Draft Co-Operatives Bill [B6-2006]: briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE
05 September 2006
DRAFT CO-OPERATIVES BILL, 2006: BRIEFING

Chairperson: Mr N Nene (ANC)

Document handed out:
Key highlights of the draft Co-operative Banks Bill, 2006

SUMMARY
The Committee was briefed on the draft Co-operatives Bill, 2006. The briefing was based on the 2004 draft of the Bill. Treasury would try and submit the Bill to Cabinet during September so that it could be introduced in Parliament at the end of November 2006. The intention was that Parliament should start processing it early next year. The presentation focussed on the background of the co-operatives banks, self-regulation of the banks, advantages and disadvantages of self-regulation, proposals for the redrafting of the Bill and developing capacity in the banks. The intention of the Bill was to create a prudential regulatory framework for co-operatives banks. It would also protect members of the banks and depositors from irresponsible lending and fraud. It was important to remember that South Africa did not have an explicit insurance deposit scheme.

Members raised a number of questions that included the following:
- what Treasury had in mind to ensure there would be no collapse of a very important institution;
- Whether it was government policy that it would help the members of co-operative banks should they fail;
- Whether it was possible for a primary co-operative to graduate to a secondary co-operative, and whether a primary co-operative had to be registered before it could become a secondary co-operative.

MINUTES
The Chairperson said that this was an initial briefing on the Co-operatives Bill.

National Treasury presentation

Mr N Mashiya (Chief Director: Financial Sector Policy) and Ms J Ferreira (Director: Legislation) attended the meeting. Mr Mashiya made the presentation. (See document attached). In his introductory comments, he said that the presentation was based on the 2004 draft of the Bill. The Bill was published in 2004 and Treasury was only discussing it with the Committee today. The Bill originated out of the Financial Sector Summit agreements of the Public Finance and Monitoring Chamber of the National Economic Development and Labour Council (NEDLAC). Co-operative banks were one aspect of the agreements. The draft Bill that had been published had to comply with the elements of the agreements. It was important to note that Treasury had to conduct policy research to ensure that the Bill made sense in terms of the policy trajectory that it wanted to fulfil.

Mr Mashiya said that the draft had to comply with the major elements of the agreements and did not necessarily fulfil all of the Treasury's strategic intentions. The draft was sub-optimal. Treasury had received a large number of comments on the Bill and had also had prolonged discussions with the South African Reserve Bank (SARB). The SARB was expected to supervise the co-operative banks and this raised the issue of capacity at the Bank. There were also discussions with the Department of Trade and Industry (DTI). Treasury had released its draft Bill before DTI could release its own. The intention of the Bill was to create a prudential regulatory framework for co-operatives banks. Treasury could have used the option of registering co-operatives in terms of the old Co-operatives Act but the Act was being reviewed. The policy intentions contained in the draft Bill could not be aligned with old policies.

Mr Mashiya said that there was a draft Bill that could have been discussed today in this meeting. This could not happen because the draft had not reached the Minister in time.

Ms Ferreira said that Treasury would try and submit the Bill to Cabinet during September so that it could be introduced in Parliament at the end of November 2006. The intention was that Parliament should start processing it early next year.

Mr S Asiya (ANC) said that he had no problem with the briefing. He was slightly concerned that the briefing was taking place whilst the Bill was still before the Cabinet. It was like putting the cart before the horse and expecting the horse to pull it.

Mr Mashiya's formal presentation focussed on the background to co-operatives banks, self-regulation of the banks, advantages and disadvantages of self-regulation, proposals for the redrafting of the Bill and developing capacity within the banks. The purposes of the Bill included the following:
- protecting clients of the banks and depositors from irresponsible lending and fraud. It was important to remember that South Africa did not have an explicit insurance deposit scheme. Several commercial banks had collapsed in the absence of such a scheme and in the case of one bank the government had to use its money to pay out the depositors in that bank. In KwaZulu-Natal clients of the bank had to sue the managers and the board of directors of the bank. The board and managers of the bank had no legal protection because there was no corporate cover that was provided in the law. The bill would create such a corporate “veil”.

