South Africa: Into The Shadows A South African Perspective On Shadow Banking

Last Updated: 6 December 2013
Article by Marius Van Reenen

The shadow of the traditional banking system has lengthened in recent years as the golden sun of profit past is forced to the horizon by the weight of greater regulatory burden.

Indeed, we have seen the demise of traditional banking giants such as Lehman Brothers in the wake of the financial crisis. Subsequent regulatory reform has weighed heavily on the profit margins of banking institutions across the globe. In the United Kingdom, the five biggest banks (Barclays, RBS, HSBC, Lloyds and Standard Chartered) reported a 40% reduction in combined profit as a result of regulatory fines, redress of customer provisions, and accounting consequences.

Standard Bank Group's new joint chief executive officer Sim Tshabalala, was quoted by the Mail & Guardian in 2011 as saying that "[w]e've never faced so much regulation in the history of global banking". Mr Tshabalala continued to argue that South African banks have at least 150 pieces of non-banking legislation to contend with.

It is in these stringent regulatory conditions that shadow banking activities flourish. But what is shadow banking and why does it flourish where formal banking regulation is at its strongest?

Defining and quantifying the shadow banking sector

The United Kingdom Financial Stability Board ("FSB") broadly defines it as credit intermediation involving entities and activities outside the regular banking system. Based on the activities of these "other financial intermediaries", the FSB argues that the sector has grown from $26 trillion in 2002 to $62 trillion in 2007 before declining sharply in 2008. It estimates the current value of the sector at approximately $67 trillion.

But there are disparate definitions of the concept. For the purposes of compiling its Shadow Banking Index, Deloitte includes only money market mutual funds, asset-backed commercial paper conduits, asset-backed securities, non-agency mortgage-backed securities, collateralised debt obligations, repurchase agreements ("repos"), securities lending, and agency mortgage backed securities in its definition.

Based on this definition, Deloitte found dramatic growth in the United States shadow banking sector between 2004 (the base year for the index) and 2008. Thereafter, the index dropped significantly and has been stable ever since.

Why 'shadow banking'?

The term shadow banking arguably carries too negative a connotation.

Essentially, it is a sector that brings lenders and borrowers together in a less formal way than normal banking channels. As such they avoid the suite of regulation that banks are subjected to as well as the related costs. These transactions are therefore often more cost effective even though they may carry greater risk.

The concept is therefore not new – in fact one could argue that shadow banking established banking activities.

What could be lurking in the shadows?

Procyclicality found its place in the common vernacular over the past six years. The IMF argues that transaction within the shadow banking sphere may perpetuate this. At the beginning of the financial crisis it was asset-backed paper that showed the first signs of significant distress as the underlying assets devalued. Later it emerged that certain compensation arrangements may have incentivised executives to over expose themselves to assets with underestimated credit risk.

Monetary policy is affected by the state of capital markets where shadow banking appears to play a major role. In a low interest rate environment other financial intermediaries flourish as the returns they offer often exceed prevailing rates. This may have adverse implications when the economic cycle turns and asset bubbles burst.

And when the cycle turns it could be up to average Joe to bail out these other financial intermediaries. This may have significant implications for fiscal policy.

Understandably, many an investor is questioning the quality of the collateral underpinning their investments while those issuing assets in the shadows scratch their heads in terms of pricing.

South Africa in the shadows

South Africa has a very well developed and regulated financial services sector. Lenders and borrowers actively transact using all forms of shadow banking assets.

However, Ingrid Goodspeed (the Governor of the South African Institute of Financial Markets) perhaps better defines shadow banking in the South African context as "nonbanks carrying out bank-like activities... with limited (if any) supervision and regulation"

The key differentiator between banks and non-banks according to this definition lies not in their lending activities, but rather in their deposit taking capabilities – only registered banks are able to legally take deposits in South Africa. The South African Reserve Bank currently recognises 19 registered banks.

EM Foster once said that "... there are shadows because there are hills". This could not be more apt in the South African context. The World Economic Forum's Global Competitiveness Index rates South African banks as the second most sound of the 144 countries surveyed in 2012/13. It could be argued that our banking sector is not merely a landscape of hills but rather a vast mountain range. The emergence of other financial intermediaries follows naturally.

In terms of the National Credit Act ("NCA"), all entities who aim to provide loans and advances to both individuals and legal persons are required to register with the National Credit Regulator ("NCR") of South Africa. Currently, there are more than 4 000 credit providers registered with the NCR. These financial intermediaries profoundly influence the shape and size of the South African shadow banking sector.

Bringing this sub-section of South African shadow banking into sharper focus is the widely publicised concern regarding the levels of household debt in South Africa, and in particular the exponential growth in unsecured lending. Various publications have quoted Finance Minister Pravin Gordhan expressing his concern about levels of unsecured lending, especially as they relate to lower income earners.

In October 2012, the NCR conducted surprise inspections in reaction to the violent protests in Marikana. NCR chief executive Nomsa Motshegare said that ten of the twelve credit providers inspected in that area were found to be non-compliant with the NCA. In response to these findings Minister of Trade and Industry, Rob Davies, noted that his department had seen practices that verged on reckless lending.

Statistics from the NCR shows that total personal loans and advances grew from R1.21 trillion in quarter 1 ("Q1") 2011 to R1.32 trillion for the same period in 2012. Of this R110 billion growth, R40 billion can be attributed to pure unsecured credit and a further R15 billion to credit facilities.

It is important to note that not all unsecured lending originates in the shadow with major players African Bank and Capitec Bank taking the lion's share, but the shadow is certainly lengthening as a result of this growth.

Is darkness upon us?

Valid concerns have been raised about the size and growth of shadow banking in the global sense. This has not been empirically quantified from a South African perspective, but all indicators are that the global trend applies here as well.

However, arguably the most risky of the South African shadow banking sub-segments is subject to some regulations and certainly to regulatory scrutiny even if it is indirectly via the central bank and credit watchdog. And while our banking sector is one of the best in the world, our population remains significantly under-banked. Other financial intermediaries have a noteworthy role to play in this particular segment of the population.

In South Africa it therefore seems that the lengthening shadow may be as a result of the dawn of future opportunity. Upon further investigation we may find that the sun is indeed rising not only on South Africa, but on the African continent as a whole.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions