FINANCIAL INTERMEDIARIES IN SETTLER ECONOMIES: THE ROLE OF
THE BANKING SECTOR DEVELOPMENT IN SOUTH AFRICA, 1850-2000.
Stuart Jones and Grietjie Verhoef
University of the Witwatersrand and University of Johannesburg.
South Africa
Paper presented in Session 97: Settler Societies in World History.
International Economic History Association
Helsinki
August 2006.
2
FINANCIAL INTERMEDIARIES IN SETTLER ECONOMIES: THE ROLE OF
THE BANKING SECTOR IN DEVELOPMENT AFRICA, WITH SPECIAL
REFERENCE TO SOUTH AFRICA, 1850-2000.
Introduction
What was the nature of the banking system that had emerged to facilitate the development of
settler societies? There is no definitive response to such enquiry, because of the diversity in
the development of settler economies as well as the involvement of different European
powers. In Africa the British colonies extended over almost two-thirds of European colonial
presence. Financial systems in British colonies were bound to reflect British dominance, well
into the twentieth century. In general, the role of financial intermediaries in both the supply
side as well as the demand side of the development process has been explained by Lance E.
Davis. He maintained that financial intermediaries assisted in channelling investment by both
influencing the supply of funds for investment, that is those intermediaries influenced the
magnitude of investment funds invested, but the intermediaries also affected the demand side
by impacting on the choice of projects investment funds would support. (Davis,1994) Davis
and Gallman also concluded that “… the evidence also concludes that innovations in
intermediation cause an outward shift in the savings supply schedule and thus produce higher
aggregate savings.” (Davis and Gallman, 2001:42) The operations of financial intermediaries
not only mirrored the development in the settler society by the number and nature of
transactions performed, but also influenced the direction thereof by its impact on the demand
side. Engerman et al observed:
“One of the striking changes accompanying – if not causing - economic development
is the dramatic increase in financial transactions among firms and individuals, sometimes
directly between borrowers and lenders,
sometimes involving third parties (financial
intermediaries). Over time these third parties played an increasing important role. In part it is
because the type of intermediaries who appeared early on (brokers, banks, stock markets)
grew more numerous; and in part it is because of the introduction of totally new organizations
(savings and loan associations, investment trusts, and central banks). In most societies this
expansion of financial intermediaries fuelled higher rates of savings and investment, more
3
rapid growth of the capital stock, and a higher rate of economic growth.” (Engerman,
Hoffman, Rosenthal, Sokoloff,2003:1)
In explaining the direction of development of the world economy as well as the development
of the new world with settler communities, several theories contributed to growing
understanding of such development and further debate about causality and benefit. Lloyd and
Metzer (2005) identified the following
contemporary trends in economic explanation of
development: first, the Smithian growth concept of expansion of frontiers by additional inputs
rather than improved productivity; then to the Ricardian concepts of specialization and trade
in an emerging international market, leading to the contribution by Von Thünen with the
emphasis on spatial distribution of production under the influence of transport developments.
Consideration is then afforded to Marx’s conception of the revolutionary development of
modes of production, which later led to new twentieth century explanations of European
colonialism and emerging settler societies. The first attempt to construct a theory of settler
colonialism, is identified in the work by E.G. Wakefield, Letter from Sydney (1829). Wakefield
perceived ‘settler colonialism’ as a society that constructed a social structure appropriate to
capitalist development. (Lloyd and Metzer,2005:23) For the understanding of the role of
financial intermediaries in settler societies, this is significant, since financial institutions were
essentially creations of and prerequisites for the capitalist economy. The economic
development in colonies is analysed by investigation into the extraction of staples, trade and
beneficiation thereof, rather than by reference to ‘frontier’ relations. The development in
settler economies shows capitalist investment in the extraction of staples and production,
leading to essential linkages to inter alia “… financial, transport and final demand linkages
that were of most significance in the 19th century rather than those to manufacturing.”
Industrialisation was therefore initially encouraged by the capital accumulated from resource
wealth, rather than from exports. (Lloyd and Metzer, 2005:25) The ‘dependence’ (where
‘dependence’ is understood in a more nuanced meaning than simplistically interpreted by the
“core/periphery” dependency theory), of colonies on the “…imperial governance framework of
liberalisation and specialisation on capitalist primary production were comparatively beneficial
in the British settler economies.” (Lloyd and Metzer, 2005: 26)
4
A recent argument by Engerman and Sokoloff is that the “..superiority of English institutional
heritage, or to the better fit of Protestant beliefs with market institutions” could be enhanced
by providing for a more nuanced perspective on the divergent paths of development in settler
societies. They argue that European colonies in the New World were primarily characterized
by “..their factor endowments, by extreme inequality in their distribution of wealth, human
capital and political influence. We argue, moreover, that these initial differences in inequality
were of major import, because societies that began with great inequality tended,…to evolve
institutions that contributed to the persistence of substantial inequality and generally poor
records of development over the long run.” (Engerman and Sokoloff,2005:3-4) It is therefore
interesting to investigate the role of banking institutions in a settler society such ass South
Africa, in the development of the overall economy of the colony and specifically, the region.
Banking institutions were primarily establishments by or
for the settler community in
accordance with their European heritage. In South Africa this was though not only British, but
also distinctly Dutch.
It was in thus in an environment of capitalist economic development created by colonial
powers for settlers, that financial intermediaries emerged as institutions to mobilise savings
and facilitate investment. The introduction of financial intermediaries could benefit the
savings-investment process by reducing transaction costs for savers, reducing the level of
asymmetrical information between savers and the receiving firms and finally improve the
liquidity of assets whereby risk-avers savers might experience a greater sense of safety.
(Davis and Gallman, 2001: 42) In the early stages of economic growth those financial
intermediaries would primarily be engaged in mobilising available savings, rather than
increasing savings. The mobilisation of savings funds depends on how the financial
intermediaries can provide information to savers and reduce their perceived risk. The role of
the financial intermediaries is therefore located more on the demand side: to direct mobilised
savings towards certain sectors of the economy where savers’ claims would be justified and
optimally
rewarded.
These
sectors
would
be
the
new
growth
sectors
of
the
emerging/developing economy, where investment is required. Financial intermediaries thus
have the dual role of mobilising savings as well as allocating them to projects dependent on
external finance. (Engerman et al, 2003:2) The success of financial intermediaries in
5
performing this task, is dependent on strict adherence to ‘rules of the game’ and sufficient
information collection. The role performed by financial intermediaries and banks in settler
economies must therefore be assessed by the degree to which they support the growing
needs of the emerging economies: security for savers and funds for investors.
This paper is concerned with the specific nature of the financial sector in South Africa, with
some reflection on the development of financial intermediaries in other settler economies. The
focus is on the development of the banking sector, thus not considering the full scope of
potential financial intermediaries, such as mortgage markets, equity markets or other asset
markets. This paper will address the trends in the banking history of South Africa, with
references to other settler economies, then reflect on the period of functional stability in the
South African settler economy, and then finally consider the diversion during the period of
functional instability.
Modern Banking in South Africa
The history of modern banking in Africa is in large part the story of banking in South Africa
extending northwards and westwards, bringing best banking practice to regions that were
either unbanked or underbanked. Banking operations were market driven. The first banks
were run by government monopoly. In the Cape colony the DEIC had introduced The
Lombard Bank in 1793, which was in principle, a mortgage bank using paper money called
rix dollars (Rds) and following liquidity constraints, the establishment in 1808 of the Discount
Bank. These government owned banks were the first banking institutions in southern Africa.
The British colonial authority was opposed to the privatisation of banking operations, since it
was feared such a step would undermine colonial government revenue substantially. The
banks yielded annual profits of between £6 000 and £7 000 and colonial revenue “…
notwithstanding the objections that may attach to the Government being engaged in banking
transactions, ought not in the present state of the Colony Finances, to be unnecessarily
compromised.” By the law of the Colony, the business of banking would remain exclusively in
the hands of government. (Arndt,1928:223) Only in 1837 was permission granted by the
British colonial government to establish the privately owned Cape of Good Hope Bank.
