Although there are valid concerns about the ability of many South African consumers to meet their debt obligations – many of which have originated as loans from the formal and ‘shadow banking’ sectors – the less formalised lending bodies making up the shadow banking sector and serving the nation’s unbanked population still has a role to play in the economy.
Shadow banking, which differs in that it is exempt from many of the regulatory and supervisory requirements placed on registered banks, still has to satisfy some regulations and is subject to indirect scrutiny from the South African Reserve Bank and the National Credit Regulator (NCR). The major difference between the two exists in the fact that only registered banks are able to take in deposits.
While our banking sector is one of the best in the world, it must be recognised that our population remains significantly under-banked. Therefore other financial intermediaries, such as those operating in the shadow banking industry, have a noteworthy role to play in extending credit to this particular segment of the population.
What is of concern is that although there are more than 4 000 credit providers registered with the NCR, it was recently found by the body that in the troubled Marikana area, 10 of the 12 credit providers were not operating strictly within regulations of the National Credit Act. In many cases practices that verged on ‘reckless lending’ were noted by the Department of Trade and Industry.
Essentially, the shadow banking sector operates less formally than traditional banks. It has two noteworthy advantages. The first is that it does not have to comply with the plethora of regulations that govern banking. The second is that the costs that are related to regulations are also avoided. Transactions are therefore often less costly even though the level of risk may be relatively higher.
In a low interest rate environment, such as that being experienced in South Africa, shadow banking flourishes as the returns offered by shadow bankning products routinely exceed prevailing rates in the regulated banking sector. The downside, however, is the implications of what can occur when the economic cycle turns and asset bubbles burst.
It is no small wonder then that concern still exists over how shadow banking could affect the lending market and its exploding growth. These are reflected in statistics from the NCR that show that total personal loans and advances (that is both personal secured and unsecured loans) grew from R1.21 trillion in quarter one (‘Q1’) 2011 to R1.32 trillion for the same period in 2012. Of this R110 billion growth, R40 billion can be attributed to pure unsecured credit and a further R15 billion to unsecured credit facilities.
The concern about the size, rapid growth and influence of the shadow banking sector is not only applicable to South Africa. It is a global phenomenon that has been noted in major financial centres across the world. On a global scale, the United Kingdom Financial Stability Board estimates that activities of ‘other financial intermediaries’ grew from US$26 trillion in 2002 to US$ 62 trillion in 2007 before declining sharply in 2008. It estimates the current value of the sector at approximately US$67 trillion.
It is a positive aspect that South African shadow banking activity, the most risky of the South African banking sub-segments, does not operate without some regulatory guidelines. For millions of unbanked South African consumers, the shadow banking industry offers the only access to the world of personal loans.
Shadow banking in the country may be casting a lengthening shadow that is a precursor to the dawning of new opportunities.