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Origin of the Central Bank of South Africa, the South African Reserve Bank The Central Bank of the Republic of South Africa, commonly known as the South African Reserve Bank (SARB) was established in 1921 in terms of a special Act of Parliament, the Currency and Banking Act, 1920 (Act No. 31 of 1920) (SARB, 2012).

Before the SARB was established, South African commercial banks issued banknotes to the public. However, the legislation on the issuing of banknotes by commercial banks was not uniform (SARB, 2012). According to the SARB (2012), the price of gold in the United Kingdom rose above its price in South Africa after World War I, thus leaving the South African banks to trade at a loss.

To protect their financial viability, the commercial banks requested the Government to release them from the obligation to convert their banknotes into gold on demand. This led to the Gold Conference of October 1919. Following the recommendations of the Conference, a Select Committee of Parliament recommended the establishment of a central bank to assume, among other responsibilities, responsibility for the issuing of banknotes and for taking over the gold held by commercial banks (SARB, 2012). Parliament subsequently accepted the recommendation on the creation of a central bank. In December 1920, the Currency and Banking Act, which provided for the establishment of the SARB, was promulgated. Effect was given to its various provisions in the course of the subsequent six months and the Reserve Bank commenced operation on 30 June 1921 (SARB, 2012).

The SARB is responsible for the monetary policy goal of containing inflation. Its main purpose is to maintain financial stability via price stability in South Africa. Additionally, it formulates and implements monetary policy; acts as banker to government; supervises the banking sector; ensures effective functioning of the national payment system; manages gold and foreign-exchange reserves; issues notes and coins; acts as lender of last resort in certain circumstances; and administers the country's exchange controls (SARB, 2012).

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The structure of shareholding in the SARB has, however, not been amended since its inception. The SARB and seven other central banks (in Belgium, Greece, Italy, Japan, Switzerland, Turkey and the USA) have shareholders other than the governments of their respective countries (SARB, 2012).

Overview of the Banking Sector in South Africa

The South African banking industry is governed by, among other acts, the South African Reserve Bank Act 90 of 1989 as amended; the Banks Act 94 of 1990 as amended; the Mutual Banks Act 124 of 1993 as amended; the Currency and Exchanges Act 9 of 1933 as amended; the National Payment System Act 78 of 1998 as amended; the Financial Intelligence Centre Act 39 of 2001 as amended; and the Financial Advisory and Intermediary Services Act 37 of 2002 as amended (SARB, 2012). In addition to these Acts, South Africa’s banks are regulated in accordance with the principles set by the Basel Committee on Banking Supervision. Consequently, the banks comply with sound international practice and offer a sophisticated banking system to the public (Bank of International Settlement “BIS”, 2012a).

Over the past decades, South Africa has established a well-developed banking system, which compares favourably with those in many developed countries; and which sets South Africa apart from many other emerging economies (BIS, 2012a). The sector has undergone a lot of changes, with the early 1990s being characterised by a process of consolidation, resulting from mergers of a number of banks (the Banking

Association South Africa “BASA”, 2010).

The promulgation of the Banks Act of 1990 led to a number of banking licenses being issued and by the end of 2001, there were 43 registered banks in South Africa.

However, the announcement of Saambou’s financial troubles in 2002 resulted in a run

on smaller banks. This resulted in a number of banks not renewing their banking licenses and others seeking financial assistance from foreign shareholders (BASA, 2010). Other banks also experienced financial difficulties during that period and were placed under curatorship (BASA, 2010).

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Although the South African banking sector has been through a process of volatility and change in the past, it has attracted a lot of interest from abroad with a number of foreign banks establishing a presence in the country and others acquiring stakes in major banks (BASA, 2010). To date, South Africa has a relatively well-developed financial sector, which compares well with some of the BRICS countries (Brazil, Russia, India, China and South Africa) and with other developed countries.

South African banks also dominate the banking landscape in Africa. Out of Africa’s top

200 banks in 2008, South African banks accounted for 40.4% of total banking assets, 34.6% of net earnings, 49.9% of bank credit, and 42.4% of bank deposits (Mlambo and Ncube, 2011). The sector is, however, heavily concentrated, with the largest four banks accounting for over 80% of total bank assets. Over time, the South African banking sector has become marginally more concentrated as the total number of banks has also declined, falling from 58 (41 domestic, 2 mutual banks and 15 branches of international banks) in 2003 to 33 (18 local banks, 2 mutual banks and 13 branches of international banks) in 2009; and further down to 36 (17 domestic, 3 mutual banks, 1 co-operative bank and 15 local branches of foreign banks) in 2012 (Mlambo and Ncube, 2011; SARB, 2012).

Although its structure has not changed much over the last few years, the banking system in South Africa has continued to grow in terms of assets, deposits, profitability and product offerings. The growth has been mainly underpinned by a number of changes in respect of the regulatory environment, product offerings, and number of participants, resulting in a greater level of competition on the market from smaller banks which have targeted the low income and the previously unbanked market (BASA, 2010).