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(Arndt,1928:176-234; Solomon,1983:130-131, 137; Houghton,1976:190-191) This step was
hailed as a ‘triumph for private initiative’ (Arndt, 1928:234) In the nineteenth century, after
1850, the market reigned supreme in the British ruled parts of Africa. This was the same in
other parts of the British Empire: “The Australian banking system during the latter half of the
nineteenth century was relatively unregulated, and is considered to be a good example of a
free banking system. …it had few legal barriers to entry, no branching restrictions and.. no
credible restrictions on assets, liabilities or bank capital…” (Hickson and Turner,2002:147)
Economic developed followed closely upon the heels of the banks, not because they caused
development, but because they facilitated the process, primarily because the banks were the
products of private entrepreneurial activity in financial markets. It was observed that economic
growth was widespread in the northern hemisphere before World War ll, amongst others
because “… politicians in these countries recognized how important finance was, and they,
therefore, allowed a broad array of private financial intermediaries to operate. This broad
array allowed the finance sector to quickly respond to new challenges as the economy
developed.” (Engerman et al, 2003: 4) Banks were thus service providers responding to
signals coming out of the market. Banks did not go into remote corners of Africa, where
development was late or slow. Banking lubricated the arteries of commerce and should be
seen as part of a larger growth process. Initially that process was firmly controlled by the
DEIC and later Dutch government rule, as well as under British colonial administration.
The British occupation of the Cape made possible the introduction of the best banking
practice of that era; but nothing happened in the 1790s or, indeed, in the first quarter of the
nineteenth century, because there was no demand for banking services. Ironically, the Dutch
had pioneered a number of crucial financial institutions into the English society (the Dutch
were instrumental in the establishment of the Bank of England in 1694), but did not introduce
private banks to the Cape during DEIC rule.(Ferguson,2003:18,24; Kindleberger,1993:77)
Under DEIC rule the Lombard Bank or Bank van Leening – mortgage bank) was established
in 1793, but firmly under the control of the company. The Company made advances to the
Bank such amounts of paper money as were available and in accordance with the needs of
the Colony. These advances were against land, houses, or gold and jewels. (Arndt,1928:165
7
– 169) After 1795 the British authorities in the Cape also discouraged the founding of local
banks.(Solomon,1983:137;Arndt,1928:169-171) Laissez-faire views came slowly to the
imperial bureaucracy, while, only in 1826, did the government in England agree to allow nonchartered joint stock banks in England. (Kindleberger,1993:82,86) That occurred in the wake
of the nineteenth century’s sharpest and most unexpected financial crisis that swept away
hundreds of small private banks. Banking, with company law one step behind, was evolving
but was still too fragile in the 1820s, 30s, 40s or even the 50s, to produce London-based
banks for business in far away colonies. The British occupation since 1806, however, did
bring in increased merchant activities and therefore the need for common law, with the rights
of individuals to form companies. In 1808 the Colonial Government converted the Lombard
Bank into the Lombard Discount Bank ( known as the Government Discount Bank) to accept
deposits and discount vendue extracts. which led to the foundation of The Cape of Good
Hope Bank in 1836. Others followed, almost all of them small local banks, primarily confined
to serving the needs of local agricultural communities.
This leads directly to the question of whether banking in settler communities differed from that
in other regions. The answer is clearly no. Banking in settler communities was the same as
banking in other agricultural communities, in which the production of products for the market
dominated the local economy and banking services were required both for financing the crop
and financing the sale of the crop. (working capital in both instances) Local merchants then
arranged for transportation to and from the coast to the distant metropolitan markets. In the
Cape the banks’ were closely tied to wine and wheat agriculture and wool, where as in
Australia it was also sheep farming and dairy farming in New Zealand. (Denoon, 1983: 5253,84,167 ; Hickson and Turner, 2002:148) In the other direction banks played an essential
role in financing the import of consumer goods or land speculation.
The problem for banks, in a world operating on the gold standard and where runs on deposits
were an ever present concern, was that the economic fortunes of agricultural districts tended
to be tied to the fortunes of the dominant local crop. If depression struck and the price of
commodities fell sharply, farmers were threatened with insolvency that all too frequently
enveloped the local banks. This was a matter of concern in the Cape since the 1840s to the
8
1870s and 1880s when falling prices wrought havoc upon the small local commodity
dominated banks(Arndt,1928:269-295) just as it did in the United States in the 1930s, when it
would be hard to describe that country as a settler society.
Banking in agricultural
communities in the nineteenth and early twentieth centuries shared a common risk profile in
regions as far apart as South Africa, Australia, Argentina and North America.
Where British laws allowed the development of large and secure multi-branched joint stock
banks the problem of risk was reduced (Born,1983:63-72). In England this had occurred by
the middle of the century after the introduction of The Joint Stock Banks Act of 1833. The
British colonies of South Africa and Canada followed by the last decade of the century and in
Australia shortly afterwards. The United States and Argentina were the exceptions, because
of political interference in the working of the economy. In Argentina currency instability was
added to the problem of insecure local banking and rapacious politicians. In America politics
had not only prevented the evolution of nation-wide banking; it has prevented state-wide
banking (California was the exception), thereby exposing the banks to the risks of single
commodity markets.
It was not primarily the market that led to the massive failure of
American banks in the 1930s; it was politics.(Born,1983:272-279) This may be seen by
comparing the Canadian experience with that of the United States. Banking in the British
Empire consequently was more secure than banking in other settler societies organised
around agricultural activities. In Uruguay after the collapse of the Brazilian Banco Mauá,
banks of British origin emerged to offer better banking facilities than those under Brazilian
control. These banks had a clear commercial focus. (Denoon,1983:148)
India, also an
agricultural economy, had relatively secure banking, which further supports the argument that
it was a market friendly political environment that played the major role in developing a sound
banking system and not whether settler communities were, or were not, involved.
The
experience of non-agricultural Hong Kong provides yet further support to this argument.
At the Cape Colony the British government resisted the introduction of private banking. Arndt
explained : “ Banking, one of the most dangerous enterprises to be found in Government
hands, was a Government monopoly in South Africa from 1792 to 1837 Indeed , not only
banking but nearly every profitable profession at the Cape, banking, surveying, conveyancing,
9
transferring of slaves, printing and auctioneering, were all monopolized by the Government to
the injury of numbers with little profit to itself.” (Arndt, 1928: 197) In 1825, when sterling was
introduced at the Cape, the first efforts were lodged to establish a joint stock bank for the
Cape “…to advance its commercial and agricultural prosperity… and as a means to place its
finances on a sure and solid footing.” (Arndt, 1928:196,255) A Cape Town businessman Mr
J. B Ebden applied for a charter to establish a bank at the Cape similar to the charter granted
to the Australia Bank. Ironically the Australia Bank was chartered on the request of an English
company for permission to establish banking operations in Australia and South Africa. The
first modern bank in South Africa was established in Cape Town, the seat of government and
a small merchant community in the Cape Colony. This was the Cape of Good Hope Bank
established in 1837 – a private bank, described as “ as a triumph for private initiative.” (Arndt,
1928: 236; Solomon, 1983: 136). Shortly afterwards followed the introduction of the woolled
sheep to the Eastern Cape in the 1830. Eighteen years after the first settlers arrived, the
Eastern Province Bank was established in Port-Elizabeth in 1838 (Webb,1992:6;
Arndt,1928:238), and by the middle of the century both the Eastern and Western Cape were
dotted with small unitary banks – 27 unit banks with paid up capital of £924 021.
(Arndt,1928:254) These banks resembled the early Australian banks : unit bank structure,
owned and managed by merchants of the locality concerned, based on the principle of
unlimited shareholders’ liability, issued their own bank notes and were virtually uncontrolled
by government. These small banks were not the only enterprises undertaking banking
business, as some well established mercantile firms conducted their own ‘private banking’,
by issuing their own bank notes,eg the Barry and Nephews merchants of the Overberg area,
or the Mosenthal Brothers of Graaff-Reinet. (Solomon,1983:138) What is important, is the
emergence of formal and informal networks of financial intermediation after the demise of
government controlled banking in the Cape, paving the way for extensive networks of savings
and credit to support flourishing business. Not all such enterprises were eternally successful:
during the mid-1860s severe drought and adverse agricultural conditions coupled with
extensive credit creation led to the liquidation of many of these small unit banks in the Cape.
This development did not lead to economic or financial instability, since the so-called
‘imperial’ banks had entered the market by 1861. As in 1835 the Australian Bank was
established in England to extend its capital in the Colonies where interest rates were higher
10
than in England, so various other banking companies followed almost 25 years later. The
London and South African Bank (LSAB) was established and incorporated in London in 1861.
