University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool BANKSETA CONFERENCE TRANSFORMATION AND THE UNBANK

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool 1.Introduction SA successful transition to political democracy SA successful transition to political democracy Political stability and sound economic framework Political stability and sound economic framework However the socio-economic challenge is still daunting However the socio-economic challenge is still daunting Cannot be removed over-night Cannot be removed over-night Thread to fledgling democracy Thread to fledgling democracy

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool 2.The Global Transition SA part of global transition SA part of global transition SA double paradigm shift SA double paradigm shift Three revolutions: Political democracy; market economy & knowledge economy Three revolutions: Political democracy; market economy & knowledge economy Global revolutions will bring enormous progress Global revolutions will bring enormous progress Yet also the dangers of the fourth world Yet also the dangers of the fourth world

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool 3.The Development Challenges Of SA’s Transition Five types of freedom (Sen): Five types of freedom (Sen):  Political  Economic facilities  Social opportunities  Transparency guarantees  Protective security

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool SA mixed results SA mixed results Core and peripheral economy Core and peripheral economy Little trickle-down effects Little trickle-down effects Per capita income growth negative 1975 – 2000 Per capita income growth negative 1975 – 2000 UNDP: Growth of 7.0% needed or 3.5% per capita UNDP: Growth of 7.0% needed or 3.5% per capita Even a 5% growth scenario may be optimistic Even a 5% growth scenario may be optimistic 3.The Development Challenges Of SA’s Transition (Cont.)

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool Income of the richest 20% grew by 60% ( ) Income of the poorest 40% declined by 60% Unemployment between 29% and 40% Unemployment between 29% and 40% Growth of jobs in the financial, chemical and information technology fields Growth of jobs in the financial, chemical and information technology fields SA’s human development index.696 (Norway.942) SA’s human development index.696 (Norway.942) 35.8% of the population live on $2 a day 35.8% of the population live on $2 a day 11.5% on $1 a day 11.5% on $1 a day 34% of the population under the age of 15 34% of the population under the age of 15

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool 4.Access To Facilities Marginalisation of 50% of the population Marginalisation of 50% of the population Modern and peripheral sectors not well integrated Modern and peripheral sectors not well integrated New forms of economic growth will have to be created New forms of economic growth will have to be created The SMME sector crucial in this regard The SMME sector crucial in this regard Access to economic and other facilities germane to new growth Access to economic and other facilities germane to new growth Will have to be increased significantly Will have to be increased significantly

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool 5.The Unbank: The Challenge Of A Unique Solution SA very good banking system SA very good banking system Good networking system Good networking system Though complaints in rural areas Though complaints in rural areas 72% of Blacks; 53% of Coloureds and 43% Indians do not have bank accounts 72% of Blacks; 53% of Coloureds and 43% Indians do not have bank accounts Use of bank accounts have declined Use of bank accounts have declined SA usage level 40%; Brazil 35% and Kenya 5% SA usage level 40%; Brazil 35% and Kenya 5%

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool Access particularly a problem in rural areas (35% live there) Access particularly a problem in rural areas (35% live there) 25% of the economically unbanked in informal settlements 25% of the economically unbanked in informal settlements 24% in townships 24% in townships 1.9 million are pensioners and 2.9 million are students 1.9 million are pensioners and 2.9 million are students The limited access of the poor limits savings mobilisation The limited access of the poor limits savings mobilisation

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool Hence limits investment and the growth potential of the economy Hence limits investment and the growth potential of the economy Exert a negative influence on the stock of housing Exert a negative influence on the stock of housing Stokvels interesting example Stokvels interesting example Link between formal and informal systems Link between formal and informal systems 60% of stokvel members have bank accounts 60% of stokvel members have bank accounts Could think anew Could think anew However, risk for commercial banks too high? However, risk for commercial banks too high?

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool SA need to extend access to financial services on a wider basis SA need to extend access to financial services on a wider basis Reform of the banking system needed Reform of the banking system needed Good examples of community banks exist overseas: Developed and developing countries Good examples of community banks exist overseas: Developed and developing countries Community guarantee fund in USA Community guarantee fund in USA

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool UNCTAD: UNCTAD:  Importance of financing SMME’s which are not commercially bankable  Create suitable instruments and institutions  Provide services with different profit, risk and liquidity profiles  Extend credit to agricultural smallholders and small enterprises

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool  Development banks and venture capital  And micro-credit institutions  Financial policies can create rents for the small financial institutions Case for a three tier banking system in SA Case for a three tier banking system in SA Narrow, core and community banks Narrow, core and community banks

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool SARB positive SARB positive Also accepted at Nedlac Also accepted at Nedlac For government: For government:  To promote a diversity of institutions that extend access  Encourage competition in the financial sector  Protect consumers from exploitation and abuse

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool Could make housing for the poor more affordable Could make housing for the poor more affordable New legislation required; Current exemptions to the Mutual banks Act has not increased access New legislation required; Current exemptions to the Mutual banks Act has not increased access Could describe minimum level of capital required for community banks Could describe minimum level of capital required for community banks For these banks could allow deposit taking and extending of loans For these banks could allow deposit taking and extending of loans

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool At a next level: Transmission and account payments to clients At a next level: Transmission and account payments to clients Participation and settlement services to clients and higher level Participation and settlement services to clients and higher level  Several developing countries successful with savings mobilisation: Bolivia, Dominican Republic, Ecuador, Guatemala, Honduras and Nicaragua

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool  Needed: Access to credible institutions Convenient service Market returns Security for savings

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool  In Bangladesh 80% of the poor access to micro-financial services: institutions  Light regulation and indirect role by central bank  Adequate supervision and regulation required for savings mobilisation  SARB should not take on role for which it does not have the capacity or finances

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool Community banks can fund themselves through wholesale deposits and minimum intervention If they grow: higher level of prudential, governance and risk management required Regulation should provide investor protection and systemic stability

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool 6.Conclusion SA in grip of double paradigm shift SA in grip of double paradigm shift Significant progress, though huge backlogs Significant progress, though huge backlogs Economic growth shows long term decline Economic growth shows long term decline Poor insufficient access to financial services Poor insufficient access to financial services Constraint on savings mobilisation, investment and economic growth Constraint on savings mobilisation, investment and economic growth

University of Stellenbosch Business School Universiteit van Stellenbosch Bestuurskool Small enterprises denied access and prospective homeowners as well Community banking or third tier can be successful Light form of regulation required Investor protection and systemic stability required