the banking association south africa annual review 2014

Annual Review 2014

2 RESPONSIVE | PROGRESSIVE | ACCESSIBLE | A BETTER FUTURE THROUGH COMPETITIVE, RESPONSIBLE, AND PROFITABLE BANKING

Mission

Vision

n To be the only mandated representative of the banking sector in South Africa

n To contribute to the socio-economic growth and development of our country by facilitating and encouraging our members to deliver financial services to a broad spectrum of the population

n To continually catalyse transformation and innovation in the sector and enable the consolidation of the outcome of these initiatives into the business of banks

n To encourage and facilitate the sustainability of the banking sector through profitable, responsible and environmentally sensitive business by our members

n To undertake the necessary research to inform the debate on implementing international best practice in the business of our members

n To forge dynamic partnerships with relevant stakeholders to influence an environment in which banks can do profitable business in a way that promotes international best practice and sustainable socio-economic growth and development

n To continually explore a role for The Banking Association South Africa in the southern African region and the rest of the African continent, as our members extend their footprints into these areas

cont

ents

As the mandated representative of the banking sector, to aspire to a progressive, sustainable and globally competitive sector that is respected by, and relevant to, the broad spectrum of stakeholders in South Africa

Vision and Mission ..........................2

Theme ................................................3

Who are we? ....................................4

Representation ................................5

Chairman’s report ...........................6

Economic overview ..................... 10

Managing Director’s report ....... 14

Issues of interest .......................... 18

Industry statistics ......................... 20

Membership .................................. 22

Corporate information ............... 23

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ThemeThe establishment of the Small Business Development ministry in 2014 provides an opportunity for government to drive the development of the small and medium enterprise (SME) sector to achieve the policy objective of creating 90% of the 5 million job opportunities in the National Development Plan through SMEs by 2030.

The challenges that face SMEs are diverse and complex, and require a champion to rapidly break down barriers. The difficulties experienced in South Africa will mirror those of our international counterparts in the

G20 where at a conference on opportunities for SMEs held in Melbourne, Australia, during June 2014, a number of key recommendations were proposed.

Our visual theme for 2014 illustrates the programme of change needed to re-energise the SME sector.

The banking industry will continue to focus on SMEs, facilitating finance for all aspects of our economic growth to improve the quality of life for all South Africans.

A small business owned by a women has a better chance of being profitable than one run by a man, according to findings of the SME Survey 2014, an annual study of factors behind success of small and medium enterprises in South Africa. Findings revealed that 78% of women-owned businesses were profitable well ahead of the 70% owned by men. While this result may seem like a big win for women, the level of female ownership remains exceptionally low with just 8% of South African SMEs being female-owned businesses.


Market and value chain opportunities for SMEs in the manufacturing sector most widely cited by stakeholders include the manufacture of vehicle parts, components and accessories; recycling equipment; downstream production and conversion of minerals; manufacture of components to support the green economy (e.g. solar panels); leather products; furniture; packaging for a variety of finished products; and the manufacture and supply of corporate clothing.

The Banking Association South Africa (BASA) is the representative trade association for the banking industry and therefore has no power to regulate or sanction its members.

The Banking Association strives to shape the future of banking in South Africa by formulating a long-term view of the demands that may be placed on the banking sector and, through proactive engagement with its members and other stakeholders, assists in transforming the industry towards this long-term view.

Who are we?The Banking Association’s executive is required to balance the demands

of industry representatives with that of being a catalyst for change. This dual role requires effective governance processes to ensure the executive manages expectations when fulfilling its catalytic role, without necessarily having the required mandate from member banks.

A board-appointed committee of senior bank representatives provides the necessary oversight to ensure mandated industry positions are fully supported.

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SMEs in the agriculture sector require support to enter markets, overcome challenges or grow their businesses. They have identified the need for financial assistance, particularly in order to acquire production inputs and machinery and technical support, and skills transfer through mentorship as key factors to business success. (Source: www.seda.org.za)

The Banking Association participates in a number of external forums including:

Representationn African Union for Housing Finance (AUHF)n Anti-Money Laundering Advisory Committeen Association of Corporate Treasurersn Business Unity South Africa (BUSA)n BUSA SME Task Groupn BUSA Climate Change Forum n BUSA Economic Policy Committeen BUSA Finance Committeen BUSA Transformation Policy Committeen Centre for Development and Enterprise (CDE)n Credit Information Ombudsmann Estate Agency Property Group (EAPG) SAICA Workgroupn Financial Advisory and Intermediary Services (FAIS) Advisory

Committeen Financial Sector Charter Council (FSCC)n Financial Sector Contingency Forum (FSCF)n FinMark Trustn Financial Services Board (FSB) Treating Customers Fairly (TCF)

Steering Group n Homeloan Mortgage Disclosure Act Work Groupn International Banking Federation (IBFed) n IBFed Consumer Affairsn IBFed Crime Working Party n IBFed Communications PR/Committee n Industrial Development Corporation (IDC) Risk Capital Facility

