Debanking in South Africa: The risk of financial exclusion based on reputational damage

THOUSANDS of bank accounts are being closed in South Africa on the basis of reputational risk despite legislative changes in the United States that seek to stop this.

- PHILIPPA LARKIN

Reputational risk as a metric is a slippery slope. Banks do so on the basis of negative media press.

Banks use data platforms LexisNexis, World Online and World-Check that aggregates news from media outlets. The problem is that these articles that flag reputational risk lack any forensic or legal basis.

Banks don't have to verify if the perceived reputational risk carries weight and on the basis of the negative articles they can debank you whether the news is true or not.

The irony is that the banks themselves, such as Standard Bank and Nedbank, are also flagged by the Zondo Commission for wrongdoings, which by their metrics would make them subject to reputational risk.

In February, Parliament hauled the FSCA over the coals about the lax manner in which they were treating the unilateral and arbitrary closure of bank accounts. Parliamentary standing committee on finance chairperson, Joe Maswanganyi, said transformation within the financial sector is not merely an option but a constitutional and economic imperative.

However, despite the Parliamentary hearing, debanking is still very much in force in South Africa.

What is debanking?

Debanking refers to the practice of financial institutions closing or refusing to open bank accounts for individuals, companies, or political groups due to concerns over reputational risk. Banks and financial institutions claim that they make these decisions to protect their image, avoid association with controversial figures, or comply with legal or regulatory pressures. However, the practice has become highly contentious, as it often involves political or ideological motives, especially when it targets individuals with unpopular views or dissenting political stances.