Recent comments by Mteto Nyati – an Eskom director – and later, the publication of the latest procurement regulations by the national treasury, have led to keen debate on the relevance of economic transformation.
As one would expect from a country still polarised by questions of what the best way for facilitating economic participation is, the debate evoked longstanding contestations and contradictions. At the heart of the contestations remains the fallacious view that the empowerment model is nothing more than a displacement model whose benefits are superficial at best.
Such debates evoked a trip down memory lane to the debates regarding the transformation of the financial services sector.
Just over 20 years ago, various social partners converged at the National Economic Development and Labour Council (Nedlac) Financial Sector Summit to initiate the development of the transformation blueprint for the financial services sector. In a world of borderless financial markets and open economies, the financial sector was rightly identified as the nerve centre of the post-apartheid economy.
The Nedlac summit in August 2002 was where Kennedy Bungane, the then president of the Association of Black Securities and Investment Professionals (Absip), representing the voice of black professionals and black business in the sector, reflected on the broken patterns of the South African economic landscape where access, participation, ownership and leadership were historically determined by exclusion and discrimination.
The sector – as a subset of the population, whose history of racial exclusion is well documented – was naturally not immune from the national complexities. In seeking to develop a blueprint for a sector that was reflective of the social dynamics and national commitment to the transformation of all economic levers, various roleplayers with conflicting and divergent philosophies had to find a common solution based on commitments to the national cause that transcended the interests of individual constituencies.
The success of the summit was reflected in the development of the Financial Sector Charter which eventually came into existence in 2004. In its initial iteration, the charter identified the core pillars of ownership, empowerment financing, human resource development, procurement, financial inclusion and access as fundamental issues that needed to be addressed if the transformation of the sector was to be achieved.
The charter set goals and milestones whose achievement would, in theory, lead to a transformed sector. As with all negotiations, the process came with concessions and trade-offs. Its main trade-off related to ownership targets, which were set at 25% minimum black ownership by 2010. Such a target – when contrasted against the national demographics – reflected the unique features of the sector, where foreign and institutional ownership is a common feature.
The cost of facilitating ownership deals was also a factor in the deliberations that resulted in the initial targets of 25%. A lesser-explored question related to the question of how these ownership models would be maintained beyond the initial period. For deals that focused on ownership stakes to individuals or interest groups, the funding model of “vendor financing”, resulted in the economic benefits being split across loan repayments and dividend distributions.
The filtering of economic benefits had the unintended effect of persuading holders of ownership stakes to sell off parts of the shareholding at the end of the lock-in periods. This has resulted in the minimum levels of the initial charter becoming the permanent steady state. In its 2022 Transformation Report, the Banking Association of South Africa indicated that voting rights in the hands of black shareholders accounted for 28% of total voting rights, with economic interest at a lower 23.6%.
A key challenge associated with growing ownership stakes within banks remains the high capital hurdles associated with investing in banking assets. In a sector regulated by more than 200 laws and subject to high regulatory capital requirements, very few black individuals or institutions have the capacity to independently acquire significant ownership stakes.
Case study: African Bank
The African Bank case represents an outlier in the sector as a consequence of its history and unique circumstances. Founded as a banking institution for black citizens at a time when exclusion was the practice of the land, African Bank has always evoked a sense of identity and opportunity for black investors and customers.
Its curatorship process, where the South African Reserve Bank had to intervene in order to maintain market stability and also save a strategically important institution, was successfully navigated and a more resilient institution emerged from that process. Over the past year, African Bank has emerged as a strategic dealmaker in the financial services sector. Its recent acquisitions of the assets of Ubank and Grindrod Bank enabled it to spread its footprint and pursue the diversification that was missing in its pre-curatorship period. In the six months ending March 2022, the bank doubled its profits to R372 million.
Given the headwinds of Covid-19 and the intense competition in the local banking sector, African Bank’s performance indicates progress in the right direction and a renewed ability to function independently.
These developments represent the type of responsible audacity that Bungane has identified as necessary steps in ensuring that African Bank lives up to its historical mission to be a significant player in the local banking sector.
Quite importantly, the novel solution initiated by the Reserve Bank, where it engaged a consortium of other institutions to create a co-ownership model in the aftermath of the curatorship, was designed to be temporary. It is in the impending change to that ownership structure that African Bank represents yet another opportunity for accelerating the transformation mandate.
In a process initiated by the Reserve Bank in 2021 in order to offload its stake in the bank, a range of proposals was evaluated and eventually, a decision was taken not to proceed with the disposal. Rather, a process of an open listing seems to be the inevitable destination where many more citizens will be able to acquire direct, unfiltered stakes in the bank.
Given the rather rare nature of listings in the financial services sector, thanks in part to the long-established hegemony of the established banks, an opportunity to mobilise mass participation in the listing represents an opportunity that participants in the Nedlac Summit of 2002 may have regarded as the long-term wish whose realisation, regrettably, has remained remote over the past two decades.
The accidental steady state of 25% and not much more in black ownership stakes is an anomaly that requires strategic approaches from different stakeholders. Absip – as one of the founding members of the Financial Sector Transformation Council and a signatory to the Financial Sector Charter, remains acutely aware of the need to ensure that the pursuit of transformation in the sector remains an ongoing mission.
As we approach the 20-year anniversary of the existence of the Financial Sector Charter, it is our collective responsibility to reflect on the progress made since 2004 and deliberate on the questions of what the sector and the country at large need to do in order to ensure that the spirit of the commitments made in 2002 is permanently reflected in the architecture of the sector and ultimately, in the economy.
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