The banking empire has struck back at critics with a move to explain high interest rates, rising bank charges and lack of attention to the needs of consumers.
In a glossy 38-page Review of South African Banking published this week, the Banking Council has taken seriously the criticisms levelled at banks by an increasingly angry public and by parliament.
The review follows widely publicised hearings by parliament's Trade and Industry committee in Cape Town earlier this year, where the banking industry was accused of failing to meet the needs of most South Africans, driving many into the hands of money-lenders.
Tackling the thorny question of punitive interest rates, the Council notes that last year's huge lending rate hikes "caused great difficulties for all households with a high level of debt" and led to the economic slowdown in the second half of the year.
But the Council says the banks had no option but to raise interest rates last June. Banks' own margins were being squeezed by the higher cost of borrowing from the Reserve Bank as the country tried to weather the emerging market crisis and speculative attacks on the rand.
"Where banks borrow funds more expensively from the Reserve Bank, they are compelled to pass the increased cost of borrowing on to consumers in the form of higher interest rates."
Explaining how the prime overdraft rate the rate at which banks lend to their best customers shot up to 25,5 percent last August, the Council says interest margins of 3,7 percent in South Africa are relatively low. Examples of interest margins in other countries are: five percent in Argentina, 3,5 percent in India, 7,7 percent in Zimbabwe, 3,4 percent in Australia and 2,5 percent in the United Kingdom.
"The margin between the interest rates at which banks borrow and the rates at which they lend is one of their principal sources of revenue," says the Council, adding: "Contrary to popular belief, interest rates are determined by the market and not by the banks."
In the world market, where money can be moved around with a touch on a computer keyboard, any bank charging excessive interest or paying too little on deposits would soon lose clients.
But if interest margins are narrowing, why are bank profits increasing?
After-tax profits of all the banks jumped 25 percent last year to R6,9 billion. The Council says this is partly because banks are now less dependent on interest revenues for profits.
And anyway, it points out, adequate profits are necessary to attract investment. Investors who can get comfortable returns without risk from, say government bonds, are not going to invest in banks unless they can get better returns. This risk premium, according to a study by accountants KMPG, varies from three to eight percent on banking shares in South Africa compared to 15 percent in the United Kingdom, 10 percent in Australia and up to 50 percent in other African countries.
"Any reduction in profits would encourage shareholders to seek better returns elsewhere and severely erode the financial strength of the banks.
"Moreover, comparing charges with the cost of providing services, and bank charges in South Africa with charges in other countries, it is equally clear that consumers are being fairly treated."
Countering accusations that bank charges have increased dramatically, the Council says transaction fees in South Africa are much the same as in Australia and lower than in the United States, though they are nearly three times higher than charges in the United Kingdom.