As the Expropriation Bill comes ever closer to being signed into law, the ‘land debate’ has come down to earth, descending from the heights of political theory to the realm of practicality. Here’s a practical question: if property is confiscated by the government, will banks take the hit, or will they force clients to absorb the double loss?
According to the Banking Union of South Africa (BASA), the total debt collateralized by land is high, at R1.6 trillion. TransUnion analysed over R1 trillion of that debt and found the average amount outstanding per account was over R500 000, with 6.8% of accounts three or more months in arrears. South Africa’s biggest private banks have been double-downgraded below junk status in the last year.
This is a sad fall from the most recent bank-boom, when Cyril Ramaphosa was inaugurated president, which saw the JSE Financial 15 index rocket up 20% in a period defined by ‘Ramaphoria’. But the index fell back by the end of 2019. Then, under lockdown, the stock value halved, and since then has only recovered half that loss. The banks are bleeding, but things are about to get worse.
Short of a volte face, the Expropriation Bill, which aims to allow the government wide scope to confiscate property – expropriation without compensation (EWC) – will become law soon. The simple question is this: if a person owns a property, but also owes the bank money with that property as collateral, what happens to the mortgage after EWC? Will the expropriated owner still have to pay back to the bank, or will the bank have to write off the debt?
Neither option is acceptable. Someone who has just lost a major asset, which may include their home and their business, is hardly in a position to repay his or her loan to the bank. Nor should they be forced to do so as that would amount to double EWC, first by the government then by the bank.
Banks can ill afford to take the hit
But the banks can ill afford to take the hit either. To quote a passage from BASA’s submission to Parliament at length:
‘Should lenders incur losses due to expropriation compensation being below market value, this would in turn result in:
- Lenders adopting a more conservative approach to the extent of loans they would be prepared to provide as compared to property values; and/or
- Lenders increasing borrowing interest rates to compensate for the additional risk (and potential losses) in the event of expropriation;
- If losses are severe enough, private sector lenders withdrawing from providing loans where property is being offered for security, thus sterilizing the market.’
This matters to you even if you are not subject to EWC. You will get hit because the bank will pay for its risks and losses by making your future loan more expensive, squeezing the market dry, and so also lowering the value of your present house. As BASA noted, ‘This has a domino effect.’
BASA’s ‘domino effect’ quote comes from a government brief that was adopted by Cabinet in 2012, which then made the following recommendation. ‘In order to mitigate these negative implications, Government should automatically guarantee the difference between “just and equitable” compensation as contemplated in s25(3) of the Constitution and “market value” for private sector lenders. The Bill should provide for the Cabinet-approved policy framework.’
In other words, governments should pay off the debt to the banks on EWC properties, even if they don’t pay the owner. BASA’s nostalgia for the 2012 Zuma Cabinet motion is understandable. At least, back then, there was sufficient pragmatism to try and safeguard the big banks to stop dominoes from falling across the country. If that pragmatism is lacking today, though, what solace is that to the victim of EWC?
To its credit, BASA opposed EWC clearly in its 2021 representation to Parliament, calling for the EWC section of the Expropriation Bill to be ‘deleted’ on ‘principle’. Yet the 2012 idea to try and save the banks while throwing some clients under the bus has not been unambiguously abandoned. Instead BASA calls for this as a kind of backstop in case EWC is driven through. It does make one wonder.
Danced around
All members of BASA are also members of Agbiz, the Agricultural Business Chamber of South Africa, which has danced around EWC for years. Agbiz CEO John Purchase bragged about ‘the access we now have to ministers and to the presidency and to the president himself’ after Wandile Sihlobo, Abgiz’s chief economist, was placed on President Ramaphosa’s advisory panel on EWC. Agbiz wrote that ‘Wandile represents Agbiz on various platforms’ with the first listed being ‘President Ramaphosa’s advisory panel’.
Sihlobo had been a long-standing and famous opponent of EWC at the time, but for reasons that remain unclear ended up endorsing EWC to the President, after which Agbiz again posted a link to a statement by an ANC MP who wrote of Sihlobo as Agbiz’s man on the Ramaphosa Panel. In so doing, Agbiz endorsed EWC to the President on behalf of all its members, including all South Africa’s banks. Agbiz also denounced Agri SA after the latter’s members on Ramaphosa’s panel refused to endorse EWC, in contrast to Agbiz.
So Agbiz endorsed EWC, but is ‘officially’ mandated to oppose EWC, which it has done before parliament. The Agbiz ‘dance’ around EWC is more of a ‘split’ across both sides of the same issue. For more detail on this debacle read here.
The upshot is that the major banks have, through BASA, made a clear appeal against EWC, while calling for banks’ balance sheets to be protected while clients subject to EWC are dispossessed. Likewise, the banks have, through Agbiz, officially opposed EWC while also making a public endorsement of the very same policy.
If you think South Africa’s banks are talking straight from a position of strength, then there is no story here. But then you should be able to answer the question: will expropriated owners be forced to pay back the banks, or not?
We cannot answer that question for the simple reason that we do not know. So, we have asked BASA to enlighten us. What calculations are they making over the R1.6 trillion worth of collateralized debts sitting on their books? Where exactly does the buck stop?
[Image: Gerd Altmann from Pixabay]
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