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Good evening ladies and gentleman. I thank you for inviting me here to speak at this celebration of your twenty-first anniversary. The twenty-one year mark is as much a milestone for a child moving through the rites of passage to adulthood as it is for an organisation such as yours that has worked for change in a society wounded by years of apartheid. I congratulate you on all you have achieved during these past years and I wish you all the best in your future endeavours.



I am going to take some liberty this evening and talk about the importance of the Bank’s functions being supported by the law and the wider implications of having a strong legal and regulatory framework. The legal basis of the South African Reserve Bank has roots that stretch back to the 18th century. At that time the need for the establishment of a bank of issue with special privileges in South Africa was strongly advocated. The prevailing system where each of the provinces within the Union of South Africa had its own set of banking rules proved dissatisfactory because of the resulting lack of uniformity in the banking system. But it was only in the year 1920 that legislation providing for the establishment of a central bank in South Africa was enacted. Section 9(1) of the Currency and Banking Act, 1920 (Act No. 31 of 1920), for the first time provided for the establishment in Pretoria of a corporate body called the South African Reserve Bank. As could be expected, the charter of the South African Reserve Bank was closely modelled on widely accepted central banking precepts and was in general based on the theory and practice of central banking as it had developed up to that stage.


The legislation endowed the newly established Reserve Bank with certain rights and obligations. In terms of section 12 of the Currency and Banking Act, the Reserve Bank was given the right to establish branches or appoint agents or correspondents in or outside the Union. The legislation required the Reserve Bank on occasion to fix and publish the rates at which it was willing to discount various classes of bills. And it also authorised the Bank to act as the banker and financial agent of the government and government institutions. The Bank was also authorised to manufacture and issue bank notes in the Union for a period of 25 years, which was later extended, and the Bank was given complete monopoly over the issue of bank notes. The South African Bank Note Company, a wholly owned subsidiary, today carries out this function.



Over the years, the Currency and Banking Act was amended several times and eventually repealed. It was replaced by the South African Reserve Bank Act, 1989, also known as the "SARB Act". It provides the legal basis for the existence of the Bank as it stands today. The Reserve Bank of South Africa differs from other central banks because it is a publicly held company, listed on the JSE Securities Exchange. Its shares today are tightly held by about 667 individual shareholders, which include companies, institutions and private individuals. Shareholders are limited to a maximum stock ownership of 10 000 shares of R1 each and receive a fixed annual dividend of 10 cents per share.

The Bank functions as a legal persona and is governed by a board of fourteen directors. The executive management comprises a Governor and three Deputy Governors, all appointed by the President of the Republic after consultation with the Minister of Finance and the Board. Of the 10 non-executive directors, the President appoints three, and seven are appointed by the shareholders.

The Reserve Bank’s executive management are tasked with steering the Bank to achieve its mandated objectives. In accordance with modern international economic trends, it is recognised that the potential for economic growth and the creation of jobs can be fulfilled only under stable financial conditions. This, then, is the Bank’s main aim in conducting its monetary policy. In this vein, it is recognised that only by containing inflation can balanced and sustainable growth be achieved. This requires the achievement of two objectives: price stability and stable conditions in the financial sector.


Just as the Legal Resources Centre is committed to ensuring that the principles, rights, and responsibilities enshrined in South Africa’s Constitution are promoted, protected, and fulfilled, so the Reserve Bank is obliged to ensure that it upholds its duties as set out in the Constitution. The Bank’s mandate is set out in section 224 of the Constitution and in section 3 of the South African Reserve Bank Act. These pieces of legislation state the primary objective of the Reserve Bank as - and I quote: "...[T]o protect the value of the currency [of the Republic] in the interest of balanced and sustainable economic growth ...." In addition, the law also plays a fundamental role in initiating, facilitating and regulating the administrative process whereby the primary objective of the Bank is to be achieved. Incidentally, the protection of the value of the currency is interpreted as safeguarding the internal purchasing power of the rand, in other words, combating inflation, and not as defending the exchange rate.


