Public Hearings on Financial Sector Transformation 3 May 2017 Presentation to the Standing Committee on Finance and Portfolio Committee on Trade & Industry Desmond Golding - Chairman CBDA David de Jong - Supervisor: CFIs Kobus van Niekerk - Head Central Support Services Nomadelo Sauli - Head Capacity Building

TABLE OF CONTENTS 1. CBDA Position in the Financial Sector Transformation Agenda 2. CBDA Mandate 3. What is a CFI? CBDA Programs: 4.1 Supervisory Function 4.2 Capacity Building 4.3 Central Support Services 5. Sector Challenges 6. Vision for the sector 7. Co-operative Banking Sector – South African & International Perspectives 8. Recommendations

1. CBDA POSITION ON THE FINANCIAL SECTOR TRANSFORMATION AGENDA

2. CBDA MANDATE Liquidity Support Capacity Supervision & Regulation Building & Development Liquidity Support Stabilisation fund Supervision & Regulation Co-operative Banks Act of 2007 (as amended) Banks Act Exemption Notice 620 of 2014 Co-operatives Act of 2005 (as amended) National Credit Act of 2005

Capacity Building unit Central Support Services unit CBDA MANDATE - Achieved through 3 key strategic imperatives Supervision Ensures that members deposits are safe and sector institutionally safe & sound Capacity Building unit Ensures that the CFI sector is adequately capacitated Central Support Services unit Enhance CFI Operational capability Banking platform CBDA To build a strong and vibrant financial co-operative banking sector

WHAT IS A CFI? Co-operative Financial Institution is the umbrella term used for member based deposit-taking financial co-operatives owned and controlled by their members who have a common bond and whose members choose to call themselves: Credit union Savings and credit Co-operative (SACCO) Financial Services Co-operative (FSC) Financial co-operative Co-operative Bank

The common bond is classified into three types: WHAT IS A CFI – Common Bond The common bond is classified into three types: Work based, working for the same employer or employed under the same business district; Associational, have common membership in an association or organization, including religious, social, co-operative, labor or educational groups; Geographic, reside within the same defined community within rural or urban district.

WHAT IS A CFI – Types of CFIs Secondary CFI/Co-op Bank Tertiary/Apex Co-op Bank Members: 2 secondary co-ops To provide services to its members relating to the financial sector Secondary CFI/Co-op Bank Members: Primary co-ops At least 2 primary co-op banks or 2 CFIs or a combination of 1 co-op bank and 1 CFI A primary co-operative is a co-operative where all the members are individuals. The purpose of a primary co-operative is to provide employment or services to its members, and to promote community development. It takes at least five people to form a primary co-operative. A secondary co-operative is a co-operative where the members are primary co-operatives. The purpose of a secondary co-operative is to provide services to its members relating to the sector where they are active. It takes at least two primary co-operatives to form a secondary co-operative. Primary co-operatives which are involved in similar activities often come together in secondary co-operatives. A tertiary co-operative is a co-operative where the members are secondary co-operatives. The purpose of a tertiary co-operative is to advocate the interests of the member co-operatives to government bodies, the private sector and other stakeholders. Another name for a tertiary co-operative is an apex organisation. An “apex” is the word for the top of a pyramid shape. To provide services to its members relating to the financial sector Primary CFI/Co-op Bank Members: Individuals (At least 200 individuals) To provide services to its members and to promote community development

WHY JOIN OR START A CFI? WHAT IS A CFI – Why start/Join CFI? CFI COMMERCIAL BANKS Type of organization Not for profit but to provide financial services to its members Generate profit for shareholders Who owns it? Members. One person 1 vote Shareholders. 1 share one vote Board of directors Elected unpaid volunteers Paid shareholders Fees Typically have fewer or lower fees Fees are expensive Income / surplus Back to Members/owners Shareholders Interactions Co-operative Competitive Investment options Circulates/Invests money in members back into community Invests in the rich WHY JOIN OR START A CFI?

Cooperative Principles WHAT IS A CFI – Cooperative Principles CFIs are governed by the same co-operative principles as sat out by the International Co-operative Alliance (ICA). Voluntary and open membership; Democratic member control; Members Economic Participation; Autonomy and Independence; Education , Training and Information; Cooperation amongst co-operatives; Concern for Community.