Programme Steering Committee

n International Banking Federationn International Union for Housing Finance (IUHF)n Johannesburg Development Agency (JDA)n KwaZulu-Natal Financial Literacy Associationn Millennium Labour Council (MLC)n National Business Initiative (NBI)n National Home Builders Registration Council (NHBRC)n National Treasury Consumer Education Task Teamn National Treasury and Economic Development Department Steerco

for Business Information Registryn NEDLACn NEDLAC Finance and Investment Committeen Nepad Business Foundationn Ombudsman for Banking Servicesn SADC Banking Associationn Sectional Title Regulation Boardn South Africa Savings Institute (SASI)n South African Bank Risk Information Centre (SABRIC)n Takeover Regulation Panel (TRP)n Trust for Urban Housing Finance (TUHF)n UCT — African Institute of Financial Markets and Risk Managementn UCT — The African Collaboration for Quantitative Finance & Risk

Researchn United Nations Environmental Programme (UNEP)n UNEP FI Property Working Groupn Wits Council


Sizwe Nxasana: Chairman of the board

Small and Medium EnterprisesThe importance of the SME sector as an engine for economic growth and job creation is a global phenomenon and we are pleased that a ministry has been established to focus on developing the SME sector. As an industry that finances bankable SME’s we believe that an aggressive approach to increase the attractiveness of the SME sector is needed, red tape and other impediments need to be reduced so that new opportunities can be realised.

Chairman’s report“Positioning SMEs appropriately in our economy is vital if we are to meet the aspirations set by our countries transformational agenda framed by the National Development Plan.”

Land reformWe welcome Minister Lindiwe Sisulu to a second term as Minister of Human Settlements. The Banking Association was a key signatory to the Social Contract that was signed between the Minister and multiple stakeholders in October 2014. This Social Contract is based on a multiple public/private sector stakeholder partnership to create amongst others, enabling conditions for the co-production of integrated sustainable human settlements, increase housing delivery and deepen access to affordable mortgage finance through innovation.

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Access to finance to expand is a major challenge for retail SMEs as retail is seen as a high risk sector by financing institutions. This makes it more difficult to compete in mainstream retail with the ‘big boys’ in prime shopping locations. (Source: www.smesouthafrica.co.za)

The long awaited Spatial Planning and Land Use Management Act was promulgated during 2014 and will undo past racial and unsustainable spatial planning and land use laws and practices. The start of the so called merging of “first and second economies”, together with increased densification and mixed-use land use is expected to dominate future municipal and provincial spatial planning frameworks. We view this legislative framework positively and expect this developmental shift to create considerable opportunities for lenders and impact positively on job creation and economic growth.

We are however concerned with the potential dilution of property rights in the broader definitional sense i.e. real and personal property rights including moveable, immovable and intellectual, if the draft Bills that deal with this subject matter are legislated in their current form. This would include the controversial Promotion and Protection of Investment Bill, the Expropriation Bill, the Restitution of Land Rights Amendment Bill and the Security of Tenure Amendment Bill. All of these bills have the ability to undermine both local and international confidence in property rights in South Africa, which in turn, will negatively impact on food security and investment. Our hope is that 2015 will see improved policy certainty and rationality on this emotive matter.

Cost of complianceA consistent theme of past chairmen has been to express concern at the rapid pace of regulatory reform since the financial crisis and the sometimes challenging application for emerging markets. This past year is no different as we face a barrage of new legislation initiated by both international standard setters and our own national agenda. The compliance burden is occupying exponentially more time with the threat of substantial punitive sanctions, including personal liability. This increasing cost of compliance weighs heavily on the activities of banks, dampening product innovation and potentially making banking more expensive. Although we are supportive of best international practices, there is little time for the effect of these changes to be measured to determine what the impact will be on our economy and society at large. We remain concerned that the banking sector of tomorrow may not respond well to the domestic agenda as set out in the National Development Plan.

SecuritisationsThe adoption of Basel III in South Africa has introduced a number of challenges for the banking sector. The liquidity coverage ratio requires banks to hold additional liquidity in the form of high quality liquid assets


Location, location, location – Despite the growing adoption of telecommunications and internet services amongst SMEs, studies reveal that businesses in cities, or headquarters in cities, are more likely to be profitable than those located in smaller towns or rural areas. The necessity for the personal touch is still a component of a successful business, something many SME owners instinctively understand. (Source: www.worldwideworx.com/smelocation/)

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As is the case with most sectors, SMEs in the catering sector claim that a major stumbling block to financial stability is cash flow from customers, including government. The SARS approach of levying VAT on invoices rather than on receipts means that the SME has to pay SARS before receiving payment from the customer. The shift of payments by customers from 30 days to 90 days and longer over the calendar year end has exacerbated this cash-flow problem.

Chairman’s reportcontinued

and save more. The drive to encourage increased savings has begun with the introduction of a R30 000 tax free savings account introduced by National Treasury, however this will not be enough to change behaviour.

Accolades and acknowledgementsI would like to extend the Boards sincere thanks to Governor Gill Marcus for her stewardship of the South African Reserve Bank and for her years of service to the financial sector in various guises. We also welcome the incoming Governor Lesetja Kganyago, another well respected financial figure, who takes the helm of this national asset during the implementation phase of the Twin Peaks regime and look forward to working with the Governor to preserve and grow our world class banking sector.

