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BAnker SA Edition 9

SA

Edition 9 2014 Magazine of The Banking Association South Africa

20 YEARS OF DEMOCRACY

Our past vs our future Chris Hart A realistic view Prince Mashele Has BEE succeeded?

Profile SARB’s Lesetja Kganyago

Who gets the credit? Black customers’ experience

Picasso Headline

Banking news Rivalry in retail Infrastructure bonds Global customer survey BankerSA_Cover_edition9_3.indd 1

The future of banking E&Y The bank of 2030 KPMG Responding to regulation + Banking in the cloud 2014/04/07 1:03 PM


CONTENTS

10 09 MD’s Message

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Critical issues dealt with by the Banking Association South Africa

10 SA democracy

37 Reportback

South Africa: 20 years of democracy

It’s time for a frank assessment of our first two decades as a democratic nation, says Cas Coovadia

SABRIC: winning the fight against banking crime

Collaboration is the key, says CEO Kalyani Pillay

16 SA democracy

A realistic view of SA democracy

How far have we come, and where to from here, asks Chris Hart

22 SA Democracy

The story of BEE: 20 years into democracy

Has BEE succeeded? To judge it we must look at its predecessors, says Prince Mashele

28 Industry report

Responding to regulation: the future

KPMG reports on the road ahead

31 Training

Fresh challenges create employment opportunities

Changes in banking require new skills

41 Security

Innovation to protect your money

Cash transportation has had to become a hi-tech business

44 Customer story

Who gets the credit?

Zithulele “KK” Combi says not much has changed for black customers

49 Banking IT

Financial services move to the cloud

The cloud’s efficiencies are good news for smaller banks

53 Opinion

A catalyst for economic growth

South Africa’s financial regulations and banking industry are driving growth in SA and Africa, says Citi’s Donna Oosthuyse

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CONTENTS & CREDITS

55 Publishers: Picasso Headline (Pty) Ltd Times Media Building Central Park, Black River Park Fir Street, Observatory, 7925 Cape Town 8001, South Africa Tel: +27 21 469 2400 Fax: +27 86 6822 926

Content Manager Editor Banking Association Editorial Board

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Contributors

Picture Credits Copy Editor Production Editor Content Coordinator Head of Design Studio Designers Business Manager Project Manager Sales Consultants

55 Opinion

The bank of 2030 and beyond

E&Y’s Emilio Pera on the transformation of banking

58 SA Banking News

Rivalry in retail banking and more on infrastructure bonds

60 SADC & International Banking News

Subscriptions and Distribution Financial Accountant

Raina Julies Charles Boffard boffardc@timesmedia.co.za Lawrence Khoza Luyanda Tetyana Ndivhuho Mafela Thenji Nhlapo Charles Boffard Cas Coovadia Chris Hart Prince Mashele Phakamisa Ndzamela Donna Oosthuyse Emilio Pera Dr. Retha du Randt Gallo/Getty Images Fikiswa Majikela Mike Scarth Shamiela Brenner Michele Jarman michelej@picasso.co.za Jayne Macé-Ferguson Mfundo Ndzo Leo Abrahams Robin Carpenter-Frank robinc@picasso.co.za Andrew Green andrewg@picasso.co.za Andre´ Potgieter Derrick Asimwe Selwyn Petersen William Rompelman Shihaam Adams subscriptions@picasso.co.za Lodewyk van der Walt

Senior General Manager: Newspapers and Magazines Mike Tissong Associate Publisher Jocelyne Bayer

ADVERTISING: ANDREW GREEN E-mail: andrewg@picasso.co.za

Tel: +27 21 469 2469

Lessons from global customer satisfaction survey

63 Lifestyle

Meet the bankers

Lesetja Kganyago, Deputy Governor of the South African Reserve Bank

CTPprinters

CAPE TOWN

Copyright: Picasso Headline and The Banking Association South Africa. No portion of this magazine may be reproduced in any form without written consent of the publishers. The publishers are not responsible for unsolicited material. SA Banker is published quarterly by Picasso Headline Reg: 59/01754/07. The opinions expressed are not necessarily those of Picasso Headline. All advertisements/advertorials and promotions have been paid for and therefore do not carry any endorsement by the publishers.

