive business case.”
It can be risky to have too many small players in the market, the submission found. History predicts, when there is a crisis, capital moves from small banks to multinationals, which are perceived to be stronger.
South Africa’s four-pillar model of four large banks was determined desirable in 2000, in a study commissioned by the Reserve Bank and the treasury, when the government had to consider a bid for Nedcor to take over Standard Bank. The proposed merger was blocked.
Some years earlier, Australia similarly shifted from a six-pillar model to a four-pillar model.
This “Goldilocks” structure does imply less price competition. But Intellidex argues there is evidence for the big four competing on transaction fees and interest rates, and on the risk level they accept.
Intellidex said competition tends to drive down costs and drive innovation but a fragmented market can mean higher average cost per client for each bank, and therefore higher costs to consumers.