Banking Sector
The South African banking sector has undergone quite a lot of changes and developments over the years, more specifically its regulatory provisions. However, despite all the changes, the banking sector of the country still seems to be a stable and sound environment. The rise of the so-called ‘digital banks’ in South Africa have proved and demonstrated to be a huge part/ large contributing factor to such changes in the banking environment. We have seen new banking licenses issued over the years to entities that consider or rather call themselves the “branchless banks” or “digital banks”. More information on such entities shall be discussed below in this essay and the above-mentioned changes that have occurred in the banking sector.
The South African Reserve Bank regulates and supervises banks in the country, its purpose basically is to achieve a sound and effective banking system within the country in the interest of depositors of banks and the economy at large. The Reserve Bank also issues banking licenses to banking institutions and also monitors such institutions’ activities and regulations in terms of either the Banks Act or the Mutual Banks Act.
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Banks play various role of payments and also that loan intermediary, in which it brings borrowers and lenders together. Such a loan intermediary role is said to can only be successful with proper interest rate risks, credit, and liquidity which will in most cases, be overseen by the South African Reserve Bank. Matters relating to solvency is regulated by Public Banking law while Private Banking law, which is divided between mutual banks, commercial banks and cooperative banks, provides legal certainty of rights and obligations arising from individual transactions.
The Banks Act does not expressly prescribe the different types of banks in the banking sector but it does define the business of a bank, and one can, from reading the such definition of the bank's business, determine what a bank is. There are however various ways in which one categorizes or classifies the types of banks. The first way would be by distinguishing between banks that are regulated by The Banks Act (i.e. Commercial Banks which are regulated by The Banks Act ) and those regulated by other Acts (i.e. Mutual Banks which are regulated by the Mutual Banks Act ). A second way would be grouping or categorizing the banks that fall under the national payment system and those that don’t. The third way is to distinguish between retail and investment banking. Retail banking deals directly with small businesses and individuals, while investment banking deals with financial market activities. The fourth way is to distinguish between the different bank tiers, which I shall for the purposes of this assessment, get into greater detail.
In the first tier, we have Commercial/Retail banks, Investment banks, The Land and Agricultural Development Bank of South Africa, and The Development Bank of Southern Africa.
a) Commercial/Retail Banks
In South Africa, Commercial and Retail Banks are one in the same thing in the sense that they are similar and no distinction is drawn between them. Commercial/Retail Banks may be described as banks that typically act as payment intermediary services to their customers by taking deposits, making payments and making loans. These Banks aren’t to be confused with Investment Banks as they are also involved in investment banking, but this is not considered their main area of business. Commercial Banks generate their net income in the form of bank charges and interests generated usually through maturity loans they provide or give to their customers. The customers make deposits to the bank which such banks will convert to large maturity loans. An example of this type of bank in South Africa is Absa, Standard bank, Nedbank and the First National Bank.
b) Investment Banks
Investment Banks are banks that provide or assist individuals, companies and other entities such as the government to raise capital by assisting or acting as their agent in matters relating to securities. This type of bank also assists companies with mergers and acquisitions, trading/exchanging foreign exchange and commodities. As mentioned above this type of bank should not be confused with a commercial/retail bank because, unlike a commercial bank, an investment bank does not take deposits. They simply offer two categories of banking services to their customers, which are:
- Selling, trading, or promoting securities for cash or for other securities.
- Managing or advising their customers on their assets on behalf of pension funds or the investing public.
c) The Land and Agricultural Development Bank of South Africa
This is a state-owned financial development institution that was established in 1912 by the South African government to promote financial development in the agricultural sector of the country’s economy. It is not regulated by the Banks Act 94 of 1990, but rather the Land and Agricultural Development Act. This clearly shows that the Land Bank is exempt from the provision of the Banks Act or any other law governing banks unless of course other laws expressly provide for their application to the Land Bank.
d) The Development Bank of Southern Africa
The Development Bank of Southern Africa is also one of the state-owned financial development institutions of the country established in 1983 and was incorporated as a juristic person in 1997. The Banks Act has provided that it does not apply to the Development Bank, the Development Bank is therefore regulated by the Development Bank of Southern Africa Act. This is the type of bank that focuses largely on infrastructure projects in both the private and public sectors, with its main objective being to promote economic development and growth, the support of development projects in the region, and human resource development amongst others. We can basically conclude that this type of bank aims to improve the lives of the people in the country.