- Giving co-operatives banks the power to accept deposits and provide loans. At the moment co-operatives banks could accept deposits in relation to the Exemption Notice but there were limitations in terms of how they could use them. The intention was to remove restrictions and allow them to use the deposits in various ways.

- To establish a Supervisor in the SARB to register co-operatives banks and supervise their activities.

- To ensure that co-operatives banks contributed to the development of the local economies in accordance with the principles of the co-operative movement. The collections of the co-operative banks were required by law to be placed with a commercial bank. Commercial banks were charging the normal fees in dealing with the funds and co-operative banks did not charge any fee on their members. A co-operative bank could collect and deposit R50 000 from its members. Members had to take some money from the collections in order to go to the commercial banks. Commercial banks charged a fee for collecting, keeping and withdrawing the money. There were also additional management fees on the money. What was deposited as R50 000 would be less when the co-operative bank went to withdraw it. If this happened over time, the cumulative effect was that the deposit liability would grow and the assets would reduce. Anything that was left could be given to members as loans at little or no interest. This was one reason for the collapse of the co-operative banks. Co-operative banks that did not collapse easily were those that did not offer loans.

Mr Mashiya said that Treasury had undertaken study tours and had learnt a lot from Germany, Canada, the UK, Kenya, Uganda and Tanzania. He suggested that the Committee should at some stage undertake such tours to get first hand experience of how co-operative banks worked. These countries had sophisticated co-operative banks. The largest competitors of commercial banks in Canada were co-operative banks. Currently there was a debate in the US about the powers given to co-operative banks. Commercial banks were of the view that some of the powers created an unfair competitive advantage for co-operative banks.

The Chairperson agreed that the Committee should undertake study tours. He recommended that the Committee should visit KwaZulu-Natal on its local leg of the tours.

Discussion
Ms J Fubbs (ANC) said that the Committee had received very interesting information. There were a number of prudential requirements and restricted activities. Some of the requirements and restricted activities were being reviewed. It was unclear which requirements and activities Treasury was happy to change and how many it was reviewing. The co-operative banks would operate like commercial banks on issues like interest. They would be allowed to take deposits and make loans. She asked what Treasury had in mind to ensure there would be no collapse of a very important institution.

Mr Mashiya replied that the co-operative banks existed and one could not wish them away. The initial thinking was to create a regulatory framework that would avoid risk and to put as many restrictions in place to ensure that people did not lose their money. A lot of criticism had been raised on the restrictions. Treasury had moved away from the restrictions. Primary co-operatives would be free to do much of the banking activities but would be restricted from engaging in activities like the management of derivatives and trading in equities because these were high risk activities that required more skills. Tertiary co-operatives would be allowed to engage in such activities. The restrictions on primary activities took into account the skills that were likely to be found there.

He said that the decision was not to create a tick list indicating which activities co-operatives could engage in. The only tick that was in place provided that the business model of primary co-operatives was restricted to deposit taking and investments. There were no restrictions for tertiary co-operatives except that they could not become commercial banks. There was a move from a rule-based approach to a principle-based approach.

Mr Mashiya said that there had been basic mistakes in the past with co-operative banks providing services to members and not charging any fees. Co-operative banks were bound to collapse if they did not charge any fees, had no revenue streams and got further services from commercial banks. Commercial banks charged fees for services that they offered and co-operative banks were bound to collapse if they did not have any other form of revenue. There were two interventions in this regard. Firstly, co-operative banks would no longer be forced to go to commercial banks. They would be allowed to be part of the payment system. They would also not be restricted from taking their money to commercial banks should they decide to do so. Co-operatives could cut costs by not taking their money to commercial banks. There would be a need for training on how to use the money should it not be saved at a commercial bank. This was where the Development Agency for Co-operative Banks fitted in.

Secondly, there was a clear distinction between what a member could bring in as a deposit and what a member could bring in as capital. There was also a distinction in relation to what percentage of the capital would be regulated capital and what percentage could be used for operational purposes. This should from part of the constitution of the co-operative bank so that all members could know about it.

