Co-operatives Banks bridging SMMEs / Co-operatives Funding Gap: stakeholder engagement

Small Business Development

26 October 2022
Chairperson: Mr F Jacobs (ANC)
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Meeting Summary

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The Committee met with stakeholders to look at cooperative banks to bridge funding gaps for small businesses and cooperatives. The Banking Association of South Africa (BASA) told the Portfolio Committee on Small Business Development that there were 41 banks in the country made up of 14 local commercial banks, 13 foreign banks, four foreign-controlled local banks, three mutual banks, and seven cooperative banks. Most banks operating in South Africa were members of BASA – except for the cooperative banks.

Economic uncertainties due to the geopolitical challenges between Ukraine and Russia have led to inflation, resulting in the need to stabilise processes for the survival of small businesses. BASA was of the view that other role players in the market needed to play a role by providing sources of funding for small, micro and medium enterprises (SMMEs), as bank funding was not always appropriate, especially for businesses in the concept and start-up stages. Development finance institutions (DFIs) also had an important developmental role and acted as a bridge to commercial funding. Partnerships between DFIs and commercial banks also ought to be encouraged.

Members of the Committee expressed dissatisfaction with the banking industry’s low transformation rate, and their failure to employ credit strategies that catered for the needs of previously disadvantaged persons.

The Cooperative Banks Development Agency (CBDA) shared its vision of seeking to facilitate the development of a competitive, accessible and sustainable cooperative banking sector that empowers communities. Its mission was focused on creating an enabling environment for the E-cooperative banking sector through innovative solutions, capacity building, funding and technology interventions by providing support to cooperative banking institutions for the ultimate benefit and financial inclusion of underserviced communities in South Africa; development and support; promoting the cooperative philosophy and principles, and building confidence in the cooperative finance institutions sector.
Proposed amendments to the Cooperative Banks Act and the National Small Enterprise Act to enable the merger of the Small Enterprise Development Agency, the CBDA and the Small Enterprise Finance Agency, would be finalised by mid-November as an attachment to the business model of the merged entity, for comments. After amending the Cooperative Banks Act, the Prudential Authority (the South African Reserve Bank) would be the sole custodian of the Act.

The Committee asked about the accessibility of cooperatives in South Africa, including whether the CBDA invited big corporations to invest in cooperatives. How could the Committee ensure that people came together to invest in cooperatives? Did the CBDA believe cooperatives should become a part of the Banking Association of South Africa?

Meeting report

Mr Khulekani Mathe, Head: Financial Inclusion, Banking Association of South Africa (BASA),  said the country had a total of 41 banks, which was made up of 14 South African commercial banks, 13 foreign banks operating in South Africa, four foreign- controlled South African Banks, three mutual banks and seven cooperative banks. The majority of them were members of BASA, although cooperative banks were not yet members. 

Banks were financial intermediaries that collected deposits from savers and lent to those who would like to borrow. The core requirement for lenders included the minimisation of risk and costs, and ensuring liquidity. On the other hand, borrowers require funds at a specific date for a specific period at the lowest possible cost.

The role of Banks was to:

Collect amounts of deposits and pool them together to meet the requirements of large borrowers;
Transform funds lent for a short period to medium and long-term loans; and
Transform risk by minimising the risk of individual loans by diversifying their reserves as buffers for unexpected losses.

Banks in South Africa currently hold R4.9 trillion in deposits from the public. They were the largest funders to small, micro and medium enterprises (SMMEs), as 60% of their funding came from banks. These numbers would dispel the perception that banks were reluctant to lend out money in times of need.

Transformation

In the 2020 financial year, banks spent over R33 billion on procurement from black-controlled businesses, up from R30 billion that was spent in 2019. Banks further provided R19 billion in finance to black small and medium enterprises, R10 billion to black farmers, and R47 billion towards affordable housing.

The banks were also transforming their workforces. In 2020, 87% of junior management and 65% of middle management were black. Senior management was still facing challenges, as it had 45% of black representation. The banks were continuing to improve their share of representation of blacks.
The target for voting rights for black people in the financial sector was 25%, and in 2019/20, the performance of the banking industry was at 28% percent, meaning it exceeded the target. The economic interest was 23.8% in 2019/20, and declined slightly to 23.6% in 2020/21. This was due to the black economic empowerment (BEE) deals that started maturing in 2015/16. Those shareholders then started selling their shares, but the sell-off had been gradual. 

Small businesses

A study done by the International Monetary Fund (IMF) estimated the size of SMMEs in South Africa at R5.78 billion in both the formal and informal sectors. Half of the entrepreneurs in this sector were categorised as survivalist entrepreneurs qualifying as self-employed, 36% were registered in the informal sector, and only 14% were categorised as formal businesses -- and these enterprises had not grown over the past ten years.