An important aspect of the legislation governing the establishment and the functions of the Reserve Bank is that its independence is entrenched. Section 224(2) of the Constitution determines that the Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice. Regular consultation must however take place between the Finance Minister and the Reserve Bank. This duty to consult should be regarded as a procedural safeguard of the administrative law and, in a legal context, it entails that the government’s advice or opinion is sought, as indeed it should be the case in a democracy. In spite of this, the executive management of the Reserve Bank remains the primary organ responsible for the achievement of the Bank’s stated objective.


Historically, the argument in favour of a strong, independent central bank was associated with the Bank’s legal right to create money. Many debates ensued during the early years of central bank development over whether the legal right to create money should fall under the ultimate control of the government or whether the responsibility should lie with an independent and autonomous institution. It was argued that the power to spend money should be separated from the power to create money to keep at bay a potentially disruptive force. The danger of having the government control the creation of money is that of high inflation if it is tempted to create too much money and this is not matched by an increase in production or capacity in the economy.


Not only do the dangers relate to the creation of money. An elected government, concerned about its status in the minds of the voters, may be tempted to lower interest rates in the short-term - even at the risk of higher inflation in the medium to longer term. By legally delegating decisions about interest rates, in particular, and monetary policy, in general, to an independent institution such as the Reserve Bank, with a clearly defined mandate, society can hope to achieve more favourable developments in inflation over the longer term.

High rates of inflation have many disadvantages and particularly affect the poor. High inflation can distort the allocation of resources and discourage and erode the savings of a country’s citizens. And it usually leads to an uneven and unequal distribution of income and wealth. It is with this in mind that we at the Reserve Bank adopted the inflation targeting monetary policy framework early last year. Our aim is for CPIX, which is the headline consumer price index excluding mortgage costs, to fall to between 6 and 3 percent by the year 2002. This aim remains the primary focus of our minds when we sit down, like we did today and yesterday, at our Monetary Policy Committee meetings to decide on our monetary policy stance.


Not only is the Reserve Bank’s independence enshrined in the laws of the land, but so too are sound management principles. These two go hand in hand. Since law creates the institutions necessary for the existence and operations of public administration, it follows that the powers of administration depend on such law. Principles of modern corporate management do however dictate that the day-to-day business of large companies be vested in the hands of their expert executive officers and that they normally be allowed a considerable measure of freedom and discretion in exercising their functions. The law normally entitles executives of a company to manage the daily business of a company free from interference. With regard to relevant legislation pertaining to the Reserve Bank, it is evident that the Legislature recognised this important management principle.



The law protects and provides for the Bank and its functions not only in its efforts to achieve its primary objective, but also in its "auxiliary" functions. Sections 10 to 14 of the SARB Act and some provisions of the Banks Act, 1990, create the capacity for the Reserve Bank to exercise various functions in pursuance of a number of objects ancillary to its main object of protecting the value of the currency.


These functions include operations in the money market, acting as the custodian of gold and foreign reserves of the country, providing liquidity assistance, regulating and supervising banks, facilitating clearance and settlement, manufacturing and distributing notes and coin, collecting and processing economic information, managing the country’s public debt and administering exchange controls. The Reserve Bank is also actively involved in the process of the drafting and subsequent promulgation of amendments to laws such as the SARB Act, the Banks Act and the Bills of Exchange Act, 1964. These auxiliary functions are important for the Bank to transmit its monetary policy intentions to the economy at large while acting as a supervisor of the banks in order for it to achieve its primary objective.



The Bank’s legal framework has far wider ramifications. Since the law should aim to bring about equitable rights between people, so too, by striving to contain inflation and achieve financial stability, the Reserve Bank is trying to bring about equity within the financial system. There are two important factors to bear in mind: the Reserve Bank is the lynch-pin of the financial sector in South Africa and the health of a nation’s financial sector is generally viewed as an indicator of the health of a nation’s economy. It follows then that the Bank must be an institution that engenders public confidence - both domestically and internationally. This confidence is important if the Reserve Bank is to perform its function effectively. The sound legal framework that upholds, underpins and directs the operations of the institution is also an important factor, which creates this confidence.


