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Understanding South Africa’s banks
Sim Tshabalala

What are banks really for?

Here’s what the sceptics say: ‘Banks are parasites on the real economy. They create nothing and profit by making bets. They slow down growth and they don’t care about jobs.’

While it’s true that banks are not the engine of the economy, they are the gearbox and transmission, the petrol tank and the seat-belts. Banks enable all of us to buy and sell safely and reliably; they often provide the insurance that makes it possible for us to take risks; they attract and reward savings, and they lend savings on – safely – to help firms to invest and create jobs and to enable people to afford homes and other assets.

In some other countries, the banking industry has grown too large compared to the rest of the economy, encouraging wasteful expenditure and increasing risk. This hasn’t happened in South Africa. As measured by the value of lending to the private sector as a share of GDP, South African banks are the right size to be socially useful.

South Africa’s banks are highly innovative and creative. For instance, we’re at the forefront of South Africa’s economic expansion into the rest of Africa, growing rapidly in Africa ourselves, and helping our clients to do so, bringing home income and jobs.

South Africa’s banks are among the world’s leaders in digital innovation, annually investing many billions in the most up-to-date technology and training staff to make the most of it. Standard Bank, for instance, spends close to R15 billion every year on IT and owns software valued at around R21 billion. Our competitors are similarly focused on digital innovation so Standard Bank is certainly not alone in making these large investments, which contribute to SA competitive advantage.

The industry directly creates and indirectly sustains a lot of jobs. About 150 000 South Africans work for banks, and they in turn sustain about 450 000 more jobs. In total, therefore, the banks are responsible for about 7% of formal employment.

Standard Bank cares a lot about growth and jobs throughout the economy. This is not because we’re angels. Like all businesses, we do far better when the economy is growing and communities are prospering. This is especially true for banks, because nobody buys banking services for their own sake. Faster growth, better investor and consumer confidence, more jobs, and more people with formal bank accounts all mean more profit for Standard Bank.

Are the banks part of ‘monopoly capital’? Is a state bank the answer?

Getting a banking license in South Africa is a very demanding process, requiring that applicants prove that they have both the capital and the skills needed to run a bank sustainably. Thanks to these rules, and the high standards to which our regulators hold us, the South African banking system is extremely high quality and resilient. According to the 2017 Lafferty Bank Quality ratings, we are home to the world’s highest rated bank, Capitec. The 2017 Global Competitiveness Report ranks South Africa second best in the world for the soundness our banks; and 11th in the world for overall financial sector development.

The rules create safety and excellence, not a monopoly. There are in fact 19 banks offering retail banking in South Africa, including six large full-service banks. Soon, there will probably be eight, including the state-owned Post Bank.

Of course, it would be possible to lower the requirements to open banks, creating a lot more competition. Proponents of this argument suggest that the new banks would offer lower fees and higher interest rates. Some of them might do so. But, as a great deal of local and international evidence shows, many of these new banks would collapse - particularly the ones that cut the most corners and made the most ‘generous’ offers.

So what? Well, unless they are bailed out by taxpayers or by other banks’ customers through a deposit insurance scheme, depositors in such banks would lose their savings.

Even worse, a collapse at one bank can trigger a general panic, weakening other banks and – in the worst cases – reducing the stability of the financial system as a whole. This isn’t a hypothetical scare-story conjured up to defend the status quo. American banking regulation encourages small banks and new entrants. As a result, there are 5 856 banks in the United States. 553 (9.4%) have failed since 2000. So far this this year, there have been one or two failures every month. In South Africa we opened up the market in the 1990s. 22 small banks stopped operating between 1999 and 2002.

There’s a trade-off between the stability of the banking system and the quality of new entrants. Standard Bank is pleased to welcome good new banks into the market. The competition keeps us on our toes and is good for customers. But lowering the barriers to entry so that many new banks can take on more risk than the current incumbents is a sure way to hurt savers and taxpayers.

Standard Bank welcomes a fully-fledged Post Bank into the retail banking market so long as it meets all the necessary regulatory requirements and is held to the same standards of governance and risk management as the private sector banks. We also believe that that there is more room in South Africa for local cooperative and community banks to bring finance closer to communities – but, crucially, the stability of cooperative banks needs to be guaranteed by appropriate regulation and by community involvement.

