About cartels, price fixers and radical transformation…
Never mind a state bank Jacob Zuma, how about we apply your radicalism to the current structure first?
On the 9th of February 2017, President Jacob Zuma – in full possession of his newfound commitment to all things radical – pronounced in the annual State of the Nation Address that the ANC would now be more radical in pursuing all matters of social justice. Very few people believed him or even understood what he meant.
On the 15th of February, the Competition Commission announced that 17 local and international banks, had been engaging in collusion aimed at manipulating the currency. Included in the list – were ABSA, Investec and Standard Bank. Everybody was shocked but yet again, very few people understood what exactly happened.
On the 24th of February – the rather stoic premier of the North West province – Supra Mahumapelo – announced that he had been in contact with Maria Ramos who is the CEO of ABSA (and former salesperson of strategic state assets to random foreigners). It appears that Supra plans on moving R20 billion of the province’s money away from ABSA to VBS (they of the obscure corporate profile). VBS is very famous for its infamous loan to the president. Very few people know what else it can do. So naturally, when Supra threatened to move R20 billion to VBS, very few people took him seriously.
On the 27th of February 2017 – Nedbank announced that it had been awarded – for the third consecutive time – the right to be the primary bankers for the Western Cape Government for the next 5 years. Because it is Nedbank and the Western Cape has tendencies of being a self-governing colony, very few people noticed.
In other words, during the course of one month, South Africa was thrown back to the colonial age. We have a president making bold pronouncements regarding plans he has no intention of ever executing (wake up Paul Kruger). We have discovered that the banks have yet again been in collusion to screw us all (ever heard of ROCO?). And the Cape government is banking with the green bank (flashbacks to the Cape of Good Hope Bank).
What was different this time was the fact that a lot of people – hysterical over the collusion saga – then started calling for the development of a state bank to solve all our problems. Included in the list of people who seem to believe that a state bank is what we need are the president and the ANC Youth League. What they seem to share in common is a complete lack of context regarding the desirability of a state bank. We have been here before – and it didn’t end well. Thanks to an entity now called Nedbank.
In the winter of 1793, the governing Commissioners of the Cape Colony set up the Loan Bank – which was a government-owned bank aimed at creating stability in the economy. This was essentially South Africa’s first bank and changed its name to the Lombard Bank in 1795. The profits made by the bank were regarded as an important source of funds for the state. Back then – unlike today – the government seemed to know exactly what the desired economic structure needed to look like. So when a certain JB Ebden attempted to open up his own private bank in 1826, this was blocked by the government.
But this state bank had this habit of well – running out of money. Not because the bank was a problem but because the demands made by the Cape business elite often exceeded the available funds. The government then had a monopoly on banking from 1793 to 1837 and this monopoly extended to other sectors including conveyancing, surveying and of course – slavery. The monopoly was only broken in 1837, precisely 180 years before Jacob Zuma’s radical speech – when the first private bank was established in Cape Town. The bank was known as the Cape of Good Hope Bank it set out to compete with the state bank and was immediately followed – in 1838 – by the creation of the Board of Executors (the BoE Bank).
The growth of the private banking system continued throughout the 1800s and was highlighted by the founding of Standard Bank in 1862 and the arrival – in 1888 – of the Nederlandsche Bank (the modern-day Nedbank). Nedbank was incorporated in Amsterdam and originally had desires to take over the whole banking system in the country. Having been intimately associated with the Dutch East India Company that had delivered Jan van Riebeck in 1652, Nedbank had strong intercontinental connections, and actually pioneered commercial banking in South Africa which distinguished it from the state bank that had a rather narrow focus.
What also made Nedbank different from the other smaller banks is that they had all been created essentially to fund the farmers in their jurisdictions. Therefore the sustainability of the smaller banks was linked to the fortunes of the dominant crops in that area. Whenever a drought or a plague hit the area, the farmers and indeed the banks that funded them, would go bankrupt. The banks that survived then had a more diverse client base that didn’t depend only on the agriculture sector. By the time the 1920s arrived, Nedbank alongside the Standard Bank and the ambitiously-named National Bank, were the dominant players in the market with a national rather than regional footprint. In an attempt to be the market leader, the National Bank engaged in reckless lending and essentially collapsed in 1925.
