The simple reason why a state bank is unnecessary

There’s nothing about South Africa that makes it impossible to start a successful business here. Nothing that is, except the government. As the Free Market Foundation has been saying, high taxes and regulations add significant layers of uncertainty to the already risky process of starting a business.

This is a lesser problem if you already have access to money and can thus afford things like lawyers and accountants, it is a much bigger problem for the enterprising young person living in a township. Some regulations are quite absurd. For example, if you want to start growing and selling medical marijuana (a business that many poor people in townships are already involved in, albeit illegally), you have to comply with the conditions of a licence that could cost you R44,000 or more. This is according to regulations issued by the Minister of Health in April 2019.

Nowhere in the economy is the difference between the haves and have nots as stark as in the economic sectors where the government applies the most stringent regulations. Ultimately, regulation causes the very thing that governments claim to hate: concentration of industry. The rich can afford to comply while the poor cannot, it is as simple as that.

This is especially true of the financial industry. In recent years South Africans have been hearing calls from our latter-day socialists for the establishment of a state bank to service poor black people, but we already have proto-financial institutions in the form of the so-called mashonisas (loan sharks). The problem? South Africa’s elites confuse their own wants and needs with those of everyone else, especially the poor.

This means that mashonisas are not recognised for the vital role they play in the lives of many poor people because their financial and credit needs are not the same as that of policy-makers. I still remember when I got my first job in 2012, I had to attend training for the first month without pay. Mashonisas filled the gap at least for the first three months, I used the loans to pay for transport and other costs.

Now, mashonisas currently provide pay-day finance to people who do not qualify for loans anywhere else because of their risk profile, these businesses can be found in virtually any workplace in South Africa. Every workplace I have ever been a part of has had a resident mashonisa, even though most of these were illegal. It just goes to show that government cannot abolish a business for which demand exists, it can only drive it underground and make it riskier, including forcing market participants to engage in violence in resolving their disputes because they cannot take each other to court.

What would it take for a mashonisa or a stokvel to become a legal commercial or mutual bank?

It turns out that the requirements for a banking licence in South Africa are explicitly anti-poor and anti-small business. For a mutual bank (bank in which depositors own the bank, (comparable to a stokvel), prospective entrepreneurs will require at least R10 million in capital. This is in addition to regulations on interest by the National Credit Act (which means if your customers’ profile is inherently risky you cannot adjust interest rates to account for this).

The Reserve Bank, as the prudential authority, can also add further requirements based on their judgement of what is in the public interest. In reality, the public interest is in the eye of the beholder. I would say if a bank can attract depositors and borrowers, then, clearly, its operations are in the public interest.

You might think the conditions for starting a mutual bank are bad, considering the capital requirements for a commercial bank. If you are considering registering your own banking start-up you will need a cool R250 million in capital. It is also forbidden for any single person or entity to own more than 15% of the bank, meaning an essential tool for raising venture capital is  less available (exchanging equity for operating capital).

Clearly, setting up a bank is outside the reach of any enterprising poor young person who could start out taking small deposits (in the order of R100) and giving out small loans. This is despite the fact that mashonisas in townships and most workplaces in South Africa are already engaged in small-scale lending, illegally according to the current regulations. Considering the fact that banking in Europe began with small-scale money-changers and lenders that eventually grew into giant businesses, the current regulatory regime is simply not appropriate for a poor country like South Africa.

Politicians through regulation have created exactly the problem that they now propose to solve through further regulation and the creation of a state bank. South Africa is not lacking in poor black people who can start small businesses in the banking sector. It is the high start-up costs imposed by the government that make this virtually impossible. There’s no denying that a consequence of deregulating this sector would also entail an increase in the number of banks that fail. That would be fine, as long as customers have choice and access to banks that offer more or less security.

The market allows each individual to define their own risk appetite. Government regulation does not actually do away with this, it just makes it a privilege of the rich. The assumption underlying all regulation is that the poor cannot be trusted with risk while the rich can (remember, the higher the risk, the greater the reward). The cost of compliance invariably comes down to money: whether paying for consultants, paying for someone to spend time on your behalf filling in forms, capital requirements, licence fees etc.

The South African government simply cannot claim to be pro-poor while the poor are confronted with so much regulation when they dare start their own businesses, even businesses that they are already running through the black market. A pro-poor government would go on a massive drive to deregulate each and every sector of the economy, this would, of course, require ignoring the naysayers in their ivory towers who don’t know what it is like to go to bed on an empty stomach. Everyone who understands what it means to be poor will understand why it is a moral imperative of the highest order to deregulate the economy.

Poverty will not decline until poor people are allowed to make their own choices. This is true whether we are talking about communal land, employment contracts or regulations on banking and other industries. Having choices also means the possibility of failure. If we cannot accept that poor adults are not children, poverty is going to be with us for a while yet.