Why SA needs a Mega State Bank
We have the capital, and the technology, to revolutionise lending
Credit is the enemy. Debt causes knots in your stomach as you fall asleep that are still there when you wake up in the morning. It can choke you. As things stand now, I’d say that the vast majority of those people in SA who are (un)fortunate enough to have access to credit have found it to be a destroyer, not an enabler.
It does not have to be this way.
Credit is a liability that has to be balanced by an asset if it’s to make sense. So borrowing to buy a house, within reason, makes sense. Not pure sense, mind you, because the house, in and of itself, doesn’t generate cash flows to service and repay the capital (and interest) borrowed to buy it. Your salary (or, rather, the take-home portion of it) does that.
But even though there isn’t a direct link between the yield of this asset and the interest rate it’s required to service, you have to live somewhere, and if you weren’t paying off your own bond, you’d be paying off your landlord’s — so it makes sense.
The trouble is that we don’t borrow money only to finance assets, and that’s where the real problem starts. You can’t borrow money to finance consumption. Really, you can’t. Ice creams can’t repay loans, nor can a new pair of shoes.
At the most basic level of economics, it is obvious that if the cost of the debt is above the yield of the asset, you’ll go bust (in a closed system, where you can’t ask your aunt to help you out, knowing you can never repay her, either).
It should be equally obvious that the riskier the credit applicant, the higher the cost of debt (the interest rate), and so it is that the poorest (who need help the most) pay the most for access to credit. In the result, the unit cost of consumption is higher for the poor, who end up borrowing more and more until it finally catches up with them and destroys them.
It’s not more complicated than that. Finally, we end up with a vicious cycle of poverty and a vast proportion of the population that is simply not “bankable”, in the traditional sense. The problem extends beyond individuals into small business and entrepreneur debt funding.
This “un-bankable” state permeates practically our entire society and, as a nation, we cannot grow. Hell, we can’t even hope to grow. Inequality of credit access leads to un-bankability, which entrenches poverty and unemployment. We know that.
We have to change the rules of engagement, and we have to involve the state. We have to change the price of credit. We have to use technology. We have to have an end-to-end solution, a virtuous circle.
The price of credit won’t be solved by finding more assets to lend to, or more security. There simply aren’t any.
Two things are paramount: cost of capital to the source funds provider; and oversight on the use of the money.
The first role of the state is to be the source of funding, because it has the lowest cost of capital as the sovereign borrower.
If even cheaper funding can be arranged (such as this latest Brics bond issue to provide funding for public utilities in general, and renewable energy in particular, at a lower cost than the government, because it has a better, AA+, credit rating), so much the better.
International and local grant funding should likewise not be excluded. The state could even further subsidise the lending rate to the extent required to make the economics stack up, because it’ll get it back in taxes.
Because of what I might label “oversight technology”, asset-based lending can be replaced with transaction-evidence-based, incremental, grow-as-you-grow cash advances.
If an SMME (call it a spaza shop) buys goods for R100 and sells them for R120, and there is scope for market growth, then that business could borrow, say, another R100 to get to sales of, say, R235. At a 5% cost of debt, the net gain in profits is obvious.
Of course there’ll be conditions, Ts and Cs apply. You can only use the money for the purpose for which it was borrowed. If your bank’s oversight technology detects another use of funds, an unexplained change in margins, whatever (like buying a Rolex), the account is frozen, or the payment blocked.
We have to change the rules of engagement, and we have to involve the state. We have to change the price of credit. We have to use technology
Mark Barnes
SA Post Office CEO
Technology can do that, easily. You won’t be able to waste money by mistake.
Second, critically, and without exemption, state-sourced funding can only be advanced to registered taxpayers in good standing.
This is how the circle gets complete. Enabling funding for growth, at the right price, creates the opportunity for increased turnover and profit. Turnover results in VAT payments, profit results in income tax.
These cash flows, previously lost into the informal market, to loan sharks charging extortionist rates, are now fed back into growing the economy, funded by the expanded tax base.
There you have it, a virtuous circle of value creation, replacing a vicious cycle of poverty.
Only the state can do this, because the fiscus has a monopoly on the collection of taxes and the allocation of expenditure to the sectors of the economy where it is most required for, say, the creation of jobs.
The problem is big, and the solution will have to be big. We don’t need a whole bunch of disparate state funding organisations with separate mandates and management overheads. One big state organisation will suffice. Combine all of the existing entities — National Development Agency, Industrial Development Corporation, Development Bank of SA, Land Bank, National Empowerment Fund, Post Bank, all of them — into one massive facility.
This will optimise the expertise pool, enhance the credit rating and enable centralised policy formulation, oversight and regulation. If we can find a way to persuade the private-sector funders (through corporate social investment programmes or even prescribed assets — a couple of percent of balance-sheet footings should do it) to join in, we’ll have a significant foundation to start with.
Applications can be processed at capacitated post offices throughout SA.
There may still be some equity funding required in the beginning, to balance the risk-return equations (we need ambitious growth).
Enter the Public Investment Corp (PIC). It boasts assets in excess of R2-trillion. Just 10% — R200bn — of its assets under management can anchor the funding of a lot of growth, properly leveraged by the Mega State Bank.
I wouldn’t be surprised if the PIC doesn’t generate even better returns from these high-growth investment opportunities (which it should hold forever) than by investing in old, established businesses.
Our established commercial banks aren’t going to do this. Our micro-lenders and the informal market won’t do it at the right price.
The government has to do it, lest the consequences of its absence go beyond just economic inequality. It is already tense out there.
Let’s get on with it. The problem is clear and present, but so is the capital.