The call for a state-owned bank has been a constant refrain from the ANC and indeed from government in recent years. President Cyril Ramaphosa in his 2020 State of the Nation address said the government was proceeding with the establishment of a state-owned bank as part of its effort to extend access to financial services for all South Africans.
Why the government feels the need for another institution when it already has several state-owned lending institutions is not clear. The state owns Land Bank and the Development Bank of SA and Postbank, which was unbundled from the Post Office in September and can now apply for a full banking licence.
The Reserve Bank’s Prudential Authority, which regulates the banks, will have to decide whether Postbank is financially sound enough, and its shareholder reliable enough, to be trusted with safeguarding the savings of millions of depositors. Postbank’s catastrophic failure to pay social grants earlier this year has raised questions about its ability to manage its operations soundly.
Then there’s state-owned Ithala Bank, which has a banking licence of sorts but has never succeeded in gaining a full licence despite a decade of trying. It is allowed to operate and take deposits only thanks to an exemption by the Prudential Authority that has to be renewed every year or two. That in itself tells us something about the financial soundness or otherwise of the KwaZulu-Natal-based bank and its shareholder, the provincial government’s development finance arm.
Now it turns out there are also questions over the bank’s conduct — the way it treats its customers and their money. Ithala is under fire from the Financial Services Conduct Authority (FSCA) for two breaches of banking legislation. One is that it failed to ring-fence insurance premiums clients pay it for their insurance products in a separate insurance account as required by law. The other breach is that Ithala did not submit financial reports for two years to its regulators, though it now reportedly has submitted numbers for 2023.
Instead of suspending or taking away Ithala’s licence, the FSCA has given the bank a chance to mend its ways. Meanwhile, it is also at risk of losing access to SA’s payment system after its sponsor, Absa, dumped it last year over governance concerns.
Hopefully these shortcomings can be addressed. SA needs more competition in its banking sector, and small banks that serve communities should be nurtured and have the space to lend to small businesses and development projects to fill gaps left by larger banks.
However, this is depositors’ money. If it is going to be used to make loans, the bank’s clients need to know their money is safe That is why licencing conditions are so demanding, and regulators so intrusive. Whatever their ownership, banks need to manage prudently, and their shareholders need to have deep enough pockets to backstop the risks that arise from lending activities.
The call for a state bank seems to be driven by notions that such a bank would lend to small enterprises or development projects that mainstream commercial banks would not. But while SA needs to develop a much stronger small business sector, money in many cases is not the answer.
Rather, the government should focus on slashing the endless red tape that holds small businesses back and create an environment that makes it much easier for them to survive and thrive.
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