The second tier comprises of Mutual Banks, Co-operative Banks, and the Postbank of South Africa.
a) Mutual Banks
This is said to be a type of bank that caters for the lower-income segment of the market and is regulated by the Mutual Banks Act. The Banks Act does not apply to Mutual Banks. The clients/customers of this bank, by virtue of being customers, simultaneously become shareholders of such a bank and get to participate in the management of such bank’s affairs. This is how the bank attempts to involve the communities in banking because the Mutual Banks Act does make provision for what is called a local board for Mutual Bank branches. Such local branch however remains under the control and regulation of the directors of the mutual bank, who are also responsible for delegating rights and duties to the members of such local board. The Mutual Banks are required to have at least seven members who have subscribed their names to the proposal to governing of such mutual banks in which they are shareholders. This bank can grant loans and other credits on a national level as well as accept deposits
b) The Postbank of South Africa
The South African Postbank Limited Act, came into effect on 2011 July to regulate the Postbank as a savings financial institution that operates as part of or as a division of the Postbank, which is also incorporated as a legal entity and is a participant of the National Payment System. Section 2 of the Banks Act has provided that it does not apply to the Postbank. The Postbank encourages and attracts savings from people within the country and also performs services that are quite similar to those of commercial banks by taking deposits. Cash and other transactions such as withdrawals can be performed at the post office branch, or over the counter at any automatic teller machine.
c) Co-operative Banks
A cooperative bank is described as a bank in which its members have an underlying factor that in some way brings them together or classifies them to belong in the same group. This is, for example, a similar occupation or profession, people who have common membership in an association or reside within the same geographical area
The Co-operative Banks Act is one of the government’s attempts to promote access to financial services, particularly to those ‘low-income’ groups/communities who lack adequate access to banking and other financial services. From this it is quite clear that the Act aims to promote and advance the social and economic welfare of South Africans. Before this Act can apply to this type of bank it must first be ensured that the bank takes deposits, has more than 200 members and that it has deposits-holdings in excess of R1 million.
The third tier comprises of formal and informal financial institutions which provide services similar to those of the banks but with these institution, there aren’t strict requirements like those of the first and second-tier banks.
a) Village banks
A village bank is described as a form of an informal community bank organized and owned by its members, with an objective to provide financial services at a local village or community and to provide a link to a first-tier bank. The savings of such members are collected and deposited with an ordinary commercial bank. With this type of bank, a member will have access to credit services only when sufficient funds have been saved to be able to grant credit to such a member. Its members get rewarded in one or two ways; they either get the returns associated with their shares in the bank or they get the usual benefits derived from investing with an investment bank.
b) Dedicated banks
The regulatory bill on dedicated banks has not yet been passed into legislation. The bill has been drafted to improve access to essential banking services for low-income and traditionally disadvantaged people. Although this bank, as one of its purpose, is to lower the prudential requirements that are required for banks registered under the Banks Act or Mutual banks, it is also still expected as a bank to maintain a minimum capital such that the sum of its primary and secondary money, and its primary and secondary unimpaired reserve funds do not exceed an amount prescribed by regulation. Dedicated banks are also saving and loaning banks.
c) Stokvels
A stokvel is a credit and saving association which is in most cases used in local villages/disadvantaged communities. They provide services that are a bit similar to those of a bank in terms of savings and credit services. This is an informal organization and thus does not fall under the ambit of the Banks Act.
d) Mobile Banking Services
This is described as bank software developed by banks for their clients to use their cell phones as payment devices anywhere in world. These are referred to as mobile payments. There is currently no specific statute that specifically regulates mobile banking services, the legal regulatory framework for e-banking would be fitting to apply to mobile banking.
From this, it can be understood that banking law is an aspect of law that regulates the legal activities/relations of financial institutions. It comprises of private banking law, which regulates legal relationships banks have with individuals and public banking law, which regulates legal relationships banks have with organs of states having authority over banks e.g. The Registrar of Banks. Public international law can also be said to regulate the legal relationship between individuals, banks and the state because one of its purposes also includes ensuring that banking institutions are always in a position to honor their repayment obligations towards depositors and to provide and control effective payment methods in terms of foreign trades for instance. The sources of banking law include primary and secondary sources. The primary sources here include principles/ laws that are binding to courts as well as individuals who are bound by South African law. Unlike the primary sources, the secondary isn’t binding per se, however, the principles contained can be turned to by courts to help interpret or explain the primary sources where there is ambiguity.
Primary sources include Legislation, Judicial precedents and customs or trade usage to mention a few. In terms of Legislation, The Constitution of the Republic of South Africa, 1996 as the supreme law of the country regulates all other legislative provisions in the country. The Bill of Rights and fundamental rights contained in such constitution bind the legislative, executive, and all organs of state. This thus means that the bank as a juristic person is also subject to the provisions of the Bill of Rights. Matters relating to banks and their duty to abide by and conduct their businesses in a manner that is consistent with the Constitution can be found in the cases Chief Lesapo v North West Agricultural Bank and Bredenkamp v Standard Bank of South Africa Ltd to name a few. Judicial precedents may be described as decisions or judgments that have been made by judges before, which in most cases serve as an example that may be used or turned to, to solve a similar subsequent case before a court. Common law can also be used to regulate a legal relationship where certain legislation is absent. This is done by basically regulating the relationship by the terms contained in a contract of the parties involved in it and by the relevant provisions of contract law.
