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FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
22 August 2007
CO-OPERATIVE BANKS BILL: BRIEFING BY NATIONAL TREASURY
Chairperson: Mr N Nene (ANC)
Documents handed out:
Co-operative Banks Bill Presentation by National Treasury
Audio recording of meeting
National Treasury briefed the Committee on the Co-operative Banks Bill. It formed part of the regulatory framework and was intended to create an appropriate regulatory framework for deposit- taking second and third tier banks, Financial Services Cooperatvies, Credit Unions, village banks and community banks. It would further enhance access to banking services. The Bill would apply to any co-operative that took deposits, was registered with the Co-Operative Act and under this Bill, had 200 or more members and held deposits of members to the value of R1 million and more. Cooperative Banks were defined and the banks were set out. Registration would depend upon ability to demonstrate sufficient human, financial and operational capacity to function competently. All banks would have to have an audit committee and supervisory committee. The presenters summarized the powers and functions of the different types of banks, and the requirements to be adhered to. It was noted that reports must be made to the supervisor, who could de-register or suspend registration of a co-op bank. Co-op banks were restricted from amalgamating, unless with another co-op. An Agency would be set up to accredit banks. The Reserve Bank and the Agency would administer the legislation.
Members asked questions on the responsibilities of the Minister, the Department of Trade and Industry and the Reserve Bank, on whether this Bill would not be putting pressure on consumers, the number of co-op banks, Treasury’s comments about the submissions made on the Bill, and regulation of loans through the common bond. Further questions addressed the remuneration of supervisors, the relationships between Supervisors and Agency, the likelihood of banks meeting the primary requirements, and issues of competition. Members also asked about the payroll, the investment of some banks in forex, alleged tensions between the Reserve Bank and Treasury, the risks posed, the relationship with the Financial Intelligence Centre Act and Credit Act, judicial management, the steps to put in place support, and safeguards against regulatory arbitrage.
Co-Operative Banks Bill: National Treasury (NT) Briefing
Mr Nkosana Mashiya, Chief Director. Banking Development and Financial Access, Department of National Treasury, briefed the Committee on the Co-operative Banks Bill. He said that the Bill formed part of the financial regulatory framework and created second and third-tier classes of banks. The purpose of the Bill was is to create an appropriate regulatory framework for deposit- taking Financial Services Cooperative institutions, Credit Unions, village banks and community banks. It aimed to promote the development of sustainable and responsible co-operative banks and to promote and advance the social and economic welfare of all South Africans by enhancing access to banking services.
The Bill was intended to apply to any co-operative that took deposits, was registered with the Co-Operative Act (or this Bill, once enacted), had 200 or more members and held deposits of members to the value of R1m and more. There was a definition in Clause 1 of “Co-operative Bank” and the different types of banks were set out in clause 5: namely Primary Savings, Primary Savings and Loans, Secondary co-operative and Tertiary banks. A co-operative bank (co-op bank) would not qualify for registration unless it demonstrated that it has sufficient human, financial and operational capacity to function competently as a co-op bank. The constitution of a co-op bank must provide for the appointment of an audit committee and the establishment of a supervisory committee.
Primary Savings co-op banks could provide services that included the soliciting and accepting of deposits and opening savings accounts for its members. They could also invest money in investments as may be prescribed by the Minister. These were the basic services for all the tiers. The Primary Savings and Loans co-operative banks could in addition grant secured and unsecured loans to members. At the Secondary and Tertiary banks level, there was an introduction of trading in financial instruments and the opening of accounts with a commercial bank to facilitate foreign currency transactions.
There were prudential requirements that the banks must adhere to, which included capital requirements, asset quality, liquidity requirements and surplus reserves that had to be maintained. A bank’s inability to meet or to maintain the prudential requirements should be reported to the supervisor, who could de-register or suspend the registration of a co-op bank. There were certain transactions that a co-op bank could not enter into, which included not converting into any other form of corporate or unincorporated body. It could only amalgamate with another co-op bank and transfer assets, rights, liabilities and obligation to another co-op bank.
