The heart of the banking system is the South African Reserve Bank, which is the primary monetary authority and custodian of the country's gold and foreign exchange reserves. The Reserve Bank is managed by a board of fourteen directors, seven representing major commercial and financial institutions, industry, and agriculture, and seven appointed by the government. Of the latter, one serves as governor, and three serve as deputy governors of the Reserve Bank.

The Reserve Bank's primary functions are to protect the value of the rand and to control inflation. The Reserve Bank regulates the money supply by influencing its cost--i.e., interest charged on loans to other institutions. It is technically independent of government control, but in practice it works closely with the Treasury and helps to formulate and to implement macroeconomic policy. The Reserve Bank issues banknotes and is responsible for the sale and purchase of foreign exchange for the government, as well as for the administration of the treasury-bill tender system. Its major customers are government agencies, private banks, and discount houses, although it also performs clearinghouse functions for private banks and assists banks that experience liquidity problems. Finally, the Reserve Bank is the authorized buyer of gold bullion, thereby acting as agent for the gold-mining industry in effecting sales on their behalf in the private market.

The Reserve Bank uses monetary policy to control inflation, primarily by adjusting the liquid-asset requirements of private banking institutions and by restricting bank credit in order to control consumer demand. Until 1975 the bank enforced fixed interest rates on long-term government securities, but thereafter it allowed transactions at market-related prices. Direct control over deposit interest rates quoted by banking institutions was abolished in 1980; nevertheless, the Reserve Bank still exercises considerable indirect control through its own bank rate.

The private banking sector was controlled by commercial banks until the 1950s when banking services began to diversify. Until then, commercial banks had avoided services such as personal loans, property leasing, and credit-card facilities. New institutions--including discount houses, merchant banks, and general banks--emerged to meet this demand, and in reaction to these changes in the banking sector, commercial banks increasingly entered into medium-term credit arrangements with commerce and industry and acquired interests in hire-purchase firms and leasing activities. In addition, they expanded their operations into insurance and even invested in manufacturing and commercial enterprises.

During the late 1980s, the "big five" commercial banks--First National Bank (formerly Barclays), Standard Bank of South Africa, Nedbank, Volkskas, and Trust Bank--were increasingly challenged by building societies, which had listed holding companies on the Johannesburg Stock Exchange (JSE) and had set up commercial and/or general banking arms. The Deposit Taking Institutions Act of 1991 formalized the overlapping of functions between the banks and the building societies that had existed for more than a decade. The act brought South Africa into line with internationally recognized standards for capital requirements.

In February 1991, four of the country's leading financial institutions--Allied Bank, United Bank, Volkskas, and Sage Banks--merged to create the largest banking group in the country, the Amalgamated Banks of South Africa (ABSA), with assets of R56 billion. ABSA, which merged with a fifth bank in 1992, is jointly controlled by the Rembrandt tobacco group and the South African National Life Assurance Company (Sanlam), the country's second-largest insurance group. The banking industry is undergoing further reorganization in the mid-1990s, in part to establish banking services in poor communities that were neglected under apartheid.

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