On the wholesale side, Standard Bank values the fact that the development finance institutions help to fill gaps that we can’t reach. Owing to the regulations that protect savers, we’re not able to make risky long-term loans. The development finance institutions can and should do so.

Serving the low-income mass market is expensive. Long-term development finance is very difficult to provide sustainably without tax-payer support. There are more efficient ways of doing both of these important things if the public and private sectors worked together.

Do the banks collude to cheat our customers?

The Competition Commission alleges that some banks have tried to rig the Rand-Dollar market.

Standard Bank has looked in great detail at the conduct of our employees in the relevant areas and we have found no evidence of wrongdoing.

We need to be very clear: If any individual who works for the Standard Bank Group – or anywhere in the industry - has broken the law or behaved unethically, they must be held to account, and their employer must accept an appropriate share of the accountability.

But Standard Bank is against automatic collective guilt. We employ 54 000 honest and hard-working people. We don’t deserve to be labelled as ‘banksters.’

The rule of law means that due process must be followed, that the facts must be accurately established, that the law must be correctly interpreted and fairly applied, and that both the facts and the law must be tested in the competent forums. This process is still underway and we are actively participating in it.

Why does South Africa need an independent Reserve Bank?

As the ANC’s policy conference has just affirmed, the Reserve Bank has a Constitutional mandate to be independent – and that means independent from both political and private sector interference. Setting interest rates must be done independently so that it can be based on what’s good for the economy in the long run – not what is popular today. If people believe that the Reserve Bank will bow to short-term political or private influence, then they won’t believe that it will impose the painful rate hikes sometimes necessary to control inflation. Therefore, when Reserve Bank independence is lost, inflation spirals out of control.

Who gets hurt if inflation does get out of control? Certainly not rich people. They can protect themselves against inflation and Rand weakness by buying Dollars, or shares, or property. Highly skilled and unionised workers can make sure that their employers keep raising their wages. But the poor will see the little money they have melt into nothing. If a loaf of bread costs more than R100, that hundred in your pocket isn’t worth much.

That’s why the pain of a rate hike is nothing compared to the pain that would be caused if populist thinking takes over the Reserve Bank.

By the way, the policy independence of the Reserve Bank has nothing to do with whether or not it has any private shareholders. The fact that the Reserve Bank has private shareholders is just a lingering anachronism. Like the ‘glove box’ in a car – you don’t use it to store gloves and it doesn’t affect the car’s performance.

Do banks oppose credit amnesties because they want to squeeze every cent out of the poor?

Standard Bank opposes credit and credit information amnesties because they end up making life harder for the vast majority of working and vulnerable South Africans.

In 2016, Standard Bank’s South African retail customers paid back 98.7% of what they owed. We know that this wasn’t always easy. But our customers did it anyway. They did it because it was the right thing to do and because they know that they will probably want to borrow again in future.

If the government decides to wipe out certain categories of debt owed to banks, this will provide temporary relief for the small minority of customers who default. However, all customers – those who pay and those who don’t – will then find that the banks will then make it much tougher to borrow at all. Why? Because once banks start to worry that the debts owed to banks will be ‘forgiven’ by government, they will lend only to 100% sure bets. This will drive vulnerable South Africans into the hands of loan sharks.

Unscrupulous informal lenders don’t care about affordability assessments or interest rate caps or debt amnesties. In our view, since the government wants to protect the most vulnerable from reckless and predatory lending, much more effort should go into enforcing the National Credit Act against loan sharks – under the law, those ‘loans’ are illegal and should not be paid back.

The situation is exactly the same when it comes to home loans. If the government decides that banks may not take back houses from the very small percentage of people who can’t or won’t pay their bonds, then it will become much more difficult for anyone to get a home loan.

Do the banks try to sabotage black business people by closing their accounts?

Standard Bank closes accounts that have been dormant for five years. Account closures for any other reason are extremely rare and are caused mainly by our need to comply with South African laws and international regulatory standards on the prevention of money laundering and other crime. Standard Bank also occasionally ends banking relationships when it no longer makes commercial sense to maintain a relationship – we are a business after all, and profit is important to us - or when our employees have been abused by customers.

Over the past five years, Standard Bank has terminated an average of 21 retail banking relationships per year out of 12 million customers. We have terminated 1 or 2 corporate banking relationships per year, out of 11 000 corporate relationships.

Some cars are more expensive than houses and the banks let customers pay them off in five years or less. So why do banks insist on 20 and 30 year home loans? Isn’t this just to make customers pay more interest?

