Financial Crime World

South Africa’s Banking Sector Remains Concentrated and Well-Capitalized, But Challenges Loom

Pretoria - Despite some concerns over the concentration of foreign banks in South Africa, the country’s banking sector remains well-capitalized and highly concentrated, according to a report by the Central Bank of Lesotho (CBL).

Sector Performance

The report evaluated data from 2017 and shows that:

  • Loans and advances by commercial banks increased by 17%
  • Exposures of foreign subsidiaries to South African banks through balances held with them rose by about 70%
  • Total liabilities of the sector grew by 24%, driven mainly by deposits, which jumped by 39%

Capital Adequacy Ratio

The Capital Adequacy Ratio (CAR) stood at around 18% as at December 2018, indicating that the banking sector remains well-capitalized. However, the report warns that:

  • Customer deposits are the predominant liability of banks
  • Loans to customers represent a smaller percentage

Regulatory Framework

The CBL’s powers to authorize, regulate and supervise banks are set out in the Financial Institutions Act (FIA) of 2012, which enables the central bank to set prudential requirements, including minimum CAR. However, the report notes that:

  • The FIA contains language and methodology belonging to the Basel I framework, which may limit the CBL’s ability to be “fleet-footed” in its supervisory processes

Risk-Based Supervision

The report highlights the need for the CBL to enhance its risk-based supervision (RBS) framework to fully leverage Pillar 2 International Capital Adequacy Assessment Process (ICAAP) and Supervisory Review Process (SREP), which will require technical assistance (TA).

Lesotho PostBank

Meanwhile, Lesotho PostBank has expressed its intention to grow aggressively in electronic products and enablers, and secure credit lines with other commercial banks. However, the bank’s liquidity policy requires it to hold additional capital for liquidity purposes, which may pose challenges if it is not able to generate sufficient profits.

Challenges Ahead

The report highlights several challenges that need to be addressed by regulators and banks alike to ensure a stable and sustainable financial system:

  • The CBL will need to provide guidance to Lesotho PostBank on how to manage risks and plan for regulatory capital under Basel requirements
  • The central bank has also been advised to improve its supervisory practices and risk culture to make them less compliance-like and truly risk-based supervision

Conclusion

Overall, while South Africa’s banking sector remains well-capitalized, the report highlights several challenges that need to be addressed by regulators and banks alike to ensure a stable and sustainable financial system.