However, a saviour was found in the form of Barclays which bought out the National Bank in 1926. The 3 dominant banks at that stage formed a banking cartel known as the ‘Register of Co-operation’ (ROCO) which simply means that they would decide amongst themselves what interest rates and commissions they needed to charge. This killed off all competition and restricted market access to just these banks. In this era, regulation was non-existent as the Reserve Bank was only created in 1921 and wasn’t even ready to intervene when National Bank collapsed and had to be bailed out by Barclays in 1925/6. So thoroughly spineless was the Reserve Bank its first Deputy Governor was a man named Jorrison. He was an executive from Nedbank who had been completely opposed to the creation of the Reserve Bank. So in order to silence him – he was made a Deputy Governor of the bank and was now in a prime position to actually influence the policy of the Reserve Bank.
This cartel operated with impunity throughout the 1900s and was only disrupted by that great drama that was witnessed when Jan Smuts lost the 1948 general election to the National Party. Adamant that the 3 banks in existence were inherently biased towards the English and Jewish business elite, the National Party promptly created Volkskas Bank and – in a stroke of genius – immediately transferred all government accounts to Volkskas (long before Supra thought about such things). Still, the 3 big banks thought this was a temporary problem and only became aware that they were in trouble when the National Party won re-election in the 1952 elections. At that stage, Nedbank realised that Volkskas was growing larger each day and then decided to betray its own brothers in the cartel by quoting lower prices than Standard and Barclays. In addition to screwing over the 2 cartel members, Nedbank also targeted the much smaller building societies by offering interest rates for deposits that were higher than what the building societies could offer. This protected Nedbank temporarily from losing market share until the National Party struck again by opening another bank – the Trust Bank.
What distinguished Trust Bank from Volkskas was that Volkskas focused on the Afrikaans clientele and Trust Bank positioned itself as more cosmopolitan with the intention of appealing to the Jewish and English business sector. In its attempts to drag customers away from the big 3, Trust Bank became the first bank to offer overdrafts which came in the form of notes that indicated how much the bank was owed. Trust Bank aggressively marketed this product to the English community and new Afrikaans middle class – newly elevated into economic participation by the National Party having won the elections (remember the promise of BEE?). This included offering credit at lower rates so that the Afrikaner middle class could at least get a foot in the door. Inevitably, such a business model turned out to be flawed and Trust Bank collapsed at the end of the 1960s. It was then bailed out by the National Party. The interesting part of this approach is that Trust Bank was essentially allowed to run rogue and give a chance to the Afrikaner middle class for them to access the economy. By the time it failed – the National Party was happy to bail it out; but more importantly, a lot more Afrikaner citizens had been integrated into the economy. And that Baba Zuma – is the definition of radical.
Through all these years, there were various building societies in operation. As part of its strategy of undermining the fellow members in the big 3 cartel, Nedbank also targeted the clients of the building societies by offering higher interest rates and essentially killed off building societies. The big 3 banks had traditionally avoided unusual transactions like car and furniture credit. One of the entities that exploited this gap, was the Schlesinger Organisation (using the Colonial Banking and Trust Company) which collaborated with the Sanger family and Western Credit Bank to create an entity called Wesbank. Wesbank turned out to be less profitable than expected and John Schlesinger sold the business to Anglo American which also then sold it to Barclays in 1975. What Wesbank did very well was introduce credit cards to the mass market – which the cartel of the big banks initially refused to do.
Through this time, Volkskas kept growing and in order to fight off this threat, the cartel members went on a path of consolidation through buying smaller banks; then acquiring the consumer finance banks like Wesbank and finally buying out the building societies. By the end of the 1980s, Volkskas and Bankorp had acquired most of the Afrikaans banks; Barclays had changed its name to First National Bank. Nedbank and Standard Bank made up the remainder of the big 4.
