Mr. Stals comments on financial sector reforms in Africa Contribution by the
Governor of the South African Reserve Bank, Dr. C. Stals, at the Sixth Session of the
Conference of African Ministers of Finance and Governors of Central Banks arranged by the
United Nations Economic Commission for Africa and held in Addis Ababa on 31/3/97.
I INTRODUCTION
1. Background to the South African financial sector reform process
Unlike many other countries on the African continent, South Africa has a
well-established financial structure which includes a relatively independent central bank,
sophisticated modern banking institutions and competitive financial markets. There developed,
nevertheless, a need for far-reaching financial reforms in recent years. The experience of South
Africa in this regard provides an interesting case study from which some lessons can be learned.
The South African financial sector and, for that matter, its total economy, was
isolated to a high degree from the rest of the world for more than a decade because of
unacceptable internal political and social policies, and international punitive actions taken
against the country. In the circumstances, developments in the financial sector did not keep
abreast with the evolutionary international changes of the past twenty years. With a lack of
external competition and economic concentration in a few powerful corporate conglomerates, a
stagnating economy, and a comprehensive protective exchange control system, a "hot-house"
climate was created that contributed to a retarded adjustment process of the financial sector.
Major political and social reforms in South Africa culminated in the democratic
election of the Government of National Unity in April 1994. The scene was then set for major
changes, also in the economy of the country. Indeed, not only was the scene set, but the
expectations of the people of the country demanded major reforms that would, as a minimum,
provide a better economic performance and an increase in the standard of living of millions of
previously disadvantaged members of the community.
Over the past five years, South Africa was therefore not only challenged with the
need for reintegrating the South African economy, and more in particular, the financial sector in
a rapidly changing global financial environment, but also with the challenge of adapting to a
new domestic socio-political structure. These adjustments in the financial sector, which are still
in progress, were facilitated by the existence of a sophisticated, albeit marginally retarded,
financial system with a long history of more than a century.
The Government's policy approach to the needed reforms is based on a gradual
but resolved transformation of the financial sector, mainly by exposing domestic institutions
more to international competition, by integrating policy measures, the institutional framework,
and the financial markets gradually into the global village, and by adapting at the same time to
the changing needs of the local community. In the next part of this paper, the attention is focused
on the reform process of the financial system to meet these policy objectives.
The new South Africa was also confronted with a daunting further challenge, and
that is to become, and to be part of, Africa. With the admission of South Africa during the
second half of 1994 to the Southern African Development Community (SADC), comprising
twelve countries in the Southern African region, new challenges were offered for the expansion
of financial co-operation on a regional basis. The third part of this presentation will provide a
brief summary of the progress so far made with co-operation amongst the central banks of the
members of SADC in the implementation of financial reforms in the region.
II FINANCIAL SECTOR REFORMS IN SOUTH AFRICA
2.1 Macroeconomic policy implications
The integration of the South African financial system in the global economy
obviously holds major implications for macroeconomic policies. A country that exposes itself to
the whims and the fickleness of fund managers and financial traders operating in a
technologically integrated global market system can no longer ignore the international norms
and standards set for financial disciplines, prudent management, sound government and internal
stability and security. Integration into the world financial system brings the advantage of access
to a massive pool of excess saving in the mature economies of the world, but also demands from
the individual participating country adherence to the disciplines of a global market economy.
This presentation will, however not cover the consequences for macroeconomic policies of the
financial reforms, but will rather concentrate on major institutional adjustments. Aspects of
economic policy, such as exchange rate policies have been, or will be, covered in other sessions
of this Conference.
2.2 The role and functions of the central bank
The South African Reserve Bank was founded in 1921 as one of the first central
banks to be established in the new world outside of Europe. The Bank therefore has a long
history and experience, and has always operated with some autonomy from Government. Even
today, the South African Reserve Bank is privately owned, with important restrictions on the
rights of shareholders, for example that no individual shareholder may hold more than one-half
per cent of the capital of the Bank, and that the Bank may not pay a dividend of more than 10
per cent per annum on the paid-up share capital of the Bank.
