Banker S.A. Edition 07

Edition 7 2013

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Magazine of The Banking Association South Africa

FNB’s Chief Economist Sizwe Nxedlana

A FUNDING CRISIS FOR SMEs How to ease the burden

PROFESSOR KALU OJAH Infrastructure bond realities

Prioritising the NDP

2013 Banking Summit

Is positive about SAs future

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contents

1Edition 7 BANKER SA

05 MD’s Message The Banking Association South Africa MD Cas Coovadia on making the right decisions for growth, prosperity, equity and well-being

08 Profile The need for compromise FNB Chief Economist Sizwe Nxedlana has a positive perspective on the implementation of the NDP

12 Financing SMEs SMEs: funding is not enough Access to bank funding is not the silver bullet

16 Feature Mind the gap The Banking Association’s Pierre Venter

addresses the growing “gap” housing market

22 Feature Infrastructure development Banks and the NDP: Professor Kalu Ojah on relevant financing models

27 Summit 2013 Banking Summit Banking on the National Development Plan

31 Reportback 2012 Banking Summit What progress has been made since last year’s

summit on infrastructure funding?

32 Customer Story Breaking the bond barrier Ebrahim Moolla reports on bank customers

trapped in the rental market

37 Banking IT Integrated Reporting: developing

a local standard Combining financial and non-financial information

into one consolidated report

41 Legal Viewpoint The cost of frivolous debt

review applications A cautionary tale from attorneys Kelsey Biddulph

and Rebecca Thomson

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Copyright: Picasso Headline and The Banking Association South Africa. No portion of this magazine may be reproduced in any form without written consent of the publishers. The publishers are not responsible for unsolicited

material. SA Banker is published quarterly by Picasso Headline Reg: 59/01754/07. The opinions expressed are not necessarily those of Picasso

Headline. All advertisements/advertorials and promotions have been paid for and therefore do not carry any endorsement by the publishers.

Publishers: Picasso Headline (Pty) Ltd

Times Media BuildingCentral Park, Black River ParkFir Street, Observatory, 7925

Cape Town 8001, South AfricaTel: +27 21 469 2400 Fax: +27 21 462 1124

Editor Charles Boffard [email protected]

Content Manager Raina Julies

Banking Association Editorial Board Lawrence Khoza Luyanda Tetyana Ndivhuho Mafela Thenji Nhlapo

Contributors Charles Boffard Prof Kalu Ojah Sure Kamhunga Phakamisa Ndzamela

Copy Editor Fikiswa Majikela Production Editor Shamiela Brenner

Content Coordinator Michele Jarman [email protected]

Head of Design Studio Jane Macé Senior Designer Shaun Reddiar Designer Mfundo Ndzo

Business Manager Robin Carpenter-Frank [email protected] Special Projects John Dos Santos [email protected] Project Manager André Potgieter [email protected]

Sales Consultants Andrew Green Basil Jones Financial Accountant Lodewyk van der Walt

SUBSCRIPTIONS AND DISTRIBUTION

Shihaam Adams E-mail: [email protected]

Tel: +27 21 469 2400

ADVERTISING: ANDRE POTGIETERE-mail: [email protected] Tel: +27 21 469 2498

CTPprintersCAPE TOWN

Senior General Manager: Newspapers and MagazinesMike Tissong

Associate PublisherJocelyne Bayer

45 Banking Association Member Introducing Deutsche Bank Providing signifi cant access to key markets

in sub-Saharan Africa

47 Banking Association Member Introducing Habib Overseas Bank Adhering to a business philosophy of providing supreme customer service

49 Technology Big, bigger, best Those huge, tablet-sized phones are popular for a reason

50 Banking News: South Africa What and who is making news in South African banking?

53 Banking News: International Asia’s regulation issues, and its interest in Africa

45

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MD’s Message


The Banking Summit 2013 under the theme: “Banking on the National Development Plan”

outh Africa is at a T-junction. We need to make the right choices to meet the full potential we have as a country. The right decisions will take us along a path of growth, prosperity, equity and well-being. Fail-ure to make the right choices and be decisive about

these could have the consequence of increasing strife, inequity and a loss of opportunity to build a sustainable country for our children and grandchildren.

We need a cohesive plan to guide our policies and interactions if we are to take the path to growth, prosperity, equity and well-being. The National Development Plan (NDP) is such a plan. Business does not agree with every aspect of the NDP, as is the case with other sectors of society. However, we support the NDP as the only plan that has buy-in from a broad spectrum of stakeholders, more so than any other plan on the agenda.

The NDP, in my view, addresses three critical matters:• The role critical stakeholders must play in developing relevant

implementable programmes;• The need for a capable state to facilitate and regulate this; and• The need for an ethical and morally sound approach among

all stakeholders.The NDP gives the country a platform to centre our moral compass and to implement programmes that will address unemployment, service delivery, education and poverty. The successful implementation of programmes informed by the NDP will also create economic growth, which is necessary to address the above. I am convinced that the private sector must take the lead in developing implementable programmes and work with government and other stakeholders to ensure successful implementation.

If we are to achieve the three critical matters I raise above, we need to put national interest at the top of the agenda. The successful concretisation of the NDP will require all of us to explode out of our accepted and comfortable paradigms. Compromises and sacrifices will be necessary if we put national interest, not party political interest, not business interest, not labour interest, but national interest on the top of our agenda. Business must promote sustainable growth, which includes, but moves beyond, profit. Labour must recognise the role of business in generating economic growth and creating jobs, but must agitate constructively to ensure worker rights, but within a growing economy. Government must facilitate and regulate these interactions decisively and ethically. Government must use private sector expertise in building a capable state to play a positive regulatory and facilitative

role. Utilisation of such expertise, through secondments and other means, is more sustainable than throwing money at systems that do not work. We need to find a “new way” to engage and implement. We need to move away from the violent public discourse, encourage criticism, learn from such criticism and continuously test our outcome against an agreed vision in the national interest. The NDP enables us to do this!

I believe business needs to take the lead in concretising the NDP, while engaging on aspects over which we still need to reach broad agreement.

The banking sector is putting together programmes to optimise our role in human settlements and spatial planning, SME development and financial inclusion.

The issue of ethics and high moral standards must be the golden thread guiding engagement and implementation. All sectors of society must be held to the highest standard of ethical behaviour and moral fibre.

Allow me to conclude by quoting Mark Cutifani, who spoke at the recent Mining Lekgotla:

‘I have no doubt that South Africa can be a leader in Africa and the world. The only question I have is: do we have the courage to make the tough choices to take us there and do we have the love for the country that will allow us to put our personal interests aside to help build a country for all?’

‘We need bold leadership, cool heads and the courage to think and do what is right, for the long term. We need stability to prosper. And if we prosper, so does the country; so let’s create a partnership. In fact, we already have the right starting point for that partnership – the implementation of the National Development Plan.’

Business is keen on making the NDP a living plan that informs our efforts towards achieving a growing economy that is equita-ble and sustainable. South Africa must now be open for sustain-able, equitable business. We must attract the best global skills to help us achieve our potential.

I am convinced the vast majority of South Africans love their country and want to see their country achieve its full potential. I know we, in this room, believe that.

Cas CoovadiaManaging Director, The Banking Association South Africa

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MD'S Message.indd 5 2013/10/15 10:23 AM

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8 BANKER SA Edition 7

profile

The need for compromiseFNB Chief Economist Sizwe Nxedlana is positive about the country’s future, and views the policy proposals contained in the NDP in a positive light.

‘W e need supply-side reforms to promote a more sustainable and labour absorptive economic path. The NDP contains sen-sible policy proposals to move us in this direction. However, some of the NDP’s

proposals require reforms to existing policies that are sacrosanct to various stakeholders meaning that its successful implementation will require compromise. But our young democracy was built on compromise, so there is a precedent,’ says Sizwe Nxedlana, the re-cently appointed chief economist of First National Bank.

In his spare time Nxedlana, who obtained a BCom and MCom from the University of Cape Town and KwaZulu-Natal, is an avid reader of economic magazines and follows national and global eco-nomic trends. He admits the decision to become an economist was not one that was difficult to make. ‘From a very young age, I wanted to find out why things were the way they were; for example, why people like me (blacks) were poor. That is what led me to study eco-nomics, and I am privileged in that i get paid to study and try to answer interesting questions,’ he says. Nxedlana brightens up when asked about the NDP, the country’s economic challenges and the role of government and the private sector to drive economic growth. ‘You might say I’m a naturally optimistic person and I tend to see the glass as half full rather than half empty, due to the progress that I’ve witnessed over the past15 years,’ he says.

So what does he think of the NDP with its core thrust to eliminate poverty and reduce inequality by 2030?

Nxedlana says that the NDP is a credible list of supply-side re-forms detailing government’s strategy to promote sustainable eco-nomic growth. But, he says, its successful implementation faces hur-dles which will require compromise. The pressure points include, labour relations, a perceived lack of policy coordination within government, insufficient energy and a sub-optimal logistics chain. Ultimately progress on the above will require a consensus approach where government, the private sector and the labour movement continue to engage constructively to reach a common vision on how to balance their various interests.

Pressure on labour costs is rising across South Africa as trade unions become more militant, demanding salary and wage increas-es that are above inflation. Trade unions cite spiralling living costs, fuelled in part by a spate of increases in administered tariffs such as electricity and municipal rates.

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But employers are warning that such demands, without a com-mensurate increase and improvement in productivity, spell disaster for their companies, which are already battling with waning domes-tic demand while the export market has been stunted by the general global downturn.

Such challenges require all the role players in the economy – par-ticularly the government, unions and the private sector – to engage in discussions on what can be done to translate the objectives of the NDP into practical interventions which can address the economic and social problems facing South Africa, one of the most unequal societies in the world. Investment in labour-intensive sectors is crit-ical because this can easily absorb many of South Africa’s unem-ployed and unskilled. Unemployment in South Africa increased to 25.6% in the second quarter of 2013 from 25.2% in the first quarter.

From 2000 until 2013, the unemployment rate averaged 25.5%, reach-ing an all-time high of 31.2% in March of 2003, and achieved a record low of 21.9% in December of 2008.

Unemployment is a crisis in South Africa. One way to alleviate this is to reduce the constraints on and provide support to the pro-ductive sectors of the economy, which have underperformed the tertiary sectors of the economy. Sectors such as mining, agriculture and manufacturing have the potential to create employment, par-ticularly for those with limited skills. ‘Better performance out of the supply-side sectors of the economy can help us to achieve more ex-ternally sustainable growth while absorbing lower skilled labour in greater numbers. This would mean faster growth for longer, before running into balance of payments constraints that cause currency and macroeconomic volatility,’ he says. He re-iterates: ‘This hinges

‘Unemployment is a crisis in South Africa. One way to alleviate this is to reduce the constraints on and provide support to the productive sectors of the economy, which have underperformed the tertiary sectors of the economy.’



profile

on reaching a compromise on some of the holy cows holding us back, and that requires leadership from all the major stakeholders.’

‘These are sectors which can help us to achieve sustainable growth and most importantly can absorb labour and even increase our for-eign currency earnings – which will have a positive impact on our current account deficit, in turn ensuring that our currency does not come under pressure,’ he says. He acknowledges that expansion of these sectors will not happen overnight, repeating his belief that ‘a supply-side response is urgently needed if we are to achieve the objectives of the NDP’.

There are several factors that are constraining the competitive-ness of the supply-side sectors of the economy. Labour disruptions are the most visible. We also need accelerated delivery of power stations to lift South Africa’s energy constraint. Industrialists have expressed concern about the reliability of power supplies to support existing and planned investments.

Eskom has a multi-billion rand expansion project to add genera-tion capacity but miners in particular are concerned that the power utility might not be able to complete its projects on time. Investment in the

Information Technology sector is lagging, and countries such as Kenya have become regional ICT hubs and are attracting invest-ment from global companies such as IBM and Microsoft. ‘We could easily be the regional ICT centre, but there are constraints on broad-band (capacity), cost and reliability, and that is an area which also needs urgent attention,’ he says.

Another “enabler” of economic growth is the capacity of gov-ernment to implement its multi-billion rand infrastructure project, which has been on the cards since the end of the frenetic boom period leading up to the 2010 World Cup. Soon after the end of the tournament, government promised it would launch a raft of proj-ects, ranging from roads to water supply projects, to maintain the momentum created in boosting the country’s infrastructure capac-ity. This would also create jobs and provide additional work to the construction sector, suffering under the recession.

‘Without that compromise, the required supply side reforms will not occur and our medium- and long-term growth objectives will be stillborn.’

The roll-out of projects has been slow, although government this year announced several projects by state companies, such as Eskom and Transnet, to boost energy and transport capacity. ‘State capacity on infrastructure investment and its capability to roll-out these proj-ects is critical, and is also an enabler of enterprise and production,’ he says. ‘My concern, however, is that there seems to be a disconnect between public policy and what is experienced by the private sector in its dealings with the state. This is something that I hear consis-tently,’ he says

Without that compromise, the required supply side reforms will not occur and our medium- and long-term growth objectives will be stillborn.’ We will remain an economy mired in an unnecessary and self-imposed mediocrity, underperforming our potential. Confi-dence would remain muted in such an environment as would fixed investment.

The supply-side reforms proposed by the NDP will require po-litical will, as well as compromise by all relevant stakeholders. ‘A compromise will require leadership in the broader context – not only political leadership but also leadership by labour, govern-ment and private business. Without that compromise, the necessary supply-side reforms won’t occur and our medium- and long-term growth prospects will be mediocre.’ By Sure Kamhunga ■


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enterprise development

Banks and all relevant public sector organisations will have to deepen cooperation to help small businesses tackle challenges that go beyond access to funding.

South Africans have mainly focused on an argument that banks are not adequately funding

SMEs, overlooking other challenges that these enterprises face. Part of the criticism has been that banks are not prepared to fund small businesses that do not have collateral as surety.

