The 3 rd African SACCO regulators roundtable Licensing
The 3 rd African SACCO regulators roundtable Licensing and supervisory requirements for SACCOs David de Jong Supervisor: Co-operative Banks
South African experience thus far �Background �Regulatory complexity �Designing an appropriate regulatory regime �Requirements for registration �Submission of documents �Capital adequacy �Investments �Loan provisioning �Liquidity �Large exposures �Other issues
Background In 2002 began lobbying for SACCO specific legislation as an alternative to self regulation Co-operative Banks Act of 2007 Created a Co-operative Banks Development Agency to assist financial co-operatives with development Appoint a supervisor to supervise and regulate coop banks Establishment of a deposit insurance Establishment of a appeals board Unintended consequence: Three tier supervisory system
Definitions of the Act (Chapter 1) “Co-operative bank” means a co-operative registered as a co-operative bank whose members (a) Are of similar occupation or profession or who are employed by a common employer or who are employed within the same business district (b) Have common membership in an association or organisation, including religious, social, Co-operative, labour or educational groups; or (c) Resides within the same defined community or geographical area
Co-operatives Act structure Tertiary/Apex Members: 2 nd co-ops To advocate interests of their members to government/private sector/other stakeholders Secondary Members: Primary co-ops (At least two primary co-ops) To provide services to its members relating to the financial sector Primary Members: Individuals (At least 5 individuals) To provide services to its members and to promote community development
Co-op Banks Act supports a tiered structure Tertiary co-op bank Secondary co-op Bank 1 Savings Co-op Bank Savings and credit Co-op Banks Secondary co-op Bank 2 SACCO Secondary co-op Bank 3 FSC
Who is responsible for Supervising what? Currently a three tiered supervisory system 1. CFI’s below R 1 million in deposits or not registered as a Co-op Bank 2. Registered Primary Co-op Banks up to between R 1 and R 20 million in deposits 3. Registered Secondary and Tertiary Co -ops Banks and primary Co-op Banks above R 20 million in deposits
Who is responsible for what? 1. Unregistered CFI’s and those below R 1 million � Any start up deposit taking co-operative or � financial co-operative not registered as a co- operative bank must be registered with a recognized Self Regulatory agency (SACCOL or samaf) under one of the Banks Act exemption notices. Services these CFI can offer include � deposit taking up to R 30 m (SACCOs) and R 20 m (FSCs) � loans and brokerage services � Must subject themselves to the rules of their regulator (SACCOL or samaf)
Who is responsible for what? 2. Registered Primary Co-op Banks with 200 members and between R 1 million and up to R 20 million in deposits Must apply for registration with the Supervisor located at the Co-operative Banks Development Agency (CBDA).
Who is responsible for what? 3. Registered Secondary and Tertiary Coops Banks and primary Co-op Banks above R 20 million in deposits Must apply for registration with the Supervisor South African Reserve Bank (SARB)
South African Reserve Bank (SARB) > 20 million SARB Co-operative Banks Act R 1 m deposits and 200 members > R 1 m < 20 million Cooperatives Banks Development Agency (CBDA) Less than R 1 m: SRO (SACCOL or samaf) Financial services Housing Worker Social Agricultural Burial society Consumer Marketing/Supply Service dti Co-Operatives Act
Primary legislation Threshold/type Activities 1. Co-ops Act 2. Banks Act -Exemption Notice Self Regulated by SACCOL/samaf 1. Co-ops Act 2. Co-op Bank Act Regulated by Supervisor: CBDA 1. Co-ops Act 2. Co-op Bank Act Regulated by Supervisor SARB < R 30 mil and not registered as a Co-op Bank R 1 mil < R 20 mil SACCO and Financial Services Co-operative Bank Limited liability Limited Liability May receive CBDA assistance Deposit Insurance Savings and loans Savings and Loans/NPS Savings and loans/ NPS / financial instruments / foreign currency CBDA assistance Secondary and Tertiary > R 20 mil
Primary savings CB �Deposits and savings accounts �Transfers �Borrow �Open an account �Trust/custody services �Invest in prescribed investments �Other services asloans Primary saving’s and approved by minister CB �Same as primary savings Co-operative but also �Grant secured and unsecured loans Secondary Co-operative Bank All of the above + Trade in financial instruments Open foreign currency accounts in name of members Amendment to the National Payment system allows access.