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MD’S MESSAGE

Report from the Managing Director

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he first edition of Banker SA for 2014 is published as South Africa celebrates its 20th birthday. It also precedes the 5th general election of our young, but maturing, democracy. It is thus fitting that The Banking Association South Africa (The Banking Association) celebrates 20 years of democracy, but also assesses where the country is after this time. This is also the first edition since the passing away of our global leader and exemplar, Nelson Rolihlahla Mandela, our beloved Madiba! I will reflect on the 20 years of democracy in a contribution elsewhere in this edition of the magazine. Let me thus limit my report to the critical matters that The Banking Association has dealt with in the last quarter. The following areas are pertinent: • The credit environment; • Key legislative matters; • The National Development Plan (NDP); • Business Unity South Africa (BUSA). The credit environment remained challenging. There has been a significant amount of concern about the rise in unsecured credit, some of it expressed in a pragmatic and balanced way, but some concern has been expressed in a manner that adds uncertainty to the environment. The Banking Association participated in the consultation process on amendments to the National Credit Act (NCA), including making oral presentations to the dti Portfolio Committee in the National Assembly. We expressed concern about the process around the introduction of additional amendments late in the process, without, in our view, sufficient time for public participation on these. The Trade and Industry Minister also gazetted regulations for the Removal of Adverse Credit Information from credit bureau. We have consistently expressed our concern about this, and we are still seeking clarity on critical aspects of the regulations. We will continue to engage government on this critical area of bank business, with a view to finally agreeing on appropriate legislation that will protect consumers, while also enabling banks to conduct profitable and responsible business. We have dealt with some critical legislative issues in this quarter. We have submitted comments on the last consultation document on Twin Peaks. We have maintained our consistent support for the Twin Peaks regime, but also continue to request involvement in the details of building the two peaks. We have also maintained consistency in our position that the Twin Peaks legislation offers us the opportunity to ensure coordination in the regulation of the financial sector and have participated in comments on the new land bills, human settlement bills and the

Cas Coovadia, Managing Director, The Banking Association South Africa

ongoing implementation of BASEL III. This first quarter also saw further instances of rolling blackouts and we have engaged with Eskom through Business Unity South Africa (BUSA). We will continue such engagements at a senior level in the coming months.

We would like to appologise for the incorrect title used in the Member Banks article on pg45 of Banker SA Edition 8. It should have read: Mr. Jinguo Zhang, General Manager, China Construction Bank Corporation, Johannesburg Branch

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South Africa 20 years of democracy By Cas Coovadia, Managing Director of The Banking Association South Africa

Nelson Mandela votes for the first time in 1994. 10

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adiba passed away on 5th December 2013, leaving South Africans with a legacy and value system we must cherish and emulate! Madiba was 95 years old when he left us and the country will be celebrating 20 years of democracy a few months after he passed on. The first edition of the Banker for 2014 thus marks two seminal moments in the history of our proud nation! This is an opportune moment for us to take a few steps back and make a frank assessment of the first 20 years of democracy. There is absolutely no doubt that SA has become a better place to live in for its entire people over the past 20 years. We have a constitutional democracy that is the envy of many parts of the world and political freedom which ensures equal rights to every human being in SA. Substantially more people have access to electricity, potable water, municipal services and other services that improve their lives. Substantially more children attend school today than was the case during apartheid. We have started addressing inequities in economic access and economic control. We have enabled access to homes for over two million people in the 20 years of our democracy, more than any nation coming out of repression into democracy. We have worked with others to put Africa, our continent, on the global map, and we have built an economy that has the potential to grow and contribute to the ongoing growth of the continent. A recent Goldman Sachs report identifies the following positive

