FINANCIAL INCLUSION
Dealing with a false
dichotomy between Basel III
and Financial Inclusion
Often in the public discourse on transformation in the financial
sector, an inverse relationship is assumed to exist between financial
regulation and access to financial services.
T
o be more precise, prudential regulation is considered
to be the main cause of inadequate financial inclusion,
or of causing financial exclusion.
I was recently invited to participate in the
roundtable discussion organised by the Association
of Black Securities and Investment Professionals (ABSIP).
The topic for discussion was ‘The impact of Basel III on Black
Economic Empowerment (BEE) finance’. What is implicit in this
topic is an inherent hypothesis that Basel III is intrinsically designed
to have an undesirable effect of crowding out BEE financing,
whether intentional or not.
Soon after that, on September 2, 2012, the business supplement
of the City Press published an article with the heading: “Banking
system security trumps BEE”. In this article, Ismail Momoniat, head
of Financial Sector Policy at the National Treasury, is quoted as
having said that Basel III regulations will take precedence when it
comes to dealing with BEE to safeguard South Africa’s financial
stability. Indeed, much of the narrative in this often emotional
debate is based on the assumption that prudential regulation has
a countervailing effect to financial inclusion. I would like to argue
that there is no trade-off between these two public policy objectives.
In fact, when correctly applied and adequately complied with,
prudential regulation should enhance financial inclusion. Similarly,
Basel III should have positive long-term spin-offs for BEE financing
in South Africa. Prudential regulation seeks to achieve three
objectives: (1) to protect the public’s deposits, especially of the retail,
unsophisticated members of the public who save their hard-earned
money with banks for safe-keeping rather than for investments
or wealth creation; (2) to ensure institutional soundness of every
registered bank; and (3) to promote the stability of the banking
system as a whole.
Basel III is an improvement compared to Basel II. It seeks to
correct some of the weaknesses that the recent financial crisis
helped to identify regarding the amount and quality of the capital
held by banks as well as in the strength of their liquidity positions.
16
THE BANKER
Edition 3
Capital in a bank is meant to enable it to absorb losses, both in
normal times and in times of financial distress. Liquidity is meant
to enable a bank to meet its liquidity obligations, such as the ability
to meet withdrawals from the public at all times. To this end,
Basel III requires banks to build financially sound balance sheets
with enough resilience to sustain their services to the public even in
times of severe domestic and international economic and financial
crises. Basel III compliant banking systems should progressively
build adequate reserves through boom periods to be able to better