Public already owns banks, who already finance us all
With a proposed bill that would allow for the creation of state-owned banks just one signature away from becoming law, exactly what role state banks would play remains something of a mystery. To say nothing of the generally dismal track record of its state-owned enterprises, I’m not convinced that the country needs state banks. But if we are to get them, it’s worth discussing what we hope they will do.
There seems to be this idea among state bank proponents, the EFF in particular, that
existing commercial banks are privately owned and, to quote EFF deputy president Floyd Shivambu, “used as instruments and mechanism of financial exclusion and reproduction of apartheid economic activities”.
State banks, the party says, would provide enterprise finance, housing finance and vehicle finance for all South Africans “in a manner that promotes development, not the narrow pursuit of profits”.
First, it must be noted that all SA’s major banks are listed on the JSE and therefore publicly owned, largely by local and international pension funds and other institutions investing the savings of working class people.
Even bank founders such as Laurie Dippenaar of FirstRand and Stephen Koseff of Investec hold miniscule stakes (1% or less) in the banks they helped build — significantly below the stakes held by the Public Investment Corporation on behalf of government employees. Second, figures from the Banking Association SA show that between 2012 and 2015 banks spent R69bn on transformational infrastructure; R41bn on black small and medium enterprise financing; R7bn on financing black agriculturalists; and R94bn on affordable housing.
Black businesses’ turnovers below R1m accessed R14bn in credit between 2011 and 2016.
This hardly equals financial exclusion, although more can always be done.
Offering affordable banking services to poorer people in remote areas or developing innovative credit scoring models that reduce the cost of unsecured loans are both areas in which growth is needed. But it’s not clear that creating state banks is the way to achieve this. Particularly as new entrants such as TymeBank and Postbank (which is a stateowned bank), seek to address these gaps.
Capitec, meanwhile, recently acquired business bank Mercantile and wants to expand into small business lending. It makes no sense for state banks to compete with the private sector in these areas by offering loans on commercial terms, as this creates little additional value for society.
The real value of state banks is in development finance. Their capital can be used to crowd in private sector investment in making long-term loans to fund large infrastructural projects.
Organisations such as the Industrial Development Corporation, the Development Bank of Southern Africa and the Land Bank have a vital role to play. But rather than creating additional state banks, the focus should be directed towards recapitalising and better capacitating existing banks. In a similar vein, to boost small business funding greater investment is needed in the National Empowerment Fund and the Small Enterprise Development Agency.
Perhaps the strongest argument in favour of state banks, made by Post Office CEO Mark Barnes, is that they need not measure returns quite as narrowly as commercial banks, giving them greater flexibility. Arguably, the ultimate return would come from the fruits of greater financial inclusion: an enlarged tax base and better economic growth.
That is not to say state banks should be unprofitable that would be a terrible waste of taxpayers’ money and, worse still, perilous to the funds of depositors in the bank — but the end game and profit motive for the state would be different.
Still, SA should tread with caution. State banks easily fall prey to political interests and patronage-driven lending. Most empirical evidence suggests “government bank ownership in developing economies has had negative consequences for long-run financial and economic development”, the World Bank finds. Indeed, a decade-long corporate lending spree by India’s state-owned banks has required them to be recapitalised with $32bn.