Analysis of the third kind
30 September 2014 11:58 (South Africa)
Opinionista Ivo Vegter

Break the banking cartel

  • Ivo Vegter
There is one law that, if changed, could revolutionise commerce in South Africa. Thing is, it isn't in the government's interest to change it.

In a free country, a government can only exercise such powers as are granted to it by the citizens. But there's a problem. Once ceded, it is very hard to reclaim those powers. Governments aren't too keen to give them up.

It is not surprising to note that most of a parliament's work is in writing new law, as opposed to repealing old law. The only repeals you tend to see are laws that are superceded by updated (and expanded) versions. The result is ever growing government, becoming ever more costly and interposing themselves ever more in the citizen's personal and economic lives.

One of the most insidious powers ever ceded to governments was the power to print money.

Historically, banks issued money. They did so in the form of exchangeable depository receipts for assets (usually gold or silver). They then granted loans with the assets on deposit as collateral. This further increased the supply of currency to the market.

The credibility and value of any one currency was determined by the issuing bank's reputation in the market, the faith depositors had in it, and the value and integrity of the assets against which the currency was issued.

It worked like this until roughly a century ago. The currency was created by the market as a means of exchange, and the amount in circulation would depend entirely on the needs of the market. If governments wanted to do something, they had to obtain consent from the representatives of the people to raise tax for it. They could not spend what they didn't earn in revenue.

However, governments always wanted to spend more than they could raise in tax. Wars, and the occasional bank failure, gave them a good excuse to create this ability for themselves. The result was the concept of the central bank. It has monopoly control over the price of credit, or, interchangeably, the amount of money in circulation. In essence, a government could raise revenue simply by printing money. This deliberate "inflationary monetary policy", had the effect of devaluing the currency in circulation, as well as deflating government debt. So, deficit spending became possible.

John Maynard Keynes formalised this principle during Franklin D. Roosevelt's New Deal era, which was an extreme case of deficit spending mirrored later by programmes such as the Great Society of Lyndon B Johnson (which resulted in the stagflation of the 1970s), and the stimulus programmes started by George W Bush and enthusiastically expanded by Barack Obama (which will result in the stagflation of the next decade or two).

That deficit spending doesn't work, and usually just primes the market for the next big boom and bust, is usually explained away by saying that things would have been even worse without the counter-cyclical spending of the government.

The reality, however, is that the government's policy doesn't ameliorate booms and busts, but causes them. Throughout the 19th century, there was no real inflation. A dollar minted in the year 1800 bought pretty much the same as a dollar minted in 1900. During the 20th century, however, the dollar began to depreciate, consumer prices skyrocketed, and bubbles with their subsequent crashes became not only more common, but synchronised throughout the economy.

Of course, people aren't suckers, and they'd quickly flee a depreciating currency for one that held its value better – such as paper issued by a reputable institution, or gold, for example. To prevent this, governments passed "legal tender" laws, which require one to accept the state's mandated currency in settlement of debts. Retaining monopoly control over the currency is today a paranoid article of faith for central banks and governments.

Last weekend, I presented this at GeekRetreat, a gathering of technology entrepreneurs, educators, venture capitalists, and journalists held in the picturesque surroundings of Stanford in the Western Cape.

Most everyone grasped the notion intuitively, although a few expressed surprise that you seldom hear this argument. That might be because governments, central banks, banks and economists all have vested interests. Government's spending ability relies on the ability to print money. Central banks are mandated to protect the currency. Banks quite enjoy the monopoly they have on an essential service, which permits them to gouge customers for all they're worth. Economists are fed a diet of Keynes at university, and fattening governments that need their data can't hurt.

This is why the SA Reserve Bank is implacably opposed to relaxing deposit-taking laws, which permits only licenced and regulated banks to accept deposits, repayable upon demand.

The Bank's justification is that this protects depositors, and anyway, because you wouldn't trust a telco or a shopping mall with your money, it should be illegal to place it with them.

In truth, regulation does little to protect depositors. Deposit insurance might, but ask anyone who suffered from the collapses of Lehman Brothers, Saambou, Regal Bank, or the Icelandic banks, if their banking regulations served them well.

Besides, if you didn't trust your telco, would you buy pre-paid airtime? You're betting that the telco will be around long enough to make good on its debt, in services. Would you buy a gift voucher from a mall, if you thought the mall would go under before you could spend it? What difference does it make whether the value is repayable in goods or cash? And why outlaw something that the central bank says you wouldn't do anyway?

