M.Phil. (Economics) / There has been increasing focus on banking system stability worldwide, particularly due to the recent financial crisis experienced and the resultant adverse economic effects. In the case of a developing country like South Africa (SA), the stability of the banking system is even more important as it is crucial for the achievement of the country’s development goals. Credit extension is also a core component for facilitating economic and social development in the country. The downside risk attached to credit extension is that once it reaches a point of being excessive it can have a destabilising effect on the banking system and the economy. SA has experienced a rapid increase in credit extension since 2001, which prompted the implementation of the National Credit Act (NCA), with the intention of regulating the credit industry and improving the practices therein. More recently, further concerns have been raised by regulatory authorities around the possibility of an asset bubble in the SA economy as a result of the level of unsecured credit extended in the country. The objective of this study therefore is to investigate the impact of the NCA on risk, both credit and systemic, in the banking system. This is important, as investigating and understanding the impact of credit controls, like the NCA, on risk in the banking system is critical to supporting the SA development agenda. The findings of this study show that the NCA has been successful in reducing credit risk in the banking system, even though this was by default and not through the stated intention of the Act. This was achieved through the introduction of the affordability requirement into the credit assessment process. This study highlights however, that there are still areas of improvement which can be made to the NCA to increase its effectiveness in preventing excessive credit extension.

Abstract not available. / Thesis (MBA)-University of Natal, Durban, 2001.

South Africa introduced inflation targeting as a monetary policy framework in 2000. This marked a sizable shift in monetary policy management from the previous "eclectic" approach and the explicit focus on M3 money supply before that. The study appraises the effectiveness of monetary policy under this new dispensation. However, the analysis does not centre on inflation outcomes, which can be a measure of effectiveness because they are the overriding objective of the South African Reserve Bank in effect, it is possible to have a target-friendly inflation rate for a length of time despite monetary policy that is ambiguous and encourages unpredictability in market interest rates. However, persistent policy opaqueness can, over time, damage a favourable inflation scenario. For instance, if the public is unsure about the Reserve Bank's desired inflation target, price setting in the wage and goods markets may eventually produce an inflation outcome that is higher than the Bank may have intended. Rather, this study adjudicates the effectiveness of monetary policy within the context of policy transparency, which is an intrinsic part of the inflation targeting framework. The study looks at the extent to which monetary policy transparency has enhanced both the anticipatory nature of the market's response to policy actions and the force that policy has on all interest rates in the financial system, particularly long-term rates. These concepts are important because through the transmission mechanism of monetary policy, the more deft market participants are at anticipating future Reserve Bank policy the greater the Bank's ability to steady the economy before the actual policy event. With the aid of regression models to estimate the response of market rates to policy changes, the results show that there is significant movement in market rates in anticipation of policy action, rather than on the day of the event or the day after. Indeed, the estimates for market rates movement on the day of and even the day after the policy action are generally minute. For instance, the R157 long-term government bond yield changes by a significant 41 basis points in response to a one percentage point change in the Reserve Bank's benchmark repo rate in the period between the last policy action and the day preceding the current action. In contrast, the R157 bond yield changes by an insignificant 2 basis points on the day of the current repo rate change and about 1 basis point the day after the current change. The results point to a robust relationship between policy transparency and the market's ability to foresee rate action. If this were not the case, it is likely that there would be persistent market surprise and, hence, noticeable movement in interest rates on the day of the rate action and perhaps even the day after. Another important observation is that monetary policy impacts significantly on both short- and long-term market rates. Again, certifying the robustness of monetary policy under the inflation targeting regime

It has long been accepted that changes in monetary policy have real economic effects; however, the mechanism by which these policy changes are transmitted to the real economy has been the subject of much debate. Traditionally the transmission mechanism of monetary policy has consisted of various channels which include the money channel, the asset price channel and the exchange rate channel. Recent developments in economic theory have led to a relatively new channel of policy transmission, termed the credit channel. The credit channel consists of the bank lending channel as well as the balance sheet channel, and focuses on the demand for credit as the variable of interest. The credit channel is based on the notion that demanders and suppliers of credit face asymmetric information problems which create a gap between the cost of external funds and the cost of internally generated funds, referred to as the wedge. The aim here is to determine the size and lag length effects of changes in credit demand, by both firms as well as households, as a result of changes in interest rates. A secondary, but subordinate, aim is to test for a balance sheet channel of monetary policy transmission. A vector autoregressive (VAR) model is used in conjunction with causality tests, impulse response functions and variance decompositions to achieve the stated objectives. Results indicate that the interest rate elasticity of credit demand, for both firms and households, is interest inelastic and therefore the monetary policy authorities have a limited ability to influence credit demand in the short as well as medium term. In light of the second aim, only weak evidence of a balance sheet channel of policy transmission is found.

