Community Reinvestment Legislation and Access to Housing Finance in Post-Apartheid South Africa

Abstract

Using legislation as one of its main tools, the apartheid government provided white South Africans with abundant resources and economic opportunities. Correlated with the opportunities provided to whites was the systematic denial of opportunity to members of other groups. Since 1994, the African National Congress- (ANC-) led government has worked to remedy the effects of apartheid through legislative means. South Africa's Department of Housing has attempted to use community reinvestment legislation as part of this effort. This paper assesses the various political and economic factors that led to the failure of South Africa's reinvestment legislation process. These fall into two categories: extra-legislative factors and factors internal to the process itself that, even should other inhibitions not have existed, might still have undermined South Africa's reinvestment legislation process. The paper relies largely on analysis of interviews conducted with South African bankers, government officials, community representatives, and housing and lending specialists.

Keywords:

• Housing finance
• South Africa
• community reinvestment legislation

Notes

¹ Thirty semi-structured interviews were conducted in total. Representatives from the banking sector included employees of Standard Bank of South Africa, ABSA, Nedcor, and The Banking Council South Africa. Representatives from government included officials at the Department of Housing, the National Housing Finance Corporation, the Micro Finance Regulatory Council, and several private consultants to government. Community representatives included citizen activists, members of the South African Communist Party, and individuals at the Savings and Credit Co-operative League of South Africa. Housing and lending specialists included employees of the National Urban Reconstruction and Housing Agency, Servcon Housing Solutions, and three agencies small enough that identifying them would reveal these interviewees' identities. Four individuals were interviewed on both the first and second research trip to South Africa and their quotations therefore have either an ‘a’ or ‘b’ following their identification number.

² These trips would not have been possible without generous support from the following organizations: the Mario Einaudi Center of Cornell University, the Institute for African Development of Cornell University, the Program on International Studies in Planning of Cornell University, the Alumnae Association of Mount Holyoke College, and the Department of International Relations, Law and Politics of Mount Holyoke College. None of these organizations is responsible for the content of this work; the paper represents solely the views of the author.

³ South Africa's retail banking sector is highly concentrated. Four main banks, Standard Bank of South Africa, ABSA, First Rand and Nedcor, known collectively as the ‘big four’, dominate the country's retail financial market. The big four are responsible for over 90 per cent of mortgage lending in South Africa (Joffe, 2002).

⁴ When the term ‘black’ is used in this paper, it is used as preferred by South Africa's Black Consciousness Movement, i.e. to refer to all but South Africa's white population.

⁵ The Reconstruction and Development Programme (RDP), the major initiative of the Mandela-led Government of National Unity, was upheld by six basic principles: integration and sustainability, a people-driven process, peace and security for all, nation-building, linking reconstruction and development, and democratization. Four of the main programs of the RDP were: meeting basic needs, developing human resources, building the economy, and democratizing the state and society.

⁶ The mid-1970s to the early 1980s became known as the years that the apartheid government implemented its ‘total strategy’, an effort to increase the power of the National Party Government, whose apartheid policies were under increasing attack both from within and outside the country. One element of the total strategy concentrated on giving those agitating for changes to the apartheid state an economic stake in maintaining that state (Morudu, 1993; Worden, 2000) through such things as increased access to both homeownership and housing finance. For example, a 30-year township leasehold system was reintroduced by the South African Government in 1975 and was extended to a 99-year leasehold system in 1978; it was only after the introduction of the 99-year leasehold program that Africans became eligible for finance from South Africa's building societies (most of which were eventually absorbed by South Africa's banks) via the Financial Institutions Amendment Act, No 80 of 1978. Following changes to the provision of household lease arrangements and homeownership schemes in black areas, the South African Housing Trust was established in 1987 as a joint venture between the state and the private sector for the purpose of developing low-cost housing. The South African government made a R440 million interest-free loan available to the Trust with the understanding that the private sector would match this amount. Khayalethu Home Loans (Pty.) Limited was established as a subsidiary of the Trust with the intention of providing end-user finance for affordable housing. Khayalethu loans were granted on a project (as opposed to an individual) basis, and the interest rates charged were set at slightly higher than market mortgage rates. By 1994 Khayalethu was serving approximately 26 000 clients and had a portfolio in excess of R500 million (Zack, 1994). With regard to business's complicit role in stifling opposition to apartheid, one organization that sought to quell the increasingly visible and vocal dissatisfaction of township residents in the 1980s was the Urban Foundation. Founded by members of the business community in the late 1970s, the Urban Foundation worked to “promote improvement of the quality of life in urban (and primarily African urban) communities” (Urban Foundation pamphlet as quoted by Wilkinson, 1998). The Urban Foundation was at the forefront of promoting a free-market approach to the provision of housing in urban South Africa, with the thought that increased homeownership in the townships would lead to increased stability in these regions. According to Wilkinson (1998), the Urban Foundation promoted two strategies: self-help housing strategies (under which residents were assisted in housing themselves) and the sale of public rental stock. In an effort to address some of the concerns of black South Africans who were agitating for change to the apartheid state, the South African government introduced new means for assisting with property finance in black areas.

⁷ The South African rand has fluctuated greatly in value since the political transition in 1994. This paper valuates the rand using the average of the exchange rates for every 1 July 1994 through to 2004. This comes to R1 = US$.182. Exchange rates used for this paper are calculated from those found at http://www.onanda.com.

⁸ The figures in Table 1 and in this discussion are from 2004, the heart of the debate over CRA. The South African subsidy program has changed somewhat since that time, with the amounts available increased to account for inflation.

