Financial Sector Forum SADC Financial Services Liberalisation Forum Birchwood Hotel – Johannesburg, South Africa 1st – 2nd July 2013

Presentation 4: Competition and Regulation in SADC: Banking & Microfinance Services by Stephen Chisadza (DNA Economics) and Matthew Stern (DNA Economics) 1st – 2nd July 2013

Outline of Presentation Introduction Trade in services negotiations GATS Schedules of SADC countries Main findings of the review Market access limitations National Treatment limitations Key issues for further discussion Thank you 1st – 2nd July 2013

1. Introduction Objectives of the study To assist SADC member countries in their preparations for negotiations on trade in financial services liberalisation that begin in 2013. To broadly document the current competitive dynamics level and effects of trade in financial services This research is NOT about identifying areas that require reforms, but about identifying and listing all of the current restrictions or barriers to trade and foreign investment. The report tries to identify those areas where barriers to market access remain, either in law and/or in practice. 1st – 2nd July 2013

1. Introduction Methodology The country reports were based on a desktop review i.e.: Annual reports and publications (i.e. Central banks, Finance Ministries,regulators, financial institutions, etc) Various FinScope Reports Legislation World Bank Services Trade Restrictions Databases Other secondary sources 1st – 2nd July 2013

1. Introduction Definitions Financial services were defined as: All insurance and insurance related services i.e. life, accident and health insurance, non-life insurance, reinsurance, retrocession and services auxiliary to insurance. Banking and other financial services (excl. insurance) i.e. accepting deposits and repayable funds from the public; lending (consumer credit; mortgages; credit for financing commercial transactions etc); financial leasing; money transmission service; trade in money market instruments, foreign exchange, and derivatives; securities; asset management, money broking, settlement and clearing, advisory and other auxiliary financial services. 1st – 2nd July 2013

1. Introduction Banking and other financial services Activities accepting deposits and repayable funds from the public; lending (consumer credit; mortgages; credit for financing commercial transactions etc); financial leasing; money transmission service; trade in money market instruments, foreign exchange, and derivatives; securities; asset management, money broking, settlement and clearing, advisory and other auxiliary financial services. Broad Sub-Sectors in Report Banking Microfinance Collective investment schemes Bureau de change Capital markets National Payments System 21.09.2018

1. Introduction Definitions The four modes by which services are supplied internationally: Mode 1 - Cross border supply e.g. fees associated with the payment and transfer of money between residents and non-residents and commissions related to international trade in financial securities. Mode 2 - Consumption abroad e.g. a foreign tourist using their bank card at a local ATM. The amount withdrawn would represent a capital flow and the service fee levied by the bank would represent the value of the trade in banking services. Trade in banking services through each of these channels is measured differently and is seldom reported consistently or entirely. 1st – 2nd July 2013

1. Introduction Mode 3 - Commercial presence e.g. banks providing services abroad through the establishment of a branch, subsidiary, representative offices or joint venture. Mode 4 - Presence of natural e.g. services provided by a foreign specialist or the movement of foreign managers or specialist personnel from a parent company to a subsidiary or branch abroad. Trade in banking services through each of these channels is measured differently and is seldom reported consistently or entirely. 1st – 2nd July 2013

2. Trade in services negotiations There are two types of commitments under GATS General commitment are pledges that will apply to all sectors Most Favoured Nation Principle i.e. no discrimination between service providers National Treatment Principle i.e. no discrimination against foreign service providers in favour of domestic providers Specific commitments are pledges to provide market access to a sector, but with limits placed on liberalisation. These limits must be scheduled (tabled/declared). Trade in banking services through each of these channels is measured differently and is seldom reported consistently or entirely. 1st – 2nd July 2013

2. Trade in services negotiations Restrictions of the following nature must be scheduled: Limitations on the total number of service providers, Limits on the total value of service transactions or assets. Limitations on the number of service operations or quantity of output, Limitations on the number of natural persons employed Measures that restrict or require specific types of legal entity or joint venture Limitations on the participation of foreign capital Trade in banking services through each of these channels is measured differently and is seldom reported consistently or entirely. 1st – 2nd July 2013

3. GATS Schedules of SADC countries Only 7 of the 14 SADC countries had made commitments in banking services at the WTO. The commitments differ in scope, depth and design: Malawi, Mozambique and Zimbabwe have made commitments across the entire banking sector except Mode 4 (Presence of a natural person) Mozambique’s schedule refers to rules for Mode 3 (Establishment of a Foreign Presence) Zimbabwe limited its commitments to 5 sub-sectors and market access limitation in Mode 3 (Foreign presence) 21.09.2018

