Financial Services For All
in South Africa
SA Banking System – Dec 2001
4 major banks each with assets > Baht 520 billion
2 large banks each with assets > Baht 200billion
Those 6 banks have 87% of total assets of industry
18 small banks with assets < Baht 50 billion each
15 very small banks with assets < Baht 4 billion each
9 foreign controlled banks
15 branches of foreign banks
61 foreign bank representative offices
The regulatory context
DeKock Commission in the early 1980’s. Same
as Campbell in Australia. Deregulation and
move to functional approach.
Very weak second tier deposit takers. High
barriers to entry and no deposit insurance.
• Banks B 3.3 billion – 30%
• Life Assurers – 40%
• Mutual Funds – 30% (all in the last 10 years)
Wehave had bank failures – unfortunate but
Entry of foreign banks and niche players
Convergence – bank networks being used for
the sale of all 3 product ranges.
SouthAfrican banks have moved “offshore”
and particularly into Africa.
Even though we are logically “the financial
centre for Africa” the objective is to maintain
an internationally competitive and stable
financial sector. If the result is that we are a
centre, that is a nice result.
SA Banking System Continued
Total assets Baht 3,276 billion
4 major banks
• Gross ROE: 22.5%
• ROE net of interest: 9.3%
• Average interest margins: 4.3%
• Interest income as a % of total income: 50.8%
• Cost to income ratio: 58.2%
• Bad debts & provisions as % of total assets: 1.7%
Banking services for all
• Retailing - high volume and low margins; and
• Relationship banking - low volumes and high margins
Focused use of technology - easy, fast, friendly
Efficient - account opened in less than 5 minutes
One standard off-the-shelf integrated product
Cash and savings facility
System measures and rewards regular saving and
Automatic life assurance
Can be used at special assisted outlets, all ATM's and
most points of sale
Withno advertising - from 700,000 clients in
1996 to 2.4 million in 2001
From a loss of Baht 600 million p.a. in 1996 to
a profit of Baht 1.6 billion in 2001
Average Balance - Baht 3,200.
Average transactions - 2.3 per month.
Can be franchised
Difference between the usual strategy of
• reducing the value of the offering and increasing
the price; and
• E Plan, giving real value for the client's money
Only one of a number of initiatives
• Pension payouts
• Use of the new proposed national Identity smart
card as an ATM-access and benefits transfer smart
• Smart card applications
• The cell phone
But these initiatives cater for saving,
transactions and cash only.
They do not cater for credit
Basic proposition -
• private ownership
• of a self-standing house
• financed by a mortgage loan from a bank
Agreement with Government in 1995 that
banks would make 50,000 low-income
mortgage loans per annum
Government once-off capital grant to low-
income first-time home owners of Baht 66,000.
Enough for a serviced site and a 25square
meter shell structure.
Financing a mortgage loan
40 square meter house costs Baht 200,000
Monthly instalment on a mortgage loan of
Baht 200,000 is Baht 4,000
Minimum income required is Baht 16,000
Only15% of population has family income of
Baht 16,000 per month
Banks granted 140 000 mortgages (Baht 44 billion)
over the 3 years of the agreement
People couldn't afford it
Boycott of instalments and service charges as a form
of political protest
There are now 22,000 re-possessed houses in a joint
Another 44,000 re-possessed houses held by banks
The real test is the secondary market, and the
overhang of PiPs kills the secondary market
Low-income people can't afford private houses
financed by mortgage loans
Interest subsidies don't work
Capital subsidies have worked
The income stream as a mortgageable asset
Usury laws don't put a ceiling on the interest rate, they
put a ceiling on access to credit.
For credit extension in low-income communities, you
have to "know your client" and be in touch with him.
You can't do that through technology; branch
contraction of banks is a major problem
Community Re-investment Act
If the agreement with Government didn't work, CRA
Government can't force banks to do unprofitable
business unless Government guarantees the loans
If the Govt guarantees loans banks are careless
It results in severe distortions in the market
The only basis for CRA is sound banking practice and
incentives to do profitable business
This applies to all types of banking business -
including opening branches
1992 Government exempted loans < Baht
24,000 (now Baht 40,000) from the usury laws
(current interest ceiling - 23%)
Micro-lending took off – estimated 15,000
micro-lenders in 1999
Two basic forms
• Instalments paid off salary roll - Micro-lenders were
charging 45% p.a.
• Instalment collected by micro-lender - They were
charging 40% p.m.
The “Wild West”
1999 Government intervened to stabilise industry.
Established the MFRC.
To get exemption you have to register with MFRC
• Max interest 13% per month
• Bad practices regulated
6,854 branches. More than all the banks
Total book Baht 56 billion. 10 registered banks
account for 51%
Total number of loans 2.6 million. Average loan Baht
Industry is now respectible and formal banks can
Current position continued
As the industry was cleaned up, the bad eggs left.
