The government and consumers should not look to South Africa's four major banks to provide banking services for poor people.
Bob Tucker, chief executive of the Banking Council, says there is a conflict of interest between the government's responsibility to maintain international banking standards and its responsibility to ensure banking services for the low-income market.
Tucker was speaking at the launch of the latest Banking Review in Johannesburg recently.
The government should lower the entry levels required to establish lending institutions so that institutions aimed at servicing the poor - such as community banks - can enter the market, he says.
The government cannot expect the major banks to become involved in establishing these alternative banking institutions as they will more or less be in direct competition with the major players.
During the Asian banking crisis, when banking came under pressure in well-balanced economies, investment was put under strain.
But, if South Africa is to secure foreign and domestic investment, investors should be offered opportunities to invest in a variety of market instruments and not just equities, bank deposits and government and parastatal debt instruments.
In some markets, because there is a lack of sufficient risk capital, people look to the banks to provide loans using the public's deposits.
Tucker says banks cannot lend to start-up businesses which have an annual turnover of under R500 000 a year.
Moreover, it is "perilous" to lend to businesses which have an annual turnover of less than R100 000 a year.
The cost of making loans to start-up micro enterprises which are inadequately capitalised and have few managerial skills is enormous compared to the loan.
The cost of making a "very small" business loan of R30 000 is more than 37 percent a year as a percentage of the loan. Clearly, very small businesses cannot carry the cost of such a loan and banks are legally not permitted to charge this kind of interest rate, he says.
The picture for micro business loans is even bleaker. The total cost of extending a loan of R500 amounts to 61 percent a month, and banks simply cannot do it, Tucker says.
Since the 1980s, enormous pressure has been placed on financial institutions to increase their exposure to low-income housing where risk is not always matched by return.
In an agreement with the government in 1994, the banks undertook to increase lending to this market on the assurances that the government would uphold the rule of law in these areas.
Because of the low incomes of most township residents - a situation that would normally preclude them from obtaining a home loan - the banks have generally had to adopt less stringent loan approval practices to grant these loans.
Typically, a township mortgage bond involves pledging pension or provident fund benefits, using guarantees from employers or even purchasing a guarantee to cover much of the required deposit.
The result is that many township borrowers, having been granted a loan to the maximum of what they can afford, quickly become over-extended when their financial circumstances worsen.
Spiking interest rates, in particular, can have a devastating effect on their financial situation.
This experience has clearly demonstrated that, while traditional mortgage bonds are very successful in the conventional market, they are inappropriate lending instruments for low-income consumers, Tucker says.