The Banking Association of South Africa (Basa) has warned that land expropriation without compensation could pose a significant risk to the banking sector.
In a submission to parliament on Wednesday (24 March), the association said that a marked decrease in the value of land-based property, caused by either an amendment to legislation and/or market uncertainty, and the resultant reduced appetite from property buyers, could destabilise the banking sector.
This will also have a negative impact on the credit rating of the sector and the country, it said.
The current exposure banks have in relation to land-based property is approximately R1.613 trillion in the form of mortgages.
This amount excludes other types of non-mortgage loans afforded to borrowers premised on their net worth, where their land-based property constitutes much of their net equity base and provides support to lenders for such loans in the event of default – the market value of land-based property is estimated to be in excess of R7 trillion.
“Many banking crises around the world have as their starting point the decline in land-based property and the impact that this has on market confidence.
“An example of this is the 2007-2008 global financial crisis which started from the downturn of land-based properties in the United States of America.”
It is therefore important that South African land reform initiatives be implemented in a manner that limits any potential destabilisation of the financial markets, whilst still balancing the need for redress, it said.
Uncertainty around loans
The association has previously said that there is a lack of certainty around what will happen to existing bonds and loans should land be expropriated without compensation.
Basa said that expropriation without compensation in its current form does not seem to take into consideration the security rights (real rights) mortgagees have over immovable property.
“At this stage, it is not understood if any of these rights will be affected and if property law legislation in South Africa would need to be amended to cater for the changes. This will need to be fully investigated,” it said.
“Security aside, we understand that in the event a property which that bank has taken security over is to be expropriated, such an event will be considered as default under the loan.”
Basa said that this will have the following consequences:
- The repayment of the loan at the election of the bank could be accelerated and this would place the borrower in a situation whereby he/she would need to repay the loan far quicker than what was anticipated;
- The immovable property could, at the election of the bank be foreclosed upon as set out above; and/or
- Cause default in other loans (not only residential or commercial property finance loans) which has the potential impact of financially crippling the borrower as those loans could be accelerated at the election of the bank and security executed against same.