Transformation in the financial sector: 2005 Financial Sector Charter Council Portfolio Committee on Finance 15 November 2006

Financial Sector Charter: annual review Background to the 2005 review Financial Sector Charter derives from Financial Sector Summit Declaration in 2002 In effect since 1 January year transformation process (interim targets set for 2008, final targets 2014) Dual focus:  The sector itself  Sector’s contribution to broader social transformation Primary objective: ‘promoting a transformed, vibrant, and globally competitive financial sector that reflects the demographics of South Africa, and … contributes to the establishment of an equitable society … by effectively providing accessible financial services to black people and … by directing investment into targeted sectors of the economy’

Financial Sector Charter: annual review Background to the 2005 review 7 performance pillars Sector focused  Human resources  Human resources : Employment equity in senior, middle and junior management + skills development  Ownership  Ownership : Black ownership in the financial sector  Control  Control : Black and black women directors and executives Broader focus  Procurement  Procurement : From BEE accredited suppliers  Access  Access : Access to retail financial products and services by 80% of historically unbanked (LSM 1-5) + financial literacy and consumer education  Origination & targeted investments  Origination & targeted investments : Transformational infrastructure, low- income housing, agricultural development, black SMEs  BEE transaction financing  Corporate social investment  Broader focus = +R100 billion in transformation funding

Financial Sector Charter: annual review Charter Council composition and operation Board: 5 constituencies Financial sector Government Absip Community Labour  Board sets annual targets, performance standards and provides framework for transformationExecutive Principal Officer  Responsible for annual review, ratings and annual report to BEE Advisory Council  Responsibility defined in Charter to ensure independence

Financial Sector Charter: annual review Annual review process All financial institutions submit comprehensive reports based on reporting form prepared by Council Executive Council Executive  Receives, considers and approves each report  Confirms provisional scoring and BEE rating of each institution Ratings  Provide BEE credentials for use in tenders etc  AE  A = high … E = poor Charter targets subject to alignment with BBBEE Act Codes of Good Practice  Charter targets will equal or better Code targets Charter to be gazetted as Financial Sector Code of Good Practice

Financial Sector Charter: annual review 2005 review objectives and process Phased in Baseline study – snapshot of transformation to use for measuring future transformation Identify transformation strengths and weaknesses  Feedback enables institutions to re-focus, re-prioritise and redeploy resources to achieve targets No scoring or rating Retirement funds not required to report (IRF undergoing transformation) 9 trade associations  Banks, short-term and life insurance, re-insurance collective investments, asset management, investment management industries

Financial Sector Charter: annual review 2005 review: reporting 372 institutions due to report 50 institutions exempted from reporting More than half participated in 2005 review Participants accounted for +70% of sector by market capitalisation and +90% of designated investments 1 Statistically reliable sample for assessment of the sector Baseline study as yardstick for future transformation 1 Estimates only because of exclusion of retirement funds from 2005 reporting

Financial Sector Charter: annual review Employment equity and black skills development Directors & executives Black directors: 30% (2008 target: 33%) Black women directors: 7% (11%) Black executives: 22% (25%) Black women executives: 4,9% (4%)  Alignment with the codes will present a challenge Management  On track to meet 2008 black management targets (25% senior management, 30% middle management, 50% junior management)  Already met or close to 2008 black women manager targets (4% senior management, 10% middle management, 15% junior management)  Again the issue of alignment will be a challenge Skills development 1,2%  Sector reported spending 1,2% of total basic payroll on black skills development 1,5%  Annual target: 1,5%  Review identified correlation between skills spend and employment equity progress

Financial Sector Charter: annual review Procurement  R16 billion to BEE accredited suppliers (36% of total procurement)  2008 target: Annual 50% from BEE accredited suppliers   27% of BEE procurement from >50% black-owned suppliers   73% from <50% black-owned Enterprise development   2% equivalent of BEE procurement spent on enterprise development (23% of this went to white-controlled companies)   Some enterprise development could have been claimed under procurement Procurement and enterprise development

Financial Sector Charter: annual review Access to retail financial services Mzansi initiative  Mzansi ‘affordability’ and ‘appropriateness’ assumed for 2005 Other products  Standards agreed for short-term insurance, life assurance, banks and collective investment schemes from 2006 Products deemed compliant for 2005 Consumer education  Standards still being negotiated  Annual target: 0,2% of post-tax operating profit  Reported 2005:0,39% = R117m  Qualification:LSM 1-5 audience not tracked LSM 1-5 accounts with non-Mzansi bank Active Mzansi accounts Total at 31 December 2005

Financial Sector Charter: annual review Reported performance against targets R6,7 billionR25 billion Transformational infrastructure: R6,7 billion (cumulative 2008 target: R25 billion ) R19 billionR31,8 billion Low-income housing (<R7 900 household income): R19 billion ( R31,8 billion ) R0,5 billionR1,5 billion Agricultural development (resource-poor farmers): R0,5 billion ( R1,5 billion ) R7,5 billionR5 billion Black SMEs (<R20 million turnover pa): R7,5 billion ( R5 billion ) Qualifications Performance includes non-transformational infrastructure and non-Charter agricultural funding Housing borrower household income not accurately tracked Government risk mitigation initiatives not finalised to release additional R10 billion for housing Funding clusters in Gauteng, Western Cape and KZN Retirement funds not included on the performance while included in targets Origination & targeted investments)

Financial Sector Charter: annual review BEE transactions 2008 target: R50 billion Reported by 2005 year-end:R47 billion Best performance in transformation categories

Financial Sector Charter: annual review Ownership 2008 Ownership target:25% direct black ownership 2005 reported sector average:16% direct black ownership (linear average) 54% of institutions report any black ownership, 46% report no black ownership 2008 target achievable Ownership statistics are calculated on linear average

Financial Sector Charter: annual review Corporate social investment CSI annual target: 0,5% of post-tax operating profit 2005 reported:0,81% of post-tax operating profit CSI reported for 2005 = R240 million

Financial Sector Charter: annual review 2005 review: overall findings Subject to the qualifications raised BEE transaction financing  2008 target (R50 billion) nearly achieved Targeted investments  Ahead on black SME funding, lagging on transformational infrastructure and agricultural development, uncertain on low-income housing  Skewed to major urban centres (Gauteng, Western Cape, KZN) Procurement  On track for 2008, but skewed towards ‘black influenced’ and ‘black empowered’ suppliers HR  On track to meet 2008 management, executive and director targets – Charter acknowledges targets low Access to retail services  Baseline study in 2006 only CSI  Reported ahead of annual targets

Financial Sector Charter: annual review 2005 review: conclusions Adequate start to 10-year transformation process Support from majority of institutions  Demonstrated by 50%+ reporting, 75%+ by market capitalisation, 90%+ by designated investments Baseline study in place to measure future transformation progress  Statistically valid reporting sample in most aspects  Others measured in 2006 (Access to retail services, consumer education) Best performance areas – traditional commercial financing (BEE transactions and black SMEs) Interventions and re-focusing by Charter Council and sector  Housing  Skills development  Procurement and enterprise development  Agriculture development