3. GATS Schedules of SADC countries South Africa and Lesotho the financial sector is unbound (no limits) except for Mode 3 (Establishment of a Foreign presence) South Africa is the only country to specify a national treatment limitation in this sector: “branches of banks not incorporated in South Africa must maintain a minimum balance of R 1 million on the deposit accounts of natural persons”. Lesotho’s commitments provide clarity on the process to be followed by a foreign bank in establishing or acquiring interests in a bank in Lesotho. 21.09.2018

3. GATS Schedules of SADC countries Mauritius’ commitments appear to have no limitations in Modes 1 and 2 (Cross Border and consumption abroad) except for deposit-taking and clearing services. For Mode 3 (Establishment of a commercial presence) all financial institutions must have a license or Central Bank approval. Angola’s commitments apply only to conventional banking activities (deposit-taking, lending and money transfers), and deal largely with limitations on residents to borrow or bank abroad. 21.09.2018 Company-Presentation – GFA Consulting Group GmbH

4. Main findings of the review The report is an attempt to identify the areas where barriers to market access remain, either in law and/or in practice that may require being scheduled. The detailed country reports still need to be reviewed by regulators because: It was a desktop review dependent on publicly available information Sector categories under trade negotiations are by activity (e.g. deposit-taking, lending etc) national legislation follows a different pattern 21.09.2018

4. Main findings of the review – (a). Market access limitations Many SADC countries have liberalized their financial services sectors resulting in less state control and increased private sector participation. In most cases, the SADC banking sector seems relatively open to trade and competition. For Mode 3 (Commercial Presence), a few market access limitations were identified. Existing laws and regulations are predominantly prudential. 21.09.2018

4. Main findings of the review – (a). Market access limitations Many SADC countries still impose foreign exchange controls or restrict the ability of local consumers to access financial services (cross border) from abroad. Most barriers in this sector apply across mode 4 (Presence of natural persons) - Limiting the ability of banks and other financial institutions to employ foreign staff residents in key positions, limits on the total number of foreign employees 21.09.2018

4. Main findings of the review – (a). Market access limitations Zimbabwe is the only country that currently imposes an explicit limit on the participation of foreign capital in banking-sector investments. In Botswana, some degree of local ownership in financial institution is encouraged and is a ‘consideration’ in the award of all banking licenses. 21.09.2018

4. Main findings of the review – (a). Market access limitations In most SADC countries, there are prudential limits on the shareholdings in financial institutions, e.g. in Malawi an individual or entity (foreign or local) may not own more than 49% of a prudentially regulated entity without the approval of the registrar. In Lesotho, individual shareholdings (or the shareholding of a group acting in concert) above 10%, 25%, 33% or 50% require prior approval from the Central Bank. 21.09.2018 Company-Presentation – GFA Consulting Group GmbH

4. Main findings of the review – (b). National Treatment limitations Some prudential and licensing regulations seem to discriminate against foreign financial institutions, e.g. Zambia - security vetting fees for microfinance operators licenses are higher for foreign applicants and the Bank of Zambia will be introducing a tiered Minimum Statutory Capital (MSC) structure for commercial banks, with foreign owned banks required to set aside around five times as much as local banks Namibia - foreign applicant banks must have attained a long term investment grade rating from a recognised international ratings agency such as Moodys, Standards & Poors, and Fitch. This appears not to apply to local and African banks. 21.09.2018

4. Main findings of the review – (b). National Treatment limitations Generally, most limitations on national treatment (in SADC and elsewhere) relate to: residency and in some cases citizenship requirements that are imposed on many key positions across the banking sector (over and above general work permit requirements). 21.09.2018 Company-Presentation – GFA Consulting Group GmbH

4. Main findings of the review – (b). National Treatment limitations Country Limitation Botswana A nationality requirement for the board of directors of banks and collective schemes. Stock brokers must reside in Botswana and must own assets in Botswana that exceed their liabilities by no less than P50,000. Lesotho foreign financial institutions should appoint at least two natural persons who reside in Lesotho to manage the business of a branch, and one of these appointed persons should be the Chief Executive Officer. 21.09.2018

4. Main findings of the review – (b). National Treatment limitations Country Limitation Malawi The majority of a financial institution’s board should be non-executive and reside in Malawi. At least one audit committee member must be a resident of Malawi (unless they can attend meetings regularly). Seychelles Section 5(1)(l) of the Financial Institutions Act requires at least one director is resident in the Seychelles. 21.09.2018

4. Main findings of the review – (b). National Treatment limitations Country Limitation Mauritius At least one director of a Bank must be a resident. Applications for a Category 1 Global Business license require that at least 2 directors are resident in Mauritius, and that the business maintains its principal business account in Mauritius. To qualify for a work permit, the basic salary of that individual should exceed MURs 20,000 (approximately US$701.80) monthly. Should the expatriate be earning less than this then they must be vetted by the Ministry of Labour and industrial Relations and Employment. 21.09.2018

