A resource dependence theory perspective on low savings, cost of capital, leverage and bank valuation in South Africa

Abstract

ABSTRACT South Africa has one of the lowest savings rates of the emerging economies. However, the minimum capital and liquidity coverage prudential requirements are consistently exceeded by local banks. This paper investigates whether low savings have any impact on bank’s cost of capital, leverage and valuation through the lens of the resource dependence theory. The Autoregressive Distributed Lag Bounds Test estimates of panel data from 2008 to 2018 suggest that low savings have a long-run relationship with cost of equity, leverage and bank’s value. Furthermore, bank’s value and cost of equity are negatively affected in the short run but positively in the long run, implying that South African banks benefit from their interactions with contractual savings institutions in the long run and transfer cost increases to customers. As for leverage, the impact is positive in the short and not significant in the long run. The policy implications of these findings are, at the banks’ level, to act on the financial determinants of savings and household over-indebtedness. Banks should promote financial literacy and trust, avoid predatory lending and cut back bank charges in order to attract households informal savings (called stokvels in South Africa) by offering, for example, fixed floor rate on deposits when repo rate decreases and no ceiling when repo rate increases. At a national level, competitive exchange rate as well as the protection of property rights as per the literature would drive individual and national savings through investment.