⁹ It is interesting to note that the government was only willing to cover political risk under the Mortgage Indemnity Fund; subsequent research has revealed that less than 5 per cent of default is due to political protest, while 59 per cent of default stems from affordability problems (Porteous & Naicker, 2000).

¹⁰ The figures included here are taken from the following sources: Rust, 2002; South African Institute of Race Relations, 2002; Department of Housing website, http://www.housing.gov.za, October 2004.

¹¹ The draft Community Reinvestment Bill defined redlining as occurring “when a financial institution does not offer a home loan to a borrower or household mainly on account of the house to be financed being located in a particular geographical area or neighbourhood”.

¹² ‘Targets’ are defined in the draft Bill as “that proportion of a financial institution's book that is prescribed by the Minister [of Housing] for disbursement either directly or indirectly to low- and medium-income level households for housing purposes”. ‘Standards’ are defined as “the performance, conduct and level of compliance that is prescribed by the Minister [of Housing] to a financial institution in attempting to meet its target”.

¹³ The Department of Housing set an employee from the National Housing Finance Corporation the tasks of completing the HLMDA regulations and setting up the Office of Disclosure.

¹⁴ The last mention in the press occurred in September of 2003. See Loxton (2003).

¹⁵ Thanks are due to an anonymous reviewer whose criticisms helped to reframe and clarify this discussion.

¹⁶ The World Bank has developed a three-tier system for classifying where countries fall within the global economy. Countries are either low-, medium-, or high-income, depending on their gross national income per capita. According to the World Bank's 2005 ‘Country Brief’ for South Africa, the South African gross national income per capita is $3630, which makes South Africa “one of the few African countries to have joined the group of upper middle income countries” (World Bank, 2005). However, the distribution of income in South Africa is skewed enough to make this classification almost meaningless for the majority of South Africans.

¹⁷ ‘Internal colonialism’ is said to differ from international colonialism in one crucial respect: in a situation of internal colonialism, the colonizing race or nation occupies the same territory as the colonized people, which means that a post-colonial break via expulsion of the colonizers is impossible. See Wolpe (1975) for a thorough treatment of this topic.

¹⁸ In 1993 South Africa's parliament created a multiparty Transitional Executive Council that would be responsible for overseeing South Africa's transition to democracy. For details, see Thompson (1995).

¹⁹ Bond (2000) describes the situation as follows: “… the very first act of South Africa's interim multi-party government—the December 1993-April 1994 Transitional Executive Council—was an application for an $850 million IMF loan purportedly for drought relief but in reality aimed at servicing part of the apartheid foreign debt which had been renegotiated on surprisingly onerous terms a couple of months before” (p. 176).

²⁰ South Africa's involvement with the World Bank came somewhat later. According to Bond (2000): “… the first World Bank loan to democratic South Africa—worth R340 million [approximately $62 million]—was only granted in 1997” (p. 160). The World Bank provides a current figure of South Africa's borrowing: “As of February 2005, the World Bank had approved 13 loans for South Africa for a total amount of approximately US $302.8 million”.

²¹ See Sparks (2003) for full details of GEAR's development.

²² A colloquial expression meaning ‘a squabble’.

²³ The current president of South Africa.

²⁴ The first Minister of Housing following South Africa's democratic elections in 1994 was Joe Slovo. He held the post until his death in 1995. Following Slovo's death, Sankie Mthembi-Mahanyele became Minister of Housing. In 2003, Mthembi-Mahanyele left office to become Deputy Secretary General of the ANC and Brigitte Mabandla, who had until then been Deputy Minister of Arts and Culture and had limited experience in housing issues, took over the position of Minister of Housing. Mabandla's reign at the Department of Housing was brief: in early 2004, she became Minister of Justice and Constitutional Development and the post of Housing Minister went to Lindiwe Sisulu, previously Minister of Intelligence.

²⁵ The Banking Council, whose name changed in 2005 to The Banking Association of South Africa, is a private agency that serves as the representative voice of South Africa's commercial banks. For ease of comprehension, this paper refers to this organization using the name that was current at the time the interviews were conducted, i.e. ‘The Banking Council’.

²⁶ An exhaustive analysis of the agenda-setting process surrounding South Africa's draft Community Reinvestment Bill is provided in Freeman (2007).

²⁷ NEDLAC is a forum within which business, labor, government and community can meet to discuss issues of social and economic policy.

²⁸ The Charter Council comprises four members of government, three members of the Association of Black Securities and Investment Professionals, four representatives of community, four members of the labor movement, and six members of trade associations (including the Banking Council)

²⁹ The Council issues a scorecard which rates each institution's success in meeting its goals. The scorecard is used as a basis for self-assessment by each institution, as a means for the Charter Council to evaluate black economic empowerment progress in the financial sector, by government who might, if it wishes, award contracts based on compliance with the Charter, and by the private sector as it makes its decisions to award contracts to financial institutions. (The concept of Black Economic Empowerment has been discussed in South Africa since the late-1990s. According to the Broad-Based Black Economic Empowerment Act, black economic empowerment is “the economic empowerment of all black people, including women, workers, youth, people with disabilities and people living in rural areas through diverse but integrated socio-economic strategies that include, but are not limited to: increasing the number of black people that manage, own and control enterprises and productive assets; facilitating ownership and management of enterprises and productive assets by communities, workers, co-operatives and other collective enterprises; human resource and skills development; achieving equitable representation in all occupational categories and levels in the workforce; preferential procurement; and investment in enterprises that are owned or managed by black people” (Republic of South Africa, 2004, p. 4)).

³⁰ As of this paper's writing, the 2006 review of the financial sector in meeting its Charter goals is not yet available.