Yesterday, Reserve Bank Governor Gill Marcus announced that the repurchase rate would increase by 25 basis points pushing it to 5.75%. This would in turn push the prime lending rate up to 9.25%. This decision was taken because the economy contracted in the first quarter of 2014 and the growth outlook for the rest of the year remains subdued amid low business confidence.
The consequences of the decision are not what I am concerned with; I would rather focus on another question: what exactly is the South African Reserve Bank?
This is a question that most of us might take for granted. However, given that the primary purpose of the Reserve Bank is to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa, I think this is a question that more people should engage with. Is the Reserve Bank a private institution or a public institution? Moreover, if it is indeed a public institution, what powers does the State have in relation to the actions it takes?
The Reserve Bank is a creature of statute established by section 9 of the Currency and Banking Act 31 of 1920 and currently governed by the South African Reserve Bank Act 90 of 1989 (SARB Act, last amended in 2010). The Reserve Bank serves as South Africa’s central bank.
A central bank can loosely be defined as a national bank providing financial and banking services for its country’s government and commercial banking system, as well as implementing the government’s monetary policy and issuing currency. In the South African context, the SARB Act states that the primary objective of our Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.
According to section 4 of the SARB Act, the Reserve Bank has a board of 15 directors, one of which is designated as a Governor while three others are designated as Deputy Governors. According to section 5 of the Act, the Governor and Deputy Governors are appointed for five‑year terms while the remaining directors are appointed for three-year terms. The Governor and Deputy Governors may be re‑appointed for a term not exceeding 5 years through the same process under which they were appointed. The same is true for the other directors with the difference being that their term following re-election or re-appointment may not exceed 3 years.
Interestingly, out of the 15 directors of which the Board is comprised, the Governor and the three Deputy Governors are appointed by the President after consultation with the Minister of Finance and the Board of Directors. Four directors are appointed by the President after consultation with the Minister of Finance. The remaining seven directors are elected by the shareholders from candidates confirmed by the Panel. You read that last sentence correctly; the Reserve Bank does have private shareholders and is thus privately owned.
Those who are more disposed to conspiracy theories amongst us might at this very moment be inclined to rage about the fact that our central bank is owned by private shareholders. I urge them not to; there is a major difference between the rights and powers of shareholders in an ordinary company and those who hold shares in our Reserve Bank.
First, the Reserve Bank has a share capital of R2 million divided into 2 million ordinary shares of which no single shareholder may own more than 10 000 shares individually. Dividend payments are not more than 10 cents per share per annum to shareholders and the surplus of the Bank’s earnings is paid to the Government. This effectively means that Reserve Bank shareholders can at maximum receive a dividend of R1000 per individual shareholder.
Second, as per section 23(1) of the SARB Act, a shareholder shall, at a meeting of shareholders, be entitled to one vote in respect of every 200 shares of which he has been the registered holder. The Governor presides at the meetings of the Board of Directors and in his or her absence from any meeting, the Deputy Governor designated by the Governor. This is important because the Governor, who is essentially appointed by the President, has a deliberative vote and in the event of an equality of votes, a casting vote by virtue of their status as the person presiding at board meetings.
Third, while seven directors are elected by shareholders, these directors are selected from candidates confirmed by “the Panel”. According to section 4 of the SARB Act, “the Panel” is comprised of the Governor who in turn appoints a retired judge and one other person (both nominated by the Minister of Finance) and three persons nominated by NEDLAC (National Economic Development and Labour Council) to sit alongside him or her on the Panel. Moreover, in the performance by the Panel of its functions, the Governor has a deliberative vote and, in the event of an equality of votes, a casting vote.
Lastly, of the directors elected by the shareholders: two shall be persons with knowledge and skill in commerce or finance; one shall be a person with knowledge and skill in agriculture; two shall be persons with knowledge and skill in industry; one shall be a person with knowledge and skill in labour; and one shall be a person with knowledge and skill in mining. These requirements have been argued to be aimed at making the Board of Directors more representative of the wider community in whose interest it acts.
Whether the Reserve Bank should have private shareholders is debatable given that most central banks around the world are owned by their respective governments. The Reserve Bank’s private shareholders have in the past tried to increase the amount of dividends they could get paid to them by passing a ‘special resolution’ to amend the SARB Act. This was and will remain a doomed venture, given that the Bank is a creature of statute, any such dividend increase to shareholders would require legislative amendment of section 24 of the SARB Act.
In any event, in response to the questions I raised earlier, it is clear that the mandate of the Reserve Bank to act in the public interest militates against control by its private shareholders. The Bank’s mandate also militates against profit maximisation. Ultimately, the Government has a measure of control over the Bank and, in that sense, it can be thought of as a privately owned central bank over which the State exercises considerable control due to its importance to the Republic.
For more about the origins and structure of the Reserve Bank please refer to this useful piece by Johann De Jager “The South African Reserve Bank: An Evaluation of the Origin, Evolution and Status of a Central Bank (Part 1)” (2006) 18 SA Merc LJ 159–174.
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