When a populist politician decides to wipe out certain loans in the hopes of keeping voters sweet, the banking system suddenly looks a bit dodgy.
Back in the late 1970s, I decided to dump the idea of becoming a barrister and pursue a career in banking in London. The chief attraction of banking over law was that it seemed so much easier back then and the pay was better when you were embarking on your career. Plus, you didn’t have to wear stockings, a horse-hair wig and heavily embroidered robes as you progressed up the banking ladder.
Another huge attraction were the lunches. Bank lunches in the 70s were legendary and would start at 12.45 with pre-lunch drinks. Then a superb gourmet meal would be served, prepared by some gorgeous, well-connected Sloane Ranger who’d completed a cooking course at the Cordon Bleu school. After the plates were cleared away, the port, brandy and cigars came out and the lunch would roll merrily on to way past three o’clock. Sadly all this changed when the Yanks invaded the City of London and ‘Big Bang’ happened in 1986. By that time I’d gapped it to South Africa, which was still way behind the times and promised at least fifteen more years of long lunches, if you happened to be involved in financial markets.
One of the banking acronyms I picked up while I was still in London was LDC. It stood for ‘Loans to Developing Countries’ and was very popular for a while with any financial institution that wished to neutralize unfavourable reaction to its host country’s involvement in colonialism. Within a few years, though, the acronym LDC stood for ‘Loans Don’t Comeback’, and that rather scuppered the faux philanthropism of banks as they wondered how to disguise the hole in their balance sheets.
The thing about banking is that, in essence, it’s a fairly simple business. Strip away all the credit swaps, derivatives, securitization and such mumbo jumbo and it’s about taking deposits from those with surplus cash and lending it out to those who want to borrow it. Naturally, a small charge is extracted in the middle of that transaction and that generally comes down to the difference between the cost of borrowing and the cost of lending.
Obviously, if you borrow money for one month and lend money for one year then you may be caught short if the lender doesn’t want to renew his loan after one month. But that’s what makes banking such fun and why it is important to match your lending book as far as possible with your borrowing book. Obviously, things would get equally sticky if you borrowed one-year money as a bank and had nobody to lend it to. I offer this very rudimentary lesson in basic banking not to insult your intelligence, gentle reader, but in the hope that somebody in the African National Congress (ANC) hierarchy may read it.
If, as Pres Cyril has done, you decide on a whim to wipe out all bank loans of up to R50 000 for households earning less than R7 500 a month, you tend to bugger the system up a bit, particularly if you don’t consult the banking industry first.
When people place their trust in the banking system to look after their savings, they assume that the bank is trustworthy and that they will be able to get their money back when they need it, hopefully with some interest to go with it. But when a populist politician decides to wipe out certain loans in the hopes of keeping voters sweet, then the banking system suddenly looks a bit dodgy. After all, why stop at R50 000? Why not up the limit to R250 000 and say that all debt incurred by card-carrying members of the ANC will, henceforth, be written off? After all, the precedent has already been set. Too much of that and we may well find that banks are unable to repay deposits from customers.
The banking industry has already pointed out that of all Cyril’s ‘New Dawn’ ideas, this isn’t one of the best. Apart from interfering in the business of companies that have shareholders to consider, the message this meddling sends to the banking sector is to be extra careful when lending money to low-income earners. In fact, rather avoid it altogether. That can hardly have been the intention, but the reality is that those earning under R7 500 per month may be forced to resort to loan sharks to get by rather than form a relationship with a registered bank. Loan sharks tend to use rather more violent methods to call in overdue loans and their interest rates give the middle finger to the Usury Act.
Admittedly there is a lot of bureaucracy involved in cancelling debt and that could take years, given the number of people who might apply. So what’s the point if the relief isn’t immediate? And who is going to wade through all these applications and at what cost? Will it be the bank’s responsibility or is this a cunning job-creation plan for the benefit of the cadres? Will the banks be able to challenge a ruling and who will decide the case?
As you can see, it has all the promise of becoming a major balls-up as well as further weakening our economy, but that should come as no great surprise given the party sponsoring the idea.
I suppose the smart move would be to open a bank account on behalf of somebody earning under R7 500 a month, cut them in on a percentage and immediately borrow the maximum ‘free’ loan of R50 000. But I bet most of the ANC politicians have already thought of that one.
David Bullard is a columnist, author and celebrity public speaker known for his controversial satire.
The views of the writer are not necessarily the views of the IRR.
If you like what you have just read, become a Friend of the IRR if you aren’t already one by SMSing your name to 32823 or clicking here. Each SMS costs R1.’ Terms & Conditions Apply.