Volume 10; No. 1; Winter 1998
Replicating CRA in South Africa
By Dr. Etienne van Loggerenberg, General Manager, ABSA Group Ltd.
in cooperation with Shawn Elliott Marshall, Community Investment Advisor,
Federal Reserve Bank of San Francisco
South Africas complex and often troublesome history has created a number
of global perceptions about its current banking conditions and the future
of its banking system. The notion that South African financial institutions
have neither the capacity nor the will to actively and creatively reach
their emerging markets continues to persist. In South Africa, the term
emerging market describes potential bank customers considered to be
both socially and economically disadvantaged. This emerging market represents
the majority of the countrys population; it is predominantly Black, has
had little or no access to banking services in the past, and comprises
the lowest income-brackets of the South African economy.
Further elements underscore the perception that South African banks arent
adequately serving this emerging market. Chief among them is that most
bank branches are physically removed from the daily lives of low-and moderate-income
populations. As a result, many South Africans believe that banks cater
unduly to the whims and fancies of a well-heeled minority. The serious
and resolute introduction of a banking system where disadvantaged populations
have access to bank services and credit could go a long way in removing
such perceptions over time.
The ABSA Group
The ABSA Group is the largest banking institution in South Africa. Upon
the formal dismantling of apartheid in 1994, ABSA recognized the need
to adopt a new way of thinking about the ways in which low-income, emerging
markets would be served. At the same time, ABSA wanted to consolidate
its previously established community development activities, and strengthen
its position within the emerging marketplace. Although South Africa doesnt
have nearly the number of banks that the U.S. has, it should be noted
that ABSA is only one of a few banking institutions addressing the needs
of its lower income communities. It has done this through:
- the creation of NuBank, a subsidiary bank (with branches in township
areas) that focuses on microlending;
- the establishment of a televised education system that provides adult
education through a national network;
- the creation of a foundation for community development and social
- its role in the development of affordable housing throughout the country.
These and other efforts contribute to local capacity building and support
the Growth, Employment and Redistribution (GEAR) strategy of the South
In addition to their work in South Africa, the research division of ABSA
embarked on a multi-year, international study in 1994 to learn how financial
and non-financial institutions provide banking services to low-income
populations in their respective countries. After extensive research in
Southeast Asia, parts of Africa and Latin America, a high-level delegation
visited the United States in the spring of 1997. Assisted by staff from
several Federal Reserve Banks, the delegation toured eight cities and
towns across the U.S. with the following objectives in mind:
- to investigate the role of the U.S. Community Reinvestment Act;
- to learn more about the process of community-based development finance;
- to consider how these activities might have relevance for ABSA and
other South Africas initiatives.
The South African Marketplace
Before ABSA could analyze and apply what they learned from their international
study, it was important to understand the cultural and social realities
that affect the banking system, the emerging market and the South African
economy in general. Some of these realities include:
- South Africa has a sophisticated, first-world infrastructure that
exists within an otherwise thirdworld economy;
- Most Black South Africans view their personal and informal business
finances as a single entity;
- In the urban centers, well over 50 percent of all adult Blacks are
involved in, or aspire to participation in, informal business ventures;
- Principles of sharing and collectivity run deep through both urban
and rural Black communities; and,
- Low levels of literacy, poor standards of formal education, and minimal
exposure to the fundamentals of the mainstream economy are a reality
within the emerging market segment.
Although these and other realities present very real challenges, ABSA
continues to emphasize the need for disadvantaged segments of the South
African population to be better integrated into the financial system.
Doing so will eventually lead to more balanced trade, legal entrepreneurship
and economic growth.
It must be accepted, however, that the third-world nature of the emerging
market will require approaches that are less formal, less conventional
and altogether different from the traditional ways in which banking has
historically been conducted. Instituting these approaches may present
the greatest challenge of all.
Lessons from the United States
During the U.S. study-tour, the South African delegation received a crash
course in the history, regulatory requirements and oversight of the Community
Reinvestment Act. In addition to meeting with senior representatives of
the Fed, the delegation met with several CRA officers, CDC directors and
other key stakeholders involved in U.S. community reinvestment initiatives.
In addition to the CRA, the delegation learned about U.S. safety and soundness
laws and considered a number of fair lending issues. The delegation toured
numerous local projects and studied their financial structures º learning
along the way how community-based organizations leverage financial resources
to bring projects to fruition.
