FRANS CRONJE: Banks being set up for failure to clear way for state banking sector
Clients could remain liable for loans made on the expropriated property, pushing banks into such a deep crisis that they turn to the state for rescue
Bekezela Phakathi’s report on expropriation without compensation (EWC) and banking opens up an important assessment of the long-term prospects for SA’s private sector financial institutions (“Expropriation without compensation will not collapse banks, says Ngcukaitobi”, April 20).
I suggest there are politicians and activists who are setting up the country’s banks for failure, to open the way to a state banking sector, and that these activists may succeed in doing so.
SA’s banks maintain that their clients should carry the costs of the government’s EWC policy via those clients remaining liable for loans made on property that is expropriated.
In narrow legal and contractual terms, the banks might have a case, but in practice and in moral terms that case quickly falls apart.
First, where the client of a bank loses their source of income via an expropriation they will simply not be able to pay off the loan. Many farmers carry loans that are a multiple of their earnings out of agriculture. If they had significant additional financial assets they might not have borrowed so heavily from banks to begin with.
Nor will expropriated property owners be inclined to develop a new source of income or business if the banks are waiting to pounce on the proceeds. That prospect would stunt future entrepreneurship, and it would therefore be much better — though not good — for the economy going forward if mortgage bonds and underlying debts simply then evaporated. This is the kind of trade-off that must be made in a country that is sincere about its expropriation ambitions, as it would be better for the economy.
Second, where bank clients lose their property but retain some other asset, such as another business or some savings, do SA’s banks seriously propose seizing that remaining asset from their client? Even though this could bankrupt or impoverish those clients and drive them, together with their families and employees, into poverty?
In many cases, that asset could itself be bonded to the bank or managed by the bank. The politics of such secondary seizures would be appalling, and would turn public opinion against private sector banks — which will be necessary if they are to be brought down. Consider the media reporting on a family that first lost much of their earnings and assets to the state before having the banks come along to seize the balance.
Third, SA’s banks suggest they have no social or economic liability in the event of an expropriation, when in practice, through lending money to property owners, the banks have historically benefited from SA’s property relations just as much, if not more, than the title holder of a piece of land.
Historical property relations
If it is true that historical property relations represent a crime against the people of the country and are the root of all present poverty and inequality as well as sustaining that poverty — and that it is therefore good and virtuous for the state to intervene in the economy and seize such property without compensation to bring about justice — then it is not clear why the banks believe they should be spared the costs.
The simple fact is that banks financed property transactions to profit from the proceeds, and were therefore, if all the arguments made by expropriation activists hold true, engaged in a morally reprehensible practice for which they should be punished. (To be clear, this is not, of course, our view. We hold that justice and righteousness could best be achieved via extending and deepening property rights while growing the economy and creating new sources of wealth and prosperity.)
Lastly, banks have blown hot and cold on the issue of EWC. In parliament they have cautioned against the policy but, critically — and this is most important — they have also endorsed it via the recommendations of the president’s advisory panel on land and agrarian reform, which the Agricultural Business Chamber (Agbiz) endorsed. Most banks are members of that chamber and it represents their agricultural interests to the government. To join in advising the government to proceed with EWC, and then to suggest that their clients (who have been firm in their opposition to expropriation) should carry those costs, does not fly.
As for whether SA’s banks could survive the hit, even in the ever-more-likely event that the government moves to nationalise all land via a custodial taking, the odds are that they would, albeit in a much weakened state. The threat to the survival of the banks will in the main emerge when expropriation and custodial or regulatory taking policies begin to be applied to other sectors of the economy, which we believe is the inevitable evolution of present EWC policy.
The great risk to the survival of SA’s banks is that land is simply the thin end of a wedge and that land seizures will set a precedent for broader economic and asset seizures. This we think is the policy of the government given its debt and deficit position and the critical need to finance patronage networks that once relied on now dwindling taxpayer funds.
But ideologically driven politicians and activists — of the kind willing to endorse land seizures in the first place — are unlikely to see a domestic banking crisis as a great problem given that it would open the way to a state bank financed through currency printing.
We have long held that the state bank idea is not aimed at creating a competitor to SA’s commercial banks, but rather at usurping the role of those banks. This can perhaps best be achieved by pushing domestic banks into such a deep financial crisis that they turn to the state for rescue. Hence the engineering of such a crisis makes strategic sense to the government’s more dogmatic ideologues, and more so if the risk prompts banks to turn on their clients.
Readers must make of our warnings what they will. The temptation will be to dismiss them. But we have been right on our expropriation calls for more than a decade, whereas most analysts and economists have been wrong. We flagged the EWC risk long before it was adopted as policy by the government and ANC. Along the way, we were told that EWC would never happen, that it was not government policy, that it made little sense, and that the constitution would not allow it.
When we warned that the constitution would then be changed to authorise it, we were roundly rejected. Of late there has been an effort to assure the country that the state would use any new EWC powers with careful moderation — a hope entirely at odds with the evidence of everything from the state capture efforts of the Zuma era to the looting of Covid-19 funds in the Ramaphosa one.
Back to the present issue of who should be held liable for mortgage bonds and their underlying loans after expropriation for little or no compensation, my advice to banks is that pinning that liability on their clients is a strategic mistake which, in addition to its echoes of Martin Niemoller’s famous warning, plays into the hands of government ideologues in that it will so turn public opinion against the banking sector that the political momentum to ensure its longer-term downfall and incorporation into a state bank will be virtually assured.
For the banks and their shareholders, the only way out of the rapidly closing trap is to stop the expropriation laws now in train. These must be replaced by sensible and pragmatic policies that ensure high levels of economic growth and job creation — the type of growth and job creation SA benefited from so handsomely in its first decade as a democracy.
• Cronje is CEO of the Institute of Race Relations.
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