Financial Sector Summit and Charter: inputs from NEDLAC constituencies

Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES
17 September 2004
FINANCIAL SECTOR SUMMIT AND CHARTER: INPUTS FROM NEDLAC CONSTITUENCIES

Co-Chairpersons: Dr R Davies (ANC) and Mr T Ralane (ANC)

Documents handed out:
Update on the Financial Sector Summit Agreements: Presented by Mr H Mkhize
NEDLAC Community Constituency report: Presented by Dr B Nzimande
Labour input on Financial Sector Charter: Presented by Mr B Ntshalintshali
Financial Sector Charter: Presented by Mr C Coovadia

Relevant document:
Financial Sector Charter
Business Day article on Financial Sector Charter 21 September 2004

SUMMARY
The NEDLAC constituencies briefed the Committees on progress with the implementation of the Financial Sector Summit Agreements and the financial sector charter process. The Charter dealt with employment equity, skills development and control of financial and access to financial institutions. It also dealt with empowerment financing (in excess of R100 billion) which included financing of low-income housing, black small and medium enterprises and transformative infrastructure finance. The labour and community constituencies of NEDLAC lamented that the financial sector was moving too slowly in implementing the Financial Charter.

MINUTES
The Committees were briefed by Mr C Coovadia (Vice President: Business Unity South Africa), Mr H Mkhize (CEO: NEDLAC), Mr B Ntshalintshali (Cosatu Deputy General Secretary), Dr B Nzimande, Mr D de Jong (Savings and Cooperatives League of South Africa) and Mr E Masilela (National Treasury). Dr Davies chaired this part of the meeting. These NEDLAC constituencies briefed the Committees on progress on the implementation of the financial sector summit agreements and the financial sector process.

Mr Mkhize gave background on the "Red October Campaign" and the Financial Sector Charter. (See presentation document). It objectives were to influence the community re-investment legislation and the transformation of the financial sector in favour of the poor, the creation of a cooperative banking sector and other publicly owned financial institutions and convening an urgent sectoral summit on development financing and banks. NEDLAC convened the summit in August 2002.

Delegates at the summit agreed, amongst others, to take the necessary steps aimed at ensuring access to basic financial services, increasing participation in the economy, regulation of credit bureaus and developing new legislation for second and third tier deposit-taking Institutions.

Mr Coovadia gave background to the process that led to the signing of the Charter, the actual signing process and the principles of the Charter. (See presentation document). The Charter emanated from the South African Communist Party (SACP) Red October Campaign and the NEDLAC Financial Sector Summit. It was a voluntary process and inclusive within the financial sector. He felt that perhaps the financial sector erred in not including other social partners. However, a view was taken that the financial sector was sensitive and operated on perception. Hence a decision was taken not to involve other social partners. If implemented correctly, the Charter would transform the sector in the next five years.

The Charter dealt with employment equity, skills development and control of financial and access to financial institutions. It also dealt with empowerment financing (in excess of R100b) which included financing of low-income housing, black small and medium enterprises and transformative infrastructure finance.

Since the signing of the Charter there had been 9 working or task groups dealing with various aspects of the Charter. The working groups were tasked with making plans to guide the implementation of the Charter. Attempts were made to link the Charter with the NEDLAC Financial Sector Summit processes. A National Bank Account (NBA) would be launched very soon. It would be a simple product with no monthly administrative charges and would also guarantee capital appreciation.

Mr Coovadia said that the Charter Council had not yet been established. The Council would be the definitive body that would interpret the Charter and also adjudicate on reports from financial institutions on performance against the Charter. The first reports would be tabled in March 2005.

Mr B Nzimande briefed the Committees on behalf of the Community constituency of NEDLAC. He said that he was saddened by the report he made on behalf of the community constituency. At the same time, the community constituency was angry that, fully two years after the historic signing of the Summit declaration, there was little to be proud of in reporting implementation of the Summit agreements. The financial sector had consistently thwarted efforts to implement the Summit agreements in an open, inclusive and transparent manner as required by the Summit itself, to which all the parties committed themselves.

He said the Community Constituency thought it had made progress in 2002 with the signing of the NEDLAC Financial Sector Summit agreements. The Summit signed 13 agreements. They were signed as a package and not as isolated agreements, aimed at fundamentally transforming the financial sector to serve millions of South Africans historically ignored by the sector, particularly millions of black workers and the poor. He noted that government had embarked on significant measures towards fulfilling its side of the bargain. However, the response of the financial industry so far had been extremely disappointing. After the signing of the Summit agreement, the financial industry went off on its own to draft a financial sector charter to give effect to these agreements.

Although the Charter had some positive elements, it also had severe shortcomings. It was a voluntary Charter and non-prescriptive. The industry had lobbied hard for the Community Reinvestment legislation to be shelved and to be replaced by the Charter commitments on affordable housing. Mr Nzimande felt that the legislation should not be shelved until it was clear that the financial sector would do what was expected from it. The Charter was silent on some important elements of the NEDLAC Summit agreements. It said nothing about supporting the informal economy and micro-enterprises. It also offered no support for the many burial societies and stokvels from which banks and insurers made money.