4. Main findings of the review – (b). National Treatment limitations Country Limitation Mozambique Employment contracts with foreign workers have to be authorised by the Ministry of Labour. Labour laws encourage the transfer of skills from foreigners to locals by requiring that the number of foreigners in management positions should decline over time. 21.09.2018

4. Main findings of the review – (b). National Treatment limitations Country Limitation Namibia At least two Namibians resident in Namibia shall be appointed to manage the Namibian branch of any Bank with at least one being appointed as the principal officer. The Minister may publish regulations and determinations that impose further limits on the citizenship or residence of a board member. South Africa At least 2 people that reside in South Africa must be appointed to manage a branch of any bank, one of which shall be the chief executive. Brokerage firms must be headed by a locally licensed and resident broker. 21.09.2018

4. Main findings of the review – (b). National Treatment limitations Country Limitation Tanzania A licensed institution must seek and obtain the approval of the Bank of Tanzania before employing a non-Tanzanian. All banks and financial institutions regulated by the Bank should appoint a minimum of five board members, of which at least two must be Tanzanian and the majority of the board members must reside in Tanzania. Zambia The minimum percentage of domestic residents that should be appointed onto the board of directors of a Bank is 51%. Part III Section A of the Securities Act requires that non- Zambian collective investment schemes should appoint a Zambian representative who is in turn licensed under section 82 of the Securities Act. 21.09.2018

4. Main findings of the review – (b). National Treatment limitations Country Limitation Zimbabwe A labour market test is required to show that the desired skill is not available locally. At the senior management level, the composition of the Board of Directors must reflect the requirements as set out in the indigenisation and Economic Empowerment Act, and the managers and trustees of a collective investment scheme should be registered and resident in Zimbabwe. Registered stockbrokers must be Zimbabwean residents with domestic assets that exceed their domestic liabilities by no less than US$10,000. 21.09.2018

5. Key issues for further discussion Market access and foreign competition Available legislation suggests that banks are able to offer services across all SADC countries in almost any legal form, without unnecessary legal or regulatory impediment. Foreign banks have experienced few difficulties in establishing a presence in most SADC countries. Yet access to banking services in many countries is low There is no discernible pattern between the level of foreign competition and access to banking services. 1st – 2nd July 2013

5. Key issues for further discussion Market access and foreign competition 1st – 2nd July 2013

5. Key issues for further discussion Policy questions: Is the regional banking environment as open in practice as it seems on paper? Are there other regulations or procedures in place which make it difficult for new and/or foreign banks to compete in individual markets? What is the future regulatory trajectory in the banking sector? 1st – 2nd July 2013

5. Key issues for further discussion The role and treatment of microfinance Countries may impose or envisage different regulations in the banking and microfinance industries. Given the importance of the microfinance industry in SADC, does it need to be scheduled and negotiated separately from banking? The WTO sector classification list (W/120) separates between financial service activities, not institutions. As such, all lending activities, whether provided by banks or microfinance institutions, should be scheduled jointly 1st – 2nd July 2013

5. Key issues for further discussion The role and treatment of microfinance Legislation for microfinance across SADC is relatively less mature and consistent across countries. Where regulations do not exist, this might make it difficult for countries to make commitments. Is there a need and potential for improved cooperation / harmonisation between regional micro-finance regulators? Would it be desirable to develop a common understanding between SADC member states as to what constitutes micro-finance, and how trade and investment in this industry should be regulated? The WTO sector classification list (W/120) separates between financial service activities, not institutions. As such, all lending activities, whether provided by banks or microfinance institutions, should be scheduled jointly 1st – 2nd July 2013

5. Key issues for further discussion Access to the National Payments System An independent supplier of ATMs, money transfer agencies and cellphone banking offerings such as M-PESA must all be sponsored into the system by a clearing bank. For credible innovative institutions this appears to limit access to the payments system. Is access to the payment system used to keep out new entrants? Are there any examples from other countries, that might provide guidance as to how national and regional payment systems can be developed and optimised to extend banking services between and within countries? The WTO sector classification list (W/120) separates between financial service activities, not institutions. As such, all lending activities, whether provided by banks or microfinance institutions, should be scheduled jointly 1st – 2nd July 2013

5. Key issues for further discussion Prudential Limits Some prudential regulations seem unnecessarily protective or to favour local firms over foreign institutions. Are SADC prudential regulations in-line with international best practice? Is harmonisation of certain prudential aspects desirable? (e.g. principles for setting maximum and minimum limits) Is some kind of mutual recognition agreement between regulators possible, so that SADC countries can meet minimum regulatory standards to recognise the prudential competency of other SADC member states? The WTO sector classification list (W/120) separates between financial service activities, not institutions. As such, all lending activities, whether provided by banks or microfinance institutions, should be scheduled jointly 1st – 2nd July 2013

6. Thank you For further comments contact stephen.chisadza@dnaeconomics.com Thank you 21.09.2018