CBDA PROGRAMMES 4.1 Supervision Unit 4.2 Capacity Building Unit 4.3 Central Support Services

4.1 Supervisory Function

Supervisory Function - Registration Requirements Co-operative Financial Institutions Co-operative Bank 200 members (minimum) 200 members R100 000 Member share capital R1 million in member deposits Definition of a common bond Definition of the common bond Meet the requirements of the Co-operatives Act Meet the requirements of the Bank Exemption Notice Meet the requirements of the Co-operative Banks Act CBDA rules, prudential standards and operating standards SARB rules, prudential requirements and operating standards.

Supervisory Function - Key Activities Regulation Supervision Registration of CFIs Renewal of annual licence De-registration of CFIs Issuance of infringement notices Non-prudential registration of Representative and Support orgs. On-going supervision and monitoring Onsite Risk based and Compliance Offsite report analysis Problem CFI resolution Refers to the process of a government taking control of a company or industry, which can occur for a variety of reasons. When nationalization occurs, the former owners of the companies may or may not be compensated for their loss in net worth and potential income. Nationalization is most common in developing countries subject to frequent leadership and regime changes. In these instances, nationalization is often a way for a government to expand its economic resources and power

4.2 Capacity Building

Capacity Building Unit Key Activities Capacity Building Unit 1. Pre-registration Support 2. Training Provision 4. Impact Assessment 3. Direct Technical Assistance

Moving towards – Holistic CFI Support Capacity Building - Moving towards – Holistic CFI Support Improved operational efficiency Informal, formal training, mentorship and other capacity building interventions Develop strong CFI brand Build marketing campaigns Business Process & Systems Engineering Institutional Strengthening Branding & Marketing PPP – CFI Holistic Support – towards vision 2020

Enhanced service offering Capacity Building - Enhanced service offering Enhanced Capacity Building Unit Customised service offering ICT enabled service offering Provincial footprint Strengthened stakeholder relations

4.3 Central Support Services

CENTRAL SUPPORT SERVICES Strategic Objective: To enhance the Operational capability of the participating CFIs and integrate the organisations into the National Payment System; The Central Support Services has created an enabling environment where the sector can compete on an equal footing with commercial Banks; Banking Platform Project The CBDA identified the need for a common system for the Co-operative Financial Institutions and Co-operative Banks that will enable the sector to improve service to their communities, enter the National Payment System and achieve economy of scale.

Central Support Services – Banking Platform Components CO-OPERATIVE FINANCIAL INSTITUTIONS Banking Platform FTP Server Accounting System MIS & Reporting Sql Excel Access CENTRAL SUPPORT SERVICES PARTNER BANK (SPONSOR) NATIONAL PAYMENT SYSTEM

5. Sector Challenges

CHALLENGES – Sector Specific Low skills base (Finance, Banking etc); Inaccurate financial reports submitted to SU; Inadequate capital, low growth trends; Poor governance structures; (oversight role) Weak risk management levels; Lack of understanding and non-compliance to the regulatory framework;

CHALLENGES – Sector Specific Infrastructure; Seed funding; Branding & Marketing; Manual operations; Limited product & service offerings; Constraining regulatory requirements

6. VISION FOR THE SECTOR

CO-OPERATIVE BANKING SECTOR STATUS South African International Perspective SA – Cooperative Banking Sector as at Feb. 2016 – CBDA Annual Report WOCCU Statistics – Dec. 2015

Rural Peri-Urban Urban

Vision for the sector – Vision 2020

Vision for the sector – Vision 2020

Tertiary/National co-op bank Vision for the sector – CFI Network Tertiary/National co-op bank Provincial Secondary Co-op Bank Industries Co-op Bank SOC Co-op Bank District co-op bank Rural CFI Rural Co-op Bank Public Sector Co-op Bank Provincial Secondary Co-op Bank Industries Co-op Bank SOC Co-op Bank District co-op bank Rural CFI Rural Co-op Bank Public Sector CFI

