The case against a new state-owned bank

This column was written by Stuart Theobald and was first published in Business Day on 13 October 2014.

The idea of a new state bank is like a zombie that keeps coming back to haunt us. The Gauteng ANC’s conference last weekend resolved to set up a task team to investigate the creation of one. This is nothing new. Minister of economic development, Ebraham Patel, proposed the same thing back in 2010. The problem with the idea is that upon investigation you quickly realise that the problems that need to be solved can’t be solved that way.

The government is already the biggest financial services provider in the country. It counts among its institutions the largest fund manager (Public Investment Corporation), the largest retail branch network (Post Bank’s 1400 branches), the biggest infrastructure funder (Development Bank of Southern Africa), the biggest industrial development funder (Industrial Development Corporation) and the Land Bank. It also has major business funders like the National Empowerment Fund and the Small Enterprise Finance Agency. Both of these were specifically designed to fund black entrepreneurs.

So what is the gap that a state bank is meant to fill? The zombie’s latest stirring was sparked by former Reserve Bank governor Tito Mboweni, who called for one apparently after funding applications for his new investment business were rejected by the big banks. There is something more than a little self serving about his calls. Mboweni will know that banking is a confidence business having presided over a banking crisis that consumed Saambou and BoE. He will know that banks have to apply strict risk criteria in deciding what to fund. After all, it is depositors’ money they are putting at risk. A bank that cannot generate a return from its assets is one that cannot sustain itself. Eventually it runs out of capital or the confidence of its funders or both. Then it is game over. If a bank doesn’t have the confidence to fund Mboweni’s business plan, the answer is not to demand a new bank be created. It is to change the business plan.

The problem is not a lack of funding but a lack of bankable business plans. We have a demand side problem rather than a supply side problem. It is not hard for a provably profitable concept to get funding. Our problem is that we don’t have enough of those. The World Economic Forum’s annual survey of business people rates South Africa very highly for the availability of equity capital and debt, although arguably this availability is not across the board.

If only the political capital being spent on motivating for a state bank was instead dedicated to creating business opportunities that are bankable by the existing funders, both state and private sector. Instead, we seem to do the opposite. Apart from calling for a state bank, the Gauteng ANC also called for the state to own 49% of all mining companies. That is a really bad idea if you care about the supply side. What we should be doing is creating an environment that supports black entrepreneurs to launch themselves into sectors we need to develop like coal and natural gas. If the Gauteng ANC cared more about the supply side it would focus on making it feasible for black entrepreneurs to come up with bankable business plans. It would call for a more conducive and stable policy environment around mining rather than threatening even more destabilisation. It would call for better services from the department of trade and industry and the new ministry of small business to simplify the bureaucracy that business owners have to live with. It could call for government to push forward its much talked about infrastructure spending plans, which could create opportunities across the economy.

The existing funding environment is not perfect. The NEF, for instance, could do with more capital and more skills to support its entrepreneur mentorship schemes. The Post Bank could do with some serious reform, starting with the management team. That’s not news to anyone, though the ANC could ask some questions as to why these obvious steps still have not been implemented. But, by in large, what we lack are convincing business ideas which we lack because of an unsupportive economic environment and a shortage of skills.

What we don’t need is a new state bank. Let’s stop wasting time on the idea. If the ANC instead focused its energy on creating a strong business environment that will foster black entrepreneurs, it will earn the support of the black middle classes it fears losing at the 2016 local government elections. Empty rhetoric about state banks is cheap.

Theobald is chairman at Intellidex.