Mr Nzimande said that the developments since the launch of the Charter in October 2003 were even more disturbing than the faults in the drafting process or the document itself. Since the signing of the Summit agreement in 2002, the financial industry had concluded BEE equity transactions of an estimated R15 billion without spending a cent on anything that addressed the interests of the workers and the poor. Nothing had been spent on low-cost housing or on supporting financial co-operatives and burial societies. He said the industry's priority was enriching a few. Their BEE deals clearly benefited a tiny minority or elite.

Mr Nzimande called for the finalisation of the composition of the Charter Council as a matter of urgency with equitable representation for community and labour constituencies. This was necessary to ensure that the Charter targets were finalised in an inclusive, rather than a secretive and exclusive, manner.

Mr Ntshalintshali presented Cosatu's views of the Financial Sector agreements. (See presentation document). He said that before 1994, millions of workers experienced legal and institutionalised discrimination based on race and gender. That discrimination was now largely illegal. Nonetheless, workers still faced institutional discrimination and disadvantage. The financial institutions as a whole did not adequately serve the poor, the vast majority of whom were black, especially black women. This situation was aggravated by continued discrimination against people with HIV. A second complex of problems arised from the failure of the financial institutions to adequately fund low-income housing and micro enterprises. Systematic redlining by banks of targeted communities remained common.

Despite these concerns, he appreciated the effort to shift the industry toward a more sustainable, equitable and progressive development path. However, this effort might be undermined or even ended by the current deadlock on the structure of governance for the Charter. The debate centred around who should participate, how it should take decisions and its functions. Dealing with the current deadlock in the Financial Sector Charter required real political leadership. Government could not continue to act as if it had no role in resolving the debate. After all, many financial institutions were involved essentially because they wanted to retain access to government, including state tenders.

Mr Masilela gave government's position during the negotiation leading up to the Financial Sector Summit and after signing of the Charter. In terms of the negotiation leading to the Summit, the government acknowledged the "Red October Campaign". It found it appropriate to respond to issues raised by the campaign. There was a need to increase access to services that encouraged investment and saving. The government was not comfortable with forcing a change on the lending rules of banks. As a regulator it could not dictate to financial institutions where to invest. It proposed looking at alternative financial institutions that would encourage competition in the banking sector. Putting in place alternative institutions would not be sufficient and would take time before producing the necessary competition. Since the beginning of the negotiation process the National Treasury had been concerned about the level of competition across the economy. There was a need to improve the level of competitiveness in order to provide choice to the consumer. Banks should start identifying areas in which they were not operating and provide services to such areas. As access to the sector was increased, one should be careful not to compromise the regulatory sustainability of the sector.

Mr Masilela said that the government welcomed the developments around the Charter. However, the Charter should not be seen in isolation from other initiatives sharing the same objectives with it. There must be compatibility between the Charter and the Growth and Development Summit (GDS). The GDS was the overarching document that guided government policy. Anything that took place should take place under the umbrella of the GDS.

Mr Masilela said that there was a need to take into account the various principles outlined in the Black Economic Empowerment legislation. It identified four pillars to encourage empowerment. Unfortunately only one pillar gets sold to the public. It was necessary to take all pillars as a package and market them to the public. It should be indicated that the financial sector had decided to lead the process of empowerment without being forced by anyone or government in particular. This indicated a change in thinking. The financial sector seemingly saw a reduction or complete removal of risks. Rural areas still had no access to financial services due to particular positions taken by the financial sector. There was a need to manage risk. Government needed to improve information asymmetry in the sector. This would improve the risk rating of individuals on a commercial basis. It also needed to manage expectations. There were people who were still sceptical about black economic empowerment. The challenge was to show that the risk associated with black economic empowerment could be equated with the risk of doing normal business in the South African economy. The introduction of third tier financial institutions would create major regulatory challenges. The question was whether the government would be able to regulate them as it regulated the top five banks in the country.

Discussion
Ms B Hogan (ANC) said that transformation must have implications for the poor. However, sometimes policies have not been able to meet the needs of the poor. She was surprised that the insurance sector was under less scrutiny that the banking sector. She was also concerned with the absence of the micro lending sector from the meeting. Micro lending institutions should be involved in any discussions around second and third tier banking institutions. She asked to what extent the micro lending institutions would be scrutinised as part of transformation.

Mr Nzimande agreed that much focus was on the banking sector and not the insurance industry. He assured Members that discussions in NEDLAC were comprehensive and covered every sector. It was critical to deal with micro lenders. The official South African Reserve Bank interest rate was academic to the majority of the people. Some paid up to 200% interest to money lenders. There was a need for an investigation on this matter.

Mr Coovadia replied that the Credit Law Bill would address issues around micro lenders. Some of the larger micro lenders had the potential of becoming second or third tier banks.