The health of the economy was a key driver for bank lending. The South African economy was anaemic and had been approaching a recession even before Covid-19. The lockdown had stalled economic activities, resulting in a higher prospect of defaults.  

Challenges facing small businesses

Mr Mathe said the uncertainties due to the geopolitical challenges between Ukraine and Russia had resulted in inflation. The need to stabilise processes was crucial for the survival of small businesses. SMEs were often faced with inadequate or insufficient information to enable banks to process their loan applications. This was followed by difficulties with planning in general, due to SMEs not always being equipped and capacitated with financial planning skills to handle the cost swings that adversely affect their pricing and profitability. The limited use of movable assets as collateral by banks constrained the banks' abilities to capture the opportunities at the lower end of the market.

Banks were of the view that other role players in the market needed to play their role in being a source of funding for SMMEs, as bank funding was not always appropriate, especially for businesses in concept and start-up stages. Support ought to be given to SMMEs. Development finance institutions (DFIs) also had an important developmental role and acted as a bridge to commercial funding. Moreover, partnerships between DFIs and commercial banks ought to be encouraged.

Discussion

The Chairperson stated that due to time constraints of the meeting, the Committee had analysed a range of matters, and the issues for consideration were as follows:

What were the challenges that the banks were facing, and what progress had they made so far with the "Bounce Back" scheme?

The Bounce Back scheme/loans to SMMEs had been capped at the repurchase rate of plus 6.5%. Given the recent increase in interest rates, what was the overall interest on the loans that SMMEs had to pay currently?

In BASA's view, how was the R5 billion allocated to a quality-linked scheme being implemented?

The performance of the Loan Guarantee Scheme had been dismal, in this regard.

What were the banks doing differently to ensure the Bounce Back scheme was successful?
What targets did the banks set for themselves to support SMMEs owned by black people, women, and youth in townships and rural areas to ensure that their operations were inclusive?
How were banks mentoring and supporting those SMMEs that had been approved, as well as those that had been rejected?

BASA had reported that banks want to lend money to borrowers who meet certain criteria, but the context of the legacy of apartheid remained.

In the process of assessing funding applications, what were the banks doing differently to ensure that the scheme was inclusive and responsive to the inequalities in the South African business environment, while avoiding reckless credit?

How did banks ensure that the 50% of South African SMMEs that did not keep financial records, particularly those in townships and rural areas, were ready and able to access financial support within the current regulatory environment?

The International Financial Corporation (IFC) reported an SMME funding gap of R300 billion in South Africa, while BASA acknowledged the critical gap by all role players in the field.

What were the banks doing to correct the situation and reduce the funding gap?

In the Bounce Back scheme, government was covering 20.5% of the risk, whilst the banks were responsible for 79.5%. Could BASA explain in detail what this risk sharing
             meant practically?

 Given that commercial banks and the public sector had different goals, how did the banks ensure that the risk-sharing mechanisms were transparent and protected from corruption?
What percentage of their deposits came from township customers, and what percentage of lending went to township SMMES?

How best could the banks form a partnership with lending institutions to address the financing gap of R84 billion to serve the informal and micro-enterprise sectors?

What percentage of their current lending went to the informal and micro sectors?

What sort of legislation should be introduced and amended to speed up lending to the SMME market?

What commitment could they make to increase lending to township and informal sector businesses? Such commitment could then be regularly reported to the Committee.

The Chairperson also commented that banks were required to lend the money for loan guarantee schemes to small and medium-sized businesses at the repo rate plus a fixed spread of 3.5% (at the time 7.75%, equal to the prime lending rate). The banks were not allowed to make a profit from the scheme. The 3.5% margin was to be used to provide funding for losses before the banks and the Treasury incurred losses. However, in 2021 the banks made a profit of R95 billion after they recovered from the economic impact of Covid-19. The retirement and investment funds that provided pensions for government and private sector employees -- like the Government Employees Pension Fund (GEPF) -- were major shareholders of banks.

Ms M Lubengo (ANC) focused on the contribution of banks when making funding considerations for previously disadvantaged groups, particularly women and those living with disabilities. How were banks monitoring and supporting the previously rejected, but currently funded, SMMEs? What systems were used by banks to ensure that these enterprises did not misuse funds?

Mr H April (ANC) expressed extreme concern that when government introduced the Bounce Back scheme, the commercial banks continued with their normal vetting process, even though the circumstances differed. The black African child was still not being empowered, even though government had given the banks some guarantees. History dictated that Africans would not have the collateral to back the funding. Moreover, the interest charged to blacks was always higher than that charged to white consumers. The bank could have one of the biggest transformational roles in South Africa and needed to be more active. In terms of racial categorisation, he asked if there was a law governing this treatment by the banks, or if it was part of the systematic exclusion of Africans from participation in the economy of the land. The banks were being used as tools to disperse these finances.