Through all these developments in banking history, an alternative form of banking remained in force. Building societies had been common across the world and were created primarily to assist members buy homes. They were community-based and had the focus of creating a funding base for the community to borrow and build properties without relying on the big banks which were actively manipulating interest rates. Once the Nedbank strategy of undercutting building societies became more effective the building societies then either sold themselves off to a traditional bank or allowed institutional investors to put money into the society. In light of these changes, building societies were then allowed to convert themselves into traditional banks if they wished to do so. The problem with this approach is that banks are required to keep large capital reserves – much higher than building societies. Another difference is that – due to their predominantly social mandate – building societies were granted tax privileges which enabled them to keep the cost of lending to their members lower than traditional banks. And then the Reserve Bank went into bed with the cartel.
Since its creation in 1921, the Reserve Bank enjoyed a disturbingly cosy relationship with the big 3 banks. After the National Party’s election in 1948, the Reserve Bank was then captured by the Broederbond with an explicit agenda of advancing the cause of the National Party’s banks (specifically Volkskas). The Reserve Bank engaged in a series of policy shifts that reinforced the stifling of competition in the banking sector. The cartel arrangement (ROCO) had worked as the formal arrangement between the banks that allowed them to set interest rates and prices that they wanted. The Reserve Bank was always are of this collusion, tolerated it and failed to intervene. This arrangement was only abandoned in 1983 after the De Kock Commission had been asked to investigate the money markets and interest rate policies in South Africa. De Kock recommended a clear separation between the banks and the Reserve Bank.
Unfortunately the Reserve Bank then decided that it would replace the commercial banks as the primary instrument of market manipulation.
Firstly the Reserve Bank designated the (now) big 4 banks as ‘too big to fail’. In other words if such banks screw up, the Reserve Bank is ready to intervene and help them out. Then the Reserve Bank decided that it would support the profit motive of the commercial banks through the repo rate system. In terms of this system, if the banks borrow money from the Reserve Bank they are charged a particular interest rate. They are then allowed to add a margin on that number and refer to it as the prime rate. So if the Reserve Bank lends money to the banks at the rate of 10%; then the rate the banks can charge at prime is 13,5% – this is the rate they give to their best clients. But – to pause for a moment – the rate of 3,5% is not a scientific number, it is simply what the banks and the Reserve Bank agreed should be the spread.
In its radical days, the National Party actively intervened in this margin in order to facilitate life into the economy. Now we need to remember that this margin is an important instrument of controlling the economy. If the margin is wide it really means that the cost of borrowing for the consumers is excessive and this impacts on economic growth. If the margin is reduced then the cost of economic participation is significantly lowered. And the National Party understood this quite well. So the margin from 1946 to 1958 was only 1,5% (less than half of what the ANC allows the rate to be). From 1958, the margin was adjusted to 2% and was maintained for the majority of the remainder of the National Party’s time in office. And yet, when the ANC came into power, it then decided that the margin should actually increase to 3,5%. So we had a National Party that decided that 1,5% was an acceptable margin; and an ANC decides that 3,5% is the answer. The banking cartel are the chief beneficiaries of this as they simply increase their profits.
Even more disturbingly, the ability of the banks to charge a margin of 3,5% means that they can validly tell anyone who needs to borrow that they have to charge prime as a minimum. However, in their assessments, the banks will look at particular factors before deciding on an interest rate. So if you have high disposable income, you are good. And if you have other assets already – then you are even better. This is referred to as an assessment of one’s risk profile. If your risk profile is low – in other words, high disposable income and old assets – the banks can even offer you a rate below prime. Disturbingly, in light of the fact that white households have at least 5 times the average earnings of black households, you can guess who is likely to end up with a rate below prime in South Africa.
