Considering the state of our economy, is there a place for another state bank?

Of late, there has been much debate in the media regarding the SA government’s plans to restructure and corporatise SAPO’s Postbank and to expand its range of services to include lending, bancassurance and other financial services. 

Postbank will assume its full retail banking role once it has secured a banking licence from the Reserve Bank, which will likely be granted in the 2024/25 financial year.

Regardless of what you may think of Postbank’s less-than-stellar performance over recent years and its near-bankrupt mother brand, SAPO, it offers several advantages that make it a serious contender. 

First, as a savings bank, it has a not-so-insignificant customer base with approximately 6.2 million accounts, and according to the 2021/22 Annual Report, its asset base adds up to R13 billion.

While it has experienced challenges, Postbank is the enabler of Sassa grants to over 18 million South Africans. It currently processes 97% of grant payments using the National Payments System via ATMs and retailers.

Another significant plus is Postbank’s network of 2 400 branches (through SAPO), spread country-wide and especially strong in underserved rural areas.

And as financial inclusion has always been among Postbank’s core objectives, the bank offers affordable, straightforward banking services.

Now, that’s all well and good, but does South Africa need another state-owned financial institution in addition to the existing specialist entities with a national footprint – the Development Bank of Southern Africa (DBSA), Industrial Development Corporation (IDC), and the Land and Agricultural Development Bank of South Africa?

According to its 2022 Financial Statement, the DBSA earned a net profit of R3.8 billion, and its total asset, as of March 31, 2021, was R100 billion. 

In 2022, the IDC recorded a record funding of R16 billion to South African companies and grew its asset base to R177.4 billion.  

Unfortunately, the Land Bank has not enjoyed success in recent years. After defaulting in 2020, which led to credit rating downgrades, the Treasury allocated the bank a R5 billion bailout in 2021/22, and it will receive another R1 billion each for 2023 and 2024.

Despite this, our policymakers still exclaim a resounding ‘yes’ for transforming Postbank into a licenced, full-service state bank. They claim we cannot depend on commercial banks to introduce inclusive banking services, especially in underserved sectors.

The belief is that state banks are more willing to grant access to credit for individuals and businesses that do not meet the stringent loan requirements demanded by private banks.

Advocates of state banks also argue that state-owned institutions will challenge the dominance of our five leading institutions, which will encourage more competition throughout the industry.

However, others vehemently argue that the opposite is true, that state ownership of banks stunts economic growth and dampens financial development, especially considering the government’s regrettable record in running SOEs. 

As it would be controlled by those on the government’s payroll, a state bank could become vulnerable to political interference that would undermine efficiency.

The detractors also cite overly bureaucratic processes that would result in slower decision-making and outdated practices that would lead to poor customer service.

Moreover, a state bank may be exposed to higher financial risks by granting loans to unviable borrowers, leading to financial losses. And, as we have experienced with Land Bank, a non-performing state bank could be a drain on the fiscus.

As I see it, the bottom line is that there are strong arguments on both sides, which is why I am leaning towards a hybrid model—a public-private partnership (PPP) whereby the private sector has full responsibility for operating the bank. 

In this model, based on private equity principles, the state assumes the role of a limited partner. In contrast, a management company (ManCo), controlled by a private entity, plays the part of the general partner. The ManCo would be appointed in a transparent and meritocratic selection process.

With private sector participation, a hybrid model can introduce more expertise, efficiencies, and market discipline with a stronger focus on customer service. ManCo is expected to put skin in the game and would be incentivised to ensure complete alignment of interests.

In terms of governance, the ManCo would be governed by a management board approved by the regulator, with the participation of the limited partner (government) on an advisory board. This framework ensures minimum political interference, the main reason for government failures at many SOEs.

Diversifying the bank’s ownership can also mitigate the financial risks associated with state banks and lessen the burden on taxpayers, as the private sector has far more access to private investment vehicles.

On its path to success, Postbank has already stated that it will introduce more transactional accounts, credit facilities, insurance products, saving products, and remittance services.

And offering affordable products and services would undoubtedly be attractive to low-income earners and the 6.5 million unbanked SA citizens. It will also provide alternative services to the estimated 15 million existing bank customers who are said to be under-banked.

There is a massive need for a bank to address the needs of these people, and I believe it’s highly achievable through a hybrid Postbank.