PRESENTATION TO THE PORTFOLIO COMMITTEE ON SMALL BUSINESS
PRESENTATION TO THE PORTFOLIO COMMITTEE ON SMALL BUSINESS DEVELOPMENT “Towards a Sustained Cooperatives Banking and Economic Integration ” 31 January 2018, Cape Town
ARCHITECTURAL CONSTRUCT Cooperatives Banks Cooperative Financial Institutions International Financial Construct Structure of South African economy Gross Domestic Product Government Debt Radicalised Economic Transformation Binding Constraints Strategic Corrective Interventions
CO-OPERATIVE’S BANKING VISION Facilitation of financial inclusion AND sector competition CURRENT REALITY Financial sector concentration, monopoly, inefficiencies, economic sluggishness
SOCIO-ECONOMIC REALISM SA financial sector is a microcosm of bigger economy – highly concreated and monopolised SA banking sector is dominated by the Big Four which controls over (90% of banking sector (Standard Bank, ABSA, First Rand Nedbank) § non-banking sector is dominated by the savings and insurance subsectors Long-term insurance, short-term insurance, savings and investment industry controls assets of about R 9. 4 trillion 1 , about half of which is from the retirement savings subsector (R 4. 7 trillion), and the other half from Life Offices (R 2. 6 trillion) and Unit Trusts (R 1. 8 trillion), and short term insurance (R 156 billion) Long-term insurance market is highly concentrated with the top four players (Old Mutual, Sanlam, MMI Group and Liberty) accounting for 67% of the total assets of Life Offices, while 69 players share the remaining 33%. 5. 3. 3 South Africa has about 130 asset management companies who manage assets of about R 9 trillion but only R 408. 3 billion (or 4. 6%) of the total assets of the sector is managed by black asset management companies 3 Existing economic transformation measures, incl Financial Service Charter, have all have been less effective Millions remains unbanked and outside banking sector and transactional banking costs and fees are exorbitant and prohibitive
FINANCIAL COOPERATIVES ECONOMY Financial cooperatives have become a significant global phenomenon Their major growth driver during and after the global financial crises is their ability to withstand macroeconomic shocks to their balance sheets, thus, wining the confidence of many people Financial cooperatives are able to help create middle classes in societies as they provide an entry to the formal financial system § existence of a broad middle class contributes to political and economic stability Imperative of radicalized societal transformation in South Africa – § unemployment, poverty and huge income inequality (GINI index of 63. 4) The NDP (2030) is the current economic and social policy pushing for an equitable social change through economic empowerment, making financial cooperatives one of the various mechanisms to that realization In SA, most of financial cooperatives and cooperative bank members are from the working class and poor in townships and rural villages and derive their income from the CFIs and, many, from social grants Globally - Germany, Kenya, Philippines, Ireland, USA financial cooperatives are big and at times multinational institutions § Examples : (Harvard University Credit Unions, Zenex Bank, Qantas Credit Union)
Kenya, Philippines, Ireland § Financial cooperative pays a levy that is then used to fund the Regulator Supported by a large CFI industry US § regulator Receives a substantial portion of its funding requirement from the government § South Africa Government funding Low levy for certain processes and services e. g. registration paid by CFIs Ability to increase or add new levies constrained by market size and performance
SA BINDING CONSTRAINTS Sector manages assets of about R 280 million Cooperatives Banks and CFI are seen as inferior and governed by the Cooperatives Act of 2005 to stay inferior and stunted growth NACFISA represents 28 CFIs and 2 cooperative banks with a total membership of about 30 000 Financial cooperatives face some regulatory burden making compliance cost very high Lack of capacity, skills, and have a futuristic vision and prepare for change Poor outreach strategy, poor governance and risk management structures; inability to attract the right talent; low product diversification; high operating costs; and low diffusion of technology innovation in operations Lack of participation on the National Payment System Low adoption of technological banking systems Tight cash flow positions Lack of innovation to develop appropriate financial products High operating costs making losses Need for fundamental shift of Co-operative Banking
NEW THINKING CONSTRUCT Fundamental mindset shit - perception that financial co-operatives are the poor person’s bank Strong paradigm shift that financial cooperatives could be small, medium and big § Created by communities – SKA Orania wherein all community members contribute § Created by professionals – Harvard University Credit Union or Qantas credit union § Changes of business to become co-operatives Need for a separate regulatory regime, but integrated with prudential regulation and market conduct New Model must take into account the imperatives of the National Development Plan New Model must take a long term horizon which is disaggregated into annual targets – (SMART – Simple, Measurable, Achievable, Realistic and Time bound) New Model be premised on “Vision 2040” of fundamental industry transformation with CBDA at the centre of such discourse Plus 20 year horizons for Stabilisation, Stimulation and Real Sustenance of the Industry The New Radicalised Sector Model (“ 5 Vectors”)
