23 October 2008
South Africa’s financial system is fundamentally sound, well capitalized and well regulated, the International Monetary Fund (IMF) reports, with the country’s banks and insurance companies enjoying good profitability, capitalization levels and reserves.
However, despite having weathered the global financial market turmoil without major pressures so far, “the system faces heightened macro-financial risks, and financial institutions are bracing for a less benign environment,” the IMF says in its latest Financial System Stability Assessment of South Africa, released on Wednesday.
The report, completed on 19 August, was compiled by a joint IMF-World Bank team that visited South Africa from 6 to 20 May.
According to the report, South Africa has a sophisticated, diversified financial system “supported by an elaborate legal and financial infrastructure and a generally effective regulatory framework.”
The country’s financial institutions “have benefited from a prolonged economic expansion, supported by prudent macroeconomic management and high commodity prices.”
The report warns, however, that South Africa’s banks are facing increased credit risk, especially in their home loan portfolios, in the face of “record household indebtedness and a mounting debt service burden.”
At the same time, “stress tests … show that capital and reserve cushions at banks and insurance companies are adequate to absorb large but plausible shocks.”
The report found that South Africa’s money, foreign exchange and capital markets were relatively well-developed. However, a dependence on non-resident inflows made the country’s stock and bond exchanges vulnerable to changes in investor sentiment, placing a premium on investor-friendly policies.
The report recommended “steps to foster liquidity and depth in the local markets and to attract foreign direct investment inflows.”
At the same time, South Africa’s financial authorities “should continue their cautious approach” to easing foreign exchange controls, which have helped protect the country’s banks from the global financial crisis.
The IMF-World Bank team found that South Africa’s financial sector regulatory framework was modern and generally effective, while noting the need to strengthen supervision of the country’s dominant financial conglomerates “with a focus on risks that span more than one sector”.
And while the framework for securities regulation had been enhanced, there was a need “to strengthen surveillance of over-the-counter (OTC) markets and for improved monitoring of listed company disclosure,” the report stated.
The report also welcomed a marked improvement in access to financial services in South Africa in recent years, with the country’s “banked” population having grown from about 25% in 1994 to 63% today.
At the same time, the adoption of the National Credit Act had reined in reckless lending practices and improved consumer protection.
Remaining challenges included bringing nonsalaried individuals into the system, broadening access to non-bank services, and financing small-and medium-sized enterprises (SMEs) and affordable housing.
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