It was established solely to conduct business in the Cape, with ambitious plans to extend a
branch network in the colony. In 1862 the Standard Bank of British South Africa (SB) was also
established with the same purpose. The small unit banks were perfectly suited to the needs
of the communities of the day and could not be compared to the so-called ‘wildcat’ banking of
the United States. Their limited capital and inability to extend it easily, together with the close
ties to local fortunes, placed them at risk when disasters such as drought affected the
agricultural economy. As Engerman et al noted: ”…financial crises, far from always being
disasters, can sometimes generate responses that promote financial innovation.” (Engerman
et al, 2003:4) The small banks in the Cape Colony were often family affairs that had no
interest in expanding business across the Colony or into other British possessions. The
demise of the small agricultural banks ushered in the era of the ‘imperial banks’. (Jones,1996)
Banking functions had taken on their classic form in London in the second half of the
seventeenth century, when the London goldsmith bankers developed the modern bank-note
and added the issuing of bank-notes to that of taking in deposits and making short-term loans
by discounting bills of exchange. These functions remained fundamentally unchanged until
the late 1960s. For three centuries these constituted the core activities of British banks.
Small changes occurred. Overdraft facilities, backed by the appropriate collateral, joined
discounting as a way of earning interest on the banks deposits and in the later nineteenth
century the purchase of foreign exchange or equities provided additional new services for
customers. Modern banking, therefore, had developed in an urban commercial environment,
heavily orientated to overseas trade, and then expanded from that base into the market towns
of England in the eighteenth century, before being swept up in the growth of manufacturing
associated with the industrial revolution, from where it was exported to developing regions on
the periphery of the industrialising North Atlantic districts in settler communities, but worked
well in the market towns that emerged to meet the needs of such agricultural communities.
The semi-subsistence agriculture of the South African Republic for example, could not
support a banking network, before the discovery of gold.
11
Banking functions can be divided into two categories as financial intermediaries and as
money creators.(Solomon,1983:128). The latter was the result of banks taking in deposits and
lending them out though the operations of the bank multiplier was not fully understood until
well into the second half of the nineteenth century.
At a time when the coinage was
inadequate and central banks did not exist, the banks made a valuable contribution to the
country’s monetary supply. Yet it was not their money creating functions that led to the
formation of banks. It was their function as financial intermediaries. It was the demand for
these services that was the driving force behind both the evolution of the London goldsmiths
into modern bankers and the development of the first banks in the Cape. A place of security
into which one could deposit surplus funds was an obvious function, as was the provision of
short-term loans to merchants and farmers. That this was done by means of discounts was
the result of acting in i.e. gold standard environment, in which customers could demand gold
coins at a moment’s notice, either for their deposits or in exchange for bank-notes. Banks
that lent long-term had a tendency to enjoy very short lives. Discounting was accompanied
by the other major service provided by the banks, that of making and receiving payments.
Remittance work was just as important as the provision of working capital.
It is important to understand the good sense behind the development of banking functions
that were so enduring. For three centuries they provided a solid framework of reference for
banking in British colonies. They did not prevent banks from being badly managed and
collapsing, as the experience of the Cape so dramatically revealed in the late 1860s. Yet this
same experience showed how the London-based imperial banks had abided by the rules.
These banks were managed from London, operated under limited liability and had access to
capital bases far in excess of the combined capital of all the small banks collectively. [The
total capital of the 27 small banks in the Cape Colony in 1861 was £1 572 815, with the
largest bank controlling capital of £120 000. The capital of the LSAB was £400 000 and that
of the SB £1 000 000. (Arndt,1928:255 – 257;Jones,1996:6,11,24) The imperial banks did
not collapse and, in the 1890s, when Australian and South American banks were going down
in droves, the South African banks sailed serenely on. The potential economic instability of
the failure of the small banks in the 1860s was smoothed out by the intervention of the
imperial banks, that brought in the ‘innovation’ of branch networks to the British possessions
12
in southern Africa. No imperial bank failed in either the 1890s or 1930s, when the ruins of
unitary banks in America were littering the landscape. The reasons for the solidity of South
African banks was the quality of their management and the insistence on focusing on the
classic functions, even though this meant eschewing long-term lending and saying no to
customers and governments.
Commercial banks, (in England clearing banks) were not development banks or industrial
banks. Nor were they expected to act as merchant banks. Their task was to provide services
to local people who required them and could pay for them. Only after two decades of
unparalleled world-wide economic growth in the 1950s and 60s did banking functions begin to
change; and then it was in an environment of government controls and government managed
currencies that accompanied market needs.
How unchanging traditional banking was in
South Africa may be seen in the accounts of the Standard Bank. Their sources of earning in
1960 were little different from those in the 1860s, which in function were probably not so very
different from those of seventeenth century England. Over time, interest on discounts or
overdrafts provided around two thirds of total earnings. The other third came from
commissions
on
foreign
exchange,
ledger
fees
and
payments
out
of
accounts.(Jones,1996:111,257)
This paper argues that the century and a half considered here may be divided into two period,
that of functional stability between 1850 and 1970 and that of functional change or instability
1970-2000. The first of these periods may be further subdivided into a period of vigorous
local expansion in the 1850s followed by a long period of dominance by the imperial banks
that lasted from the early 1860s to around 1970. The period of change that then began falls
into two sections, the era of moderate change in the 1970s and 1980s, and the years of rapid
change in the last decade of the century. While the long period of stable functions was
characterised by overseas ownership by conservative banks, in the new era of change
ownership was not a major factor in determining the introduction of new functions, or
products, as they are now called, nor in determining the explosive growth of the 1990s. The
world outside South Africa had developed the classic banking functions of the nineteenth
century and the world outside South Africa developed the new functions that transformed
13
banking in the traditional commercial banks en masse moved into territory hitherto considered
the preserve of merchant and industrial banks. This, in turn was made possible because a
sizable manufacturing sector had developed in the second half of the twentieth century.
Part I: THE PERIOD OF FUNCTIONAL STABILITY, 1850-1970
1.
The Situation in the 1850s
On the eve of the great mid-Victorian boom that embraced the third quarter of the nineteenth
century, the economy of the Cape was poised for growth. The Cape Colony was one of the
regions on the periphery that was being drawn into the economic orbit of the expanding North
Atlantic core with the development of its wool industry – about a quarter of a century behind
similar developments in Australia.
Pastoral booms triggered the formation of a host of local banks in both the Cape and Australia
and, as Mackay noted over seventy years ago, these tended to occur in clusters. In Australia
these clusters occurred in 1817-30, 1834-41, 1851-55, 1863-73 and 1919-26; in South Africa
in 1838-39, 1844-54, 1857-62 and 1891-92.(Jones,1994:63; Makay1931:237) The need for
remittance services played a major role in their formation. Banks, that allowed farmers or
local merchants to pay for their inputs with discountable bills of exchange and to receive cash
or credit for sales of wool, were a valuable resource to a farming districts perennially short of
a circulating currency. This shortage led naturally to the issuing of local bank-notes and, as
the business developed, to the banks allowing customers overdraft facilities. These, however,
in small unitary banks, all too often tended to flow into the pockets of directors or friends of
the
directors, thereby making the banks very vulnerable to a downturn in the market.
Nevertheless, when the taking in of deposits is added to their functions, one can see that, in
the 1850s, the Cape banks were reproducing the classic functions of the seventeenth century
London private bankers. These basic banking functions were conducted in all the banking
enterprises in settler economies – it was exactly that which the British banks did in Australia in
the wool industry (Denoon, 1983:52-53, 152,165-166)and in New Zealand dairy industry
(Denoon,1983:167).
14
Banking, therefore, was already a conservative business in the 1850s and this conservatism
was emphasised by the need to pay gold upon demand. At all times the banks had to have
sufficient gold in their coffers to meet any expected, or unexpected, runs on them. In theory
banking should have become steadily safer as each succeeding financial crisis led to a
Darwinian process of selection with the weaker disappearing. In practice, though, this did not
happen, as America learned in the 1930s, when two thirds of the country’s bank closed their
doors and one third did not re-open them. Nor did it occur in South Africa in the nineteenth
century, as the small unitary banks that had sprang up in the boom times inevitably developed
serious problems when the boom ended and interest rates rose.
Conservatism in function did not provide banking security. Nevertheless by 1860 the 27 Cape
banks had managed to raise £945,186 in capital. At that time they were more numerous than
their counterparts in Australia! Twenty six banks had been funded in Australia by 1860, but
three had been absorbed by other banks and six had failed. (Jones,1996: 17-19). Some of
the Cape banks had capital of £100,000, but the majority were small and had insufficient
reserves to withstand a prolonged downturn in a staple economy. Nor, in 1860, were most of
them controlled by men with banking experience. They were known to be insecure, which is
why the coming of the imperial banks presented a very real threat to their continued
existence. That threat was upon them, for in 1860, the first of the imperial banks, The London
and South African Bank was being established in London. Soon other banks were to be
established in South Africa.
