Innovations in Banking Professor Mthuli Ncube Wits Business School BANKSETA conference October 2006

The role of banking institutions? Mobilizing savings Mobilizing savings Matching borrowers and savers Matching borrowers and savers Selecting positive NPV projects Selecting positive NPV projects Promoting allocative efficiency Promoting allocative efficiency Risk management Risk management Smoothing consumption by allowing borrowing against future income streams Smoothing consumption by allowing borrowing against future income streams Reducing uncertainty in resource allocation Reducing uncertainty in resource allocation Conduit of the “conduct of monetary policy” Conduit of the “conduct of monetary policy” Vehicles of socio-economic transformation Vehicles of socio-economic transformation

Banking issues to be tackled in SA Low savings Low savings Servicing the “under-banked” population Servicing the “under-banked” population Low entrepreneurship levels Low entrepreneurship levels Collusive banking sector Collusive banking sector High transaction fees High transaction fees Low-cost housing provision Low-cost housing provision

Total Entrepreneurship Activity 2004 Low TEA Countries Low TEA Countries Japan:1.5 Japan:1.5 Slovenia2.6 Slovenia2.6 Hong Kong3.0 Hong Kong3.0 South Africa5.4 South Africa5.4 UK6.3 UK6.3 USA11.3 USA11.3 High TEA Countries High TEA Countries Ecuador27.2 Ecuador27.2 Uganda31.6 Uganda31.6 Peru40.3 Peru40.3 Global Average 9.3 Global Average 9.3

South African Total Entrepreneurship Activity SA Entrepreneurship SA Entrepreneurship activity on downward trend since 2001 Downward trend Downward trend despite falling Interest rates and stable Rand and low inflation

Wide Interest Rate Spreads (%):2002 Interest rate spread in sub- Saharan Africa is 13 % compared to 7% for the rest of the world Spreads too wide costly for business

Servicing the “under-banked” Financial Services Charter and BEE policy Financial Services Charter and BEE policy Mzansi accounts…3 million accounts Mzansi accounts…3 million accounts Unit trusts: Money, Equity, Balanced and Guaranteed Funds Unit trusts: Money, Equity, Balanced and Guaranteed Funds Unit trusts linked to borrowing…micro-lending Unit trusts linked to borrowing…micro-lending Access to remote areas using “virtual money” Access to remote areas using “virtual money” “Virgin money”….lower transaction fees “Virgin money”….lower transaction fees

Derivative and Structured Products Derivative products on equities Derivative products on equities Equity-linked notes paying interest Equity-linked notes paying interest Fixed-to-floating mortgage loan products Fixed-to-floating mortgage loan products Mortgage loans linked to pension savings Mortgage loans linked to pension savings Interest rate and forex Swaps Interest rate and forex Swaps Caps, Floors and Collars Caps, Floors and Collars Credit Derivatives: CDOs Credit Derivatives: CDOs Asset-backed securities, eg mortgages Asset-backed securities, eg mortgages

SA Housing Backlog by Province: 2004 In 2002 the housing backlog was houses, nationally. In 2003 the backlog increases slightly to houses and in 2004 the backlog was In 2002 the housing backlog was houses, nationally. In 2003 the backlog increases slightly to houses and in 2004 the backlog was

Housing Backlog Problem Rough estimates reveal that 1.8 million dwellings are classified as inadequate and account for a large part of the housing backlog. Rough estimates reveal that 1.8 million dwellings are classified as inadequate and account for a large part of the housing backlog. The number of households living in informal settlements and backyards are about 2 million by 2004 estimates. If the average household has 4 members, then the approximate number of people needing proper housing in the urban areas is 8 million people. The number of households living in informal settlements and backyards are about 2 million by 2004 estimates. If the average household has 4 members, then the approximate number of people needing proper housing in the urban areas is 8 million people. The progress on housing supply has not kept up with the demand but significant progress has been made. In the last 10 years to 2004, the government-assisted housing initiatives has resulted in about 1.6 million subsidy-houses, and transferred title of old stock of housing to families, all from the R29.5 billion that has been made available through government initiatives. The progress on housing supply has not kept up with the demand but significant progress has been made. In the last 10 years to 2004, the government-assisted housing initiatives has resulted in about 1.6 million subsidy-houses, and transferred title of old stock of housing to families, all from the R29.5 billion that has been made available through government initiatives. Housing subsidy grants increased from R2.692 billion in 1996/97 to R4.5 billion in 2004/05, and expected to increase to R5 billion in 2006/07. Housing subsidy grants increased from R2.692 billion in 1996/97 to R4.5 billion in 2004/05, and expected to increase to R5 billion in 2006/07.

Securitized Guarantee International Lender (IL) provides guarantee against default to local banks International Lender (IL) provides guarantee against default to local banks Guarantee to carry a “premium” payable monthly along with interest on Guarantee to carry a “premium” payable monthly along with interest on IL issues yield notes whose payments are funded by “premium payments” (securitization) IL issues yield notes whose payments are funded by “premium payments” (securitization) Yield notes are sold to investors such as asset managers, insurance companies, pension funds, banks Yield notes are sold to investors such as asset managers, insurance companies, pension funds, banks Demand for yield notes driven by “black economic empowerment” drive for which holders of notes will earn BEE points Demand for yield notes driven by “black economic empowerment” drive for which holders of notes will earn BEE points

Thank You Final Thought: Banks should manage risk rather than avoid it