Cooperative Banks Development Agency Report 2010/11, SA Reserve Bank Report & financial statements 2010/11

Meeting report

Co-operative Banks Development Agency Report 2010/11
Mr Nkosana Mashiya, Deputy Register of Banks, who was also the Supervisor of the Co-operative Banks, noted that in terms of the Co-operative Banks Act, the Minister of Finance was required to appoint two supervisors, because of the differences in sizes of Co-operative Banks. The supervisor in the Reserve Bank was responsible for supervising the larger banks,  while the supervisor in the Co-operative Banks Development Agency (CBDA) was responsible for the smaller and upcoming banks. Mr Mashiya explained that the presentation, on behalf of the CBDA, would cover both the report from the CBDA and the supervisor of Co-operative Banks in the CBDA.

Ms Olaotse Matshane, Managing Director, CBDA, outlined the establishment and mandate of the CDBA. She noted that the Co-operative Banks Act (the CB Act) was passed in 2007 and the first Board was appointed in August 2008. Operations started in 2009, a Managing Director was appointed in March 2009 and a Supervisor in May 2009. The establishment and mandate of the CBDA were in accordance with sections 54(1) and 55(1) of the CBA,  respectively.

Ms Matshane outlined the CBDA organogram (see attached presentation) and presented the main responsibilities, strategic goals and objective of the Co-operative Bank Supervisor. The main responsibilities included regulation, through the making of rules and enforcing compliance with legislation, and the supervision of on and off-site operations. The Supervisor must establish and ensure financially sound and stable corrective action. The strategic goals and objectives of the Supervisor included the registration and supervision of co-operative banks, compliance with and the review of the legislative framework, and the handling of troubled co-operative banks.

In relation to the capacity building and information report, she noted that the strategic goals and objectives involved assembling an effective capacity building team, understanding the existing Co-operative Financial Institutions (CFI) sector in depth, and supporting, promoting and developing co-operative banks, including deposit taking co-operatives. Further objectives were the creation of accessible programmes to meet sector learning needs, and implementing a CFI development monitoring system. The capacity building team comprised of a Director and two technical staff, who were assigned to develop accredited training materials, develop capacity building tools, facilitate workshops, provide technical assistance to CIF’s and release publications.

Ms Matshane commented on the current status of the CFI sector. Firstly, she noted that it was characterized by weak and inadequate capital levels. There was a sector capital return of a low 2% over the past four years, yet dividend payments were made regardless of the weak capitalization.

Secondly, the governance structures were weak. The majority of the CIF’s did not hold Annual General Meetings. Many of the board members were regarded almost as permanent, with some boards having an average age of 77 years, and some members had been on the board for 15 years. The existing boards lacked adequate training and understanding of the models of financial co-operatives.

Thirdly, the sector had inadequate credit risk management practices. There were no credit committees to provide oversight over lending, and there was a lack of adequate loan policies. There were inadequate capabilities for monitoring and managing delinquent loans and the writing off of bad debts.

Fourthly, she noted that there was weak operational capacity. The existing credit and savings policies were outdated or were not implemented properly. There was still widespread use of manual and paper based systems. There was a general lack of skills within the sector.

Ms Methane’s fifth observation related to the reporting on financial performance. She noted that Financial Services Co-operatives did not produce conventional financial statements. They had the tendency of reporting as for grant funding purposes. Savings and Credit Co-operatives were not consistent in reporting to the Savings and Credit Co-operatives League of South Africa. There was a general  absence of required experience and qualifications in basic accounting skills, and prevalence of unedited financial statements. Even if statements were audited, it was found that the auditors did not understand the financial co-operative model. The sector was not prioritized by auditors, and this resulted in the late production of financial statements, sometimes as much up to a year after those statements should have been drawn and audited.

The CBDA had received an unqualified audit report for 2010/11. However, the Auditor-General (AG) had commented on irregular expenditure and fruitless and wasteful expenditure.

