South Africa's banking sector stands like a towering giant on the African continent. The country's leading banks have also been great innovators, for example, introducing the first ATMs that can read thumbprints. However, as MOIN SIDDIQI reports, competition has intensified with the influx of a large number of foreign banks.
South Africa enjoys a unique position among emerging markets because of its first-world service industry in banking, insurance, capital markets, and information technology. The country's banking strength is reflected by its domination of the continent's banking assets and capitalisation. About 80% of combined sub-Saharan bank assets and 72% of total capitalisation are concentrated in South Africa. South Africa constitutes one-third of the GDP of the entire sub-Saharan Africa.
The banking sector is highly concentrated with only five out of a total of 39 registered local banks controlling 80% of aggregate assets. They have about 3,640 branches and electronic delivery networks. Among the major banks are Amalgamated Banks of South Africa (ABSA), Standard Bank (Stanbic), First National Bank (FNB), Nedcor, and Investec Bank, a comparatively new investment bank, with $15bn under global management.
The banks operate in a regulatory environment that is more characteristic of OECD economies than those of developing countries. The South African Reserve Bank's supervision involves one of the most up-to-date and sophisticated systems of risk evaluation and risk management. All banks, including foreign ones must maintain a capital equivalent of 8% of risk-weighted assets. Last year, the average Basle ratio, (including both tier 1 and 2 capital) was 12% for top SA banks and compares favourably with major OECD banks.
Reporting and provisioning requirements are also stringent. High real prime rates since 1996 have severely hit small businesses, thus leading to an increase in banks' bad debt provisions.
Profitability remains reasonably healthy with major banks achieving average returns on equity and assets of 24.3% and 1.5% respectively. However, the cost/income ratios of almost 70% are above international averages, indicating a need for rationalisation and improved efficiency. Nevertheless, credit-ratings for top-tier SA banks are on a par with some major OECD banks.
The market has grown dramatically since the lifting of international sanctions. Competition has reduced margins on interest rates and fees, whilst similar product offerings have resulted in highly competitive service costs.
Advanced banking technology
Despite decades of political isolation, SA banks have always been among pioneers of advanced banking technology, especially in biometrics and retail banking.
South Africa's technological superiority over even the developed countries was reaffirmed when Visa International introduced its first multifunction smart card in alliance with two SA banks, FNB, and Nedcor. Both banks are investing R7bn and R5bn respectively in upgrading technology at retail outlets and ATM terminals for the new card, which will replace separate debit and credit cards.
In the post-apartheid era, major banks are launching extensive innovative schemes to serve a potentially large underbanked clientele. An estimated 10m South Africans or 25% of the total population have no bank accounts.
In 1996, FNB introduced a brilliant new programme called Cash Paymaster Services which has completely revolutionised the process of paying out state pensions to recipients in rural areas. Special security trucks are fitted with modified ATMs. They arrive at remote rural communities, the pensioners place their thumbs on a biometric reader and the ATMs recognise pensioners by their thumbprints. The system has reduced fraud.
Major banks have also now formed separate institutions, focusing on delivering low cost and viable services (ranging from savings accounts to small house mortgages) to the unbanked masses in the townships and former homelands. …