2.
The Period of Dominance by the Imperial Banks, 1860-1970.
During the period of stability, South Africa remained tied the gold standard, though after the
First World War gold coins gradually ceased to be the main circulating medium. It seems like
that there was a connection between the continuance of the gold standard and the
conservatism of banking functions. Being on the gold standard kept inflation in check and
prevented politicians from trying to stimulate growth prior to elections by expanding the
currency. Since periods of rapid economic growth combined with high inflation tend to lead to
15
change, financial intermediaries could not remain immune to what was going on around them.
Conversely, periods of relatively stable prices, tend to strengthen the conservative forces in
both society and economy. In the long period between 1860 and 1970, with the exception of
the immediate post-war years, when exchange rates were fluctuating alarmingly, and again,
1931-32, when the National Party government resisted devaluing the currency, South Africa
experienced currency stability, low inflation or deflation, and moderate economic growth. The
existing structures and ways of doing things worked well. There was little pressure for
change.
This absence of sustained demand for change was reinforced by very success of the imperial
banks. They survived, when all the local banks failed. Between 1862 and 1892 with the very
small exception of the Stellenbosch District Bank, al the local Cape banks disappeared from
the scene, leaving the Cape Colony dominated by the Standard Bank and the Bank of Africa.
(Jones, 1999:111) The imperial banks, like the local banks, trained their managers by the
apprenticeship system that placed a premium on caution. Yet the strategy of the imperial
banks was different from that of the local banks. From the beginning the London-based
banks set out to cover the whole colony with a network of branches and, in determining
policy, they took into account the interests of the whole economy and not that of single
localities.(Jones,1999:113: Arndt,1928: 295)
This strategy required a larger capital base
which in turn provided the imperial bank with greater security. It also provided them with the
means to take over small local banks, when the business cycle moved downwards. The
imperial banks in Australia though, were not invariably better positioned to weather the storms
than the locally incorporated banks, as locally incorporated banks survived the 1890s crisis
better in Australia than the imperial banks. This is ascribed to the ‘…greater caution of the
Sydney bankers.” (Denoon,1983:166;see also Jones,1994:65-68) In Australia the imperial
banks brought stability by offering capital when a shortage of capital was experienced,
extended branch networks and limits on volumes of discounts and restive covenants
concerned with collateral and skills. (Merret, 1992:306- 308) These benefits stemmed from
the direct links with the London directors and London offices of these banks available to the
banking operations in the settler societies.
16
The attempt to achieve rapid growth in South Africa, by opening branches did not last long. In
the case of the Standard Bank it lasted less than a year, from the time the first office was
opened in Port Elizabeth early in 1863, to December when the board of directors in London
became alarmed at the speed with which branches were being opened and voted to end
it.(Jones,1999:115) By then the Standard Bank had 18 branches and agencies in operation.
This was a prescient decision, for when Robert Stewart arrived in Port Elizabeth as general
manager in 1865, he discovered that the local boards of directors not only were not effective
supervisors of managers, but that they themselves were absorbing the capital of the banks!
(Jones,1999:115) This was a risk common to settler societies. The policy of growth by
acquisition failed initially. The Commercial Bank of Port Elizabeth was taken over early in
1863 but only one other followed in the early years, the Beaufort West Bank, despite the
directors declared policy of preferring growth by acquisition.
In a slow moving agricultural society there was little pressure to change the strategy of the
banks and so their structure did not change. This was true of the agricultural depression of
the late 1870s and 1880s, when the local Cape banks failed in droves and of the early days of
gold mining. When the deep level mines began to develop in the 1890s, this situation began
to change. Larger enterprises required the services of larger banks. The Standard Bank was
already large and had been the first bank to open a branch on the gold fields, when the South
African Republic was underbanked. The Transvaal Republic failed almost completely to
attract banking facilities and the imperial banks were not interested in rural credit.
(Denoon,1983:163) Local politicians, fearful of the expanding British Empire, supported
Kruger in his scheme to establish a national bank for the republic in 1891-92, as did many of
the new mining houses. (Joubert,1986:93 -136) The Standard Bank was slow to adapt its
conditions for discounts and overdrafts to the new conditions on the gold mines and this
presented Kruger with the opportunity to establish the National Bank, thereby providing
effective competition to the two imperial banks; but it did not immediately lead to any change
in the structure of banking.
Nor did it alter their functions. These had met the needs of an agricultural and trading
community and these were provided for to the new mining economy. Once the mines went
17
deep level in the 1890s, capital was raised abroad, not through the banking system. The
main effect of the development of the Witwatersrand gold mines was on the banks’ remittance
business, which grew rapidly, both from demands of the mining companies and the increased
economic activity that accompanied their development.
The British occupation of the
Transvaal led to the National Bank passing into the control of mining interests and to that
bank gaining the accounts of the Transvaal government, but not to any significant change in
the way the banks operated. Banking in the new mining economy was little different from that
of the pre 1886 agricultural economy.
The response of the banking sector in Australia and in the Transvaal to the discovery of gold,
was different. In Australia the gold rush led to urbanization and the emergence of Melbourne
as the financial capital of the country. It contributed to the formation of new locally owned
banks that adopted the best practice of the imperial banks . In South Africa the gold fortunes
enabled the Transvaal government to establish its own bank, the National Bank. This was not
an English bank, but had substantial English capital. While the discovery of gold led to the
formation of a number of new banks and increased competition amongst them in Australia, in
South Africa it ushered in the concentration movement amongst banks. This followed from the
deep location of gold deposits in South Africa demanding capital intensive methods of
production. (Houghton,1976:104-105) In Australia the banking crisis of the 1890s led to
increased government control in banking by the establishment of numerous government
savings banks and after 1893 state lending to farmers.(Lewis and Gallman, 2001:476)
The coming of union in South Africa in 1910 did not alter the strategy of the banks, but it did
trigger the second stage in the amalgamation movement. The growth of the mining industry
had crated the need for larger banks and these larger banks now seized hold of the
opportunity presented by political union to establish themselves in every sizable town in the
Union. Within the space of four years, the National Bank had bought up the two local banks
of any size, the Bank of the Orange River Colony and the Bank of Natal, and the second
largest of the three imperial banks operating in South Africa. By 1914 South Africa had two
nation-wide banks, the Standard and the National and the latter had beaten the Standard
Bank to the post by acquiring the government accounts. Banking operations in South Africa
18
nevertheless remained characteristically privately owned and managed. At no time after 1860
could the banking sector in South Africa been compared to the government controlled and
dominated Australian banking. Banking in South Africa and banking in Australia had
developed in a similar way following the English example, but began to diverge as South
African operations became increasingly concentrated and Australian operations government
controlled. The imperial banks could not sweep aside competition in Australian banking as
comprehensively as in other parts of the Empire. By 1890 22 banks were issuing notes in
Australia and after 1890 Australia was still served by imperial, Australian as well as parochial
banks. The different banks nevertheless obtained much of their capital from London or
Glasgow, but local incorporation remained. Banks in Australia also serviced New Zealand
businessmen. (Denoon, 1983:150,154)
In South Africa continental banking experience also entered the business of banking when the
Dutch opened the Nederlansche Bank en Credietvereeniging (NB en CV) in 1888, initially with
the hope to obtain the Transvaal Republic’s concession to establish the National Bank.
