The Select Committee on Finance held a virtual meeting with the Co-operative Banks Development Agency (CBDA) on their quarterly reports and the impact of COVID-19 and the recent civil unrest on their programme. Members were presented with information on the mandate of the CBDA, their five-year plan, their sector overview, and the highlights of the past year.
Members wanted more information on the Agency's mandate, and how it differed from a cooperative financial institution (CFI) and a mutual bank. How did it compare to a stokvel? The Chairperson pointed out that there was much scepticism about cooperative banks, even among the ruling party, and it was essential that they were very prudent and impeccable so as not to reinforce that scepticism. Cooperative banks could not afford to be separated from the broader cooperative sector that the government departments dealt with. The Committee also asked what the organisation was doing about the fruitless and wasteful expenditure identified in the Auditor- General's report.
The CBDA reported on the support it was receiving from Treasury, and said was in a state of flux, and that it was quite unfortunate that the current board had not been part of the discussions around the incorporation and movement of the CBDA from National Treasury into the Small Enterprise Development Agency in the Department of Small Business Development.
The Chairperson said that the Committee would write to the Director-General and the Minister expressing its displeasure that the CBDA had not been adequately consulted about the merger.
Co-operative Banks Development Agency quarterly report
Mr Luyanda Ntuane, Chairperson, Co-operative Banks Development Agency (CBDA), briefed the Committee on the mandate of the CBDA, and highlighted its vision and functions. Mr David de Jong, Acting Managing Director, CBDA, presented the vision, mission, the five-year plan and sector overview. Due to bad connectivity, Ms Nomadelo Sauli, Senior Manager, had to finish the presentation by looking at the impact of Covid-19 and community unrest on the Agency, financial cooperation with its programme, and its performance for the year.
(See attached document for details)
Mr D Ryder (DA, Gauteng) said he did not know anything about the CBDA. He was just learning about them, although he had been a banker for 20 years before politics. He asked for more information on their mandate, the difference between the CBDA, a cooperative financial institution (CFI) and a mutual bank. He asked if they had plans for expansion and if they would do more advertising, because 31 520 customers was small for a cooperative financial institution. He also asked if they could be involved in the virtual indaba as stakeholders.
Mr M Moletsane (EFF, Free State) asked about the National Stokvel Association of South Africa (NASASA), whether it had joined as a national body representing all the provinces, or as just a portion of provinces that had joined as members?
Mr De Jong clarified that a cooperative institution was a group of people that came together, mobilised their savings and they gave each other loans. Where they differed from a stokvel was that they formalised by registering as formal cooperatives and were required to meet a certain level of requirements in terms of the Cooperatives Act. Because they were deposit taking, they needed to register with a potential prudential authority. A CFI was a basic savings and loan entity, which could operate up to R50 million. It would also have to meet certain operational capacity requirements to register as a cooperative bank. Cooperative banks were bigger, and the CFIs were the start-ups that gave people entry into the sector.
Referring to the Mzansi account, he said the cooperatives were owned and controlled by the members and were therefore able to ensure that part of the mandate included financial inclusion, in that people could own and control their own banks as opposed to servicing commercial banks. The prudential requirements were far less strict for a CFI than for cooperative banks. Cooperative banks could operate at any level, but were limited on the products and services offered, such as foreign exchange. They were very conservative in their nature, and did not speculate with members' money and invest it on the stock exchange. It would go into secure funding and government bonds.
The difference between a cooperative and a mutual bank was that the cooperatives operated under a common bond -- either a group of people that worked together, or belonged to a certain association or a certain geographical area. For example, the National Education, Health and Allied Workers Union (NEHAWU) had their own CFI, and it was associational. On the other hand, a lot of rural CFIs were based on the geographical area in which they worked. For example, Webbers, the clothing manufacturer, had their own CFI which had reached the stage of being a cooperative bank, so all the employees at Webbers had created their own and registered it as a cooperative bank. Mutual banks required R10 million as a minimum capital requirement to start out. They did not have a common bond, but were still mutually owned and controlled by the members themselves.
31 000 members was not a big number, but the CBDA played a role in financial inclusion, in that the CFIs were run by ordinary people. Because they were run by ordinary people, the CBDA played a role of capacitating those directors to understand their roles and their responsibilities. It assisted managers and the staffing of the various CFIs to understand their roles and their responsibilities. Internationally they were known as credit unions, and in Kenya, Swaziland and in Malawi more people belonged to savings and credit cooperatives (SACCOs) than banks.