‘A well-funded business without a market is no business at all. While a common perception is that the biggest challenge facing SMEs is due to lack of funding, it is our experience that access to markets and non-financial support is as crucial to sustainable business growth,’ says the Johannesburg based Barclays Africa Group, previously known as Absa.

‘We believe that we need to be part of job creation and driving economic growth. Our point of departure is that money alone will not solve the problem.

‘It is no secret that 80% of new businesses fail. If financial institutions want to play in the development lending space, they cannot simply push money along and hope for the best – they have to go beyond their traditional services and facilitate business support and access to markets for new enterprises.’

A glimpse into the role that South African banks have played in supporting SMEs illustrates how they have gone beyond lending. Enterprise development centres offering advisory solutions have been set up by banks to help small businesses.

FNB recently launched an initiative that will ease the administrative burden faced by some small businesses. Owners of these small businessess tend to be sidetracked by bureaucracy rather than focusing on business, something that poses a risk to their enterprises.

To deal with these challenges FNB recently launched a partnership with the Competition and Intellectual Property Commission (CIPC). This partnership created a mechanism for small businesses to open a business account and register their business with the CIPC on a single platform.

‘Our customer insights constantly reveal that start-up businesses are plagued by onerous administrative efforts’ says Sanjeev Orie,

SMEs: funding is not enoughAccess to bank funding is not the silver bullet that will ensure the success of small and medium enterprises (SMEs) in South Africa.

Subbed Banker SA Financing SMEs article.indd 12 2013/10/15 12:11 PM


Cyril Ramaphosa at the 2013 Banking Summit: The NDP banks on the banking industry to develop small businesses.

Our approach is that in order to look after the capital we advance, it makes sense for us to spend money to achieve this.



enterprise development

Head of Products at FNB Business Banking. ‘It really is the small, yet very important aspects that continuously trip them up.

‘This initiative will allow start-up businesses to be banked and company registered in a few simple online clicks. The same efficiency has also been extended to the annual renewals processes, and now businesses are notified when they are due for the renewal process to prevent their business from inadvertently being deregistered,’ says Orie.

Nedbank recently told Business Day that it went beyond the call to finance small businesses. Nedbank said its procurement spend on services provided by small-medium enterprises was expected to be over R2.6 billion in 2013 and about 3 000 small business suppliers would benefit from this initiative. Nedbank further committed itself to the Prompt Payment Code which pushed for small businesses to be paid on time.

The delay experienced by small businesses in payment for services rendered is one of the challenges that has suffocated many SMEs.

Barclays Africa Group says it has been in their own interest to operate enterprise development programmes as this helps reduce the risk of default in payments due to a lack of business flows for small businesses. The Group says it has been working with large corporations in this regard to channel some of the procurement to small businesses who can deliver the goods and services.

‘Our approach is that in order to look after the capital we advance, it makes sense for us to spend money to achieve this,’ says the Barclays Africa Group.

FNB’s assistance for small businesses extends to helping en-trepreneurs compile their financial statements by using the FNB Instant Payroll solution, which assists enterprises in paying their employees.

Donovan Steenkamp, Head of Business Banking Client Financial Solutions at Standard Bank, says the bank’s Enterprise Development Unit has established a four-party partnership between the bank, large organisations in the private and public sector, business development service providers and small businesses, to help small businesses succeed.

Standard Bank’s loan book to SMEs, including vehicle and asset finance for small enterprises, is more than R14 billion.

Steenkamp says that Standard Bank’s aggregated credit application approval rate for small enterprises is about 70%. Nedbank told Business Day that of the credit applications it received, the bank had a credit approval of more than 93% for enterprises at its business banking segment.

‘The larger issue at hand, though, is that businesses fail for a variety of reasons, and credit is very seldom a part of that failure,’ says FNB’s Orie.

He adds that a large part of the perception around lack of

funding for small businesses is due to the fact that ‘failure rates for new start ups is so high, and the mistaken belief that these failures are related to credit provisioning (or lack thereof) and the role that banks can play in helping businesses succeed.’

Barclays Africa Group also points out that there is a view that small businesses are not funded because they can offer no collateral.

‘There is a perception that banks only fund SMEs that have security. In the real world many SMEs struggle with this requirement. For instance, we fund SMEs on the back of corporate off-take agreements. We also support the development of sustainable SMEs by providing access to markets and business support.’

On the question of whether sectors should be exploring or are under-exploring small businesses, Orie says that franchises have proven to be more successful than ‘lone entrepreneurs’ starting something new.

Orie says small businesses involved in franchises are often given support by a franchisor, who offers mentoring and advice oppor-tunities. He adds that there is a need to focus on digital and online services and solutions.

‘These types of businesses are easiest to start, scale fairly well, and the cost to start up and the cost of failure is small enough to absorb,’ Orie adds.

Standard Bank believes that small enterprises have been traditionally best represented in the consumer retail, basic community services and public transport sectors. Steenkamp says the businesses in these sectors have the lowest barriers to entry in terms of capital and skills invest-ment, ‘but their popularity also makes them the most competitive and overtraded sectors.

‘Entrepreneurs need to consider other sectors and particularly niches within sectors where they can better leverage their advantage as small businesses, that is, specific market knowledge, specialist skills and products, and customisable customer service,’ says Steenkamp.

On what needs to be done to improve SMEs’ chances of success, Steenkamp says all stakeholders need to consider what value they offer small enterprises, beyond the ambit of their particular service or product.

‘For example, the lending continuum would range from com-mercial lending to venture capital, with Standard Bank focus-ing on effectively delivering the former. The nature of value adds would differ depending on where the stakeholder fits in a small enterprise’s value chain; in all cases, however, players should be making value adds part of their standard proposition to small and start-up enterprises.’

The Barclays Africa Group says that a proper assessment aimed at understanding the key challenges faced by entrepreneurs needs to be done to assist the SMEs to function efficiently. By Phakamisa Ndzamela ■


Cash-based collateral dethroned

In a world scarred by the events of 2008, considerable questions have been raised regarding asset safety, the mitigation of counterparty credit risk, the protection and use of collateral and greater demands on transparency within the financial services arena.

New regulations will be enforced to mitigate many of the risks in the greater market regarding capital adequacy. Basel III, Solvency II and Regulation 28 of the Pension Funds Act are examples of these regulations that will place a greater emphasis on the retention of liquid assets on the balance sheet of South African financial institutions. This will increase the need to collateralise financial transactions, forcing banks to retain greater cash reserves and increase capital adequacy ratios.

The trend globally in response to regulations such as these has been to rather substitute high-quality liquid securities as collateral for cash as far as possible. Recent published articles have alluded to the likely possibility of a shortage of high-quality eligible collateral, particularly cash, which is the most common form currently utilised in the South African financial markets.

Collateral is a key risk-management tool used to manage credit and counterparty risk. It is common to re use collateral received against other financial exposures. However, the current bilateral nature brings with it limitations, such as the incomplete overview of placed and received collateral, as one counterparty can only “see” their collateral as far as their direct counterpart. There is often uncertainty relating to the size of the collateral, where it has been reused and how it can be traced throughout its movements to the final holder.

The fungible nature of cash used as collateral also brings with it uncertainty of recovery in the event of financial failure of the counterparty receiving the collateral.

There are complexities when using securities as collateral, such as daily collateral calls, corporate actions, manual collateral substitutions, management of eligibility criteria and collateral valuations. This can be administratively intensive and the build-up of collateral silos across financial products also leads to inefficient use of collateral or over collateralisation. Studies show that in 2007 global defaults on debt were US$8 billion (approximately R54.64 billion), which spiked to over US$400 billion (approximately R3.98 trillion) a year later – when the financial crisis hit.

According to Finadium, a specialist research and advisory firm in the securities and investments industry, failure to effectively manage and implement effective and efficient collateral management systems could result in the loss of financial and revenue opportunities.

There is a growing demand for more automated solutions, focusing on solutions that streamline processes and improve operational efficiencies. The focus and trend internationally is to adopt a single, centralised market-wide collateral management system that manages the members’ pool of exposures against the members’ pool of collateral placed.

The South African financial market is looking at a centralised, market-wide multi-asset class integrated collateral management solution. This complies with local regulations and complements current collateral management functions within financial institutions, and is aimed at improving the tracking and efficient use of collateral management in South Africa.

The Tri-Party Collateral Management service, which is being driven by Strate as South Africa’s licenced Central Securities Depository (CSD), will manage eligible dematerialised bonds, equities and money markets in multi-currencies.


feature

The housing vision is to establish viable, socially and economically integrated communities, which have convenient access to economic opportunities, as well as health, educational and social amenities, in which all South Africans will, on a progressive

basis, have access to:• Permanent structures; • Secure tenure;• Protection from the elements;• Privacy; and • Potable water, adequate sanitary facilities and energy supply.

Addressing the growing “gap” housing market

Post democracy, government reviewed the apartheid housing policy framework in its entirety and adopted what was deemed international best practice. The two fundamental documents, which underpin the mandate of the Department of Human Settlements, are the New Housing Policy and Strategy for South Africa: White Paper, 1994 and the Comprehensive Plan for the Development of Sustainable Human Settlements, 2004.

Over the past 19 years, government’s success in addressing the housing needs of the most vulnerable is unparalleled globally. Noteworthy achievements include:• About 3.85 million capital subsidies have been approved, with

approximately 3.4 million vulnerable families having received a subsidy (free) home (14.2% of the total number of households in South Africa).

• 85% of households have access to energy.• 91% of households have access to piped water.• 95% of households have access to waterborne sanitation.• 93.6% of households have access to either landlines or

cellular phones.

BacklogsDespite these remarkable achievements, the housing backlog has increased over the past 19 years. There are still about 2 million households in urban areas alone that live in sub-standard housing conditions. Informal settlements have increased from 300 in 1994 to approximately 3 000 in 2013. Estimates for the number of households who earn too much to qualify for a free subsidy home but too little to afford an entry-level bonded home (the gap market) total approximately 3.5 million households or 24% of South Africa’s household population (estimated gap housing backlog 600 000 households). Population growth, household migration from rural to urban areas, coupled with smaller family sizes primarily accounts for government being unable to reduce housing backlogs. Unless there is a policy shift that creates a more appropriate environment for a substantial increase in housing delivery, we can expect housing backlogs to increase, especially as urbanisation is expected to continue to increase.

Subbed Banker 7 Affordable Housing.indd 16 2013/10/15 12:08 PM


Home ownersHip subsidy programmesIn 1994, government defined vulnerable households who qualify for a subsidy (free) home as households earning a gross income of up to R3 500 per month. This income ceiling has never been increased, as government’s focus has been to address the housing needs of the most vulnerable. In today’s terms, a gross monthly income of R3 500 in 1994, if increased by Consumer Price Inflation (CPI) would be R11 144 per month, and if this was increased by the Building Cost Index (BCI) this would be R16 961 per month.

On average a 45m2 entry-level bonded home costs approximately R350 000. It is therefore not surprising that households earning less than R14 000 are unable to afford a starter home and they therefore constitute the gap market.

In 2007, the Department of Human Settlements introduced its Finance linked Individual Subsidy Programme (FLISP) to close this affordability gap. The intent of FLISP was to provide a subsidy to reduce the actual loan amount that such households required, improving affordability. Regrettably, this programme has been unsuccessful for the following reasons:• The quantum of the FLISP subsidy has been insufficient to close

the affordability gap.• Government has been unable to increase either the number of

FLISP subsidies it makes available and/or the quantum of such subsidies, as it would have to reduce the monies allocated for subsidy (free) housing commensurately. Given growing housing backlogs for the most vulnerable households, this has not been a viable option.

• The Department of Human Settlements has capped the purchase price for a gap market home at R300 000, which is below the cost of a starter home.

diagram 5: affordability with FLisp

addressing tHe Housing backLog and aFFordabiLity gap Should government increase its annual budget allocation for the provision of housing, it would have to reduce commensurately its

budget for other socio-economic priority areas such as education, health or social services, which is not a viable option. A sustainable solution must therefore be to reduce the cost of subsidy (free) homes, a starter home for the gap market, or a combination of both.

The cost of the 40m2 subsidy home, while varying from development to development, is approximately R212 000. For the current housing backlog within the subsidy market to be eliminated within 10 years, we would need to double housing delivery. This is simply unaffordable. In its endeavours to deliver a completed home, we believe the Department of Human Settlements has shifted from its vision statement. The 1994 White Paper promoted “width over depth” as its initial housing support for the vulnerable. This is where households would be provided with a serviced site and, if affordable, a 20m2 core structure to which families would incrementally improve upon. This would allow government to double subsidy housing delivery at no extra cost. Essentially, government would be providing less homes to more vulnerable families as opposed to the current model of more homes to fewer households. Such an option, however, may be politically and socially unpalatable, but it is nevertheless a reality check.

Alternatively, there may also be the opportunity to reduce the cost of subsidy and gap market homes. We believe this option has merit. The construction of a home can be broken down into the following broad components:• Raw land• Township establishment • The provision of bulk, link and connector services• The provision of the top structureThe following cost components are contained within the overall purchase price of a construction home:

diagram 6: total development costs


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We are of the view that there are three cost areas that, if addressed appropriately, would reduce the affordability gap in the housing ladder significantly. These are:

Cross-subsidisation between market segments within a mixed-income housing developmentAverage developer profits differ substantially for the house type being constructed. Generally speaking, subsidy (free) houses are loss leaders within a mixed-income housing development and developers recover these losses from bonded homes within such developments. This cross subsidisation between house types exacerbates the affordability gap for entry-level homes. Research undertaken at a few major develop-ments indicates that developers are inflating the price of bonded units by approximately R65 000 in order to recover their losses on subsidy (free) houses. Should this forced cross subsidisation between subsidy (free) homes and bonded homes be eliminated, the affordability gap for starter homes would reduce accordingly.

