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The banking industry must change, but without risking the assets of its clients or undermining confidence in the financial sector, writes Cas Coovadia.
South Africa’s financial sector is at a complex crossroads.
Encouragingly, our institutions are recognised as among the most sound and well run in the world.
We offer reliability to our clients and our market conduct guarantees a stable financial system.
However, we are in the midst of a fundamental review of the transformation of our sector by Parliament’s standing committee on finance and the portfolio committee on trade and industry.
The hearings before these committees found high levels of distrust between stakeholders in the industry.
They recommended greater engagement to address this and to speed up transformation.
Against this background, poor people in South Africa are crying out for jobs, services, opportunities and an end to inequality.
As the committee noted in its interim report, their frustrations point to a looming social explosion that could consume everyone involved in the financial sector.
This places the finance sector in an invidious position.
We are transforming, but we must do far more.
At the same time, we must achieve this without risking the assets of our clients and undermining faith in the financial system, which would also be catastrophic – for the poor especially.
The key to achieving inclusive growth is for all parties – government, business and civil society – to engage constantly and meaningfully.
Only then can we begin to align our approaches, make gains, make compromises and build a shared vision.
This engagement process is well underway.
The parliamentary hearings themselves brought many interested parties together.
The recent banking summit of the Banking Association SA (Basa) allowed government and business to share views.
Several civil society organisations have come on board with Business Leadership SA’s contract with South Africa.
Basa will meet stakeholders to ensure a revised approach to transformation.
The outcome of this process will be tabled at the proposed financial sector summit, scheduled for 2018.
The interim report of the transformation hearings found that the Financial Sector Charter (FSC) council’s transformation targets may not go far enough.
As the banking sector, we have reached similar conclusions, as we stated in our response to the interim report.
We agree with many of the interim report’s recommendations.
We support the proposal for a “name and shame” approach for those who do not comply with FSC reporting requirements.
Only when we have credible data can we track our transformation progress.
We acknowledge that our sector can better communicate our transformation progress.
We welcome the undertaking by Treasury to produce an “ownership monitor” to improve data quality.
Basa supports the caution contained in the report against transformation targets, particularly for ownership, being coded in law.
We further caution against transformation targets for licensing requirements.
Prudential rules dictate that bank shareholders should have debt-free capital, which makes individual ownership of a bank almost impossible.
For this reason, most banks are primarily owned by institutional funds.
Making direct black ownership a licensing requirement would limit new entrants into banking, as few entrants would meet these capital requirements.
Pushing through what seems to be a progressive proposal could have the unintended consequence of stifling competition.
Basa notes the report’s view that corporates must be penalised if they fail to achieve FSC transformation targets. Mechanisms must be found to ensure compliance.
However, one of the strengths of the FSC has been its voluntary nature and we need to preserve this.
The report implies that banking start-ups find it harder to access finance compared to other sectors.
This may simply be a function of higher regulatory requirements for banking compared to other industries, rather than a deliberate bias against start-ups in the financial sector.
Regarding claims of a monopoly in the financial sector that leads to higher charges, in reality, competition has increased in the banking industry.
With the entry of Capitec, charges and fees dropped significantly. Several institutions have been granted provisional licences, and there will soon be even more banks.
While Basa and its members are absolutely committed to transformation, our sector is undergoing major restructuring, with amendments to the Financial Intelligence Centre Act, Financial Sector Regulation Act, Conduct of Financial Institutions Bill and Levies Bill.
There is also the proposed Debt Relief Committee Bill.
Care should be taken in introducing further reforms to avoid overwhelming the financial sector.
Already, institutions spend billions on regulatory compliance and the new reforms will add to that.
Legislating transformation can be counterproductive, but our intention to change remains uncompromising.
To demonstrate this commitment, the Basa board has resolved to move beyond FSC commitments and to accelerate transformation in specific areas:
. We want to strengthen the role of banks as a transformative force by identifying where we can use our expertise to solve critical problems in society, including social grant payments, revitalising township economies, infrastructure financing and management of state-owned companies;
. We will prioritise representation of black people, particularly black women, at executive and senior management levels;
. We commit to increasing black ownership in a diversified financial sector, opening opportunities to black-owned and black-women-owned enterprises through our procurement policies and to enhancing enterprise development.
We commit to working with regulators to understand why so few cooperative banks have been launched and work to promote these; and
. We must deepen financial inclusion, with specific focus on increasing access to finance by small and medium-sized enterprises and enable increased usage of accounts opened by individuals who were not in the banking system previously.
All of this transformation must drive inclusive growth, the ultimate engine of prosperity and social upliftment.
This will boost the confidence that can unlock investment as well as promote a national spirit and enable the quantum leap in growth that constitutes real economic transformation.
Coovadia is managing director of the Banking Association SA.