A voluminous literature attempts to explain the various channels of the monetary policy transmission mechanism through which central banks ultimately achieve price stability. However, most research focuses on interest rate pass-through and the demand for money phase, while there is limited research on the demand for credit. This study endeavours to contribute to the understanding of this neglected phase of monetary policy transmission by exploring the response of the real demand for bank credit by the private sector to changes in the real prime rate from 1990:1 to 2004:4 in South Africa. Firstly, the behaviour of the real prime rate in relation to the repo rate is explored using graphical analysis. The study observes that an increase in the repo rate causes an increase in the real prime rate, such that there is always a margin of three or four percentage points between the two rates. Secondly, using secondary data, the Johansen methodology is used to determine the relationship between the demand for bank credit and its determinants (GDP, inflation, real prime rate and real yield on government bonds). Two co-integrating relationships are found. The Gaussian errors from one co-integrating vector are used to model the Vector Error Correction Model, which provides the short-run dynamics and the long-run results, through the use of Eviews 5 software. The results of the study show that while all other variables are negatively related to the demand for bank credit in the long-run, GDP has a positive influence. In the short-run, yield on government bonds and inflation coefficients depict a positive association, while the coefficients of real prime rate and GDP are negative. The error correction coefficient is -0.32, which implies that a 32% adjustment to equilibrium happens in the demand for bank credit in a quarter and that the complete adjustment takes about three quarters to complete. Thirdly, the generalised impulse responses results indicate that the impact on the real prime rate affects the demand for bank credit from the first quarter. The study concludes that the real prime rate has a negative impact on the demand for credit both in the short-run and long-run.

The fact that South Africa has a floating exchange rate policy as well as an open trade policy leaves the country’s import, producer and consumer prices susceptible to the effects of exchange rate movements. Given the central role that inflation targeting occupies in South Africa’s monetary policy, it becomes necessary to determine the nature of influence of exchange rate changes on domestic prices. To this end, this thesis examines the magnitude and speed of exchange rate pass-through (ERPT) to import, producer and consumer prices in South Africa. Furthermore, it explores whether the direction and size of changes in the exchange rate have different pass-through effects on import prices, that is, whether the exchange rate pass-through is symmetric or asymmetric. The paper uses monthly data covering the period January 1980 to December 2005. In investigating ERPT, two main stages are identified. The initial stage is the transmission of fluctuations in the exchange rate to import prices, while the second-stage entails the pass-through of changes in import prices to producer and consumer prices. The first stage is estimated using the Johansen (1991) and (1995) cointegration techniques and a vector error correction model (VECM). The second stage pass-through is determined by estimating impulse response and variance decomposition functions, as well as conducting block exogeneity Wald tests. The study follows Wickremasinghe and Silvapulle’s (2004) approach in estimating pass-through asymmetry with respect to appreciations and depreciations. In addition, the thesis adapts the analytical framework of Wickremasinghe and Silvapulle (2004) to investigate the pass-through of large and small changes in the exchange rate to import prices. The results suggest that ERPT in South Africa is incomplete but relatively high. Furthermore, ERPT is found to be higher in periods of rand depreciation than appreciation which supports the binding quantity constraint theory. There is also some evidence that pass-through is higher in periods of small changes than large changes in the exchange rate, which supports the menu cost theory when invoices are denominated in the exporters’ currency.

This study investigates the contribution of bank credit extension to the private sector to inflation in South Africa, covering the period 1970:1-2006:4. The long-run impact of bank credit on inflation is investigated by means of the Johansen co integration model. The short-run ynamics of the inflation is subsequently modelled by means of the Vector Error Correction Model (VECM). Using the Johansen methodology, the study identifies two co integrating equations linking inflation and its eterminants. The results suggest that the long-run relationship between inflation and bank credit to the private sector is negative and statistically significant at 10% level. The determinants that are significant at 5% level are: money supply, real gross domestic product, the money market rate, rand/dollar exchange rate and imports. The results are consistent with previous findings. The speed of adjustment in response to deviation from the equilibrium path was found to be negative at 10.56% per quarter, which is consistent with findings by Ohnsorge and Oomes (2003) for Russia. Both the signs and the magnitude of the coefficients suggest that the co integrating vector describes a long-run inflation equation. The impulse response functions confirm the theoretical expectations except for the import prices. The most persistent and significant shocks observed are on impulse response functions of money supply and bank credit to the private sector. The variance decomposition results also suggest that inflation responds quicker to innovations from money supply and the money market rate. The overall results provide evidence that the surge in inflation is associated with an increase in money supply as well as the instability in exchange rate. The effects of exchange rate fluctuation on inflation are reflected through changes in import prices. Based on the results we conclude that an increase in bank credit during the period 1970:1-2006:4 had a negative mpact on inflation in South Africa.