Time frame for converting “raw” land to obtaining permission to erect a home on a serviced siteGuidelines issued by the Department of Human Settlements in 2010 indicated that the process for an average size development should take approximately 27-30 months. While the duration varies, the developers’ experience is that this process takes about 48 months to complete. For developers, time equals cost and risk. Such costs affect the on-going viability of developments and put a developer’s business at risk. This also adds about 16% to the overall cost of a unit.

Based on research undertaken into municipal development processes, time saving of at least 50% can be achieved should municipalities improve their process efficiencies, performance-measure staff and use experienced staff to engage with developers. There also needs to be a specific intervention for mega projects (10 000 plus homes, with social and economic amenities) as the development process for such projects takes well over five years to complete.

Provision of municipal services Separate research indicates that while the cost of a top structure is generally only increasing in line with the CPI, the cost of pro-viding basic services to a home is increasing way ahead of this benchmark. The provision of basic services now constitutes over a third of the overall cost of constructing a home. It is not un-common for a serviced site to cost over R125 000. This cost element must be addressed urgently. Further, should mu-nicipalities forfeit the services development cost of approx-imately R32 000, which they charge developers per site, to

which additional infrastructure costs are often added, for all bonded units, including homes within the gap market (this constitutes a double recovery as they recover this from home owners through rates and taxes/utility accounts for which they do not give such households a rebate), the overall cost of a bonded starter home would be reduced by at least a further 11%.

The implementation of these three interventions, namely:• Removal of cross subsidisation between subsidy (free) homes

and bonded starter homes• Improved municipal development process efficiencies and• Reduced municipal development and infrastructure charges

will, we believe, reduce the affordability gap in the housing ladder from households earning between R3 600 and R11 600 per month to households earning between R3 600 and R7 800 per month, and the price of a R300 000 starter home can be reduced to approximately R156 000.This would make significant inroads into reducing the num-

ber of households that find themselves in the invidious position of not being able to afford a starter home (graphically depicted below). This leaves government with a less difficult task of improv-ing FLISP subsidies for households earning between R3 600 and R7 800 per month.

Diagram 7: Closing the affordability gap in the housing ladder

ConClusionWe hold the view that a holistic review of the current housing policy framework is overdue, and urgent! Such a review must include increased focus on affordable rental accommodation and an incremental housing approach in lieu of the current subsidy (free) house. A critical issue is that government must demonstrate the political will to shift towards a sustainable housing policy model, failing which we can expect to see housing backlogs increase, the affordability gap in the housing ladder to continue to grow, and increased social tension as communities vent their frustration at having to continue to live in informal settlements. By The Banking Association South Africa ■


RURAL HOUSING LOAN FUND THE FINANCIAL MUSCLE BEHIND INCREMENTAL RURAL HOUSING

What is the Rural Housing Loan Fund? Rural Housing Loan Fund (RHLF) is a South African Government owned entity established in 1996 with the mandate to facilitate access to incremental housing finance by low income earners who want to improve their housing conditions in rural areas and small towns in all provinces.

RHLF operates as a wholesale finance institution and facilitates access to housing finance nationally through a network of housing finance lenders. These intermediaries access funds from RHLF and on-lend to individual borrowers throughout the country.

RHLF only works with:• intermediary lenders that are NCR registered and who are serving the general public; • stokvels, cooperatives, and/or community-based organisations who lend to their members only.Borrowers use loans accessed from retail lenders for the following purposes:• to build a new house,• to improve the quality of their home,• to extend their existing homes,• to buy residential land, • to connect to services, such as electricity and water,• to improve sanitation conditions, and• fence their homes – security.

RHLF PerformanceSince establishment up to the end of March 2013, RHLF has:• facilitated 370 524 loans for low-income earners to improve their living conditions in rural areas;• disbursed more than R1.1 billion to the incremental rural housing finance market.

In the last five years to March 2013, RHLF has achieved the following:• annual disbursements to intermediaries• number of loans

Our intermediary lenders enable RHLF to reach aLL nIne PROvInces of south africa!

People who benefit

Banker SA_RHLF.indd 40 2013/10/17 11:19 AM

Cumulative commitments R’000s 620,239 705,139 815,539

Cumulative disbursements R’000s 681,701 738,701 852,301 1,011,175 1,118,281

Cumulative facilities approved number 91 100 111

End user loans financed p.a. number 40,537 33,112 40,289 47,043 44,812

Annual commitments R’000s 39,500 84,900 110,400

Disbursements R’000s 85,792 57,000 113,600 158,874 107,106

Disbursements including mezzanine funding R’000s 139,313 161,133 224,366 275,244 239,962

Cumulative number of loans open 164,730 205,267 238,379 278,669 325,712

End user loans financed p.a. 40,537 33,112 40,289 47,043 44,812

Cumulative number of end user loans financed 205,267 238,379 278,669 325,712 370,524

If you want more details on RHLF, contact: Postal address: P O BOX 645, Bruma 2026 Telephone: +27 (0)11 621 2500 Email: [email protected] website: www.rhlf.co.za

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Banker SA_RHLF.indd 41 2013/10/17 11:15 AM


FEATURE

The Banking Association South Africa’s annual summit, held in September, focused on how the banking industry can aid realisation of the National Development Plan’s (NDP) aspirations, which can be summarised as:

• Job creation through services-based SMEs;• Development of public infrastructure;• Increased provision of affordable housing; and• Reduction of poverty and inequality.

Among several salient points of the keynote address by ANC Deputy President Cyril Ramaphosa, was the clear burden of expectations which the NDP appears to place on the banking industry. He specifically flagged the banking industry’s expected role in realising the NDP’s envisaged creation of about 11 million jobs by way of services-based Small and Medium Enterprises (SMEs).

Infrastructuredevelopment

Ramaphosa’s address stood out as instructive for several reasons. First, he placed his finger on a socio-economic problem that has dogged the South African economy since the birth of the new republic: the seemingly double-digit rate of unemployment (23% or higher), even in the face of recorded economic growth. Second, he acknowledged a universal veracity about SMEs being affirmed as a source of job creation and economic growth. Third and most relevant to the theme of the summit, he pointed to the sore spot of the banking industry’s less than spectacular financial intermediation role1. It is a regular refrain of critics of the banking industry to point to banks’ “refusal” to fund the country’s engine of growth in the face of trillions of investable rands lying fallow at South African banks. Is this a fair criticism?

This article takes off from this question to: (1) contextualise the issues implicit in the question, (2) map the economic landscape within which demands are made of banks, and (3)

suggest relatively more appropriate financial arrangements suited to realising the NDP’s aspirations. Let us start by contextualising the question.

Implicit in this popular refrain of the banking industry’s critic is the seeming lack of appreciation for the role risk plays in credit resource allocation. SMEs generally lack track records which would inform banks

of their likely ability to service a loan if given one; and equally, as fledgling businesses, SMEs lack collateralisable

assets that can serve as a safe recourse should they default on their debt. This latter problem becomes exacerbated in the case of services-based SMEs. Banks are therefore justifiably unlikely to extend credits whose returns would be imperiled from the onset by high

risk inherent in loans to highly opaque SMEs.

On the other hand, the level of financing gap in respect of SMEs – an important source of incremental jobs and economic growth – speaks

to the banking industry’s current credit allocation model screening out a highly important segment of the country’s

consumers of loanable funds. It also suggests

Banks and the NDP: reality checks and relevant financing models

Prof Ojah at the 2013 Banking Summit: Infrastructure development is also tainted with the problem of South Africa’s two-in-one economy.

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the industry’s failure to innovate financial contracts (products) which appropriately incorporate rewards commensurate with the level of risk inherent in funding SMEs – businesses that are highly promising, but with less than transparent financial dealings and records.

Most poignant in this murky situation is the apparent lack of appreciation for the disparate economies that co-exist within South Africa: (i) there is a developed segment of the economy amenable to the architecture of South Africa’s first-rate financial sector. (ii) There is a less-developed segment of the economy that requires the financial architecture of an economic landscape akin to those of frontier market economies, which are characterised by high levels of information asymmetry and relatively high transaction costs.

So how realistic are the NDP’s expectations of the banking industry? Understanding the lay of the land makes it easier to point to some useful ways forward. I order financial inclusion, articulated as a priority by The Banking Association, as an important starting point. I define financial inclusion as “(1) pooling of the most available heap of investable funds possible from all nooks and crannies of the economy and, (2) channeling the pooled funds to attractive production activities, particularly those of SMEs which are established engines of economic growth and job creation across countries”2.

In other words, no matter what the banking industry and the financial services sector do, without effective intermediation they will be unsuccessful in aiding economic activity and growth, whether by way of the NDP or any other development programme. Effective intermediation is sequenced as: first, all efforts at pooling available surplus funds and, second, every endeavour to ensure the pooled funds reach the most attractive job and output-creating economic activities, with inherent risks traded and/or managed efficiently.

In the first step of the two-step process, the banking industry is not exemplary in scouring the land for savings. Yet there is support for the likelihood of higher saving, should high-regulated minimum deposits be reconsidered – for example, the Mzansi initiative enabled via the Financial Services Charter recorded about 2.3 million new accounts. As The Banking Association has amply shown, the banking industry is not necessarily in competition with other financial services firms which identify

and serve unfilled market niches. Efforts such as Mzansi and Capitec’s funds-pooling models should be encouraged, with sensible prudential supervision in tandem. In the same vein, Micro-Finance Institutions (MFIs), which focus on micro-saving activities, are instructive and are available for adoption and adaptation at minimal cost. These models will measurably increase the pool of investable funds, which in turn would increase credit provision across all forms of credit consumers.

On the second leg of the intermediation sequencing, let’s start by examining financing models that can aid the NDP’s goal of creating millions of jobs via services-based SMEs. Success here will have the twin effects of reducing South Africa’s unemployment and narrowing the inequality gap. Recall that the main reason for the high-financing gap in the SMEs space is the banking industry’s apparent lack of appreciation for South Africa’s two-in-one economy, with SMEs not appropriately viewed as existing in a space different from one that banks are accustomed to and, for instance, ill-advisedly accepting the regulatory constraints of Basel accords when considering SME funding.

Besides amply documented activities of MFIs, the venture capital model is one that appears quite suited to the South African situation. For one, its partnership organisational form permits the general partner to take on the kind of high, unlimited liability that tends to preclude SMEs from accessing banking funds; so banks can come in with their funds as limited partners. Second, the structure of funds provision to SMEs, which bases capital release (in tranches) on scaling specific hurdles, reduces the feared risk of moral hazards. Third, the tendency that general partners (who by design serve on management team of venture firms) tend to possess expertise relevant to the businesses they finance, would enhance the corporate governance of fledgling SMEs.

In sum, these features permit funds to be appropriately allocated to the SMEs’ space where they are most needed, with important safeguards for creditors including the banking industry, and begin to build a bridge between financing production in the disparate segments of the South African economy. I see a big role here for The Banking Association, who have shown themselves capable of facilitating such bridging and financial sector expansion exercises.

‘As The Banking Association has amply shown, the banking industry is not necessarily in competition with other financial services firms which identify and serve unfilled market niches.’


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Now to the next item in the order of importance among the summarised aspirations of the NDP, as I see it: the financing of infrastructure. If you have travelled across countries in the African continent, you will appreciate the high level of public infrastructure deficit that is commonplace in Africa. You will also be right to count South Africa greatly blessed among African countries in terms of infrastructure supply and sophistication. Yet it is also common knowledge that the reach of available infrastructure in South Africa is an increasing concern, including dwindling status of key social infrastructures such as health care and education. Thus, successfully updating these and developing badly needed additional economic ones such as electricity and transportation, will increase inputs for job creation and reduce the overall cost of production.

Incidentally, infrastructure development is also tainted with the problem of South Africa’s two-in-one economy, albeit to a lesser extent than the SME space. For instance, the ease of financing infrastructure development in Gauteng province will not be the same as in Limpopo province; even within provinces there exist huge disparities between cities, townships and rural settlements. Accordingly, financing models that take cognisance of varying financial markets’ development levels are recommended.

Beyond government appropriations and state-owned enterprises (SOEs) approaches to infrastructure development in South Africa, public-private partnership is increasingly fancied as an alternative that partly unburdens governments and decouples the pace of infrastructure development from the political ticket. Two private sector-based models appear appropriate for South Africa’s less developed segment of the economy and the developed segment, respectively: project finance and project or infrastructure bonds.

Project finance is generally initiated via a special-purpose vehicle (SPV), equity owned by a few firms that usually have requisite knowledge of infrastructure projects. The SPV in turn sets up loan syndications, as needed, to fund projects, with the syndicate including domestic and international banks. And the loans provided by these banks are non-recourse debts.

Because ownership of the SPV is independent of financed projects and syndicate loans are non-recourse debts, (1) project risks are assigned to syndicate members better able and willing to bear them; (2) the lead banks have the latitude to become project insiders, as the sponsoring SPV, to structure from the onset detailed contracts, such as those of venture capital, that ensure appropriate, effective governance. In other words, project finance is best suited to funding public infrastructure development in sections of South African society shunned by traditional financial sector firms.

Finally, we turn to the project or infrastructure bond model, which sits well with the developed segment of the economy. Not only does South Africa have a first-rate stock market and banking industry, it has also developed one of the focused public debt (bond) markets in Africa. The bond market facilitates private sector funding of public infrastructure development by effectively accessing available surplus funds from far and wide,

with the expected future revenue of the infrastructure being the sole source for servicing the project bond, without recourse to government revenue or guarantee. Any and all effort at deepening the public debt market will equally enhance the facilitation of the infrastructure bond market .