Ms Matshane outlined the statements of financial position and performance for the 2010/2011 financial year (see attached presentation for full details). She concluded by saying that the CBDA had an opportunity to support the co-operative banking sector and could ensure its sustainability and viability. The sector was showing definite growth and there was a need to ensure that the sector was regulated and did not put depositor’s funds at risk.

South African Reserve Bank briefing
Mr Daniel Mminele, Deputy Governor, South African Reserve Bank, presented the Group annual financial statement for 2010/11. He noted that the South African Reserve Bank (SARB or the Bank) was established by the SARB Act No 90 of 1989. Its primary objective was to achieve and maintain price stability in the interest of sustainable and balanced economic growth.

Mr Mminele outlined the functions for which the SARB had responsibility (see attached presentation for full details). He then took the Committee through the corporate governance structure of the Bank. The affairs of the SARB were managed by a Board of Directors, which consisted of four executive directors appointed by the President of the Republic of South Africa, and eleven non-executive directors. The Board met five times a year, and had various sub-committees. These included the audit committee, the non-executive director’s committee, the remuneration committee and the board risk committee. The Group’s annual financial statements were audited by two independent audit firms, who reported to the shareholders. The SARB held an Annual General Meeting of shareholders, and at this, the annual financial statements were presented and approved.

The SARB Group consisted of the Bank and four wholly-owned subsidiaries. These subsidiaries included the Corporation for Public Deposits (CPD), the South African Bank Note Company (SABN), the South African Mint Company (SA Mint), and the South African Reserve Bank Captive Insurance Company (SARBCIC).

Mr Mminele gave an overview of financial performance, noting that SARB incurred an after tax loss of R1.2 billion for the 2010/11 year, compared to R1.0 billion for 2009/10. This was due to the high costs associated with holding the country’s gold and foreign reserves. Owing to continued adverse economic and financial market developments, the returns earned on foreign investments had been minimal, while the funding costs of these investments approximated the repo rate. The losses were incurred in the execution of the Bank’s public duties and did not in any way relate to operational deficiencies or undue risks being taken. SARB had a sound risk management framework, a disciplined budgeting process and prudent expenditure management. The losses were offset against the contingency reserve, which was created in terms of the SARB Act and amounted to R7.9 billion, after loss write-off. Once the Bank returned to profitability, there would be a need to rebuild the contingency reserve and reconsider the level at which it should stand in future, taking account of recent experiences.

Mr Human Anderson, Assistant General Manager: Financial Services Department, SARB, outlined a summary of the comprehensive income statement. This summary showed that in 2010/2011, the Group had a net loss of R1.093 billion, and the SARB itself had a net loss of R1.046 billion.  In terms of loss after taxation, the loss of the Group was R73 million lower than that of the Bank alone. On the statement of financial position for 2010/2011, he noted that the Bank had total assets of R362.993 billion, and total liabilities of R354.280 billion. The total capital and reserves were listed. The  Group had total assets of R372.062 billion, total liabilities of R362.123 billion and total capital and reserves of R9.939 billion.
 
Mr Anderson outlined the assets. He said that the gold and foreign exchange holdings increased by R26.8 billion and the accommodation to banks increased by R5 billion. The reason for the increased assets were the increased deposits from National Treasury, the increase in the gold price from R8 164 (per fine ounce) in 2010 to R9 732 (per fine ounce) at 31 March 2011, and offset by reduction in valuations caused by the appreciating rand against the US dollar. The total liabilities for the Bank increased by R33 billion. The SARB debentures issued increased by R12.5 billion and the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) decreased by R7.4 billion, due to the rand appreciating against the US dollar. Foreign loans and deposits increased by R31.3 billion.

Discussion
The Chairperson asked why the financial statements of CBDA did not have any notes attached to them. He pointed out that the report of the Auditor-General said that the CBDA needed to check certain irregularities relating to fruitless and wasteful expenditures, but these were not noted anywhere. The notes to the statements should have indicate these irregularities.

Mr Mashiya replied that the notes related to the financial report were included in the Annual Report. He explained that the issue around fruitless and wasteful expenditure concerned an amount of about R55 000 which was incurred when payments were made for a CBDA staff member to travel abroad. Due to delays at the relevant embassy, the visa was not processed in time, and the trip could not be made although payments and reservations had already been made.