Mr I Davidson (DA) said that the presenter had outlined a scenario of problems and one could see what Treasury was trying to avoid. He suspected that most of the stokvels and burial societies were operating successfully. The question was what was the incentive for institutions such as those to get into the co-operatives system. Would there be a coercive element? When looking at the cost involved, the prudential requirements and the greater level of sophistication that would be required, most of the institutions would say that the co-operatives system was not for them because they were operating very well. The question would then be where did they fall in terms of the regulatory system. There would be a large number of institutions that the SARB would have to supervise. This raised the issue of the capacity of the Reserve Bank to monitor, take corrective action and supervise them. He imagined that there would be a ballooning Department in this regard.

Mr Mashiya replied that there would be problems if the system were not properly established. The problems that the Supervisor was more likely to be concerned with would be picked up by the secondary and tertiary co-operatives. One of the intentions of establishing secondary co-operatives was to ensure stability in primary co-operatives. The secondary co-operatives would mostly likely assist any primary co-operative that had shown the likelihood of not complying with certain requirements. The collapse of one or two primary co-operatives under a secondary co-operative would have the effect that the secondary co-operative itself would collapse. It was therefore in the interest of the secondary co-operative to ensure that its primary co-operatives did not fail. The SARB would be there to supervise the primary co-operatives but would only come in at the stage where the secondary co-operative had failed in its duties.

He said that it was important to indicate that stokvels were largely insurance type organisations and not deposit takers. Some stokvels were there as savings club, social occasions and burial schemes. There was no credit risk in them. Treasury was more concerned with institutions that took deposits that could be withdrawn on demand. Stokvels did not allow for withdrawal. Many of the target market could only smooth their consumption patterns by savings. Some people could get credit from banks but the target market did not have such a luxury. Some of the stokvels might want to get the benefits associated with being part of the system.

Mr Mashiya said that capacity was a serious problem. There was a comment that it might be preferable for the Supervisor to be in charge of co-operatives of a certain balance sheet size. There should be regulation by the Supervisor once the co-operatives had started to grow and there were potential systemic risks. Treasury was seriously considering this comment and was engaging the SARB on it.

In terms of covering all people who were on the radar screen, Ms Ferreira replied that one of the requirements for establishing co-operative banks was a membership of 200 or R2 million deposits. The primary purposes of the legislation were to protect the depositors and to enhance the institutions. There was currently no regulatory framework for these institutions. Treasury was considering having provisional registration but with different levels of regulation.

Mr B Mnguni (ANC) said that the co-operative system was one system through which most of the people had access to finance. He asked how many people had access to co-operative banks. Was it government policy that it would help them out should they fail? The government had to step in and pay people in the Eastern Cape and KwaZulu-Natal following the failures of such banks. It was said that tertiary co-operative banks were more of a lobby group. He asked the presenter to elaborate on this.

Mr Mashiya replied that secondary and tertiary co-operatives were not entitled to take deposits. Only the primary co-operatives were allowed to take deposits. Secondary co-operatives were only entitled to regulate primary co-operatives but not to take deposits from them. The Bill would allow them to take deposits and thereby provide additional services to primary co-operatives. The Supervisor would play the supervisory role. Government would have to help should the co-operative banks fail. The government was being asked to take responsibility for the deposits in the co-operative banks just as it took responsibility for the safety of deposits in the commercial banks. The payouts that government had done in the past were just a favour because it was not obliged to do so. Treasury was also considering creating a specific deposit insurance scheme for co-operatives banks.

Ms Ferreira added that primary co-operatives consisted of individuals and secondary co-operatives were composed of primary co-operatives. A tertiary co-operative was formed by a number of secondary co-operatives. It would take some time before this pyramid was properly established.

Mr S Dithebe (ANC) asked if there would be any positive change in status in cases where a primary co-operative wanted to graduate to secondary co-operative. Was it possible for a primary co-operative to graduate to a secondary co-operative? Did it have to be registered before it could become a secondary co-operative? The presenter had mentioned Uganda and Kenya as some places that Treasury had visited. He asked if Treasury had done any studies in the Indian State of Kerala where this movement was very strong albeit with very strong communist influence.