Ms M Gomba (ANC) asked what banks were doing to ensure they prepared themselves when the demand for funding grew. Were they taking advantage of the high demand times?

BASA's response

Mr Mathe referred to the issue of profit, and said it was critical for Members to understand that they belonged to South Africans in varying forms, such as depositors and pensioners.

The banks' contribution to society was twofold:

Like every other corporation in South Africa, banks had a certain amount of profits that went towards corporate social investment (CSI), which funded a range of developmental challenges. 
It supported the financial education programmes offered in schools jointly with the Department of Basic Education (DBE).

Individual banks also worked with some enterprises that may qualify for credit. They often offered assistance to such institutions to ensure they were good for credit, as issuing loans was the bread and butter of banks, so it was therefore in their interest to issue loans.

One underlying factor of the Bounce Back scheme seemed to suggest no demand for the scheme. At this stage, BASA did not have all the information on the scheme, as it was sitting with National Treasury. The Association was prepared to engage further once all the information was available.

A more detailed response to all the questions asked would be provided in writing to the Committee.

Members were reminded that in dealing with the questions around the reach and effectiveness of the loan guarantee schemes, the criteria for qualifying as set by the banks were based on a mandate that was provided by government – National Treasury and the South African Reserve Bank (SARB) – to ensure that they did not expose National Treasury to additional risks, so the banks used their "usual" risk-based approaches. The loan guarantees were part of an overall scheme.

The Chairperson echoed Members' sentiments that BASA was appreciated, but the plea was for the Association to do more and find mechanisms to help the greater public to gain access to finance that was accessible, affordable and sustainable.

CBDA's development initiatives

Mr Paul Rossouw, Deputy Chairperson, Cooperative Bank Development Agency (CBDA), said that the vision of the Agency was to facilitate the development of a competitive, accessible and sustainable cooperative banking sector that empowered communities.

Its mission focuses on creating an enabling environment for the E-cooperative banking sector through innovative solutions, capacity building, funding and technology interventions by providing support to cooperative banking institutions (CBIs) for the ultimate benefit and financial inclusion of underserviced communities in South Africa; development and support; promoting the cooperative philosophy and principles; and building confidence in the CBI sector.
The Cooperative Banking Indaba was an annual event where industry players learnt from each other. This year it would focus on implementing the cooperative banking strategy in November which would take place in the Eastern Cape. The main thrust would be to provide progress on work conducted towards implementation of the cooperative banking strategy within the following pillars:

Formation of a secondary cooperative bank for scale;
Access to financial infrastructure;
Support organisation for advocacy and training; and
Tiered licensing and proportional supervision.

The South African cooperative banking sector had low penetration, slow growth, and adoption of technological innovations compared to other countries around the globe. Despite the lack of technological innovation in the sector, cooperative banks currently held a loan book of R368 million and assets to the value of R508 million. There are currently 29 cooperative banks registered. The growth had been organic by having an improved loan book and deposits.

The proposed amendments to the Cooperative Banks Act and the National Small Enterprise Act (NSEA) to enable the merger of the Small Enterprise Development Agency (SEDA), the CBDA and the Small Enterprise Finance Agency (SEFA) would be finalised by mid-November as an attachment to the business model of the merged entity, for comments. The merger would take place by 31 December 2023. After amending the Cooperative Banks Act, the prudential authority (SARB) would be the sole custodian of the Act. The financial and non-financial support of cooperative banking institutions would be "transferred" to the merged entity by amending the NSEA.

Discussion

The Chairperson highlighted the importance of cooperatives, and cited how the Afrikaans community had developed through utilising cooperatives, stressing that their importance could never be over-emphasised.

Were big corporations being invited to invest in cooperatives? How could the Committee ensure that people came together to invest in cooperatives? Did the CBDA have any relationships with the cooperative associations in South Africa? What were the presenter's views on cooperatives becoming a part of the Banking Association of South Africa?

Ms Gomba asked if the CBDA had looked at the shareholder agreement. How did it ensure that contributors to cooperatives were aware of the legalities of the organisations?

CBDA's response

Mr Rossouw highlighted the importance of cooperatives and banks, and said cooperatives were comprised of members, not shareholders. The new legislation looks at providing financial and non-financial support to develop a code of schemes for providing grants and donations to start-up cooperatives. At the core, the legislative amendments were looking to make it more appealing for cooperative banks to be established and ensure they received the necessary assistance going forward.

Closing Remarks

The Chairperson reiterated the importance of cooperatives and expressed the intention of the Committee to invite the CBDA officials to share how they were going to get cooperative banks to reach new heights in South Africa. They would be closely following the developments of the upcoming indaba, with the hope that they would address issues of innovation, private sector partnerships, and, most importantly, how funding for cooperatives could be accessed. The Committee was invested in the success of cooperatives.

The meeting was adjourned.

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