Clause 36 provided for the setting up of a Cooperative Banks Development Agency, which was intended to be a support organisation for the co-op banks. The banks would have to apply for accreditation with the Agency. The South African Reserve Bank (SARB) and the Agency would be the supervisors who would be responsible for administration of the legislation. Supervisors must annually submit a report to the Minister. The Agency must notify the SARB when a primary co-op bank started holding deposits of more than R20m.
Mr K Moloto (ANC) asked if there was any thinking around the delegation of responsibilities by National Treasury. He wanted to know who would be taking responsibility in the amalgamation of the banks. He also asked why the banks had to seek the permission of the Minister of Trade and Industry when seeking to wind-up.
Mr S Asiya (ANC) asked whether the Department of Trade and Industry (dti) was involved in the terms of the discussions and deliberations on the Bill.
Mr N Mashiya said in regard to the winding up and consultation that dti had been involved with discussions and deliberations on the Bill and that the provisions included in the Bill were aimed at making the winding up process quicker, because liquidity was not a problem. This arrangement enhanced the legislation.
Mr Asiya indicated that the Governor of the Reserve Bank had been increasing interest rates in response to a statement that people were consuming too much. He then asked whether this Bill would not be putting pressure on consumers, and thus contradicting what the governor was trying to achieve.
Mr Mashiya said that the governor looked at the dynamics of the economy and used interest rates to respond to changes. When the governor increased the repo rate, commercial banks increased their own prime rate. Co-operative banks would determine their own lending policy, which might not necessarily be linked to the prime rate. The way in which cooperatives worked meant that they would familiarise themselves with people, would know who they were and where they stayed, and who were their families. The entire credit policy would be built around this knowledge. The credit policy here was linked to the fact that Treasury knew who the clients were. If a comparative study were to be conducted between the rates of the co-operative banks and those of commercial banks, it would probably be found that the rates of co-operatives were much lower because of the economies of scale
Mr D Gibson (DA) asked for clarity on the number of co-operative banks that existed in South Africa presently and the number that Treasury anticipated would register in the current year. He then went on to ask whether the Department had had an opportunity to look at the submissions that had been made and, if so, what their views were on these matters.
Ms Olaotse Matshane, Director, Banking Development, National Treasury, responded that in 2005 when Deloitte was appointed to do the payout process there were 62 FSCs registered with the Co-operatives Registrar. Thirteen of them had agreed to close, and pay out was done. Twenty-two were still willing to continue and payout was not done. Twenty-seven of them were not contacted because the details in the register might not have been correct. A process would commence in researching those that would close and what support was required for those who would continue.
Mr M Mbili (ANC) asked how the loans were going to be regulated and whether National Treasury was going to assist with the regulating.
Mr Mashiya replied that the lending policies of the trade unions were based on the Common Bond. The difference with primary co-operatives was that the banks were trading with insiders and would not be trading in derivatives. Basically these banks were putting money together to protect themselves against external risk. National Treasury would assist in regulating the loans made out through the Prudential regulation. He added that this was quite a difficult model for commercial banks.
Mr Mbili asked, in regard to remuneration of supervisors, how this was going to be handled because SARB had said they had no budget. He asked whether National Treasury would be taking care of it. Lastly he asked how the relationship between the supervisors and the Agency was going to work, and whether they would work together or work independently of each other.
Mr Mashiya said on this point that the Department and SARB had been engaged in discussions on the matter. The SARB had indicated that it was in the process of establishing a system. SARB had appointed a team expert in Financial Stability to engage with the department on the National Payment System issue. The National Payments department was willing to allow for consequential amendments. National Treasury would fund supervisors in the Agency, and SARB would fund supervisors in the SARB.
Mr S Marais (DA) said that the primary banks were voluntary schemes and asked how many of them would meet the primary requirements set out, whether others would close down or only a few would be registered.
Mr Mashiya responded that not all voluntary schemes would be willing and able to register. Those who wanted to continue as stokvels, for example, would be allowed to do so. A family club need not register if it did not want to. The requirement to register on reaching 200 or more was intended to cater for a more systematic approach.
