Cooperative Banks Bill [B13-2007]: public hearings

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Finance Standing Committee

27 August 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
28 August 2007
PUBLIC HEARING ON CO-OPERATIVE BANK BILL

Chairperson Mr N.E. Nene

Documents handed out:

South African Chamber of Business (SACOB) submission
Banking Association submission

Competition Commission submission
Competition Commission presentation

COSATU and NEHAWU submission

Savings and Credit Co-operative League of South Africa submission

Savings and Credit Co-operative League of South Africa presentation


Audio recording of meeting

SUMMARY

The Committee heard public submissions on the Cooperative Banks Bill. It was clear that most submissions supported the basis and principle of the Act and the Chairperson noted that the submissions would be very useful.

The Competition Commission noted that it had limited jurisdiction over banks, hoped that the Bill would increase competition in the banking industry, and raised queries in relation to clauses 8(2), the amendments to the National Payment Systems Act, and clause 14. It called for a good working relationships with the Supervisor and queried whether cooperative banks could enter joint ventures. Members sought clarify on whether clause 8(2) was regarded as contradictory to clause 8(1), the role of the Commission in bank mergers, issues of conditionality, and exclusion of rural population skills through clause 7. It was noted that currently hearings on bank charges were under way.

The Banking Association of South Africa had already made submissions to National Treasury on proposed amendments. The Bill supported the ideals of the Financial Sector Charter, but was concerned that the cooperative banks should also be compliance with the Financial Intelligence Centre Act (FICA) regulations, which was not currently covered in the Bill. Questions by Members were directed to membership of the banking association and the importance of compliance with .

Congress of South African Trade Unions welcomed the Bill as an improvement to the history of banking, where may working class people had been denied access to banking or control over banking institutions. Specific concerns were raised on use of the word "appointment" to the Board, in clause 32, the suggestion was made that there should be access to payrolls, the role of the Development Agency needed to be clarified, and its role broadened to empowering secondary cooperatives. Clarity was sought on conversions of financial entities, and it was suggested that because cooperative banks had a developmental role they should receive tax benefits. Members raised queries on representation at the Boards, and queried also the tax proposals, mentioning that this might hamper the tax base of Treasury, and run counter to the principles of profit maximization.

The Savings and Credit Co-operative League expressed full support for the Bill but indicated some critical areas that should be tightened up, including the role of the Agency, the formation of representative organizations, the composition of the Board, proposed amendments to Clause 55, and taxation dispensations. Members queried whether cooperative banks had suffered liquidity problems, what would be done to assist them, the difference between share certificates and registration and the tax exemption proposals.

The Business Parliamentary Office welcomed the introduction of the Bill, urged that good governance and accountability be encompassed in the regulations, that investment criteria should also be set out in the regulations and that any regulations must enhance access to finance, personal savings and investment, black economic empowerment and enterprise development. It favoured a steady build up in growth, which would avoid unforeseen or harmful consequences. It suggested the establishment of international links. Members raised queries on the FICA regulation, whether the rapid expansion of cooperative banks could threaten the established sector, and protection of funds.

MINUTES
Competition Commission: Submission
Mr Keith Weeks, Economic Analyst, Competition Commission tabled the Commission's comments on the Cooperative Banks Bill (the Bill). It noted that the Commission had limited jurisdiction over banks. In brief, the Commission hoped that the Bill would increase competition in the banking industry. It raised a query under clause 8(2, relating to supervision. Other queries related to proposed amendments under the NPS Act, offering of transaction services, and conducting of additional services under clause 14. The Commission also called a good working relationship with the Supervisors. It also suggested that a consequential amendments to the Competition Act would align the position for banks and coop banks in respect of mergers. The Commission asked if coops could enter joint ventures. For full details, see attached presentation.

Discussion
Mr D Gibson (DA) sought clarification on whether clause 8 (2) was contradicting or complementing clause 8 (1), or whether there was an assumption that 8(1) qualified 8(2). He also sought the view of the Commission on whether is was not intentional in clause 14(1) b) to limit the powers rather keep clause 14(1) (g), which grants the Minister of Finance powers.

Mr Weeks answered that there were conditions attached to the license which creates serious implication for the co-operative (coop) banks' participation in the market. Clause 8 (1) and clause 8 (2) should be clarified so that co-operative banks were certain and could avoid legal battles. The two sections were ambiguous. In terms of the limitations of powers, there may be a good reasons for the limitations but there was a justifiable case for competition.