Then it gets worse, because if I want to build a house in Soweto then my risk profile is actually worse than the one trying to build in Sandton – so then I end up being charged prime plus. And that Jacob Zuma – is the crux of the South African problem. The interest differential the banks generate from the black, ‘high risk’ clients is the backbone of the banking industry. And it starts off by the Reserve Bank insisting that 3,5% is the margin. This is the type of nonsense you should be talking about if you want to be radical. And until the Reserve Bank can prove that a margin lower than 3,5% is a problem – I remain convinced that you are likely to implement your newfound radicalism if you actually start by interrogating this.
In 1997, Fitch (yep, that ratings agency that you hate so much) published a report that indicated that the South African big 4 banks’ net interest margins (the difference between the interest paid by the banks – primarily to the Reserve Bank – and the interest they charge to you and I) – was amongst the highest in the world. This is facilitated by the fact that the Reserve Bank gives the banks such great flexibility in setting interest rates. So when I hear that the President is trying to be radical I would think he would firstly advocate for the reduction in this spread so that the cost of funding is cheaper for his own constituency. Apparently I would be wrong.
Given that you are in a radical mood these days – I would recommend that next time you head out to Parliament, please obtain a sample of bank loans for houses in Soweto, Soshanguve, Midrand, Sandton and Clifton and simply check who gets interest rates below prime. Then we can actually take your radicalism seriously.
The fact that the Reserve Bank maintains such an incestuous relationship with the banks is just one problem. It is how the Reserve Bank decided to facilitate the death of the Building societies that should really be the centrepiece of your economic radicalism debate.
Since 1986, the building societies were regulated by the Building Societies Act. The Act understood the role of the building societies in facilitating credit for communities. Given the profile of their business and the low risk attached to it, the capital requirements for building societies were much lower than the traditional banks. When the very Broederbond Reserve Bank governor Chris Stals intervened however, the building societies were now required to hold the same capital reserves as the traditional banks. This made no sense. In addition to this, the one remaining advantage for building societies – the tax privileges – were rapidly dismantled by the finance minister of that age – Derek Keys. Unfortunately Codesa decided that Chris Stals had to remain in his position after democracy and Derek Keys had to be the Finance Minister – even though he had no connection to the ANC. Eventually he ditched Nelson Mandela’s cabinet in 1996 and was replaced by Chris Liebenberg – who then became the chairman of Nedbank. Remember that Jacob?
And when it couldn’t get worse; the Reserve Bank then issued the new Mutual Banks Act in 1993 to regulate building societies. The Act then said that mutual banks had to be registered twice. The first registration would result in a provisional licence which would be confirmed as a permanent licence 5 years later. The result of all these activities simply meant that mutual banks were locked out of the market and the primary beneficiaries of this process were the banks which had now taken over the role played by the building societies. That should have been the end of building societies as we know it – thank you Nedbank and Chris Stals. Except there was one problem.
Throughout all these interventions, Nedbank and the other members of the banking cartel had failed to penetrate one particular market – the black homelands. Three in particular – Bophuthatswana, Ciskei and Venda – remained untouched by the Nedbank march. But of course it went wrong. Albert Vermaas – a senior manager at Volkskas Bank – headed off to Ciskei with the simple mandate of destroying the Ciskei Community Bank and drive it to bankruptcy. The Harms Commission appointed by PW Botha investigated this episode and concluded that the Reserve Bank; the Banking Regulator and indeed SARS had actually assisted Vermaas in defrauding the Ciskei Bank. Which – when you look at the individuals that ran those institutions at that point – should not be surprising at all. The Bophuthatswana Building Society did not survive the siege – and merged with 2 other banks to form the now defunct Future Bank Corporation. And remarkably – just one building society from the homelands survived – the Venda Building Society.
After 1994 the Venda homeland was incorporated into South Africa and suddenly the Nedbank brigade had access to the Venda market. It would have been easy to understand if VBS had been competing on equal terms with the banks – but it wasn’t. Because VBS maintained its identity as a building society now regulated by the Mutual Banks Act; it was firstly subjected to provisional registration. This means that if you and I had walked into VBS immediately after 1994 we would hear of a provisional registration whilst the Nedbank across the road would have a permanent registration as a bank. Naturally, human instinct dictates that Nedbank is a safer option. Immediately the innocent customer who is unaware of the distinction between the provisional and final registration would prefer Nedbank. And that is how the Reserve Bank facilitated the death of mutual banks in South Africa. The Reserve Bank only finalised the VBS licence in 2000. Somehow, VBS Mutual Bank survived.