Adv Jo-Ann Ferreira, Chief Director, Legislation, National Treasury, added that the purpose of the Bill was to align it to the Co-operatives Act. Only a co-operative could become a co-operative bank. In respect of the Minister’s role she stated that the Co-operative Act also allowed the Minister of Trade and Industry to exercise regulatory and oversight responsibilities. If the Minister wanted to act he should act in conjunction with the Supervisor so that there was consultation and agreement. The role of the Minister was strengthened by the terms of the Bill. She then went on to say that competition issues did not arise within co-operative banks because of the common bond issue. Co-operatives did not compete against each other because they were community banks and not commercial banks.
Mr K Moloto (ANC) asked for more clarity on the issue of competition. He said that if there were, for example, five co-operatives in Worcester and they all decided to amalgamate, there would be no competition. He asked who would make the call in that situation, the supervisor or the Competitions Board.
Adv Ferreira responded that where there was amalgamation, it had to be done by under the supervision of the supervisor of the bank.
Mr Mashiya added that even if there were different tiers of co-operative banks, competition between them would not happen. Unlike commercial banks, co-operative banks made money by trading with members. These banks were trying to achieve economies of scale, and the model was entirely different to the competitive environment. National Treasury set up co-operative banks in order for them to support each other.
Ms J Fubbs (ANC) asked about the payroll.
Mr Mashiya said that National Treasury had had discussions with the Life Offices' Association and the Banking Association and that if they did allow certain payroll discussions, it would be difficult to say where these were going to stop. He said that if they allowed administrative discussions then some other LOA would doubtless come and request that deductions should be allowed for pensions. He said that they wanted a prudential manner in which collections could be made and avoid corruption that occurred in the past.
Ms Fubbs said that the Department indicated that forex would be applied to funds invested by certain co-op banks only. She however believed that certain banks that were savings banks only would also want to invest in forex, and then asked how the Bill would be applied. She said that some instruments would apply to the currency only. This could result on pressure on co-operative banks, and National Treasury had not mentioned how they would deal this.
Mr Mashiya added that the reason that banks were being permitted to do remittances and open foreign accounts was that they envisioned that migrant workers would also want take part in this. In terms of the investment profiles, these would be different for the different levels in the co-operative banks. He said that Primary Savings Co ops would be allowed to invest in government bonds because it was safer. Tertiary Co-operatives wanted to manage risk and make returns. He suggested that maybe there should be prescription of how much investment could go into the various types of investments. He said that tertiary co-operative banks could not be expected to invest in bonds only because the intention was that they should be able to maintain and increase their liquidity, as this tier of banks was almost fully fledged banks.
Dr G Woods (NACEDO) mentioned that Treasury had consulted with a couple of departments in the reserve banks but the word “consulted” could mean anything. He asked for clarity on this. He then asked for clarity on what the Bill had mentioned about supervisors being approved by the minister. He asked whether SARB world not be more enlightened on certain issues.
Mr Mashiya responded that there was a common practice that even if a Commissioner of Banks was appointed, the Minister would be notified. In regard to the alleged tension between SARB and National Treasury, he noted that SARB would determine the interest rate, although administrative functions were not really their area of specialty. SARB was the lender of last resort and normally had money to be able to help. He said that the Minister of Finance approved certain transactions in the Banks Act.
In relation to consultation, Mr Mashiya noted that the draft of the Bill was released in 2004 and this was the result of consultations with the Financial Stability Department.
Adv Ferreira added that the separation of duties was very closely aligned to what was stipulated in the Banks Act. The Minister still approved the registrar although the person was in fact appointed by the governor of SARB.
Mr B Mnguni (ANC) asked about the risk that co-operative banks posed to financial stability when they were examined from a capitalist view on a macro-economic basis.
Mr Mashiya said that he doubted that this would happen. He said that the only way that this systematic risk could be caused was if the legislation was allowing the banks into the payment system department. Mr Mashiya doubted that a payment failure of R40 million would collapse the whole system.
Mr M Johnson (ANC) said that the Committee was now used to receiving instructions from National Treasury on what they should do. He said that the impression given by Treasury was that South Africa was the only one that should follow the co-operative banks route. He suggested that National Treasury should rather concern itself with advising the Committee whether it agreed or disagreed with legislation, rather than telling the Committee what to do.