SA DEMOCRACY developments in the first 20 years of democracy: • GDP almost tripled from $136bn to $400bn; • Inflation fell from a 1980-1994 average of 14% to a 1994-2012 average of 6%; • Gross gold and FX reserves rose from $3bn to a prudent $50bn; • Tax receipts of R114bn from 1.7m people rose to R814bn from 13.7m people; • In the last decade there was a dramatic rise in the middle class, with 4.5m consumers graduating upwards from the lower (1-4) Living Standards Measure (LSM) and in total 10m consumers being added to the middle-higher LSMs (5-10); • Social grant beneficiaries rose from 2.4m to 16.1m. However, we have also conducted ourselves in a way that threatens all these gains and hampers our ability to grow our economy and create jobs for millions of people. We have more children in school than at any time in our history, but the quality of our education and the education infrastructure has deteriorated. We consistently find ourselves close to last, if not last, in mathematics and science proficiency in the World Economic Forum Global Competitive Reports. Yet we need to produce people, through the education system, to participate in an increasingly technical and IT-based global economy. Many of the houses we built and handed to people are defective and falling apart. We have more informal settlements today than at any time in our history. We have not yet broken the spatial development patterns created by apartheid. We are

We are falling short in creating an environment for economic growth. Edition 9 BANKER SA

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SA DEMOCRACY

We have a constitutional democracy that is the envy of many.

not training enough artisans and creating enough entrepreneurs to contribute to the growth of our economy and make a dent in the jobless situation. We are also falling short in creating an environment for economic growth, through inappropriate regulations and uncertainty in consistent implementation of regulations. The social fabric of our societies is weakening and is tenuous, and we have become a violent society that does not care for our women and children. We are weakening our constitutional and democratic structures, with rampant corruption just one of the manifestations of this. The Goldman Sachs report quoted above also identifies the following problems that persist after 20 years of democracy: • Unemployment remains stagnant at 25% from the 23% inherited in 1994, concentrated amongst the youth; • The majority of Africans remain in the lower-income categories whilst the vast majority of white people remain in the middle to upper-class categories; • The current account deficit is now 6.8% of GDP, one of the highest amongst global peers, placing SA in the exposed company of other

twin deficit countries; • The contribution of mining and manufacturing to GDP has fallen to 23% now from 38% in 1986; • Household debt to disposable income soared from 57% in 1994 to the present 76%; • Real wage inflation across the economy of 3% per annum was recorded over the two decades of democracy, whilst in the mining sector wage inflation in the decade 2001 2011 was 11% per annum, just as Platinum Group Metal (PGM) productivity declined by 4% per annumover the period; • The public sector, despite increasing to two million employees,amid significantly increased spending has seen its contribution to GDP fall from 19% in 1994 to 15% today. We have achieved much in the first 20 years of our democracy. We have built a platform from which we could achieve much, much more, for all of our people. It is not constructive to try to allocate responsibility for the opportunities we have lost, and are losing. We must come together, as South Africans; to address the problems we have as a country. Critical stakeholders must Edition 9 BANKER SA

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REPORT SA DEMOCRACY BACK realise there is only one boat, and we are all in it together. We need to demonstrate strong and moral leadership across the different elements of our society. We must also, in the 20th year of democracy, grasp the nettle and challenge each other to move away from selfish agendas and sectoral interests, and move out of current paradigms and comfort zones to put the national interest top of a new agenda! If we fail to shift the tone and agenda of our engagements, we will not be able to position SA to receive substantial real investment, and we will fail to empower our people to have a real stake in our country. In conclusion, allow me to go back to the beginning of this article. Madiba has left us! His life epitomised discipline, focus, high moral values and living, non-racism, honesty, efficiency and professionalism. Madiba taught us that those of us with resources and comfort cannot, and must not rest, so long as so many people live in poverty, disempowerment and lack of opportunity. We must use these values, and his way of life, as the mirror through which we look at ourselves. We must ask if Madiba would have been happy with us if he saw that we are failing to deliver adequate services to the majority of our people, that we have still not included the majority of our people in our economy, that we have so many people not having the dignity of a job, that we react violently in our interactions and that we are letting our children down! I believe Madiba would be very unhappy!