In closing, let us note that this discourse has examined primarily the private sector’s possible intervention in aiding the NDP achieve its aspirations. Among other pertinent private sector organisations, The Banking Association South Africa, under its exemplary focused and successful leadership of Managing Director Cas Coovadia, has plenty of opportunities in the above laid out possibilities to continue facilitating the financial sector’s role in the national development agenda. The numerous heavy lifting required of the government in making the NDP work, by way of the financial sector, is for another day. And it needs to be explored as well. By Professor Kalu Ojah ■

FOOTNOTES1 See Basson, N. and Ojah, K. “Macroeconomic determinants of banking efficiency: An empirical analysis of South Africa against the rest of the world “, SSRN Working Papers, 2011. http://ssrn.com/abstract=18626812 Ojah, K. “Financial inclusion in South Africa: an unfinished conversation”, Wits Business School Journal, 2013, pp. 64-65.

Kalu Ojah is Professor of Finance at Wits Business School.

‘...public-private partnership is increasingly fancied as an alternative that partly unburdens governments

and decouples the pace of infrastructure development

from the political ticket.’


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27

2013 SUMMIT

Edition 7 BANKER SA

The summit, themed “Banking on the National Devel-opment Plan,” sought views from stakeholders in the financial services sector on what banks ought to be doing in implementing the NDP. Speakers addressed the role that banks could play in the NDP by working

with other state institutions in funding infrastructure in the coun-try, and in assisting Small and Medium Enterprises (SMEs).

The Banking Association made a commitment in the presence of ANC Deputy President and National Planning Commission Vice-Chairman, Cyril Ramaphosa, that bankers would “get their hands dirty” in the national interest and were ready to play a meaningful role in implementing the NDP.

In his opening address, The Banking Association Managing Director, Cas Coovadia said South Africa was at a T-junction and needed to make the right choices if the full economic potential of the country was to be met.

The path to growthDuring the 2013 Banking Summit held beginning of Spring, The Banking Association South Africa (The Banking Association) had warmed up to the idea of implementing South Africa’s National Development Plan (NDP).

‘We need a cohesive plan to guide our policies and interactions if we are to take the path of growth, prosperity, equity and well-being. The NDP is such a plan,’ Coovadia told the summit.

‘Business does not agree with every aspect of the NDP, as is the case with other sectors of society. However, we support the NDP as the only plan that has buy-in from a broad spectrum of stakeholders, more so than any other plan on the agenda.’

Equating the NDP to a caravan that was moving forward, Ramaphosa said that despite the differences around the NDP in the ANC’s tripartite alliance, the framework was a “living document” and financial institutions needed to come on board and help develop SMEs.

The NDP, a policy framework whose targets include fighting unemployment and poverty, identifies SMEs as key to government’s plans to reduce unemployment from about 25% currently to 6% percent in 2030.

Subbed Banker SA 2013 Summit.indd 27 2013/10/15 10:42 AM

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‘This is understandable and prudent. However, banks need to find mechanisms to ensure that finance for small business development does not dry up,’ Ramaphosa said.

He told the summit that there was a need for the expansion of angel funding – capital provided by high-net-worth individuals – and seed capital.

Investec CEO Stephen Koseff, speaking from the floor, told the Banking Summit that it was not only about advancing credit flows to small businesses, but also ensuring there was cooperation between labour, government and business. He said there was a need to have a grand bargain with labour to help small businesses work better. Koseff said strikes had an impact on the affairs of small businesses.

‘The effect on micro businesses of these strikes and this dysfunctionality that we have in the large cooperate market has a knock-on effect on all these small chains that live off large corporates,’ Koseff said.

Weighing in on the debate, Malose Kekana, Chairman of Ithala Bank and former CEO of the Umsobomvu Youth Fund, said one of the biggest problems impacting on lending to SMEs was information. Kekana said that some small businesses did not understand what information banks needed from them in order to get a successful application for funding.

‘From a banking point of view we may want to have a technical committee that can work with the Department of Trade and Industry and National Treasury to look at the implementation of these things,’ Kekana said.

One of the summit panelists, Professor Kalu Ojah, a professor of finance at the Wits Business School, said banks needed to make it less expensive for small businesses to access finance. He concurred that there was a need to tackle labour challenges inhibiting the free flow of production. ■

There are differences of opinion on whether the small businesses or large corporations will create the largest pool of jobs. Research by Finscope has shown that 90% of the jobs created between 1998 and 2008 came from small and medium-sized firms. But union federation Cosatu has cited a study which has showed that large firms have a higher rate of net job creation than small firms.

Ramaphosa told the summit that the NDP had identified an ‘important role for small businesses in growing the economy, and contributing to the creation of 11 million jobs between now and 2030,’ and said that the NDP banked on the banking industry to develop small businesses.

‘There are a number of areas where the private sector, and specifically the financial services sector, needs to play a meaningful role. They need to do so not merely as responsible corporate citizens but because it is the right thing to do and that social progress is critical to the success and sustainability of their business activities,’ Ramaphosa said.

He said South African banks had a “massive pool” of personnel commanding advanced financial and business acumen.

‘It would not cost much, nor require great effort, to deploy some of these capabilities to mentor small business owners,’ the ANC Deputy President said.

He said one area that remained a challenge to SMEs was access to finance, and that banks needed to investigate feasible ways to extend credit to small businesses.

Ramaphosa called on banks to collaborate with government in creating financial instruments aimed at assisting small businesses. This included cooperating on building risk-sharing agreements that would assist in funding small businesses.

He also added that with the international regulatory framework seeking to manage the risk in the financial services sector, there was an aversion by banks “to certain types of risk”.

‘Business does not agree with every aspect of the NDP, as is the case with other sectors of society. However, we support the NDP as the only plan that has buy-in from a broad spectrum of stakeholders, more so than any other plan on the agenda.’

Subbed Banker SA 2013 Summit.indd 29 2013/10/15 10:42 AM

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31

reportback

Edition 7 BANKER SA

The 2012 Banking Summit, which was addressed by Deputy Finance Minister Nhlanhla Nene, focused on addressing the need for public and private partnerships to better fund South Africa’s infrastructure projects. Last year Nene said South Africa’s R3.2-trillion

infrastructure programme would need funding support from the private sector.

It was agreed that South Africa’s infrastructure programme could not be solved by government alone simply out of the national fiscus. Of the R3.2-trillion earmarked for infrastructure, about R1.9-trillion has already been allocated for electricity, education and transport.

The Banking Association MD, Cas Coovadia said that his organisation had worked on a model where banks would offer project finance expertise on infrastructure along with experts from the development finance institutions and state-owned enterprises like Transnet.

Coovadia said government needed to put priority projects on the table and the financial services sector would come on board. Once the priority projects had been outlined the financial services sector would put out how much it was setting aside to fund South Africa’s much needed infrastructure programme.

The Banking Association, he said, was also participating in engagements at Business Leadership South Africa (BLSA) with other private-sector players to speed up work on infrastructure funding. Coovadia said the broader BLSA initiative was working on the conceptualisation and implementation of the major infrastructure projects.

The Banking Association and the Association for Savings and Investment are also working together on a document that will take the discussions further. The document, which Coovadia says should be finalised soon, will stipulate what needs to be done to deliver on the infrastructure programme. Added to this, the two organisations are involved in a National Treasury task team on private sector financing of infrastructure.

The Presidential Infrastructure Coordination Commission and the government’s investment manager, the Public Investment Corporation and Finance Trade Union SASBO are also involved in the process.

‘We are engaging substantively on getting the infrastructure programme implemented,’ Coovadia reported in September to the

The progress on infrastructure fundingThe Banking Association South Africa is making concrete progress in developing plans to achieve what was discussed in the 2012 Banking Summit on infrastructure.

2013 Banking Summit. ‘The objective is to identify projects with Transnet and others; put private and public sector project structuring people around these projects and deal with blockages as we get our hands dirty. The banking sector is putting together programmes to optimise our role in human settlements and spatial planning, SME development and financial inclusion.’

Putting emphasis on the need for partnerships in South Africa’s infrastructure plan, ANC Deputy President Cyril Ramaphosa told the 2013 Banking Summit that as funders, financial institutions had ‘a great deal of experience and expertise that can be used to ensure that future public private partnerships do indeed generate the anticipated value’.

In South Africa’s National Development Plan (NDP) framework, infrastructure spend is seen as key to growing South Africa’s economy and boosting employment. The Association has been working on a framework to understand the role it can play in advancing funding for infrastructure projects in energy, transport, education, health, human settlements, water, sanitation and information and communications technology. It is expected that investment in these sectors will contribute to job creation and economic growth.

The NDP has an ambition to create 11 million jobs between now and 2030. The idea is to cut unemployment from about 25% to 6%. By Phakamisa Ndzamela ■

The Banking Association Managing Director Cas Coovadia, Deputy Minister of Finance Nhlanhla Nene and FirstRand CEO Chairman Sizwe Nxasana at the 2012 Summit.

Subbed Banker SA Summit 2012 Reportback.indd 31 2013/10/15 11:08 AM


CUSTOMER STORY

Currently at just 8,5%, South Africa’s prime interest rates are at rock-bottom lows; a far cry from the heady days of 1998, when the prime cost of borrowing was pegged at an astonishing 25%. Our recent cost of borrowing has encouraged many South

Africans to look into owning their own homes. However, banks are still suffering from the housing bubble hangover and are wary of loading too much risk onto their portfolios. Besides this lender caution, banks also have to toe the National Credit Regulations line,

Breaking the bond barrierMany bank customers don’t currently qualify for housing subsidies or home loans, trapping them in the rental market.

and home buyers have to meet strict affordability criteria to qualify for mortgage loans.

During the property boom years as many as 80% of all home loan applications were granted. Currently the bond approval rate is around the 50% mark for those lucky enough to have a minimum of a 10% deposit, but numbers are on a gradual upward trajectory. The increased number of approvals since the recession period is due to more buyers showing affordability and property pricing coming down to more realistic levels.

Subbed Banker SA Customer story.indd 32 2013/10/15 11:07 AM

33

CUSTOMERS STORY

Edition 7 BANKER SA

But despite the favourable lending environment, impaired credit records, poor account conduct, insufficient cash flow and unsatisfactory credit scorecards continue to stymie many first-time homebuyers’ efforts at securing funding and breaking out of the rental market. The National Credit Regulator (NCR) has revealed that in the last year, no less than 394.4 million credit record enquiries were made to assess potential borrowers’ credit worthiness, a year-on-year increase of 27.1%. According to the NCR, the number of creditors in good standing in the last quarter decreased by 76 000 to 10.5 million, while the number of consumers with impaired records rose by 189 000 to 9.53 million, representing 47.5% of all South Africa’s credit active consumers. Many of these consumers are oblivious to their credit standing and have only a vague idea of how to go about dealing with credit bureaux and accessing reports.

Mickey Singh, a self-employed father of one was recently left gnawing on his lip after being rejected out of hand several times in his quest to obtain a home loan. Singh, whose construction business has been running for two years, was also taken aback by the attitude of his consultant and urges greater investment in

developing point-of-contact relationships as well as the reduction of mortgage-processing fees, which he slates as “exorbitant and unnecessary”.

‘It was traumatic to say the least. To have had to present my case over and over again in front of a snooty consultant who seemed to think she was doing us a favour instead of doing her job, and with the added stress of having a baby on the way, wasn’t an experience I’d like to go through again,’ said the 35-year-old roof technician, whose application for financing was eventually approved.

‘It wasn’t as if I had a bad credit record – it’s just that my business is still developing and is considered a risk.

‘It just doesn’t make sense to me. They wouldn’t even accept the assets I had built up as security. There is also a dense wall of technical information for bond applicants to try and penetrate – it would be so much easier if this was presented in simple, everyday language,’ he adds.

Singh’s views are echoed by Mike van Alphen, National Manager of the Rawson Property Group’s bond origination division, Rawson Finance, who maintains that an urgent restructuring of the bond-award process is needed to prevent discrimination against many classes of potential property investors, including pensioners and entrepreneurs.

‘Even if the older person takes out life insurance ceded to the bank, any person aged over 60 is likely to have difficulty in getting a normal 20-year bond. The banks like to insist that such bonds be geared so as to be fully repaid by the time the applicant is 70 years old. But often it is these people who have financial assets with which they are interested in buying property.

‘I appreciate only too well that banks are not in a position to assess the future performance of a business. However, in many cases the entrepreneur who is prevented from getting a bond on account of a fluctuating income stream is also the person who has built up a big asset base,’ says van Alphen.

More than one class of buyer finds it difficult to access home finance, but younger buyers who do not qualify for state housing and have difficulty accessing mortgage finance can be trapped in the rental market, reducing their ability to save. And without first-time homebuyers, who are currently the primary drivers in the property market, the move-up market will be sluggish and new and existing home sales will be subdued – the economic pendulum will swing from one side to the other. By Ebrahim Moolla ■

I appreciate only too well that banks are not in a position to assess the future performance of a business. However, in many cases the entrepreneur who is prevented from getting a bond on account of a fluctuating income stream is also the person who has built up a big asset base.

Subbed Banker SA Customer story.indd 33 2013/10/17 12:28 PM

9

Finance MEC Ina Cronjé said that the idea of hosting an annual funding fair was born because of the disjuncture that seemingly exists between the demand for and the supply of funding, and especially development funding. She further said that a perception exists that there is very little funding available while, on the other hand, there are many funding agencies that are looking for projects to fund. The next iteration of the funding-fair concept is an infrastructure funding fair.

In October this year, KwaZulu-Natal will host the infrastructure funding fair. The fair will allow government departments and municipalities to exhibit approved infrastructure projects to potentially gain project funding and/or partnerships. The funding-fair model is also being contemplated by other provinces.

The infrastructure funding fair is a creative solution that looks at ways to facilitate infrastructure development and funding. The challenge to the financial institutions is to move beyond the traditional senior debt lending role and to work with other funders to come up with new products and ways to fund this massive infrastructure requirement. This challenge is also underpinned by the implementation of Basel III and the structural changes required by lenders to fund long-term projects. In light of this, what will be the response of financial institutions?

JP LabuschagneAssociate DirectorE-mail: [email protected]

The National Development Plan.

