Financial Sector transformation: briefing by Banking Association of South Africa

Meeting report

The Chairperson welcomed Mr Cas Coovadia, Managing Director of Banking Association of South Africa, accompanied by Mr Lawrence Khoza, Senior General Manager: Stakeholder Management, and said that the Association’s briefing would provide a good background to the Committee’s agenda for its meeting the next day, 11 August 2010. The Committee sought to understand the Association’s mandate and role, and the challenges in the sector in which it was operating. The Chairperson understood that the Association was the voice of the commercial banks. He said that he regarded this as the first of many such meetings. 

Banking Association. Presentation
Mr Coovadia welcomed the opportunity to meet the Committee for the first time, other than to make a submission on a piece of legislation. He thought that it was critical for the Committee to understand the role of the Association, to understand its position in relation to other organisations, to interact with the Association strategically, and for the Committee to sensitise the Association to some of the issues in the sector. The Association was convinced that this sort of interaction, over and above its coming to make submissions, would add value to the Committee’s deliberations.

Mr Coovadia outlined the presentation. He introduced the Banking Association, its position, and its objectives. He reviewed the financial sector very broadly with some statistics to provide context; the regulatory regime for banking in South Africa and how the association interacted with it; and the Financial Sector Charter. The Association was a member of the Charter Council; members of the Association reported “against the charter”.

Mr Coovadia said that he would be guided by the Chairperson on interaction with the financial sector whose representatives would be present at the 11 August 2010 meeting; which he would also attend.  He said that he would review some challenges that the industry faced, including challenges that were broader than transformation, together with some of the high impact initiatives in which the industry sought to be involved. This would help assess the role the Association should play in the agenda of the developmental state.

Mr Coovadia said that the Association was the only mandated representative of the banking sector in South Africa. It represented the banks. It was fully funded by the banks. It represented both South African and international banks. However, it was not a regulatory authority. The Association was voluntary and banks did not need to belong to it. However, the Association’s constitution said that if a bank wanted to be a member of the Association, that bank was required to be a bank licensed by the Reserve Bank of South Africa. It was the case that every bank, South African and international, licensed by the Reserve Bank, was a member of the Association. So it was important to say at the beginning that the Association did represent the banking industry. However, in representing the industry, members of the board and members of executive management were well aware that the Association’s role was not simply to take the views of the industry and represent them. It was also to look strategically at the industry in the context in which the Association and banks worked, and to encourage the industry to work in a way that made it more relevant.

The Association contributed to the socio-economic growth and development of South Africa through facilitating and encouraging members to deliver financial services to a broad spectrum of the population. It sought continually catalyse and enable transformation innovation initiatives in the sector and enable the consolidation of the outcome of such transformational and innovative initiatives into the business of banks.

However, the Association had no powers of compulsion over the banks. Through moral persuasion the Banking Association tried to get banks to think more creatively about the way they did business.

The Association encouraged and facilitated the sustainability of the banking sector through profitable, responsible and environmentally sensitive business. It often found itself in debate about profitability. It was necessary to state that banks bought and sold money for profit. However, the Association believed that banks must treat customers fairly, and impact with people’s lives on a daily basis. This was the area of sustainable business and being environmentally friendly.

The Association undertook research and development to inform international best practice in the industry. It forged dynamic partnerships with relevant stakeholders to influence an environment in which banks could do profitable and sustainable business in a way that promoted international best practices and sustainable socio-economic growth and development.

The Association played a key role in the Southern African Development Community (SADC) region and on the continent of Africa, and played a catalytic role in ensuring an environment attractive to sustainable banking. It managed a 14 member association of banks from the SADC region at the cost of the Association, and participated in a five year project with Canadian funding to work with six countries on public private partnerships. The Association sought to understand cooperatives, microfinance, and small to medium enterprises (SMMEs) more thoroughly.