Mr K Moloto (ANC) was emphatic about the issue of conditionality attached to co-operative banks, and the concerns that primary co-operatives might not have the capacity to manage banks, and said that this concern might be the rationale for limiting their powers. He also sought clarification on the role of the Competition Commission in the bank mergers.

Mr Weeks, indicated that the issue of conditionality that was imposed for primary co-operatives banks limited the competition that the Cooperative Banks Bill sought to cover. That was the reason the Competition Commission had expressed concerns on the limitations. In addition, the Competition Commission did not have total jurisdiction over bank mergers due to their complex nature and the fact that they affected the monetary policy directly. The Minister of Finance had the power to veto the bank merger.

Mr M Johnson (ANC), sought clarification on whether clause 7 was not excluding rural populations in terms of the expertise required for people to manage a bank. .

Mr Weeks indicated that there was certain expertise required for entering the banking or financial sector or market, and the Bill was clear on the development path that should be followed for those who had minimum skills. The Bill proposed establishment of an Agency to increase skills in the Co-operative Bank sector.

Mr J Bici (UDM) requested statistical information on Bank charges and the opinion of the Competition Commission on the conditions attached to the primary co-operative banks.

Mr Weeks indicated that he was unable to comment on the statistical information on the bank charges as the Competition Commission was currently conducting hearings on these charges and their ability to stifle competition. Once the hearing with the banking sector had been finalized, the results would be made public and the Committee would be afforded an opportunity to comment on the outcome.

In relation to the conditions attached to the primary co-operative banks Mr Weeks indicated that the increase in the number of banks would benefit the consumers, increase competition, grow the economy and reduce the concentration in four banks.

Banking Association of South Africa submission
Mr Cas Coovadia, Managing Director, Banking Association of South Africa indicated that the Banking Association of South Africa (BASA) supported the Bill and the objective it sought to achieve. He noted that the BASA had made several submissions to National Treasury, responding to various drafts of the Bill. In broad principle BASA believed this Bill was supporting the commitments of the Financial Sector Charter to lower the barriers to entry and facilitate competition. It believed that co-operative banks could play an important role in delivering financial services to particular sectors. BASA had already commented that potential coop banks would have to be compliant, in an internationally-accepted form, with Financial Intelligence Centre Act (FICA) regulations targeting money laundering and the financing of terrorism. This aspect was not dealt with in the Bill, although it was apparently the intention that coop banks would be FICA compliant, and that this would be addressed through regulations or any necessary statutory amendment. The Association believed it was critical for this matter to be addressed, because FICA compliance would be an important factor in promoting partnerships between co-operative banks and banks registered under the Banks Act. It believed that successful co-operative banks would also add value to some sectors of the market that had access to some degree of services at the moment.

Discussion
Mr S Marais (DA) enquired whether the coop banks could be members of the Banking Association of South Africa and sought clarification on the nature of partnership that the Banking Association sought to establish with co-operative banks. He further sought the views of Association on the importance of FICA compliance.

Mr Coovadia indicated that the co-operative banks were presenting a new challenge within the banking sector and the Association did not have any primary co-operative banks as their members so far, but it was a thought that was worth considering. A proper regulation regime would encourage partnerships because banks would better understand the nature of the risk they were taking and the consequences of those risks
.
Mr Asiya sought a clarification on the impact of non compliance to FICA regulations and whether the Bill should specifically address or include FICA regulation to create comfort for the Banking Association.

Mr Coovadia indicated that the Banking Association had tabled their concerns with regards to the FICA regulation to the National Treasury and there had been an in- principle assurance that the Treasury would attend to the matter.

Congress of South African Trade Unions (COSATU) Submission
Mr Tebogo Phadu, Head of Policy Unit, COSATU, indicated that the current Co-operative Banks Bill was a significant improvement in the South African banking history. Cosatu had always demanded an alternative banking system where the working class could save their money and spend it in a way that improved their socio-economic conditions. Cosatu supported a Bank that would be owned and controlled by the customers or workers, where those customers could have a direct influence on the regulation of the bank, instead of it being controlled by shareholders who would seek domination based on their monetary muscle. The co-operative banks were not about profit maximization, but about surplus. The historical significance of this Bill was that it would also consider financing other co-operative movements in the agricultural and housing sectors.

