A banking risk arises from the Expropriation Act - IRR

Banks have always depended on the bedrock of property for extending capital while minimising risk – but now that bedrock is being legislated into quicksand.

At some point, warns Institute of Race Relations (IRR) researcher Anlu Keeve, the risk of extending capital may no longer be worth taking.

The Expropriation Act, recently signed into law by President Cyril Ramaphosa, threatens to disrupt a key marker that banks rely on to assess risk and extend credit.

Collateral-backed lending is Banking 101 and forms the very foundation of credit risk management. An asset of value serves as the primary security for a credit line, meaning that if the borrower defaults, the lender can sell the collateral to recover their losses. Almost anything can be used as collateral, as long as it is tradable and has a known and preferably stable market value.

The Expropriation Act casts doubt on the market value of property, including property being used as collateral. This implies a higher credit risk, firstly because owners might lose their mortgaged properties and receive compensation below market value, making it impossible for them to settle their debt, and secondly, because the mere risk of expropriation anywhere in the country creates uncertainty about the value of property as collateral.

Higher credit risk means higher interest rates and tighter lending conditions. Without the confidence that property will retain its value or remain in the hands of the borrower, this is inevitable.

Keeve recalls the warning to Parliament by the Banking Association of South Africa in 2020 that expropriation could “lead to systemic consequences for the economy and the financial system as evidenced by the 2007 global financial crisis”.

The Expropriation Act has since become law.

“What were once concerns about potential risks are now warnings of possibly imminent risks,” says Keeve.

According to the Expropriation Act, expropriated owners remain liable for existing property loans. If compensation for the property being expropriated falls short of the outstanding debt, this will place severe strain on the original owner, who will incur additional costs for alternative accommodation while still having to service a loan on property he or she no longer owns. If the expropriated property was used to generate an income, then that income will also be lost, increasing the financial strain.

Because of this elevated risk, the Expropriation Act could mean that banks will have to apply stricter loan approval criteria, higher interest rates, and reduced access to credit − particularly for first-time homebuyers, small businesses, and those with weaker financial profiles. If borrowing becomes more expensive, demand for property and business investment will decline.

If fewer people can access financing, property prices will drop. This could result in a selloff of Real Estate Investment Trusts (REITs), mortgage-backed securities, and property-linked bonds, which would reduce their value. This would further erode the value of the collateral that banks rely on to secure loans.

“Banks will think twice before issuing new property loans in an environment where title deeds can be arbitrarily revoked,” Keeve says. “Over time, the risk is that the Expropriation Act will slow activity in property markets, reducing homeownership rates, construction activity, and real estate investment.”

If credit risk escalates further, it could lead to a rise in non-performing loans. A wave of defaults would weaken bank liquidity and force financial institutions to write off massive losses.  

Keeve stresses that even if a full-scale banking crisis is avoided, the uncertainty alone is damaging. Financial instability breeds investor nervousness. If confidence in the system dwindles, foreign and domestic investors will withdraw capital. This means a weaker Rand and the prospect of capital flight.

Failing banks would place direct pressure on National Treasury, increasing the risk of government bailouts.

“If banks start to collapse, the state will have no choice but to step in with public funds, placing an unplanned burden on an already overstretched national budget and potentially risking further credit-rating downgrades, which have their own set of very negative consequences,” Keeve says.

To avoid these outcomes, the Expropriation Act must be amended to ensure all expropriations are subjected to proper judicial supervision and linked to market-based compensation in each instance, with deviations from market value being rare exceptions requiring special justification and being applied on a predictable scale.

Media contact: Anlu Keeve, IRR researcher Tel: 071 929 9516 Email: anlu@irr.org.za

Media enquiries: Michael Morris Tel: 066 302 1968 Email: michael@irr.org.za