‘As The Banking Association has amply
shown, the banking industry is not
necessarily in competition with other
financial services firms which identify and
serve unfilled market niches.’
the industry’s failure to innovate financial contracts (products)
which appropriately incorporate rewards commensurate with
the level of risk inherent in funding SMEs – businesses that
are highly promising, but with less than transparent financial
dealings and records.
Most poignant in this murky situation is the apparent lack of
appreciation for the disparate economies that co-exist within
South Africa: (i) there is a developed segment of the economy
amenable to the architecture of South Africa’s first-rate financial
sector. (ii) There is a less-developed segment of the economy that
requires the financial architecture of an economic landscape akin
to those of frontier market economies, which are characterised
by high levels of information asymmetry and relatively high
transaction costs.
So how realistic are the NDP’s expectations of the banking
industry? Understanding the lay of the land makes it easier to
point to some useful ways forward. I order financial inclusion,
articulated as a priority by The Banking Association, as an
important starting point. I define financial inclusion as “(1)
pooling of the most available heap of investable funds possible
from all nooks and crannies of the economy and, (2) channeling
the pooled funds to attractive production activities, particularly
those of SMEs which are established engines of economic growth
and job creation across countries”2.
In other words, no matter what the banking industry and the
financial services sector do, without effective intermediation
they will be unsuccessful in aiding economic activity and
growth, whether by way of the NDP or any other development
programme. Effective intermediation is sequenced as: first, all
efforts at pooling available surplus funds and, second, every
endeavour to ensure the pooled funds reach the most attractive
job and output-creating economic activities, with inherent risks
traded and/or managed efficiently.
In the first step of the two-step process, the banking industry
is not exemplary in scouring the land for savings. Yet there is
support for the likelihood of higher saving, should high-regulated
minimum deposits be reconsidered – for example, the Mzansi
initiative enabled via the Financial Services Charter recorded
about 2.3 million new accounts. As The Banking Association
has amply shown, the banking industry is not necessarily in
competition with other financial services firms which identify
and serve unfilled market niches. Efforts such as Mzansi and
Capitec’s funds-pooling models should be encouraged, with
sensible prudential supervision in tandem. In the same vein,
Micro-Finance Institutions (MFIs), which focus on microsaving activities, are instructive and are available for adoption
and adaptation at minimal cost. These models will measurably
increase the pool of investable funds, which in turn would
increase credit provision across all forms of credit consumers.
On the second leg of the intermediation sequencing, let’s start
by examining financing models that can aid the NDP’s goal
of creating millions of jobs via services-based SMEs. Success
here will have the twin effects of reducing South Africa’s
unemployment and narrowing the inequality gap. Recall that
the main reason for the high-financing gap in the SMEs space is
the banking industry’s apparent lack of appreciation for South
Africa’s two-in-one economy, with SMEs not appropriately
viewed as existing in a space different from one that banks
are accustomed to and, for instance, ill-advisedly accepting
the regulatory constraints of Basel accords when considering
SME funding.
Besides amply documented activities of MFIs, the venture
capital model is one that appears quite suited to the South
African situation. For one, its partnership organisational
form permits the general partner to take on the kind of high,
unlimited liability that tends to preclude SMEs from accessing
banking funds; so banks can come in with their funds as limited
partners. Second, the structure of funds provision to SMEs,
which bases capital release (in tranches) on scaling specific
hurdles, reduces the feared risk of moral hazards. Third, the
tendency that general partners (who by design serve on
management team of venture firms) tend to possess expertise
relevant to the businesses they finance, would enhance the
corporat