Is South Africa ready for a state-owned bank?

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Currently, the Banks Act only allows public companies to register as a bank or bank controlling company. Up until now, state-owned companies had to obtain numerous exemptions in order to perform some of the functions of a bank. The proposed amendments to the Banks Act would remove the need for these exemptions and would allow entities such as the Postbank and the Land Bank to register and operate as fully operational banks.

Postbank, which currently operates under various exemptions to the Banks Act, which were required for the bank to accept deposits, does not have a banking licence and is unable to operate as a fully-fledged bank. This may change however, should the amendments to the Banks Act be promulgated. If Postbank is awarded a banking licence, it would be entitled to operate as a fully-fledged bank. In November 2018, Postbank indicated that it had double the amount of capital it needed to operate as a bank. Postbank also noted that, once it has obtained a banking licence, it intended to pursue opportunities to provide government-to-citizen services as well as lending activities with a focus on offering loans to small start-up businesses, Small, Medium and Micro-sized Enterprises (SMMEs), small-scale agricultural operations and the like. Postbank took over the distribution of social grant payments across the country as of 1 May 2018.

The introduction of a state-owned bank is seen by some as a way to facilitate the provision of low-cost banking services and financial inclusion in South Africa.

The Banking Association of South Africa (BASA) recently indicated that it had no objections to the introduction of a state-owned bank but said that such an entity should be subject to the same prudential, market conduct and corporate governance legislation and regulations that apply to other registered banks. This is to mitigate potential risks to the country's financial system. BASA has also noted that adequate safeguards should be put in place to ensure that a state-owned bank did not suffer the same fate as other state-owned entities in South Africa, which have battled with years of maladministration.

Some of the questions raised by the proposal to establish a state-owned bank include: ‘How would tenders for government banking services be affected?’ and ‘How would a state-owned bank comply with the prudential requirements under the Banks Act?’ Currently, banking services that are provided to the State are put out to private commercial banks for tender. Accordingly, should commercial banks wish to provide any form of banking services to the State, the State would first have to issue a request for proposals and the banks would then compete for the work through the tender process. If we follow the reasoning that a state-owned bank should comply with the same legislation and regulations applicable to other banks, it should also be required to participate in the tender process to provide services to the State. This should also ensure that government banking services are procured at a competitive price and delivered efficiently.

A factor to be considered in determining the viability of a state-owned bank is that every applicant for a banking licence is required to have the financial means to comply with the requirements of the Banks Act. Applicants are required to maintain prescribed levels of capital reserves to safeguard the rights of customers with deposits at the bank, to avoid introducing systemic risk into the financial system and to avoid any scenario where the state may be required to bail out a failed bank with taxpayers’ money. Given the condition of the "safe of the nation", it seems unlikely that the treasury would be in a position to guarantee the obligations of a state-owned bank.

Further requirements to be complied with by a potential state-owned bank include that it must be solvent for 24 months prior to applying for a licence, and that it must receive approval from each shareholder as well as the Ministry of Finance.

Ultimately, the granting of the licence is at the discretion of the Prudential Authority, a division of the South African Reserve Bank which regulates banks, as well as the Financial Sector Conduct Authority (formerly the Financial Services Board).

While these proposals have been well received in certain respects, they require more debate and deliberation to ensure that the interests of all stakeholders have been considered and that accurate safeguards are in place to properly regulate the proposed new bank.