Without going into the details of the functions and responsibilities of the South
African Reserve Bank, the new South African Government recognised a few basic principles for
the role of the central bank in the development of the economy. These can be summarised as
follows:
Monetary policy is part of overall macroeconomic policy for which Government
takes final responsibility. There must therefore be good co-operation between the central bank
and Government, and regular consultation must take place between the Governor of the Reserve
Bank and the Minister of Finance. The task of the central bank must be clearly defined and must
be restricted to the objective of creating a stable financial environment that will be conducive for
optimum real economic development. The central bank must protect the value of the currency.
For the implementation of monetary policy, the central bank must be given sufficient autonomy
to enable it to make objective decisions on sensitive monetary policy issues, such as the level of
interest rates, money supply guidelines, financial liquidity management and bank credit
extension policies. The central bank must be accountable to Parliament.
To give effect to this policy approach, the South African Government included
the following mandate for the South African Reserve Bank in the new Constitution of the
Republic of South Africa:
"The primary object of the South African Reserve Bank is to protect the value of
the currency in the interest of balanced and sustainable economic growth in the Republic.
"The South African Reserve Bank, in pursuit of its primary object, must perform
its functions independently and without fear, favour or prejudice, but there must be regular
consultation between the Bank and the Cabinet member responsible for national financial
matters".
2.3 The development of the banking system
South Africa has always had a private sector banking system, based on private
sector ownership and on effective competition in a free market environment. The major reforms
introduced in recent years to adapt the banking system to the needs of the country's changed
philosophies, macroeconomic policy objectives and international relationships, were therefore
concentrated on improving the existing structure.
Firstly, recognition was given in the banking legislation to the existence and role
of "informal" banking business that developed mostly in the less developed communities over
many years. The Banks Act was therefore amended to provide for the continuation of numerous
informal savings clubs ("stokvels") outside the normal constraints of bank regulation and
supervision, but also then, of course, without access to central bank accommodation at the
discount window.
New legislation to provide for communal ownership of a banking institution was
introduced in the form of the Mutual Banks Act.
Secondly, banking institutions adapted their own internal policies to provide for
greater participation in the social upliftment programmes of the country, for example by entering
into an agreement with Government to provide a minimum amount per year for low-cost
housing. On the other end of the spectrum, banks also introduced new electronic data processing
systems, for example automated teller machines, and "smart card" facilities for a gradual
introduction of electronic money.
Thirdly, bank regulation and supervision underwent major changes over the past
ten years to apply the world-wide supported directives of the Basle Committee. At this stage,
bank regulation and supervision is based primarily on risk identification and management, with
clearly defined roles for shareholders, boards of directors, senior management and internal and
external auditors.
Fourthly, the South African banking scene was opened up for foreign banks, and
South African banks, in turn, were allowed to establish branch offices, subsidiaries and
representative offices in many countries around the world. Today, in addition to about 35
domestic banks, there are more than 10 established branches and subsidiaries of foreign banks
operative in South Africa, and about 60 international banks with representative offices in the
country. South African banks have opened up 29 branches/subsidiaries in 13 other African
countries.
It is still too early to judge the effect of this wider competition on the South
African banking system. There are signs, however, that it is beginning to squeeze the margins of
banking business. In particular, the share of foreign banks in wholesale banking, foreign
exchange business and financial market activity increased significantly. This was accompanied,
however, by an almost explosive increase in the total volumes of business in these markets,
which provided for continued growth in existing and newly-established institutions.
2.4 The development of financial markets
Once again, the new South Africa had the advantage of inheriting
well-established and relatively sophisticated financial markets. This did not mean, however, that
no reforms were required in these markets. The most striking adjustments occurred in the capital
market. A "big-bang" revolution took place in the Johannesburg Stock Exchange last year when:
the market for trading in equities was separated from the bond market; an electronic screen
trading system replaced the traditional open-floor outcry system; corporates and non-residents
were allowed for the first time to become broker-members of the Exchanges; provision was
made for negotiated commissions and principal versus broking trade by members of the
Exchange.
Over the past few years, a market in derivatives also developed, originally as an
over-the-counter market, but since the establishment of the South African Futures Exchange
(SAFEX) in 1990, on a more formal basis.
These reforms, together with the other socio-politico-economic changes in the
country, boosted turnovers in the financial markets. In 1996, the total turnover in equities on the
Johannesburg Stock Exchange exceeded US $27 billion; total turnover in the Bond Market
amounted to US $703 billion, and 4.1 million contracts were traded through SAFEX.