NEW CONSTRUCT VECTORS 1. New Value Proposition “ Towards A New Construct” § Financial cooperatives are businesses § “New Construct” financial cooperatives or cooperatives are stablished only with the social purpose of serving poor communities, but are commercial construct to create wealth for their members, promote financial inclusion and real transform § Financial cooperatives appeal to cross sectors of the society § Financial cooperatives to formulate policies and outreach strategies to draw membership from a cross-section of the population to achieve balanced mix of funding and membership § CBDA is the fulcrum of financial cooperatives sector building and sustainability § Need for new terminology for South Africa - “Financial Cooperative” and/or “Cooperatives Banks”, (do away with other confusing terminology
MODEL UNPACKED 2. Re-engineering and Growth § legislative changes is required to promote them to a broader population mix § Participation on the National Payment System § Laxing the external credit cap of 15% to total assets § Adoption of technological banking systems § Concessionary tax framework for co-operatives to promote savings and industry sustainability § Tax exemption status for CFIs as they are social enterprises § Government entities to also save in CFIs as juristic members § Financial cooperatives to contribute for the deposit insurance protection § Redesigning model not dominated by savings and credit only § More branches in other provinces § Possibility of issuing transactional cards for convenience § Easy access to credit for financial cooperatives members compared from banks and Developmental Finance institutions § Build integrated national financial cooperatives banking system
MODEL UNPACKED 3. Financial Sustainability § Institutional support and robustness - CBDA § The regulatory reform allowed CFIs to drive membership by relaxing the common bond restriction to multiple bonds § retain talent through competitive market salaries § Annul ringfenced allocation of R 100 m for Stabilisation Fund § Financial Services Charter and industry players and National Treasury § § § Build of strong capital base to absorb credit risk Deposit insurance guarantee protection to members Strong corporate governance structures Once funding R 5 billion from Financial Service Charter and window fall of banking monopoly fines Strengthening savings culture among members Robust managerial skills - profitably & sustainably Diversified product offerings Business and technological innovation - improve convenience, efficiencies Reduce operating costs making losses Stronger financial sustainability to attract strategic “blue chip” stakeholder interest CBDA allowed to resources funding beyond the national fiscus and create strategic relations with national and international organisations
MODEL UNPACKED 4. Market Trust - Triple Trust § § § Leadership, management, risk management Strong banking and business skills – transactional banking skills Marketing of the financial cooperatives as concept to the greater public Increase allocation to CBDA budget to R 100 m per annum (base line) to ensure capacity building and building of financial co-operatives movement in SA Building of strong co-operatives movement in SA Attractive premises to appeal to the middle & upper class Rebranding CFI concept to appeal to all classes Improving members saving culture through financial literacy National campaigns to encourage people to join local cooperative banking organisations Free capacity building from CBDA and BANKSETA Improved financial literacy Establishment of an advisory unit that assists provincial, local government and municipalities to develop the CFI sector at a fee
5. Institutional Resilience and Superior Performance § CBDA to be reconfigured with a new Vision of “becoming premier institution to facilitate building of o robust financial cooperatives geared towards improving financial inclusion, wealth creation, sector competitiveness and economic and financial transformation” § CBDA needs facilitate 10% of the financial cooperatives growth in the South African financial markets in the next 30 years § CBDA to focus on capacity building and strategic partnership development for industry sustainability § CBDA positioned as a premier financial cooperatives organisation and centre of excellence for government, private sector and non-governmental players § CBDA resident technology for industry superior performance § CBDA build integrated national financial cooperatives banking system § Build internal cutting edge research and modelling and repository for financial cooperatives knowledge § CBDA offer financial services and retail banking skills for industry and self growth § All government to cooperate and partners with CBDA § CBDA strong outreach and information massification § Financial sustainability of CBDA – R 100 m per annum (base line) § CBDA pursue a new vision as a development agency and geared towards “facilitating financial inclusion, economic transfer nation and sector competitiveness in order to grow the cooperative banking”
