Establishing a bank in South Africa is a complex but rewarding endeavour. With the right approach and the support of a skilled legal team, aspiring founders can successfully navigate the regulatory landscape, from developing a robust business plan to meeting stringent legal requirements.
To address regulatory fragmentation, improve customer protection and enhance financial stability, South Africa adopted the twin peaks model of financial regulation. Prior to the implementation of this model, the South African Reserve Bank (SARB) was responsible for, amongst other functions, the regulating and licensing of banks. With the introduction of the twin peaks framework, two separate authorities have been established. These authorities are the Prudential Authority and the Financial Sector Conduct Authority.
The Prudential Authority is now the primary body responsible for the prudential regulation and supervision of banks. The Prudential Authority makes the final decision on the banking license applications, subject to the concurrence of the Financial Sector Conduct Authority who oversees market conduct and customer protection in the financial sector.
The SARB has been given an expanded financial stability mandate, particularly through macroprudential oversight. As a result, while the SARB retains an overarching responsibility for financial stability, the Prudential Authority is now the main authority responsible in respect of banking license applications.
Before you dive in, it is important to know which activity differentiates a bank from other credit providers:
The business of a bank includes the soliciting or advertising for, or the acceptance of, deposits from the general public as a regular feature of its business.
A bank may be established in various forms, as detailed below.
Commercial banks
A commercial bank is a public company owned by its shareholders, who may not necessarily be depositors or share a common bond. This banking structure is the most prevalent form in South Africa.
The Banks Act of 1990 and its Regulations, together with the Prudential Authority directives and guidance notes, govern the licensing process and required governance structures for commercial banks. Compliance with the Prudential Authority directives are compulsory, both during the licensing and on an ongoing operative basis. As a public entity, commercial banks operate subject to adherence to the general company law legislation.
Mutual banks
Mutual banks are creatures of statute, established in terms of the Mutual Banks Act of 1993. Unlike commercial banks, a mutual bank does not need to be incorporated as a company under the Companies Act of 2008. A registered company may apply to establish a mutual bank, and upon successful registration, be removed from the register of companies. It would continue to exist solely as a mutual bank.
Mutual banks are owned by its depositors who qualify as members through their shareholding in the entity. As such, they are entitled to exercise control in the general meeting of the bank. Therefore, it is important that the articles of association of the mutual bank be drafted carefully, in order to ensure that the founders retain majority control. At least seven founders are required to apply for the establishment of a mutual bank.
Co-operative banks
A co-operative bank is an autonomous association of individuals who collectively control the bank based on cooperative principles. Membership is based on a "common bond", which may be:
- employment by a common employer or within the same business district;
- shared membership in an association or organisation (including social, cooperative, labour, religious or educational groups); or
- residence within the same defined community or geographical area.
The application process depends on the type of co-operative bank sought to be established, which is determined based on the intended operations. As each term is defined in the Co-operative Banks Act of 2007, the proposed functions may categorise the entity as either a:
- primary savings co-operative bank;
- primary savings and loans co-operative bank;
- secondary co-operative bank; or
- tertiary co-operative bank.
In addition to the required policies and plans, the application must be set out in a prescribed form, tailored to the specific type of co-operative bank sought to be established.
Banking license applications
Banking license applications are typically iterative in nature. The process involves written applications for the Prudential Authority's review, followed by rounds of commentary to be posed to the applicant bank and/or additional questions or conditions to be addressed by the applicant bank. Generally, banking license applications would need to satisfy the Prudential Authority in relation to multiple factors, which include amongst others, that:
- it is in the public interest that the proposed bank be established;
- the proposed bank is commercially viable and will continue to operate in a financially sound manner; and
- the proposed bank implements effective management and reporting lines.
A recent SARB working paper notes that South Africa's banking sector has seen over twenty bank failures and deregistration in the past three decades. In a number of instances, this was caused by liquidity issues, poor management and external economic factors.
In order to ensure market stability, banks and banking groups are subject to an extensive regulatory framework. In addition to the authorising legislation listed above, this framework includes the Financial Sector Regulation Act of 2017, the Code of Banking Practice, the Companies Act of 2008 (as applicable), the Financial Advisory and Intermediary Services Act of 2002 and the Protection of Personal Information Act of 2013.
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.