Although this attempt failed, the NBvZA was nevertheless incorporated in Amsterdam and
operated primarily in the Transvaal with the view to finance international trade between South
Africa and Europe. Dutch banking was less conservative than the English practice but
directed its operations at financing trade. The NB en CV was a wholesale bank, as opposed
to the typically commercial banks from England. The NB en CV concentrated on urban
business and was wholly uninterested in the gold mining industry nor in rural agricultural
credit. The NB en CV opened branches only in commercial centres, such as Johannesburg,
Pretoria, Durban, Cape Town, and Dullstroom, where a well established Dutch community
had settled. The NB en CV operations remained marginal until after World War ll, when it
pioneered innovation in commercial banking in South Africa. (Verhoef, 1992: 80 -83) The
uniqueness of the conglomerate European descent of the settler community of South Africa
thus added a more risk prone and commercially challenging banking dimension to South
African banking than had been the experience in other British colonies, such as Australia and
New Zealand. The important contribution of Dutch banking was the extension of the network
of South African business into continental networks, especially the dominant Dutch
international trading networks. The Dutch link was also influential when the Princeton
19
economist, Kemmerer, lobbied strongly for the return to the gold standard by Britain and other
countries by 1926 in order to restore international financial stability. (Bordo, Edelstein,
Rockoff, 2003: 300 – 302) The Dutch link through Kemmerer and Vissering Report (1925) on
the return to financial stability via the gold standard, as privately expresses by South Africa ,
Australia, Switzerland and the Netherlands, illustrated the centrality of those markets by the
late 1920s to international trade and finance. Although the NB en CV was still marginal to the
banking industry in South Africa, it constituted an important connection to continental banking
and the international trade centre of Amsterdam for the settler community in Southern
Africa.(Neal and Quinn,2003:14)
No significant change in functions accompanied the acquired oligopoly in South African
banking, though the exchange business was expanding from arranging for payments in
London to payments world-wide with the country’s expanding network trading partners, at a
time when both France and Germany were important buyers of gold mining shares. To this
development the NB en CV contributed effectively as well. The imperial banks also purchased
equities for customers. This business, though, was limited at a time when most bank
managers considered the Johannesburg Stock Exchange to be a casino. After 1918 further
ownership changes occurred, the full gold standard was only restored in 1926, but no
significant change developed in banking functions. The National Bank got into difficulty in
1924-5, as a result of reckless expansion in the immediate post-war years and a policy of
granting easy loans in the post-war boom conditions, which resulted in the collapse of the
bank when the depression struck in 1920. A lifeboat was found in the creation of Barclays
Bank Dominion, Colonial and Overseas (DCO) in 1926, which took over the business of
National Bank and amalgamated it with a small West Indies bank and an Egyptian bank.
(Jones,1996:42 -52; Solomon,1983:144-146) This intervention of another imperial bank was
characteristic of the impression of stability displayed by those banks. Denoon commented: “
Commonly, but not invariably, the imperial banks were more cautious in their credit policies
than the local banks, rarely venturing their capital in long-term or speculative enterprises.”
(Denoon, 1983:166)
20
Economic growth had been disappointing in the Edwardian era and this pattern continued in
the 1920s. This situation changed in the 1930s, after South Africa devalued the pound. In
these years, too, the pace of technological change remained relatively slow, thereby reducing
the pressure to innovate in the service sector. It was only in the 1930s that Johannesburg’s
future became assured and the fear of becoming a ghost mining town died away – a fear that
was still present in the 1920s. On the whole, therefore banking remained uncomplicated and
somewhat uncompetitive in the inter-war years.
Three main consequences flowed from the amalgamation movement in South African
banking. First among these was the creation of the banking cartel, known as the Register of
Co-operation (ROCO) among banks, that fixed interest rates and commission charges. It
emerged in the immediate pre-war years and lasted until the 1970s. Although Monteith
argued that such collusive agreements amongst banks in the West-Indies did not exclude
competition completely amongst the commercial banks, (Monteith,2000: 67 -87), ROCO in
South Africa curbed competition and restricted access in favour of the imperial banks.
(Verhoef,1986:412 -415; Skinner and Osborne,1992:65) A second consequence was the
creation of nation-wide bank clerks trade union (SASBO – South African Society of Bank
Officials) that in practice also tended to reinforce the conservative elements at work in the
sector. A third consequence was that very large banks would not be allowed to fail. In 1925
this applied to the National Bank. At that time the newly established central bank (established
in 1923), the Reserve Bank was still learning the ropes and was in no position to attempt a
rescue, which was why the help of a large overseas bank was necessary and why nationalists
had to welcome the arrival of Barclays.
Another possible consequence of the concentration in banking was declining productivity
within the banks. This was a long-term trend in the Standard Bank, as productivity, in period
1900-1914, was lower than in the period 1885-1900, and declined further in the inter-war
years.(Jones,1996:180) Evidently political developments had not provided the British bank
with undue favours. It does, however, suggest that oligopoly and cartels reduce the need to
innovate, If reduced competition exerted a negative impact upon the banks in the first half of
21
the twentieth century, then it might be expected that the disappearance of the building
societies at the end of the twentieth century to have had a similar effect in the 1990s.
The relatively slow growth of the economy may be seen in the figures of the deposits and
discounts of the commercial banks. Adjusted for price movements these show deposits grew
by 38 per cent in the decade 1919-29 and by 65 per cent in the decade 1929-39. Discounts
moved in the opposite direction, growing by 88 per cent in the earlier period and 29 per cent
in the later period. (Jones,1996:180-188) The importance of discounts as a proportion of
bank assets had already begun its long decline In these two decades the banks’ importance
declined. The national income benefited more from the expansion of the gold mines in the
1930s than in the two large banks. As a result, the demand deposits of the Standard Bank
and the National Bank, as a proportion of national income, fell from 21 per cent in 1919 to
18.5 in 1939, (Jones,1996:188-189) providing once again evidence that banks are followers
rather than leaders in the process of economic change.
The banks survived the Second World War relatively unharmed and, but faced a more
uncertain political future in a world, in which Britain’s economic influence was declining. The
threat to the future of the gold mines by a fixed gold price was reduce by Britain’s devaluation
in 1949. This paved the way for the expansion of gold mining into new explorations in the
Free State and then into the Far West Rand. It could not, however disguise the rise of AfroAsian nationalism that accompanied the decline of European nationalism. In Asia, India led
the way, in Africa, South Africa, with the election of the National Party Government in 1948.
As a result, the pressure for change in the financial sector focused not on the type of business
conducted in modern jargon,’ the products they sold’, nor on the type of customer they
served, but on who owned the banks. In the decolonising world all the African states adopted
some form of national socialist policies. In sub-Saharan Africa national socialism merged with
Marxist socialism and tribalism.
In this respect, some aspects of national socialism also
surfaced in South Africa.
This had implications for banking in the 1950s and 60s, because the importance of the market
was diminishing and that of politicians enhanced. Planning became fashionable, with the
22
Soviet model seducing both France and India, and failing. Five year plans of a strict socialist
nature were not adopted in South Africa; but there was talk of nationalisation of the mines and
of the banks. In the event the economic environment of the 1950s was not sufficiently robust
for the new National Party government to make any revolutionary moves.
Balance of
payment constraints periodically threatened the economy, especially in the wake of the capital
flight that followed the 1948 election, but more specifically after the decision to leave the
British Commonwealth and accept the status of a republic in 1961. Subsequent to that the
Sharpeville incident caused great alarm and contributed to a substantial capital flight.
Nevertheless the new government made use of its extensive patronage facilities to direct
resources into the hands of its supporters and to politicise the bureaucracy at the central,
provincial and municipal levels.
The South African economy shared in the world-wide growth that characterised the quarter of
a century after 1948. The driving force was a combination of renewed expansion in the gold
mining industry and import substitution. Political unrest following the Sharpeville incident led
only to a temporary setback in the early 1960s that, in effect, highlighted the vigor of the
growth later in that decade. Indeed, growth in both decades was beginning to place pressure
on existing financial practices. GDP rose by 80.6 per cent between 1951 and 1960 and then
by 123.1 per cent in the nine years from 1961 to 1970. (Jones and Muller,1992:129,231) The
looming population explosion reduced per capita growth in GDP to 61.9 per cent while rising
inflation further reduced the real benefits of this growth. Growth of that magnitude made it
possible for new institutions to emerge to challenge the dominance of the two imperial banks
and for the first merchant bank, Union Acceptances, to be established in 1957, but it did not
lead to the introduction of significant changes in banking functions.
The decade of the 1950s was characterised by renewed competition in banking, first between
the Standard Bank and Barclays and then, as the decade progressed, with Volkskas. In the
early 1950s, though, both the London-based banks were slow to recognise the threat posed
by Volkskas at a time when the country’s foreign trade was still predominantly tied to Great
Britain. Government accounts were systematically transferred to Volkskas, but it was only
after the National Party’s second election victory in 1952 that the two imperial banks awoke to
23
the full nature of the threat to their cosy cartel. In 1953, the Netherlands Bank broke ranks
from the cartel and began to quote lower rates for the transfer of funds to South Africa.