I would like to acknowledge the support of my colleagues on the Board during the past year and to make a special mention of the tremendous contribution that Cas Coovadia has made to not only the banking industry but also rising to the challenges presented by BUSA and stepping in to the acting CEO role. Finally, I would like to thank the BASA Board Executive Committee for their tireless efforts in guiding The Banking Association, and the staff for their invaluable contribution to the evolution of our industry. As I will be stepping down from my position as Chief Executive Officer at FirstRand in 2015, I would also like to welcome Johan Burger who will, amongst his other responsibilities, replace me as the FirstRand chairman of the Banking Association Board.

to cover the net cash outflows over a thirty day time horizon. South Africa does not have sufficient high quality liquid assets for the banks to meet this commitment and the South African Reserve Bank elected to introduce one of the options available to countries with limited high quality liquid assets, the contractual committed liquidity facility.

This temporary facility required banks to commit to supplying acceptable collateral in the form of securitisations as well as paying a fee to the South African Reserve Bank for the facility by the end of 2014. A further complication was the suspension by the Chief Registrar of the Deeds Registry during 2014, of an earlier exemption allowing copies of mortgage bonds, in favour of a more onerous requirement for the lodging of original bond documents when these cessions are to be registered. During 2015 we will be taking this matter further as securitisations are increasingly becoming the only available instrument to bridge the current structural constraints in our country.

An additional concern is the longer term liquidity metric called the net stable funding ratio introduced by Basel III that limits excess maturity transformation, by calculating the minimum amount of stable funding available over a one-year time horizon, to support longer term lending.

In South Africa, securitisations or the introduction of covered bonds would provide some relief to this difficult liquidity target. South African securitisation regulations are crafted from the best international standards applied globally and will provide an interim measure that could prevent a potential change in bank lending.

The structural changes required in our country to meet the standards that have been adopted, will mean that consumers will have to spend less


Supply-side constraints will limit the oil windfallFollowing a dismal growth performance in 2014, prospects for the South African economy remain uninspiring. For the next two years, the economy is expected to grow around 2,0% as binding constraints on the supply side are not expected to ease over the forecast period in an environment where both fiscal and monetary policy will have to tighten.

Global backdropThe divergent prospects for the world’s major economies remain a

Sizwe Nxedlana: Chief Economist, First National Bank

key feature of the global macroeconomic landscape. Economic activity in the US surprised on the low side during 1Q 2015 while growth in Europe and Japan picked up somewhat. China’s economic growth is under pressure. The Eurozone and Japan seem to be benefiting from easy monetary policy as their central banks continue with asset purchase programs. The aggressive easing of monetary policy by the Bank of Japan and the European Central Bank coupled with the Fed which has signaled its intention to raise rates has led to significant dollar strength which seems to have hurt the US economy. This may constrain the ability of

Economic overviewThe divergent prospects for the world’s major economies remain a key feature of the global macroeconomic landscape.

11

% y/y

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013 2014

World SAEmerging markets Sub-Saharan Africa

% y/y

-5

0

5

10

15

20

25

30

2006-Q1 2008-Q1 2010-Q1 2012-Q1 2014-Q1

Household spending Non-mortgage creditReal wages

0

1

2

3

4

5

2006 2008 2010 2012 2014

Fitch S&P Moody's

the Fed to raise rates by the magnitude it has signaled. We expect the diverging trend in growth and monetary policy stances among the world’s major economies to continue pushing the US dollar stronger relative to other major currencies. Weak growth in the world’s largest economies, coupled with a strengthening US dollar, is weighing on commodity prices, including oil. This will have adverse effects on the growth of sub-Saharan Africa’s commodity exporters.

SA growth outlookThe SA economy was under significant pressure in 2014 as severe labour unrest, electricity supply shortages and weak growth in the country’s export markets weighed on output. The economy grew by only 1,5% last year, its weakest performance since 2009.

Over the 2015-2017 forecast horizon, domestic economic growth is expected to recover relative to the dismal outcome registered in 2014. The slight improvement will be driven by the impact of lower oil prices, which will help reduce inflation and lift household real disposable income. However, we anticipate that this benefit will fade in 2016 and 2017 as the oil price recovers and the rand remains weak.

The positive impact that the lower petrol price will have on inflation this year is expected to see the SARB delay rate hiking until late in 2015. Lower cost-push inflation should also support corporate earnings through margin expansion and higher sales volumes, particularly for those with exposure to households.

Despite the oil windfall, GDP growth is set to remain lacklustre by historical standards. This underperformance is likely to reflect tighter fiscal policy, ongoing electricity and other supply constraints and low business confidence.

We expect SA economic activity to hover around 2,0% over the next three years. This forecast reflects our assessment that binding constraints on the supply side of the economy will not ease over the forecast period in an environment where both fiscal and monetary policy will have to tighten. Risks to this forecast are double-sided. Upside risks may emerge if energy prices fall further or if government accelerates economic reforms. Risks to the downside are linked to the fragility of the global economy and the possibility that domestic electricity and labour issues could be more severe than currently envisioned.

Household spending bottomed in 2014During 2014, household spending growth averaged just 1.4%, substantially slower than the 2,9% and 3,4% growth rates recorded in

GDP growth for SA and selected regions

Household spending, real wages and non-mortgage credit growth

Source: IMF, FNB

Source: FNB, SARB, StatsSA

2013 and 2012 respectively. Households faced various headwinds last year including elevated inflation, rising interest rates, muted employment gains, a significant amount of lost wages due to strikes and a meaningful slowdown in credit extension.

