Experts queasy over SOE bank Bill

Regulator: The South African Reserve Bank will have the final say on the granting of licences to any new state-owned banks. (Oupa Nkosi)

Regulator: The South African Reserve Bank will have the final say on the granting of licences to any new state-owned banks. (Oupa Nkosi)

The notion that South Africa needs another state-owned bank, or that a state-owned entity (SOE) should be able to own and run a bank, is a “nonstarter”, experts say.

But the treasury has drafted an amendment to the Banks Act that will effectively enable parastatals to apply for a banking licence.

It is one of many intended changes to several pieces of legislation contained in the Financial Matters Amendment Draft Bill. It comes alongside a private members Bill, submitted by the Economic Freedom Fighters, proposing a similar change to the Banks Act, aimed at paving the way for a state-owned bank that would compete with commercial banks.

But the treasury’s Bill contains several prerequisites that an SOE must meet before it can apply for a banking licence.

In a letter, Finance Minister Nhlanhla Nene told the chairperson of the standing committee on finance, Yunus Carrim, that the state-owned company must be solvent (specifically for 24 months prior to applying for a licence, as per the Bill) and receive approval from its shareholder ministry and the minister of finance.

Nene said the granting of the licence would be at the discretion of the Prudential Authority of the South African Reserve Bank, which regulates banks, and the Financial Sector Conduct Authority.

“These requirements are proposed to limit the fiscal risks of state-owned banks, which, in terms of their founding legislation, may be able to continue to operate despite not being a going concern,” Nene said.

This will also bring existing state-owned banks, such as the Land Bank, the Postbank and the KwaZulu-Natal provincial Ithala Bank, which operate with exemptions from the Banks Act, into the financial sector regulatory framework and “will strengthen governance and oversight of these entities”, he said.

In a written submission to the committee, Cas Coovadia, the managing director of Banking Association South Africa, said the industry had “no objection to the introduction of the state as a potential owner and/or operator of a bank that will compete with the current banking industry”.

But he said such a bank would have to be regulated “under the same legislative, regulatory, prudential, conduct and corporate governance provisions applicable to the current banks, to ensure that there is a level playing field and to ensure consistency and transparency”.

In a presentation by treasury officials, Ismail Momoniat, the deputy director general for tax and financial sector policy, and Roy Havemann, the chief director for financial stability and markets, said any state bank wishing to ensure the safety of depositors’ funds would have to act conservatively under the same regulatory oversight.

Some existing state-owned banks had already required substantial government support, according to the treasury presentation. The South African Post Office, the owner of Postbank, had received R4-billion in capital injections since 2014, and Ithala Bank, the development finance arm of KwaZulu-Natal, had received R340-million since 2016. Both entities had run at substantial losses in recent years.

Lumkile Mondi, a senior lecturer at the University of the Witwatersrand’s school of economic and business sciences, called the proposals a “non-starter”.

“It is important to understand that the global financial crisis that happened in 2008 was as a result of greed in the financial sector, which manifested itself as reckless lending,” said Mondi, adding that the amendments needed to be informed by the need for “thrift in society”. South Africa had one of the lowest savings rates compared to our gross domestic product (GDP).

With low savings and investment rates, Mondi said, the country should not be promoting credit in an economy where households were already heavily indebted, while at the same time broader government “lives beyond its means”.

“What is the incentive to allow SOEs to lend money when many cannot even service their own debt?” he said.

The government should be looking at a new economic policy aimed at structurally transforming the economy so that it serviced the many, he said.

It should be introducing microeconomic reforms aimed at breaking up monopolies in highly concentrated sectors, including those where the state was dominant, he said.

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