ANDREW BATEMAN: State-owned retail bank will do more harm than good

The finance minister announced at the end of last year that the National Treasury would support the launch of a state bank through Postbank to introduce competition into the sector. The bank aims to provide cheaper financial services to poor and unbanked South Africans, including credit for small, medium and microenterprises. 

While the minister’s intentions are worthy, the DA opposes this as it will create unfair competition in the banking sector and retard economic growth and job creation.

The state’s role is to create the environment in which banks can compete. If the government owns a retail bank, it stands behind it in finance and reputation, which is an abuse of its power and position. 

Further, a state-owned retail bank would undermine the government’s first priority of inclusive economic growth and job creation. 

As state-owned enterprises (SOEs) often rely on ongoing subsidies rather than innovation or tough decision-making to remain operational, they have placed a big financial burden on the state. A state-owned retail bank is unlikely to buck this trend, especially because banking is competitive, complex and inherently risky. Ithala is a relevant case study.

Private sector banks make informed lending decisions in a competitive environment. If they do not, they go out of business. In contrast, a state-owned bank will not make market-related lending decisions. This may be by deliberate political design, or by corruption or neglect. Whatever the cause, the result will be that depositor capital will be placed at risk and the state will foot the bill.

Ill-advised loans have serious knock-on effects. Ordinarily, loans grow the economy, create sustainable jobs and are repaid with interest. This enables banks to expand their capital bases, increase their lending and enable further economic growth and jobs.

If a state bank makes ill-judged lending decisions it breaks the positive cycle of lending, growth, job creation and capital formation.

To fund the subsidies that will be required, the government will need to resort to additional borrowing or higher taxes. Both options depress private investment, economic growth and job creation.

Higher taxes have this effect by reducing household savings and business profits available for investment and damaging our international competitiveness.

Government debt has the same effect: it pushes up the cost of capital by increasing the risk premium on government bonds and crowds out private sector borrowing and investment.

Our government is already near a fiscal cliff. With 21% of our budget servicing interest, an increase in interest rates and debt is unthinkable. 

The bottom line is that a state-owned retail bank will hinder economic growth and job creation. It will end up doing more harm than good for the poor and unbanked it purports to help.

This raises the question: how do we reduce the cost of financial services for poor and unbanked South Africans? 

Digitisation has been driving the cost of banking services lower and several commercial banks offer innovative, user-friendly, low-cost banking solutions without state support. This forces other banks to follow suit or risk losing customers and market share. That is how the market operates. 

The government must ensure that the legislative and regulatory environment in which banks operate is as efficient and conducive to new market entrants as possible, while protecting depositors and satisfying our international commitments.

The government should aim to reduce the long-term cost of capital by reducing inflation, reining in government spending, government debt and administered prices, and implementing policies that are attractive for direct private investment.

This is the key to growing the economy and creating sustainable jobs to address poverty, unemployment and inequality.

• Bateman is DA deputy finance spokesperson.