‘If we fail to shift the tone and agenda of our engagements, we will not be able to position SA to receive substantial real investment and we will fail to empower our people.’

A dream deferred? 14

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A realistic view of South African democracy Twenty years following the first fully democratic election in South Africa, the country finds itself at an inflection point.

“Poverty alleviation strategies have reached their maximum efficacy. The time has come to shift to poverty reduction strategies.� Writes economist Chris Hart 16

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SA DEMOCRACY ‘Apartheid remains a national scar with a deep-level legacy that still weighs on the broader society. The triple problems of poverty, inequality and unemployment are identified by the government as the priority challenges left by the Apartheid legacy.’

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.hile substantial progress has been made to .reduce poverty and improve standards of .living, it is quite clear that more progress is .required. However, getting to this point has .been an achievement for South Africa. The birth of the South African democracy was the result of a successful transition. The position of the Apartheid government had become increasingly untenable as the decade of the 1980s progressed. Earlier, the National Party had attempted a half-baked reform by introducing a tricameral parliament, which included the coloured and Indian population groups but excluded the black majority. This was unacceptable both within South Africa and also with the international community. The isolation intensified after the Rubicon speech by President PW Botha; reforms ground to a halt, South Africa was forced into a default and a number of states of emergency were declared as unrest escalated. The economy was also sapped through the border war being fought in South West Africa (now Namibia) at the time. President PW Botha suffered a stroke and was eventually replaced by the more reform-minded FW de Klerk. He unbanned the ANC and had Nelson Mandela released. Negotiations for a transition were initiated but this proved to be a difficult period. The CODESA (Convention for a Democratic South Africa) negotiations broke down initially and had to be restarted. CODESA2 also broke down, but an interim constitution was eventually agreed upon, paving the way for the 1994 elections. A landslide by the ANC won this election and a democracy was born under a government of national unity. Twenty years down the line, South Africa finds itself largely at peace. This was not an obvious outcome, given that the country was already experiencing a low-level civil war in the late 1980s and early 1990s. Even the legitimacy of the 1994 elections was at risk, with some key parties (mainly the Inkatha Freedom Party) planning to boycott the elections. Last-minute negotiations secured their participation. The new order quickly became widely accepted. The full spectrum of both extreme left and right wings were operating within the system, using the courts and also participating in elections. This was an important early development in the transition from the oppression of Apartheid to the freedom of the new democracy. The constitutional framework negotiated in

the run-up to the 1994 election was a key success factor. The establishment of strong and credible institutions meant that a constitutional democracy was established in South Africa. Some of the key institutions that were established included the offices of the Public Protector, the National Prosecuting Authority, the Independent Electoral Commission, the Constitutional Court and other so-called Chapter 9 institutions such as the Human Rights Commission. In addition, the bill of rights was embedded in the constitution. The independence of the judiciary was affirmed, as was the independence of the South African Reserve Bank. Sufficient checks and balances have been put in place to assure minorities of their protection against the might of the majority. South Africa is correctly described as a constitutional democracy. Property rights were also given protection in the constitution and that helped to generate confidence in South Africa as a place to invest and do business. The government implemented macroeconomic management measures that aimed for the economy to progress along a sustainable path. Inflation was brought under better control and the budget was managed to the point of surplus in 2008. In this way, the economy was able to recover from the debilitating effects of sanctions and the cost of sustaining the war in what is now Namibia. In many ways, South Africa has been fortunate. Strong leadership steered the country away from an intractable civil war and wise, levelheaded pragmatic negotiations formulated a good constitution. However, Apartheid remains a national scar with a deeplevel legacy that still weighs on the broader society. The triple problems of poverty, inequality and unemployment are identified by the government as the priority challenges left by the Apartheid legacy. To deal with poverty, the government has implemented an extensive poverty alleviation programme, which includes both child and old age grants. This has provided a basic social safety net. Government budget expenditure is aggressively redistributive to try and deal with poverty. The tax take is also highly ‘progressive’, which means that the ‘rich’ carry the highest tax burden. The combination of reducing incomes of top and middle earners and providing grants to the bottom earners has helped to reduce inequality. Edition 9

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South African president Jacob Zuma gives a celebration speech on Freedom Day at the Union Building in Pretoria, South Africa on 27 April 2010.