The Bank cannot act without due regard to the environment in which it operates. The strong legal structure underpinning the role of the Bank would be of little significance if a trustworthy legal framework did not similarly support the environment in which the Reserve Bank operates. This means that the legal framework governing the actions of the financial and business sector must also be in line with international best practice so as to emphasise and entrench the stability of South Africa in the eyes of the business community.

I will now illustrate my point by turning for a moment to the Asian crisis of 1997 and 1998. This, I hope, will show the importance of a robust legal and regulatory framework for the financial sector and what can happen when these structures are weak and ineffective.


The Asian Crisis was an unpredicted event that impacted severely on the global financial system. It was not the first global financial crisis, and in all likelihood will not be the last, but it highlighted a number of issues surrounding legal and regulatory frameworks. A number of important initiatives resulted from the experience. Unexpectedly, it was some of the so-called Asian Tigers, like Thailand, Korea, Malaysia and Indonesia, which were the source countries of the crisis. In the years prior to the turmoil, these countries had experienced impressive economic growth and substantial foreign capital inflows.

So what went wrong? The International Monetary Fund refers in various papers to a number of underlying causes of the crisis, which began in Thailand with a series of speculative attacks on the baht in July 1997. Although individual country circumstances varied, some broad causes can be discerned. Among these are firstly, the combination of macroeconomic imbalances; secondly, the interaction of large capital flows attracted by the region’s growth and macroeconomic stability; thirdly, the external developments; and fourthly, weak financial and corporate systems and weak corporate, banking and public sector governance.


In the aftermath of the crisis, however, there appeared to be a growing consensus, that the main catalyst for the crisis was weakness in the financial sector. This included unhedged foreign borrowings by financial institutions and corporations, making them vulnerable to currency depreciation; a mismatch in the maturity of debt and assets, creating the potential for liquidity problems; high asset prices; and poor risk management in the allocation of credit.

Further, it was recognised that some of these Asian countries had inadequate supervisory and regulatory structures that had not kept pace with international best practice and were unable to face the tests of a globalised financial market.

An about-turn in market sentiment lead to a vicious circle of currency depreciation and capital outflows. Contagion spread rapidly throughout the region after the devaluation of the Thai baht, as investors feared that other countries were facing similar weaknesses. By the time the crisis had run its course, a number of financial institutions and corporations in the affected countries were bankrupt. The decline in foreign investor confidence in the Asian countries lead to a wider loss of confidence in emerging markets as a whole and lead to a substantial withdrawal of foreign capital from these markets as investors sought "safer" assets. South Africa, too, was caught in the net. The contagion spilled over into South Africa in May 1998. This was seen in the decline in foreign bond holdings and a depreciation in the rand. From an increase of R16 billion in non-resident bond holdings for the first four months of the year, the holdings decreased by R26 billion from May to December 1998.

But South Africa was fortunate to have a well-developed financial system and this stood us in good stead during the Asian contagion. The major banks displayed resilience and were able to withstand the effects of high interest rates and the volatile exchange rate in a mature South African financial market, backed by a good regulatory and legal framework. This was confirmed by an IMF and World Bank assessment in 1999 in a so-called Financial Sector Assessment Programme. They found that South Africa complied with the majority of the Basle Core Principles for Effective Banking Supervision. Steps were taken to address the few inadequate areas.


But, on a global scale, the Asian crisis highlighted some important issues for the international financial system, many related to the current progress on a new financial architecture. It emphasised that financial supervision and regulation in both debtor and creditor countries needed to be improved. And it exposed the shortcomings in the global financial intermediaries ’ risk management procedures.


In line with this, structural reforms were a key feature of the IMF programmes introduced in Asia to tackle the roots of the crisis. The heart of the structural reforms focused on the financial and corporate sectors. Individual institutions were dealt with through intensive corporate restructuring and restoring viable balance sheets, and the entire system had to be put on a sound footing, by improving financial supervision and regulation to minimise future problems of a similar nature.