Major micro-lenders failed (including subsidiary of a
major bank last week). Loss of Baht 6 billion (33% of
Failure is because they think this is just another
Success requires a totally different business approach
- much better knowledge of the borrower, constant
contact, very fast follow-up on default.
The good micro-lenders have got this right
Govt had to intervene on the State Salary roll
Micro-Finance is used for housing improvement,
education, business and consumer credit.
Small, Medium and Micro Entrepreneurial
We have had to include Micro and very small
But the defninition is very important.
Smalland medium entrepreneurs - access to
bank credit is not a problem
Small business loan – B 4 million
Interest payable to depositors at 8% B 288,000
20% ROE on capital B 114,285
Admin Costs B 20,000
Cost of liquid assets, reserves etc. (0.4%) B 16,000
Average losses on this type of loan 3% B 120,000
Total costs to be covered B 558,285
Total costs as % of the loan 14%
Until Thursday 19th January, 2002 -
• The cost of funds was between 8 and 9%.
• The prime overdraft rate was 13%.
• The usury rate was 23%.
• The maximum rate on micro-loans was 13% per
• On the 19th January, the prime rate was increased
• The cost of funds and all other rates will, over a
period of time, go up a similar amount.
Very Small Loan B120,000
Interest payable to depositors at 8% B 8,640
20% ROE on capital B 3,430
Admin Costs B 12,000
Cost of mentoring (20 hours at B 400/hour) B 8,000
Cost of liquid assets, reserves etc. (0.4%) B 480
Average losses on this type of loan 7% B 8,400
Total costs to be covered B 40,950
Total costs as % of the loan 34.1%
Micro loan B 2,000
Interest payable to depositors at 8% B 12
20% ROE on capital B 4.7
Admin Costs B 1,000
Cost of liquid assets, reserves etc. (0.4%) B 0.7
Average losses on this type of loan 10% B 200
Total costs to be covered B 1,217.4
Total costs as % of the loan 61% p.m.
Use of Technology to serve SME
Crowding the banking halls
SME problem is cash flow and credit control.
Need to know what deposits and debits went to the
Bank downloads yesterday's transactions and any
special notices into the cell-phone data mail box.
All that information is available on the cell-phone
without visiting the bank.
Cash deposit drop boxes, counted under video.
BOE mobile bank clerks
Extensive internet banking
Micro and very small start-up
More like your Traditional SME's
• The cost of screening
• The cost of mentoring, including the drawing up of
a basic business plan
• The risk relative to the potential margin income
So a joint bank venture
Sizanani (screening and mentoring)
Both grant-funded. Grant-funding is possible
for such an industry initiative.
Sizabantu re-insuring 80% of risk with Khula (a
government agency) and the banks carry the
first 5% of the risk themselves
20% loss ratio
A few bad mentors gave us bad loans
Banks not carrying enough risk themselves
and careless in approving loans
Although using call centre techniques,
screening costs too high (only 2% approved)
Khulais not able to take any more risk than
the banks, so it adds no value
We are closing the initiative.
The real problem
Guaranteeing the bank loan is not the
Bank loans are too expensive and too
inflexible in the early stages of the loan.
Risk capital is needed
the initiative with financial
banking of DIFD and mentoring from Skills
Purpose is to facilitate bank initiatives instead
of trying to do it ourselves.
Credit bureaux list all court judgments.
In closed user groups also all credit records.
Also provide Credit Scoring Systems.
Not sufficient for SMME. What are the
prospects for the business and how good is
the business person?
The better the information available to the
banks the easier the access to credit
The way forward in South Africa
Four ingredients are necessary –
• Physical infrastructure (Technology, telecomms,
ATM networks etc)
• Legal infrastructure (legal systems for
collateralising, securitising, dealing with bankruptcy
• Regulatory framework (prudential regulation,
disclosure and conduct regulation)
• Appropriate institutional arrangements
1 – 3 you can make happen
4is largely how the private sector responds to
The way forward in SA continued
We are doing well on 1
We are substantially OK on 2
We are 1 step behind on 3. As a consequence
a “summit” called by the SA Communist Party.
We need to work out how to facilitate the
institutional arrangements if we are truly to
“empower” rural and low-income urban
Lessons from the USA – securitisation and deposit
Difference between delivering product and services
and empowering communities.
Too late to start new community banks - inadequate
capital and skills - major banks too strong.
Major banks aren't going to do it. Inadequate return.
We have the basic ingredients, but not the institutions
• E Plan, smart card, ATMs etc.
• Use micro-lenders or franchise micro-lenders
Regulatory structure needs to accommodate
Govt and major banks must play role.
The over-riding lessons
Much private sector innovation has taken place
The Government could never match the diversity and
energy of the initiatives
There is no substitute for a free market place,
including success and failure
The role of Government is to create and maintain an
appropriate environment, and to reduce the risk,
spread the risk or share the risk where the market
itself is unable to cope with the risk
It is not the Government’s role to eliminate the risk.