(Verhoef,1986:441-442 ;Jones and Muller,1992:62-63) The Netherlands Bank also began to
pay higher interest on deposits to counter competition from the building societies. Volkskas,
with it domestic branch network, provided the real threat and, as Verhoef observed, the
Volkskas’ proportion of total bank assets rose from 3,17 per cent in 1947 to 10.3 per cent ten
years later.(Verhoef,1992b:131) Their proportion of advances grew at a slightly slower rate
from 6.3 per cent to 11.4 per cent and that of total deposits from 2.8 per cent to 9.9 per cent.
The newly established Trust Bank provided further competition in the later 1950s. For over
thirty years the two imperial banks were the epitome of gentlemanly capitalism and
gentlemanly competition in South Africa. (Cain and Hopkins,1993)
How much this had
contributed to a weakening in their entrepreneurial drive, it is difficult to say. What is clear is
that a more hostile political environment was inexorably threatening the dominant position of
the traditional banks, but not yet, in 1960, leading to any radical changes in banking functions.
Sustained economic growth in the 1960s then led up to the changes in both function and
ownership that occurred in the last decades of the century. This same economic growth also
undermined the basis of apartheid and made the realisation of racial separation unrealisable.
By the standards of South East Asia, South Africa’s growth in the 1960s was relatively
moderate. Between 1961 and 1970 GDP rose by 123 per cent and per capita GDP by almost
62 per cent, if the population statistics are correct.(Jones and Muller,1992:131) Admittedly
the gold mines were still increasing their output, but their Indian summer was not the driving
force behind the growth of the economy. This was manufacturing. Moreover, government
policy had belatedly changed from import substitution to export promotion.
It was the
expansion of manufacturing that made it possible for the economy to support a couple of
merchant banks in the 1960s, in addition to providing a market for the ebullient Trust Bank
that introduced an American style of banking into the country. In practice this meant heavy
spending on advertising, putting up glossy new buildings staffed by dolly birds in bright
costumes and one new function. In America overdrafts were not allowed and Trust Bank
followed this practice. Instead, customers wanting to borrow money from the bank had to
sign notes, which the bank then bought and with an agreement for monthly payments. In fact
24
the Trust Bank pushed personal loans energetically, appealing to newly embourgeoised
Arikaners; but in the 1960s wealth generation was neither sufficiently vigorous, nor yet
sufficiently extensive to induce a major change in banking functions. As for Trust Bank its too
rapid growth, built on the quick sands of easy credit came to a abrupt halt at the end of the
decade and then led to its virtual collapse. Thirty years later the losses incurred during its
imprudent dash for growth with relaxed lending policies were still causing ABSA difficulties.
[Amalgamated Banks of South Africa, or ABSA, was the successor conglomerate bank that
emerged from the merger and take-over by Volkskas and the largest building society, the
United Building Society, of numerous other smaller banks, Trust Bank and smaller building
societies in early 1990s.] Proof was thereby given, if ever it was needed, of the value of the
conservative banking practices introduced and enforced in South Africa by the imperial banks.
(Verhoef,1992b:151-153)
At the end of the seventh decade of the twentieth century banking functions remained in
principle the banking functions of 1850. Limited liability had come and been accepted. Bank
notes had been issued and then discarded before the impact of the Reserve Bank’s notes.
Gold coins had disappeared from circulation while bank deposits formed the major
component of the country’s currency. In 1970 the two British banks still gathered in the bulk
of the deposits and provided the bulk of the loans. These conservative banking practices
resembled the operations of the British banks in Argentina. Banking in Argentina was
dominated by two large official Argentine banks, the Bank of the Nation and the Bank of the
Province of Buenos Aires. Both failed during the 1890 crisis, but were reconstructed relatively
successfully. Domestic banks in Argentina developed more extensive branch networks than
those in Canada or Australia, and thus drew deposit primarily from domestic savers. These
banks concentrated on the financing of trade and agriculture. Apart form the official banks,
private banks developed from mercantile interests and conducted business relating to lending
to and investing in industrial enterprises involved in bridging landed and manufacturing
operations. The foreign banks were engaged in the usual commercial banking functions and
syndicated long-term debt underwritten by merchant or private banks. Davis and Gallman
stated: “Of the foreign (British, French, Italian and Spaniard) banks, the British were the most
important and the most successful. Unlike their domestic and Continental counterparts, their
25
loan policies were typically conservative. They followed the real bills doctrine, largely limiting
themselves to short-term loans supported by commercial paper, and held very substantial
reserves, reserves that at times amounted to one-half of their total assets” (Davis and
Gallman,2001:791-792) These Argentine banks were able to survive the 1890s crisis which
earned them enhanced reputation amongst Argentine savers which positioned them as a
significant actor in Argentine banking.
In Australia government intervention in the financial sector characterised the banking sector
from early on. Despite the relative absence of regulation of the banking sector in Australia
during the latter half of the nineteenth century (Hickson and Turner, 2002), governmentowned savings banks were established since the 1860s and government was increasingly
involved in financing agriculture. In nineteenth century South Africa banks were opposing
government involvement as experienced during Dutch rule and early British control, but in
Australia “…the habit was
to
look
to the central government…” (Davis
and
Gallman,2001:478) and as Lloyd explained: “By 1905 Labour had come down decisively on
the side of protection…The main building block was state ownership of key sectors of the
national economic infrastructure, notably…. the new ’people’s bank’, the Commonwealth
Savings Bank.” (Lloyd,2003 :414) The reconstruction of the banking sector in Australia took
place through massive government involvement, (Davis and Gallman, 2001: 506 -512)
whereas the banking failures of the 1860s in the Cape Colony was met with private initiated
restructuring of the banking sector – the imperial banks absorbed ailing small banks and
developed branch networks to extend their operations. Both the Australian and early South
African banking operations depended heavily on capital from London, but in South Africa
colonial governments were not spearheading the restructuring of banks. In Australia
government regulation of the banking and finance industry after the 1890s crisis, resulted in
the formation of government owned banks in competition with privately owned financial
institutions in the interest of financial stability. (Merret, 2002:269-280) The nature of banking
practice in both settler economies nevertheless remained predominantly conservative British.
Two factors changed this adherence to basic British banking in South Africa: political
intervention, which commenced during the late twentieth century, and innovation and
diversification by the Netherlands Bank as well as non-commercial banks, such as Trust
Bank.
26
Political pressures were bringing about changes in ownership. Banking legislation in South
Africa was amended in 1972. Banks operating in South Africa were required to invest a
substantial proportion of their long term liabilities in prescribed investments, that would be
used to finance public sector needs. Shortly afterwards the government required foreign
shareholding in banks operating in South Africa to be reduced to 50% of total shareholding.
(The Netherlands Bank disinvested in 1970 and the Standard Bank became a South African
company in 1969 with a portion of its equity held locally. Barclays followed two years later.
Jones and Inggs,1999) Change was in the air, but, in 1970 this had not yet extended beyond
bank ownership to bank functions. Nor is there yet any evidence that banking in a settler
community was in any significant way different from banking in metropolitan Britain. Merchant
banking and industrial banking were different and in those sectors new functions were being
developed, but in 1970 these had not yet flowed into mainstream commercial banking.
Part II THE PERIOD OF FUNCTIONAL TRANSFORMATION, 1970-2000
2.1.
The Period of Moderate Change, 1970-1990
Private enterprise had pioneered the introduction of modern banking into South Africa in the
second quarter of the nineteenth century. The functions they performed had been developed
and refined in England to meet the needs of a trading and agricultural economy that was in
the process of industrialising slowly. Risk management had been geared to the needs of a
developing economy so that the transfer of the same services to the settler communities of
southern Africa was a relatively easy undertaking, though it did not, of course, prevent bad
management and the shocks of downward movements in the business cycle.
One and a half centuries later private enterprise once again pioneered the introduction of new
functions into banking in southern Africa, but his time it was led by large corporations. The
most innovative bank in South Africa was the Netherlands Bank, which initiated new banking
‘products’, thus ushering in extensive diversification of banking operations in South Africa.
The Netherlands bank was the first commercial bank in South Africa to break away from the
27
conservative “British” model and ventured into alternative strategies of banking to free itself
from the ‘hold’ by the ‘imperial ‘banks over the banking sector in South Africa. The
Netherlands Bank identified two strategies to counter the ROCO restrictive oligopoly:
development of new ‘banking products’ to be offered in the existing bank network, or establish
subsidiaries to offer related financial services as part of a bank group. The Netherlands Bank
pioneered negotiable certificates of deposit (NCDs) as money market instruments whereby
the bank could escape from the limitations of its small branch network and access money
market funds. The bank established an industrial finance subsidiary (The Netherlands
Finance and Investment Corporation - Nefic) in 1949 and expanded its operations into
merchant banking, a discount house, hire-purchase finance, share issuing and underwriting
and
general
money
market
transactions.
