Recent trends in urban policies in OECD countries

As indicated in Chapter 2, a formal credit arrangement depends on the existence of a monetary economy. As such, the banking industry in South Africa emerged as part of the commercial economy, which is illustrated by the timeline in Table 3.1 below.

Table 3.1: Important events in the early banking history in South Africa

1823: Privately incorporated banks allowed in the Cape Colony

1830s: In South Africa, 28 local banks thriving thanks to agricultural prosperity

1860: London & South Africa Bank: the first imperial bank to open doors in South Africa 1862: Standard Bank is established

1865, 1876, 1881, 1890: Banking crises which wipe out many local independent banks.

Only seven banks remain active in the Cape Colony

1854: Natal Bank established. In Natal, this is soon followed by Standard Bank and London & South Africa Bank

1862: Bloemfontein Bank established. Imperial banks soon follow in the Republic of the Orange Free State

1888: Netherlands Bank for South Africa established in the South African Republic (Transvaal)

1890: National Bank formed under concession of the Transvaal government, backed by a consortium of financiers from London, Amsterdam and Berlin

Circa 1910: National Bank of SA acquires Natal Bank, National Bank of the Orange Free State and Bank of Africa. Standard Bank acquires African Banking Corporation

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1926: Barclays Bank (Dominion, Colonial and Overseas) acquires National Bank 1934: Volkskas established

Source: Verhoef (2012b, p. 212)

According to De Villiers (2012, pp. 40-44) early commercial development in South Africa (or a lack thereof) can only be understood by referring to the policies of the Vereenigde Oost-Indische Compagnie (United East Indian Company, usually abbreviated as VOC), which was founded in 1602 and based in Amsterdam. This was the first truly globalised company in history, which sourced commodities in the Orient and traded in Europe. The Dutch Republic granted it a charter to enter into agreements, and founded settlements wherever needed for its commercial ventures.

The settlement at Table Bay, named the Cape of Good Hope and founded in 1652, was conceived as an outpost with the single function of providing food and fresh water for ships sailing between Europe and the Orient. The supreme authority of this new colony was not the Dutch government, but the board of directors of the VOC. This body soon regarded the Cape as an unavoidable drain on their funds, and expended no more than the minimum attention and funds on it. This myopic approach led to outsourcing of food production to the newly created class of Vryburgers (free burghers) in 1657, a step which resembled abandonment, rather than emancipation. In addition, in a worldwide system where corruption was endemic, employees of the VOC entered into private trade with the company, excluding Vryburgers. The majority of Vryburgers moved into the African interior, where their distribution was only contained by the end of the nineteenth century. Their economy tended to self-sufficiency, with little need for banking services (De Villiers, 2012, pp. 40-44). Towards the end of VOC rule, it established the Lombaard Bank in 1793, which was fully owned by the government, but had commercial objectives (Rossouw, 2009, p.1).

With the British takeover of the Cape Colony in 1795 (which became permanent in 1815), private ownership and the right to trade with visiting ships were guaranteed.

Agriculture developed an almost commercial approach with the arrival of the 1820 British Settlers. During these years, shop owners provided consumer goods, but also acted as import–export agents and providers of credit (Verhoef, 2012a, pp. 204–205).

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The emergence of a commercial economy slowly led to a need for financial services.

Therefore, small banks were established, such as the Cape of Good Hope Savings Bank in 1831, the Eastern Province Bank in 1838 in Grahamstown and the Port Elizabeth Bank in 1847. During this era, 25 local banks were also established, but with the depression which followed late in the 1860s, many did not survive. However, the interest of British banks was aroused by rising wool exports from the Cape Colony since the 1840s, but the state of the economy and politics in Europe prevented these banks from investing before the 1860s. The first European bank to open its doors in South Africa was the London and South Africa Bank (LSAB) in 1861, then the Standard Bank in 1862, and finally the Oriental Bank Corporation in 1873. The depression of the 1860s led to most of the small local banks to be taken over by either LSAB or Standard Bank (Jones, 1996, pp. 17–18; Verhoef, 2012a, pp. 205–206).

Until 1856, the territory of Natal was regarded as part of the Cape Colony, but with little commercial activity. English-speaking farmers gradually moved into Natal with the express purpose of producing commodities, for instance sugar, maize and cotton, for British industries. One result was the founding of the Natal Bank in 1854, with branches of the Standard Bank and LSAB following in the 1860s (Verhoef, 2012a, pp. 208–210).

Economic growth in the Free State was slow, but exports of wool and leather slowly created a monetary economy. In 1862, the first two banks were founded, namely the Bank of Bloemfontein and the Bank of Fauresmith. The Standard Bank and LSAB also opened branches, but conflict with government led to a prohibition on all foreign banks (Verhoef, 2012a, pp. 212–213). Nevertheless, the Oriental Bank and another colonial bank, the Bank of Africa, were allowed (Jones, 1996, p. 27).

Before the mineral revolution, there was no competition in Transvaal for the branch of the Standard Bank founded in Pretoria in 1877. This was not the result of constrained competition, but of the lack of commercial activity (Jones, 1996, p. 27).

Jones concedes that the early imperial banks mobilised latent capital, but maintains that bank advances were, as elsewhere, the most important source of deposits. The levels of investment created by the world-wide economic recovery of the late 1860s enabled Britain to export capital and knowledge. Imperial banks introduced banks to South Africa with large capital bases, branch banking, regular payment of interest on deposits, skilled management and effective hierarchical management, which enabled

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the head office in London to control affairs in South Africa (Jones, 1996, pp. 3–4, 12–

13, 20).

The principles according to which imperial banks conducted business in Southern Africa were:

 no lending on accommodation bills;

 no lending against real estate;

 note issuing to be undertaken with caution;

 no unsecured overdrafts; and

 no exchange speculation.

In time, however, lending against real estate was undertaken (Jones, 1996, pp. 11-12).

This section indicated how the foundations for a modern banking industry in South Africa were laid, while the economy was still relatively undeveloped. The next section describes the fundamental changes to banking, following the discovery of diamonds and gold, in 1867 and 1886 respectively.