Critical Assessment Of The Banking System In South Africa

1558 words - 7 pages

Introduction
Origin and History of Banking in South Africa
The concept of banking has existed in South Africa has existed from as far back as the 1790’s with the establishment of the Lombaard bank in Cape town. There was increased European investment as a result of the discovery of substantial mineral resources in the late 19th century. But it wasn’t until the mid 20th century that South Africa experienced a massive boom in its financial sector with total financial assets being greater than GDP. This growth was hampered by disinvestment in protest of the apartheid policy introduced in 1948. But as the economy recovered from the negative impacts of the apartheid policy, the banking sector ...view middle of the document...

There has been some discussion as to the possibility of a ‘big five’ banking structure in South Africa due to the growth of Capitec Bank in recent quarters. Recent data from the SARB shows that market share of these four banks alone has dropped to 84% as at June 2012. The difference between 2007 and 2012 can be attributed to the coming of prominence of Capitec Bank in the midst of those years with data from the South Africa’s Audience Research Foundation showing that 6.4% of South Africans regard Capitec bank as their main bank, compared with 6.3% for Nedbank. It could still be argued that Capitec bank is yet to join the league of big South African banks as further research reveals that even though, it has a higher market share based on the number of people with more than one bank that cite it as their main bank, it still has less clients, less deposits received and less banking assets (loans, reserves and investment securities) in total than Nedbank.
Theory of Competition
One of the major characteristics of perfect competition is that firms are price takers. This is clearly the case in the South African banking industry as even though, each bank sets their interest rate for deposits and loans independently, the fact that there are several alternatives acts as an incentive to offer competitive rates to the market. Thus, interest rates are set by demand for and supply of loans and regulated by the SARB by setting the repo rate which is the rate at which banks borrow rands from the SARB. Another feature of perfect competition is the ease of entry and exit of new banks into the market. According to the World Bank resources, the minimum capital entry requirement for South African banks is the greater of ZAR250 million or a prescribed percentage of the sum of amounts relating to the different categories of assets and other risk exposures and calculated in a prescribed manner. This is quite a substantial amount compared to the ZAR required to register a regular South African firm.
A key difference between the theory of perfectly competitive banks and the Monti-Klein theory of Monopolistic banks is that while perfectly competitive banks can maximise profit by setting quantity but not price, monopolistic firms can set both of these, but not at the same time. Since the interest rates for treasury bills are constant in the monopoly bank, the interest rate for loans is determined primarily by the elasticity of demand. Thus, as the elasticity of demand for loans increases, the interest rate required for loans reduces and vice versa.
But it is unrealistic to say that there is monopolistic competition in the South African banking industry as there are more than one bank with a significant portion of the market. Also, in terms of product differentiation, the products are essentially the same with branding accounting for major differences. Thus, competition in the South African banking industry is an oligopolistic one.
Competition in the South Africa...

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