In South Africa there were a lot more challenges, because of the very sophisticated banking and financial sector. On the one hand, people were being serviced to some extent, but it was mostly transactional in that money went in and people did not get any additional value. The hope was that the CFI and the cooperate banking model would present an alternative.
NASASA was an association where some of its members had registered their own CFI, so those members had come together, established a constitution, registered with the prudential authority, and were in the process of establishing themselves. He said they were quite excited by that initiative, because they thought it would create some type of "buzz," and that they would see a lot more people involved and interested in CFIs.
The Chairperson said the Committee had invited the CBDA when the term began and they had the entities before them, but it had slipped out in preparing the programme. In the last term of Parliament, the CBDA had played a crucial role during the Covid 19 onslaught and the constant change of Ministers.
He called for a more explicit set of answers from the CBDA. The first question was that since the financial sector transformation sector report, what had happened and to what extent had National Treasury assisted them, and to what extent had they helped to shape the cooperative development bank strategy? Were there any specific things that Treasury could do within the existing constraints as a reasonable set of practical support measures? He asked if they had done enough on fruitless and wasteful expenditure, because they did not sound decisive enough and had to reduce the prospect of that happening again.
There was so much scepticism about cooperative banks, even within the ANC, and it was essential that they were very prudent and impeccable so as not to reinforce that scepticism. Cooperative banks could not afford to be separated from the broader cooperative sector which the government departments dealt with -- and the ANC was the ruling party. It could have been that the party did not know about them because it was not necessarily what it felt was important. He did not know what the DA’s position on cooperative banks was, and maybe they did not have a strong policy on it. He asked if DA members could explain. He expressed his regret at not having invited the CBDA when they had invited all the other entities.
Mr Ryder asked what the benefits of registering were, because it seemed like a glorified stokvel . A cooperative arrangement among a group of people could be a loose arrangement. How were they promoting themselves and promoting the fact that people could benefit from signing up? He struggled to see the relevance, and he wanted to see how much was put forward by Treasury each year.
Mr W Aucamp (DA, Northern Cape) said he had been answered partially on the irregular expenditure. He asked why the research showed there was a big difference in the penetration rate in SA compared to other African countries, such as Kenya, Togo and Rwanda. Kenya was standing at 13.3%, Togo at 26.7% and Rwanda at 13.8% respectively. South Africa’s penetration rate was 0.06%. That showed a big backlog with regard to marketing. He asked why there was such a huge increase in the irregular fruitless and wasteful expenditure over the previous years.
The Chairperson referred Members to page six of the report, and said that the CBDA had not explicitly responded to some of questions. The researcher had spent a lot of hours doing that report, and the views expressed were not those of the researcher. She had sought to be objective and technical, but those questions had been raised and needed to be taken seriously.
Mr Ntuane responded on the irregular expenditure, and said that one of key focuses was to implement consequence management across the organisation. They had done quite a lot in that regard, such as investigations to try to unpack the reasons and the context of each kind of audit finding over the past two years -- at least, since he joined the board. They did not investigate only for consequence management, but also to strengthen the controls within the environment, and there had been an improvement from an audit perspective. He apologised for not producing a written document on the responses to the research.
Regarding the support from Treasury, the CBDA was in a state of flux, and it was quite unfortunate that the current board had not been part of the discussions around the incorporation and movement of the CBDA from National Treasury into the Small Enterprise Development Agency (SEDA). They remained committed to ensuring that the mandate was still carried forward and would welcome any efforts that required assistance in facilitating and enabling an environment that would allow for better incorporation. Treasury perspective had austerity measures in place from a funding perspective, but from a support perspective it had assisted in a lot of governance and operational management functions, such as information technology, legal services etc. They had experienced some frustrations regarding processes and privatisation issues, but the engagement with the National Treasury was starting to improve, and they hoped to carry those engagements over to the Department of Small Businesses Development (DSBD) after the merger.
Since the last engagement with the Committee, they had managed to develop a national cooperative banking strategy with the help of the World Bank, leveraging a partner that was outsourced by the World Bank global practitioner and experts in cooperative banking. The strategy had been proposed to the cooperative banks, and had been a very big initiative, even though it was executed during the Covid period. None the less, they had been successful in engaging in an indaba with a wide range of participants from the industry through online tools.
