From deposit-takers to partners — how banks can rescue SA’s municipalities

Banks are at a unique vantage point. As deposit holders and lenders of first resort, they should possess granular data on municipal cash flows, revenue patterns and financial behaviour that no other institution commands. The question is whether they will use this position to merely extract fees, or to become genuine partners in municipal recovery.Commercial lending accounts for 47% of municipal borrowing, with banks holding 31% of outstanding long-term loans and most municipal bonds. The Development Bank of Southern Africa (DBSA) holds 46% of outstanding long-term municipal debt, with 30% of its total loan portfolio concentrated in local municipalities.The four major banks – Absa, FNB, Nedbank and Standard Bank – lend primarily to metros and top-rated municipalities. Yet the real crisis lies below this tier, in the 200-plus municipalities where revenue collection barely clears 70%, electricity distribution losses swallow half of what is produced, and debt compounds faster than any grant can cover.Banks earn significant revenue from this relationship: transaction fees, lending margins, arrangement fees and earnings on cash balances. The municipal banking market runs into billions of rands annually. The question is not how much banks make, but how much they plough back into making their clients viable.From deposit-takers to trusted advisersBanks must evolve from deposit-takers into trusted advisers managing the entire municipal finance value chain. This is not charity. It is risk management. A technically insolvent municipality is a deteriorating credit. Every rand of fee income extracted from a dying client deepens the eventual default.Banks could deploy their skilled relationship executives, credit managers and risk analysts to provide structured advisory services.They understand the municipal business model canvas – budget composition, revenue generation, expenditure patterns, wastage, leakage and compliance gaps.This expertise could be packaged into diagnostic tools that identify cash flow risks before they become crises, revenue optimisation strategies that improve collection rates and treasury management systems that prevent unsustainable debt accumulation.Revenue collectionOn the technology front, banks are uniquely positioned to deploy digital platforms that automate revenue collection. Municipalities suffer from fragmented billing systems, poor debtor management and cash handling inefficiencies.A bank-integrated revenue management platform – linking property rates, service charges and licensing fees into a single digital payment ecosystem – could transform collection rates. Mobile payment solutions, automated debit orders and real-time reconciliation dashboards would give municipalities visibility into their cash position that most currently lack.Debt collection tools, powered by the bank’s credit risk analytics, could identify delinquent accounts early and reduce the accumulation of arrears that cripples municipal balance sheets.Treasury management and governanceOn treasury management, banks could provide cash forecasting tools, liquidity management solutions and investment advisory services for surplus funds.Most municipalities operate with no treasury function. Their cash sits idle or is deployed without strategy. Structured treasury advisory – helping municipalities match cash inflows to obligations and optimise expenditure timing – would add value far beyond any lending relationship.The deepest value banks could add is in governance. Credit managers who assess municipal loan applications could be trained to evaluate governance structures, political risk and institutional capacity.They could introduce covenant structures that tie lending to governance milestones – audit outcomes, vacancy rates, revenue collection targets and debt service coverage ratios. Breach of covenant would trigger mandatory advisory intervention, not just penalty fees.Banks should also be formal participants in the Section 139 intervention process. When a municipality is placed under administration, the bank holding its accounts and debt has a vested interest in the success of the Financial Recovery Plan.Rather than sitting on the sidelines, banks should provide cash flow data, validate revenue projections and monitor the deployment of borrowed funds. The DBSA already does this through its technical assistance functions. Commercial banks should follow suit.Credit risk mitigationThe Financial Sector Charter already requires banks to invest in municipal infrastructure, but this has been treated as compliance rather than strategy. Banks should reframe municipal relationships as long-term partnerships where a portion of fee income is reinvested into capacity building – financial management training, technology infrastructure, and revenue collection systems.This is not corporate social responsibility. It is credit risk mitigation. A municipality with strong financial management is a better borrower.The DBSA model offers a template: lending combined with technical assistance, capacity building, and project preparation. Commercial banks could replicate this at scale, leveraging their technology platforms and data analytics. A Municipal Finance Recovery Unit within each major bank – staffed by municipal finance specialists, not generic relationship managers – could transform the quality of engagement.Many municipalities are beyond salvation through lending alone. No amount of debt restructuring can compensate for governance collapse, political capture and institutional hollowing.Banks must be honest about this. They should not lend to municipalities that cannot demonstrate basic financial competence. They should use their data and analytics to identify salvageable municipalities – those with revenue potential, manageable debt, and political will – and concentrate their partnership efforts there. For the rest, the bank’s role is to protect its exposure, not deepen it.South Africa’s banks have the capital, talent and technology to play a decisive role in municipal recovery. What they lack is the strategic will to move beyond transactional banking into genuine partnership.The municipalities that survive this crisis will be those with banks standing beside them, not just as creditors, but as advisers, technology providers and governance partners. The alternative is a continued spiral of insolvency, default and state bailouts, with banks left holding the bag. The choice is theirs. DMThis is the final of a series of four articles on the state of South Africa’s municipalities and how they can be fixed.See Part 1, Part 2 and Part 3