This is a quantitative study which explores whether there is a positive relationship between customer satisfaction as perceived by corporate customers and revenue generated from such customers of the corporate division of a single South African bank. This research report has three sections, namely the (1) academic paper which comprises a condensed literature review, research methods, results and discussion, (2) an expanded literature review, and (3) an expanded research methodology. Although these three sections are interrelated, they may be considered stand-alone documents. A review of literature contends that customer satisfaction has been a topic of interest for over four decades when, in 1965, the concept was first introduced to literature by Cardozo. Even in these early stages it was hypothesized that higher customer satisfaction would lead to repeat purchasing and cross selling. Thus, for some time, researchers have proposed that a link exists between customer satisfaction and a company’s bottom line, ultimately alluding to the notion of positive associations between customer satisfaction, revenue and profitability. The corporate banking division of a South African bank has dedicated significant time and economic resources to monitoring and improving the satisfaction of their corporate customers each year. With a focus on this single corporate banking division, this quantitative study used secondary customer satisfaction data to establish whether a positive relationship between customer satisfaction with a bank representative or more formally termed, the ‘transactional banker’ (TB) and revenue at an account level exists. The study used a one-dimensional customer satisfaction construct summated from several variables or a one-dimensional multi item scale. This quantitative study made use of secondary data obtained through customer satisfaction surveys conducted with the division’s clients in three waves during September 2010, March 2011 and September 2011. At the time of data collection, telephone interviews were conducted with individuals in corporations who were customers of the corporate division within the bank. These individuals in their respective corporations were identified and surveyed because they (a) managed the primary relationship of the corporation with the banking division and (b) were senior financial decision makers of their organization’s (i.e. had the ability to influence a decision to change banks). Sample sizes of 273 (September 2010), 259 (March 2011) and 310 (September 2011) individual corporate customers were achieved through a method of stratified sampling. In this study, customers were stratified according to the TB who is responsible for their account. Within each stratum a random sample of 10 – 15 participants were included for each of the 30 TB’s. Monthly revenue data, recorded as a) credit revenue, b) overdraft revenue and c) total revenue was sourced from internal company records for each month from September 2010 to January 2012. Pearson’s correlation coefficient was used to assess whether a positive correlation between the two variables of customer satisfaction and revenue exists. This was followed by Ordinary Least Square Regression to investigate the magnitude and nature of the relationship between customer satisfaction and revenue using customer satisfaction as the independent variable and revenue as the response variable. Cronbach’s alpha was also used for internal scale validity. The results of the research indicated no statistically significant relationship between a customer’s satisfaction with the performance of their TB and either the credit, overdraft or total revenue generated from such a customer through their account. By highlighting this, these findings, nevertheless, contribute to the growing body of knowledge examining the impact of customer satisfaction efforts on revenue. On the basis of the findings of this study, it cannot be practically recommended that customer satisfaction efforts be terminated or changed within the organization of study owing to several study limitations which were present. Firstly, the study was hampered by small sample sizes due to a lack of the availability of revenue data in some instances, particularly in the case of overdraft revenue. Secondly, the study only focused on a single bank account held with the bank and increases and decreases in revenue based on the balances held within that single account. Since one of the purported consequences of improved customer satisfaction is the purchase of additional products, the current design of the study does not take into account the take up of additional accounts or banking products with the bank. Thus, an increase in revenue for the bank as a whole due to the purchase of additional accounts may be masked. Similarly, the scope of the study does not extend to examining the effect of recommendations made by these corporate customers to others and hence growth of divisional or bank revenue due to the addition of new customers. Finally, this quantitative study does not examine revenue growth when compared to customer satisfaction improvements over time due to a limited sample of customers taking part in the study over a number of periods as well as incomplete revenue data. The recommendations for future research are to examine the relationship between changes in customer satisfaction and changes in revenue at divisional level in the long run within the South African banking industry as the impact of an increase in customer satisfaction may be obscured by salient factors in the short run. It is also suggested that future research look at the correlation between dissatisfaction and revenue, where adequate sample sizes are available. Theoretically, the results of this research do bring into serious question the universal application, especially in the context of the South African banking industry of the Service Profit Chain and Satisfaction Profit Chain which propagate the existence of a positive relationship between customer satisfaction and revenue.

