It may be premature for South Africa to set up a state bank, without the government first looking at other means to get banks to lend more to small businesses – as a number of its emerging economy peers currently do.
The debate over a state bank has hotted up since South Africa's former Reserve Bank governor Tito Mboweni (pictured above) suggested last year that the government should buy one of the country’s banks.
First off despite their popularity in a few emerging nations like China, India and Brazil, state banks are no longer the vogue – with government ownership of banking assets having fallen from 40% in 1970s to 19% by 2009, following privatisations.
There is some concern too that state banks often funnel loans to political connections. Another is that they are operate less effectively than private banks do.
Economist Eduardo Levy Yeyati (pictured below) and his colleagues argue in a 2004 report that state ownership of banks can benefit growth, but only in countries with highly developed financial systems. They believe this is because countries with well-developed financial systems are better equipped to deal with the distortions that arise from government ownership of banks. South Africa fits this bill. But concerns over corruption may mitigate against a state bank.
Three ideas to consider
A better idea may be for the state to rather use various carrot and stick methods to get private banks to increase funding to small firms without having to set up a state bank. Here below are three.
The first involves the state covering some of private banks’ risk of lending to small firms by using credit guarantees – essentially where the state pledges to cover a certain promotion of a risky loan. This increases the bank’s willingness to fund small firms.
The Small Enterprise Finance Agency (Sefa) is attempting to revive its credit guarantee scheme – which in 2013/14 saw a mere $1.2 million (R13.8 million) go to 21 firms. In comparison Chile’s Fogape lent out $1.4 billion (R15.6 billion) to 48 489 firms in 2013.
Another way to improve loans to small firms is for the state to improve ways to calculate and report on the risk of small businesses for banks.
Malaysia has been able to boost loans and lower default rates through the introduction of a credit bureau for SMEs and a credit reporting system.
Since the implementation of the system in 2001, outstanding loans grew at an annual average rate of 9% to 2012, while the overall impairment ratio showed a significant decline from its peak of 16% in 2001 to 2% in 2012, according to the country’s reserve bank.
Finally one can opt to impose targets on bank lending to small businesses with fines for those that don’t meet these. An ideal place to put them would be the Financial Sector Code.
In India banks must channel 40% (32% for some foreign banks) of lending to priority sectors, which includes small businesses and the agricultural sector as well as others.
Those banks that do not reach these targets are penalised by having to deposit the shortfall in a fund for rural development or another for small business development.
A 2013 report by economics academic Najmi Shabbir reveals that in recent years state-owned banks have given out a higher share of loans to small businesses than commercial banks, with the former’s share at 15% of net bank credit in 2011, compared to 10% for commercial banks.
Chartering the way forward
South Africa’s current Financial Sector Code, launched in 2013, lumps lending by banks to black small businesses together with other targets, such as low-cost housing and sets banks a target of R48 billion for targeted investments by 2017.
While banks exceeded the targets they set for themselves in the first charter, there are no penalties for banks that don’t their meet targets, which as they are set by banks themselves may even be set artificially low. Getting a state body involved may help.
It’s vital to get banks involved, as the state’s portion of lending to small business is dwarfed by banks which account for 75% to 95% of finance to the sector (according to the author's own calculations based on a banking sector presentation, as well as Reserve Bank data and annual reports of government agencies).
But banks must be made to increase mentoring and support programme so that funding increases are linked to bankable business ideas. If not banks might be forced into swallowing huge losses which may rock the country’s entire financial system. Getting banks to play ball while increasing the number of bankable ideas will be the state’s main challenge.
Timm writes on small business. He is presently in Cape Town, South Africa. Click here to sign up to his monthly newsletter. Follow him on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a