*This content is sponsored by RMB, a diversified financial services brand encompassing investment banking, fund management, private wealth management and advisory services.
By James Formby*
Repeated calls for the nationalisation of South Africa’s banks, and the frequent habit of bank bashing does not help a sector which is so critical to the proper functioning of a country’s economy. Added to this is increased pressure on the sector from the recent downgrade by S&P with Moody’s expected to follow. South Africa’s financial system has always been highly regarded across the world because of its good governance and structures. But the integrity of financial market infrastructure needs to be maintained to ensure the country’s future prosperity.
South Africa’s standing in world rankings has already fallen, as illustrated in a number of recent independent surveys, including Rand Merchant Bank’s recently released eighth edition of Where to Invest in Africa which plots the investment potential of African economies using Investment Attractiveness rankings, balancing economic activity against the relative ease of doing business. For the first time, South Africa did not top the rankings – due mainly to sluggish GDP growth rates and mounting concerns over issues of institutional strength and governance. A key input into this ranking is the World Economic Forum’s (WEF) global competitiveness index which saw South Africa fall 14 places in its 2017-2018 rankings.
Concerningly for those operating in the banking sector, South Africa’s ranking for financial market development in the latest WEF report has fallen 33 places, from 11th in the 2016-2017 report. In 2014-2015, South Africa ranked 7th in the world for financial market development. Combined with a deterioration in the institutions pillar (South Africa is now ranked 76th, down from 40th in 2016-2017), this is particularly concerning for a country that has long taken pride in its banking system.
Banks make many beneficial contributions to the economy. Aside from the financial services sector as a whole contributing roughly 20% of South Africa’s GDP and being a material source of the country’s tax receipts, one of the primary roles of banks is to protect depositors’ money. Ordinary people entrust banks with their savings, which are used to generate economic returns. Banks also act as intermediaries, helping to ensure the efficient allocation of capital within an economy. As such, banks form an integral part of the country’s “soft” infrastructure.
Hard infrastructure is easy to see – it’s all around us, in roads, bridges and buildings – and key to driving economic growth is the development of this hard infrastructure. A significant amount of funding for major infrastructure projects comes from the banks arranging and structuring innovative funding solutions to address the country’s infrastructure deficit. Recently, banks have committed funding to enable the development of some of the world’s largest wind and solar energy projects being deployed under South Africa’s renewable energy programme. Banks have also supported the transformation journey in South Africa, advising on and funding black economic empowerment transactions.
But it is the less visible soft infrastructure which is arguably more important – functioning institutions and ecosystems that allow for the efficient operation of an economy.
Corporate and investment banks enable corporate South Africa, financial institutions and the public sector to execute large and complex transactions in South Africa and across different geographies. They execute day-to-day transactions, and help clients raise the capital (debt and equity) to facilitate their growth. The money to fund expansion also comes largely from banks. They also help clients mitigate some of their major risks and help smooth fluctuations in volatile variables like forex rates, interest rates and commodity prices, enhancing market efficiency.
Another key contributor to the strength of South Africa’s banking system is the South African Reserve Bank (SARB) which strives to achieve and maintain price stability, as well as ensure the efficient functioning of the country’s payment systems. The SARB has also played an integral part in ensuring that South Africa’s financial system continues to evolve and keep pace with global standards. Recent threats to undermine the independence of the institution should concern all South Africans.
As part of soft infrastructure, South Africa’s financial system is inherently fragile because its strength relies on ecosystems, institutional memory and sound regulation. It needs to be protected and maintained. If it is compromised, this can only have negative consequences for the future prosperity of our country.
- James Formby is chief executive of Rand Merchant Bank.