Mr Coovadia described the Association’s critical areas of activity as to policy and legislative influence. The Association had worked with the Department of Trade and Industry (the dti) on the National Credit Act. It had taken three years of interaction and the resulting legislation was a work of compromise. It was the Association’s responsibility to interact with Government over a dynamic partnership on the banking industry. The Association assisted Government departments where practical, for example, Human Settlements, and Home Affairs with the training of staff. It was not a one-way street. The Association saw Government as a partner to the extent that it was practicable. The Association needed to be selective in the interaction that it had. The Association engaged with Cabinet and Parliament on banking issues.

The majority of people on the Association’s board were not bankers; the board was chaired by an advocate. The Association worked with the Ombudsman. The Association had cooperated with the Department of Minerals and Energy to secure its agreement to allow credit cars to be accepted at garages. The Association was represented in Business Unity South Africa (BUSA). Mr Khoza did much work at the National Economic Development and Labour Council (NEDLAC).

The Association sought to teach children to save. It had a programme in schools to teach children saving and budgeting in association with the American Banking Association which had asked three countries, Mexico, Turkey and South Africa to take the lead; it had been a very successful programme.

The Association regarded the transformation charter as catalytic.  It did not matter whether there was a banking code or not. The lessons from the charter were that it could make good business.

Mr Coovadia reviewed financial sector performance in 2010 according to figures from the Financial Mail.  The sector was obviously of critical importance to the country. South Africa rated number six, and above the United Kingdom and many developing countries in the efficacy of its financial sector. It was important to note that South Africa had withstood the financial crisis very well.

Mr Coovadia reviewed the regulatory regime, but noted that given the number of acts, there was increasing fragmentation of the regulation of the sector; the Association advocated that regulation be coordinated. 

Mr Coovadia said that transformation of the financial services sector had begun through the National Economic Development and Labour Council (NEDLAC) in 2003; the Communist Party had raised many issues.  (NEDLAC) had held a summit at which the financial sector had volunteered a charter and committed itself to transformation of the financial services sector.

Mr Coovadia pointed out that if the mining sector needed money to fund its equity deals, it came to the banking sector. If the banking sector needed money, it had to find it by itself. Banking was like no other sector. No other sector took money on trust.

Mr Coovadia reviewed performance in transformation (slides [13-15]).  He noted that the sector had invested R525 million in corporate social investment (CSI) in 2008, an increase of R136.85 million compared to 2007 in spite of a decrease in the sector’s profits of 13%, which represented 0.88% of profits after tax.    

Mr Coovadia reviewed transformation challenges, including the structure of black economic empowerment (BEE) equity deals and emphasis on a narrow approach; the support to black empowered companies as against black owned companies to encourage entrepreneurship among black people; the relative absence of black people in the real economy since the country needed more black people in manufacturing and innovation for banks to fund; the small to medium enterprise (SME) sector needed support beyond financing; the regulatory environment and the objectives of  BEE, such as the cost of capital and liquidity requirements, such as the G20 recommendation on capital adequacy requirements; the vicissitudes of the global environment and impact such as the global meltdown; the lack of financial security for black companies and such risky areas as agri-financing; regulatory issues; the need for vibrant partnership between commercial banks and the development finance institutions; and failure to gazette the Financial Sector Charter.

Mr Coovadia reviewed other high-impact economic initiatives such as the development of an approach to deal with micro-financing and cooperatives; establishment of community banking units by the banks to broaden access; innovative ways to deal with SME funding, including a study financed by USAID; and major interest in land reform, rural development and agrarian reform as well as urban regeneration and infrastructure financing.  

Mr Coovadia concluded by saying that Association agreed with the Ten Year Review that great progress had been made in growing the economy and stabilising macro-economic policy. However economic inclusion and exclusion remained a grave challenge and that therefore there had been a failure to deal with unemployment and management and ownership patterns in the broader economy. The Association’s key interlocutor needed to be Government and the Committee.

Discussion
The Chairperson said it had been an elaborate presentation. He invited questions of clarity and comments. 

