Indigenisation and financial development: recent SBL study raises red flags

While every economy needs a highly developed and efficient financial system to drive financial and economic development, of increasing concern is that our local financial development index shows South Africa’s to be decreasing. A new study by Professor Jan Kruger of the Unisa Graduate School for Business Leadership (SBL) and Florence Zimunya of the North West University links indigenisation (or Black Economic Empowerment as it is referred to locally) to low levels of financial development across 49 countries. What does this mean for South Africa though, especially with the full effects of the revised B-BBEE Codes to be felt across the business sector this year?

Indigenisation or B-BBEE interventions have been used across the world to drive increased local participation in economies and regulate the ownership of foreign-owned or managed companies. “While politicians and governments typically claim that this approach benefits local residents – resulting in economic development – our recent study has shown that indigenisation as an economic intervention can be linked to low levels of financial development, to the extent of 81.3%,” says Professor Jan Kruger of the SBL. “Part of this has to do with the intended effect of indigenisation as an economic intervention being significantly limited by high levels of corruption.”

Conducted in 2015 across 49 countries, the study found that the indigenisation of manpower and technology had a significant effect on financial development, notably on manpower (54.5%) and technology (10.2%). “This effect is only significant after the effect of corruption is eliminated however, because corruption interferes with the meaningful transfer of ownership and control, as well as on uptake of manpower and technology,” says Professor Kruger. 

He notes that indigenisation efforts by governments in many developing countries are often surrounded by controversy and done for less than noble purposes including misappropriating intellectual property and technology under the guise of local empowerment.  “There is growing cynicism among foreign business people and corporations operating in some developing countries about the use of corrupt practices to subvert and sabotage national policies and promote their own corporate interest.” 

In the case of South Africa, where corruption and issues of “state capture” have dominated the headlines over the past couple of months, Kruger maintains that political will is a key ingredient in the transformation effort to ensure that corruption does not thwart the impact of B-BBEE and result in continued low levels of financial development.  “This requires government to match their words with deeds and mobilise the entire public sector, private sector and the public at large to fight corruption together. A five-pronged approach is needed to do this effectively: the implementation and practice of anti-corruption laws and regulations; empowering local anti-corruption agencies; the effective adjudication of corruption cases; putting appropriate administration processes in place and through ongoing education.”

While the use of smart technology can potentially be used as an effective means of reducing corruption through “e-governance”, Kruger notes that factors including rates of taxation, and local business incentives also contribute to the potential of B-BBEE to rectify past economic imbalances. “To unlock and enable the true intention of indigenisation both locally and around the globe, governments and business must commit to sustainable empowerment that goes beyond mere compliance. Only in this way will we see meaningful financial development of the communities that need it most,” he concludes. 

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