We believe household spending is likely to recover in 2015. The most obvious reason for this is the lower oil price, which will place downward pressure on inflation and improve consumer affordability. We also anticipate that there will be a modest recovery in household credit growth and that the SARB will keep interest rates on hold for most of the year. However, the weak rand and higher taxes introduced in this year’s National Budget are countering some of the oil benefit. Also a combination of further household deleveraging, as well as government’s commitment to contain its wage bill (the largest in the formal sector) implies that household spending growth will remain below its long-term average at 2,3%. In 2016, a forecast rebound in the oil price and domestic inflation is likely to result in renewed pressure on household spending growth.

SA government foreign issuer credit rating (notches above sub-investment grade)

Source: Thomson Reuters


Rand Bn saar

-250

-200

-150

-100

-50

0

50

100

2008 2010 2012 2014

Trade balance Net income receiptsNet current transfers Current Account

Index

60

65

70

75

80

85

01/2013 07/2013 01/2014 07/2014 01/2015

Economic overviewcontinued

Government restraint a major priorityGovernment’s financial position has been deteriorating since the onset of the global financial crisis, largely as a result of persistent revenue shortfalls (relative to expectations). However, the situation became more serious over the past year after Standard and Poor’s (S&P) downgraded South Africa’s sovereign credit rating to only one notch above sub-investment grade status. Finance Minister Nene’s response to the pressure from ratings agencies came in the form of a resolute commitment in the 2014 medium-term budget policy statement to reduce the fiscal deficit over the coming years, proposing a package that combines lower spending growth and increased taxes.

Trade balance set to improveDespite substantial and consistent currency depreciation since 2011, SA has run persistently large current account deficits over the past three years. The main causes of these deficits have been consumption-led GDP growth, deteriorating terms of trade (import prices rising faster than export prices) and supply-side weaknesses that have inhibited domestic production and competitiveness. While recent labour and electricity-supply issues highlight that supply-side weakness is likely to persist in 2015, we are encouraged to note that domestic consumption growth has moderated and SA’s terms of trade have begun to improve on the back of a lower oil price. These two factors are likely to see the trade balance improve in 2015. However, we expect this to be transitory, premised on our view that export constraints will persist, and the oil price will gradually recover in 2016.

Rand: Weak vs Dollar, Sideways on a Trade Weighted Basis The significant divergence in monetary policy across the world’s major economies is creating large currency moves. With the US Fed reducing monetary stimulus and gearing up for interest rate hikes, the dollar has

become more attractive for investors and has been on a strengthening trend. This is being supported by strong economic growth and a narrowing trade deficit. Meanwhile, Japan and the Eurozone are easing monetary policy. This has seen the yen and euro depreciate significantly in recent months.

The outlook for the rand will be influenced by evidence of domestic policy reforms gaining traction, market perceptions of the timing and extent of Fed tightening and the impact of monetary policy easing by other major central banks. The market’s discounting of Fed tightening has begun. This is likely to place upward pressure on the rand in the short-term given that it is attached to a small open economy that has so far failed to show reform momentum. However, there are reasons not to expect further significant rand weakness. First, the tightening of domestic fiscal and monetary policy, coupled with the lower oil price, should aid the narrowing of the current account deficit over the forecast period, mainly from import compression. However, evidence of this adjustment is likely to take time to emerge. Second, once the Fed starts hiking, it is difficult to see it hiking aggressively when its peers are heading in the opposite direction. That would probably lead to excessive dollar strength, place US asset prices under pressure and hurt the US recovery.

Temporary inflation reprieve Headline inflation is forecast to move from an average of 6,1% in 2014 to 4.7% in 2015, the lowest in five years. Core inflation is likely to remain stickier. In 2016, headline inflation is expected to rebound to above 6% on average given a partial recovery in oil prices and further significant administered price increases.

We view risks to the inflation outlook as skewed to the upside. These upside risks may emanate from a faster recovery in the oil price, larger pass-through from previous rand weakness, higher than forecast administered price increases or an increase in consumption taxes by government. Downside risks could come from a further fall in commodity prices, more significant rand strength or deterioration in GDP growth.

SA current account breakdown

SA trade-weighted exchange rate (index 2010 = 100)

Source: StatsSA (saar is the seasonally adjusted and annualised quarterly current account balance)

Source: I-Net

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To minimise the risk of non-compliance by SMEs, all stakeholders, employees and employers need to be kept up to date with regulatory requirements. Currently, only 13 banks operate in the SME space in an industry that consists of 19 registered banks, two mutual banks, 13 foreign banks with local branches, and 41 foreign banks with approved local representative offices. (Source: www.banking.org.za)

Hiking cycle hostage to the randThe monetary policy committee of the SARB has increased the repo rate by a cumulative 75 basis points (to 5,75%) since the beginning of the hiking cycle in January 2014. For most of 2014, the SARB emphasised the need to gradually normalise interest rates to combat the inflation risks posed by a weak and vulnerable rand. However, following the 45% fall in the oil price since 3Q 2014, risks to the inflation outlook have diminished somewhat. Unfortunately, the windfall from lower oil prices is only likely to be transitory (from an inflation perspective) with the rand facing renewed pressure as markets begin to increasingly discount rising US interest rates. Therefore, while rate hikes maybe delayed, we remain in a tightening cycle in contrast to many other emerging-market economies. The pace and magnitude of tightening will depend largely on rhetoric coming from the US Fed and its impact on the currency. We continue to expect a shallow hiking cycle by historical standards. This is premised on a gradual, shallow hiking cycle in the US and ongoing monetary accommodation from the Eurozone and Japan.


