Presentation 4: Competition and Regulation in SADC: Banking & Microfinance Services

Financial Sector ForumSADC Financial Services Liberalisation ForumBirchwood Hotel – Johannesburg, South Africa

Presentation 4: Competition and Regulation in SADC: Banking & Microfinance Services by Stephen Chisadza (DNA Economics) and Matthew Stern (DNA Economics)

Outline of Presentation • Introduction • Trade in services negotiations • GATS Schedules of SADC countries • Main findings of the review • Market access limitations • National Treatment limitations • Key issues for further discussion • Thank you

1. Introduction Objectives of the study • To assist SADC member countries in their preparations for negotiations on trade in financial services liberalisation that begin in 2013. • To broadly document the current competitive dynamics level and effects of trade in financial services • This research is NOT about identifying areas that require reforms, but about identifying and listing all of the current restrictions or barriers to trade and foreign investment. • The report tries to identify those areas where barriers to market access remain, either in law and/or in practice.

1. Introduction Methodology • The country reports were based on a desktop review i.e.: • Annual reports and publications (i.e. Central banks, Finance Ministries,regulators, financial institutions, etc) • Various FinScope Reports • Legislation • World Bank Services Trade Restrictions Databases • Other secondary sources

1. Introduction Definitions • Financial services were defined as: • All insurance and insurance related services i.e. life, accident and health insurance, non-life insurance, reinsurance, retrocession and services auxiliary to insurance. • Banking and other financial services (excl. insurance) i.e. accepting deposits and repayable funds from the public; lending (consumer credit; mortgages; credit for financing commercial transactions etc); financial leasing; money transmission service; trade in money market instruments, foreign exchange, and derivatives; securities; asset management, money broking, settlement and clearing, advisory and other auxiliary financial services.

1. Introduction

1. Introduction Definitions The four modesby which services are supplied internationally: • Mode 1 - Cross border supply e.g. fees associated with the payment and transfer of money between residents and non-residents and commissions related to international trade in financial securities. • Mode 2 - Consumption abroad e.g. a foreign tourist using their bank card at a local ATM. The amount withdrawn would represent a capital flow and the service fee levied by the bank would represent the value of the trade in banking services.

1. Introduction • Mode 3 - Commercial presence e.g. banks providing services abroad through the establishment of a branch, subsidiary, representative offices or joint venture. • Mode 4 - Presence of natural e.g. services provided by a foreign specialist or the movement of foreign managers or specialist personnel from a parent company to a subsidiary or branch abroad.

2. Trade in services negotiations • There are two types of commitments under GATS • General commitment are pledges that will apply to all sectors • Most Favoured Nation Principle i.e. no discrimination between service providers • National Treatment Principle i.e. no discrimination against foreign service providers in favour of domestic providers • Specific commitmentsare pledges to provide market access to a sector, but with limits placed on liberalisation. These limits must be scheduled (tabled/declared).

2. Trade in services negotiations • Restrictions of the following nature must be scheduled: • Limitations on the total number of service providers, • Limits on the total value of service transactions or assets. • Limitations on the number of service operations or quantity of output, • Limitations on the number of natural persons employed • Measures that restrict or require specific types of legal entity or joint venture • Limitations on the participation of foreign capital

3. GATS Schedules of SADC countries • Only 7 of the 14 SADC countries had made commitments in banking services at the WTO. • The commitments differ in scope, depth and design: • Malawi, Mozambique and Zimbabwe have made commitments across the entire banking sector except Mode 4 (Presence of a natural person) • Mozambique’s schedule refers to rules for Mode 3 (Establishment of a Foreign Presence) • Zimbabwe limited its commitments to 5 sub-sectors and market access limitation in Mode 3 (Foreign presence)

3. GATS Schedules of SADC countries • South Africa and Lesotho the financial sector is unbound (no limits) except for Mode 3 (Establishment of a Foreign presence) • South Africa is the only country to specify a national treatment limitation in this sector: “branches of banks not incorporated in South Africa must maintain a minimum balance of R 1 million on the deposit accounts of natural persons”. • Lesotho’s commitments provide clarity on the process to be followed by a foreign bank in establishing or acquiring interests in a bank in Lesotho.

3. GATS Schedules of SADC countries • Mauritius’ commitments appear to have no limitations in Modes 1 and 2 (Cross Border and consumption abroad) except for deposit-taking and clearing services. For Mode 3 (Establishment of a commercial presence) all financial institutions must have a license or Central Bank approval. • Angola’s commitments apply only to conventional banking activities (deposit-taking, lending and money transfers), and deal largely with limitations on residents to borrow or bank abroad. Company-Presentation – GFA Consulting Group GmbH

4. Main findings of the review • The report is an attempt to identify the areas where barriers to market access remain, either in law and/or in practice that may require being scheduled. • The detailed country reports still need to be reviewed by regulators because: • It was a desktop review dependent on publicly available information • Sector categories under trade negotiations are by activity (e.g. deposit-taking, lending etc) national legislation follows a different pattern

4. Main findings of the review – (a). Market access limitations Many SADC countries have liberalized their financial services sectors resulting in less state control and increased private sector participation. In most cases, the SADC banking sector seems relatively open to trade and competition. For Mode 3 (Commercial Presence), a few market access limitations were identified. Existing laws and regulations are predominantly prudential.