Dr Z Luyenge (ANC) said that the Banking Association had provided information that was of great assistance to public representatives. He asked if the structure of the Banking Association was representative of the provinces with regard to the localities from which members came. Basically all that was being said was about the poorest of the poor. Dr Luyenge’s worry was representivity. It was necessary to ensure that in a forum there was real representation of the underprivileged.

Mr Khoza responded that the Association was a national body. However, the kind of commitments made by member banks would often find expression in the areas mentioned. Thus banks would be represented in all the areas.

Dr Luyenge’s other issue was on the accessibility of the banking interventions in the uplifting of the lives of the poor. The securities required by the financial institutions in order to assist the black masses of South Africa was a challenge that could not be resolved by saying that one could not lend money to someone who did not have an income. In the beginning, Mr Coovadia had said that the Banking Association wanted to ensure that no one was living without an income.

Dr Luyenge thought that Mr Coovadia’s suggestion that a perpetual intervention by the Banking Association with the Committee would assist the process was helpful, since the people whom Members represented were poor and voted for the Members. In the final analysis, Members of Parliament remained the only people who could access these opportunities that the Banking Association was standing for.

Dr Luyenge said that what was accessible to Members was not accessible at the level of the poor; because that would be a capitalist approach without accessibility being open to the poor masses. The rural state of our country was a point in question, and the uplifting of the standard and conditions of people there could only be addressed if this Association could really tap on the actual issues. It had to be asked how one could then open the banking facilities to the poor.

Mr Coovadia replied that some banks operated in rural areas, for example ABSA had a complete rural programme. The Association encouraged this.

Dr Luyenge said that the poverty of our people was getting now very much closer to the medium income group, or it even was to be found in that middle income group.

Dr Luyenge gave the example, in this regard, of the teachers, who were not able to access bonds because of the manner in which they, the teachers, were being paid. They now went down to the poorest by accessing the RDP houses, because they did not qualify for the better houses. It was a very critical issue with which the Committee needed to grapple as a matter of urgency. Maybe even some of us Members could not go to the bank and obtain a loan because of the commitments that we already had. This meant that we were swimming in the same pool as the pool that was full of the poor masses.

Mr Coovadia replied that, with regard to teachers’ inability to obtain loans, hose who earned R8 000 a month might benefit from a guarantee fund of which the Minister of Human Settlements had spoken. There were people who did not qualify for a subsidy, because they earned just above the threshold, who at the same time could not afford a bond. Mr Coovadia referred to it as ‘the gap market in housing”.

Mr Coovadia said that it was the Department of Human Settlements which tracked the outcome of a housing loan.

Mr Coovadia said that the Government needed to play a role regarding the gap between affordability and obtaining a loan. “We need to do that together.” It was necessary to consider the implications of lending to people who might not be able to afford it or might not be able to repay without some form of subsidy. However, over time some such people might be upwardly mobile and become able to afford to repay. For lending to such people to begin, a partnership with Government was required.

Dr D George (DA) said that he wanted to explore the issue to financial services. The Banking Association had indicated that progress had been made. However, in the past the issue had been raised of high banking fees in South Africa. South African bank charges were literally on the high side. In response there had been a response that South African banks had a large footprint to be maintained, and that the cost of security in South Africa was fairly high. Dr George understood that recently the First National Bank (FNB) had closed a number of branches in the Free State, and this had left people without access to banking facilities. He asked how this actually squared with; on the one hand, the view that fees were rather high but compensated for by the services provided by the banking industry, but that did not actually seem to be carried through in reality.

Mr Khoza responded that there were limitations on what the Banking Association could or could not do with regard to its member banks and issues of competition. With regard to some of the Competition Commission’s findings, there were limitations as to what banks could do collectively either through the leadership of the Association or through the banks themselves. There were regulatory issues that needed to be reviewed. Even if the Association were to rule that, in the interests of South Africa, banks should adopt certain measure, the Competition Commission would object, and say that the banks had to work individually and amongst themselves. The Association’s view was that banks should remain competitive, but should engage in partnerships especially in dealing with socio-economic issues.