Despite the developments in the structural reform of the financial system in the wake of the crisis, the IMF continues to press ahead in this area. The Fund is driving continued efforts towards a legal commercial framework for the modern economy, which includes laws on bankruptcy and competition policy, the creation of institutions capable of enforcing these laws, and ensuring central bank independence. Recent studies on the policy reactions to such crises have shown that a "comprehensive approach, which addresses the stock and flow problems of weak institutions as well as the legal, regulatory and supervisory framework is critical to bolster confidence and ultimately restore the health of the system."1 And we should be mindful that very often the "devil is in the detail" and the capacity to implement corrective programmes after such crises often proves ineffective and slow.



Generally, the broader South African business environment may be viewed as having an adequate legal framework. Some of the more important statutes that govern the private business sector are the Companies Act, the Insolvency Act, and the Usury Act. These statutes variously address the rights and duties of companies and the people who deal with these companies.


The Financial Markets Control Act, 1989 (Act No. 55 of 1989), regulates and controls the financial markets, for example by restricting the carrying on of the business of a financial market or of buying and selling listed financial instruments. The Bond Exchange of South Africa, which regulates trade in listed loan stock, also functions in terms of the Financial Markets Control Act. This Act also governs the functions of the South African Futures Exchange, which provides the regulatory framework within which listed futures may be traded. The JSE Securities Exchange functions in terms of the Stock Exchanges Control Act, 1985 (Act No. 1 of 1985), and it operates as the sole stock exchange in South Africa. The Stock Exchanges Control Act regulates and controls stock exchanges and the business of stockbrokers and of certain lenders of money against the security of securities.


These statutes aim to ensure confidence and trust in the South African financial system and to protect the investing public and participants against fraud and the failure of other participants to meet their obligations.

Individual companies, some of which are listed on the stock exchange, fall under the Companies Act, 1973 (Act No. 61 of 1973). This Act regulates the constitution, incorporation, registration, management, administration and winding-up of companies incorporated in terms of the Act. It is not only the Companies Act that is applicable but certain principles in common law also apply. In this way, the Companies Act operates against the broader background of South Africa’s common law. The Companies Act enhances the common law so that South African company law keeps abreast with developments in other jurisdictions. An example of this is the recent amendments to the Companies Act regarding capital rules that followed the Canadian and American models. It must be clear by now that it is important for our country to ensure a sound legal basis for commercial transactions, one that has avenues of recourse and one that is in line with international best practice and is familiar to those who wish to do business with us.


An international topic that has leapt to prominence recently is corporate governance. Corporate governance concerns the establishment of an appropriate legal, economic and institutional environment that facilitates and allows business enterprises to grow, thrive and survive with the main goal of maximising profits, while being conscious of and providing for the well-being of all stakeholders and society. Good corporate governance dictates that a company’s board of directors must govern the corporation in a way that maximises profits and is in the best interests of shareholders.

Sound corporate governance is recognised as being important to attract investors and assure them that their investments will be secure and efficiently managed; to enhance the accountability and the performance of those entrusted to manage corporations; and promote the efficient and effective use of limited resources.


Protection may be found in the Insolvency Act, 1936 (Act No. 24 of 1936). This Act regulates the manner in which a person’s estate may be sequestrated. It also deals with the rights of creditors and sets out in law the order in which creditors are paid out and how their claims are dealt with. The Insolvency Act provides a remedy to limit the negative effects of insolvencies on others and sets out procedures to follow in such cases.


The Usury Act, 1968 (Act No. 73 of 1968) regulates the finance charges that can be levied for money lending transactions, credit transactions and leasing transactions. Generally speaking, the Usury Act protects people who borrow money against exploitation, specifically by limiting the finance charges payable and requiring companies to disclose their charges.


There are times, within the context of our mandate, when the legal rights of the citizens of South Africa are in danger of being contravened. In such cases the Reserve Bank is obliged to step in. The most recent example of this was in November and December last year when the Bank embarked on a public awareness campaign in response to an expected proliferation of pyramid or get-rich-quick schemes. The Registrar of Banks is responsible not only for supervising the business of mutual and other banks, but for the prevention of activities whereby deposits are solicited or accepted from the public in contravention of the Bank’s Act 1990. It is illegal, in terms of the Banks Act for an organisation to accept deposits from the public as a regular feature of its business and to pool these funds unless the institution is registered as a bank. The Act does not prohibit pyramid schemes as such but it prohibits the illegal deposit-taking activities that some of these schemes undertake.



