March 15 th 17 th 2021 INDABA WORKSHOP

March 15 th -17 th 2021 INDABA WORKSHOP SOUTH AFRICA Discussion Topic: CREDIT

INTRODUCTION v The purpose of this discussion is not to develop products and services for the cooperative financial institutions sector (CFIs) but to have an understanding of what CFI members are looking for. v Each CFI is unique in terms of its membership, identity, and its needs. The range of credit service need can be as basic as food needs, school fees, or to purchase a laptop or may be as sophisticated as a house loan, car purchase, or a business funding.

WHAT ABOUT CREDIT? v Cooperative financial institutions are member based and member owned financial institutions. Their core business is to mobilize savings and provide credit to members through a lending process. v Lending contributes to between 70% to 80% of the total CFI total assets (WOCCU PEARLS Ratios and best practice on SACCO regulations). v The biggest risk facing CFIs is on the management of its credit portfolio as all other risks converge on the credit (loans to members). Such risks may emanate from loan defaults, governance, market risks, funding, liquidity, ICT and technology, ethics and integrity and many others. v The easiest and fastest way to kill a CFI is to mismanage its credit function.

CFI CREDIT PRODUCTS AND SERVICES v Traditionally CFIs have offered what is referred to as back-office services. Members make their savings and obtain credit for various purposes. The current CFIs offer both back office and front office services. The latter operates more like a commercial bank, and offers similar services like a current account, with daily walk-in saving deposits and loan advances. v The current front office has enabled CFIs to provide internet banking services, mobile money services, debit cards and ATM services, balance queries and provision of other diverse products and services. v The growth of deposits in the front office is what triggered the need for prudential regulation in CFIs/SACCOs as member deposits were seen to be exposed to more risks.

CFI CREDIT PRODUCTS AND SERVICES v Financial services offered by CFIs or SACCOs are simple and should be delivered as such. Never make them look complicated. You lose it there. Complicated financial products and complex delivery channels are left to commercial banks, investment banks, insurance companies and stock traders. v What members want is credit services to finance school fees, medical, food and domestics, working capital for own business. Long term credit may include land mortgage financing, financing a car and farm equipment. Others may include social activities such as holidays, weddings and later pensions. v Credit products and services should be matched and tailored towards the members’ needs. Sometimes the simplicity or complexity of the range of credit products offered is depends on the common bond of members and varies across different CFI.

GOVERNANCE & MANAGEMENT OF THE CFI v The board of directors are responsible for both the policy and oversight of the credit administration of the CFI. v Packaging, product branding, and marketing of the available credit products and services. This must be a key focus in a competitive financial sector like in South Africa. v The sustainability of the CFIs depends on its successful management of its productive asset, loans to members. CFIs must be seen to be sustainable in the long run. They are private institutions with no government funding or donor funding and must therefore think of financial independence and long-term sustainability. v Delivery channels. Members must be served through the appropriate channels. The youthful nature of the current or potential members means that they will demand services such as mobile banking, mobile money, ATM and debit card services.

GOVERNANCE & MANAGEMENT OF THE CFI v The pricing of loan products must be competitive and fair. CFI cannot survive where the cost of their credit is at par or above the commercial bank rates. The regulator should provide CFIs with freedom to decide the cost of their funds, taking into account the market rates. v The existence of a central finance facility (CFF) for provide liquidity backing to the sector. Commercial banks should not be an alternative financier to the CFIs. v Build a culture for CFIs to save long term to match long term loans. Loans such as for motor vehicle, mortgages are repaid over longer periods. These can only be funded from long term savings.

GOVERNANCE & MANAGEMENT OF THE CFI A review of the discussion paper by Dave Grace shows that the growth of the CFI over the last 10 years have been very slow, in fact flat at 0. 7%. To grow the sector: v CFIs need to think seriously about forming CFIs along common bonds. People working in the same company, same environment, same sector tends to coalesce together. CFIs based on a company, government department (teachers, police, military), energy sector, transport sector, university staff and others will probably patronize their own CFI, save together, guarantee one another on loans and establish a central deduction point for savings and loan repayments. v Probably we need to think about the name cooperative financial institution (CFI). If the purpose was for perception, trust and confidence building, then it has not worked as people still have those issues. Why not call them Savings and Credit Cooperatives (SACCOs) or Credit Unions? v Regulatory burden and bureaucracy. The Cooperative societies Act of 2008, which brought about the regulation, may have carried with it some bureaucracies. The approval of lending process by the Financial Conduct Authority needs to be reviewed as it looks like a 3 rd layer of regulation on the sector. This second layer process should form part of the final regulation.

CONCLUSION v Savings and credit provision is the core business of a cooperative financial institution. The respective board of directors and management must be seen to focus on the two areas in the interest of members and for the sustainability of the CFF. The role of the government is, therefore to provide a conducive policy and legal environment that will bring confidence and stability of the sector.