Mr Mashiya was not sure if it was correct to use the term "graduate". A number of primary co-operatives could establish a secondary co-operative and secondary co-operatives could establish a tertiary co-operative. He said that the micro-finance industry in India was slightly different. It was not only about co-operative banks but also about non-governmental organisation (NGO) micro finance institutions. India used NGO micro finance institutions that were not co-operative in nature. South Africa had similar institutions. They were donor organisations whose task was to help rural women with the lending. There was no deposit taking happening there. For instance, USAID had created a section 21 company that simply lent money to people. India indeed had co-operative banks that were running very well. There was one large bank that used co-operative banks as leverage points to distribute its own lending and savings. Treasury had not yet studied the operations of that bank but wanted to look at it and see how to integrate the model into the SA system.

Ms Ferreira replied that tertiary co-operatives that wanted to become commercial banks would have to be de-registered under the co-operatives framework before they could register under the Banks Act. It would not be a simple case of migration. The institution would have to make an application to become a commercial bank.

Mr Y Bhamjee (ANC) said that the requirement that the co-operative should have 200 members meant that members had to contribute R10 000 to make up the R2 million. One had to ask a serious question of affordability. The presentation had reflected on people in rural areas who had lost huge sums of money through the co-operatives banks. Everybody knew very well that major commercial institution were losing millions of Rands and had appointed dedicated individuals to check fraud and hackers. He had an ideological problem with the way in which the presentation was made. It did not contextualise the issue within the broader banking systems. Commercial banks had similar problems with co-operatives banks. If the intention was to ensure that the systems were in place, the first question should be why the systems were not in place in the first instance.

He said that Treasury and SARB should indicate if, when making exceptions to the rule, they had not seen that there would be problems down the line. Commercial banks and hackers would always move in whenever they see a gap. There was no system in place to give the co-operatives banks the necessary professionalism and the skills to enable them to operate effectively. There were international experiences all over the world. Credit unions were an institution in some countries and had volumes of experiences.

Mr Mashiya replied that some people had argued that the amount was too high and Treasury had recognised this. The purpose of the legislation was not primarily about development. Development was a secondary aim and the primary aim was to ensure stability and to protect the funds of depositors. There was a need for minimum capital requirements but the requirements should not be too high in such a way that people would not be able to comply with them. There had been a suggestion that there should be no generic minimum capital requirement and that the Supervisor should have some discretion to decide what the minimum capital requirements should be. Mr Mashiya did not like this view because it gave too much power to the Supervisor. There might be very few co-operative banks coming on board depending on who was the Supervisor. The Supervisor could become too strict for anyone to come on board. There was a need for some minimum requirements and perhaps there was a need to further investigate what the minimum requirements should be.

He said that the Exemption Notice had created the feeling that government had created the institutions. The feeling was that government would come and assist should something go wrong in the institutions. This was a serious philosophical mistake that should be changed. The principle of co-operatives was that of self-help and government only came in to help people who wanted to help themselves. Everybody would want to start up something unless there were minimum capital requirements. People would have a feeling that there would be government funding to help in one or other area. He took the point that perhaps Treasury was embarking on the process a bit too late because a lot of wrong things had already happened. He agreed that a lot of things that happened in co-operative banks also happened in commercial banks. The difference was the size. The problems tended to be more visible and systematic in village banks than in large commercial banks that could absorb the losses. There were still legal processes going on in relation to one of the commercial banks that had collapsed.

Mr L Johnson (ANC) said that this was one intervention that sought to put a dent in poverty and contribute towards the second economy. It was very much a political initiative that sought to drive the process bearing in mind the transformation agenda of the country. There were charges when depositing or withdrawing money from commercial banks.

Mr Mashiya said that Ms Ferreira had redrafted the Exemption Notice so that co-operative banks would not be compelled to use commercial banks. It was true that bank charges had created a large hole in the stability of co-operative banks. The Apex Fund would set up offices all over the country and Treasury would use the offices as leverage points in order to get access to all co-operative banks.

He said that Treasury had conducted research that indicated that half of the SA population did not have access to financial services. This translated roughly to 17 million people. The figure was now about 14 million as a result of the Mzantsi account. The Mzantsi account had given about 3, 3 million people accounts since 2002. One could not conclusively say that the 3, 3 million accounts were reducing the 17 million figure because banks did not ask if people who were opening the Mzantsi accounts had other existing bank accounts. The charges were low and people could open a number of Mzantsi accounts in different banks. The Mzantsi account had been successful but there was a need to clean up the data so that one could know how many people from the 17 million figure had benefited from the account. The account also did not fix the issue of money transfers into rural areas. There was another account called the Mzantsi money transfer account that had been criticised for the high charges. It cost a person an average of R17 for every R100 transferred to another person.

