SA’s small banks are struggling. It is time to rethink the regulatory regime they are subject to.

Sasfin, which was last week fined R210m, of which R50m is suspended, for violations of foreign exchange regulations, is delisting from the JSE and refocusing on its wealth management business.

Bank Zero, which registered as a mutual bank six years ago, has so far managed to gather just R288m in deposits.

Tyme Bank, which obtained a banking licence in 2017, was carrying cumulative losses of R6.8bn in its financials for the year to June 2023, causing its auditors to raise uncertainty about its going concern status. It has since done deals to bring in more funding and has been gaining market share but has still only managed to build R6.4bn in deposits.

African Bank, which emerged from a rescue process in 2016, functions under an awkward shareholding, with the SA Reserve Bank still holding 50% and its competitors 25%. Efforts to sell or list the entity have so far failed, while its market share in its traditional business of unsecured loans has been plummeting. African Bank has been hoovering up assets to try build scale, buying out Grindrod Bank, uBank and parts of Sasfin.

Bidvest Bank is up for sale by its industrial conglomerate holding company after losing market share for five years. African Bank may well add to its collection.

The one exception is Discovery Bank, thanks to the traction it has been able to gain due to its existing financial services businesses, particularly the Vitality loyalty programme. Having kicked off in 2019, it has built a deposit base of R18.5bn and has been growing its lending books at an accelerating rate, though it is still not making a profit.

The other new entrant is Old Mutual Bank, a new licence obtained by the insurers after it exited its controlling interest in Nedbank in 2018. Similar to Discovery, this will be viable simply by leveraging the group’s existing client base, which already sits on swathes of cash assets through money market accounts and deposits in other banks that can be redirected into an in-house bank.

Bleak scenario

All told, it’s a bleak scenario if you believe that new entrant banks are important to the competitiveness of the banking sector.

This may be what Reserve Bank deputy governor and head of the Prudential Authority Fundi Tshazibana had in mind when she commented earlier this month that she would support improved “tiering” of the banking sector. Smaller banks see financial regulation as disproportionate compared with the benefits.

Several countries worldwide are concerned about the proportionality of their banking regulations, which have been overhauled after the 2008/09 financial crash. That overhaul was focused on globally systemically important banks, yet the rules regarding capitalisation, liquidity and funding ratios have often been applied without discrimination across domestic banking sectors. SA’s Banks Act, written in 1990, did not anticipate a future in which all banks would be subject to a standardised and strenuous global capital accord.

Switzerland and the UK have been working on tiering their banking sectors so that small, less complex and nonsystemic banks can get a lighter touch with a purpose-built regulatory regime. This can help them be competitive and agile, giving them a better shot at disrupting the wider banking market.

In the SA context, a tiering of sorts exists, with the Mutual Banks Act providing for a much less onerous banking licence. These need only R10m of capital as opposed to R250m and get a much trimmed down form of Basel rules. However, the Mutual Banks Act is an accident of history, created in the great rationalisation of building societies in the early 1990s. Those which use the licence, including Bank Zero, Finbond Bank and the notorious VBS Mutual Bank, as well as new entrant Young Women in Business Network, do not use it because of the mutual features of ownership, but because of the less onerous compliance requirements.

Overhaul 

The National Treasury and the PA are considering the mutual features of the Mutual Banks Act and whether these are appropriate. The deputy governor is on to something — SA does need a proper second-tier banking regime, and the Mutual Banks Act is a poor substitute for one. The debate is whether there should be an overhaul of the Banks Act, or perhaps the Mutual Banks Act, or whether the PA should itself overhaul the way it applies Basel 3, using the national discretion that Basel provides for.

My inclination is to prefer a legislative approach that establishes a clear second-tier banking regime, which seems to be Tshazibana’s preference too, given her call for policy guidance from National Treasury. But, as the extensive process to draw up the Conduct of Financial Institutions Act illustrates, major pieces of financial sector legislation are huge undertakings.

The PA could instead be a rule maker rather than rule taker by using its discretion under Basel to create a new prudential framework for smaller, simpler, banks with more relaxed rules for capital, disclosure and liquidity. It may require some amendment to legislation to give the PA the right level of authority, but this would be easier than a legislative overhaul.

The travails of small banks do strongly suggest the pendulum has swung too far. Stringency may make the system safer, but at the cost of unnecessary bureaucracy and the competitiveness of the sector. Consumers suffer from the lack of innovation and cost competition. A debate on how to shift the pendulum back the other way is welcome.