Mr Coovadia emphasised that the Association did not become involved in setting bank fees. The Competition Act did not allow the Bank Association to do so, since it would be anti-competitive. An enquiry on bank charges had recommended that banks should be more transparent. Some banks had reduced the fees, but this must happen competitively. Mr Coovadia foresaw more competition and the stabilisation of charges.

Dr George then asked about an issue which the Committee had raised before, about the repurchase rate (repo rate), the interest rate at which commercial banks could borrow money from the Reserve Bank, which worked in lockstep with the prime rate. Now Members had seen recently a joint report by the Banking Association the South African Reserve Bank, where there was the explanation that the repo rate was a sort of a bench mark that guided the prime rate. Thus the prime rate moved up and down with the repo rate. The real issue about competition was that it was about where the banks positioned the loan relative to the prime rate. Dr George agreed with the view that Members needed to engage more with the banking sector, but it would be interesting to see the statistics of how many loans in South Africa were at prime, or above or below prime, especially loans for housing.  Were statistics available? One wanted to know if that competition was in place.

Mr Coovadia replied that the Association was willing to make data on the prime rate of interest available to Members.

Dr George commended the Banking Association on its Teach Children to Save Initiative. At the same time, Dr George noted that the culture of reading was deteriorating in South Africa. “Our young people don’t read.” That obviously was allied to savings, because if one read and one educated oneself, one was saving for the future and investing in oneself and therefore one’s income would improve; and then one could get more tax out of very profitable people. So it had to be asked if the involvement of the banks should not be broader. So it was not only about saving, but about reading and literacy. There was much money involved with the social responsibility role of banks.  Surely there was some way that money could be channelled into libraries and to reading, so that this problem could be alleviated in some way. 

Mr Khoza responded on the library issue. It must be appreciated that much of the corporate social investment in the banking sector was not done by the Association but by the banks themselves, so if Members examined the quantum presented in terms of how much was being spent on corporate social investment they would see that this quantum represented what member banks did. The campaign to teach children to save was a campaign that the Association itself directed, but Mr Khoza noted that many member banks were themselves committed to education; however, he acknowledged that perhaps banks altogether were not doing enough. He said that so much depended on education, including transformation.   
 
Mr M Motimele (ANC) noted that the Banking Association sought to address most of the issues that had been raised by organised labour in the context of the march to which Mr Coovadia had referred. With regard to the critical activities there was a participation of everyone – Business Unity South Africa (BUSA) BUSA, Parliament, and Cabinet, but Mr Motimele did not see the participation of organised labour. He thought that organised labour should be given a place to participate as an eminent participant.

Mr Coovadia replied that the Association’s interaction with unions, which were party to the Charter, was not like that of an employer body such as the Chamber of Mines.

Mr Motimele asked about the question of the Committee taking part in strategic issues; he felt that Members should welcome such participation and engage in such as soon as possible because banking was the most important component of the South African economy.
 
Ms Z Dlamini-Dubazana (ANC) thanked Mr Coovadia and his team for the presentation. She asked to whom the Banking Association did account. In particular, she appreciated the engagement with stakeholders such as the Government and Cabinet.

Ms Dlamini-Dubazana noted that Mr Coovadia also mentioned that the Banking Association pushed the banking sector to work within the South African context. She had listened with passion to the presentation, but unfortunately she could not marry what Mr Coovadia had said about pushing the industry to work within the South African context. This country had five priorities to ensure that the economy of the country became stable and to drive the vision of the country. South Africa needed an economy that was inclusive, a mixed economy.  She sought some elaboration, because the presentation did not necessarily reflect the five priorities of the manifesto which was given by the President.  

Ms Dlamini-Dubazana noted that the Banking Association conducted research and development. This was a worry, since the Association’s research appeared to show no interest towards the people of South Africa or to understand the South African context.  If the Association thought that if the banks were to do well, this was what the banks were supposed to do.