Other policies, such as Black Economic Empowerment and Affirmative Action, have also been implemented in order to redress the Apartheid legacy. However, 20 years after the establishment of South Africa’s democracy, the outcomes so far have been unsatisfactory. The principal reason has been the persistence of exceptionally high unemployment of around 24%. This has been where the economy has battled. In addition, the economy has not recovered well in the wake of the global financial crisis of 2008, which had its epicenter in the developed markets. Social unrest has also become evident with the escalation of service delivery protests across South Africa. The economy has distinctly underperformed since 2008. While the 2008 global financial crisis was one factor, the underperformance of the South African economy stands out when compared with other emerging market economies and also that of many countries in Africa. A number of measures have also deteriorated such as the debt levels, the deficits and unemployment. The highly regarded 18

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macroeconomic management of South Africa has slipped; the sovereign credit ratings have been downgraded and remain at risk for further downgrades. South Africa is also considered part of the ‘Fragile Five’, a grouping of emerging market economies that have developed the twin-deficit problem in their current accounts and national budgets. A third household deficit has also developed in South Africa, which adds to its vulnerability. Essentially, South Africa has reached an inflection point. Poverty alleviation strategies have reached their maximum efficacy. The time has come to shift to poverty reduction strategies, which essentially means job creation. Reducing inequality through income-reducing taxes has also reached its limit and a shift towards lifting low-income earnings is also needed. This comes with employment creation for the unemployed but also an improvement in job quality for those who are in employment. The inflection point is mainly about job creation. Through job creation, both poverty and inequality can be reduced as issues.

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The economic distinction between poverty reduction and poverty alleviation is that poverty reduction is about shifting resources to investment as opposed to allocating resources to consumption in the case of poverty alleviation. Economic growth at levels high enough to absorb the unemployed into the labour force can only come about through investment. And investment is ultimately funded through savings. The current investment rate of 19% needs to be boosted to 30%. But even the current investment rate has generated a macro-economic mismatch, with a savings rate hovering around the 14% mark. Essentially, the savings rate needs to be doubled in order to sustainably support a higher investment rate and consequent higher growth. Essentially, at the core of the unemployment problem lies a capital deficiency that has arisen from a low savings rate. This is where reform is needed. The triple challenge of poverty, inequality and unemployment has been perpetuated

through the triple mistakes of regulation, labour unrest and taxes on saving and saving viability. The regulatory construction requires economies of scale for compliance, which is particularly detrimental to SMMEs – the job-creating engine of any economy. Labour unrest has the consequence of investor avoidance of exposure to South African labour. Taxes on capital formation and investment viability have inhibited savings. These taxes include taxes on interest earned, dividend taxes, capital gains tax, property transfer duty, death duties and taxes on pension lump-sum payments at retirement. These are inappropriate taxes when the country is capitaldeficient and facing a massive unemployment problem. The inflection point for South Africa is key to establishing a virtuous cycle or entrenching a vicious cycle. Continued success for South Africa’s democracy may well depend on whether job creation can be achieved on the scale needed. Poverty alleviation and grants are no longer sufficient. By Chris Hart, commentator on economic issues and Chief Strategist at Investment Solutions. Edition 9

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The story of Black Economic Empowerment Modern South Africa has experimented with three economic empowerment schemes. Prince Mashele measures the success of BEE against its predecessor’s.