Ms R Taljaard (DA) was impressed that the signing of the charter was a voluntary process with a cornerstone of partnership. Although there were frustrations, particularly on the composition of the Council, it would not be helpful to adopt a more combative approach. A combative approach would create an unwelcome and unwise credibility risk. There was a role for government to play in aligning its own policy agenda with some issues raised in the Charter. For instance, the legislation on second and third tier banks and the need to finalise the tax dispensation for the retirement fund industry had a bearing on how the Charter would function. She asked if the soon to be established banking account would compete with second tier banks. She asked Mr Coovadia to comment on the application of the GDS agreements.

Mr Nzimande replied that NEDLAC constituencies were not being over combative. They had allowed the financial sector to draft the Charter; yet they were moving slowly. It was almost two years after the agreement had been signed and nothing had been delivered on the agreement.

Mr de Jong replied that it was difficult to say if the new account would compete with second and third tier banks because he had not yet seen the legislation on second and third tier banks.

Mr A Moloto (ANC) agreed that there was an exploitative relationship between stokvels and burial societies and banks. He asked what kind of empowerment Mr Nzimande would like to see happening and what form of institutions he would like to see emerging from the empowerment process. He noted that Cosatu made innovative proposals on the retirement fund restructuring to finance development. When it came to defined benefit funds there would not be major risks. However, the situation would be totally different with respect to defined contribution funds in that if there was any shortfall there might be hardships for workers. He asked how the Union would manage the process.

Mr Nzimande replied that the Charter committed itself to human resource development. However, it was limited to employees within the banking and insurance sectors. A lot of money flowed into these industries from the stokvels and burial societies. An organisation that represented the savings and credit cooperatives movement (Savings and Cooperatives League of South Africa) had to rely on overseas donor funding to train board members who were running the savings and credit cooperative schemes. Training and support were critical. The government must play its part by passing the relevant legislation.

Mr E Sogoni (ANC) was pleased that the financial sector voluntary participated in the transformation process. He felt that the business sector was moving slowly in introducing changes. He asked Mr Coovadia if the voluntary nature of the process meant that the sector could introduce changes at its own pace without putting targets in place. He asked Mr Mkhize if there would be no proper monitoring mechanism before the establishment of the Charter Council.

Cosatu had problems with the voluntary nature of the Charter. It was felt that once a process was taken to NEDLAC it should cease to be a voluntary process. The financial sector should not be left to deal with issues raised in the Charter on its own.

Mr Coovadia replied that the pace of the implementation should be contextualised given the nature of the financial sector and the complexities of the issues involved. The signing of the Charter was an achievement on its own. There was no monitoring mechanism outside the Charter Council.

The Chairperson said that the composition of the Charter Council was critical. The relationship of the Charter process to the Summit and the GDS was also very important. He asked the parties to comment on how to balance the relationship.

Mr Nzimande replied that it was important to align the GDS and the financial sector agreements. Even the composition of the Charter Council should be aligned with the fact that the financial sector agreements emanated from NEDLAC. Parliament should play a role in ensuring that the agreements were aligned.

Mr Coovadia added that there should be meaningful representation across the board. The Charter and the GDS commitment should be aligned.

Dr P Rabie (DA) shared Mr Nzimande's views that most sectors of the economy had social responsibilities. He noted that a suggestion had been made that banks should match government's commitment to affordable housing and that the current financial model was untenable. He asked for clarity on proposals on alternative low-cost housing funding systems.

Mr Nzimande replied that it was totally inappropriate to have a R1 million bond charged as a R30 000 bond. He called for an investigation on this. There should be an investigation on whether it was necessary to have people earning a certain amount of money having a 20-year bond instead of a 5-year bond. TEBA bank has developed a model wherein some of its clients were able to pay their bonds in less than 10 years.

Mr Coovadia said that the financial sector had made most of its progress on housing out of all deliverables. The sector had no problems with the housing strategy submitted to Parliament by the Minister of Housing. He agreed that mortgage bonds were not appropriate for low-income housing.

Mr M Stephen (UDM) asked Mr Coovadia if there was any need for the National Banking Account. The possible explanation for this could be that banks did not want to compete with each other. He asked what interest rate the bank account would apply and what kind of charges it would impose. He asked Mr Mkhize if he had engage the credit bureau on the kind of information that should be given out.

Mr Coovadia replied that the account would facilitate access to an affordable and simple savings account. Every bank would operate its own account. The pricing structure would be different from one bank to another.

Mr Y Bhamjee (ANC) said that the mindset of fund managers had to be researched on the issue of risk. There was a need to change the mindset to make certain things workable. The housing project had brought about 1,5 million homes. The questions were whether the homes could be used as collateral or whether they could be bought and sold in the market. There was a perception that black people constituted an investment risk. He felt that there was no volunteerism by the business community in participating in the Charter process. They felt that if they could get closer to the black elite they would also get closer to the seats of power. There were very few fund and assets managers who were totally committed to the government's agenda.

Mr M Johnson (ANC) said that the debate on bank charges was not new. There had been research that showed that South African banks lived on bank charges rather than profit margins.

The meeting was adjourned.