Mr De Jong commented on what the benefit of registering was. Cooperative banks had to register with the prudential authority to legally take deposits. For example, Nehawu had almost 10 000 members, so while the assets might not be that large (about R30 million), they were more than a stokvel. Stokvels were generally smaller groups, and they would rotate funds amongst each other and would not operate as formal businesses. One of his concerns, being in the development agency field, was that they would in fact end up over-regulating because as a prudential authority, they were concerned about the safety of the members' funds. There was a story about one of the CFIs that had failed about four years previously, and they were taking the board members to court.
On the issue of the fruitless and the irregular expenditure, their latest audit for 2021 revealed there had been no additional fruitless and wasteful expenditure in that entire year. With the improved controls they had the situation under control, and the issue at that moment involved the other cases. They had had a resignation, and had also handed a case to the police, and were continuing with consequence management, which was a major emphasis. Upon arrival in the organisation, he had had to deal with 16 audit findings, but it was under control. They had developed the strategies in a very engaging way, tabled them in the indaba, and then created sub-committees. It was a very simple document and a simple strategy for growth in the sector, and the CBDA would play a support role for the sector to drive it forward.
The Chairperson asked if there was a date for the merger to occur?
Mr Ntuane responded that very little information had been shared with the CBDA, even in terms of the contribution to the Cabinet on their decision, and its ramifications.
The Chairperson said that the reason the report reached the CBDA so late had been because there had been a change to the programme, and they were not supposed have met with the CBDA on that day, so he understood why they could not give a more pointed reply. He expressed his displeasure with the Treasury for not consulting the Cooperative Banks Development Agency on the move to the DSBD. The majority of the Committee did not agree with the approaches taken. The finance sector transformation report suggested that it was an important area, even though the CBDA had committed a lot of mistakes which had nothing to do with their limited budget and research allocation. He also thought that National Treasury had not taken the CBDA seriously, and would raise it with the Minister or the DG.
Mr Ntuane reiterated that there were clear benefits to the merger. There was a very strong business case, and they supported the decision. It was just that they did not understanding the nuances behind the discussions regarding that decision. Otherwise, they were happy and willing to start those engagements to facilitate a more fluid transition.
The Chairperson said he understood, but the issue was about the consultation. He asked if the merger meant that Treasury would not have anything to do with the CBDA, or if it would be solely under the DSBD.
Mr De Jong said they could not comment on anything relating to the merger due to the lack of consultation. All they knew was that there was an announcement that they would be merging in seven months’ time. This had affected staff morale, mainly because they had not seen a business case, though there were some real benefits. They had a R20 million budget, half of which was used to do governance work as a schedule 3A entity. This used up the budget, so if they could use the full R20 million towards the development of the selector, and half of that for promotion, it would go far.
The reason for the big difference between SA and other countries, was that other countries had access to payroll deductions from source. The biggest CFIs and credit unions around the world were public sector-based, and could access the payroll deduction system. However, in South Africa they were denied access to that system, which meant that every one of the members still needed to belong to a bank to be able to do deductions and savings. It appeared almost counterintuitive to have a bank account deduction or have to pay cash every single month to a CFI. Nehawu had experienced the same thing, in that money would go into the bank's accounts and the money would get taken out of the bank accounts for savings purposes, but if there had been access to the payroll system like every other country in the world, it would have made a huge difference. They had never succeeded in being able to argue with Treasury that If they were serious about economic empowerment, that would be the first way of doing it.
On the issue of taxation, cooperatives generated a surplus, so the members essentially were being overcharged and would have to pay tax on the surplus. Internationally, most cooperative did not pay tax on certain surpluses. They would have to pay tax on any reserves that they set aside, but not on the general surpluses. Deposit insurance excluded cooperative financial institutions, so there was a situation where the smallest and most vulnerable institutions were the poor people who did not have access, not withstanding that they were regulated by the prudential authority, so cooperative banks were going to fall under deposit insurance, but CFIs were excluded. This was another incentive that had been taken away from the sector.
One of the biggest things that had held back the sector was the lack of digitisation or computerised systems, because they struggled to afford the technology required to provide the service. He asked if the Committee could assist in the areas they needed help.
The Chairperson asked if they had requested to be consulted on the merger. Regarding the cooperative banking sector being weaker, he highlighted that a very established banking sector was the reason why the M-PESA branchless mobile banking system and others had become e-wallets. Vodafone had tried something equivalent to M-PESA, which was banking through a cell phone which had not worked due to the established banking sector.
