Government is moving ahead with its plans to launch a state-owned bank, and it will also launch a sovereign wealth fund.

President Cyril Ramaphosa announced the plans in his 2020 State of the Nation Address on Thursday evening (13 February).

“The National Treasury and the SA Reserve Bank are working together to ease pressure on business and consumers.

“We have decided to establish a sovereign wealth fund as a means to preserve and grow the national endowment of our nation, giving practical meaning to the injunction that the people shall share in the country’s wealth,” the president said.

“We are also proceeding with the establishment of a state bank as part of our effort to extend access to financial services to all South Africans.”

Finance minister Tito Mboweni would give more details on the plans in his Budget Speech later this month, Ramaphosa said.

In July 2019, Mboweni announced that deputy minister David Masondo had been given the responsibility to start the process of forming a state bank.

While the minister did not go into any detail about what this process would entail, he said that the establishing of a state bank was necessary.

“It’s a matter of responding to a cry among our people – and that cry fundamentally has to do with the discriminatory nature of the standing banking institutions,” the minister said at the time.

A sovereign wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.

A R7 billion mistake

The position to forge ahead with the establishment of a state bank comes counter to warnings from National Treasury itself that such an institution could be a massive liability that the country can ill-afford.

In a presentation to the Standing Committee of Finance in February 2019, Treasury warned that a number of recent banking failures – including the failure of VBS Mutual Bank – showed that a banking licence should not be handed out lightly.

It also warned of previous issues with state-owned banks, highlighting that the South African Post Office used depositors’ funds to finance postal operational losses in the late 1990s.

“International experience and South Africa’s own experience suggests that state ownership of banks has (the) potential to undermine prompt corrective action by prudential regulators,” it said.

“Prudential regulators sometimes forebear (i.e. they do not apply full regulatory measures) when faced with failing state banks due to the reluctance to frustrate what could be viewed as government policy or programs.”

Treasury added that the traditional rationale for introducing a state bank relates to addressing market failures, i.e. the state supplying services that privately-owned banks may be unable or unwilling to supply.

However, in a market where failures do not exist, introducing state banks is harder to justify, it said.

“The ownership of banks by the state represents a huge contingent liability on the shareholder (in this case ultimately the fiscus). Currently, the contingent liability is circa R7 billion,”it said.

“Financial inclusion is often cited as the key reason for the establishment of state-owned retail banks.

“However, South Africa has made progress in improving retail financial inclusion, with 90% of South African adults using some form of financial service and of which less than 1% is attributable to the Postbank.”

Read: Ramaphosa’s new plan to create jobs – including an online platform that will match workers to opportunities