With the exception of the most expensive luxury cars and the smallest and most affordable homes, houses are a lot more expensive than cars. The average house in South Africa cost R 1.2 million last year. The average car cost R 291 000 – a quarter of the price of a house.

Houses also tend to keep their value far better. A ten year old house often costs a lot more to buy than it did when it was just built. A ten year old used car is typically worth only a small fraction of its price when it was new.

In order to be able to afford the house they want, people usually need to spread their repayments on a home loan over many years. If it was decided that the maximum length of a bond was, say, ten years, this would not free people to afford better houses and to pay less interest. The opposite is true: The monthly payments due on bonds would rise sharply and far fewer people would be able to afford houses.

Fortunately, because houses do keep their value, banks can safely lend our depositors’ and shareholders’ funds over long periods to home owners. The same is clearly not true for cars, which depreciate quickly and which can lose all their value very suddenly if they’re stolen or get totalled.

Banks actually don’t insist on long terms for bonds. In fact, if customers can pay more than their minimum monthly instalments, their bond will start going down surprisingly quickly. And if people are fortunate enough to be able to do so, they can pay off the whole bond at any time.

Cars can also be made more affordable by choosing a deal with a ‘residual’ at the end – though that does mean that customers could end up with less money to buy their next car.

Do banks take away people’s homes as soon as they can’t pay?

In total, we finance around 600 000 homes. Unfortunately, last year, we conducted 1 791 sales in execution and, very sadly, 73 evictions. This was 0.01% of the homes we finance.

Repossession is an absolute last resort and we will always try hard to prevent this from happening, especially for home owners in the affordable housing category. (Affordable housing owners are people who earn between R3 500 and R22 500 a month)

When clients are having trouble meeting their payments, we get in touch to understand exactly why this is the case. We can then offer a range of solutions to help people get back on their feet, including temporary reductions in the monthly payments and extending the term of loans. If the client’s financial distress can’t be lessened in these ways, we can assist them to sell the house voluntarily. Standard Bank does not condone abuses of sales in execution and we’re certainly open to further careful and evidence-based discussion about how to prevent houses being sold for far below their market value.

In some situations – for instance in the case of child-headed households – we will do everything we can to find a solution that keeps the family in its home and we will not proceed with an eviction.

In 2016, Standard Bank assisted 5 662 affordable housing owners to stay in their homes by restructuring their loans.

Is it true that the banks’ BEE deals didn’t work and they must do another round to achieve real transformation?

The industry’s existing BEE deals have generated R57 billion in value for black shareholders in banks. But still only about a quarter of bank shares are held by or for black South Africans.

So why can’t we do more ‘vendor-funded’ BEE deals like we did a decade ago? We could - but they would come at a very high cost to the economy.

Regulations that protect everyone who transacts or saves with us dictate that the shares in a vendor-funded BEE deal are excluded from our regulatory capital until the deal matures and the funding is settled. This in turn means that banks cannot use the funds in such a BEE deal to support lending. On average, banks can lend R8 for every Rand of shareholders’ equity they have. To put it another way, for every R10 of their capital that banks apply to funding a vendor-funded BEE deal, R80 is removed from the resources we have available to finance new black businesses.

Therefore, in setting up new vendor-funded BEE deals, banks would be choosing between, for example, immediately funding eighty new factories for black industrialists at R100 million each or creating ten new black shareholders who each own R100 million in bank shares which they can’t do anything with until the deal has been paid off.

Our society has evolved and now has different needs from fifteen years ago. Nobody should deny that it was entirely legitimate and socially valuable to create a black middle class and several large-scale black capitalists in the aftermath of apartheid. But, just as surely, what we need now are many more black industrialists directly managing production and creating jobs.

The fact remains that 25% black ownership of the banks is too low. While there are no instant cures for this, more transformation and faster growth will help to solve the problem. Black industrialists and their employees – as well as black staff at existing firms - all need to save for their retirements. The main way to do this is by buying shares through pension funds and RAs, which will fairly quickly lead to greater black ownership.

Talking of pension funds, it’s important to remember that the vast majority of bank shares are held by institutions that have a duty to their investors (that’s all members of collective savings schemes) to resist dilution of the value of the investments they manage. This limits what we can do.

Our room for BEE deals is also limited by the fact that about half of South African bank shares are held by international investors. This is not a scandal or a problem. Because South Africans don’t save enough ourselves to fund the investment that our country requires, foreign investment is very beneficial to us.

