A state bank is a very bad idea

Douglas Gibson on the loud demands by the ANC’s economic illiterates for the establishment of such an entity
Some people who can only be described as economic illiterates are calling loudly for the establishment of a state bank.  This is part of the new populist stance of one of the factions in the ANC.  Now that there is a new minister of Finance who knows little about the subject, the chances are that he will smile on the project.

Some provinces wish to terminate their existing banking relationships and transfer their accounts to the new bank, not as yet formed.  Such touching faith in this entity, not yet conceived, let alone not yet born, tells all about their financial management.  For reasons other than financial prudence, provinces want to entrust our money (it is not the provinces’ money; it is the taxpayers’ money) to persons unknown.

Some of them are cross with the big banks because they refused to carry on acting for (and making money out of) the Guptas.  That is a sin in some quarters.

Some are cross with ABSA because a predecessor bank was bailed out by the Apartheid government more than a generation ago. Judge Denis Davis found ages ago that ABSA did not benefit and that there was no point in pursuing a claim.

Some are cross because of the alleged involvement by several bank employees in shady dealings relating to foreign exchange trading.  At least two of the banks have already denied absolutely, after investigation, that any of their employees were involved and they have invited the Competition Commission to furnish particulars of the allegations. If these prove to be true, the persons concerned should go to jail.

Some say they want competition for the big four banks, FNB, Standard, ABSA and Nedbank, or the top six, including Capitec and Investec, that have a virtual monopoly because of their size.  This is a fair point but they seem not to know that there are:

13 locally controlled banks,

6 foreign controlled banks;

15 foreign banks with branches in South Africa;

43 foreign bank representatives,

3 mutual banks and

3 other banks: Development Bank of Southern Africa; Land and Agricultural Development Bank of South Africa and Postbank.

I suppose it is possible to argue that one extra bank would make all the difference. I suspect that the prospect of accessing pots of money, board appointments and executive jobs for the connected weighs most heavily.

What is of concern, however, is that the record of State Owned Enterprises (SOEs) has been dismal.  The list, far from exhaustive, is depressing: think of SASSA; PRASA; SAA; Eskom; SARS; Transnet; SABC; Petrosa; POSTBANK; and on and on.  All of these SOEs are to a greater or lesser extent an embarrassment to the government.

They are characterised by constant demands for bail-outs or financial guarantees; many of them have entirely inappropriate directors without special skills or knowledge, deployed there as “loyal cadres” by the ANC, not required to insist on good governance because many of them would not know what that means even if it slapped them across the face.

Many of the SOEs are hotbeds of corruption, being seen as feeding opportunities by those who have managed to get a place at the trough.  Of course, it is not only the directors that are inadequate, many are staffed by ANC cadres without their merit necessarily being measured against other aspirants not possessing party membership cards.

Expecting a state bank to compete effectively, operate at a profit, maintain safe margins of reserves, be free of corruption and run efficiently is enough to make a horse laugh.  If the government is unable to run anything else properly, why would anyone think it would be able to run a bank big enough to compete with the existing larger banks?

Do the proponents of this new bank have any conception of the amount of expertise required? Do they understand that loans cannot be extended to all who apply if they do not comply with minimum risk considerations? Loans actually have to be repaid.  If they are not that constitutes a loss that has to be made up somewhere else.

The four major banks together in 2016 paid tax of R24.143 billion.  In 2015, those four banks paid tax of R22,2 billion.  Do the state bank enthusiasts realise that if it eats into the market currently occupied by the big four banks, their profit will take a dive and the tax they pay will also nosedive? Is there any guarantee that this wonderfully run state bank will pay profits to the state enough to make up the shortfall?

Or given our bitter experience with SOEs, will the money just disappear into a black hole, wasted, misapplied or stolen somewhere along the way?  The state bank will presumably be regarded as “too big to fail” and when it needs a bail out of a few billion each year the government will just have to find the money.

One foresees that the state bank will feel constrained to compete by charging lower fees and while conceding that nothing is more irritating than the high fees the other banks seem to charge when compared with some other countries, the fact is that lower fees might lead to lower profits, lower taxes and a lower margin of soundness.

Remember that during the Great Recession and the world banking crisis in 2008, South African banks stood out proudly in comparison with banks in many other countries that either failed or had to be bailed out at vast cost to the taxpayers.

The latest World Economic Forum Competitiveness Ranking rates our country 56 out of 144 countries overall but in respect of soundness of our banks, we rank number 6 in the world.  That is something to be proud of.  Let’s not wreck that.

Douglas Gibson is a former opposition chief whip and a former ambassador to Thailand. His website is www.douglasgibsonsouthafrica.com. This article first appeared in The Star