Cas Coovadia, managing director of the Banking Association of South Africa, talks to South Africa Magazine about the industry's progress, the eurozone crisis, opportunity in Africa and the future of banking.

By Ian Armitage

The financial problems facing Europe are causing worldwide panic and we are in a dangerous new phase of the debt crisis.

If Europe's troubles spread to the banking sector, the contagion effect would be inevitable and South Africa could be further affected.

However, domestic financial institutions' exposure to European debt is still relatively low.

Those are the views of Cas Coovadia, managing director of the Banking Association of South Africa.

“South Africa has a developed and well-regulated banking system, comparable to that of any industrialised country,” he says. “Our banks navigated successfully through the worst banking crisis in living memory. This was not luck, but rather a result of excellent business acumen and sound regulation. As a result of those measures, our financial institutions’ exposure to European debt is relatively low; importantly our banks are well capitalised.

“They are not going through the sorts of challenges here that they are in Europe and America.

“But, having said that, they are working within a fairly constrained environment. The broader economy, or real economy, has been impacted on by what is happening in Europe, which is still our largest trading partner and, as a result, there has been a downturn in South Africa – the demand for credit thus has reduced.

“Overall, South African banks have largely escaped the crisis experienced by global financial institutions; the sector's balance sheet is solid,” Coovadia adds. “South African banks also have a sizeable buffer to absorb liquidity pressure.

“I think European leaders, though, probably need to do a lot more to prevent the crisis from spreading and worsening, and to address the concerns of developing countries, which are innocent bystanders, should the contagion affect their economies.

“Emerging market economies have been hard hit by Europe's debt crisis and South Africa's rand has been rendered extremely volatile by the uncertainty. South Africa is particularly vulnerable to toxic effects of the eurozone debt crisis because, like I said before, it is our major trading partner and also our current account deficit is primarily financed by international capital flows.

“Yet, the fact is we are in a very good position, on the whole.”

You might forgive some scepticism. Earlier this month, Moody's downgraded South Africa's debt outlook from stable to negative, in the face of low growth prospects, strained public finances and rising poverty and unemployment.

So why is Coovadia so confident, and what’s next for our banks?

“Everyone’s looking at Africa,” he says. “There has been a steady rise in investment on the continent, which certainly has captured the financial world’s attention.”

Africa has been seen as something more than a curio in global investment terms since 2007, he adds, when the Industrial and Commercial Bank of China bought up a 20 percent share in Standard Bank, South Africa’s biggest lender, for $5.5 billion.

“Africa is flavour of the day,” Coovadia says. “If you look at Standard Bank, they have cut down on other global activity and are saying that they want to focus on Africa. Barclays is a significant player in Africa. Citigroup and Standard Charter are two international banks that are significant players in Africa. Nedbank has a partnership with Togo-based Ecobank, which has operations in 31 countries across the continent. I could go on; the banks are obviously viewing Africa as a critical market.”

Africa is becoming more and more competitive, and there are broadly two sorts of banks operating in the region. First, the biggish locals, such as Standard Bank, which is active in 16 countries, and Togo-based Ecobank, which operates mainly in west and central Africa. Then you have the Western world giants like Barclays, Citigroup and Société Générale.

“Once seen as unpromising and overly risky, sub-Saharan Africa, and the continent generally, is now one of the world’s fastest growing emerging banking markets and an increasingly sought-after investment destination,” Coovadia continues. “Economies are expanding rapidly, while steadily increasing consumer affluence is creating fresh demand for banking services.

“There are challenges, but also undoubted opportunity. As an association, we are doing a lot of work with regulators to try and ensure reform and ‘proper’ coordination across the region. South African businesses are obviously investing heavily in Africa - the likes of Pick ‘n’ Pay or Spar, to give examples - and they need banking services for that. So, banks are following in their footstep to provide the services they need. The opportunities in Africa are certainly very good.”

Coovadia says the banking sector plays a central role in supporting South Africa’s real economy and went on to explain that more probably needs to do more to support it.

“We are very concerned that the sector is being overregulated at the moment; we need some sort of coordination and appropriate regulation to enable the banks to continue to grow, to enable them to remain at the cutting-edge of international best practice,” he says. “The sector also has a vital role to play in the ongoing transformation of our society, and our desire to bring a better life to all of our people. That is a big priority. But of course, we have to view it now from within the constrained environment, which makes it more difficult. We are working hard on all fronts.”

South Africa's banks rank 2nd in the world for soundness, according to the Global Competitiveness Report 2011/12. It also ranked 2nd out of 183 countries for good practice in protecting both borrowers and lenders when obtaining credit for business (World Bank Doing Business Report 2011).

The future is bright.

“It is, but we need to ensure that we maintain the right balance to ensure we maintain, if not improve, our position; we don’t want to fall behind others in the global marketplace,” Coovadia says.

“Broadening financial services to the unbanked is one of the critical challenges going forward and there is going to have to be a balance between an appropriately regulated sector, which is not drowned in regulation, and as a result becomes extremely costly, and broadening financial services to the unbanked, which will have to be properly managed.

“Over the next 10 years, I think there will be significant activity in Africa and we will want to work with African governments, regulators and others to see how, on the back of our banks’ expansion into the region, we can have an association that can facilitate anything that needs to be facilitated in a regulatory and infrastructure environment.

“I also think that there are African market conduct and consumer issues that will have to be addressed in the next few years and, again, we need to see sound market conduct – it is an essential component in managing risk. We would encourage that. At the same time, there is a fine balance between market conduct and consumer protection and prudential issues; we would like to see that balance maintained well.

“Banks are the oil that grease the machine that is the economy. A healthy banking sector is critical for a healthy economy. If the banking sector is not healthy, if there is any uncertainty, then it immediately raises questions about the broader economy because the banking sector is the critical funder of the broader economy. Whether you like it or not, the banking sector is vital. As a result we need to ensure it is properly regulated, appropriately regulated and we don’t actually, in anyway, create or force conditions where banks have to actually do unsustainable business.

“Banks are important to the economy and it is absolutely essential to ensure that the sector is sound,” Coovadia concludes.

Website: www.banking.org.za.

Image: Getty