IMF published its staff report and selected issues report under the 2019 Article IV consultation with South Africa. The IMF Directors welcomed resilience of the financial sector and called for continued vigilance, given the recent pick up in unsecured lending. They also encouraged SARB to use the forthcoming Financial Sector Assessment Program (FSAP) as an opportunity to further strengthen its supervisory and regulatory framework. Directors welcomed the entry of new players and technological innovations to promote financial inclusion.
The staff report highlights that the financial sector is strong and resilient but exposed to weak economic growth, given its high interconnectedness and the vulnerabilities in small banks. Banks are fully compliant with the Basel III solvency and liquidity requirements. Solvency risk is low, although non-performing loans, or NPLs, have risen (to 3.8% of gross loans). Unsecured lending picked up in banks looking to boost profit and the resolution framework is being buttressed. To further enhance resilience of the system, the authorities have sought assistance from international bodies. Amid low growth and increasing competition, financial stability should be preserved while advancing progress on financial inclusion.
The report further notes that the recent increase in unsecured lending and vulnerabilities in small and medium-size banks warrant close monitoring. The commitment of SARB to adapt supervision to the rising risks from the subdued economy and changes in banks’ business models is welcome. The early warning system and crisis management framework need to be strengthened by complementing stress testing with assessments of domestic and cross-border interconnectedness and enhancing the resolution regime, including the deposit insurance scheme. Enhancements to stress testing are expected to assist risk identification and improve supervision of riskier banks. The fintech space has expanded, particularly in payment services, which, together with the entry of several new banks, could reduce fees and improve access to financial products. Going forward, deepening the local corporate bond markets would help widen the pool of high-quality liquid assets and reduce the sovereign-bank nexus. Promulgation of the bank resolution bill is expected in 2020.
Keywords: Middle East and Africa, South Africa, Banking, Article IV, FSAP, Fintech, Stress Testing, Basel III, NPLs, Crisis Management Framework, IMF
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