The Chairperson said that the CFIs were facing a number of challenges, as stated in the presentation. He wondered if there were also other challenges, and asked if the CBDA needed assistance from Parliament.

Mr Mashiya said that there had been many measures and interventions already put in place to address the challenges noticed. These were detailed in the 2011 report, and were going to be presented to Parliament in due course.

The Chairperson asked what role the SARB had played in regard to the global financial crisis. He also enquired what role it played in regard to BRICS (Brazil, Russia, India, China, South Africa trade consortium), and the African Development Bank.

Mr Mminele replied that the BRICS was a great opportunity for South Africa and the SARB was involved in discussions around that. Ahead of the G20 meetings, which the SARB attended, there were usually BRICS meetings that were held to align the positions of BRICS members, and to set a common agenda. The lead role of the BRICS work was with the Presidency and the Ministry of Finance. BRICS countries were looking at establishing a development bank, and South Africa had been given the opportunity to develop the model framework, and put forth more concrete proposals.

The Chairperson asked what projections SARB made on the issue of rising and high food prices, and the effects on the local and rural consumers.

Mr Mminele said that there were a number of factors and mechanisms which determined this.

Mr M Makhubela (COPE, Limpopo) asked how often the SARB reviewed the monetary policy. He asked which of employment targeting and inflation targeting was the most common in South Africa, and what the impact was of the Euro zone crisis on the South African economy.

Mr Mminele replied that the monetary policy reviews were done on a continuous basis, when the operating environment changed. The use of employment targeting had been increasingly replaced by inflation targeting, and the latter was becoming the broad consensus for central banking. The SARB distinguished goals and instrument independence, and stated that the SARB had only instrument independence. The difficulty with inflation targeting lay in establishing, initially, the type of employment rate, which sector it applied to, and at what level.

Mr Mminele added, that there would definitely be a direct impact on the South African economy, through the Euro Zone crisis. This was because South Africa was a relatively small and open economy with very strong links to Europe, and the fact that Europe was the main export destination for South African goods. However, the exact effect of that impact would be controlled by the way in which that crisis would be approached.

Mr J Bekker (DA, Western Cape) asked why the CBDA reports had no figures and values attached to them. He said that the presentation of the challenges and the issues was very vague and needed more precision.

Mr Mashiya replied that the CBDA had received an unqualified audit report from the Auditor-General (AG), but the Emphasis of Matter were points that the AG recommended should be considered by the CBDA. The values and figures were not given, because the CBDA received an unqualified report.

Mr R Lees (DA, KwaZulu Natal) asked what bank was referred to when the CDBA talked about “money in the Bank”.

Mr Mashiya replied that 2010 was the first year of operation of the CBDA, and it did not have a bank account. The money that was allocated actually remained with the National Treasury, and CBDA had to sign requisition forms for payments to be made. This was why it was said that there was “money in the bank”.

Mr Lees questioned why the salary bill of the CBDA was low, in relation to the number of positions in the Agency.

Mr David De Jong, Supervisor: Co-operative Banks, CBDA, said that the some of the staff were budgeted for, for the full year, but because the Agency was still at its start-up phase, the accounts showed that the amounts actually paid out to staff were not very large. This was also the reason why the Report reflected mostly challenges. In its first year of operation, the CBDA had mostly confined itself to making a thorough  assessment of what was happening in the field, which resulted in the many challenges being highlighted. It was necessary for the CBDA to understand the CFI environment  in depth.

Mr Lees asked for clarity on the assertion that staff members of the SARB were producing papers and he asked whether these staff members were paid solely to produce the papers, or whether they had other duties and produced papers as a side-issue.  

Mr Mminele replied that the SARB had researchers and staff whose duties were essentially to publish papers. The bank was aligned with tertiary academic institutions, and this resulted in the publication of papers. It was a core function of a particular department.

Mr Lees wondered why, if SARB had made an overall loss, there was an item for tax.

The meeting was adjourned.