Registrar of co-operatives CBSU Co-operative Banks Self Regulatory Bodies (SACCOL/samaf) CBDA Board Supervisor
Designing an appropriate regulatory regime Regulations, rules and licensing requirements/processes should take cognisance of the activities, form size and nature of the institutions to be regulated. In SA most still small. Needs to be scalable - from start up to large Regulatory burden a concern for smaller institutions Design needs to be “developmental” rather than punitive. Bring applicants along, not simply reject. Introduces moral hazard/adverse selection.
Application process - Steps Using Rules complete CBF 1 form Preliminary review of application + attachments Supervisor analyses Information (off site) To be Compliant with S 91(1) i. e. Meet criteria (200 + R 1 m) must apply within 2 months of having reached the thresholds Supervisor requests additional/ outstanding documentation Decision to conduct onsite assessment or Decision to reject
Application process Conduct pre-registration Assessment Review operational capacity Ensure operational policies and procedures adequate Review submitted document Assess operations as a Co-op Bank Review financial capacity Assess ratios vs. required prudential standards Fit and proper Assess if director, MD have necessary experience Board appropriate Risk assessment 1: Assess level of inherent risk 2: Assess level of risk mgt practices 3: Assign a risk rating Registration Final resolutions Conditions of registration Complete an institutional profile Make recommendation
Supervisors have prepared Guidance notes on registration requirements: GN 1: Completion of the application form CBF 1 to register as a primary, secondary or tertiary co-operative bank Goes through the application form line by line Provides guidelines for requirements in business plan, constitution, savings and loan policies. http: //www. treasury. gov. za/coopbank/GN 1 of 2010. pdf Also produced GN’s on returns
Submission of documents to supervisor A co-operative bank must when informing, notifying or submitting notices, reports, returns and financial statements to the registrar in accordance with the Cooperatives Act submit the same documents to the supervisor within the same periods A co-operative bank must within 30 days after a general meeting submit a copy of the minutes to be kept in terms of section 31(1)(a) of the Co-operatives Act to the supervisor Current situation * Weak compliance culture with less than 10% of cooperatives compliant with co-op Act
Meeting 6% capital adequacy ratio �Capital in our regulations includes; membership shares, non-distributable reserves appropriated from surpluses (retained earning) and any other non distributable funds of a permanent nature not subject to legal claim Current situation �Many not making enough surplus to build reserves �Not made surplus but still paying dividend �Making surplus but not providing for potential losses �Few instances growth too rapid to keep up
Regulations: Investments Only in following deposits with a bank deposits with secondary or tertiary co-operative banks government co-operative retail savings bonds participatory interests in portfolios of collective investment schemes approved by the Registrar of Collective Schemes as determined by the supervisor by notice on its official website bonds and debentures determined by the supervisor
Loans and delinquency provisioning � Require 2% provision on ALL loans, additionally � 1 -6 months 35% � 6 -12 months 50% � > 12 months 100% Current situation � By making provisions creates loss position - reluctant to do � Poor monitoring systems to track/provide for delinquency correctly � Misconception that payroll based lending has not have delinquency
Liquidity Max 5 percent of total assets may be held in fixed and non-earning assets Minimum 10 percent of total deposits must be held in “prescribed investments” with a tenure not exceeding 32 days and convertible into cash at any time In addition, minimum of 2, 5 % of total deposits must be deposited with the Agency or a higher tier co-operative bank balance of deposits must be held in prescribed investments or (for savings and loans) balance granted as loans up to a maximum of 80 percent of total assets (loans granted to members that are sourced from cash donations may not exceed 15% of total deposits. )
Large exposures Hold no deposit from any one member or related person, exceeds the lesser of 10 percent of the total assets held by or 25 percent of the capital of the co-operative bank A co-operative bank may not make an investment with any one person or related person or grant a loan to any one member or related person, which exceeds the lesser of 10 percent of the total assets held by or 25 percent of the capital of the co-operative bank
Issues having to deal with Weak governance (untrained boards and staff, internal conflict etc, etc) Weak accounting systems in place. Not producing regular reconciled management accounts Policies and procedures not formulated (liquidity, delinquency, security, staff conditions, IT and data recovery etc Weak internal controls Abuse of the co-op banking model - quazi co-op banks Weak support structures to provide much needed advice and assistance to all types of financial cooperatives.
Tick Box vs. Risk based supervision Financial co-ops management (board and staff) rely on a template based approach to manage their co-ops Reflective in many through ratio based lending 1: 3 Committees not adequately trained to do risk analysis within institutions with regards to strategy, credit, interest, liquidity, operational, compliance and reputational risks. Supervisors preference is to adopt risk based approach, but most financial co-operatives don’t have capacity to carry out own assessment of risk
Thank you
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