4. Main findings of the review – (a). Market access limitations • Many SADC countries still impose foreign exchange controls or restrict the ability of local consumers to access financial services (cross border) from abroad. • Most barriers in this sector apply across mode 4 (Presence of natural persons) - Limiting the ability of banks and other financial institutions to employ foreign staff • residents in key positions, • limits on the total number of foreign employees

4. Main findings of the review – (a). Market access limitations • Zimbabwe is the only country that currently imposes an explicit limit on the participation of foreign capital in banking-sector investments. • In Botswana, some degree of local ownership in financial institution is encouraged and is a ‘consideration’ in the award of all banking licenses.

4. Main findings of the review – (a). Market access limitations • In most SADC countries, there are prudential limits on the shareholdings in financial institutions, e.g. • in Malawi an individual or entity (foreign or local) may not own more than 49% of a prudentially regulated entity without the approval of the registrar. • In Lesotho, individual shareholdings (or the shareholding of a group acting in concert) above 10%, 25%, 33% or 50% require prior approval from the Central Bank. Company-Presentation – GFA Consulting Group GmbH

4. Main findings of the review – (b). National Treatment limitations • Some prudential and licensing regulations seem to discriminate against foreign financial institutions, e.g. • Zambia - security vetting fees for microfinance operators licenses are higher for foreign applicants and the Bank of Zambia will be introducing a tiered Minimum Statutory Capital (MSC) structure for commercial banks, with foreign owned banks required to set aside around five times as much as local banks • Namibia - foreign applicant banks must have attained a long term investment grade rating from a recognised international ratings agency such as Moodys, Standards & Poors, and Fitch. This appears not to apply to local and African banks.

4. Main findings of the review – (b). National Treatment limitations • Generally, most limitations on national treatment (in SADC and elsewhere) relate to: • residency and • in some cases citizenship requirements that are imposed on many key positions across the banking sector (over and above general work permit requirements). Company-Presentation – GFA Consulting Group GmbH

4. Main findings of the review – (b). National Treatment limitations

5. Key issues for further discussion Market access and foreign competition • Available legislation suggests that banks are able to offer services across all SADC countries in almost any legal form, without unnecessary legal or regulatory impediment. • Foreign banks have experienced few difficulties in establishing a presence in most SADC countries. • Yet access to banking services in many countries is low • There is no discernible pattern between the level of foreign competition and access to banking services.

5. Key issues for further discussion Market access and foreign competition

5. Key issues for further discussion Policy questions: • Is the regional banking environment as open in practice as it seems on paper? • Are there other regulations or procedures in place which make it difficult for new and/or foreign banks to compete in individual markets? • What is the future regulatory trajectory in the banking sector?

5. Key issues for further discussion The role and treatment of microfinance • Countries may impose or envisage different regulations in the banking and microfinance industries. • Given the importance of the microfinance industry in SADC, does it need to be scheduled and negotiated separately from banking?

5. Key issues for further discussion The role and treatment of microfinance • Legislation for microfinance across SADC is relatively less mature and consistent across countries. Where regulations do not exist, this might make it difficult for countries to make commitments. • Is there a need and potential for improved cooperation / harmonisation between regional micro-finance regulators? • Would it be desirable to develop a common understanding between SADC member states as to what constitutes micro-finance, and how trade and investment in this industry should be regulated?

5. Key issues for further discussion Access to the National Payments System • An independent supplier of ATMs, money transfer agencies and cellphone banking offerings such as M-PESA must all be sponsored into the system by a clearing bank. For credible innovative institutions this appears to limit access to the payments system. • Is access to the payment system used to keep out new entrants? • Are there any examples from other countries, that might provide guidance as to how national and regional payment systems can be developed and optimised to extend banking services between and within countries?

5. Key issues for further discussion Prudential Limits • Some prudential regulations seem unnecessarily protective or to favour local firms over foreign institutions. • Are SADC prudential regulations in-line with international best practice? • Is harmonisation of certain prudential aspects desirable? (e.g. principles for setting maximum and minimum limits) • Is some kind of mutual recognition agreement between regulators possible, so that SADC countries can meet minimum regulatory standards to recognise the prudential competency of other SADC member states?

6. Thank you • For further comments contact • stephen.chisadza@dnaeconomics.com • Thank you

Presentation 4: Competition and Regulation in SADC: Banking & Microfinance Services