Whilst welcoming the Bill in principle, Cosatu had some concerns as follows:
- Clause 32 implied "appointment" of the directors and board, but the Co-operatives Act of 2005 indicated that the Directors and the Board should be democratically elected.
- The Bill should enact for access to payroll system of workers, which had been the recipe for success in other countries.
- The concept of Co-operative Development Agency was relevant, but its role should be further clarified as it was currently confusing. The Agency should also extend its role into empowering secondary co-operatives.
The agency should also enter into partnership with the intention of accreditation
- The Bill should also further provide a clarification or substance on the issue of conversion of financial entities who wished to enter the co-operative bank sector. Cosatu asked whether they would be expected to dissolve or would they be exempted, and what conditions would apply.
- The Bill should also be clear on the issue of tax exemption as the co-operative banks had a developmental role, so should not be taxed in the same way as the conventional banks, because their motives were different. The transactions were not with public, but limited to the members.

Discussion
Mr Moloto sought clarification on whether Cosatu expected 51% representation to the Board of the co-operative bank and would exclude people from other critical sectors that could add value to the management of the bank.

Mr Phadu indicated that co-operative banks could be democratic through Annual General Meetings (AGM) where members would elect a leadership that would represent their interests in the daily running of the bank. Through AGMs members could influence the strategic direction of the banks. The Board and Directors would be members too, so that was the democratic feature of the banks. In addition co-operative banks were about the people - that was stipulated clearly - and those outside could certainly be afforded an opportunity to add value without dominating the running of the bank.

Mr Gibson expressed his appreciation for the detailed submission, but sought clarification on the logic behind the tax exemption proposals. He further enquired about the appointment of directors and the Board, and whether Cosatu expected the membership to be involved in the daily running of the bank. He also commented that for the co-operative bank to qualify for a licence it would be required to present a written savings policy and business plan. A democratically elected Board would be responsible for the development of such policies.

Mr Phadu indicated that profit from the co-operative bank was different from the conventional bank, because the motives of the two banks are different. An ordinary bank would be driven by the interests of the shareholders , whereas a coop bank would be driven by the interests of the community, who intended to use the bank to change their lives. Co-operative banks were established through a need, not a market. The Bill stipulated clearly that when the surplus was accumulated it would be re-invested in the bank. It also was mandatory for the co-operative bank to set aside 5% of the surplus as a reserve. The Co-operatives Act protected members.

Mr M Malahlela (ANC) commented that the issue of tax exemption would hamper the tax base of Treasury and asked if Cosatu was expecting the one-member-one-vote approach in the management of the Bank.

Mr Asiya commented that there was no business driven purely by democracy, and that the fundamentals of every business were about profit maximisation. He also sought the guidance of Cosatu on the type of tax relief it was proposing.

Mr Johnson sought a clarification on the difference between a progressive and regressive bank and the monitoring mechanism that Cosatu was proposing for the effective functioning of the bank.

Ms J Fubbs (ANC) expressed her gratitude for Cosatu’s comprehensive submission and the guidance it continued to provide to the Committee on policy matters affecting the working class. She asked whether exemption from taxation for coop banks would still government to meet its redistribution role, because government used tax to ensure that needs of the indigent were met. She requested that Cosatu should present concrete proposals on the nature of tax exemption.

Mr Phadu indicated that skills training should be continuous and the stringent expertise that was stipulated in the Bill may exclude rural people. In term of tax exemption there was a study that was conducted by New Economic Development and Labour Council (NEDLAC), wherein various tax options were presented to the National Treasury. Cosatu was willing to engage directly with the Committee on other matters related to the Bill.

Savings and Credit Co-operative League (SACCOL): Submission
Mr David de Jong, General Manager, SACCOL, expressed full support for the Bill but indicated some critical areas that should be tightened up (see attached presentation) Clause 20 should deal with treatment of shares. It was concerned with large exposures under Clause 23(1)(a). It also recommended amendments to Clauses 23(3) and (4). SACCOL proposed that clauses 24 and 25 should stipulate simply that the deposit insurance contributions as prescribed by the Minister should be paid. The remainder was a duplication.