Banks are closely supervised by the South African Reserve Bank to ensure that the financial stability responsibility of the Reserve Bank is discharged. Banks are unique entities in the financial system for several reasons. Their deposit liabilities are generally accepted and used as means of payment, they grant credit to the general public, and they are part of the payment and settlement system of the country. For these reasons, the role of banks in the maturity-transformation process of deposits is systemic in nature. The claims on banks are short-term in nature, whereas the loans made, are long-term. And for these reasons, too, banks remain under close scrutiny from the authorities.

Banking is undergoing a fundamental change in the new economy. Rationalisation forces are at work to ensure that banks remain globally competitive and provide a quality service to the public at large who use these services to give effect to commercial activities.


The business of banking is regulated by statute, in particular the Banks Act, with the objective of ensuring a stable, efficient and fair financial system in the country. To this end, and because banks handle other people’s money, the entry requirements for new banks are rigorous. Firstly, the management of a bank has to be fit and proper and act in the best interests of the client and the social responsibility of the bank has to be balanced with its self-interest. Secondly, the owners and providers of capital have to provide the minimum capital of R250 million and undertake to ensure that a proper system of corporate governance will protect the depositors from underlying risks. Thirdly, the process of granting authorisation to establish and register a bank includes that an acceptable business plan has to be submitted to prove the viability of the activities and sustainability of the operations.


In most instances when a newly registered bank does not realise its business plan, there are grounds to question the viability of the new operation. Since banks operate in a competitive environment, the market rejects banks that are weak, and competitors withdraw their banking lines and inter-bank deposits from such banks.


From time to time the regulator may be faced with a tough decision to deregister a bank that has not been able to deliver the requisite services for which it was established. Deregistration is a legal responsibility required by the Banks Act, when a bank has ceased to conduct the business of a bank, that is, the business of taking deposits and providing a banking service to the general public. We wish to point out that banking registration licences are not tradable on the secondary market for a very important reason: the management of a bank is the most important factor considered in the process of granting registration to a bank and management normally does not move when the bank’s ownership changes.


We have, on occasion, had to withdraw the registration of a bank that was viewed as a black economic empowerment bank. This was recently the case, which made the decision all the more difficult. The decision was reached basically due to the bank not being engaged in the business of banking and if we showed forbearance this would have sent the wrong signal to those banks already active in the banking system. Black economic empowerment must not mean an abuse of our banking system. Indeed we have a few examples of good banks within the context of black economic empowerment.



In conclusion, it is possibly correct to say that the challenges that lie ahead are immense. In the final analysis, we must bear in mind that the Reserve Bank should not be viewed in isolation, but as part of the community. A central bank cannot be created merely by legislation, but should grow like a living organism within the environment provided by the financial and economic system of the country in which it exists. Although the golden thread of financial stability will always run through it, its activities and structure must evolve in response to the needs and demands of that system, which is known for its tendency to rapidly change. A central bank must serve all the citizens.

It is known that the law recognises that the community’s perceptions of what standard of conduct the law should exact under particular circumstances will change with the passage of time. Consequently, we can expect that the legal profession will play a major role in the process of continuously developing and adapting the Reserve Bank to meet with the prevailing needs and demands of this country.



Kochhar, Kolpar; Loungani, Prakash; Stone, Mark R: The East Asian Crisis: Macroeconomic Developments and Policy Lessons, a Working paper of the International Monetary Fund, 1998, WP/98/128.

Lane, Timothy: The Asian Financial Crisis: What Have We Learned, Finance & Development, quarterly magazine of the IMF, September 1999, Volume 36, Number 3.

Aghevli, Bijan, B.: The Asian Crisis: Causes and Remedies. Finance & Development, quarterly magazine of the IMF, June 1999, Volume 36, Number 2.

Currency and Banking Act, 1920

South African Reserve Bank Act, 1989

The Constitution of the Republic of South Africa, 1996

Banks Act, 1990,