Amended Banking Act raises concerns over SOE banks

A banking and finance expert has questioned amendments to the Banking Act that allowed for the establishment of the state bank and for state-owned entities (SOEs) to set up their own banks, citing a big concern given the poor track record in the management of the SOEs.

For the same reason, some stakeholders expressed fear that the state-aligned banks could become a drain on the fiscus, due to possible reckless lending.

Dr Johan Coetzee, senior lecturer of banking and finance in the department of economics and finance at the University of the Free State, questioned the ability to successfully operate a state bank and the SOEs’ ability to absorb the “expensive” risk associated with banking.

Coetzee cited the issue of trust of state entities by economic players because “at the heart of a vibrant and stable financial system was the notion that economic players trust the system”.

“My question is, will the state bank be able to harness enough trust in the South African economy to ensure that not only depositors’ funds are protected, but also that taxpayers are not again called on to bail out yet another SOE?” he asked.

“This is a question that is open to debate, but as things stand and given the track record of SOEs in South Africa, a lot more needs to be done in the management and governance sphere with regards to SOEs.”

He was reacting to the adoption of the Financial Matters Amendment Bill by parliament this week, effectively amending the Banking Act to provide for the establishment of the state bank and authorised for SOEs to establish banks of their own.

The legislation requires that the company assets and those of its holding company must exceed its liabilities, which could prove to be a challenge for some of the SOEs that relied on government bailouts and foreign borrowing for their survival.

In the meanwhile, Cas Coovadia, managing director of Banking Association of SA, said as they did not have a problem with the government establishing a state bank as long as it was regulated properly and did not become a drain on the fiscus.

“We always maintained that if the government wants a state bank, it’s their decision,” Coovadia said. “But once that bank was involved in irregular lending practices and unable to get their money back, it would have to be bailed out by the taxpayer and that is not what we want in SA.”

The governing ANC, which welcomed the Bill’s adoption, had been advocating for a state bank and even adopted a resolution on the matter at its Nasrec national conference in line with the vision of the National Development Plan.

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