SA banks dominance hampers growth

CAPE TOWN - As the spotlight continues to fall on the country's banking sector and the power they have, an extensive report recently tabled before Parliament has found that South Africa has the highest level of concentration in the sector, relative to countries such as Brazil, Australia and Nigeria.

The 416 page “Measuring Concentration and Participation in the South African Economy: Levels and Trends Report” by the Competition Commission (Compcom) provides a detailed assessment of both the levels and trends in concentration and participation over the past five to 10 years across 178 industries.

The report paints a bleak picture of how four commercial banks control almost 90% of the country's banking sector.

Increasing concentration is commonly associated with “higher margins and profitability, suggestive of a decline in competition that may result from an exploitation of market power or rising entry barriers,” said the Compcom.

“In the South African context, concentration has been associated with rising margins and is seen to impose structural constraints on growth. Persistent concentration by historically dominant firms is also associated with a lack of transformation of the economy, denying opportunities to those that were historically excluded to grow their share of economic value,” the Compcom said.

“We found that the banking sector is still dominated by ‘the big four’, namely Standard Bank, ABSA, FNB and Nedbank. Overall, the largest four banks combined constituted 89.9% in 2016 and 87.6% in 2019 in terms of assets under management. Investec and Capitec were the next largest banks in 2019 accounting for 8.4% and 2.1% of assets under management in 2019 respectively, with Capitec experiencing a small increase in its share over the 2016-2019 period. Tyme Bank and Discovery Bank entered the segment in November 2018 and July 2019 respectively,” the report stated.

Based on a compilation of cross-country research on concentration ratios in the commercial banking industries of seven countries between 2002 and 2019, it was evident that South Africa has the highest level of concentration relative to three other countries - Brazil, Australia and Nigeria - over the 2016-2019 period, said the report.

In the financial sector as a whole inequality as measured by the Gini coefficient (a statistic which quantifies the amount of inequality that exists in a population), had increased from 0.762 in 2011 to 0.769 in 2016, the report said.

“Turnover generated by large firms increased by a significantly higher percentage from R278 billion in 2011 to R520 billion in 2016, almost an 87% jump over the period. Large firms represented 2.9% of the total number of firms in the sector, generating 67.5% of total sales turnover in 2011. By 2016, large firms made up a similar percentage of total firms (3%) but accounted for a larger percentage of total turnover (72%),” the report stated.

Strategy consultant to the South African financial services industry for over 15 years, Athol Williams, said significant capital was needed to get more black-owned banking entrants into the game.

“While the sector is dominated by the ‘big 4’ it is encouraging that there is still space and opportunity for new entrants with innovative offerings as shown by Capitec. While the report shows Capitec holding only 2.1% of assets, it has the third-highest market cap among the banks, roughly the size of ABSA and Nedbank combined. This highlights the opportunity in the market for innovative entrepreneurs backed by significant capital,” said Williams.

“The constraint for black-owned entrants is definitely not skill as the banking industry has developed numerous skilled black bankers over many years. The real constraint to black-owned banks emerging to challenge the current set, is financial backing. This is where transformation capital needs to walk the talk, and where black banking entrepreneurs need to develop unique customer-centred offerings at economics that the traditional banks cannot match. The sector is due for a significant refresh that better addresses the changing profile and needs of the South African banking market, but significant capital will need to be put behind black bankers if we want to see a sustainable transformation in which they lay claim to a slice of the market.”

The country’s banking sector has also come under fire over the barriers that prevent small-scale business from accessing funding.

The system was “designed in such a way to create difficulties for small black-owned businesses,” said Muammer Kasu, owner of a local eatery, Rack N Grill.

Kasu, a qualified chef, started his co-owned business during 2015.

“When we started the business, registered the business and drew up business plans, we then went to the banks. It was declined and there was so much red tape involved and the main concern was that they could never give us a reason why it was declined. If they could give us proper answers why it was declined, we could then work on those issues and then re-apply but it was just a no, time and again.

“In our first year of business we had to borrow money to start up the … food truck. In our first year of operating we made a turnover of just under R1 million and we went to the banks with those figures and still nothing. We continued having to borrow money. At one point we borrowed R50 000 from someone and with how good our business was doing, we could pay that back within two weeks,” said Kasu.

Still the banks would not assist the business hopefuls who had started pulling bigger clients and had to negotiate with suppliers to give them stock and pay the debt after.

With the pandemic, Kasu said they were hit even harder despite banks offering payment holidays and further applications were made for this, and they were declined again.

“We did however get a payment holiday for our company vehicle which was approved but the bank and later the attorneys said we are in arrears and they want to come fetch the vehicle,” said Kasu, who eventually had to sell his vehicle to settle his debt.

The Black Business Federation added: “Small, medium and micro enterprises (SMME) struggle to compete with large businesses due to a lack of access to markets and the lack of access to capital. South Africa’s economic environment remains closed from SMMEs and very uncompetitive with skyrocketing operational costs.

“Banks do not have the appetite to fund SMMEs as they use stringent regulations to finance entities and the fact that most SMMEs do not have collateral, no security deposit as a means of surety. SMMEs also don’t get clear support from the likes of IDC, SEFA, DTI, Ithala and many other government institutions as they are also designed or using the same model.

“The lack of support makes many SMMEs not last in the business environment. As a result South Africa will remain unequal between the haves and the have nots including the growing rate of unemployment.”

Asked about what transformation initiatives it had, the Banking Association of South Africa did not respond to the question, only saying: “In litigation that is currently pending in the Equality Court, Independent Media is an applicant in the proceedings whilst BASA is listed as a respondent. Given these circumstances, BASA does not believe it is appropriate to respond to queries, at this stage.”

Cape Times