The distinction between a representative body and support organisation was not distinct. The Bill should clarify this. SACCOL suggested that regulations not be based on rand values of R20 million as a threshold.
Under Clause 32 and 37, SACCOL suggested that there could be proliferation of support organisations, and that five coop banks should form a representative organisation. It suggested that the regulatory authorities be compelled to negotiate agreements.

SACCOL believed that there must be separation of duties and the role of the Agency must be clarified.

SACCOL also suggested amendments to Clause 55, to assist those banks who belonged also to secondary or tertiary banks. Further submissions were also made under this clause.

SACCOL suggested that 49% of the Board form representative bodies, and that the remuneration of the Board should be set out in the Bill.

SACCOL also suggested taxation dispensations to assist banks to reach the minimum prudential standards.

Discussion
Mr Moloto sought clarification on whether was risky to financially bail out banks, and whether current co-operatives have experienced liquidity problems.

Mr de Jong indicated that liquidity and bankruptcy were two different things, and would be handled respectively by Reserve Bank (SARB) and by National Treasury. In his experience no co-operative had experience liquidity problems. In an incident where this might occur the co-operative would undergo a rehabilitation and a formal report would be submitted to the Reserve Bank for further support. SACCOL, as an organisation, did not have the capacity to monitor or assist co-operatives.

Ms Fubbs sought clarification on the different between the share certificate and registration. She also further enquired on the various options that SACCOL was proposing on tax exemption.

Mr de Jong indicated that the actual cost of the share certificate was exorbitant and if the Bill required that every member should have a certificate, instead of the quarterly statement, that would be working against the intended cost objectives of the Bill. In terms of the tax exemption, NEDLAC had undertaken a comprehensive study on the different tax options that could be applicable to the co-operative banks. The Bill could indicate that transactions being conducted with members might not be subject to tax, or that certain exemptions could apply to business with the public.

Business Parliamentary Office (BPO): Submission
Mr Abdul Patel, Parliamentary Liaison Officer, BPO, indicated that BPO was an initiative of the South African Chamber of Business, whose organised business constituency members included the Chambers of Commerce and Industry South Africa (CHAMSA) and Business Unity South Africa (BUSA).

BPO welcomed the introduction of the Bill as a further progressive step to ensuring the continuous improvement of access to a variety of viable banking products and services for South Africans, and to regulate a presently unregulated area. Access to sustainable cooperative financial services was important to fully realise socio-economic benefits.

BPO felt that important features captured in this Bill included sound institutional governance and administrative accountability. Cooperative development could be sustained through good governance to protect the members of the bank. BPO urged that the good governance and accountability measures must be extended in regulations to the Bill, and that these should also include the investment criteria for cooperative banks. Any regulations should aim to improve access to finance, personal savings and investment, broad based black economic development, job creation and enterprise development.

BPO was in favour of legislation resulting in a steady build-up in the growth of cooperative banks rather than a rapid wholesale uptake, which would help to avoid unforeseen consequences. Slower growth would assist in meeting the practical challenges. A 2006 World Bank publication “Making Finance Work for Africa” noted institutional lessons learnt in cooperative financing on the continent. Benin, for instance, had experienced rapid growth under credit lines in 1998, which ultimately jeopardised institutional stability. Kenya's Cooperative Bank was cited as a positive example.

BPO suggested it would be prudent for the South African cooperative banking movement to establish linkages and working relations with the International Cooperative Banking Association. This would assist in exchange of information and collaboration, and could lead to sharing of research and exchange of best practices. BPO commended the extensive consultation process with stakeholders, and was happy to act as a conduit for enquiries and information between the Committee and experts.

Discussion
Mr Gibson sought clarity on whether the Bill should be explicit on the FICA regulation.

Mr Patel indicated that the Bill implicitly made reference to National Credit Act. BPO welcomed that approach and believed that similar approaches should also apply in the case of FICA.

Ms Fubbs sought the view of BPO whether there would be unintended consequences of the Bill. Most South Africans did not use banks, and the rapid expansion of co-operatives could create competition for the financial institutions.

Mr Patel indicated that the BPO believed that there would be protection if FICA regulations were applied across the board and made explicitly part of the this Bill. The critical issue in banking was protecting the depositors' funds, and that went with credibility and reputation.

The meeting was adjourned.

 

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