Question

are south African banks operating as a cartel?

Answer 1

Broadly speaking, No! In fact South African banks were the first to adopt the Basel 3 norms right after the Central bank made it a mandate. In fact the major banks of South Africa want the least dependency on the Central Bank of South Africa.

Since the collapse of the African bank in 2014, all the other major banks have been vulnerable due to the high number of unsecured loans in their portfolio. Even though the African Bank was bailed out and continues to operate. Increased interest are levied on the customers, besides a slow growing economy and increasing inflation has led to an increase in the cost of living for the people which directly affects the rate of defaults on loans.

The currency has depreciated continuously for the last 10 quarters when pegged against USD. The central bank has already increased interest rate during the year by 75 basis points and contemplating further increase to stem the currency fall.

On top of it, All the banks have already made their regulations more stringent. Unsecured lending only comprises about 6% of all consumer borrowing and so it is relatively small in the lives of the major banks in SA. Since African Bank was the lender in the bulk of the unsecured lending space, the fact that they have cut in half their lending, they are no longer a "a lender of last resort". As a result, banks are anticipating an increase in the rate of non-performing loan formation in the absense of thos backstop. For mortgages, this should translate into a couple pf percentage points at worst. Banks that are more concentrated in the unsecured lending space are more vulnerable. Of bigger concern is the poor atate of the SA economy that will necessarily leaad to worsening performance on debt obligations across the board.

A highly volatile currency is also a contributing factor. The Rand is a uniquely volatile currency because it is highly speculated on. Why is it speculated on so much? Because the country sits on the fence when it comes to a lot of Black and White classifications. South Africa is a free and fair democracy, but in its current form has always been led by the same single party which controls 8 of the 9 Provinces. A democracy should show a relatively stable political environment but a one party state is obviously far less stable.

South Africa has two distinct economies, one a large under developed economy but also a smaller highly developed one as well. As such while it is a developing economy in some sense to group it with a country like India is incorrect. But to group it with a country like Spain is equally incorrect. And to group it with a semi developed country like Turkey is also incorrect. When trends in one grouping start it is often uncertain how South Africa will respond.

South Africa is a tiny, irrelevant and highly isolationist country yet because of its heritage (post Apartheid reconciliation) and a combination of complicated political manouevering by external players, it often punches far above its own weight like as a member of BRICS. At the same time it is often completely ignored on the foreign stage.

Overall South Africa is an incredibly contrasted economy which behaves erratically and often not as one would expect. This creates an environment where speculation can be very profitable.

Speculation is why the volume of Rand trading far exceeds a normal amount given the size and nature of the economy. Speculation is also highly emotive and unpredictable which enhances the volatility of the Rand.