Financial services sector must meet its challenges head on
“The banking and financial services sector plays a critical role in the realisation of the developmental aspirations of any country, including South Africa,” said Finance Minister Pravin Gordhan. He was the keynote speaker at the Banking Association 2nd Banking Summit held at the Crowne Plaza Hotel in Johannesburg, 23 August 2011. The summit, Towards a Globally Competitive Banking Sector, served as a platform for an open engagement and ideas exchange on how the banking sector faces up to the so-called “new normal”.
The summit took place in the aftermath of the most significant financial crisis the world has ever experienced. And although the financial system meltdown played out late-2007 and early 2008, we are still battling the tail-end of the crisis. In recent weeks we’ve witnessed the impact of ongoing European sovereign debt concerns as well as the US debt default debacle and subsequent ratings agency downgrades on markets. The reason: It takes economies much longer to recover from recessions triggered by financial events. The world is now in the third phase of recovery – we’ve survived the prolonged fall in global asset prices, experienced a deep decline in employment numbers and are now battling an explosion of government debt.
Banks will lead South Africa Inc forward
South Africa has learned from the crisis. We now know, for example, that we must take a holistic or system-wide view of the financial sector (by considering both the soundness of the institutions within the system and the system as a whole). In addition we must find ways to tackle the challenges of moral hazard, privatising gains and socialising costs, and the interconnectedness of markets. “The risks emanating from one part of the system can be transmitted across borders at the speed of light!” said Gordhan. Some of our planned responses to the crisis were spelled out in the National Treasury document A Safer Financial Sector to Serve South Africa Better. Our main defence against future financial system collapse will be to move to a ‘Twin Peaks’ model of banking system regulation, which separates the task into prudential oversight (under the SA Reserve Bank) and market conduct and consumer issues (under the Financial Services Board).
Why is this important? Because the financial services sector – banks in particular – plays a crucial role in the economy. Banks are catalysts for economic growth and create platforms for citizens to transact for goods and services… To illustrate, the financial services sector contributes approximately 10.5% of South Africa’s annual GDP and employs about 250 000 people (4% of the formally employed in the country). “Banks have a huge role to play in achieving the targets in government’s New Growth Plan,” said Gordhan. As part of this plan government hopes to create five million new and sustainable jobs by 2020.
Aside from regulatory issues one of the major challenges for South Africa’s banking sector is to become more inclusive. Despite the sector’s best efforts to date only 63% of South African adults have bank accounts… Gordhan issued a challenge to the industry to leverage recent improvements in technology – especially mobile banking – to extend this reach to 70% by year-end 2013. The usual plea for reductions in banking, insurance and savings costs was also issued – with a warning that Treasury could take a tougher stance in forcing costs down in future.
More competition to bank the un-banked
South Africa’s banking sector is dominated by the so-called “big four” which accounted for 84.6% of the sector’s total balance sheet at year-end 2010. Gordhan said there was a need to create diversity in the sector and thereby engender healthier levels of competition. He mentioned the move toward co-operative banks. In recent years two such banks have been registered with another 19 applications under consideration. There was also a healthy trend towards community-based cooperative financial institutions, which currently account for around R175 million in assets under management. The Minister has requested that the development agency meet with the banking sector and cooperatives to formalise the sector and investigate its growth needs.
His final appeal was for to banks to do more to boost small business. “Our view is that the domestic banking sector can do more to boost the SMME sector,” he said, before lamenting the decline in SMME lending (as a percentage of gross credit extension) from 16% end 2009 to just 10.4% in June 2011! Gordhan ended his speech with a plea to all stakeholders to work together to “build a safer financial sector to serve South Africa better!”
Editor’s thoughts: South Africa’s banking system seems to be in good shape – and we believe the “Twin Peaks” model proposed by National Treasury will go a long way to weathering future financial storms. The big question is whether Treasury’s goal for an inclusive financial services sector can be met against the backdrop of declining fees. Banks are in business for profit – and the more marginal services they extend to the poor – the more they will want to squeeze from their wealthy clients. Can financial services providers cut costs in the face of spiralling regulation and continued calls for greater inclusion? Please add your comment below, or send it to [email protected]
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