Saturday, February 19, 2005

previous entry | main | next entry | TrackBack (0)

Deepening capital markets in South Africa

As part of's keen interest in the spread of financial services to the developing world (click here for an earlier example of this interest), Laurie Goering has a story in today's Chicago Tribune on the effort by South African banks to get South Africans comfortable with the idea of depositing their money in... banks:

In this nation where making a cash withdrawal at a teller's window can cost you $4 in fees, it's no surprise that more than 40 percent of adults have never opened a bank account.

But South Africa's banking fees, the highest in the world, are just one reason that 12 million South Africans don't use banks. Unemployment is rampant, and many people struggle to save even the minimum balance necessary to open an account. Millions live in rural villages miles beyond the reach of the nearest bank. In a 2003 private survey, a third of South Africans said they agreed that "you can easily live your life without having a bank account."

South Africa's government, and its banks, are trying to change that. Embarrassed that banking remains so inaccessible to black South Africans a decade after the end of apartheid and eager to tap into a vast market of potential customers, banks are launching a flurry of new promotions.

First National Bank offers the "Million-a-Month" account that gives each depositor one chance at a monthly $250,000 cash prize drawing for each $16 they keep in the bank. Absa, another bank, offers cut-rate funeral insurance with its accounts, a huge draw in a nation where tens of thousands are dying of AIDS.

Many banks now offer mobile automated teller machines, driven by truck into rural villages a couple of times a month, and Absa has come up with an entire 28-ton mobile bank, capable of being lifted by crane onto a truck and hauled wherever it is needed. Illiterate customers can open accounts and access money using only their fingerprints, recorded and checked via an electronic scanner.

"When you start talking with people about banking, they always bring up the negative things, like the high charges," said Innocentia Nkomo, an Absa branch manager in Dobsonville, a busy middle-class section of Soweto. "But once they see the benefits, they come flocking in."

At the heart of the effort to broaden the reach of banking is the new national Mzansi, or "southern," account. Launched in October by all the nation's major banks, it offers depositors a debit card and no-fee banking as long as transactions are limited to debit-card purchases, one deposit and a couple of ATM withdrawals per month.

In the first four months, more than a half-million Mzansi accounts have been opened, a rate well beyond the expectations of most banking officials.

"In 10 years' time I don't think there will be a person without a banking account in South Africa," predicted Tshidi Madisakoane, a floor manager at the bustling Dobsonville Absa branch. "The community is showing so much interest in banking now. Things have changed."

Read the whole thing.

As someone who knows very little about the South African financial sector, I have two questions after reading this piece:

1) Why the hell are South African banking fees to high?

2) Why aren't South African banks aggressively seeking to extend credit? That's both their greatest potential source of revenue, and the best way to foster entrepreneurial growth in the country.

posted by Dan on 02.19.05 at 12:19 PM


I have many friends from South Africa, and if I had to hedge my bet on any one factor, I would put it on crime. If I lived there, I would not want to be seen going in to and coming out of a bank. Collecting my money and hiding it in my household, where I would have a nice collection of armed shot guns, would be the safer choice. Otherwise, you are just asking to get mugged.

Of course, that is mainly do to the culture of poverty. Stimulate investment and create good jobs with good pay and crime will begin to dwindle. But with the current fear, that will be hard to do in the banking aspect. Law enforcement, therefore, would have to be the first step in the plan.

posted by: Robert Mayer on 02.19.05 at 12:19 PM [permalink]

I'm still waiting for ANC to impliment Mugabeenomics that seem to be working so well in the neighboring Zimbabwe.

posted by: BigFire on 02.19.05 at 12:19 PM [permalink]

Don't know about South Africa specifically, but banking fees in West Africa are high because

(1)the transactional costs are relatively high. Little is done electronically, data entry is often of the pen-and-paper variety, information is transferred via snail mail or courier, interaction with the client is always face-to-face. It can take weeks or months for local branches to co-ordinate transaction logs with the head office.

(2) The returns are dismally low; most clients cannot afford to put in more than a few dollars a month. Banks will put out the red carpet for customers with lots of cash, but winners in the chickenfeed sweepstakes are not worth the investment.

(3) security is a problem, in many ways, in countries where the rule of law is lax. clients don't trust banks not to rob them, banks don't trust clients not to defraud them, and old-fashioned robbers are always on the lookout for customers withdrawing a lot of cash. When my dad withdrew a large sum money for a house he was building in Nigeria, he got a free armed escort from the bank's downtown premises to the intercity highway.

As to the question of why banks don't aggressively extend credit, (I assume you mean to small-scale entrepreneurs, they have no problem with the big boys), the underlying contributing causes are weak rule of law, coupled with the trust-and-verification problem that comes with weak governmental infrastructure. (Microloans, carried out within existing rural tribal or village structures, with their own trust/verification structures, are another matter.).