Mr Coovadia replied that the research and development done by the Association was not just international, the Association learned also from countries in Africa and South America so that it could apply that practice if it was appropriate here. Such research pertained to microfinance, cooperatives, and related topics. It was necessary to use some of the existing structures in order to begin providing banking services in rural areas. However, the Association had to convince its members to do this in a sustainable way.

Ms Dlamini-Dubazana asked what the banks done so far towards black economic empowerment (BEE). Why should the commercial banks not assist high risk borrowers, since they were all using the tax payers’ money? She was not sure about the development part of the Banking Association’s programme. She asked if the Banking Association embodied the norms and standards of the institutions which it represented. She expected the Banking Association to have ethics and codes of how banks were expected to behave. She expected the Banking Association to ensure quality and to offer access.

Mr Khoza responded on norms and standards that the Association as a voluntary body did have particular expectations of members. There was debate in South Africa on whether there should be regulation from within or from without. The point had been made earlier that a bank could not join the Association unless it was licensed by the Reserve Bank. However, most of the codes for the banks in South Africa were really driven by the regulatory authorities, such as Mr Coovadia had mentioned. So with regard to credit, the Credit Regulator would have views on how it should be done. So the banks were highly regulated, but not by the Banking Association.

Ms Dlamini-Dubazana asked about procurement from black companies. Was that 55% inclusive of all the banks? Or was this 55% particular to the Banking Association itself? 

Mr Coovadia replied that he was not sure if he had understood the question on procurement. He pointed out that the Association was a small institution.

A Member welcomed the presentation as a necessary exercise that would assist the Committee in carrying out its mandate especially around monetary policy. He asked for more information on the role of the Association in relation to the origination of loans. He asked secondly about the challenges that had been cited, and said that Members needed a comprehensive approach to challenges, one by one. Thirdly, he appreciated that this was the Committee’s first engagement with the Banking Association. Therefore Members needed more documentation about the origin and structure of the Banking Association, such as annual reports and strategic plans. Fourthly he applauded the initiative of encouraging the use of debit cards at filling stations.

Ms P Adams (ANC) asked what the success rate of the Association in teaching children to save was. Did the Association do this by itself or in collaboration with the Department of Basic Education?

Mr Khoza responded that the Department of Basic Education was involved in the campaign of teaching children to save. He gave the example of a recent programme in an Islamic school in Gauteng in which the provincial department had been involved. Thus the Department was a partner in this programme.

Ms Adams was from the Northern Cape and was aware that many First National Bank (FNB) bank branches had closed; many people had to travel 100 kilometres to go to a bank. She asked for the Association’s views.

Mr Coovadia replied that the issue of FNB’s closure of branches in the Free State and the Northern Cape had nothing to do with him as a representative of the industry. FNB might have particular reasons. Mr Coovadia did not have a mandate. There might be various issues. He did not get involved in the operations of banks.

Ms Adams asked about learnerships for matriculants and graduates as part of transformation.  Did these include children from rural areas? More analysis was required of how many there were. 

A Member noted that asked Mr Coovadia had said that the business of banks was the buying and selling of money. However, with reference to the third bullet in slide 16, he asked Mr Coovadia to please explain why, with regard to the money that the banks collected, even from the poor, the Association not consider the poor, and especially those who could not afford to apply even for housing loans. The Member affirmed because banks did not buy this money: it was merely being channelled to the banks and then sold out at a high rate of profit. He noted that Mr Coovadia had said that it was a business that concentrated on profit, and that in the final analysis banks collected money from everybody. However, when banks started to make their profits, the banks forgot the poorest of the poor, especially those who were not in middle classes. Why was that?

Mr Coovadia replied that banks operated like any other kind of business. So profitability was an issue for banks. Therefore the Association could not encourage members to adopt any practice that would cause them to loose money. A bank, moreover, had to be able to meet its obligations to its depositors at any time. No other business did that. If a bank could not repay a depositor, it would have recourse to its shareholders and ask them for more capital. If the shareholder could not provide more capital, the bank would have recourse to the Reserve Bank, which would then have to put in tax payers’ money. This is what happened in the United States and in Europe.