The real reason there's such a restriction on deposit-taking, is that the central bank is terrified of the rise of alternative currencies. It fears we'd all trade in US dollars using Paypal, airtime minutes issued by a telco, or moola issued by MXit. While the fear is probably overblown (Paypal didn't kill the dollar; the government did), the effect of this restriction is severe.

The restriction on deposit-taking hampers innovation that would make electronic transactions available to the half of South Africa that is currently unbanked. It restricts it to bank-backed solutions. This is why we cannot get cash back out of Paypal to enable sales to foreigners: it doesn't have an alliance with a local bank that would be under Reserve Bank control. This is why airtime, although used as a currency, can never be redeemed for cash.

In Kenya, the M-PESA system, which is telco-led, has been a raging success, and has done more to extend commerce to the poorest sectors of society than any bank ever did. In South Africa, mobile phones – unlike banks or fixed internet access – cover an estimated 75% of the population. It had to shatter some barriers around deposit-taking, but luckily, it managed to survive legal challenges from jealous banks.

It is true that banks are slowly introducing partial solutions to this problem. An example is FNB's mobile banking solution, which works with even the lowliest cellphone, and through which three times more money is transacted than through ATMs and internet banking combined. It is splendid, but it doesn't go far enough. Another is ABSA's CashSend service, which requires a bank account only on the part of the sender. That's one banked customer too many, and works only within the country.

It may be possible for smaller banks, such as Old Mutual or Capitec, to launch innovative, lower-cost, competitive products. But they also have yet to make a big dent in the 50% of South Africans that remains unbanked. And while agile new companies such as Pocit or Wizzit are promising and worth supporting, they need to be allied with a bank to achieve anything truly meaningful.

Mohammad Yusuf, the Nobel-winning founder of Grameen Bank, puts it thus: "The point I try to make to the policy makers is that banking laws are like the architecture of a supertanker that needs to go out to the deepest parts of the ocean. Banking the unbanked requires new institutions that are like a dinghy in shallow waters: they don't need as much support and they need a totally different architecture. Unless these policies are created to help, we will never reach the people we need to. You need the backing of the system in order to succeed."

When someone starts a small business in the informal sector, or one aimed at a small but international customer base, are they likely to have a registered company, or qualify for a costly credit-card merchant account? Hardly. Yet this is where economic growth begins. It doesn't begin in the formal sector, among privileged entrepreneurs with business plans and venture capital and a media profile.

Our own Minister of Trade & Industry, Rob Davies, admits to the shortcomings: "The formal banking sector in this country is not designed to fulfil this role [of banking the unbanked in a largely informal environment]. Our banking laws are extremely conservative."

He added, however, that government would be looking at all regulatory constraints.

If he seeks innovation, it will have to come from companies that are specifically built to reach the poor, the rural, the informal, the second economy.

The key regulatory constraint that prevents this is the restriction on deposit-taking by non-banks. There are others, but this one law makes it outright illegal to create a fully-functional payment system, for anyone other than banks. The very same banks who have proved incapable of addressing rich and poor, banked and unbanked, local and foreign, big and small, urban and rural.

Granted, it might be a bridge too far to expect the government to give up the right to print money whenever it sees a pretty new power station or a cool new warship, or some vote-buying boondoggle.

So let's concede some regulations. Limit the size of transactions or deposit balances with non-banks to a useful, but small, amount. Think R10 000 or R20 000. Disallow fractional-reserve lending for non-banks. Require them to submit to regular audits. Impose rules to keep the tax-man and the money-laundering spooks in business.

But then let innovative firms compete to come up with a complete payment system for all South Africans. One that allows cash deposits, transfers and withdrawals of any size, local and foreign, and regardless of whether you're a big shot with your own company and a business account at a bank, a labourer seeking to remit wages to his rural home, or a rural woman making cute things for rich foreigners.

The ability to trade and grow prosperous requires the ability to freely transact and exchange money with anyone, anywhere. Until we have that, free trade and prosperity will remain the preserve of the rich and privileged.

That this is so by law is monstrous.

  • Ivo Vegter
IvoVegterBW

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He approaches issues from the perspective of individual liberty and free markets. He grew up in the deep south of Johannesburg, and learnt his politics reading the Weekly Mail and Vrye Weekblad at Wits University during the early years of the country's transition to democracy. He recently left the city for the lower cost of living of Knysna, where he continues to write about everything under the sun. He is always right.

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