In other words, imagine a country where birth records are not kept, most citizens have no ID, passports can be faked or bought easily, where most streets have no names and there is no ministry or parastatal that keeps track of residential or business addresses anyway, and there is little or no taxation, so no IRS, so no income records. How the hell does a bank know that a potential credit recipient is (a) who he says he is (b) runs the business he says he does, (c) earns what he says he earns (d) lives where he says he lives (e) owns the collateral he says he owns (f) and how the hell will a bank enforce any kind of contract with a weak, bribable, corrupt justicial apparatus - and still make money?

I visited a childhood friend of mine some years back in Nigeria. He was a fresh economics graduate and his first job was at a bank, as assistant loans officer. His task? Undercover background investigation of loans applicants. This meant going to the neighbourhood where the applicant lived, surreptitiously interviewing neighbours (so they wouldn't cover for him), watching to see if he in fact slept there every night etc. An enourmous amount of hassle just for one lousy loan. Any wonder that banks aren't so enthusiastic?

posted by: Elliott Oti on 02.19.05 at 12:19 PM [permalink]

Is Dan Drezner trying to pull our leg? I suspect that political correctness is rampant at the University of Chicago---but this is getting ridiculous. He knows very well why such problems exist in South Africa and much of the rest of the continent: the radical left pushed out the Europeans too prematurely before the indigenous folks were ready to handle their own affairs. It’s as simple as that. Banking problems? Heck, everyone should see “Hotel Rwanda.”

Look at the fool who is now the leader of South Africa. He even denies that AIDS is a real disease. There should have a deliberate and well thought out transfer of power. Instead, the whites handed over power to blacks utterly incapable of handling these responsibilities. A few more years would have made all the difference.

posted by: David Thomson on 02.19.05 at 12:19 PM [permalink]

Oti's comments above were good and I suggest you read them if you haven't.

The point I would emphasize would be the cultural one. Like anything else, business requires a certain amount of social capital, a culture in which mindsets appropriate to capitalism are prevalent. Dan's question about business loans assumes an entreprenurial mindset based on long-term calculation which does not come natural and does not exist in many countries. Charging high fees upfront, on the other hand, comes natural to the statist-minded who have - or believe they have - a captive market; you just soak people for what they have, even if it isn't productive or rational in the long-term.

I've never lived in South Africa, but I've lived in other developing countries where the culture of entrepreneurship hasn't taken root, and this doesn't just come naturally.

posted by: Kirk H. Sowell on 02.19.05 at 12:19 PM [permalink]

Having just visited Capetown for the second time in a year, I'm optimistic about the future of South Africa, but there is much higher than average risk in a country of over 40 million people, with about 25% incidence of HIV, 30% unemployment, and 50% living below the poverty line. Despite all that, South Africans of all economic classes seem generally happy and do not believe that their future looks like Zimbabwe.

As for banking issues, it appears to me that there is substantial competition among banks and I would suggest that market forces will push down banking fees and other barriers to consumers.

There is an essentially capitalist spirit in the country despite a generally ignorant and socialist-leaning government. In my many conversations with locals, including unemployed blacks in townships, nobody wanted a government handout. They simply wanted an opportunity to start their own businesses and the biggest hinderance was the unavailability of small business loans. This is one area where someone might be able to so some real good and earn profits at the same time.

Capetown is one of the world's great small cities. I highly recommend you visit. If the rand weakens substantially I will buy property there (unless the currency is reflecting political instability.)

posted by: Ross Kaminsky on 02.19.05 at 12:19 PM [permalink]

Do you really want to understand the destruction caused by the politically correct liberals? I have a very simple recommendation for you to consider: spend the next day imagining that the indigenous Africans are not black, but blond haired and blue eyed white people. It really is that simple. There is no reason to overcomplicate matters. Liberals get discombobulated when the issue of race is brought into the discussion. Their brains turn to mush.

See the movie, Hotel Rwanda. The Belgians were guilt tripped into leaving that nation before the natives (yes, let’s use blunt language) were ready to take over the responsibilities of running the government. Would that have occurred if they were white? Of course not.

posted by: David Thomson on 02.19.05 at 12:19 PM [permalink]

David Thompson writes: "He [Drezner] knows very well why such problems exist in South Africa and much of the rest of the continent: the radical left pushed out the Europeans too prematurely before the indigenous folks were ready to handle their own affairs. It’s as simple as that. Banking problems? Heck, everyone should see “Hotel Rwanda.”"

Ah, yes, the Rwandan genocide. Those black people are just so, backward, and evil, whyat with the planning and execution of genocides and the like. Thank god no white people have ever been caught doing that.

posted by: mrjauk on 02.19.05 at 12:19 PM [permalink]

Some of these comments are incredible, are people so prejudiced against "natives" anywhere in Africa that Rwandan genocide or nigerian corruption explain the finance decisions of poor south african blacks or even more incredibly the pricing decisions of (generally White managed) SA Banks.

The mind boggles.

posted by: tadhgin on 02.19.05 at 12:19 PM [permalink]

Post a Comment:


Email Address:



Remember your info?