Post Office plans to bank the unbanked masses
After years of talk about establishing a state-owned bank, the government could soon end up with two.
The first came about after the spectacular failure of unsecured lender African Bank. The recently relaunched bank is now majority owned by the South African Reserve Bank and the Public Investment Corporation, which hold 50% and 25% respectively.
The second will be a fully fledged Postbank.
Until now Postbank has been a deposit-taking institution, without the ability to offer loans. But providing a broader range of financial services through the South African Post Office’s extensive footprint, particularly in areas underserved by commercial banks, is seen as key to saving the postal service.
Last week, Telecommunications a n d P o s t a l S e r v i c e s Mi n i s t e r Siyabonga Cwele, as well as Post Office chairperson Simosezwe Lushaba and chief executive Mark Barnes, announced that the Reserve Bank had approved Postbank’s application to establish a bank, taking it a step closer to obtaining a banking licence.
The next and final level in the process is expected to be complete within a year and will include the approval of nominees to the Postbank board, its registration as a company with its own governance structures, and the transfer of existing Postbank business from the Post Office to the new company.
This is an “incremental strategy” but Barnes believes there is no reason Postbank cannot, in time, begin offering unsecured loans at rates that are far below those other banks offer their customers.
Financing to small and medium enterprises is a market Postbank could target, he says.
Postbank products could also include insurance and education savings policies.
In the microlending space in the private sector, the shareholder returns required are focused on net returns after bad debt, Barnes said. “And the bad debt [in this] sector has been quite high, so the cost of capital to providers of unsecured loans is high, because shareholders want serious return on that risk.”
But this is self-destructive, he added. “The shareholders require a higher return, which means the providers have to pass on a higher cost.” This invariably makes the rates at which these loans are extended unsustainable.
But with the state behind a bank, driven by motives beyond “economic extraction”, the cost of capital could be far lower, said Barnes.
Hypothetically, this could be equivalent to the government cost of funding, or rates at which the government borrows money from capital markets — currently between 8% and 9%.
If the government underwrote Postbank-issued bonds at rates such as these, it would be feasible to lend profitably to customers at somewhere in the range of 12%, he said.
This is well below the regulated maximum that unsecured l enders can charge on loans, which is the repo rate plus 21% a year — or currently about 28%.
The government would be interested in providing this “apparent subsidy” because the private sector model had failed, which had led to the state owning a bank in the first place, said Barnes. “The government has had to pick up the pieces, as we’ve seen.”
In addition, there is a massive informal sector that is unbanked and falls outside of the tax net, he added.
If this economic activity could be brought into the formal financial sector, the country’s tax base could widen dramatically and investments could be directed into the communities where the cash originated, Barnes said.
The envisaged Postbank would be best positioned to provide financial services with this in mind, given the Post Office’s extensive branch network.
“There is no better institution, with a bought and paid-for infrastructure, to launch this initiative than Postbank,” said Barnes.