Pretoria - The way South African banks go about cutting ties with businesses or individuals using reputational risk as a determining factor, has come under scrutiny from three senior academics in the economic and financial sector. Academics have expressed disappointment in the banks’ approach of being subjective and in some cases, discriminatory.
Economist Mzwanele Ntshwanti, who is a lecturer at Unisa’s College of Economics and Management Sciences, said many factors such as market risk and individual risk underpinned the application of the reputational risk rule.
He pointed out that in applying “reputational risk”, the banks appear to use sentiment and subjectivity to guide their decisions, which he said, bordered on racial discrimination, especially against black people.
As an example, Ntshwanti cited how banks can prejudge people based on where they operate their business and their political affiliation. They qualify risk using a set of prearranged principles and questions.
“They ask about the level of education in their processes. They have a view of how educated people behave versus those who are not educated. Those who drink versus those who don’t drink etc, and all of this contributes to building your risk profile. However, it is important to note that they cannot fully know everything there is to know about your company and you as a person, who is seeking finance at the bank. The ‘X’ factor does not usually make it into the equation, yet they can continue to make this assessment,” Ntshwanti said.
That said, Ntshwanti shared that the subjectivity portion of the consideration, was preceded by risk assessment, which included: “models like consumer maximisation, procedures models that have interest rate risks, model values and other technical tools that all add up to determine whether a person is suitable to deal with for the bank or not”.
As an example of racial profiling by the banks, Ntshwanti referred to financial investigations consultant, Emerald van Zyl’s many cases whereby the activist had helped people (mainly people of colour), challenge banks for overcharging them on interest rates.
Ntshwanti also holds the view that banks appear to be colluding, in the manner they operate with clients.
“On the face of it, it would seem like they are the same. The likelihood is that they collude. The banking sector is concentrated among only a few. So obviously, this ‘power’ being concentrated among the few, offers them the potential to conspire and collaborate. The report issued by the South African Reserve Bank (SARB), three years or so ago, found the likelihood of collusion in the exchange rate manipulation,” Ntshwanti said.
Senior Lecturer of Economics at the University of Mpumalanga, Dr Ferdinand Niyimbanira, strongly believes that the implementation of reputational risk is supposed to be “objective,” although it may end up being subjective, when looked at by the company at risk of losing a relationship with a bank.
“Reputational risk is like ethics; you can’t say ethics must be subjective. You can’t say doing one or two things is ethical to you, but it is not ethical to me. In other words, it is about what is right and what is wrong. So, it can’t be right on the one hand and wrong on the other,” Niyimbanira said.
Weighing in on the decisions by the banks to terminate accounts of the Sekunjalo Group and risk the employment of 8 500 employees and some 40 000 dependants, he said: “The company is big and any bank would actually be losing an important customer. It is unfortunate that the employees end up suffering from the situation,” he said.
According to Niyimbanira, the banks’ decisions, “could be politically influenced because the banks, as much as they are companies, are run by human beings, so politics can also somehow have a role. It is highly possible, but in this case, I am not confirming that”.
Dr Eduard Toerien, lecturer in the Department of Financial Management at the University of Pretoria, explained that: “the banks are closing the banking facilities of the client not because the client has a reputational risk”.
“The reputational risk has all to do with the market risk or people’s perception of the business practice, and if people are unhappy with the way in which the company conducts itself and that will be reflected in loss in business and decrease in the share price.”
For example, explained Toerien, if there were companies that were implicated in the State Capture project or have ties with the Guptas, “then Absa could say this could hurt us reputationally because these companies that I am doing business with, their reputational risk may lead to my reputational risk”.
Toerien commented that there is a level of subjectivity in the banks’ decisions.
“But that all comes down to what causes reputational risk. If the reputational risk is the court order or members of the board, or directors who have been charged with corruption, then it becomes a little bit more objective, because you can’t do business with people who have been proven to be corrupt. That’s bad for business and you have a moral obligation then to sever business ties because at the end of the day, it goes for what is good for your shareholders,” Toerien said.
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