How EFF and state bank proponents ignore perils and limitations
A successful state bank would need political independence and lending based on strong economic fundamentals, writes Hanna Ziady
As India’s state banks post record losses, calls for the creation of state-owned banks in SA are mounting, with the EFF seeking to amend the Banks Act to achieve this.
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". Without them, the black majority will remain "on the margins of mainstream financial participation", EFF deputy president Floyd Shivambu argued in a recent Daily Maverick article.
The EFF is not alone in contending that SA needs a state-owned bank to spur financial inclusion for the poor and for black-owned businesses. But its proponents too easily ignore their perils and limitations.
India’s state-owned banks need $32bn in recapitalisation. In many countries that have experimented with state banks, political interests have played a role, leading to patronage-driven lending, which places pressure on public finances and hinders economic growth.
"The bulk of the empirical evidence suggests that government bank ownership in developing economies has had negative consequences for long-run financial and economic development," the World Bank found in a 2013 report Rethinking the Role of the State in Finance.
While state banks "can play a positive role in stabilising aggregate credit in a downturn", their track records in credit allocation remain "generally unimpressive", the report stated.
In Brazil, rather than channel funding to small businesses, state development bank BNDES subsidised the country’s largest companies with cheap credit during the financial crisis.
Even though the companies qualified for commercial bank loans, Brazil’s central bank was forced to set its benchmark rate at an artificially high level to "offset the impact of BNDES’s subsidised rate on the wider economy", The Economist reported. This lowered the provision of credit in the economy.
Some state banks do meet their mandates. The world’s largest commercial bank, the 70% state-owned Industrial and Commercial Bank of China (ICBC), issues loans based on borrowers’ creditworthiness.
"The Chinese government does not interfere in ICBC’s daily operations or determine which loans the bank should grant. Commercial rules are followed at all times," says its representative in SA, Lubin Wang.
It has strong corporate governance, which includes independent nonexecutive directors on the board including Sheila Bair, former chairwoman of the US Federal Deposit Insurance Corporation.
Poland also has a successful state-owned bank. PKO Bank Polski is the country’s largest commercial bank with a 20% market share, World Bank senior economist Marcin Piatkowski says.
Despite lending when other banks wouldn’t during the global financial crisis, its loan quality is better than the market average. Its lending is based on strong economic fundamentals and a domestic deposit base that can finance its loans.
"The case of Poland’s PKO BP suggests that state-controlled banks can indeed play an important countercyclical role during crises by supporting lending to the economy," Piatkowski writes in a blog post for the Brookings Institute.
It is difficult to see how SA’s government, with its dismal track record in managing state-owned enterprises, can successfully manage a bank, or how such a bank, if successfully managed, will be different from existing commercial banks
But for state-owned banks to excel, he adds, they must be "professionally managed, commercially oriented, open to free-market competition and subject to hard budget constraints".
It is difficult to see how SA’s government, with its dismal track record in managing state-owned enterprises, can successfully manage a bank, or how such a bank, if successfully managed, will be different from existing commercial banks.
SA’s state banks include the Industrial Development Corporation, the Development Bank of Southern Africa (DBSA), the Land Bank and provincial development agencies.
Andrew Donaldson, a former Treasury official, says these entities should be urgently recapitalised and better capacitated. The DBSA, for example, had total assets of R83.7bn in March 2017, compared with the R1.95-trillion and R1.3-trillion balance sheets of Standard Bank and FirstRand, respectively.
But state institutions can be better used to support cofinancing and risk-sharing arrangements with commercial banks, says Donaldson.
Standard Bank Group CEO Sim Tshabalala says state development banks can play an extremely useful role if their capital is used to crowd in private sector investment.
"Under Basel III, it is prohibitively expensive for private sector banks to provide equity or make very long-term loans — say to fund transport or energy infrastructure. But public sector banks can and should," he says.
State involvement makes it possible for private sector banks to lend to these projects "several multiples of the initial public sector investments", Tshabalala adds. Standard Bank has no "in-principle or blanket objection to state-owned banks — either retail or wholesale. However, when state banks compete with the private sector to offer loans on commercial terms, little or no additional value is created for society — and there are … much better uses for public sector money than competing in a mature market."
SA should increase access to finance for black people in general and small businesses in particular. But it is unlikely that a state-owned bank is the best means of doing that. For businesses, more equity funders are required for institutions such as the National Empowerment Fund and the Small Enterprise Development Agency.
For individuals seeking finance, co-operative banks that are member-owned could be part of the solution.
What has to be top of mind — and what the EFF and others often fail to acknowledge — is that any bank, state banks included, must protect depositors’ funds. A bank cannot lend to borrowers who have little prospect of repaying the loans.
Postbank has a nationwide footprint, R7bn in deposits and 7-million depositors — and offers the government an easy entry into banking. Currently operating under an exemption, it is expected to receive its banking licence in 2018, enabling it to extend loans for the first time
"It is imperative that a state retail bank should have to comply with precisely the same prudential and conduct regulations as all other retail banks. If not, there would be a serious risk that taxpayers’ funds would be wasted and — even worse — that depositors’ savings could be imperilled," says Tshabalala.
He says there is a good case for expanding a network such as that of the Post Office to offer affordable banking services to poorer people in remote areas, "given the substantial social and economic benefits of broader and deeper financial inclusion".
Postbank has a nationwide footprint, R7bn in deposits and 7-million depositors — and offers the government an easy entry into banking. Currently operating under an exemption, it is expected to receive its banking licence in 2018, enabling it to extend loans for the first time.
South African Post Office CEO Mark Barnes has a vision for what can be achieved. The world, he says, has moved beyond "this archaic notion that you must have an asset to borrow money".
Evidently, the credit models of commercial banks have not yet made this leap, which is why borrowers without assets — poor, black South Africans for the most part — can access only unsecured loans at exorbitant interest rates.
Barnes says this is where the state has the upper hand. By cleverly using the extensive data it has on its citizens, it could be freed from the constraints of asset-based lending.
Someone who is renting a room in Soweto in a property with no title deed "is a bankable proposition", he says. But the legislation with which banks must comply prohibits them from seeing things that way. The same is true for informal traders: a bank cannot lawfully extend a loan on commercial terms to a business that is not registered with the authorities.
While Postbank could not flout these rules, it is not difficult to see the commercial opportunity. "The end game and profit motive for the state is also slightly different," says Barnes. The state bank need not measure its return in the same narrowly defined way as commercial banks. Its ultimate return would come from the larger tax base that greater financial inclusion yields.
What is needed are "properly thought-through financial models for a broad base of citizens that commercial banks don’t really have to pay attention to because they make money elsewhere", Barnes says.
Whether this means creating yet another state-owned entity to guzzle taxpayers funds is debatable. The EFF and other state bank proponents should look first to the institutions SA already has – including the Postbank and development and equity finance institutions. These are perfectly suitable to achieve the task.