CFIs within business ecosystem Vision for the sector – CFIs within business ecosystem Raw Material Processing Manufacturing Storage Distribution Marketing and Supply Coops Consumer Co-operatives Agriculture Co-operatives Financial Co-operatives Worker Co-operatives- Labour intensive e.g. mining; construction; textiles; and arts and craft Slide source DTI

CO-OPERATIVE BANKING SECTOR STATUS South African International Perspective SA – Cooperative Banking Sector as at Feb. 2016 – CBDA Annual Report WOCCU Statistics – Dec. 2015

CBDA

8. RECOMMENDATIONS

RECOMMENDATIONS Recommendation Description Responsible Party Deliberate policy position on co-operative banking Government to take firm stand on co-operative banking as a tool for financial sector transformation Government National Treasury SARB CBDA Development of a National Co-operative Banking Strategy Research should be conducted, published and debated on financial sector transformation and co-operative banking sector as a tool for such. Academia & all stakeholders Review of the Regulatory & Legislative Framework R30 million deposit limit 15% external credit Limited investment vehicles Exclusion of CFIs from financial support (co-operatives Act ) Capitalisation of CFIs co-operative Banking Sector

RECOMMENDATIONS Recommendation Description Responsible Party Implementation of the deposit insurance fund CFI members are 100% exposed if the institution loses funds for some reason or the other, yet they are the more vulnerable members of society. National Treasury SARB CBDA co-operative Banking Sector Review of the co-operative Banking Model Dependence on member contributions for capitalisation delays economic growth Emphasis should be on enterprise lending to support other SMMEs and promote CFIs as financial intermediaries at local level Skills requirements & competency of board of directors, managers and personnel Government SEDA, SEFA, Department of Small Business Development BANKSETA

RECOMMENDATIONS Recommendation Description Responsible Party Adequate resourcing of the CBDA National footprint to enhance support especially monthly monitoring visits – housed at SEDA/SEFA /DED offices Funding the banking platform as a tool to level the playing field for new entrants into the banking sector The R16 million budget limits the performance of the Agency Government National Treasury Department of Small Business Development Prov. DEDs Location of the CBDA Government to decide on appropriate location of the CBDA especially with the implementation of the twin peaks regulatory framework – which sees the Supervision unit moving to SARB Would the CBDA still be appropriately placed at National Treasury or better placed at the DSBD as the department is the custodian of coops – for a 1 stop shop CBDA

RECOMMENDATIONS Recommendation Description Responsible Review and close monitoring of the Financial Sector Charter Set clear targets for the support of the co- operative banking sector as new entrants in the financial sector. For instance – 10% of total fines collected from banks for the price fixing scandal to go towards co-operative banking support fund; 1% of commercial banks annual turnover to go towards support of new entrants (coop banking sector); Set clear growth targets for co-operative banking sector, in terms of membership, deposits, turnover, and small business support (productive loans) 2018 – 2030, e.g Membership – 150 000 by 2020 Deposits – R500 million by 2020 Financial Sector Charter Council NEDLAC Government CBDA Private Sector co-operative Banking Sector

RECOMMENDATIONS Recommendation Description Responsible Party Review and close monitoring of the Financial Sector Charter Mentorship / Incubation for new entrants in the banking sector by experienced banking experts Financial Sector Charter Council NEDLAC Government CBDA Private Sector co-operative Banking Sector Annual progress reports on the targets by Financial Sector Charter Financial Sector Charter Council & All stakeholders

RECOMMENDATIONS Recommendation Description Responsible Party Establishment of a co-operative banking sector Industry body For the sector to succeed financially and otherwise it is important that they unite and speak with one voice. Co-operative Banking Sector Establishment of a Secondary Co-operative Bank To provide the sector with liquidity and to ensure the co-operatives and SMMEs deposit their money in their own bank. Commercial banks to be urged to assist with sponsorship into the National Payment System (NPS) CBDA Private Sector NEDLAC FSCC CFI Infrastructure enhancement CFI premises do not inspire confidence to attract different market segments Government assist with use some of the government premises that are no longer utilized – even better – negotiate alliance with post bank to cooperate and share existing infrastructure Government

THANK YOU