SME developmentOur industry has been grappling with the many challenges that small and medium enterprises are facing in South Africa and our member banks have appointed dedicated resources to ensure that SME’s are given the necessary attention within the banking sector.

The Banking Association is developing a financial literacy programme

Managing Director’s report“Having spent a considerable amount of time at BUSA during 2014, it is clear that the broader business sector has committed to the National Development Plan and is developing implementable programmes, but unequivocal support for the NDP from every ministry remains critical.”

Cas Coovadia, Managing Director

for SME’s, has begun a project to map out the SME ecosystem and has forged partnerships with other interested parties including the Gauteng Provincial Government and National Treasury.

We are participating in a National Treasury initiative, supported by the World Bank, which is reviewing credit infrastructure that may include a register for movable assets to provide much needed collateral for bank

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International initiatives to improve labour-market flexibility have led to programmes such as the Australian economic gardening concept, where SMEs are encouraged to take on extra temporary workers, and with a proposal to introduce entrepreneurship into the school curriculum as a career choice. These will undoubtedly contribute to establishing the necessary environment to create jobs, particularly for the youth in Australia.

lending together with refinement to credit guarantee schemes that could improve the bankability of SME start-ups. Furthermore, the establishment of an SME credit bureau could improve access to finance for SME’s and the SME Ministry’s initiatives to create an SME register and promote a rating agency for SME is welcomed. We hope to meet with the SME Minister soon to discuss broader partnership opportunities.

We have signed a Memorandum of Understanding (MoU) with the Gauteng Provincial Government to develop pilot projects for the support of SME’s within the context of growing township economies.

National Development PlanWe are a signatory to a Social Accord initiated by the Minister of Human Settlements and are working with her, and other stakeholders, to address various issues impeding large-scale housing delivery. The MoU with the Gauteng Provincial Government includes collaboration on infrastructure development. Senior infrastructure specialists from banks met with the Gauteng Infrastructure Finance Agency to consider the details of such collaboration. We are starting with banks giving input to an Infrastructure Conference hosted by the provincial government in June 2015.

African BankWith one of our members African Bank, being placed under curatorship during the year under review, we take comfort in the swift and decisive action taken by the Registrar of Banks, Governor of the Reserve Bank and the Minister of Finance in addressing the potential contagion effects that such an event could have on our financial markets.

The willingness of the banking sector to finance a bridge bank and the proposed amendment to the Banks Act to facilitate such a bridge institution makes South Africa a front-runner in implementing international best practice that will soon be adopted in the proposed Resolution Bill.

Financial Sector CharterAfter a period of three years with no reporting on the banks’ achievements against the Financial Sector Charter (FSC), in 2014, bank reporting was resumed against the Financial Sector Code. During 2014 much of the work undertaken by the industry on the voluntary charter that was signed eleven years ago, related to the alignment to the DTI Code.

Guidance notes updating the target market definition for affordable housing, together with access standards, were developed, and the FSC Council considered exemption applications as well as applications to deem products as access qualifying products, under the Code. The financial sector has also agreed to potentially including financing of black industrialists in the aligned Code.

The FSC Council was able to agree on the areas of alignment to the Revised BBBEE Codes of Good Practice together with scorecards and key principles for most elements, and we expect that the draft FSC aligned to the Code will be published for public comment during 2015. The DTI has extended the deadline for alignment to 31 October 2015.

Significant investment has been made into the FSC Council with an amended MOI, a new Board of Directors, the appointment of a Chief Executive Officer and approved budget with funding for 2015.

United Nations Child and Youth Finance International AwardOn 23 May, South Africa was awarded a United Nations Child and Youth Finance International Award. The contribution made by the Banking Association in our Teach Children to Save Programme over the past seven years reaching 1.2 million learners at 3000 schools was acknowledged in the list of recipients that included National Treasury, Financial Services Board, KZN Financial Literacy Association and the Department of Basic Education.


SME’s are considered an important contributor to the economy as drivers for reducing unemployment, especially since the formal sector continues to shed jobs. Unfortunately inadequate skilled labour remains a major challenge for small and medium enterprises in South Africa.

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In an article in SME South Africa, Christo Botes, executive director at Business Partners, an SME specialist risk finance company, explains that while the problems the country has had to face over the last year, from water and power shortages, are negative, these issues also provide opportunities in the market for entrepreneurs. He predicts that old favourites like tourism and infrastructure will continue to be lucrative industries for entrepreneurs, however some surprises like mining and education offer opportunities for entrepreneurs who are able to fill in the gaps created by increased demands in those sectors.

Managing Director’s reportcontinued

StarSaver ProgrammeThe generic financial literacy programme Teach Children to Save South Africa™ (TCTS SA™) has been rebranded StarSaver™ and will be launched in 2015. StarSaver will be rolled out nationally and targets learners in Grades 7 to 9 as per the 2013 curriculum review, where previously it was designed for Grades 4 to 7.