Secondary sources include International law, Customary International law, and Foreign municipal law. There are some provisions that are not contained in the Constitution of the country which are however binding on South Africa, others are just there assist in decision-making and guide us. The constitution does allow for the consideration of such international laws. The Constitution also provides that customary international laws have a force or can be effected in the country unless they are inconsistent with the Constitution or any other Act of parliament. In the Standard Bank Investment Corporation Ltd v Competition Commission, the judge had acknowledged that an Act in the matter that was before the court [section 1(3) of the Competition Act], had provided that foreign law could be considered in interpreting the act. This clearly shows that the application of foreign legal systems principles, can in allowing circumstances be acknowledged in solving an issue in South African law.
The statutory regulations of banks
1) The Banks Act
This Act is considered as one of the most important statutes that regulate in the South African banking sector. One of its main purposes is to protect the public from any losses that they might suffer due to negligence or a lack of solvency on the part of the bank and to also protect individuals from unfair competition between institutions that offer similar services. The Act provides/caters for public institutions/companies that take deposits from the public, however not The Reserve Bank, the Land Bank, the Development Bank of Southern Africa and the Mutual Bank amongst others. Apart from the above-mentioned duties, the Banks Act also deals with the appointment and powers of the registrar, the registration and cancellation of such banks, the functioning and controlling of banks etc. In terms of this Act, no one person can conduct the business of a bank unless such a person is registered as a bank and is a public company.
2) National Payment System
It has been said that one of the requirements for a stable and secure payment system, is that it should operate in a smooth, well-structured legal framework that clearly sets out the rights and obligations of parties without any ambiguity. This is done to safeguard against the risk of a loss that might occur because a contract could not be enforced or to guard against an application of a law that was unexpected. The National Payment System is supervised by the Reserve Bank Act.
3) The National Credit Act
In terms of the NCA in the banking sector, the Act requires that a person be recognized as a credit provider, and such registration is valid and enforceable throughout the whole country and also authorizes such person’s or company’s activities to be conducted anywhere within the republic. A certificate is issued upon registration and thus serves as prima facie proof of registration with the National Credit Act.
4) The Financial Advisory and Intermediary Services Act
The FAIS regulates certain financial advisory services and intermediary services that banks offer to their customers. This could be advice on a purchase the customer intends to make or an investment the client is set to make.
5) The South African Reserve Bank
The South African Reserve Bank was established by section 9 of the Currency and Banking Act and is also governed by the South African Reserve Bank Act. The Reserve Bank’s primary aim is to achieve and maintain a stable price of the country’s currency in the interests of the republic at large and its economic growth. The Act consolidates the laws relating to the South African Reserve Bank, and the country’s monetary system and also provides for matters connected thereto.
The changes therefore that the banking sector has undergone have made us see the banking sector as one of those sectors that will continue to grow and thus become a market that can be said not to have any boundaries. Digital solutions and low-cost operating models have made their way to the top of the business agenda, with non-traditional players pursuing these to also provide the best banking services/experience to their customers. Some examples of the trends that have developed in the banking sector that can be said to have a huge potential impact on the banking sector are the following: The emergence of digital solutions with lower-cost models launched by adjacent financial services players (e.g. Discovery), The emergence of the sector and industry-specific banks, closely integrated with broader supply chains, launched by non-financial services players (e.g. South African Post Office) and Ongoing transformation of the four universal banks to address changing customer, regulatory and technology needs. Another example is the African Bank which has been known for micro-lending. It is now on track to develop a fully digital transactional bank account, in a highly competitive market that is geared to give its customers a digitally-enabled bank account, which is also fairly priced and offers great products/services. These examples thus serve as indicators of a growing wave in the banking sector as players are realizing the advantage of integrating banking as part of their industry supply chain.
E-commerce has therefore become one of the biggest payment providers in the country and has provided hope for the local economy. All these years people’s focus had been on normal formal banking, preferring to physically go to the bank to process their transactions. A change has however been acknowledged since the hit of covid-19 and people had to adapt to the new normal. Almost everything is now done online. The pandemic has accelerated the adoption of e-commerce in a way that has never been seen before, and this also serves as an indicator that the digital world could take over at any given time if the circumstances allow it. This takes us back to the description the banking sector has been given- a market that knows no boundaries.
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