South Africa’s roadmap to eliminating poverty and

inequality by 2030

Private

Sector

SocietyGovernmentKey role players

The NDP responds to the nine inter-related challenges identified in the National Planning Commission’s (NPC’s) diagnostic document. It offers a long-term vision towards a more inclusive economy that will address the country’s socio-economic imbalances.

Building trust and confidence to encourage long-term

investment, incentivise private sector and job creation

Focused partnerships, investment, skills transfer, job creation, greater involvement

Decision and oversight involvement

The role of the NDP and infrastructure funding

With its main objectives being to eliminate poverty and to reduce inequality by 2030, the National Development Plan (NDP) has been launched which aims to address the identified nine primary challenges that have impeded the overall successful transition into a democratic society since 1994. One such challenge is infrastructure. The plan identifies infrastructure as an enabler of development, which can facilitate economic activity that is conducive to growth, job creation and better service delivery. Taking a large project through all the steps required to implement it (namely project feasibility, procurement, delivery and funding) is essentially the challenge that infrastructure projects are facing. The funding requirement for the infrastructure component within the NDP is estimated to be around R3 trillion, but government does not have the resources to fund this entirely on its own, so the question is “how and where will the funds come from?”.

The private sector, in particular the financial sector, has a role to play in addressing the question of where funding for the plan is coming from. However, the how needs to be looked at further.

Funding an infrastructure programme of this nature will rely on multiple sources of funds and project structures that leverage both public-sector and private-sector funds. The way in which infrastructure projects are conceptualised and structured will play a significant role in facilitating private-sector funding.

One such method of project structuring is public–private partnerships (PPPs), as they create the opportunity for projects to be ring-fenced, packaged and funded by multiple parties. However, partnerships can be structured in other ways to bring parties together for funding a project.

One innovative funding option that has been tried on a smaller scale but is currently being envisaged for infrastructure projects is a funding-fair model. In April 2013, a Funding Fair was held. This was a partnership between Deloitte and the KwaZulu-Natal Provincial Treasury and the Department of Economic Development and Tourism. The fair created a space and structure for face-to-face contact between project promoters, entrepreneurs, business development bodies, venture capital and private equity investors and lenders. The concept was simple – as was the process.

Potential funders and entrepreneurs were brought together. Entrepreneurs, who had undergone an initial selection process, were given 15 minutes to submit their business propositions and funding requests to a panel that represented the major funding bodies. Where individual funders and investors liked the initial pitch, they had one-on-one follow-up meetings with the project promoters concerned. The rationale behind the concept was equally straight forward – to get as many project promoters in front of as many possible funders and investors in a focused two-day session.

Sources: National Development Plan, SA Reconciliation Barometer Survey: 2012, OECD Economic Survey 2013, World Health Statistics 2013, UNAIDS Report 2012, WEF Global Competitiveness Survey 2012-2013, World Bank 2012

NDP vision/objective

Current statistics

Too few are employed

Out of 144 economies, ranks 113th in labour market efficiency, 143rd in its hiring and firing practices, and 144th in labour-employer relations

working-age population is employed40%

South Africa

The aim is to create 11 million jobs by 2030

of adults working should increase

of adults in rural areas working should rise

41 61%to 29 40%to

Current statistics

140Out of 144 economiesthe quality of the education system ranks

2012 Grade 9 national average Maths performance stood at 13%

•

•

•

•

41.7% of the total population has completed an education of high school or higher education15.4% gross tertiary enrolment rate

in enrolments at universities by 2030

OF LEARNERS80 90%

%

Grades 3, 6 and 9 must achieve 50% or more in the annual national assessments in literacy, maths and science.

should complete 12 years of schooling

INCREASE70

Poor quality of education for black people


to

Current statistics


63rdSouth Africa’s infrastructure is rankedout of 144 economies

are older than the original twenty-year design life

ELECTRICITY90%

ROADS78%

paved metropolitan roads are in a poor to very poor condition

3.4 million households remain without electricity

10%<

• Competitively priced and widely available broadband

• Public infrastructure investment at 10% of gross domestic product (GDP)

will increase and will be accessible to people by 2030, with non-grid options available for the rest

Infrastructure is inadequate and under maintained

Current statistics


Spatial divides hobbleinclusive development

do not have access to improved sanitation

live in small rural villages and scattered settlements

SOUTH AFRICANS

26% 31%

SOUTH AFRICANS

• Reduce the proportion of households with a monthly income below R419 per person (in 2009 prices) from 39% to 0%

• Increase the share of national income of the bottom 40% from 6% to 10%

• All South Africans will have access to hygienic sanitation


Current statistics

• The largest contributor to greenhouse gas (GHG) emissions in Africa • The energy sector is the single largest source of CO2 emissions, accounting for more than 70% of total GHG emissions

Economy-wide carbon price should be entrenched

At least 20 000MW of renewable energy should be contracted Zero emission building standards by 2030

2030

We do not use our natural resources


Current statistics

High disease burden

%12 of doctors account for total health professionals in SA

Life expectancy at birth declined from 63 years in 1990 to 58 years in 2011

1990 2011and

the infant mortality rate stood at 35 deaths per 1 000 live births

Between

Fill posts with skilled, committed and competent individuals

Reduce maternal, infant and child mortality

Increase life expectancy at birth to 70 years

Current statistics


Quality of Public Service

national and provincial departments

length of time is to

vacancy rate

=

fill posts in more than 70% of national and provincial department

80%

9months

• A public service immersed in the development agenda but insulated from undue political interference

• Staff at all levels have authority, experience, competence and support

• Clear governance structures and stable leadership

10%


Current statisticsSouth Africa

Corruption

HOUSEHOLDS

5%

• A corruption-free society, a high level of adherence to ethics throughout society and a government that is accountable to its people

110thRanked

Current statistics


Divided society

• An inclusive society and economy• Increased interaction between South Africans from different social and racial groups• Strong leadership and responsible citizenry

25%

13%

1 2 3 4 5

The NPC Diagnostic Report identified

primary challenges

6 7 8 9

-

South Africans believe that the gap between rich and poor keeps us apart


Deloitte_DPS.indd 2 2013/09/25 8:39 AM

9

Finance MEC Ina Cronjé said that the idea of hosting an annual funding fair was born because of the disjuncture that seemingly exists between the demand for and the supply of funding, and especially development funding. She further said that a perception exists that there is very little funding available while, on the other hand, there are many funding agencies that are looking for projects to fund. The next iteration of the funding-fair concept is an infrastructure funding fair.

In October this year, KwaZulu-Natal will host the infrastructure funding fair. The fair will allow government departments and municipalities to exhibit approved infrastructure projects to potentially gain project funding and/or partnerships. The funding-fair model is also being contemplated by other provinces.

The infrastructure funding fair is a creative solution that looks at ways to facilitate infrastructure development and funding. The challenge to the financial institutions is to move beyond the traditional senior debt lending role and to work with other funders to come up with new products and ways to fund this massive infrastructure requirement. This challenge is also underpinned by the implementation of Basel III and the structural changes required by lenders to fund long-term projects. In light of this, what will be the response of financial institutions?

JP LabuschagneAssociate DirectorE-mail: [email protected]

The National Development Plan.

South Africa’s roadmap to eliminating poverty and

inequality by 2030

Private

Sector

SocietyGovernmentKey role players

The NDP responds to the nine inter-related challenges identified in the National Planning Commission’s (NPC’s) diagnostic document. It offers a long-term vision towards a more inclusive economy that will address the country’s socio-economic imbalances.

Building trust and confidence to encourage long-term

investment, incentivise private sector and job creation

Focused partnerships, investment, skills transfer, job creation, greater involvement

Decision and oversight involvement

The role of the NDP and infrastructure funding

With its main objectives being to eliminate poverty and to reduce inequality by 2030, the National Development Plan (NDP) has been launched which aims to address the identified nine primary challenges that have impeded the overall successful transition into a democratic society since 1994. One such challenge is infrastructure. The plan identifies infrastructure as an enabler of development, which can facilitate economic activity that is conducive to growth, job creation and better service delivery. Taking a large project through all the steps required to implement it (namely project feasibility, procurement, delivery and funding) is essentially the challenge that infrastructure projects are facing. The funding requirement for the infrastructure component within the NDP is estimated to be around R3 trillion, but government does not have the resources to fund this entirely on its own, so the question is “how and where will the funds come from?”.

The private sector, in particular the financial sector, has a role to play in addressing the question of where funding for the plan is coming from. However, the how needs to be looked at further.

Funding an infrastructure programme of this nature will rely on multiple sources of funds and project structures that leverage both public-sector and private-sector funds. The way in which infrastructure projects are conceptualised and structured will play a significant role in facilitating private-sector funding.

One such method of project structuring is public–private partnerships (PPPs), as they create the opportunity for projects to be ring-fenced, packaged and funded by multiple parties. However, partnerships can be structured in other ways to bring parties together for funding a project.

One innovative funding option that has been tried on a smaller scale but is currently being envisaged for infrastructure projects is a funding-fair model. In April 2013, a Funding Fair was held. This was a partnership between Deloitte and the KwaZulu-Natal Provincial Treasury and the Department of Economic Development and Tourism. The fair created a space and structure for face-to-face contact between project promoters, entrepreneurs, business development bodies, venture capital and private equity investors and lenders. The concept was simple – as was the process.

Potential funders and entrepreneurs were brought together. Entrepreneurs, who had undergone an initial selection process, were given 15 minutes to submit their business propositions and funding requests to a panel that represented the major funding bodies. Where individual funders and investors liked the initial pitch, they had one-on-one follow-up meetings with the project promoters concerned. The rationale behind the concept was equally straight forward – to get as many project promoters in front of as many possible funders and investors in a focused two-day session.

Sources: National Development Plan, SA Reconciliation Barometer Survey: 2012, OECD Economic Survey 2013, World Health Statistics 2013, UNAIDS Report 2012, WEF Global Competitiveness Survey 2012-2013, World Bank 2012


Current statistics

Too few are employed

Out of 144 economies, ranks 113th in labour market efficiency, 143rd in its hiring and firing practices, and 144th in labour-employer relations

working-age population is employed40%

South Africa

The aim is to create 11 million jobs by 2030

of adults working should increase

of adults in rural areas working should rise

41 61%to 29 40%to

Current statistics

140Out of 144 economiesthe quality of the education system ranks

2012 Grade 9 national average Maths performance stood at 13%

•

•

•

•

41.7% of the total population has completed an education of high school or higher education15.4% gross tertiary enrolment rate

in enrolments at universities by 2030

OF LEARNERS80 90%

%

Grades 3, 6 and 9 must achieve 50% or more in the annual national assessments in literacy, maths and science.

should complete 12 years of schooling

INCREASE70

Poor quality of education for black people


to

Current statistics


63rdSouth Africa’s infrastructure is rankedout of 144 economies

are older than the original twenty-year design life

ELECTRICITY90%

ROADS78%

paved metropolitan roads are in a poor to very poor condition

3.4 million households remain without electricity

10%<

• Competitively priced and widely available broadband

• Public infrastructure investment at 10% of gross domestic product (GDP)

will increase and will be accessible to people by 2030, with non-grid options available for the rest

Infrastructure is inadequate and under maintained

Current statistics


Spatial divides hobbleinclusive development

do not have access to improved sanitation

live in small rural villages and scattered settlements

SOUTH AFRICANS

26% 31%

SOUTH AFRICANS

• Reduce the proportion of households with a monthly income below R419 per person (in 2009 prices) from 39% to 0%

• Increase the share of national income of the bottom 40% from 6% to 10%

• All South Africans will have access to hygienic sanitation


Current statistics

• The largest contributor to greenhouse gas (GHG) emissions in Africa • The energy sector is the single largest source of CO2 emissions, accounting for more than 70% of total GHG emissions

Economy-wide carbon price should be entrenched

At least 20 000MW of renewable energy should be contracted Zero emission building standards by 2030

2030

We do not use our natural resources


Current statistics

High disease burden

%12 of doctors account for total health professionals in SA

Life expectancy at birth declined from 63 years in 1990 to 58 years in 2011

1990 2011and

the infant mortality rate stood at 35 deaths per 1 000 live births

Between

Fill posts with skilled, committed and competent individuals

Reduce maternal, infant and child mortality

Increase life expectancy at birth to 70 years

Current statistics


Quality of Public Service

national and provincial departments

length of time is to

vacancy rate

=

fill posts in more than 70% of national and provincial department

80%

9months

• A public service immersed in the development agenda but insulated from undue political interference

• Staff at all levels have authority, experience, competence and support

• Clear governance structures and stable leadership

10%


Current statisticsSouth Africa

Corruption

HOUSEHOLDS

5%

• A corruption-free society, a high level of adherence to ethics throughout society and a government that is accountable to its people

110thRanked

Current statistics


Divided society

• An inclusive society and economy• Increased interaction between South Africans from different social and racial groups• Strong leadership and responsible citizenry

25%

13%

1 2 3 4 5

The NPC Diagnostic Report identified

primary challenges

6 7 8 9

-



Deloitte_DPS.indd 3 2013/09/25 8:40 AM

Milpark Business School is registered with the Department of Higher Education and Training (DHET) as a Private Higher Education Institution (No 2007/HE07/003) and is provisionally registered with the DHET as a private FET college (No 2009/FE07/058) valid until 31 December 2015.

Skills for a changing banking landscape

Milpark has revisited its current offerings to ensure that the students acquire the skills to operate successfully in a fast-changing banking environment. Two exciting new products in the banking field will be offered from 2014. Both these qualifications allow students to specialise in a specific field like sales, credit, private banking, etc.

The Higher Certificate in Banking Services (HCert (Banking Services)) is an entry-level higher education qualification and aims to provide students with the knowledge and skills to operate successfully in a specific junior/entry role in banking services. A major change towards compliance in the banking industry in South Africa also means that a large number of individuals employed in the banking arena will need to have an NQF Level 5 qualification.