(Verhoef,1986:270-396)
These
functions
represented a radical diversion from the British banking model dominant in South Africa by
the early twentieth century. Two decades of rapid economic-growth in Britain with a managed
currency had also altered traditional beliefs and practices. In the 1960s the commercial
banks, responding to market forces from an increasingly affluent society, began to grant
mortgage loans to their customers. This represented a sharp break with the past and two
centuries of tradition, whereby commercial banks had focused on short-term and refused to
engage in long-term lending. It had taken over thirty years since Britain left the gold standard
and half a century since gold coins had circulated widely for this change to be introduced. It
really was revolutionary and yet it was barely noticed at the time when Barclays began to
provide mortgages in the mid-1960s. A decade later Barclays began to grant mortgage loans
in South Africa and gradually the other banks all followed suit. From a market perspective the
banks were more efficient than the building societies, and they were able to charge slightly
higher interest rates and to grant much larger loans. Ultimately this move of the banks into
housing finance spelled the doom for the building societies in Britain, South Africa and
Australia, but not in America where the federal government was heavily involved in
subsidising house buying through Fannie Mae and Ferdy Mac.
This revolutionary move of the South African commercial banks into long-term lending was
paralleled by another almost equally revolutionary innovation, when the banks moved into
vehicle finance. Once again this represented a response by private enterprise in corporate
28
garb to an increasingly affluent society’s demand for automobiles.
Hire purchase was
something the commercial banks had looked down upon. It was left either to other fringe
financial institutions to provide the finance for shops selling clothing and furniture on credit, or
for the shopkeepers to do it themselves. The cost of automobiles made the second method
impossible and, in the third quarter of the century, specialised firms emerged to finance car
sales in South Africa. Wesbank was one of these and become widely known as the “wheels
bank.”(Jones,1992:213-235) Both the Schlesinger Organisation, through the Colonial Banking
and Trust Company and the Sanger family through the Western Credit Bank had moved into
vehicle financing in the 1950s. In 1964 the Schlesinger Organisation bought out the Sangers
and four years later merged the two banks into a new entity named Wesbank. When the
anticipated profits of this development did not materialise, John Schlesinger sold out all his
South African banking and insurance interests to Anglo American, which retained the
insurance business but sold off Wesbank to Barclays in 1975. Western Credit, owned by the
Sangers, had pioneered motor vehicle leasing in South Africa at the time of the credit
squeeze in the 1960s and shown considerably more enterprise the than the Colonial Banking
and Trust Company, which is why Schlesinger was attracted to it. This dynamism continued
after the merger, when Wesbank pioneered the introduction of the credit card in South Africa
in 1970. The manager of the Netherlands Branch on the campus of the University of the
Witwatersrand expressing shock at such a development and commented on how expensive it
was. Like most bank managers, trained by the old apprenticeship method, he had a prejudice
against borrowing for consumption and looked at the high interest rates that Wesbank was
charging. What Wesbank was actually doing in 1970 was repeating what had happened when
the imperial banks moved into South Africa a century earlier, introducing into the country
practices already widely available overseas.
American Express had led the way to the
creation of the Barclay card in England in the 1960s. This may perhaps be considered a
further example of banking in a settler society in 1970 still about a decade behind the
metropolitan areas.
The rapid growth of Wesbank in the late 1960s and early 1980s is evidence of its
entrepreneurial drive, responding to market opportunities neglected by the cartelised
commercial banks. The business was exceptionally profitable.
It was this that attracted
29
Barclays in 1975 and led to one of the two big commercial banks moving into consumer
finance. Although Trust Bank had commenced the offering of short-term credit, personal loans
and hire-purchase facilities since the early 1950s, the established commercial banks had
refrained from such operations before the 1970s. The smaller commercial banks had been
moving into merchant banking before Barclays made its move into consumer finance.
Nedbank acquired the oldest merchant bank in South Africa, United Acceptances Limited, in
1973 and shortened its name to U.A.L. Volkskas followed by taking control of the Orange
Free State Bank the following year and changed the name to Volkskas Merchant Bank, after
they had failed to get control of Senbank, the country’s largest merchant bank.
(Verhoef,1992b:128-129) The way was set for the traditional commercial banks to widen their
scope of operations by acquisition, first by buying merchant banks, then consumer finance
banks and finally by buying the building societies. This last mentioned development occurred
at the end of this period. What is clear, though, is that the banking environment by 1990 was
very different from that in 1970 and that the all encompassing financial institution had become
the norm. The changes in banking in South Africa increasingly aligned with the international
bank deregulation developments of the mid-1980s. This congruence showed the divergence
of the settler banking operations into global international banking.
The changes that were taking place in the banking sector were the result of economic growth
and technological change.
information, while a
Computers made possible the processing of vast masses of
broadening economic base created new demands that the banking
sector needed to meet. As a result, despite the hostile political environment and overseas
sanctions campaigns, the South African financial structure was becoming steadily more
sophisticated long before the change of government occurred in 1994. A large rural semisubsistance economy acted as a drag upon the upon the economy rather than as a resevoir
of cheap labour.
South Africa was more like modern India with its Byzantine controls,
regulation and corruption, than modern China with its cheap labour driven industrialisation.
Either way, though, by 1990 it would be difficult to describe South Africa as a settler society
2.2
The Period of Functional Transformation, 1990-2000.
30
In the last decade of the twentieth century the financial sector was transformed. Just as a
century an a half earlier, when banking functions developed for an agricultural and trading
economy were imported into South Africa, so too in the 1990s the impact of market driven
globalisation led to massive changes in the structure and functions of the banks. Alfred
Chandler has argued that a change in strategy requires a corresponding change in
structure.(Chandler, 1962) Banking structures changed considerably during the last half of the
twentieth century. Worldwide massive expansion of banking activities had taken place, to a
large degree by means of mergers and acquisitions of minority
and controlling equity
interests in foreign intermediaries, growth in foreign lending and the opening of branches
abroad in response to internationalisation of industrial and commercial enterprises. Few
international mergers and acquisitions in banking happened, since this tended to manifest
more within the domestic banking environment. (Fazio,2003:225 – 227) In almost all the G-10
nations
studied
by Ferguson
banking
concentration
rose.
Internationally financial
consolidation substantially decreased the number of banks, especially during the 1990s. This
consolidation movement created very large and complex financial institutions. Ferguson
observed that those firms increasingly operated across national borders, making them subject
to a variety of regulatory regimes. Important for this study is the identification of the forces
determining such international consolidation: improvements in information technology,
financial deregulation, globalisation of financial and non-financial markets and increased
shareholder pressure for financial performance. (Ferguson,2003:23-3 235). The concentration
movement transformed the financial system in four ways:
•
Competition between financial institutions intensified on different levels; with
other domestic and foreign financial institutions in capital markets; competition
with respect to innovation between different financial service providers; and
competition as a result of technological innovation.
•
Intensified competition between financial markets – organised national markets
compete with each other as components of the global market and they compete
with over-the-counter markets.
•
Substantially enhanced standards of transparency of operations following the
emphasis on corporate governance and value creation. More bank managers
31
had become more interested in performing an active role as shareholders in
financial markets and fund managers are demanding improved profitability.
•
Continued restructuring and growth to strengthen market power and/or
economies of scale. (Trinchet, 2003: 248-249)
These developments were evident in South Africa in the 1990s, as the banks bought
up building societies, merchant banks, industrial banks insurance companies stock
brokers and asset managers and integrated them into their business through intricate
conglomerate holding structures establishing vast financial services corporations.
ABSA for example, was a bundling together of two the Afrikaner banks (Volkskas and
Trust Bank), the country’s largest merchant bank and the country’s largest and third
largest building society supported by its largest shareholder, SANLAM (SuidAfrikaanse Lewens- en Assuransiemaatskappy
- South African Life Assurance
Company) the country’s second largest insurance company. Barclays Bank South
Africa became a South African incorporated institution in 1971 and in 1987 changed its
name to First National Bank, referring to one of the institutions absorbed by Barclays
Bank DCO (The National Bank). The First Rand Group, by contrast, was the
amalgamation of a medium-sized insurance company and a merchant bank with what
had once been Barclays National Bank.