CBDA : FUNCTIONAL ROLE MODEL ü Co-operative Banks Act of 2007 (as amended) ü Banks Act Exemption Notice 620 of 2014 ü Co-operatives Act of 2005 (as amended) Supervision & Regulation Capacity Building & Development Liquidity Support Central Support Services (Stabilisation Fund) ü National Credit Act of 2005 14
ORGANISATIONAL MARKET Targeted Function Registered Co-operative Banks (only capacity building) CFIs working towards registering as Co-operative Banks Support Organisations and Representative Bodies Organised groups e. g. employer groups, associations, unions wanting to form CFIs Other Co-operatives – CFIs at the centre of the Value Chain Register, regulate and supervise CFIs (until March 2018) Promote, register & regulate representative bodies Facilitate, promote & fund education & training to enhance the work of CFIs Provide liquidity support through loans or grants, (Stabilisation Fund not yet operational) Enhance CFI Operational Capability (Shared back office services)
ACCOMPLISHMENTS Deepened stakeholder relationships Sector qualifications. UP Certificate & UFH Diploma Sector curriculum. Governance, Financial Management, Supervisory committee, Credit committee Initiated the Banking Platform Project Developed sector performance standards and Rules Publications
SECTOR CHALLENGES Cooperatives Banks and CFIs are seen as inferior Absence of payroll deductions Regulatory burden making compliance cost very high Lack of capacity, skills, futuristic vision and preparedness for change 17
SECTOR CHALLENGES Poor outreach strategy, poor governance & risk management structures; inability to attract the right talent; low product diversification Fragmentation of Gov Support via Agencies & Products not aligned to the needs of the CFIs (high IR, CFIs excluded in support) Regulator & Dev Agency not aligned – growth strategies for the sector (common bond, investments etc. ) 18
SECTOR CHALLENGES Lack of participation on the National Payment System Low adoption of technological banking systems Tight cash flow positions resulting in weak capital base Lack of innovation to develop appropriate financial products High operating costs & limited revenue generation opportunities 19
OVERCOMING CHALLENGES Fast track the use of technology (Banking Platform Project must be fully funded) Establish a National Co-operative Bank with a government stake (eliminate the need to use the big 4 banks) Channel government funding for SMEs and Co-operatives via the CFIs 20
OVERCOMING CHALLENGES Allow payroll deductions for savings and loans Establish a deposit insurance fund for the CFIs (to be incorporated with the one for large banks) Need for political will & Government wide support to establish a Co- operative Bank for Public servants/Large SOC/MPs etc 21
OVERCOMING CHALLENGES Intensify collaboration between CBDA and Stakeholders (political level) Increase the budget for the CBDA (R 100 m) Fundamental mindset shit - perception that financial cooperatives are the poor person’s bank Need for a separate regulatory regime, but integrated with prudential regulation and market conduct Establish provincial offices for the CBDA (SEDA/SEFA/Prov DEDs) 22
Latest developments CBDA supervision unit moved to SARB on the 9 th of October 2017 The CFI rules are currently under revision Regulatory impact assessment conducted by ICURN Commissioned work – Development of National Co-operative Banking Strategy 23
CRITICAL SUCCESS FACTORS Finalisation and adoption of National Cooperatives Banking Strategy New Value proposition and Financial Sustainability Model Location of the CBDA (NT, DSBD, Market Conduct, Financial Sector Dev Agency) Productive Support: government and private sector for Co-op Banking CBDA Budget (from R 20 m to R 100 m) 24
SECTOR SIZE INTERNATIONALLY No. Country Assets Penetration rate 1 United States $1 trillion 47. 6% 2 Canada $283 billion 43. 2% 3 Australia $ 75 billion 29. 9% 4 India $ 60 billion 2. 5% 5 Thailand $ 56. 3 billion 8. 3% 6 Korea $ 55. 6 billion 15. 9% 7 Brazil $ 39 billion 4. 3% 8 Ireland $ 19 billion 74. 7% 9 Ecuador $ 8 billion 47. 1% 10 Mexico $ 6 Billion 6. 5% Source: WOCCU 2014 Statistical Report 25
GLOBAL SECTOR International dimension of the coop banking movement… § About 60, 000 co-op banks in the world serving § Over 200 -million people in § 101 countries with § $1, 2 –trillion in savings deposits, § over $1 -trillion in loans & § over $1. 6 -trillion in assets Africa Total assets - $8 billion Kenya no. 11 worldwide - total assets $5 billion & no. 1 in Africa, it accounts for 63% of Africa’s total assets (for CFIs) Tanzania - No. 2 in Africa - total assets $599 m Swaziland No 1 - Southern Africa total assets of $100 m South Africa No 2 - total assets of $23 million and Zambia no. 3 - total assets $19 million South Africa - penetration rate 0. 1%, - 2 nd lowest worldwide Penetration rate is calculated by dividing the total number of reported CFI members by the economically active population age 15– 64 years old 26
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Banking Hall – Police Sacco in Kenya 37
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CBDA The End….
