South Africa should reconsider the use of reputational risk as a debanking mechanism

The doctrine of public good, in relation to modern banking or banks, was introduced as early as 19th century. In more recent times, the notion that banks are a public good has been articulated more sharply by careful scholars in economics, having had regard to what money is and what banks do. It is now settled that banks perform a public good function.

Classical and neoclassical theory however, the type of doctrine religiously followed and evangelised by Treasury and the Reserve Bank, erroneously conceptualised banks as mere financial intermediaries whose role in the economy can be replaced by any other firm, consequently subject to the theory of a firm just like all other firms. For banks, this means they receive money (deposits) for safekeeping on behalf of depositors. They can then lend part of the pooled money to households and firms, perhaps including government. Therefore, any firm, with secure enough vaults can safekeep deposits and lend at any such needed time. With this erroneous view so perverse, the public good doctrine would hardly apply to banks.

Banks are creators of money supply through their role in purchasing securities. This makes them not only macroeconomically important, unlike in neoclassical thought, but a must for any economic activity. This implies that households, firms and institutions cannot operate without a bank, unless we go back to cave periods.

But what is a public good? Originally, a public good is one associated with it being financed or created/built/owned by the State or created by the private sector on behalf of the state such as roads etc. While this may still be true today, the concept has evolved significantly, to include many goods provided by private sector that may ordinarily be deemed as private. In all instances, a public good must have, as one of its core characteristics the fact that it is a non-excludable – meaning that the potential clients cannot be excluded from its consumption. This is an important characteristic in that it imposes on all economic, social and political actors to ensure that no citizen or firm need be excluded from consuming such a good.

Perhaps goods like a national currency, stable prices should be and are commonly considered as public goods. Just on these, there can be more to each one of these than meets the phrases. Neoclassical economics also agrees that these ones must be considered “public”. In other words, money, as popularly defined can’t be a private good. How and who creates money is a complex subject but nonetheless money must be made available to every citizen who wants to have it, using the infrastructure meant for such money. Or even anything that has been permitted by the state to play the role of money: medium of exchange, store of value, unit of account and as a means of final settlement (standard of deferred payment), must be non-excludable to citizens.

But what about monetary policy itself, and the infrastructure and transmission systems behind it? Should it be enjoyed by all citizens? It seems logical, unless perhaps for serious national security reasons. It is indeed uncontroversial that money, or anything that plays the role of money can’t be an excludable good, even if it were to be provided by private sector on behalf of the state, licenced, or even if the private sector does not know that the “thing” is a public good.

In South Africa, about 95% of all money (a public good) is created by private banks, licenced by Pretoria to perform functions named above, albeit on a profit basis. In most advanced countries it is about 98%. The word “create” may bring controversy here. It should however also be uncontroversial in economics today. In other words, virtually all money in an economy passes through a bank, let alone normal commercial activities. To deny any person or business access to money, its use or its associated infrastructure implies restricting life as we know it today.

The recognition of a bank as a public good is a short way of thinking that financial services, especially banking, which are rendered under the state control or not are important, of course, economically or socially. They may appear as not public goods, they are however public goods. Financial exclusion shouldn’t take place because of fundamental social reasons with normative approach to this challenge. It is also for this reason that financial inclusion is promoted widely.

The above discussion brings us to the widely reported behaviour or practices of banks, ostensibly under the permission of silent authorities, of politically closing bank accounts for some citizens on the basis of what they casually call “reputational risk”. Robust risk management practices are important for banks, as for many serious firms and institutions. However, the politically causal and selective way they apply this risk is highly problematic. It amounts to practically excluding one from the normal functioning of both business and social life.

While South Africa may not be the only country where this “reputational risk” factor has been applied in closing bank accounts, it is being recognised that such a factor can’t be the basis for excluding the enjoyment of such a public good. A recent (August 07 2025) executive order by Trump on the removal of reputational risk or equivalent concept as a reason for debanking citizens goes a long way to explaining how subjective this risk is applied. In June 2025, The Federal Reserve itself dropped the policing of reputational risk in banks, a practice widely frowned upon by the very banking sector yet politically applied by them.

As cash becomes more digital, banks become more central than ever in fulfilling their public good obligations. That a bank may be privately owned hardly absolves it from the public good role. Consumption of this good can only be monitored, directed or limited should it be found that a citizen poses a societal risk. But closing their account is an excessive practice that this government must urgently abolish, if not criminalise. With banking going almost digital, monitoring account use is far easier for banks as for government and its agencies.

It is time South Africa seriously reconsidered the political use of reputational risk as a debanking mechanism. The already negative publicity about banks in South Africa can only get worse should authorities fail to urgently act.

Redge Nkosi is a senior economic advisor for Coda (AU), executive director and head of research for money, banking and macroeconomics at Firstsource Money.

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