NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Article from The Economist: Banking on the Unbanked

The success of South Africa’scontroversial Black Economic Empowerment (BEE) legislation in encouraging SouthAfrican firms to engage low-income communities as clients suggests analternative optimal relationship between private firms and government that allowsboth for market efficiency and desired social outcomes.

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

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

The Financial Sector Charter, discussed in WRI’sconference last December, exemplifies the success of this model. Thecharter committed South African banks to redress the inequalities that SouthAfrican society inherited from apartheid. Seven months ago, South African banksbegan to offer Mzansi bank accounts to low-income South Africans atsubstantially reduced rates. South African banks have now opened over a millionof these accounts, according to this article from The Economist. Although clients only havethe option of storing their savings in these accounts, the South African bankshave launched the Mzansi bank accounts with the intent of building loyalclienteles who will consume future product lines directed at the needs oflow-income South Africans.

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