The alternative to a state bank | Fin24
 
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The alternative to a state bank

May 23 2018 14:53
Johan Fourie

Soon after I started lecturing at Stellenbosch, I had an idea: why not publish a book about what students should know when they go to university? 

I convinced professors at various South African universities to each write a chapter. I then proceeded to self-publish the book. 

But to print the 3 000 copies that I hoped would sell, I needed to pay printing costs of more than R70 000 – a massive amount for a junior lecturer with student debt. 

So I approached the bank with an impressive business plan, my best suit and a big smile. Proposal rejected. 

I don’t remember the exact reasons given, but I do remember being extremely angry. How could my perfectly reasonable application for funding be denied? 

But let me be honest: that was the best decision the bank could have made. Not for them – R70 000 is a drop in the ocean on their balance sheet – but for me. 

I was never going to sell 3 000 books. At least not in the two-year period that I had hoped. I did manage to scrape together  R70 000 and so two editions did see the light of day. 

But we never really made a profit (the 2009 edition – Let’s Talk About Varsity – is now available for free on Google Books). 

Somewhere in a dark office (I imagine) sat a banker and realised, even before we printed a single copy, that it’s crazy to want to make money selling books. 

I was reminded of this when I read that the EFF’s Floyd Shivambu will introduce a private member’s bill to Parliament which will pave the way for state-owned banks in SA. This is not a new plan. 

Tito Mboweni, ex-governor of the Reserve Bank, already touted these ideas in 2014. 

His yearning for a state-owned bank started when his own plans to build a business empire was thwarted by the big banks’ apparent unwillingness to invest in his dream to buy a stake with his brother in a new iron ore project in Tzaneen. 

Even after Mboweni phoned the chief executives to express his dismay, they couldn’t get a loan. They also ventured into the media world and joined a consortium vying for the broadcast licence of a now-defunct radio station. 

But the banks were only willing to advance loan capital on the condition that Mboweni put up his private wealth as collateral. 

“I said you can’t pledge private wealth for business. They are two separate things. What we have here is a radio licence; if it does not work, you take the business. 

No-one will seize my private wealth. They think I am a fool,” Mboweni wrote at the time.

Let’s review the facts. First, the radio station Mboweni had hoped to buy was soon defunct. To me this suggests that the banker in the dark office made the correct decision to decline the application. 

Had he approved it, his bank would have lost money (and, perhaps, he his bonus or, worse, his job). 

Second, the reason banks require collateral is because they want to avoid moral hazard, i.e. give people money to spend without any consequences for themselves. 

The bank would not give me a loan if I did not have assets they could seize if their money was wasted. This is true for all banks, in all times.

A state bank is not a novel idea, as the Chinese have shown, although, ironically, they are in the process of privatising theirs. 

The reason for their privatisation is exactly the moral hazard discussed earlier: state banks don’t have to report to shareholders and can therefore fund projects that are less profitable. 

They crowd out private-sector intermediaries, which means less competition and higher costs. State banks also tend to support those individuals who have strong ties to government.

There is an alternative, from SA’s own history. Following the Great Depression of the 1930s, white poverty had become very visible in SA’s burgeoning cities, notably Johannesburg. 

The centennial anniversary of the Great Trek, the construction of the Voortrekker monument, and various other factors contributed to a rise in Afrikaner nationalism. 

These nationalist Afrikaners believed that the capitalists (the English and the Jews) held them hostage economically. They had to find a solution to pull themselves up by their proverbial bootstraps. 

The answer? The Reddingsdaadbond (RDB), a savings fund (with the slogan “A people save themselves”) in which Afrikaner households (70 000 of them within five years) could invest six pennies every month.

Part of these funds helped establish Federale Volksbeleggings, an investment corporation, which would invest in new Afrikaner businesses like Gencor – later a mining giant.

This was grass-roots development at its very best.

The frustrations for many entrepreneurs at starting their business empires are understandable. But that is no reason to start a state bank that may benefit a small minority at the cost of everyone else. 

Start from the bottom instead. Imagine a modern version of Federale Volksbeleggings: imagine its power if it could attract 700 000 black South Africans to invest R50 every month (you can do this much more easily with the technology of today). 

That R35m per month could be used to invest in new business ventures of black entrepreneurs who create jobs and prosper. That is how you build a business empire.

That is how a people save themselves. 

Johan Fourie is associate professor in economics at Stellenbosch University.

This is an edited version of an article that was originally published on johanfourie.wordpress.com.

This article originally appeared in the 24 May edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.

poverty  |  income  |  grants
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