Nedbank’s fortunes took a turn for the worse after liberation. Having been the trailblazer in the industry since 1888, the bank discovered that its approach to banking was outdated in the new South Africa. Then it went on a drive to acquire other banks. In order to be black, it came up with People’s Bank. In order to increase its high-end footprint, it acquired the original private banks – Cape of Good Hope and BoE. And then it went a bit wrong. Nedbank then decided to use loans to fund the purchase of BoE – which turned out to be a disaster. In addition, Nedbank had decided that the Rand was heading for a collapse and bought all sorts of fancy instruments that would make them billions if the Rand collapsed. Unfortunately for Nedbank, the Rand recovered from R13 against the US dollar to R6 – which was a catastrophe for Nedbank. It reported a loss or R1,6 billion in 2002. Nedbank didn’t just sit out the current collusion saga because of their superior ethics – they have a R1,6 billion scar to explain why they need to avoid currency speculation! Luckily for its CEO – Richard Laubscher – the scar was made better by the fact that Nedbank fired him; but gave him R37 million for his efforts.
Last month, Nedbank won the right to be the primary banker for the government of the Western Cape – and this will make them a lot of money. Supra’s wishes are subject to a different set of circumstances. VBS does not have a branch network throughout the country – and they don’t need it. What is important about Supra’s wishes however is the fact that state departments and provinces have a primary and a secondary account. As far as distributions from national treasury to provinces are concerned, there is simply one transfer from treasury to a primary bank account. A province then needs to distribute such funds to its own departments – this can be through the secondary account. So on the question of whether VBS or any other small bank needs to invest in a branch network in order to participate in the state banking process – there is no such need.
The case would be different for a municipality however as it then transacts with thousands of ratepayers who might need to access a physical branch. And it is not just VBS that should be part of this conversation; all small banks should be given an opportunity to participate in meaningful state activities. Supra may well be able to move the province’s banking away from ABSA; but this is a small step in what ought to be a giant leap towards radical transformation of the banking sector. It is quite rare that opportunity arrives at the same time that political rhetoric needs it to do so. This is one such opportunity. Unfortunately I suspect that in spite of the radical economic transformation talk; our provincial governments are still likely to give banking contracts to the big 4 cartel. It is especially ironic that Nedbank – which facilitated the destruction of the state bank in the 1800s in its capacity as the Cape of Good Hope and BoE – remains at the forefront of banking for the state.
So Jacob Zuma, the idea of a state bank is not really about opening up a new bank but rather what such a step seeks to achieve. If your target is the de-racialisation of the banks and the break-up of the monopoly – you know exactly what you need to do. Instruct your Treasury to bring in the smaller banks – African Bank; Capitec; Ithala, VBS and even the Post Office in to the conversation.
If you want the banks to facilitate greater economic participation for black people, then you need to chat to the Reserve Bank about the 3,5% margin. Be radical. Tell them that the maximum margin to be charged on anyone buying a first property should be capped at 1%, 2% – anything that makes sense, just bloody well do something! �And if you want us to remember you as the guy that threatened to be radical and completely failed to do so – well, go ask Nedbank for a bond for a property in the township and tell me what interest rate they quote you.
Sadly VBS suffers from its tragedy of association with your loan – but then again you have been banking with the big 4 cartel since your return from exile and no one seems to find that problematic. So screw that problem.
Just go ahead and be radical Baba.
Just one last hint Jacob - remember when Nedbank lost R1,6 billion and fired its CEO? Well he wasn't the only executive that left Nedbank after that loss. The managing director for strategic business development also left Nedbank after Richard Laubscher.
That director's name was Sipho Pityana. Ever heard of him?
[Article references available on request from info@finequitytrading.com]