Admission onto the programme can be attained with a National Senior Certificate certified by Umalusi. The programme is on NQF level 5 and provides for progression onto NQF level 6/7 programmes. For example, students may proceed to an Advanced Certificate in Banking Services, a Diploma or a relevant Bachelor’s degree.

The Advanced Certificate in Banking Services (AdvCert (Banking Services)) is a second-level higher education qualification that aims to provide students with the knowledge and skills needed to operate professionally in a more senior role in an organisation that promotes banking services.

Admission onto the programme can be attained with a Higher Certificate in Banking Services or equivalent qualification on level 5. The Advanced Certificate is on NQF level 6 and provides for articulation onto an NQF level 6 programme (a Diploma) or entry to a relevant NQF level 7 Bachelor’s degree.

The new Bachelor of Commerce (BCom) degree, which has been offered since 2013, provides a strong foundation in general business principles and the required accounting, marketing, economic and quantitative skills. From January 2014, Milpark will be offering BCom students additional majors to give their BCom specific applicability.

BCom with Banking majorMany jobs in the corporate banking environment require a degree at entry level. Banks prefer commerce graduates with a major in Banking. Alternatively, study further and do a Postgraduate Diploma or a Bachelor of Commerce Honours degree.

BCom with Investment Management majorThe major in Investment Management produces graduates able to operate effectively in an entry level position in the investment environment. It also provides a platform for further studies in either a Bachelor of Commerce Honours degree or a Postgraduate Diploma in Investment Management, Portfolio Management, or Finance. Most investment management companies require postgraduate studies for a career in the sector.

Prospective students can apply for admission from 1 September 2013. Contact the Student Services Department at Milpark on 086 999 0001 for information and assistance.

Milpark_FCP.indd 1 2013/09/12 11:31 AM

37

IT

Edition 7 BANKER SA

This is driven largely by the King III report, a globally accepted business reporting framework which states that “governance, strategy and sustainability are inseparable”. The benefits to organisations that embark on Integrated Reporting initiatives are enormous, the

reports provide overall clarity. This allows stakeholders to relate

Integrated Reporting: developing a local standardWhile Integrated Reporting is a legal requirement for all JSE-listed companies in South Africa, today’s business environment demands more transparency and good governance from all companies. Integrated Reporting combines financial and non-financial information, such as environmental, social as well as corporate governance into one consolidated report.

sustainability risks and choices of their certain business endeavours to the financial compromises an organisation has to make to uphold momentum in the marketplace. Intelligent decisions can then be made based on information that has been validated based on the expectations among stakeholders and the company as a whole.

But therein lies the rub. Any financial executive tasked with

Professor Mervyn King, Chairman of the International Integrated Reporting Council: ‘This is a journey that we are all embarking on together.’

Subbed Banker SA IT.indd 37 2013/10/15 12:02 PM

Guaranty Trust Bank (GTBank), one of Nigeria’s foremost financial institutions has partnered with Clickatell to offer virtual airtime top up (VTU) – a value-added service that taps into the country’s drive for a cash-less society.

Nigeria is Embracing a Cashless SocietyHigh on Nigeria’s financial inclusion agenda is the move towards a cashless society, because according to the CBN, the cost of cash and associated risk of a cash-driven economy to Nigeria’s financial system is high and increasing.

This cashless policy is designed to promote:• Financial intermediation, financial inclusion• Minimise revenue leakages• Create internally generated revenue and reduce incidences of robbery

Despite the high unbanked population, the popularity of mobile feature phones is increasing at a considerable rate, with pre-paid services the order of the day.

GTBank and Clickatell are Revolutionising Banking with VTU

Leading the way is GTBank who, through Clickatell, now offers VTU via their Mobile Money, Mobile Banking and Internet Banking services. Pre-paid Airtime is a cornerstone

Clickatell Offers Greater Mobility to Nigeria’s Unbanked

of any mobile solution and is seen as a critical success factor to mobile banking and mobile money’s success in Nigeria. VTU is a convenient service for clients wishing to purchase airtime anytime, day or night, for themselves or others. VTU also attracts all promotional discounts offered by the Mobile Networks to the consumers. In the next exciting phase of the partnership, GTBank, in collaboration with Clickatell, will offer an even broader array of VTU prepaid products including Pre-paid data, Pre-paid fixed lines and Pre-paid BlackBerry bundles. To see GTBanks’s current offering link.

By offering GTBank customers access to VTU, Clickatell operates as the bridge between the bank and the consumer enabling them to access banking services in a virtual space that is secure and easily accessible anywhere, anytime. This is particularly vital in a country where the threat of robbery is incredibly high near ATMs and bank branches.

Samson Isa – Director of Clickatell West Africa says, “I think VTU will be a great mobile prepaid product distribution technology that will revolutionise the telecoms distribution space because of its ease of usage, security and availability.”

Isa continues, “GTBank’s approach is revolutionary in the Nigerian market, as they utilise user-friendly apps to drive mobile banking. I think they should be commended for driving this forward-looking technology, and making a success of it.”

www.clickatell.com

Clickatell advertorial.indd 28 2013/10/17 10:36 AM

39

it

Edition 7 BANKER SA

Integrated Reporting will tell you that to consolidate all the relevant information buried in e-mails, spreadsheets and word documents scattered across databases in an organisation’s enterprise is a mammoth task. It requires weeks of collating information, verifying, updating and auditing and continuous buy-in from key staff and top management before the final product is sent off to the printers or uploaded onto the company website.

Importantly, it also requires an unwavering passion from relevant stakeholders and top-level executives on the long-term sustainability of the company through issues relating to corporate social investment and not just the numbers.

However, despite many organisations’ best efforts, traditional methods of compiling integrated reports are fraught with challenges. Tight deadlines, stressful conditions and always under threat from human error, manual Integrated Reporting becomes time consuming and inefficient.

While the concept of Integrated Reporting is a relatively new one and there are no universally agreed standards yet, the South African Integrated Reporting Committee (IRC) is in the process of developing a local standard. This standard is largely based on King III and incorporates XBRL, or eXtensible Business Reporting Language, a reporting format to drive an open, global standard for business reporting and exchanging business information.

While XBRL delivers many benefits, especially improving the comparability and consistency of business information to address transparency concerns and deliver information in a universally understandable format, the creation of this language has added yet another challenge to the Integrated Reporting process. Although it is not a legal requirement in South Africa yet, it is only a matter of time. Any multinational organisation operating in South Africa and listed on the New York Stock Exchange will have to implement this type of reporting.

So how can organisations improve their business processes internally with industry-standard metrics to ease the manual

burden of Integrated Reporting while developing financial and sustainability strategies that will improve the bottom line?

Today, there are software solutions available that revolutionise the continuous process of Integrated Reporting by combining sound and legally-compliant business processes, controls and technology. However, not all Integrated Reporting software is created equal. There are several factors to look out for to reduce risk and enhance compliance.

The solution should be squarely focused on automation through collaboration from a central, secure database repository that brings together all the data, financial and non-financial, from multiple sources across the enterprise. This methodology ensures that there is only one single version of the documents in the reporting process, which in turn guarantees greater data accuracy and compliance with relevant governance regulations.

Contributors must be able to login and work securely in a collaborative environment and participate in the document build-ing process with a detailed audit trail as to what and when changes were incorporated. This includes work flow and version control as well as a fully-integrated XBRL tagging system that will comply with not-so-distant future industry regulations.

Perhaps the most important and often overlooked factor is ease of use. The reason why most Integrated Reporting tools fail is because the interface is not familiar with the average employee, and despite in-house training, a low adoption rate within an organisation still results.

In closing, while Integrated Reporting is a formidable task for any organisation with the right financial reporting solution, it is possible to automate this process. This not only reduces risk but allows management to improve internal and external business processes, and gives stakeholders the business critical information to make better decisions through accurate data analysis that is verified and audited. By Tiani Annandale ■

Tiani Annandale is a Senior Consultant at Cortell Corporate Perfor-mance Management. www.cortell.co.za.

While the concept of Integrated Reporting is a relatively new one and there are no universally agreed standards yet, the South African Integrated Reporting Committee (IRC) is in the process of developing a local standard.

Subbed Banker SA IT.indd 39 2013/10/15 12:03 PM

The banking sector is getting on board to concretise and ensure theNational Development Plan succeeds for the betterment of all.

Through our combined love of South Africa and its prosperity we are takingthe courageous steps to reach this goal.

We’re banking on the National Development Plan.

As the voice of commercial banks, The Banking Association South Africa continues to build a better future through competitive, economically responsible

and innovative banking while contributing to the socio-economic growth and development of our country.

BASA_fcp_3.indd 1 2013/10/17 4:16 PM

41

LEGAL NOTES

Edition 6 BANKER SA

The cost of frivolous debt review applicationsIn the past, courts have been reluctant to grant orders for costs against statutory functionaries, for example debt counsellors, as a result of the belief that such orders would dissuade public functionaries from carrying out their statutory functions effectively, and have an adverse effect on the public interest. However, case law has developed over the years and in appropriate cases, such an order can be made, as seen in Absa Bank v Robb 2013 (3) SA 619 (GSJ).

The facts briefly are as follows: During July 2011 the respondent (a debt counsellor) brought an application for debt review of two consumers (Mr and Ms Cassim). The debt counsellor did not fulfil her statutory obligation in determining whether or not the Cassims

were over-indebted, having failed to comply with the National Credit Act, No 34 of 2005, the Regulations or the National Credit Regulator Guidelines. The day before the hearing of the application the respondent withdrew the application and refused to pay the appellants costs. The Magistrate refused to grant an order for costs against the respondent. On appeal the South Gauteng High Court held that such a costs order could be made.

Rule 27(3) of the Magistrates’ Court Rules provides that the party withdrawing shall pay the applicant’s costs of the action or application withdrawn, together with the costs incurred in so applying. Where the plaintiff or applicant in the notice of withdrawal consents to pay the costs, such consent shall have the force of an order of court. Boruchowitz J stated “...from the reading of Rule 27(3), read with Rule 33(1)...an application for costs may be made where a party withdrawing a matter does not tender costs.”

Previous case law held that a departure from the principle that costs must be awarded to the party who incurred the expenses of defending withdrawn proceedings is only justified in exceptional circumstances. Ordinarily, a costs order will only be made against state functionaries where they have acted improperly or mala fide in the discharge of their statutory duties.

The court examined existing case law and concluded that developing case law demonstrates that the court has in appropriate cases relaxed the principle that costs orders shouldn’t be awarded against public functionaries, and awarded costs against public officials where it was justified by the circumstances.

The order of the High Court serves the important purpose of cautioning debt counsellors to properly abide by the provisions of

the Act, Regulations and Guidelines before bringing a debt review and ensuring that an application for debt review will be made only when there are reasonable grounds for concluding that a consumer is over-indebted.

It is important to note that the discretion to award costs against a debt counsellor is not limited to instances where the application for debt review is withdrawn. The court may award costs against a debt counsellor who acts improperly or mala fide in the discharge of his or her statutory duties. By Kelsey Biddulph and Rebecca Thomson ■

Kelsey Biddulph is a Candidate Attorney and Rebecca Thomson a Senior Associate, Dispute Resolution, at legal firm Cliffe Dekker Hofmeyr.

Subbed Banker SA Legal Notes1.indd 41 2013/10/15 10:40 AM


company focus

On 10 September 2013, SWIFT, the financial messaging provider for more than 10 000 banks, securities institutions and corporate customers in 212 countries and territories, published a White Paper, Africa Payments: Insights into African

transaction flows. Based on analysis of SWIFT traffic, it offers unique insights into transaction flows between African countries, and between Africa and other regions. The Paper identifies environmental factors that may drive change in cross-border transaction flows, which could reshape pan-African banking, lead to shifts in currency usage and create opportunities for multi-currency clearing in Africa.

SWIFT data highlights that “fi-nancial” flows do not reflect “com-mercial” flows, demonstrating a disconnect between payment routes and the movement of goods and services, particularly between Africa and Asia.

This means that while Asia Pacific countries are the fastest growing trading partners for most African countries, representing 22% of all commercial flows from Africa, only 5% of financial flows are sent directly to banks in the Asia-Pacific region. Conversely, while banks in North America, receive almost 40% of the payments sent by Africa, only 9% of the commercial flows are destined for the North American region. In total, more than 80% of the transactions from Africa to the United States have their financial beneficiary in another region.

There are plenty of factors that could influence the direction of payment flows – and SWIFT data shows that the impact can be significant. For example, in the West and Central African economic

Trends in cross-border transaction flowsSWIFT traffic data shows a disconnect between financial flows and commercial flows. The dollar is still the most important cross-border trading currency, but there are indications that change may be coming.

regions, where they share common currencies and common clearing and settlement infrastructures for payments, only 2% of trade settlement involves a financial intermediary outside of Africa – compared to 48% of intra-Africa trade settlement overall.

Christian Sarafidis, Head of Western Europe, Middle East and Africa, SWIFT, said: ‘Existing projects in Western and Central Africa demonstrate the potentially disruptive power of regional harmonisation, and there is significant political will for similar initiatives on the African continent. Other factors could also play a powerful role in driving change in Africa, such as an evolving

corporate sector, regulatory pressure in developed markets and new financial market infrastructure.’

Thierry Chilosi, Head of Banking Initiatives, EMEA, SWIFT, and co-author of the report, said: ‘The scenarios outlined in this paper will depend on a variety of different macro-economic factors, but it seems likely that, over time, so many converging forces are likely to drive significant change in banking in Africa and banking with Africa. The banks that will be well positioned to grow their business in Africa going forward are probably those that are already monitoring these trends.’

The Paper features contributions from the Southern Africa Development Community Banking Association, Nedbank Capital and Ecobank on relevant topics. It opens with a foreword by the African Development Bank (AfDB).