The objectives of StarSaver are to foster a culture of saving; promote volunteerism; create awareness about the value of money and the importance of savings; promote financial literacy; and assist learners to appreciate the power of choice.

The lesson plan was developed in conjunction with the Department of Basic Education, and integrated within the Economic Management Science (EMS) subject of the school curriculum. The Islamic Finance Chapter, introduced in July 2009, was customised to include concepts of money in Islam and is based on the elements of Shariah Law.

Lessons are designed to teach learners how to create and understand budgets; differentiate between needs and wants; track daily expenses; set realistic goals and plan accordingly; learn how to make saving money a part of their lives; get tips on safe and secure banking, learn about financial dignity, appreciate entrepreneurship and understand the wealth cycle of earn, save, spend, donate and invest.

StarSaver customises the wealth cycle to Learn, Earn, Save, Spend and Invest, the LESSI of StarSaver.

Over the seven years since the launch of Teach Children to Save in 2008, the programme has reached over 1.2 million learners in South Africa in more than 3,000 schools nationwide. In October 2009, the SADC Banking Association endorsed Teach Children to Save as a regional generic financial literacy programme.

StarSaver forms part of consumer financial education in the access to financial services transformative pillar and is the only industry wide collaborative initiative in the otherwise competitive consumer financial education space in banking. 23 banks and 43 financial institutions participate in this programme.

Business Unity South Africa (BUSA)At Nedlac, BUSA is the only voice for the broader business community and the banking sector has unreservedly supported this important institution going as far as seconding the Managing Director of BASA to fulfil the role of caretaker CEO to ensure the organisation would continue to fulfil its mandate.

BUSA has provided a platform for business leaders to pursue a balanced dialogue between political objectives and regulatory and commercial challenges.

Ideological debates often gain momentum with little consideration for the impact of these initiatives on the broader economy, including job creation and BUSA provides an ideal platform for the economic agents tasked with implementing these initiatives to express an opinion on the likely impact to the economy and propose alternative solutions.

Closer co-operation between Government and BUSA on the implementation of fundamental policy objectives could not only improve the understanding of the likely impediments, but also gain valuable insight into the potential opportunities that such a co-ordinated implementation strategy could make on national policy.


[1] SBP SME Growth Index 2014. [2] The G20 Agenda for Growth: Opportunities for SMEs Conference Report and Recommendations.

Issues of interestSmall and medium enterprises (SMEs)The international focus on developing SMEs as an engine for economic growth and employment across the globe has drawn attention to common challenges facing this sector, culminating in the 2014 G20 Agenda for Growth: Opportunities for SMEs conference in Melbourne, Australia. South Africa, as a member of the G20, shares in those common trends with additional local challenges added to the problem statement. The new Minister of Small Business Development, together with the Office of the Presidency, will have to implement substantial changes to unlock the value promised in the National Development Plan.

One of the most vexing challenges is credible SME data. It is inconceivable that any policy initiatives can be measured without at least a credible starting point and regular evaluation to determine if policy measures are achieving the desired result. In addition, this data could be used to participate in international benchmarking studies by the G20 and shape an approach for emerging markets. There are many legal definitions for SMEs across the spectrum of regulatory oversight, including the dti, SARS, SARB, NCR and FSB. This inconsistent approach creates a matrix of complexity that can include SMEs under one regulation while excluding them under another.

Consideration should be given to a practical, single measure for an SME in South Africa, together with a simple process to certify each SME for a full calendar or tax year. This would limit subjective assessments by other measures that could conflict with the objective of collecting credible data on this segment.

The administrative burden created for the South African government, broader business and the SME in such a complex environment is substantial, with South African SMEs’ regulatory compliance estimated at 75 hours or eight working days per month[1] with the inefficiency of the South African Revenue Services (SARS) dominating by a considerable margin. International research[2] shows that SME compliance costs can be between 10 and 30 times more than larger firms, with SMEs paying six times more tax than large companies in instances where profits are shifted into tax shelters by larger companies.

In contrast, the international community has committed to an aggressive approach of reducing red tape by not only providing an opportunity for SMEs to submit proposals for change, as in Australia, but actively driving reforms to review competition policy and either eliminate or modify those financial, legal and tax impediments that are not in the public interest. The Australian government has pledged to cut the cost of red tape by AU$1 billion per year, with deregulation units established in every department. Parliament will sit for at least two days every year removing unnecessary acts or regulations.

South Africa began establishing structures during 2014 to continue the Red Tape Reduction initiative by Cabinet for SMME initiated in 2005

A government committed to promoting SME development would need to work smarter between departments and leverage off electronic platforms such as the proposed single online entry point for personal and business information. Embracing the digital age could significantly reduce the administrative burden. Tendering processes will be addressed with a voluntary target set by the Australian government for both government and big business to purchase 20% of their goods and services from Australian SMEs.

A substantial commitment is a maximum 30-day limit for payment by the Australian government from date of initial invoice, with the burden of queries and additional requirements falling on government staff rather than the SME. National Treasury has since 2011 implemented a policy of effecting payments within thirty days from receipt of an invoice.

For many years, the World Economic Forum Global Competitiveness Report has consistently identified restrictive labour regulations and an inadequately educated workforce as key issues in doing business in South Africa and ranked us among the worst countries in the survey.

