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The Banking Council South Africa

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The Banking Council South Africa Powered By Docstoc
					Financial Services For All
     in South Africa

       January 2002
      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.
 “3   Pillars”
  • Banks B 3.3 billion – 30%
  • Life Assurers – 40%
  • Mutual Funds – 30% (all in the last 10 years)
 Wehave had bank failures – unfortunate but
 necessary.
   Consequences
 Entry   of foreign banks and niche players
 Cross-subsidisation   eliminated.
 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
   Difference between
    • 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
    maintained balance
   Automatic life assurance
   Can be used at special assisted outlets, all ATM's and
    most points of sale
   Results

 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
   The issues
 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
    card
  • Smart card applications
  • The cell phone
But these initiatives cater for saving,
     transactions and cash only.


     They do not cater for credit
   Housing Finance
 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
      Failure!!

   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
    bank/Govt AMC
   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
      The lessons

   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
    won't either
   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
   Micro-lending
 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”
      Current position
   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
   1,300 micro-lenders
   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
    6,000
   Industry is now respectible and formal banks can
    participate.
      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
    book)
   Failure is because they think this is just another
    delivery channel
   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.
   SMME Finance

 Small,    Medium and Micro Entrepreneurial
 finance
 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%
    Note
 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
    month
  • On the 19th January, the prime rate was increased
    to 14%.
  • 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
    account yesterday
   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
     businesses
   More like your Traditional SME's
   Three problems
    • 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)

 Sizabantu   (guarantee)

 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
     A Failure!!!

 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
 solution.
 Bank   loans are too expensive and too
 inflexible in the early stages of the loan.
 Risk   capital is needed
                the initiative with financial
 Re-constituting
 banking of DIFD and mentoring from Skills
 Training Levy
 Purpose  is to facilitate bank initiatives instead
 of trying to do it ourselves.
       Credit Bureaux

 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
    etc.)
  • 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
 1-3
   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
 communities.
      Community Banking
   Lessons from the USA – securitisation and deposit
    insurance
   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
   Physical infrastructure
    • 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.

				
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