Banking system security trumps BEE

2012-09-01 10:29

Banking system’s stability at stake on the back of black economic empowerment regulations

The standoff between bankers’ associations and parties calling for increased empowerment is nowhere near being resolved.

At the heart of the three-year standoff is whether the stability of the banking system is worth risking in the name of black economic empowerment (BEE), and whether the “once empowered, always empowered” rule should apply.

In August, black investors in retail lender Absa, represented by Batho Bonke Capital, discussed a special resolution to cash in their 3.9% stake, worth R2.2 billion after tax.

If they did and the once-empowered rule were to change, Absa would need to enter into a new BEE deal.

If the rule stayed the same, Absa would be regarded as complying with BEE regulations even if it no longer had a BEE partner.

“We are not going to agree with a code that is going to mess up the industry,” said Cas Coovadia, the managing director of the Banking Association of South Africa, the banking sector’s mouthpiece.

Coovadia said the industry will report according to the generic codes it had been following for the past two years.

One of the latest attempts by Trade and Industry Minister Rob Davies to align the industry charter with generic codes, the so-called “codes of good practice”, was made in March this year when he gazetted the second phase of the draft code.

All of South Africa’s big-four banks have BEE partners and there is an indication that some of the black investors are interested in selling to realise returns on their investments.

City Press understands Davies wants the “once-empowered, always empowered” clause excluded from the final code.

Banks want it included to ensure that they don’t go back to concluding BEE transactions shouldtheir current black partners desert them.

The provisional financial-sector code contains nine elements that determine broad-based empowerment as opposed to generic codes, which contain seven elements.

The generic elements of the BEE code are: ownership, management control, employment equity, skills development, preferential procurement, enterprise development and socioeconomic development.

But the financial-sector code takes things a step further and includes two more elements in the form of empowerment financing and access to financial services.

On ownership, the draft code calls for 15% direct black ownership in banks, insurers and other savings companies, as opposed to 25% ownership in the generic codes.

In terms of market capitalisation, the country’s four major lenders – Standard Bank, Firstrand Bank, Nedbank and Absa – are currently worth R522 billion collectively.

To comply with the draft code, banks will have to transfer R78.3 billion of equity into black hands.

The standoff is further complicated by the banking industry’s requirement that it complies with a raft of Basel III banking regulations.

These regulations stipulate how much equity capital (money that is not borrowed) banks need to put aside to guard against bankruptcy.

In the wake of the 2008 global credit crisis, which led to the failure and in some cases bailout of many banks, lenders are now required to put aside capital of their own to reduce the risk.

Ismail Momoniat, head of tax and financial sector policy at the national treasury, said the Basel III regulations will take precedence when it comes to dealing with BEE to safeguard South Africa’s financial stability.

“BEE measures can’t trump financial stability,” he said.

He added that investors who own 15% of a bank are classified as shareholders of reference and Basel III will require them to hold more cash reserves to ensure that if the bank is in trouble they are able to tap into the reserves to bail out the bank.

“If you are going to buy 15%, you must have cash and it must not be cash that is borrowed, it must be your own cash,” Momoniat said.

Thabo Masombuka, the founder of BEE advisory firm Florytouch, warned that it will be very difficult for blacks to hold substantial stakes in local banks as this would require huge amounts, which they don’t have.

“Broad-based black communities should not be exposed to the huge risk of big stakes in banks. In the event of a global economic meltdown, they will be wiped out,” he warned.

He also warned that if banks resort to reporting according to the generic codes, poor black South Africans may lose out as the banks will have no obligation to provide services to them.

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