For South African SMEs, labour legislation – with its bargaining councils, Commission for Conciliation, Mediation and Arbitration (CCMA) and workman’s compensation – is a constant constraint. Skills levels are desperately low, with basic literacy and numeracy not being attained. The education system no longer produces a consistent level of quality that the SME can rely on, while university qualifications are systematically being diluted.

International initiatives to improve labour-market flexibility have led to programmes such as the Australian economic gardening concept, where SMEs are encouraged to take on extra temporary workers, and with a proposal to introduce entrepreneurship into the school curriculum as a career choice. These will undoubtedly contribute to establishing the necessary environment to create jobs, particularly for the youth.

Financing is often cited as another major stumbling block for SMEs. However, South Africa is ranked 32 out of 144 countries surveyed in the category ease of access to loans, with the SBP Growth Index Report confirming that well over two-thirds of overdraft and credit applications and three-quarters of loans were granted in full. The major stumbling block is cash flow from customers, including government. The SARS approach of levying VAT on invoices rather than on receipts means that the SME has to pay SARS before receiving payment from the customer. The shift of payments by customers from 30 days to 90 days and longer over the calendar year end has exacerbated this cash-flow problem.

Establishing the small business development ministry has given the government an opportunity to address these and other issues. Guided by detailed international best practice through our participation in the G20, the focus of this ministry should be on implementable programmes to meet the deadline set by the National Development Plan.

As the banking industry, we would welcome the opportunity to partner with this critical ministry and together with DFI’s implement a strategy that would measurably derisk this sector and change the risk appetite of lending institutions.

Black SME Financing was identified as a transformational pillar under Empowerment Financing. Five-year targets were set by the Financial Sector Charter Council, monitored, achieved and exceeded. Still, more room for downstream exists in areas of micro-finance, co-operatives and co-operative banking to facilitate greater outreach, access, institutionalisation of transformation and financial inclusion.

19

Update on the progress with the Joint National Treasury (NT) / Banking Association Statement on Responsible Lending At the request of National Treasury, non-bank credit providers were included in discussions on responsible lending as part of the broader credit provider industry initiative. Representatives from the various banks have been meeting with non-bank credit providers, as well as representatives from National Treasury, to formulate credit provider positions on the various work-streams identified under the auspices of the Joint National Treasury / Banking Association statement on responsible lending.

These work streams address Garnishee Orders/Emolument Attachment Orders, Credit Life Insurance, AEDO/NAEDO/Debit Orders, Consumer Education and Standards for Measuring Affordability and we provide an update below.

Standards for Measuring Affordability The work done by this work-stream was put on-hold and this committee was subsequently disbanded, as the affordability assessment guidelines are now being done under the auspices of the National Credit Regulator (NCR).

Towards end of November 2013, the NCR invited The Banking Association and other industry members to nominate representatives for the NCR’s Technical Committee to provide input on the Affordability Assessment Guidelines proposed by the NCR.

The Banking Association submitted three responses to the NCR on 14 June 2013, 18 October 2013 and 09 May 2014 in response to the invitation to comment on the draft Affordability Assessment Guidelines.

The dti then released their updated draft Affordability Assessment Regulations for comment by the Industry on 1 August 2014 and comments were submitted to the dti by 31 August 2014. The finalised Affordability Assessment Regulations should be released in 2015.

Project Evolution Project Evolution is focused on bringing the South African Credit & Risk Reporting Association (SACCRA) and the National Loans Register (NLR) data sets together, ensuring that data quality is constantly improved. One of the main benefits is that credit providers will produce daily submissions for all registered new and closed accounts to the credit bureaus within a 48-hour time frame. Currently 76% of the total number of files within the top 50 data providers, are compliant with the new data layout.

The project is now focusing on definitions and development of layout changes in line with the National Credit Amendment Act.

Credit Life Insurance The industry work group was adjourned in the third quarter of 2013, pending the release of the Summary of Key Findings of the Research Report into Consumer Credit Insurance (CCI) by National Treasury and the Financial Services Board. In the CCI findings report, released by National Treasury and the Financial Services Board in July 2014, the need to strengthen the current regulatory framework for CCI products was identified and the report proposed three areas of focus, namely, i) regulating the pricing of CCI; ii) regulating market conduct non-pricing practices; iii) protecting consumers through insurance cover for credit providers. In September 2014, the industry commented on the three approaches proposed by National Treasury and the Financial Services Board. The dti are considering the matter and further feedback is expected in 2015.

Emolument Attachment Orders (EAO’s) As part of the National Industry Steering Committee (NISC), The Banking Association together with other credit providers, presented

position papers on the future utilisation of emolument attachment orders, as well as possible retrospective action. Statistics on the current EAO’s were submitted to National Treasury and Department of Justice (DoJ) in July 2013 and in September 2013, on the future utilisation of EAO’s, as well as retrospective actions for EAO’s already in place.

In response to NT’s request for credit providers to consider additional concessions for EAO consumers, NISC representatives referred NT to the current Debt Counselling Rules System (DCRS) which already embodies substantial concessions in extending term and reducing interest rates regarding debt re-arrangement for consumers.

NT advised NISC that they are taking the EAO matter forward with DoJ, as NISC had previously provided NT with all the necessary information required.

The banks completed a clean-up action on the then current EAO’s. We await a further update on the status of EAO’s from NT and DoJ.