Moono Mupotola, Manager of Regional Integration and Trade Division, AfDB,

said: ‘Boosting intra-African trade is an important goal for the AfDB and will play a major role in extending the continent’s growth story and promoting inclusive

growth. As part of this effort, we must look at ways to cut cost and eliminate risk for African businesses. Papers such as this one, which increase understanding about financial and commercial flows, are an important part of the debate.’ By SWIFT

Christian Sarafidis, Head of SWIFT Western Europe, Middle East & Africa.

Subbed Banker 7 SWIFT .indd 42 2013/10/15 11:10 AM


ExEcutivE summaryThis report uses SWIFT’s unique data to map trade flows against financial flows for the first time, revealing a new perspective on Africa’s transaction flows. Underscoring the importance of trade corridors between Africa and Asia Pacific and the higher than expected intra-Africa volumes, it also identifies potential drivers for change and the impact thereof on banks doing business in Africa and with Africa.

The SWIFT report suggests an evolution towards fewer but larger pan-African banks – rather than a revolution in the transaction banking landscape in Africa – and a gradual pressure to adapt to new dynamics in the currency environment.

Commercial banks, regulators and other actors in the African financial industry must watch carefully the evolution of transaction flows in order to anticipate market shifts.

currEnt financial flows do not rEflEct thE magnitudE of commErcial flows bEtwEEn african countriEs and asia Pacific• While 22% of the commercial payments from Africa will end up in Asia Pacific, only 5% of the financial flows go directly to that region.• Banks in North America receive almost 40% of the payments sent by Africa, versus only 9% of the commercial flows.• A total of 48% of intra-African import/export settlement involves intermediation by a bank outside of Africa.

The US dollar prevails as the dominant trade currency and the EUR is rarely used for transactions with clients that are not based in the Eurozone.• Almost 50% of commercial payments sent from Africa are denominated in USD.• At the same time, more than 80% of the dollar transactions sent from Africa to the US have their financial beneficiary in another region.• Only 15% of euro payments from Africa are eventually transferred outside of the Eurozone.

thE rElativE imPortancE of us dollar clEaring banks has incrEasEd in thE Past 10 yEarsThe market share of USD clearing banks has grown rather than diminished in the past decade – rising from just under 25% to almost 40% – even while trade with Asia has increased at the expense of

SWIFT white paper Africa Payments: Insights into African

transaction flows

trade with the US. Part of this may be attributed to flows with Asia that are denominated in USD and are intermediated by banks in the United States.

However, several environmental factors may drive change in cross-border transaction flows. This could lead to a reshaping of pan-African banking, shifts in currency usage and the opportunity for multi-currency regional clearing in Africa.

Political will to rEgionalisE, raisE fdi attraction and fostEr morE intra-africa tradEBoosting intra-African trade still further is important, as it has huge potential to create employment, be a catalyst for investment and to boost growth in Africa. As a result, political backing for regional integration projects that support these aims is likely to impact transaction flows.

thE dEmand sidE of thE african markEt is ExPanding and EvolvingCorporates are the primary driver of cross-border transactions. As they expand across and out of Africa, their needs will evolve. This will lead to demand for new products and services, and deeper relationships with banks in key markets.

intErnational rEgulatory PrEssurEs also imPact cross-bordEr transactionsNew regulations and compliance requirements (for example, know your customer and anti-money laundering processes) are making it increasingly expensive for banks in the United States and Europe to do business with small and unknown counterparties.

SWIFT data shows that American and European banks have already shrunk their African banking network. This opens the way for larger African transaction banks to position themselves as a gateway to other markets in Africa.

financial markEt infrastructurEs modErnisingAfrican countries are investing in financial markets infrastructures (FMIs), many at a regional level. Policy makers recognise that payment systems and other infrastructures play a huge role in fostering and deepening economic development.

Along with harmonised legal and regulatory frameworks, robust regional FMIs will make intra-region payments more competitive and reduce the need for foreign financial intermediation. ■

Subbed Banker 7 SWIFT .indd 43 2013/10/15 11:11 AM

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MeMber banks

45Edition 7 BANKER sA

For further information contact Deutsche Bank on 011 775 7000 (Jackee Downs) or visit www.db.com

Address • 3 Exchange Square • 87 Maude Street • Sandton 2196

Q & AName of bank: Deutsche BankWho owns the bank? The South African Operation is part of the global Deutsche Bank, reporting into Deutsche Bank’s Managing Board chaired by Deutsche Bank’s co-CEOs, Jürgen Fitschen and Anshu Jain. Deutsche Bank shares are listed in Germany and in the USA. Core business: Deutsche Bank in South Africa offers a full range of competitive investment banking products and services including corporate finance, equity capital markets, debt capital markets, prime finance, global markets, foreign exchange, equities research, debt and equities sales, derivatives and trading. Core values: We aspire to be the leading client-centric global universal bank. To place Deutsche Bank at the forefront of cultural change in our industry, the following values were launched at the end of August 2013 and have been embraced by the bank globally: Integrity, Sustainable Performance, Client Centricity, Innovation, Discipline and Partnership. Any newsworthy changes in the bank’s structure or business in the near future: On 16 September 2013, Deutsche Bank welcomed Peter Wharton-Hood to the Bank, succeeding Herman Bosman, as Chief Country Officer for South Africa. He is responsible for the strategic direction and overall governance of the bank’s South African operations and will lead an established and successful management team locally across all divisions. Is there a key product or initiative you wish to highlight? Deutsche Bank’s Centre for Financial Entrepreneurs, established five years ago at its Sandton premises, has enabled ten South African, black-owned businesses to flourish from one or two man start-ups to companies that now cumulatively employ over 60 staff. Furthermore, Deutsche Bank ensures that South Africa’s transformation objectives are considered when advising on significant international investments in the country. In September 2013, Deutsche Bank was appointed as Joint Lead Manager on National Treasury’s $2 billion International Bond, partnering alongside several black-owned entities including Basis Points

Introducing Banking Association Member

The CeO: PeTer WharTOn-hOOdPeter Wharton-Hood joins Deutsche Bank from the Standard Bank Group where he was Group Chief Operating Officer for four years. With more than 20 years experience in finance, banking and financial services, Wharton-Hood was with the Edcon Group, one of South Africa’s largest clothing and fashion retailers, for five years as Group Finance Executive before joining the Corporate and Merchant banking division of the Standard Bank Group in 1997. Wharton-Hood joined the Executive Committee of Standard Bank in 1999 and has held a number of executive roles in South Africa, Africa and internationally, including that of Group Deputy Chief Executive prior to his current role.

Capital, a tenant of Deutsche Bank’s Centre for Financial Entrepreneurs. International links: Deutsche Bank opened its doors in 1870 in Berlin. Today the bank is present in 72 countries and employs around 100 000 people. The South African business provides significant access to key markets in Sub-Saharan Africa.Note on CSI The Deutsche Bank South Africa Foundation has contributed over R105 million since its inception (2000) to var-ious community projects focused on education, social investments, care for orphaned and vulnerable children and the arts. ■

Deutsche Bank

BASA member bank Deutsche Banks.indd 45 2013/10/15 10:37 AM

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MeMber banks

47Edition 7 BANKER sA

For further information, contact Habib Overseas Bank Limited on Tel: 011 834 7441 • Fax: 011 834 7446 • Fax: 011 838 3672 or e-mail Javed Asad Farooqui (DGM) on [email protected]

Address: N77 North Mall • Oriental Plaza • Fordsburg • Gauteng 2092,Website: www.habiboverseas.co.za

Name of bank: Habib Overseas Bank LimitedWho owns the bank? Pitcairns Finance SACore business: Retail and Commercial BankingTarget market: All individual and commercial customersCore values or differentiators: The essence of our business philosophy is to provide a personalised service coupled with confidentiality and security of depositors’ funds. In practical terms, this leads to meticulous adherence to prudent lending policies, adequate liquidity at all times and placement of surplus funds with institutions of undoubted standing. Providing supreme customer service is how we differ from other institutions.Any newsworthy changes in the bank’s structure or business in the near future? Introduction of internet banking.Is there a key product or initiative you wish to highlight? Forex tradeInternational links: Correspondent banking relationship with major global basis

Introducing Banking Association Member

THE CEO: MANZAR A KAZMI Manzar A Kazmi joined the bank as executive director in June 2008. He started his banking career in 1971 after obtaining his BSc degree. He has over 26 years of international banking experience and has worked in senior positions in Pakistan, U.A.E and Tanzania. Prior to joining Habib Overseas Bank, he held the position of managing director of Habib African Bank Ltd, Tanzania, an affiliate bank, for eight years. He is currently the managing director of Habib Overseas Bank Limited, South Africa.

Products:• Current, call and fixed deposit accounts for corporate and private clients• Purchase and Sale of foreign currencies• Finance by way of loans, overdrafts and other credit facilities to the corporate and private sector• Sale of Saudi Riyal Travelers Cheques• Acceptance of funds and placements in the money market• Local and International money transfers• Short-term finance of foreign trade through letters of credit and negotiation of bills of exchange• Facilitation of import and export transactions• Correspondent bankingName/s of the CEO and/or Chair: HD Habib (Chairperson) and Manzar A Kazmi (CEO) ■

Habib Overseas Bank

member bank Habib.indd 47 2013/10/15 11:28 AM

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LG Optimus G prO Price R8 000lg.comWell done, LG! You created a device to challenge Samsung’s Note 2 and did a very good job of it. The Optimus G Pro has a higher-res 1080p display, faster 1.7 GHz processor and some good proprietary apps. Unfortunately, it will now compete with the Note 3, and the advantage will pass back to Samsung.

specsDisplay: 5.5-inch 1080pOS: Android 4.1.2Dimensions: 150x76x9.4mm, weighing 160gCPU: 1.7 GHz quad-coreChipset: Qualcomm Snapdragon 600RAM: 2GBStorage: 16GB internal + microSDCameras: 13MP, 2.1MP front-facing, Full HD video

technology

Big, bigger, bestThose huge, tablet-sized phones are popular for a reason.It’s a hideous name, but we’ll have to get used to it: a phablet is a phone so big it’s nearly a tablet – say more than 5.5 inches – and they’re getting bigger.

Suddenly, giant smartphones are everywhere, with Huawei, Sony, LG and others scrambling after Samsung’s success with the Note and Note 2. Sony’s Xperia Z Ultra measures 6.4 inches. That leaves us just 0.6 of an inch – about four months, at this rate – before we’re calling a Nexus 7 tablet a phone.

The big-screened phones have grown sleeker, the hardware and software better designed for one-handed use – and much, much more powerful. In fact, we’re forced to admit it: phablets have become more efficient tools than smaller smartphones. Just have a look at these…

sOny Xperia Z uLtraPrice TBCsony.co.zaThere’s no denying that it’s lovely to behold this Xperia, 6.4-inch black glass, a near-perfect Full HD screen and only 6.5mm thick. Though it’s a little overwhelming to hold at first, and one-handed operation is limited, its slim frame makes it easy to handle. The touchscreen has a protective coating that allows you to tap and swipe with any pen or pencil. And it’s water-resistant.

specsDisplay: 6.4-inch 1080p OS: Android 4.2Dimensions: 179x92x6.5mm, weighing 212gCPU: 2.2 GHz quad-coreChipset: Qualcomm Snapdragon 800RAM: 2GBStorage: 16GB internal + microSDCameras: 8MP, 2MP front-facing, Full HD video

samsunG GaLaXy nOte 3Price R9 000samsung.co.zaThe just-released Galaxy Note 3 is slightly bigger, thinner and lighter than the Note 2. Its leather-like back is nicer to hold and gives a premium look. The upgrades? A bigger, super-sharp display, 13MP camera, more battery life and most importantly, it’s turbo-charged with a 1.9/2.3GHz processor and 3GB RAM. So it’s a dazzling multitasker, aided by smart interface software that makes controlling menus and windows with the stylus a real pleasure. If you want a phablet, you have to check out the Note 3.

specsDisplay: 5.7-inch, 1080p Super AMOLEDOS: Android 4.3Dimensions: 151x79x8.3mm, weighing 168gCPU: 2.3 GHz quad-core (LTE) or 1.9 GHz octa-core (3G)RAM: 3GBStorage: 32/64GBCameras: 13MP, 2.1MP front-facing HD video

ANd ComING SooN…

By Charles Boffard

The 2013 title fight is expected to be between the Galaxy Note 3 and the HTC one max, reportedly 5.9 inches and powered by a Snapdragon 800. The Nokia Lumia 1520 should follow with six inches of screen and yes, a Snapdragon 800.

Subbed Banker SA Technology.indd 49 2013/10/15 10:35 AM


banking news

The financial resulTs of souTh africa’s four major banking groups (absa, firstrand, nedbank and standard bank) for the six months to 30 june 2013 have remained positive in spite of a challenging local and global economic climate.

The four banking groups posted combined headline earnings of r23.7 billion, up 11.5% from the comparable period last year. core earnings increased 12.4% to r47.6 billion in the first half of 2012 and 5% on the second half of the year. These are some of the findings from Pwc’s south africa major banks analysis: finding strength in adversity.

‘notwithstanding some international headwinds, the south african banking system has remained stable and the

SA banks post strong results, look to Africa

banks are adequately well capitalised, with solid returns on equity,’ said Tom Winterboer, Pwc financial services leader for africa. ‘We expect south africa’s banks to continue on a cautious growth path.’

according to the report, regulatory reform is regarded as the most significant and pressing issue in the industry. from 1 january 2013, all of south africa’s banks reported that they had successfully transitioned to basel iii.

The report showed that capital levels continue to be strong for the industry. The combined total adequacy ratio strengthened to 15.2%, compared to 15.04% in December 2012, in spite of the new basel iii capital requirements. When compared to june

South African News

Subbed Banker 7 SA Banking News.indd 50 2013/10/15 10:59 AM


continues to weaken (up 1.4% from 1H12 and up 1.0% from 2H12) as consumers take advantage of low interest rates to repay debt.