Major changes also took place in the South African market for foreign exchange,
particularly in the light of the gradual removal of exchange controls. South Africa has a floating
exchange rate system in which about 30 authorised dealers in foreign exchange (banking
institutions) make prices on a competitive basis, for foreign currencies (mostly US dollar). The
exchange rate is therefore determined by underlying forces of demand and supply, influenced to
a diminishing extent by Reserve Bank intervention (through exchange controls and direct active
participation). The Reserve Bank is gradually reducing its participation in the market, and is now
in the process of encouraging the development of a more active market in forward foreign
exchange outside of the central bank. The average daily turnover in the South African market for
foreign exchange over the past six months amounted to US $6.1 billion.
The policy of the Reserve Bank is to continue to encourage the development of
the financial markets, and to monitor these markets on a regular basis. The central bank itself,
however, is reducing its own direct participation in the market-making processes. This applies to
the market for foreign exchange and also the capital market. Negotiations for the transfer to the
private sector of responsibility for the primary funding of government and for market-making in
government bonds have reached an advanced stage. The Reserve Bank will eventually confine
its participation in these markets to transactions (such as open-market operations) aimed at the
achievement of defined monetary policy objectives.
2.5 The national payment, clearing and settlement system
Up to now, the national payment, clearing and settlement system was vested in a
joint venture between the Reserve Bank and the major commercial banks in the country.
Clearing takes place on a daily basis through an electronic data process in a communal banking
service facility known as the Automated Clearing Bureau (ACB). The ACB is, however, no
longer able to stand up to the emerging pressures of the expanded activity in the financial
markets. The Reserve Bank has therefore taken the initiative to introduce a major reform to the
national payments, clearing and settlement system. In April 1998, a new integrated system will
be introduced to provide for real-time on-line settlement on a gross basis of large transactions,
and for a daily netting-process and final settlement of smaller transactions.
The intention with this major reform project is to reduce the risk exposure of
possible default by any individual institution that could lead to the collapse of the whole system.
At the same time, the new system must be compatible with global network systems for payments
and clearing operations, and must provide a framework for an integrated cross-border settlement
system for the SADC region.
2.6 The gradual removal of exchange controls
At the centre of the South African programme for financial reform is the gradual
phasing-out of exchange controls. Comprehensive exchange controls were introduced in South
Africa over an extended period of time, ranging from 1961 to 1993. These direct control
measures were intended to provide some protection to the domestic economy against the adverse
effects of non-economic factors that afflicted South Africa over a long period of time.
When the Government of National Unity came into power in April 1994, it was
accepted as a policy objective to remove the exchange controls. At that time, however, South
Africa had virtually no official foreign reserves at its disposal for this purpose. The pragmatic
solution was therefore adopted to embark on a process of a gradual phasing-out of the exchange
controls.
Good progress has been made over the past three years with this programme. So
far all effective exchange controls on current account transactions have been lifted; exchange
controls applicable to non-residents have been fully removed; the two-tier exchange rate system
for certain capital account transactions was formally terminated in 1995; South African resident
corporates were given permission to make certain direct investments in branches and
subsidiaries in foreign countries; South African resident institutional investors (insurers, pension
funds and mutual funds) may now diversify up to 10 per cent of the total assets managed by
them in foreign currency denominated assets; and South African resident private individuals will
shortly be allowed to transfer limited amounts of capital from South Africa for foreign
investment.
The removal of the exchange controls is a process that has far-reaching effects for
the financial sector and the development of the financial markets in South Africa. It is a process
that must be applied with caution, and must be supported by other macroeconomic policy
measures aimed at improving the international competitiveness of the South African economy.
In the area of the financial sector, the authorities must make sure that level playing fields are
created for all domestic and non-resident participants in the market.
III REGIONAL FINANCIAL CO-OPERATION WITHIN SADC
When it formally joined the Southern African Development Community in the
second half of 1994, South Africa was given the task of managing the Financial and Investment
Protocol for the region. A Sectoral Committee of Ministers of Finance was established within
the institutional framework of SADC, and two sub-committees were created, one for Heads of
Finance Departments, and a second for Governors of Central Banks.
