Daniel Makina
University of South Africa

Pursuant to the declaration of the National State of Disaster in terms of the Disaster Management Act of 2002 and the subsequent lockdown in response to the COVID-19 pandemic, the financial system was deemed an essential service that could operate during the national lockdown. In implementing COVID-19 Regulations, the two arms of the recently adopted Twin-Peak Model of financial regulation – the Prudential Authority and the Financial Sector Conduct Authority -coordinated in maintaining the stability of the financial system while ensuring financial institutions limit services to those only necessary. Fortuitously, the COVID-19 pandemic presented an opportunity to test the effectiveness of the new Twin-Peak Model of financial regulation in South Africa.

In response to the COVID-19 pandemic, the Financial Sector Conduct Authority issued on 30 March 2020 Communication 12 of 2020 to financial institutions drawing their attention to the additional risks arising from the pandemic and calling upon them to put in place measures to mitigate them. The Communication stressed the need to ensure business continuity and sound operation of financial institutions. Cognisant of the challenges financial institutions might face, the regulator suspended some of its regulatory measures that included the implementation of the Banking Conduct Standard, the gap analysis required of them on the World Bank’s Retail Banking Review Report and the pre-submission of inspection documents and of proposals on the complaints management process. Similarly, the Prudential Authority issued Communique 1 of 20 advising financial institutions to continue to comply with prudential and related supervisory requirements during the lockdown, except the submission of financial statements that was extended by 60 days.

In a remarkable show of coordination by regulators, on 9 April 2020 the Prudential Authority and the Financial Sector Conduct Authority jointly issued a Directive applying to all financial institutions -banks, financial markets, insurers and pension fund administrators -setting out how they should conduct their business during the national lockdown. The Directive set out five broad parameters under which the financial institutions would operate. First, it directed the head of every financial institution to determine a minimal number of staff who would provide essential services on site while others work remotely from home. Second, it directed every financial institution to take precautionary measures to reduce the risk of exposure, transmission and spread of COVID-19. Third, it directed every financial institution to establish protocols to screen the temperatures of all persons entering and leaving premises; ensure staff with COVID-19 symptoms are identified, tested and self-isolated; and maintain a register of the names and contact details of all the staff working on site and persons visiting the site to facilitate contact tracing. Fourth, it directed financial institutions to develop and implement COVID-19 preparedness and response plans. Fifth, it directed every financial institution to nominate a workplace coordinator who would be responsible for COVID-19 related issues and act as a point person for regulators. It is noteworthy that the Directive given to financial institutions could have been similarly given to most firms and organisations so that they could have operated without the need to dislocate the entire economy with a national lockdown -an approach akin to burning the whole forest to kill one rabbit.

Financial institutions responded to the Directive by scaling down their brick-and-mortar operations while leveraging their digital services. In other words, during the lockdown, a minimal number of branches remained open to the public and clients were advised to utilise online and digital banking as much as possible. Digital transformation was thus accelerated, the consequence of which is that post-COVID-19, financial institutions will have to right-size to become leaner and more technologically enabled. Unfortunately, such restructuring will unavoidably entail retrenchments of staff.   

In recognition of the fact that COVID-19 accelerated the provision of digital financial services, the financial regulators launched the Intergovernmental Fintech Working Innovation Hub on 7 April 2020 to deal with expected boom in financial technology (fintech) driven by responses to the pandemic. The objective of the Hub is to promote responsible financial innovation during and beyond the pandemic. To achieve this objective, it aids emerging fintechs access to three technology-enabling avenues. First, the Hub offers an online Regulatory Guidance Unit to assist market innovators on issues regarding the policy landscape and regulatory requirements. Second, the Hub provides a Regulatory Sandbox through which fintech innovations are tested under the supervision of regulators. Third, the Hub provides the Innovation Accelerator, which is a collaborative platform where market innovators and regulators share ideas and learn from each other. The three activities are meant to speed up fintech development as well as financial inclusion now spurred by the exigences of COVID-19.

Although there is commitment to pro-fintech innovation, there is no specific regulation on the use of fintech yet. The existing legislation applies to fintech products and services in so far as such products and services fall within the existing legislation. However, not all new fintech products or services fall under the existing regulatory regime. For instance, cryptocurrencies do not, and hence are currently unregulated. The establishment of the Regulatory Sandbox in response to COVID-19 is expected to foster the evolution of a regulatory framework appropriate for fintech.

At the macro-prudential level, the South African Reserve Bank (SARB) is the main regulator of banking and payment services in addition to being primarily responsible for the maintenance of price stability in the interest of balanced and sustainable economic growth in South Africa. Following the adoption of the Twin-Peak Model of financial regulation, its mandate extended to cover the regulation of prudential requirements for all financial institutions in the country, a function it undertakes through the Prudential Authority. Responding to the COVID-19 pandemic, the SARB stood ready to provide liquidity to the financial system using an array of tools at its disposal.

In the first instance and buoyed by low inflation expectations and falling oil prices, the SARB lowered the repo rate by 200 basis points over a period of two months to inject liquidity in the financial system. In addition, it became an active participant in the secondary bond market through occasional purchase of domestic bonds to maintain liquidity. Ironically, the reduction of the repo rate that resulted in low domestic interest rates were countered by rising foreign interest rates triggered by the downgrading to junk status of the sovereign debt by Moody’s Service. Thus, amid the COVID-19 pandemic, cheap domestic finance temporarily lived side by side with expensive foreign finance, a dichotomy that only might not ignite high inflation (via increased money supply) because the health crisis was a supply shock rather than demand-driven. One notable consequence of both the pandemic and the downgrade to junk status was to break policymakers’ long-held ideological disdain of funding from the Bretton Woods institutions. Cognisant that junk status had put the international bond markets out of bounds, cheap finance from the IMF and the World Bank ostensibly dressed as COVID-19 palliatives became attractive and acceptable.  Going forward, COVID-19 will be remembered for having cleared the foggy road to future bailouts from the Bretton Woods institutions which will without doubt be linked to implementing long-delayed necessary structural reforms.

The most notable regulatory interventions by the SARB were measures to increase banks’ supply of loanable funds. The first such measure was a R200 billion guarantee scheme which banks could tap into to give out special COVID-19 loans priced at the prime rate to small companies with turnover under R300 million. The second measure was reducing capital requirements for banks via suspension of Pillar 2A capital requirements, a move which theoretically released new bank lending of R300 billion. The third measure was to reduce the liquidity coverage ratio from 100% to 80%. These measures released unprecedented levels of loanable funds in the South African financial system that are bound to lead to moral hazard in bank lending.

Post-COVID-19, a wave of loan defaults cannot be ruled out and regulators could well be advised to start planning on how to deal with this impending “virus” that will have dire implications on both the real economy and the sovereign debt (via loan guarantees).


FSCA (2020), Impact of Coronavirus (COVID-19): Expectations on Regulated Entities, Communication 12 of 2020 (General). Financial Sector Conduct Authority

FSCA and PA (2020), Directive under the Regulations in terms of section 27(2) of the Disaster Management Act, 2002. South African Reserve Bank and Financial Sector Conduct Authority.

Makina, D. (2019), Extending Financial Inclusion in Africa, Elsevier,

SARB (2020), Impact of COVID-19 on the Prudential Authority’s reporting timelines, PA Communique 1 of 2020. South African Reserve Bank.