Licensing and supervisory requirements for SACCOs David de Jong Supervisor: Co-operative Banks The 3 rd African SACCO regulators roundtable

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 co-op 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

To advocate interests of their members to government/private sector/other stakeholders Tertiary/Apex Members: 2nd co-ops Secondary Members: Primary co-ops (At least two primary co-ops) To provide services to its members and to promote community development Members: Individuals (At least 5 individuals) Primary To provide services to its members relating to the financial sector Co-operatives Act structure

Co-op Banks Act supports a tiered structure Tertiary co-op bank Secondary co-op Bank 1 FSC Savings Co-op Bank Savings and credit Co-op Banks SACCO Secondary co-op Bank 2 Secondary co-op Bank 3

Who is responsible for Supervising what? Currently a three tiered supervisory system 1. CFI’s below R1 million in deposits or not registered as a Co-op Bank 2. Registered Primary Co-op Banks up to between R1 and R20 million in deposits 3. Registered Secondary and Tertiary Co- ops Banks and primary Co-op Banks above R20 million in deposits

Who is responsible for what? 1. Unregistered CFI’s and those below R1 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 R30m (SACCOs) and R20m (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 R1 million and up to R20 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 Co- ops Banks and primary Co-op Banks above R20 million in deposits Must apply for registration with the Supervisor South African Reserve Bank (SARB)

Co-operative Banks Act Financial services Housing Worker Social Agricultural Burial society Consumer Marketing/Supply Service Co-Operatives Act dti R 1m deposits and 200 members > 20 million SARB South African Reserve Bank (SARB) > R1m < 20 million Co- operatives Banks Development Agency (CBDA) Less than R1m: SRO (SACCOL or samaf)

Limited Liability Deposit Insurance Savings and Loans/NPS CBDA assistance 1. Co-ops Act 2. Co-op Bank Act Regulated by Supervisor: CBDA Co-operative Bank R 1 mil < R 20 mil 1. Co-ops Act 2. Banks Act -Exemption Notice Self Regulated by SACCOL/samaf Limited liability May receive CBDA assistance Savings and loans SACCO and Financial Services Co-operative < R 30 mil and not registered as a Co-op Bank Co-operative Bank Limited Liability Deposit Insurance Savings and loans/ NPS / financial instruments / foreign currency 1. Co-ops Act 2. Co-op Bank Act Regulated by Supervisor SARB > R 20 mil Secondary and Tertiary Primary legislation Threshold/type Activities

Primary savings CB Secondary Co-operative Bank Deposits and savings accounts Transfers Borrow Open an account Trust/custody services Invest in prescribed investments Other services as approved by minister Same as primary savings Co- operative but also Grant secured and unsecured loans All of the above + Trade in financial instruments Open foreign currency accounts in name of members Amendment to the National Payment system allows access. Primary saving’s and loans CB

CBDA Supervisor CBDA Supervisor CBDA Board CBDA Board Registrar of co-operatives CBSU Co-operative Banks Self Regulatory Bodies (SACCOL/samaf)

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 CBF1 form To be Compliant with S 91(1) i.e. Meet criteria (200 + R1m) must apply within 2 months of having reached the thresholds Preliminary review of application + attachments Supervisor analyses Information (off site) Supervisor requests additional/ outstanding documentation Decision to conduct onsite assessment or Decision to reject

Application process Conduct pre-registration Assessment Review submitted document Assess operations as a Co-op Bank Fit and proper Assess if director, MD have necessary experience Board appropriate Review operational capacity Ensure operational policies and procedures adequate Complete an institutional profile Make recommendation Review financial capacity Assess ratios vs. required prudential standards 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

Supervisors have prepared Guidance notes on registration requirements: GN 1: Completion of the application form CBF1to 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. 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 Co- operatives 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 co- operatives 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 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 co-operatives.

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