Mr Khoza said that the issue of international best practice was quite important. Debates around the G20 would inform South Africa, because the financial system by its very nature was global. One of the reasons for the Association’s concern that Charter should be gazetted was that outside the Charter, if one was to take a pure business line, a bank one would aim only to make money available to clients. However, it was significant that banks went beyond that and considered socio-economic issues like affordable housing and infrastructure in depressed areas, things that ordinarily in the course of business would not be considered but which should be  considered because of the particular problems that South Africa faced. Therefore, over and above the pure banking issues, the banks did consider socio-economic issues.


Mr Coovadia said that the Banking Association was a voluntary association. No law prescribed membership. The Association did not have power to compel the banks. These were the sort of limitations that the Association had. So it was therefore necessary to work together with member banks and with the Government to say that if banks did not carry out a certain policy, in the long term these were the consequences. There was perhaps the possibility to partner with non-government organisations to lend to certain categories of clients; however, some member banks might agree, others might not. The Committee needed to be sensitive to the kind of organisation that the Association was. The Association did not lend or accept people’s savings on deposit. The Association did its best to encourage members to work in such a way as to do good business.

Mr Coovadia said that the Association was accountable to its members. His approach was to enable his members to work effectively in the context in which they were working. Banks were not the only institutions that had a role to play. It would be irresponsible of banks to lend to the poor who could not pay back and the Reserve Bank would not allow them to do so. He acknowledged that the inability of the poor to afford private sector finance was a problem for everyone. Banks were not funded by taxpayers, banks paid tax and were funded by depositors. Banks must play a role in the alleviation of poverty, but not by lending to people who could not repay their loans. There was a situation of over indebtedness in South Africa.

The Chairperson thanked Mr Coovadia. He said that talking about banks inherently generated a debate: the important matter for Members was that all voluntary organisations had a constitution. Members would appreciate access to the Association’s constitution, perhaps via the Association’s website, to consider issues of governance.

Mr Coovadia thanked the Chairperson and said that he would send the documentation requested to Members to the Committee Secretary.

The Chairperson said that it could not be ignored that the Association was a powerful voice which spoke on behalf of a sector which was the second fastest growing sector, after mining, in the country. Its influence and impact on South Africa’s developmental progress could not be underestimated. The Committee would not have the luxury of engaging with financial institutions on a one-to-one basis, so depended on its interactions with the Association. The four big banks hosted a large part of the wealth of the country.

The Chairperson acknowledged that the Association was not a regulatory body such as the Financial Services Board (FSB) or the banking supervision division of the Reserve Bank. However, it was obvious that transformation through this Association should be high on the agenda. Transformation went beyond equity.

The Chairperson noted Mr Coovadia’s reference to the challenges regarding housing, and that these challenges were less to do with money than to do with insufficient capacity in local government. The Committee took that point very seriously. It was not something new; it had been noted from audit reports throughout the country. 

The Chairperson agreed with Mr Coovadia’s suggestion for partnerships to address the issue of lending to the poor. “You cannot punish the poor for being poor; it’s not their fault.”  If this issue was not addressed, the tax base of South Africa would never be broadened.

The Chairperson asked Ms N Sibhidla (ANC), the Whip of the Committee, if she had any comments.

Ms Sibhidla indicated that the Chairperson had covered her comments.

The Chairperson suggested that the Committee should pursue other issues after the meeting on 11 August 2010, since there was a confluence between what the Association had presented in this meeting and what the Committee expected to hear in the next meeting. It would be important to see, in terms of the lending patterns, where the lending to the private sector at a higher level was going. Was it going to the stock markets? Or was it in the productive sector of the economy? Lending to the stock markets was quick lending – in and out, and profit over 24 hours: it had nothing to do with job creation.

The meeting was adjourned.