South Africa’s integration into the global economy after the first democratic elections of 1994 had important implications for the South African banking sector. The official policy has since been to open up the South African banking sector to foreign participation. As a result of this policy, 15 foreign banks have registered branches in South Africa and 60 foreign banks do business in the country through representative offices. According to BIS Review 95/2000, the South African banking sector remains sound and well-managed. The South African Reserve Bank is responsible for bank regulation and supervision which is based entirely on the recommendations of the Basel Committee.
New technologies, improved infrastructure and political stability are some of the contributing factors that will make the world a smaller place. Evidence has showed that elimination of obstacles to free trade has led to greater market efficiency and better risk-and-return combinations for investors. This is largely due to greater financial market integration. However, there are though disadvantages associated with integration of financial markets to the extent that it can reduce the ability of domestically focused policies to deal with the problems arising in the respective domestic financial markets.
Integration comes with various challenges and complexities, bringing along with it serious threats and opportunities. The next section will focus on analysing these threats and opportunities according to the PESTEL model, which takes into consideration the Political, Economic, Social, Technological, Environmental and Legal implications of such integration.
If one has to travel from one African country to another, one can easily trade in cash. The challenge is paying cashless, for example with a card, outside your home country. This is mainly due to economic; technical and legal market barriers, proving that the individual elements of the PESTEL model can often not be isolated.
The challenge of a cashless environment was addressed by the European Banking Industry through a single payment system namely, the Single Euro Payment Area (SEPA), whose main objective is to overcome these barriers. SEPA was discussed in section 4.3.
According to Dave Mitchell (Head: National Payment Systems), the plan for SADC is to set up systems that will result in a single payment system for the zone. It is reported that 12 countries have already implemented gross real-time settlement systems, which means that they have the means to conduct immediate electronic settlements. This project is largely aimed at addressing the technological aspect of the SADC regional integration.
The other three countries which had not yet achieved this level of service are the Seychelles, Madagascar and the DRC. These countries still maintain a largely unbaked population and conducted mostly cash transactions. This is a classic example where the political and social development of countries acts as a technology inhibiter.
The aim of the payment project is to mirror the European Union’s economic integration model, which would ultimately include one central bank, one multinational payment and settlement system and one currency. No firm dates have been committed to although SADC aims to have the systems integration done by 2015 and the single currency by 2018. The lesson from the EMU is that they first embarked on a single currency, and now more than 10 years into the future is still in process to establish a single payment system. The order and timelines of the SADC model might therefore be unrealistic. Figure 13 below sketches out the proposed rollout plan of the SADC single payment system.
Figure 13: Proposed Rollout PlanSource: SADC (2010)
Financial regional integration in SADC without having a single currency can translate into economic and legal risks. This is mainly due to the risks of various floating exchange rates and currencies that are not convertible. This in turn will call for most of the African regional blocks to have separate clearing houses. This is what currently exists between The Economic Community of West African States (ECOWAS) which is a regional group of sixteen countries, and COMESA.
Integration can bring along instability in financial and money markets, especially in cases where countries are trading with a single currency as with the Euro-zone. Employment levels could increase or decrease depending on the strength of institutions. Bigger banks could easily destroy or even buy out smaller competitors in under developed countries. Depending on the model, cultural intrusion becomes a huge challenge on its own.
Loss of sovereignty
One of the biggest challenges amongst the many already listed is of political nature: loss of sovereignty. The local industry faces the risks of political instability and inconsistent governments. This could ultimately lead to drastic change in policy and also poor uptake of the system. Most countries in the SADC region depends heavily on donor funds, and in some instances they show little or no financial growth and also lack of innovation.
Legal challenges that face integration projects are over or under regulation of markets. Quite often over regulated markets leave no room for competition. This is sometimes necessary in countries where the state has to play a bigger oversight role to ensure some form of competitiveness and control of the markets.
However one has to look at the benefits and opportunities that come with integration. These include widening the consumer choice across borders and new entrants into the market. The consumer has a competitive advantage with more available choices. The introduction of new technologies will benefit the less privileged countries. Investment choices across our borders will be much easier and accessible. The creation of knowledge economies will be greatly enhanced through information and communication technology.
Closed market structures are very common in the case of many African countries. The state usually plays an important role in major industries and will not let go of certain institutions as this is usually a ‘cash cow’ for many African governments. The challenge the South African banks will face is gaining market share in countries that will not easily privatise or liberalise these financial institutions.
At present there seems to be little or no competition in the local domestic market by the big four market players. New policies will have to be developed to ensure proper and well managed competition. Plans must be in place to provide for proper regulation, oversight and implementation. Transfer of skills and training will have a huge impact on regions that are already ahead in information, communication and technology.
South African banks could possibly be the only ones in the region with access to sophisticated technology and substantial assets. This already poses a threat to smaller financial institutions in the SADC region. The threat to the region could be far greater than anticipated. This could lead to larger South African banks replacing existing extra-regional banks.
It is cited in a study by African Development Bank (1999) that ‘control of the region’s banking market by South African institutions is unlikely to be beneficial to other countries. This is largely due to the fact that effective banking regulation must be in place to ensure that banks act competitively. However, for integration to work successfully all regions must be included as this will also allow the financial industry to become more innovative and competitive to stay in business.
According to a study conducted by the African Development Bank (1999), there are significant differences within the region in the structure of financial sectors. In some regions like South Africa and Zimbabwe, the financial sector is privately owned and controlled. These regions also have highly sophisticated systems in place. Malawi and Zambia has substantial state ownership and control and in some regions like Angola and Mozambique until recently, it was entirely state-owned.
Currently the banking systems in South Africa are rated very highly in the international banking industry. Most of the developing countries in SADC lack proper infrastructure and modern technologies. This will have an impact on timelines and costs to upgrade so as to be able to interconnect with the rest of the region. The question arises on how to finance this model internally and across the various regions.