Operating expenses increased by 6.6% to R61 billion compared to the first half of 2012, while total operating income increased by 9.0% to R108.7 billion. Consequently, their combined cost-to-income ratio improved to 54.1% for the first half of 2013 (56.5%: 2H12).

Cost control is an imperative for banks as they seek to reduce their cost bases by 5% in each of the next two years, according to PwC’s survey. Of particular interest is the continued significant investment by banks in IT.

‘Innovation remains a priority for the industry,’ Grosskopf commented. ‘The market has seen a number of new products launched in an attempt to attract new customers to banks and encourage them to use cheaper electronic channels, facilitating less spend or investment in new and expensive branch infrastructure.’

Salaries, which continue to represent roughly half of total expenses, grew at a rate of 7.5% p.a.

Despite the challenging regulatory environment, the aggregated ROE of the major banks is still strong at 16.1%, compared to 15.6% in the comparable period last year. However, this does not reflect the different circumstances that exist at each of the banks, in particular those with significant capital tied up in African operations, where they are in the process of building businesses. The average ROE compares favourably to that of the other BRICS countries.

In the pursuit of growth, offshore expansion into Africa remains very much in play, with each bank taking a different approach. ‘We have seen an increase in reporting on the banks’ rest-of-Africa operations, and it will be interesting to see more information as strategies mature,’ said Grosskopf.

Banking groups’ results released in September revealed that in the first half of 2013 Africa generated 9% of the FirstRand group’s revenue and a quarter of Standard Bank Group’s revenue. Co-CEO of Standard Bank, Ben Kruger, said in September that Africa was the core of the group’s strategy; FirstRand CEO, Sizwe Nxasana, said that the FirstRand group had set aside R10 billion for its continued expansion into the continent.

US $100 billion capital for bricS bank Russian President Vladimir Putin, who opened the G20 Summit in September, announced that the BRICS forex reserve pool will be capitalised with US $100 billion.

Russian Finance Minister, Sergey Storchak, said that the BRICS-led New Development Bank would be functioning by 2015.The bank will have an initial subscribed capital of US $50 billion from the BRICS countries.

Russia, Brazil and India will contribute US $18 billion to the BRICS currency reserve pool, China US $41 billion and South Africa US $5 billion, according to a press release issued by BRICS. However, it is possible that the bank’s structure and funding may change in the future to include more countries. Minister Sergey Storchak said at the G20 summit that the bank should reserve an option to add new members.

‘The bank is being created not as a closed institution. The countries that establish the bank will have privileges, but the philosophy of the institution says that others could also become its members,’ Storchak said. ■

2012, the current period’s combined ratio further highlights the strong capital positions of South Africa’s major banks, as the total combined capital adequacy ratio strengthened from 14.9% for the first half of 2012.

Growth in earnings was further enhanced by an increase in net interest income of 11.7% and non-interest revenue of 6.4%. ‘The banks have managed to continue growing their net interest margin amid the stagnating economy, the low interest-rate environment and changes made to the composition of the balance sheet,’ said Johannes Grosskopf, Banking and Capital Markets Leader for PwC Africa.

Growth in net fee and commission income was generally flat in the second half of 2012, from a percentage of 9.3% in the first half of the previous year, largely driven by an increase in transaction volumes with limited price-increases. Banks are also using electronic channels to drive transaction volumes.

The major banks reported that combined gross loan growth of 7.2% came primarily from strong corporate lending, card lending, overdrafts, instalment credit and leases. Housing credit growth

bricS leaders at the G20 Summit in St petersburg.

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INTERNATIONAL bANkINg NEws

‘Data definesthe customer’Japan’s Rakuten Bank pulled off an impressive recovery by introducing a fee-based business model and leveraging on the strengths of Rakuten Group.

Internet banking veteran and former Vice-President of Tokyo-based Rakuten

Bank, Akihito Nohara, attributes the bank’s remarkable recovery to profitability to the introduction of a fee-based business model. Through the introduction of service fees for various banking services such as ATM withdrawals and

online funds remittances, he created an important and stable source of fee income for the banking business. He revamped the bank’s fee structure to reflect the costs of its diversified product lineup. In today’s tightening interest margin environment, the ability to generate fee-based income has become even more critical.

Rakuten Group is the largest internet services company in Japan. It provides a wide range of services via the internet, including e-commerce, e-books, portal and media services, travel, telecommunications, securities, credit card and e-wallet/virtual currency. Its e-commerce subsidiary, Rakuten Ichiba, is Japan’s largest internet shopping mall, with over 83 million registered members and more than 41 000 merchants.

In contrast, eBank, which was set up in 2000 in the midst of the dotcom and stand-alone internet banking rush, was close to collapsing when it was acquired by Rakuten. It specialised in micropayments, gathered deposits for settlement, but did not do any lending. Instead, it deployed its funds through its treasury operations which traded in high-risk securities and assets. The business model was doomed when global financial markets froze during the global financial crisis.

The first order of business for Nohara and his team following the takeover was to transform the bank’s business

model. He quickly identified three key areas – the synergies that the diversified businesses of the Rakuten Group provided, the introduction of fee-based income and the need to drastically reduce costs.

Nohara also expanded the bank’s consumer loan business as he brought Rakuten Mortgage and Rakuten Credit into the bank. He employed advance data analysis and developed a credit risk assessment model to better manage and mitigate default risks as he grew the loan business.

‘The e-commerce business is about massive data that helps us to define the customer. The customer segmentation analysis that we do is one of our treasures,’ he says.

The bank has maintained its status as the most profitable internet bank in the last two years. It posted a net income of JPY 11.81 billion ($120 million), a return on equity of 23.83% and a return on assets of 0.9% in the 2012 fiscal year. By Foo Boon Ping

Since its inception in July (2013), the Shanghai Free Trade Zone (FTZ) has attracted global attention. Through its launch, the Chinese government aims to further liberalise convertability of the

renminbi and free market-oriented interest rates. ‘Under the pre-condition that risk can be controlled, convertibility of the renminbi on the capital account will be conducted in the zone, the first to carry out and test [it],’ according to an internal Chinese government document on the FTZ.

The first Hong Kong-like free trade zone in mainland China, Shanghai FTZ was personally endorsed by Premier Li Keqiang. Pointing out that further reforms were necessary to stimulate domestic demand, Li said that Shanghai was the perfect venue to conduct such a project, given that the trade volume of Shanghai’s tariff-free zones

ShanghaiFree Trade Zone launch is a stepping stone to financial reforms in China

Akihito Nohara, former Vice-President of Tokyo-based Rakuten Bank.

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INTERNATIONAL bANkINg NEws

represented more than $100 billion in 2012, or 3% of China’s overall trade volume.

Covering nearly 30 square kilometres and incorporating the special custom zones of Yangshan Deep Water Port, Pudong airport and the Waigaiqiao port, Shanghai FTZ is designed to explore investment and trade policy innovations and expand the opening of the domestic services industry. Upon completion, the free trade area will provide what aim to be world-class transport and communications facilities and a tax-free environment for domestic and foreign enterprises in order to act as a major hub of their supply chains in Asia.

At the same time, Shanghai FTZ is expected to contribute to further financial reforms in China, including interest-rate liberalisation and full convertibility of the renminbi.

Shanghai is expected to allow corporates to freely convert other currencies to the renminbi within the FTZ, buy overseas assets and equities, and raise funding abroad. In addition, foreign investment and funding activities for both domestic

and international companies will be promoted within the FTZ. Shanghai also plans to test selected offshore businesses within the zone, including offshore banking activities and foreign exchange denominated cross-border financing.

However, establishment of Shanghai FTZ has triggered concerns in Hong Kong, with mainland China’s first free trade zone seen as a threat to the latter’s status as the leading offshore renminbi hub.

Hong Kong’s offshore renminbi hub has developed rapidly since Beijing approved a cross-border renminbi trade settlement in 2009. By the end of June 2013, Hong Kong recorded $114 billion in renminbi deposits, a 12-fold increase compared with 2009.

If Shanghai FTZ can provide the same low-tax environment as Hong Kong’s free trade area, many corporates could consider moving their headquarters to Shanghai to be closer to the main market, according to Liu Ligang, Chief Economist at ANZ Hong Kong. By Alice Yang

In the most comprehensive research on the retail banking industry in the Asia Pacific, The Asian Banker found that income from banks’ retail operations grew an estimated 10% to reach a record $447 billion in 2012.

Further growth is expected in this segment, with bank revenue likely to hit $850 billion by 2020. ‘Over recent years, we have seen rapid development of wealth management products and services. We believe this activity will foster growth in Asia-Pacific retail banking,’ said Bertrand Pigeon, Senior Research Analyst at The Asian Banker.

Banks derive most, if not all, of their non-fee income from interest rates charged on loans, whether these are for mortgages, cars, or extended for purchase of appliances in households. One of the traditional yardsticks under our scrutiny is the Non-Performing Loan (NPL) ratio. Due to the evolution of financial instruments and lack of proper regulations in certain countries, this ratio has become increasingly irrelevant.

The impact of regulations on banks’ profitability was also analysed. One of the main issues with Basel III is liquidity: with higher reserve ratios, banks will not be able to lend as much as before, this in turn negatively affecting the part of retail income that is interest-rate based. Even if interest rates were to increase, the decrease in demand for loans would still lead to decreased retail income. Consumer loans are more easily affected by hikes in interest rates than corporate ones.

‘Two countries that came out top of our ranking are intrinsically different in the way their retail arms operate and in the customer pools available’, said Pigeon. Japan, with a population of 126 million, achieved a retail banking income of $109 billion, while China with over 1.4 billion inhabitants (11 times more than

Asia-Pac retail banking income topped $447b in 2012

Japan), recorded $116 billion (only 6% more than Japan).‘In China, those possessing a wealth in excess of

RMB 10 million ($1.62 million) reached 1.05 million in 2012. The super-rich, defined as individuals with personal wealth of RMB 100 million ($16.2 million) or above, increased by 2% to 64 500. With the increase of wealth among the domestic population, major local banks now have an opportunity to expand their wealth management businesses,’ said Pigeon.

The Return on Assets for Retail (ROAR) in China is 50% higher than that of Japan (6% and 4% respectively). The retail banking industry in both countries exhibited different dynamics in terms of income generation.

China has been reducing its asset base by issuing wealth management products and by having dedicated vehicles that are considered as being off balance sheet. However, the income generated, often fee-based, is considered part of the retail activity; the same does not apply to Japan.

Retail banks across the Asia-Pacific region have further room to grow as they increasingly make use of social media and online platforms to reach remote areas with large and scattered customer pools.

These inTernaTional banking arTicles are sourced from:

Asian Banker, www.theasianbanker.com

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Subbed Banker 7 Intl Banking News1.indd 55 2013/10/15 12:34 PM

In line with its strategy to deter and deflect crime, G4S Cash Solutions South Africa is installing a new foam protection system in all of its cash-in-transit vehicles that

carry bulk and high value consignments. Based on technology from Penman Engineering, a UK-based company, this solution makes it nearly impossible for criminals to steal contents

from the hold of the cash-in-transit vehicles. The G4S Denial of Access (DOA) Solution comprises of two units that contain a “mix

and dispense pack” of expanding foam. When a trigger event occurs, the foam rapidly expands until it fills the hold of the vehicle and hardens into a hardy material similar in composition to

polyurethane fillers. This material cannot be melted with chemicals or fire, meaning that it will take a would-be

robber longer to chip through the foam in order to get to the valuables, than it will take the SAPS or armed response backup to arrive at the scene. [Says Hannes Venter, sales director at G4S Cash Solutions South Africa] ‘The introduction

of this foam protection system falls in line with our commitment to using the latest technologies to safeguard our customer’s assets as well as the lives of our security

officers and members of the public.’

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Cash handling – new ways of workingCash in circulation is ever growing and the trend looks set to continue. Handling cash still costs money. The costs associated with cash are linked to robbery risks, time involved in managing cash, shrinkage losses, manual preparation and reconciliation and information.

Reducing these costs, optimising cash operations along the whole length of the cash chain – from the store all the way up to head office – as well as streamlining the processes for retailers, banks and CIT (cash-in-transit) involved in the cash cycle, all call for a whole new approach to cash handling.

The Gunnebo product portfolio offers a combination of hardware, software and global services, ranging from entry-level systems to complete closed cash-handling solutions – from cash deposit to front-office security and back-office automation.

For further information, contact Gail Carew on 011 878 2300 or email [email protected] or visit www.gunnebo.com.

56 BANKER sA Edition 7

product newsauCtion operation – sa`s top vehiCle auCtioneers Auction Operation is a national auction company recognised countrywide as the leader in the auction sale of motor vehicles, whether repossessed, end-of-term fleet vehicles or insurance salvage.

Auction Operation understands that a successful auction is a result of a carefully planned event with well-executed marketing and preparation.

The company prides itself in offering the finest auctioning services available today. The firm is fully staffed with 17 auction facilities countrywide, with a house call centre and a fleet of 50 rollbacks and car carriers for the transportation of vehicles countrywide, combined with the experience necessary to professionally conduct auctions.

For further information on upcoming vehicles sales, contact Auction Operation on 0861114665 or visit www.auctionoperation.co.za to see the different brands and models of cars put up for auction.

south afriCan MoBile enaBleMent giant targeting Banking and transaCtional serviCes Business Clickatell is one of the first and biggest mobile enablement service providers in Africa.

It covers over 1 000 networks in more than 220 territories and countries, and is looking to grow its business by targeting the development of Africa’s fast-growing mobile banking and financial services sector. They enable banks to

reach and transact with their clients securely through cost-effective channels, thus reducing the bank’s cost to serve their clients.

Clickatell has extensive penetration into the African mobile communications market and delivers secure financial transactions alongside its traditional messaging business.

For more information, visit www.clickatell.co.za.

Product News.indd 56 2013/10/15 10:58 AM

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Banker S.A. Edition 07

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Transcript of Banker S.A. Edition 07