The Committee of Governors of the Central Banks of SADC met four times
during the past eighteen months, finalised a Terms of Reference for its activities, established a
Secretariat and Research Unit within the South African Reserve Bank, and agreed on a number
of projects and programmes to be implemented. The basic approach of the Committee of
Governors has been described as a "bottom-up" approach, where the attention is focused at this
stage on financial co-operation amongst, and not integration of, the financial systems of the
twelve independent members of SADC. Furthermore, the attention is focused on the
development of the internal financial systems of members within a consistent and compatible
framework that will pave the way for the co-ordination of macroeconomic monetary policies at
some later stage, and perhaps some integration of systems further downstream.
The programme of the Governors' Committee therefore provides for an exchange
of information on, and regular discussion of, macroeconomic structures and economic changes
in member countries. To facilitate this programme, the Secretariat of the Committee has
established within the South African Reserve Bank a computerised data bank for basic financial
and economic statistics of each one of the members of SADC. All members will at some stage
have direct real-time access to this data base; an exchange of information on the structure, the
functions, the responsibilities and the relationships with the government of each one of the
twelve participating central banks. For this purpose, the Secretariat of the Committee is busy
with the compilation of an information data bank on the participating central banks; a
co-ordinated training programme for central bank officials. The South African Reserve Bank
Training Institute will this year offer three three-week specialised courses on central banking for
officials from SADC central banks; co-ordination of the exchange control policies applied by
members of SADC. At least two countries in the region have removed all exchange controls, and
many others are in the process of gradually removing remaining controls; a work study on
Information Technology (IT) develop-ments within each central bank. The exercise involved in
by South Africa to revise is national payment, clearing and settlement system provides an
opportunity to plan ahead and consider ways and means of introducing compatible and
inter-changeable systems in the region; a concerted approach on efforts to reduce or avoid
money laundering and illegal banking activities in the region; and a major initiative to improve
the quality of bank supervision and regulation in the region, and to co-ordinate policies on the
licensing of banking institutions. This work is undertaken jointly with the East and Southern
Africa Banking Supervisors Group (ESAF), which includes a few more countries than just the
SADC configuration.
Whilst the work of the Governors' Committee up to now was more
institutionally-centred, more attention will be given in the next phase to the development of the
financial markets in the region. There are obviously opportunities for a better utilisation of
existing markets in a number of the participating countries in the interest of the whole region. In
the third phase, the Committee of Governors will address the macroeconomic needs for the
harmonisation of monetary policies such as inflation and interest and exchange rate policies of
the member countries.
The broad strategy of the SADC Committee of Governors is based on the premise
that a sound financial basis must first be laid within the participating countries before it can be
extended to the region as a whole. At this stage, the main objective is therefore to learn from
each other and to help each other to create appropriate structures for the central bank, the private
banking sector and the financial markets in each one of the twelve members of SADC. The
domestic financial sector reforms introduced in each country must, however, even at this early
stage, take cognisance of the development needs of the region, and the longer-term objective of
a more co-ordinated and integrated regional financial sector. This will be the contribution of the
central banks to the expansion of trade and investment, and to improved living conditions for the
approximately 130 million people of the region.
Finally, the Committee of Governors of SADC as a regional body has a great
interest in establishing extended relationships with similar regional central banking forums in the
rest of Africa, and other similar initiatives in the Southern African region.
IV CONCLUSION
The nature of current South African financial sector reforms is dictated by the
special circumstances of the country. They may therefore differ substantially from those
introduced in other countries. The South African reforms are needed to adapt the financial sector
to major internal socio-political reforms, and to accommodate the challenges presented by an
enhanced participation in the global financial markets.
As far as regional developments are concerned, South Africa welcomes the
opportunity of participating more actively through the Southern African Development
Community in the development of the financial sector of the African continent.
There is a growing need for some closer contact between the various regional
financial sector arrangements on the African continent. From the level of financial reforms
applied within each one of the more than fifty African countries, through the second tier of
regional financial cooperation, the ultimate objective must be to establish a sound, stable and
well-functioning financial system in support of economic development in the whole of Africa.
Co-ordination on a continental basis of the financial reforms applied within the regions can,
perhaps, become an important function of the Economic Commission for Africa, working under
the auspices of the Economic and Social Council of the United Nations.