Having said all this, Standard Bank isn’t just waiting for more growth and more inclusion to create more black ownership. We are, for instance, thinking about programmes to create wider employee ownership of our shares. Furthermore, as a bank, as an industry and as a country, we need more creative thinking about creating new kinds of ownership opportunities for all black people.

Are the banks against radical economic transformation? What contributions are we making to transformation?

In a recent speech, the Minister of Finance implied that you’d have to be crazy not to support ‘radical economic transformation.’ The Minister is right. Standard Bank knows very well that this economy needs to transform radically. Far too few black people have a stake in productive assets. Far too few black people have real management control. The economy is growing far too slowly. It is not creating jobs. It is reinforcing inequality.

Fundamental and far-reaching change is urgently required. The banking sector has a key role to play in supporting and accelerating this change. Standard Bank remains committed to reinforcing South Africa’s constitutional democracy and institutions and to working with our partners in government and labour to get South Africa growing again.

As can be seen in banks’ reports to the Employment Equity Commission, the banks’ non-managerial employee demographics accurately reflect the population of South Africa. At the level of junior and middle management, 74% of bank employees are black. At Standard Bank, we are very close to our targets for hiring people with disabilities.

Industry-wide, around one-third of banks’ board members are black. Only about 15% of top executives across the industry are black. This is far too low. Banks need to work harder – and be put under more pressure – to transform their senior leadership.

6 of the 14 members of Standard Bank’s Group Executive Committee are women and 5 of 14 are black. This is certainly progress - but we are nowhere near where we should be. Looking at senior management overall, Standard Bank needs to do much more, much faster, to implement affirmative action as contemplated in Chapter 2, Section 9 of the Constitution (‘the Equality Clause’) and as required by the Employment Equity Act.

I am a product of Affirmative Action and I am proud to be able to play a part in transforming the management and ownership of our company and our economy. On my watch, Standard Bank sees affirmative action not just as a legal duty but also as an urgent commercial imperative and an ethical responsibility. Our approach to Affirmative Action demands that we work hard to identify, hire and train black people and that we accelerate their promotion whenever possible. We require that every black person who gets hired or promoted must be able to do the job to the very high standards we need in order to serve our clients with consistent excellence.

White and Indian people who believe that their careers have come to a dead end or that their children ‘won’t even get an interview’ at Standard Bank are wrong. This perception reveals a lack of information about what the Constitution and the Employment Equity Act actually say.

Chapter 3, Section 13 of the Employment Equity Act reads as follows, ‘Every designated employer must… implement affirmative action measures for people from designated groups.’ However, this specific duty is balanced by an equally specific prohibition, in Section 15 of the same Act, which reads as follows: ‘…Nothing in this [Act] requires a designated employer to take any decision… that would establish an absolute barrier to the prospective or continued employment or advancement of people who are not from designated groups’. In other words, this provision, read with the Equality Clause of the Constitution, means that we are not permitted to have a policy or an informal practice in terms of which some categories of people can never be hired, or promoted to the most senior positions, or under which a white senior leader can never replace a black senior leader. For us, this is an ethical as well as a legal imperative. Affirmative Action is about correcting past wrongs. It is about increasing equity and expanding opportunity. It is not about creating new forms of discrimination.

The banks don’t produce data on the race of every borrower as that would amount to illegal racial profiling. Under the Financial Sector Code of the Broad-Based Black Economic Empowerment Act, banks are required to track and report on ‘empowerment financing’ – that is, money that banks lend to black people or in historically black areas. The banks lent R211 billion in empowerment financing between 2011 and 2015.

Over the same period, the banks spent R210 billion with BBBEE-rated suppliers, including R50 billion spent with black-owned and black woman-owned suppliers.

According to the 2016 FinScope survey, 77% of adult South Africans have a bank account. The average for Africa as a whole is 26%. 90% of poor South Africans live within 10 kilometres of a bank service point.

Standard Bank, along with the rest of the industry, makes large contributions to promoting faster transformation, more growth and more jobs. We have a lot to be proud of.

But we also have a lot more work to do. Standard Bank can’t be satisfied with our contribution to transformation and economic development in South Africa until we look like the country at every level of our organisation; until the economy is growing fast; until every South African who wants a job can find decent work; and until our country creates dignity, hope and opportunity for all.

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