They also held the view that the VBS mutual bank collapse had been a setback for the mutual bank sector. The idea of the mutual bank was that they would acquire experience to grow and hopefully would become a small but fully fledged bank. That was the design for VBS at a later stage. Were there cooperative banking sector examples elsewhere in the world, where cooperative banks became fully fledged banks?
On the issue of assisting the CBDA, they could assist by coming up with proposals to Treasury together with Committee colleagues in the National Assembly (NA) only if they still had the oversight after the merger. He also asked if seven months meant seven months from the day the Cabinet decision was taken in August.
Mr Ntuane said there had never been an instance where they had engaged on a merger with a new department, or a movement of the CBDA. They had found out only with the rest of the public. It was unfortunate, but they wanted to deal with stabilisation issues within the organisation for the benefit of staff. Staff were people, and they needed to know their futures, and there was work to be executed by March 2022, which was the deadline. They remained ready as management to engage in teaching and facilitating a smooth and a beneficial transition to the new entity.
Regarding the different countries having different models, and through research from the World Bank and some input from the recent indaba, they had observed South Africa had a different but highly robust system. The USA was an example of a different model of cooperative banking, which manifested itself in the form of what were referred to as credit unions. In some of the European countries, cooperative banking was focused, and it had a very narrow mandate, such as whether it was for agriculture or otherwise. Due to the absence of a lot of barriers and controls in the banking sector, the growth of cooperative banking in African states was encouraged. South Africa had a multifaceted sort of approach to growing cooperative banking and cooperatives in general, but they did not have a firm grasp on consolidating all of those efforts and making sure they achieved them.
A lot DFIs, especially at the regional level, would have strategies that would speak to growing the cooperative market in their region or province at the time. There were a lot of activities around cooperatives, but there was a missing link in terms of meeting all of those efforts and optimising the use of the resources through constant communication of efforts across the board.
The Chairperson asked if there had been any discussions about the staff. The staff were going to have anxieties about what would happen to them. Were they going to retain the same staff?
Mr Ntuane responded that research spoke of the appointment of the managing director (MD), and for a long while they had operated under two models -- until March, they had had an acting chairperson on the board for one reason or another. Their biggest focus as a board was to recruit a leader for the organisation, and they were at the tail end of that recruitment process, and were close to uncovering the best possible candidate for the new position. Unfortunately, that decision culminated with a point where they would have to be ready to make an offer for a permanent MD. They would navigate the following months under some type of arrangement, such as a secondment from the prudential authority, but it had not been deliberated on.
Regarding the staff, there was a problem, but what had been done through an agreement with their shareholder was that the operational sort of human resources (HR) processes were already under way, and would continue. An example was the staff members who were on contract, and were on the verge of being converted into permanent employees. Management was, however, struggling to allay fears and give a bit more confidence, since they were no guarantees in mergers.
Mr De Jong said there were nuances from country to country. Netherlands had the Rabobank, where a lot of small cooperative financial institutions on the ground had come together and created the Rabobank bank. It had become a centralised bank which had cooperatives as their branches. These models in South Africa had been tabled before the members during discussion around the strategy. What was being proposed in South Africa was that the primary cooperative would come together to create a secondary cooperative, and the secondary cooperative would become a centralised cooperative which would provide liquidity services and other services to cooperatives. There was a strong movement to create a second cooperative bank, which the legislation allowed, hoping there would be much more coordination between the cooperatives, as one of the principles of cooperatives was that they would help and support each other.
On cooperatives becoming full-on banks, Kenya had a very successful credit and savings cooperative movement, and also had a cooperative bank which was largely capitalised by savings and credit. They had gone a step further, where 40% of the cooperative bank shares were listed on the stock exchange in Kenya. Each country took on a dynamic of its own, and the cooperative movement had developed. A lot of that was informed by the culture of the movement and some of the circumstances on the ground. SA had its own uniqueness, in that there was a very sophisticated banking sector, but many people were completely excluded from it.
He concluded that the CBDA did not have any other answers, otherwise they would have progressed much further, but they had been trying through the strategy sessions with the CFIs to find a common way forward.
The Chairperson told the Department's officials to draft a letter to the DG on the absence of consultation. The DG and the Minister would no doubt agree. There were issues that the Committee would not be able to follow up on, except to alert Treasury and the Minister of their concern. The Minister could not be held responsible, because he had not been around until two weeks earlier, and if it was the Minister, he would have been following up on a decision already made.
He wished the CBDA luck, and he stressed the importance of cooperative banking, especially with regard to Covid. He commended them on their strategy, and encouraged them to implement it.
The meeting was a
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