Community banks are no longer a feature of banking in South Africa, largely due to draconian regulation.
Why aren’t there more local or community-owned banks in South Africa? The simple answer: the state and its over-criminalisation of society. Banking legislation puts unnecessary hurdles – and even criminal penalties – on the road to community banking.
As South Africans we would be familiar with businesses such as loan sharks. Granting credit is a highly regulated activity, mainly by the National Credit Act. When undertaken by banks, it is regulated by the Banks Act. Yet, we know that credit-granting still happens “illegally”.
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Activities that a bank would do are undertaken in ordinary everyday life by people. Yet despite the success of these individuals, it is difficult for them to formalise these institutions for scalability up to even the community level.
Stokvels and loan sharks are merely examples of the urge that South Africans have for less corporate, more communal banking. Politicians have also realised this and I believe that is why they like the idea of a state bank. This is despite its questionable appeal to the very poor it is always touted as being for.
There is a lot of banking activity ostensibly happening in poor communities.
Yet the communities must rely on large corporate banks, headquartered far away, for the fulfilment of banking services that are beyond the scope of those providing the ‘illegal’ services.
Banking in South Africa is highly regulated, with multiple statutes governing the activities considered to be the business of a bank. These include the Banks Act of 1990, the Financial Sector Regulation Act of 2017, the Mutual Banks Act of 1993, the Co-operative Banks Act of 2007 and the Co-operatives Act of 2005.
At first look, starting a bank is daunting in the amount of compliance one will have to do. Even starting a bank with a minimal legislative requirement, like a Co-operative Financial Institution (CFI), is risky as failure to comply with the prescripts of the Co-operative Banks Act of 2007 could land one in jail.
Another slight on CFIs as promoted by the state is that those who are a part of it have to be driven by every other consideration except profit. “Social justice” and “community bonds” are mentioned as the legal basis for the operation of a CFI. The state seems to think that the poor who would most likely use this bank should not aspire to create profit!
Operating a commercial bank in South Africa, one which is allowed to generate profit and is [apparently] not supposed to have the goal of social justice, whatever that may be, is a legal minefield.
It should not be a surprise that we do not have a culture of local banking such as many older individuals might think back to.
One could be imprisoned simply for not submitting a form to the Prudential Authority or for not notifying them about a corporate reconstruction of your very own company. You could land in jail, be fined, or both, for having an interest in a trust or business as a bank that you did not disclose to the overlords that are the Prudential Authority, at the allotted time. These are but a few of many offences found in the Banks Act.
One might understand why the law would frown upon this, but elevating it to the status of criminality, for which one can share a prison cell with a murderer or rapist, is beyond the pale.
That we over criminalise in this casual fashion means that a chilling effect is introduced into banking entrepreneurship.
The idea of creating offences for banking activities wherein nobody’s rights are violated is gravely inappropriate in a society seriously struggling with real violent criminality. About 75 people are murdered in South Africa every day and there are about five rapes every hour.
Having a business interest as a bank, and not disclosing it to the Prudential Authority, is only an offence because there is a legislative – that is, political – requirement for businesses that conduct the “business of a bank” to notify the authority of such an interest. There is no real harm present here, in other words – only a political preference relating to monitoring.
By creating these artificial requirements that, if one fails to meet them, results in being convicted of an offence or being fined, the state is making it harder for the ordinary Sipho to establish a bank, and it is focusing law enforcement resources away from violent crime.
This legislative regime is clearly incongruent with section 12 of the Constitution, which sets out the constitutional framework for criminal justice in South Africa. It provides that nobody may be deprived of freedom without just cause and that everyone must be free from all forms of violence, including violence by the state. This means the state must take real crime – murder, rape, robbery, fraud and others – seriously, but not criminalise victimless activities.
Deregulation by removing certain offences associated with banking, or removing imprisonment while lowering the fines for those offences, would be a step in the right direction.
Taking the threat of criminal liability off the table might see the return of local and community banking in South Africa, which might be a welcome change of pace from the cold, corporate, impersonal banking we have all grown accustomed to.
The state must get out of the way and let ordinary South Africans define their financial destinies. This is not only the most economically sound thing to do, it is the most just.
Mthembu is a legal researcher at the Free Market Foundation. The views expressed in the article are the author’s and not necessarily shared by the members of the foundation.
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