Loan guarantee programs like the SBAs 504 and the low-income housing
tax credit also piqued the interest of the South African delegation. Although
the introduction of both programs would place a heavy financial burden
on the South African government, the ABSA delegation recognized the value
of such risk-mitigating programs º especially if other banks and private
investors could be enticed to participate in the emerging marketplace.
ABSA has no objection to, and would even support, the creation of a CRA-type
law for financial institutions in South Africa. In fact, it seems possible
that this kind of legislation could become reality in the near future.
ABSA points out, however, that there are a number of critical differences
between U.S. and South African banking environments. These differences
bring to light several key issues that must be addressed before any such
legislation could be effectively enacted in South Africa:
The U.S. banking system comprises more than 10,000 banks and is largely
decentralized, while the South African system is centralized, with
a few large retail lenders dominating the market. As such, initial
efforts should aim at the leveling of playing fields between all financial
institutions operating in South Africas emerging market. Issues of
bank asset size as well as the kinds of financial institutions that
would be covered under a new law must be addressed.
Disclosure requirements of a CRA- type law could exacerbate already
negative attitudes about doing business in the emerging market. These
issues would have to be resolved judiciously, and information systems
for data reporting could become a critical issue. In the U.S., the
careful development of data collection guidelines was paramount to
ensuring the credibility and comparability of the data reported.
The approach to bank regulation in the U.S. seems generally interventionist
compared to the South African approach which is less direct and emphasizes
the cost-benefit relationship in banking supervision. A regulatory
structure, which includes monitoring and enforcement, will have to
be developed. The agency designated to administer such a law should
meet with the approval of all industry stakeholders.
South African geographical areas targeted by legislation will also
be an important issue. What geographical units will form the basis
of lending activity and disclosure? Provinces, local authorities,
census tracts or township areas?
Even if these and other issues are properly addressed, reaching the
goals of a CRA-type law is dependent on an environment where due process
of law can be consistently applied. The current environment of violence
and crime in South Africa has, thus far, discouraged many low-income lending
initiatives. Until a greater degree of law-and-order prevails, the chances
for successful community reinvestment regulations and community development
programs remains tainted.
What the Future Holds
ABSA believes that a healthy banking system in which risks are properly
managed is the cornerstone of a prosperous market economy. Legislation,
supported by programs like the low-income housing tax credit and loan
guarantees, could certainly improve the economy in the lower-income sectors
of the country. Furthermore, the financial burden borne by the South African
government could be lessened by the presence of foreign investors interested
in the future of community development in South Africa. Organizations
like USAID, the World Bank and others could play a major role in this
ABSA also believes that the disclosure of relevant data is necessary
to form sound assessments of the banking systems performance over time.
However, a foundation for disclosure, which considers the aforementioned
issues, will have to be established. In this process, a proactive and
positive rather than punitive approach will be most effective in bringing
other financial institutions onto the emerging market playing field.
Finally, ABSA is aggressively forming a framework in which community
development lending/investment is a specialized part of its ordinary business.
The company is focused on establishing unconventional and non-traditional
partnerships with communities in an effort to increase the flow of capital
to the emerging market. And, as it awaits the development of possible
CRA legislation, ABSA strives to build a new world-view of South Africas
banking system. CI
1In South Africa, the term
informal business refers to one in which the income is irregular and
generated through an unregistered (often illegal) business structure.
Examples include unregistered domestic workers and street vendors. Official
statistics in South Africa classify people involved in these businesses
as having no income at all. It is, therefore, very difficult to know exactly
what is earned in this sector.
Dr. Etienne van Loggerenberg
The ABSA Group, listed on the Johannesburg Stock Exchange,
is the controlling company of the largest banking and financial
services group in South Africa. It provides a full range of retail
and corporate banking, insurance, financial and property services
through extensive local and international networks.
ABSA has nearly 76,600 shareholders and total assets of R134,9
billion (about $30 billion U.S. dollars). It serves a customer base
of about six million people throughout the country.
Dr. van Loggerenberg is a General Manager of The ABSA Group.
In this capacity, he is involved in the creation of community development
strategies, partnerships, and financial services/products which
will better serve South Africas emerging market.
Shawn Elliott Marshall