The bank's defence comes as its financial disclosures reveal a deterioration in the credit quality of municipalities.
A littered street corner in the Johannesburg CBD. Picture: X / @CityofJoburgZA
The Development Bank of Southern Africa (DBSA) has pushed back against suggestions that it is abandoning SA’s municipalities, insisting it remains committed to the sector despite cutting new disbursements for a second consecutive year.
In response to Moneyweb questions following its 2026 annual results, the state-owned development financier said it is “not retreating” from local government, but acknowledged that it remains “concerned with the credit risk profile of the municipal sector”.
The bank’s defence comes as its financial disclosures reveal a deterioration in credit quality of municipalities, with high-risk exposure ballooning from R6.2 billion to R16.1 billion in the past year.
The high-risk classification means municipalities are still paying, or are not yet in default, but have shown a significant increase in credit risk or financial stress since receiving loans, so the DBSA is watching them closely and has raised provisions.
Disbursements plummet
According to the DBSA’s 2026 annual report, total funding disbursed to municipalities has fallen for two consecutive years:
- R4.6 billion in 2024
- R3.9 billion in 2025
- R1.3 billion in 2026
This represents a nearly 72% decline from 2024 to 2026, raising questions about whether the bank is deliberately pulling back from a sector plagued by dysfunction and financial distress.
“No, the bank is not retreating from the sector,” it said in its written response.
“DBSA finances municipalities that approach the Bank on their capex or infrastructure needs.
“The role of DBSA in the sector is not measured only by disbursements.”
The bank pointed to its ‘Partner-a-District’ programme and non-financing instruments – including governance strengthening, revenue enhancement, and capacity building – as evidence of its continued engagement with municipalities.
Credit quality deteriorates
However, the DBSA’s own disclosures paint a concerning picture of municipal creditworthiness.
Of the approximately R31.2 billion in municipal exposure in 2026, R16.1 billion is classified as “high-risk Stage 2”.
This means municipalities are still paying but have shown significant credit deterioration since receiving the loans.
Municipal development loans in Stage 3 – meaning they are in default and more than 90 days overdue – increased to R154 million, although this accounts for less than 1% of the DBSA’s total municipal loan book.
The bank said it has increased provisions in response, but declined to name the municipalities classified as high-risk, citing banking confidentiality.
“High risk does not mean that the loans are not paying,” the DBSA said, providing a ratings table distinguishing between high-, medium- and low-risk classifications.
‘Municipalities cannot be allowed to fail’
DBSA board chair David Makhura, speaking at the bank’s results presentation, acknowledged the severity of the municipal infrastructure crisis.
“Municipalities cannot be allowed to fail,” said Makhura, who previously served as Gauteng premier during a period when the City of Johannesburg’s financial position deteriorated significantly.
He said municipalities require “an internal shift, including a professional and technical reset”, adding that “city managers, municipal managers and municipal executives, who are paid so well, must do their jobs”.
The DBSA’s lending concerns mirror those of other financiers. In April, the French development agency AFD declined to extend a R2.5 billion loan to Johannesburg, citing governance concerns.
Recovery claims
Despite the rising risk profile, the DBSA maintains that its municipal loan book remains fundamentally sound.
The bank reported collecting R8.57 billion from its municipal portfolio in 2026, with a collection rate of 99.95%. It said only one small municipality defaulted on a balance of approximately R10 million, which it expects to restructure successfully.
“The municipal sector is the sector with the lowest or zero write-offs as DBSA ensures that the debt is fully recovered,” the bank said.
The DBSA did not disclose the names of high-risk municipalities or provide detailed recovery plans.
“Recovery plans are developed for defaulted clients [Stage 3 clients] where focus is on recovery and the loan book are concentrated mostly in the metros and there are no payment defaults, and all payments are being received when due,” it said.
“The bank has recovery plans in place which ensures that no loans are written off.”
While municipalities owed creditors approximately R160.8 billion by late 2025, according to the South African Local Government Association, and most are functionally insolvent, the DBSA’s balancing act of supporting a crucial sector while protecting its own balance sheet remains under strain.
This article was republished from Moneyweb. Read the original here.