ADDITIONAL INFORMATION
CBDA BUDGET AUDITED OUTCOME R thousand Transfers 2010/11 2011/12 2012/13 8 200 000 9 310 000 16 000 Application fees 35 000 9 000 16 250 Interest income 43 394 102 681 Stakeholder funding 8 278 394 9 471 681 2013/14 2015/16 2016/17 16 838 000 17 341 000 16 472 000 12 011 3 895 10 000 10 200 214 945 443 879 433 589 1 089 998 1 142 209 894 278 3 304 062 4 729 802 8 808 049 14 533 200 22 005 286 27 249 047 32 157 609 17 150 398 16 236 000 2014/15 20 031 630 42
TABLE 1 - REGISTERED AND DEREGISTERED CO-OPERATIVE FINANCIAL INSTITUTIONS 31 August 2017 Name Date of registration Total deposits 31 August 2017 Total capital 31 August 2017 Net income / Loss Bakenberg FSC 16/04/2013 1, 637, 177 545, 675 33, 491 Boikago SACCO 12/04/2013 3, 939, 875 2, 485, 049 152, 476 10/2/2015 2, 072, 434 3, 134, 709 -183, 543 Kings Grange FSC 04/04/2014 222, 347 109, 780 -95, 100 Kleinfontein SACCO 10/02/2015 36, 929, 244 1, 781, 179 61, 333 Kuvhanganyani FSC 04/04/2013 Kwa. Machi FSC 09/04/2013 Kwa. Zulu Ladies Empowerment FSC 27/03/2013 4, 591, 281 696, 374 -53, 432 Medical Primary Financial Cooperative 01/12/2016 1, 299, 000 631, 580 -604, 894 Mutapa FSC 16/04/2013 711, 768 318, 546 -6, 034 Nagrik FSC 30/05/2013 2, 314, 085 1, 385, 699 -77, 542 Nehawu 27/08/2013 16, 054, 482 8, 503, 018 73, 094 Oranjekas SACCO 19/02/2015 38, 887, 703 2, 563, 649 -8, 524 SAMWU SACCO 30/07/2015 8, 960, 975 -39, 965 -51, 712 Webbers SACCO 09/04/2013 2, 605, 3447, 064, 597 GIG CFI 534, 264 43
CONT. Young Women Business Network Ziphakamise SACCO Eyakwethu Greater Tzaneen Imvelo Agricultural Co-operative Mzansi Rural Arts and Crafts Nnathele FSC SAWBCC Sekhukhune Thari Entso FSV Worcester Community SACCO 02/12/2015 5, 603, 323 5, 096, 801 24, 240 27/03/2013 4, 072, 348 1, 216, 418 276, 581 161, 731 112, 183 -2, 297 312, 959 184, 503 18, 890 16/01/2014 169, 150 195, 335 -1, 526 12/09/2014 34, 842 356, 965 44 -8, 944 24/05/2016 16/04/2015 16/3/2016 25/05/2016 29/05/2013 17/10/2016 22/01/2016
DEREGISTERED CFIS Deregistered Date of Deregistration CEBISA FSC 03/02/2017 Mathabatha FSC 14/03/2017 Mmetlakhola Stokvel FSC 10/02/2017 Motswedi FSC 29/03/2016 Ubambiswano SFSC 24/04/2017 NIC SACCO 26/10/2015 Mpumalanga Farmers 19/02/2016 Sibanye SACCO 09/12/2014 FSC Inzuzo 17/03/2014 Flash SACCO 29/05/2014 45
CFI by Location Total number of CFIs 20 20 18 16 14 7 12 10 8 6 4 2 0 Urban Rural 46
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