Sunday Times

Why SA needs a Mega State Bank

We have the cap­i­tal, and the tech­nol­ogy, to rev­o­lu­tionise lend­ing

- Mark Barnes Barnes is CEO of the South African Post Of­fice

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.

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 ?? Pic­ture: Getty Im­ages ?? Ger­many’s state-owned de­vel­op­ment bank KfW Group was formed in 1948 af­ter World War 2 as part of the Mar­shall Plan to re­build the coun­try.
Pic­ture: Getty Im­ages Ger­many’s state-owned de­vel­op­ment bank KfW Group was formed in 1948 af­ter World War 2 as part of the Mar­shall Plan to re­build the coun­try.
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