Article from The Economist: Banking on the Unbanked

The success of South Africa's controversial Black Economic Empowerment (BEE) legislation in encouraging South African firms to engage low-income communities as clients suggests an alternative optimal relationship between private firms and government that allows both for market efficiency and desired social outcomes.

BEE attracts controversy because its stated objectives focus on increasing black ownership and control of South African businesses. The South African government intends to accomplish these objectives with regulation and preferential treatment to government-contracted private firms who adopt BEE objectives. Critics have accused BEE of primarily benefiting wealthy, well-connected blacks, instead of aiding the majority of South Africans who live in low-income communities.

Rather than simply transfer assets from whites to blacks, BEE has effectively changed the incentives that private firms face in South Africa. By linking government contracts to BEE objectives, many firms must adopt social goals in order to maintain lucrative business with the government. Consequently, the South African government has successfully engaged entire private sectors, and convinced them to write charters that commit private firms to adopt specific actions that will advance BEE objectives. In the drafting of these charters, the South African government deferred to the private firms, who led the process with their hard-earned expertise in their industry. They developed strategies that satisfy both BEE objectives and their for-profit ambitions.

The Financial Sector Charter, discussed in WRI's conference last December, exemplifies the success of this model. The charter committed South African banks to redress the inequalities that South African society inherited from apartheid. Seven months ago, South African banks began to offer Mzansi bank accounts to low-income South Africans at substantially reduced rates. South African banks have now opened over a million of these accounts, according to this article from The Economist. Although clients only have the option of storing their savings in these accounts, the South African banks have launched the Mzansi bank accounts with the intent of building loyal clienteles who will consume future product lines directed at the needs of low-income South Africans.

The charters that the South African government has encouraged private firms to create provide a promising model to conceptualize the relationship between government and private firms. As opposed to other models that result in wasteful, ineffective state bureaucracies, this model depends on the incentives faced by private firms, and aligns their self-interest with socially desired outcomes. Further research on the charters created and signed by South African firms could offer insight on how best to encourage private firms to target the world’s poor as clients.