Mr Mashiya noted that when National Treasury referred to a policy decision having been taken, this meant that Treasury had received comments that required them to take a certain decision, and that this was only done after consultation. He apologized if the impression had been conveyed that the Treasury was giving instructions to the Committee, as this was not the case.
Mr Johnson sought more clarity of where the Financial Intelligence Centre Act (FICA) fitted in the model. He also asked about applicability of the National Credit Act in relation to the Bill.
Adv Ferreira noted that co-operatives banks also needed to align with the requirements of this Act. The Department had engaged the Financial Intelligence Centre to amend the schedule. The FICA allowed the Minister to amend the schedule through regulation. It would be easier for the banks to comply because in a Common Bond the banks knew their consumers. The co-operatives would also be subject to the Credit Act.
Mr K Moloto (ANC) asked for an explanation of what was meant by the “last exposures” of Co-operative Banks.
Adv Ferreira explained that the co-operatives banks did not expose all their risk to one single person only. The last exposure was basically a notion of not extending credit of more than 10% to one single person only or even having one person hold a vast amount of the asset base.
Mr Moloto also asked for an explanation of the role of judicial management.
Adv Ferreira said that this was a remedy available to all companies and corporate forms, which allowed the company or juristic person to apply to be placed under judicial management. The registrar of cooperatives or supervisor could apply. This was essentially an interim intervention strategy. The management of that company would be taken over by a person appointed by the Court, who would assist in solving problems that the corporate was experiencing, including mismanagement. It was not necessarily a precursor to liquidation.
Mr Mashiya, noted in respect of tax issues, that tax proposals would be made in the tax legislation and not in this legislation. He said that Treasury had put forward a proposal to the tax division.
Mr Thabo Legwaila, Director, Business Tax, Legal Tax Division, NT, added that most people referred to tax incentives, which did not hinder co-operative banks. He said that this flushed out a lot of things including exemptions and inclusions and that the Committee would be informed in due course of what had happened.
Mr K Moloto (ANC) said that the sequence of events set out in clause 47(1)(a) was not clear. He said that he was of the understanding that once a co-operative was under judicial management, this would assume that certain matters were not well, and he could not understand how the supervisor would fit into the picture once a judicial manager was appointed.
Adv Ferreira responded that the introduction to Clause 47 set out who was able to initiate an inspection. Supervisors would be consulted in the case where, after the take over by judicial managers, it was discovered that there was an irregularity. Prior to this, the supervisors would know from where to seek the relevant expertise.
Mr S Dithebe (ANC) then asked the Department what steps they envisaged to put in place in support for the implementation of the Bill. This question related to integration, since it was not desirable to have a situation where one part of government was working well but obstacles in other parts prevented growth at the proper pace.
Mr Mashiya responded that although the Bill was going to have a phase-in approach, there were Secondary co-operatives that were ready to comply. The development Agency would be working through them to reach to the Primary Co-operative banks, and this would form the subject of a signed agreement with National Treasury and the assisting banks.
Dr Woods said that behind every failure there was a human element. Treasury had said that supervisors would make the decisions and make sure that there was sufficient funding to function efficiently. He asked what the guideline would be, especially for those banks below R20 million, and whether the supervisors would make the decision.
Mr Mashiya said that guidelines would be provided so as to not leave all decision-making up to the supervisors.
Ms Fubbs noted that co-operative banks could be formed by any group of people just as long as they had a common bond. She was concerned that, for instance, a church congregation could see the money being tithed on the collection plate as some kind of co-operative bank. Although this could be positive in some deep rural areas, she was worried that this kind of situation could distort the intention of the Bill. She was not suggesting that churches should not take part, but wanted to point out the pitfalls.
Mr Mashiya said that it would be cheaper and easier for the church to collect their savings and put it in the commercial bank, because the co-operative licenses came with huge responsibilities.
The Chairperson asked what safeguards the Department had in place against regulatory arbitrage.
Mr Mashiya responded that was a difficult question to answer because the risk was present, and would remain there so long as there were two tiers of supervisors. The registrar at the Agency would be looking at what was going on at every bank.
The Chairperson thanked those making the briefing, and advised that there would still be further deliberations and discussions about the Bill.
The meeting was adjourned
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