Mr T Vezi (IFP) said that the idea of regulating the co-operative banks could only come from people who had not being stung by the necessary but dangerous “insect” called BEE (Black Economic Empowerment). People who had been stung by the insect could not see the poor on the ground. He asked for the status of the (Financial Solutions for Co-operating People) FINASOL. What were its functions? Did it ever have any relationship with the South African Sugar Association?

Mr Mashiya replied that FINASOL had collapsed and did not exist anymore. It had a relationship with the Sugar Association and some members of the Association had lost money following the collapse of the institution. The institutions created in FINASOL were centralised. They bought computers for the co-operative banks and put software in them but the managers in the co-operatives could not manage them. All that they did was to feed in information. The data was sent to the central office in Johannesburg. It was the person in Johannesburg who decided whether applicants should get loans. The system was frozen when the funding to FINASOL dried up. They could not afford to pay for the computer server and all the data on the co-operatives was lost following the “freezing” of the server. This meant that managers did not know to whom the money in the bank belonged and they also did not know who took money from them. It was important to train people in the systems that had been put in place. The systems used in commercial banks could not be replicated in co-operative banks.

Dr M van Wyk (DA) said that it had been said that almost 42 of the 62 institutions had collapsed because of lack of control in the past. There was a call on the Minister to intervene and he came down on the taxpayers. The legislation would introduce more controls. The intention was to make the regulation more lenient and flexible. The collapse of one tier of the co-operative banks system could lead to the collapse of the other tiers. What would this mean? Would the damage be for the account of the taxpayer again? It had been said that co-operatives in Europe had moved to the standards of commercial banks. SA had commercial banks with all the necessary infrastructure. He asked if it was not possible to assist commercial banks to render the services of co-operatives banks. Could commercial banks not render services to both the rich and the poor and urban and rural areas?

Mr Mashiya replied that one of the conditions attached to the payouts from the government was that the co-operative bank that had collapsed should close. Most of the people were opposed to the closure of their banks. He said that he had gone to one province to tell people about the Bill. Unfortunately, one of the leaders of a co-operative bank had gathered people in a big hall to tell them that somebody from the Reserve Bank was coming to give them their money (i.e. the money that the co-operative bank could not give back to the depositors). People had indicated that they did not want the Bill and wanted their money. They had thought that the box in which he was carrying documents for the presentation was carrying their money. He was kept in that hall from about 10:00 to about 16:00. He was only released after the police were called to come and help.

He said that SA had no deposit insurance scheme. The only money that had been used to help commercial banks out was taxpayers' money. This would continue until there was an explicit deposit insurance scheme in place. The Minister of Finance had some discretion and would have to consider if it was necessary to use the taxpayers' money.

Ms L Mabe (ANC) said that most of the people who used co-operatives banks were women. Theoretically, males controlled such banks given the patriarchal nature of our society. She assumed that most of the co-operative banks had collapsed due to the conduct of some men who were at the top. Such men were insensitive to what the women were trying to achieve when setting the banks up. There was nothing that the women could do about the men in charge of the banks given their powers. This could be one of the reasons why the government had ended up coming to their assistance. She asked what was the extent to which women had suffered. She also asked what the government would do to ensure that the majority of people who were in these institutions would be women because they were the majority who would be served by the institutions.

Mr Mashiya replied that it was true that women were better payers than men. He gave an example of a micro finance organisation that provided loans to women. Its income statements and balance sheet were better than those of commercial banks. Whereas the normal commercial banks had a bad debt book of about 10 to 15% of the entire book, that organisation had always maintained a bad debt book of less than 2%. The reason for this was that the loan was not given to an individual member but a group of five women at a time. The loan was serviced weekly. The loan had to be repaid before it could be given to the next person. There was peer pressure for the first person to repay it so that the next person could get it. The credit risk management was left to the women to do.

He said that the women themselves decided the leadership of the banks. In the past the informal criteria was that an elderly man who was either a teacher or a pastor would be elected to the leadership position even though they had no banking skills.

The meeting was adjourned.