South Africa

South Africa's banking system is awash with inconsistencies. While the country's largest banks work towards implementing the advanced internal ratings-based approach to Basel II, vast swathes of the population do not have access to banking services at all. South African investors face tight controls on what they can invest in, with strict limits on the amount of cash they can invest offshore. Yet the country has a small but growing hedge fund sector. And while South Africa's high-net-worth and retail investors were at the vanguard of structured product investment in the late 1990s, the market has remained virtually dormant for the past five years, bucking a global trend of rising structured product investment.

At the heart of South Africa's banking system lies a handful of world class financial institutions. The likes of Absa, FirstRand, NedCor and Standard Bank have kept pace with many of the world's most sophisticated banks in their Basel II implementation efforts to date. In fact, the recent acquisition of Absa by the UK's Barclays Group has prompted the bank to push for the advanced internal ratings-based approach, as opposed to the foundation approach. The rest of the country's top-tier banks have decided to follow suit.

However, outside of the top banks and their customers, a huge portion of the population does not have access to financial services at all. This could be about to change. The South African government has drafted two pieces of legislation aimed at encouraging the financial services industry to tap the country's 'un-banked' individuals. Several institutions - among them African Bank and Absa - are already targeting this sector. Others are expected to follow.

However, this hitherto untapped market does not come without risk. For a start, there's no credit data on the target customer base, and given the collapse of the small and medium-size bank sector in 1999-2002, there's some concern about systemic risk. That's perhaps not so much of a problem given a high liquid assets requirement on deposits (up to 40% in the draft bill) expected to be included in the final version of the legislation. However, this will mean high compliance costs for firms looking to enter this market.

There are also some concerns about the policing of the new rules, with the government stating it will examine banks' motives when granting banks licences to ensure firms do not only have their shareholders' interests at heart. It's perhaps unrealistic to expect philanthropy to be the main driver of institutions entering this business. Nonetheless, bankers reckon there's plenty of scope to make money in this business, and still provide an important service to the country's un-banked.

Nick Sawyer, Editor