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Financial Services For Allin 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 • De Kock 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) • We have 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. • South African 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 • With no 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 • Only 15% 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. • Small and medium entrepreneurs - access to bank credit is not a problem
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.
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) • Khula is 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 • Re-constituting the initiative with financial 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 • 4 is 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.