AEDO / NAEDO and Debit Orders The Payments Association of South Africa (PASA) with the SARB National Payment System Department (NPSD) is driving these initiatives in the payments space. Rules and processes for the Bad User List that aims to curb debit order abuse has been implemented.

The enhancement of the specimen debit order mandates and debit order norms / rules were completed and implemented in the third quarter, 2013. The revised AEDO/NAEDO limit increase to R10 000 was implemented on 1 September 2013. The increase of the item limit to R15 000 was implemented on 1 March 2014.

Authenticated Collections, that will in the long-term replace AEDO/NAEDO, is being driven by the Reserve Bank and the Payments Association South Africa (PASA) as a long-term project.

Consumer Education The position papers on Consumer Education (CE) in terms of responsible lending / borrowing were finalised by the CE workgroup and presented at the National Credit Industry Committee (NISC) on 31 July 2013.

In December 2013, BANKSETA advised The Banking Association that they had approved funding of R1,5 million for the generic common consumer education content. The project scope and terms of reference were agreed with BANKSETA. The Request for Bid was published in the Government Gazette on 23 May 2014.

The Consumer Education paper was also presented at the National Consumer Education Forum headed by National Treasury and the Financial Services Board on 15 April 2014, in order to update the industry on the consumer education initiative.

A joint industry workgroup was convened in September 2014 and generic consumer education content, to be used as the minimum standard of education by all credit providers, was compiled and agreed. Consumer education as part of responsible lending / borrowing by consumers will be launched by BANKSETA in 2015. The various credit provides will then be responsible for implementing this at the “teachable moments” within their consumer engagement programmes. Consumer education content will be available for interested parties.

It has been proposed that an industry credit provider body (NISC) monitors the implementation at an industry level and also advises BANKSETA if any consumer education content needs to be updated in the case of new / revised legislation coming into effect.

The banking industry through the Banking Association has invested in excess of R120 million (for period 2010 through to 2014) in debt review related projects; this excludes funds expended individually by member banks. The industry remains committed to addressing and relieving over-indebtedness, as per the National Treasury / Banking Association Joint Statement on Responsible Lending.


Actual GDP rate plus forecasts for 2015–2017 to meet the NDP

Household (forced) deleveraging underway

Source: FNB, Global insight, NDP

Source: SARB, NCR and FNB

-4

-2

0

2

4

6

8

10

1993 1997 2001 2005 2009 2013 2017 2025 2029

%

2017

Actual GDP rate plus forecasts for 2015-2017

Growth rates we would have to achieve to average at 5%

%

20

25

30

35

40

45

50

2007

2008

2009

2010

2011

2012

2013

% of consumers with impaired credit records

% %

50

55

60

65

70

75

80

85

90

95

0

2

4

6

8

10

12

14

16

1995 1998 2001 2004 2007 2010 2013

Debt service cost/disp inc

Debt to disposable income (RHS)

Industry statistics

21

USD/ZAR vs Current account balance

The fiscal deficit

Source: SARB, Stats SA, FNB Economics

Source: Econostat

-12

-10

-8

-6

-4

-2

0

-9

-6

-3

0

2Q04 4Q06 2Q09 4Q11 2Q14

Balance on current account as % of GDP USD/ZAR inverted (RHS)% of GDP

04Q94 1Q99 2Q03 3Q07 4Q11

-6

-4

-2

0

2

Fiscal balance as % of GDPS&P Sovreign credit rating%

BB s

BB+ s

BBB - s

BBB - pBBB s

BBB+ sBBB+ n

BBB+ s

BBB+ n

BBB n

BBB - s

SMEs have been identified as productive drivers of inclusive economic growth and development in South Africa and around the world. Some researchers have estimated that, in South Africa, small and medium-sized enterprises make up 91% of formalised businesses, provide employment to about 60% of the labour force and total economic output accounts for roughly 34% of GDP. (Source: www.banking.org.za)


Agribusiness is on the up with African entrepreneurs showing a new found interest in the agricultural sector. The Tony Elumelu Foundation Entrepreneurship Programme revealed that two months after its launch, of the 15 000 funding applications it received, over 6000 were interested in exploring the agricultural sector. Applications came from 51 countries across Africa, with the majority of applicants between the ages of 25 and 45. (Source: www.smesouthafrica.co.za)

MembershipInstitutionn Absa Bank Ltdn African Bank Ltdn Albaraka Bank Ltdn Bank of Barodan Bank of China Jhb Branchn Bank of Taiwan SA Branchn Bidvest Bank Ltdn Capitec Bank Ltdn China Construction Bankn Citibank N.A.n Deutsche Bank AG Jhb Branchn Finbond Mutual Bankn FirstRand Bank Ltdn GBS Mutual Bankn Grindrod Bank Ltd

n Habib Overseas Bank Ltdn HBZ Bank Ltdn Hong Kong & Shanghai Banking Corpn Investec Bank Ltdn Ithala Limitedn JPMorgan Chase Bankn Mercantile Bank Ltdn Nedbank Ltdn Sasfin Bank Ltdn Société Générale Jhb Branchn Standard Chartered Bank Jhbn State Bank of Indian The SA Bank of Athens Ltdn The Standard Bank of SA Ltdn Ubankn VBS Mutual Bank

2323

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the banking association south africa annual review 2014

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