The following is a case study report on the Cape Town business unit of Standard Bank Properties. The research project falls within the ambit of services marketing which introduces several unique management challenges for service businesses that sell services as a core offering. The principal aim of the case study is to gain an understanding of why customers bank at the business unit and to discover what aspects are critical to customer satisfaction. A further goal of the research is to examine how the business unit could improve customer satisfaction and to highlight any impediments to further improving customer satisfaction at the business unit. It is generally regarded that quality customer service is essential to building customer relationships and hence the research project emphasis on services marketing and customer satisfaction within a financial services context. The paper commences with an overview of the South African Banking Sector and its unique challenges such as the Financial Service Charter and newly introduced legislation such as Financial Intelligence Centre Act. The case study will specifically investigate the property finance industry and a detailed analysis of the business unit's operations and process flow will also be undertaken. The reason for this background information is to assist the reader to understand how the business unit operates. The research project will investigate four unique differences between goods marketing and services marketing whereafter three theoretical propositions are introduced, namely the dyadic interaction and service encounter, the Service Profit Chain and finally Relationship Marketing. Evidence in the form of a narrative will be led from insights obtained from interviews conducted with customers and staff at the business unit against these propositions with support (or otherwise) from independent surveys and documents from the business unit. The result of this analysis is the identification of several areas of concern specifically: New employees and the service encounter, Problems with FICA, Lack of a customer complaint handling system, Empowerment issues, Turnaround times, Reliance on key staff These insights together with the evidence from the literature review will be analysed and several recommendations made to improve customer service and ultimately customer satisfaction at the business unit. Several recommendations for further research are offered as well as the identification of limitations including but not limited to the specificity of the case study report.

This thesis focuses on monetary policy transmission and particularly seeks to examine the impact of credit and exchange rate channels of monetary policy transmission in the South African economy. South Africa's monetary policy has gone through several changes over the past thirty years. In this respect, there is a need for robust empirical evidence on the effects of these channels on inflation and output. The thesis employs a structural vector autoregressive (SVAR) model to identify monetary transmission in South Africa for the period 1994:q4 - 2008:q2. The form of the SVAR used in this thesis is based on the fact that South Africa is a small open economy, which means that external shocks are an important driver of domestic activity. The impulse responses and variance decomposition results show that the repo rate, credit and exchange rate play a role in terms of their impact on inflation and output. The dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the importance of the interest rate channel. A shock to the interest rate, increasing it by one standard deviation, results in a persistent fall in credit. The response of output is immediate as it falls and bottoms out within the second year. Inflation shows a lagged response, it is positive within the first year as the exchange rate depreciates but in subsequent quarters inflation responds negatively as expected. Inflation falls and reaches a minimum by approximately eight quarters then moves towards baseline. The exchange rate shows delayed appreciation. The shock to the repo interest rate leads to an immediate depreciation of the exchange rate in the first two quarters as output declines, followed by an appreciation in the third and sixth quarter. Due to larger error bounds the impact of the repo rate on the exchange rate could be less effective within the first two years. The impulse responses suggest that monetary policy plays an effective role in stabilising the economy in response to a credit shock, notwithstanding large standard error bounds. Hence, the monetary authority reacts by increasing the repo rate as a result of inflation. The impact of credit on output is positive but is offset to some extent by the rising repo rate. In response to the rand appreciation, the monetary authority reduces the repo rate significantly during the first year with the maximum impact in the second year and then returns to baseline thereafter. Therefore the monetary authority reduces the repo rate, probably to stabilise falling inflation. The result shows that inflation falls as a result of the rand appreciation. A shock to the exchange rate causes a rise in output, though small in magnitude, which is persistent but reaches baseline at the end of the period. This result could reflect the effects of the resultant fall in the repo rate and a persistent rise in credit over the whole period, which tends to increase output. The exchange rate shows an obvious and stronger immediate impact on inflation compared to credit impact on inflation. However, the credit shock has an obvious and stronger impact on output compared to an exchange rate impact on output. However, the large standard error bounds may imply that credit and exchange rate channels are not as effective in the short run. It is important to note that the results are based on the SVAR model estimated with percentage growth rate of the variables. The variance decomposition result is in line with the impulse responses and shows that the exchange rate and credit channels could be important transmission channels in South Africa over the chosen sample period. The exchange rate and credit shocks show a stronger effect on inflation than on output, looking at both the impulse responses and variance decomposition results. The reaction of the repo interest rate to the credit and exchange rate shocks comes out as expected. The repo rate increases as a result of an increase in the credit and falls as a result of the currency appreciation.