Banking dispute puts South African investment at risk

An ugly dispute between the country’s big banks and a major local company poses a potential threat to growth. The spat may see more foreign investors decide not to put their money into an economy already starved of cash.

Johannesburg // A decade ago a deal done in South Africa was considered a certain winner for foreign investors.

Good infrastructure, a well-educated labour force and, above all stability, were key.

Now the jewel of Sub-Saharan Africa is losing its sparkle and the money is no longer rolling in. Foreign direct investment (FDI) has fallen substantially in the past year to US$4.7 billion, putting it behind Egypt at $14.5bn, Nigeria’s $8.6bn and Mozambique on $5.1bn.

Added to the mix are growing fears that a rift between South Africa’s white-dominated banks and a locally based ethnic Indian company will deter non-white investors.

The timing is not good. South Africa faces a political crisis with allegations of corruption against the Zuma administration and increasing frustration with the mainly white-controlled economy.

The situation could worsen with the unfolding drama between the owners of the Johannesburg-based Oakbay Investments – the Gupta family – and the country’s four major national banks. The “Big Four” lenders are Standard Bank, FirstRand Bank, Nedbank and Barclays Africa Group, previously known as Absa.

Since April last year Oakbay accounts have been shut down by these banks over what they allege are financial irregularities. Currently, only Bank of Baroda handles their business and there are reports that the lender is preparing to close the family’s accounts held there.

After the other banks stopped dealing with the Guptas, the family, who are close to the president Jacob Zuma, immediately cast around for support in the government and elsewhere. The veteran finance minster, Pravin Gordhan, initially offered help then, in an unprecedented move, went to court to ask to be absolved from involvement in the dispute.

Racial issues aside, with a pressing need for investment, the government and businesses would dearly love to tap into the Middle East’s financial muscle.

South Africa has thousands of unemployed black graduates crying out for decent careers. Investment opportunities beckon in the financial services, mining and construction. There is growing Arabian Gulf tourism to the country and Marriot plans to build three new hotels in Cape Town and two more in Johannesburg.

Importantly for Arabian Gulf states in search of food security, there are millions of hectares of rich farmland available, plus the opportunity to develop packaging factories in South Africa’s heartland.

The South African entrepreneur Hamza Farooqui, who made a name for himself as a teenager as one of South Africa’s youngest chief executives, believes Gulf investors could benefit greatly from involvement in South Africa.

“From the Middle East market perspective they have not yet figured out how to crack South Africa, but it’s a massive opportunity to grow comfortably and there is a very natural affinity with the Gulf,” he says. “The UAE has been a very strong supporter of [ruling party] the ANC and very vocal about Africa.

“South Africa is the easiest entry point with established networks,” he adds.

However, Mr Farooqui himself appears to be another victim of white elite protectionism. For the past year he has been trying to buy the only non-white owned South African bank, the veteran Habib Overseas Bank. Coincidentally, Mr Farooqui is also the son of a former manager at the bank.

Puzzlingly, as the sensitive transaction was going through the regulators and other checks were being carried out, news of the deal was leaked to the media.

“It’s odd that something so highly confidential should come out,” says Mr Farooqui.

Still, in January, South Africa’s Competition Commission approved a merger between Habib Overseas Bank and a company set up by Salim Aziz Essa and Mr Farooqui, reported 24.com, South Africa’s largest digital publishing house.

The commission approved the intermediate merger without conditions “whereby Vardospan intends to acquire Habib Overseas Bank”, it said.

Vardospan is the company set up by Mr Essa and Mr Farooqui to conduct the acquisition for an estimated 450m rand (Dh127.7m), 24.com said.

With the four big banks dominant since the end of apartheid it is hard to break into the sector.

“Big banks don’t understand that black entrepreneurs have no collateral so rather than seeking recourse to individual assets like a home we will take our collateral in other ways, such as in stock or equipment. We have to find other means to help black entrepreneurs grow,” Mr Farooqui says.

He also makes a point that the majority in the country would support: “We need more non-white participation in the economy.”

That is one reason the Gupta situation is of increased significance. The case is a curious one. The banks alleged that there were 72 financial irregularities in Oakbay’s trading and reported these to the state financial intelligence centre. This confidential information was then leaked to the press – allegedly by the treasury, according to the South African Sunday Times. Put in context, about a million financial irregularities have been reported in total over the past five years.

Meanwhile, South Africa’s national banks find themselves alongside international lenders immersed in a scandal of price-fixing the country’s rand currency for at least the past decade.

It is difficult to judge the racial element in the Gupta case. The family came to South Africa a year before apartheid ended in 1993, taking a small computer company of eight employees to one that now employs 8,000 in several sectors.

Not everyone in South Africa is pleased with their success. There have been allegations of “state capture” – of the Guptas influencing cabinet appointments.

What cannot be argued is that a non-white enterprise evolved into a serious challenger to established wealth, providing jobs and tax income for the government. This is important at a time when South Africa’s government bonds approach junk status, there is 40 per cent black unemployment and economic growth is anaemic, hovering below 1 per cent.

The Oakbay mess is causing potential foreign investors to look on in dismay and ask whether the country’s wealthy elite are open to non-white entrepreneurs joining their club.

But for those able to overlook the spat, South Africa’s creaking infrastructure could prove to be a driver for FDI. Investors in major infrastructure projects may find the fact that South Africa’s railways only have half their 30,000km of track operational an attractive opportunity. And ports could be substantially improved, another potential avenue for investors to come in on. Combined with the fact that there is no South African shipping line to speak of, the poor state of infrastructure makes exports difficult.

However, the Oakbay situation has arrived just when the fractured Zuma government desperately needs such FDI to save the ailing economy

But as Ernie Lai King, the head of tax law for Hogan Lovells, recently said: “No one is waiting for SA’s ‘open for business sign’ to go up.”

A recent World Bank report highlighted the difficulties of starting a business in South Africa: too much regulation; complex building contracts; and uncertain energy supply.

But the government is at least taking steps to cut bureaucracy. An FDI one-stop-shop has been created to centralise all administration requirements.

“We are doing our best to create a conducive environment for investment and if there’s a time to invest then this is the time,” said Lindiwe Zulu, the ANC’s experienced minister for small business.

But the headwinds are strong. Ms Zulu suggests that some in the financial sector belittle non-white businesses. “Unfortunately, our own people are bad-mouthing our country, advising companies not to invest in South Africa, saying it is an unstable political environment. We must realise that this country belongs to all of us.”

She raises the contentious issue of who holds South Africa’s wealth, suggesting that 90 per cent is white owned. Despite 23 years having passed since white-only rule ended, many blacks are growing increasingly frustrated at what they call “economic apartheid”.

If South Africa is to succeed, the elite – and the banks – have to open their doors to non-white entrepreneurs, otherwise there might be no economy in which to be an elite.

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