Structures had changed along with banking functions to meet the needs of a developed
economy. The banks still earned interest on overdrafts and discounts and charged fees for
foreign exchange and other services that entailed electronic payments out of accounts; but
these sources of income were now only part of a much broader complex of income earning
activities. Financial services were being commoditised and becoming less profitable at a time
when risks were increasing. Risks were increasing because of the sheer scale of operations
made possible by the new technology and because of the downward movement of the
Schumpeterian cycle in the absence of any significant innovations in banking since
1970.(Jones,2003: 245-246) The transformation of banking functions was a fact. It comes out
clearly in the Price Waterhouse Coopers survey on “Strategic and Emerging Issues in South
African Banking”, which analysed sources of earnings. The details are given in Table 1. The
most profitable segment, in which earnings were more than 30 per cent was that of the
32
centralised treasuries closely followed by investment and merchant banking. In the operation
of traditional retail banking only one bank displayed earning more than 30 per cent on its
capital employed in 2000, but three of the retail banks were earning more than 20 per cent on
capital. This in turn was reflected in the growth of their capital. Standard, First National/First
Rand and Nedcor all experienced capital growth of around 20 per cent.Jones,2003:246) Nor
surprisingly by the end of the decade the market capitalisation of the three largest, FNB/First
Rand, Standard and Nedcor, had swept them up into the ranks of the country’s largest
institutions. Though large by South African standards, market capitalisations of around R40
billion meant that they were still small by global standards.
Table 1
An analysis of the profitability of the different segments of banking in South
African in 2000.
Sector
Loss-0%
0-10%
10-20%
20-30%
30%+
Retail banking
*
**
*
**
*
Corporate banking
*
******
********
*****
**
Investment and merchant banking
-
***
*****
********
****
Private banking
*
***
****
***
*
Treasury
*
***
****
***
********
Internet banking
*****
***
*
Credit cards
**
**
**
*
*
Life insurance
-
**
***
**
Brokerage
**
***
********
*
*
**
Represents an individual bank
Source: Price Waterhouse Coopers, Strategic and emerging issues in South African banking, Johannesburg,
2001, p. 26
The size of bank capital and assets and the variety of functions executed by the banks sends
out a clear answer to the question of whether banking in South Africa was designed for a
settler community. It clearly was no longer the case by the last decade of the twentieth
century.
In fact the South African financial structure was that of a first world country.
Moreover, despite having a government in alliance with a communist party and trade unions
federation, South Africa had benefited from the collapse of communism in Russia and eastern
33
Europe by the world-wide strengthening of market forces.
With the election (of the
ANC/Communist government) in 1994 these strengthened market forces were free to enter
South Africa, bringing with them capital and new technology, thereby giving an imprimatur to
South Africa’s re-acceptance into the global financial community, and to Johannesburg’s reemergence as the premier financial centre of Africa.
Table 2
The total assets and capital of the 20 largest banks in South Africa on 31
December 2000. (Rm)
Bank
Assets
Capital & Reserves
ABSA
169 960.9
12 321.8
Standard
150 983.7
14 556.5
Nedcor
145 825.1
11 442.7
First National
141 828.1
8 179.2
BOE
54 600.3
5 465.0
Investec
50 627.4
3 817.8
Saambou
15 251.6
1 063.1
Citibank
9 599.0
522.3
Credit Agricole
6 716.1
186.7
Genbel Securities
6 270.2
816.7
African Bank
5 779.2
792.3
Morgan Guaranty
4 524.4
465.0
Rand Merchant Bank
4 274.4
938.8
Unibank
4 203.6
695.6
Imperial Bank
4 165.7
521.5
Mercantile Lisbon
4 094.0
526.2
Barclays
4 016.0
58.4
ABN Amro
3 851.3
219.6
MLS Bank
3 346.5
277.8
Commerzbank
3 310.5
274.0
Source: Financial Mail, Top Companies, 2001, p. 246
34
Conclusion
If South Africa could be considered a settler community in 1850, this was certainly not the
case in the year 2000. In the period of massive British overseas trade and colonisation, her
financial presence impacted heavily on the nature of the economies emerging under her
control. Arndt remarked: “ Whoever controls the credit of the world or a country controls the
destiny of the world or that country.” (Arndt, 1928:249) In South Africa as an emerging settler
community since the sixteenth century, capital flows to the Cape and later to other adjacent
colonies, left the footprint of the colonising company/nation on the region. Under Dutch rule
no free banking developments were permitted and therefore banking resembled the needs of
the DEIC. The mortgage bank Bank van Leening provided in the long term credit needs of a
limited agricultural community, thus ’controlling the destiny ‘of the farming community.
Banking developments under British rule introduced private enterprise in banking in South
Africa. British banking practices set the framework for the dominant nature of banking in
South Africa for the most part of the nineteenth and twentieth century. The banking practice of
British banks in the cape Colony and later in the other British colonies in South Africa,
resembled those of British banks in other British colonies, especially Australia. Ironically it
was the Bank of Australia that first requested permission to open a private bank in the Cape
Colony. The banking established by the British was that of the typical “English model” :
essentially market-oriented with banks primarily ‘deposit banks’ . These banks performed the
function explained by Davis and Gallman, of mobilising savings and over time, performing a
stronger intermediation role, whereby return to savers were enhanced and the cost of access
to capital for business reduced. Through the domination of the British banks in South Africa
until the mid-twentieth century, banking institutions in South Africa primarily acted as deposit
taking institutions. The role of intermediation was enhanced by the innovative role performed
by the NBvZA, later Nedbank, and Trust Bank. These banks introduced the “continental
model” of banking to South Africa : intermediation by banks, long-term loans and closer ties
with industry characterised their activities. Dominant banking functions in South Africa would
suggest that very limited fundamental change took place in banking functions in South Africa
before the late 1960s. Ownership of the banks is less vital – be it private ownership of
35
government ownership. What is more important are the functions of the banks and the
manner in which they were executed. In South Africa during the first century since 1850 the
traditional banking functions served the interests of business and offered what they wanted. A
fundamental overhaul of banking was delayed by the close ties of South Africa with the British
economy, the fundamental role of the gold standard and the relatively slow development of
industrialisation. Geronzi remarked: “The most widely accepted historical interpretations – the
theses of Gerschenkron and Cameron in particular- identify a fundamental link between a
country’s financial structure and its stage of economic development. In essence, the slower
and later a country’s industrialization the more heavily its industrialization will depend on the
banks and, in the more backward countries, the state.” (Geronzi, 2003: 4) Industrialisation in
the South African economy only gained momentum after the World War ll and by then the
Netherlands Bank started challenging the hegemony of the British banks, supported by the
‘Americanised’ Trust Bank. Until then prudent conservative banking provided what a settler
economy required: a free competitive market; confidence to savers (because of confidence in
the banking system) and a stable financial structure to support private capitalist enterprise in
transforming the agricultural economy into a mining economy and into an industrial economy.
The dominant position of the imperial banks in South Africa nevertheless provided stability to
the settler economy through the integration into the London financial market. This stability
served the South African economy well when, in the period of strong economic growth during
the 1960s and early 1970s, the banks offered traditional services, rather than engaging in
speculative operations which could provoke instability, which is often inherent in the process
of economic growth.
The developments of the 1970s, finally transformed the traditional operations of banks in
South Africa. South Africa did not have a secondary market for funds before the
establishment of the South African Reserve Bank in 1921(De Kock,1976:9), but thereafter
South African banking displayed the co-existence of the English model and the continental
model until late in the twentieth century, when it became imperative that the dominant old
English practice be transformed. Can it be assumes that a developed economy is different
from a settler economy and that it required a different type of banking from a non-settler
community? There is little evidence to support such a proposition. What the evidence does
36
suggest is that banking responds to the changing needs of the economy and that a relatively
simple agricultural-trading economy requires relatively simple banking services and that a
highly complex modern developed economy requires complex banking services. The banks
responded to these changing demands placed upon them and, as their strategy changed, so
too did their structure.
Market forces in the hands of private enterprise led to the first modern banks emerging in
South Africa in the second quarter of the nineteenth century and then to the imperial banks
entering the country in the second half of the century. These same market forces shaped the
functions and structure of banking in the country in response to the demands of the market.
When the market changed, the banks adapted to those demands. The banks were not
designed specially for a settler society: there is no such thing as settler society banking.
Where banking structures differed, it was because of political intervention, such as that which
kept American banks small and unitary and therefore vulnerable to downward movements in
the business cycle, especially in primary producing regions. It was also government
intervention that ensured government control over the banking system in Australia.
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