When I was young I had this vision that I would one day own my own publishing house. The dream withered as I grew older, studied economics and realised that there are more rewarding (financially, and otherwise) careers to pursue. But it never completely vanished. So soon after I started lecturing at Stellenbosch, I had a business idea: why not write and publish a book about what students should know before they go to university. When the writing turned out to be a pain, I got experts to do the writing for me. (I still don’t know why people like Ruda Landman, Jonathan Jansen and Tim Noakes agreed.) I then proceeded to publish the book, and founded a publishing house (with the help of two friends). Gabbema Books. In 2007 we published the first Afrikaans edition with an English edition following in 2009. But to print the 3000 copies that I hoped would sell out easily, I needed to afford the considerable printing costs of more than R70 000, a massive amount for someone with student debt and a Junior Lecturer salary. So I approached the bank. I drafted an impressive business plan. My Accounting friend helped tweak the numbers so that financial success seemed inevitable. And I put on my best business suit and smile.
Proposal rejected. I don’t remember the exact reasons the bank gave for their refusal, but I do remember being extremely angry. How could my perfectly reasonable application for funding be denied? Wasn’t the government trying to encourage young entrepreneurs? What kind of society do we live in that wouldn’t grant me the funding to pursue my dreams? (My frustration may have boiled over on the phone to some unsuspecting banker. Glad I didn’t write blog posts back then!) But let me be honest: that was the best decision the bank could have made. Not for them – R70k is a drop in the ocean on their balance sheet – but for me. See, I was never going to sell 3000 books. At least not in the two-year period that I had hoped. I did manage to scrape together R70 000 and so the two editions did see the light of day. But we never really made a profit on any of those books (the English edition is now available for free on Google Books). Somewhere in a dark office (I imagine) sat a man with a white shirt and polka-dot tie (I imagine) and realised, even before we printed a single copy, that it is crazy to want to make money selling books. He deserves an employee of the month award.
This story came back to me when I read the cover article of the Financial Mail a few weeks ago. Tito Mboweni, former labour minister in Nelson Mandela’s government and ex-governor of the South African Reserve Bank (and, different to what the article claims, still an extraordinary professor at Stellenbosch University), is a frustrated man. His plans to build his own business empire is being thwarted by the big banks’ unwillingness to invest in his dream. Mboweni and his brother wanted to buy a stake in a new iron ore project in Tzaneen. “We went to the banks to raise capital and got a rude awakening. There were no takers. They just wouldn’t. I was shocked, actually.” Even after Mboweni phoned the chief executives to express his dismay, they couldn’t get a loan. Mboweni and his brother also ventured into the media world and joined a consortium vying for the broadcast licence of a now-defunct radio station. But the banks were only willing to advance loan capital on the condition that Mboweni put up his private wealth as collateral. “I said you can’t pledge private wealth for business. They are two separate things. What we have here is a radio licence; if it does not work, you take the business. No-one will seize my private wealth. They think I am a fool.”
Let’s review the facts. Firstly, the radio station Mboweni had hoped to buy is now defunct. To me this suggests that the man in the dark office, with his white shirt and polka-dot tie, made the correct decision to decline Mboweni’s application. Had he approved the application, his bank would’ve lost money (and, perhaps, he his bonus or, worse, his job). Secondly, the reason banks require collateral is because they want to avoid moral hazard, i.e. give people money to spend without any consequences for themselves. The bank wouldn’t give me a loan if I did not have assets they can seize when their money is wasted. This is true for all banks, in all times.
Which reminds me of another story. Following the Great Depression of the 1930s, white poverty had become very visible in South Africa’s burgeoning cities, notably Johannesburg. The centennial anniversary of the Great Trek, the construction of the Voortrekker monument, and various other factors contributed to a rise in Afrikaner nationalism. The topic of white poverty was so serious that a national convention was called in 1939. These nationalist Afrikaners believed that the capitalists (the English and the Jews) held them economically hostage. They had to find a solution to pull themselves up by their proverbial boot strings. The answer? The reddingsdaadbond (RDB), a savings fund (with the slogan ‘A people saves themselves’) in which Afrikaner households (70000 of them within five years) could invest six pennies every month. Part of these funds helped establish Federale Volksbeleggings (an investment corporation) which would invest in new Afrikaner businesses like Gencor which would later become a mining giant. This was grass-roots development at its very best.
Compare this story to what Mboweni, having failed to access credit, proposes: “It was very nice for me sitting in the Reserve Bank as governor, supervising the banks and so on, and resisting the idea of a state bank. But I am now more than lukewarm to it with the experiences that I have gone through.” He explains: “We should not waste our time on BEE; the state must concern itself about the fact that access to capital for black entrepreneurs is restricted. How do we solve that? I think the idea of a state development bank is central to resolving this.”
A state bank is not a novel idea, as the Chinese have shown, although, ironically, they’re in the process of privatising said banks. The reason for their privatization is exactly the moral hazard I discussed earlier: state banks don’t have to report to shareholders and can therefore fund projects that are less profitable, like sports stadia and other feel-good projects. (China could afford these failures for a long time, given their growth rate in excess of 10% per annum.) State banks also tend to support those individuals that have strong ties to government.
This is not to say that Mboweni is completely missing the plot. Perhaps it is true that accessing capital is difficult for black entrepreneurs (because, in general, they lack collateral, although this is perhaps a strong generalisation), and when such a market failure exists then government can potentially intervene. But before we address these apparent ‘market failures’ we need to be sure that they are indeed failures of a financial sector that is widely considered one of the best in the world. And even if we do identify a market failure, we need to be careful about the incentives addressing such failures create. How will a state bank be different than a private bank? Will it be less stringent in its criteria of profitability? Who will carry the risk if the projects – like the radio station – turn out to be a bad investments? If it is a state bank, it is inevitably the taxpayer who will have to pay up.
I enjoy Tito Mboweni’s innovative ideas to solve South Africa’s deep-rooted challenges (which he frequently posts on Facebook). His frustrations at starting his business empire is understandable. But that is no reason to start a state bank which may benefit a small minority at the cost of everyone else. I say start from the bottom instead. Because of his experience, Mboweni has recently started MB Capital to offer funding to black entrepreneurs: “The biggest investors are going to have to be pension funds, but also wealthy private individuals. It’s actually at an advanced stage. It could be like private equity but not a hedge fund.” MB Capital could be the modern version of Federale Volksbeleggings. But only if it empowers from below: imagine its power if it could attract 700 000 black South Africans to invest R50 every month (you can do this much more easily with the technology of today). That R35 million per month could be used to invest in new business ventures of black entrepreneurs who create jobs and prosper. That is how you build a business empire. That is how a people save themselves.