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ven though historians have not chronicled it as such, the first scheme can be identified as the English Economic Empowerment (EEE). When the surface has been peeled off, what remains at the core of the second scheme is Afrikaner Economic Empowerment (AEE). The last scheme is fairly well-known, simply because today’s legislation proclaims it thus: Black Economic Empowerment (BEE). Standing in the twentieth year of democracy and looking back, people ask: Has BEE succeeded? The problem is that those who proffer answers to this question do so as if the first two empowerment schemes – EEE and AEE – have never existed, or as if they are not connected to BEE. Yet history reminds us that EEE gave rise to AEE and that BEE was occasioned by what both EEE and AEE did: impoverish black people. The father and champion of English Economic Empowerment in South Africa is none other than Cecil John Rhodes. Having left school at the age of sixteen, failing to qualify for university education, Cecil’s father, the Reverend Francis William Rhodes, decided that his uneducated son must go and live in one of Great Britain’s colonies. This is how the famous Rhodes landed in what is today known as South Africa. The personal life of Rhodes in South Africa epitomised the character of the EEE in our country. Rhodes started out as an uneducated young Englishman. In the 1870s, he joined the chaotic diamond diggers in Kimberly, using hand hoes and other obsolescent digging instruments. After breathing the dust of Kimberley, he went back to school and acquired a degree at Oxford University. From someone who was physically digging for diamonds in Kimberly, Rhodes, together with his friends and countrymen such as Charles Rudd, Barney Barnato, Joseph Robinson, Alfred

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Beit and others, created what we now call the South African mining industry. Until recently, mining in South Africa was virtually an exclusive preserve of the English. They used it to enrich themselves as a group, and to keep Afrikaners and Blacks on the lower rungs of the economic ladder. Two things have facilitated the success of the English in their EEE scheme: productive work and education. This was done in the context of a succession of supportive British representative governments in the Cape Colony. So, the question arises again: Has EEE succeeded? The answer is yes. Years following Rhodes’ pioneering work, poverty has almost totally been banished among the English in South Africa. While Rhodes and his Randlord friends were indeed super millionaires, the character of the EEE scheme cannot be said to have been sordidly elitist. As the millionaires rose, they did not forget the importance of improving the socio-economic lives of the English population as a whole. Essentially, EEE was an inclusive scheme for the English. Having been marginalised by the English, the Afrikaners did not bang their heads and wallow in righteous victimhood; they embarked upon their own uniquely Afrikaner Economic Empowerment (AEE) programme. In the main, the so-called “poor white problem” – which was acute in the last quarter of the 19th century and beyond – was an Afrikaner problem. The Afrikaner was poverty-stricken and living in the bush. In October 1939, the Broederbond convened an Economic National Congress for Afrikaners in Bloemfontein, to ponder the question: How to improve the economic life of the Afrikaner? As Wilkins and Strydom observe (1978), “It was at this congress that the Afrikaner discovered the key to success for his own economic upliftment: pool Afrikaner money, establish [and

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‘Like the English, the Afrikaners implemented their AEE scheme, supported by the state. The rise of the National Party into power in 1948 injected much-needed political energy into Afrikaner Economic Empowerment.’

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support] Afrikaner concerns”. This is how the Afrikaner Economic Empowerment scheme called Reddingsdaadbond was formed. According to the Broederbond, the Reddingsdaadbond “presented the idea of an Afrikanerdom which would not only be employee, but also employer … [and] proud owner of material power”. This, the Afrikaners managed to achieve. Even before the 1939 Economic National Congress, projects were already under way to end poverty and unemployment amongst the Afrikaners. The establishment of Eskom by Jan Smuts’ government and the founding of Iscor were all part of AEE, even as there were disagreements over Smuts’ commitment to Afrikanerdom. Like the English, the Afrikaners implemented their AEE scheme, supported by the state. The rise of the National Party into power in 1948 injected much-needed political energy into Afrikaner Economic Empowerment. Here we are, confronted by the same question yet again: Has AEE succeeded? The answer is yes. By the time apartheid collapsed, poverty amongst Afrikaners was almost totally banished. All this was done through productive work and education, supported by the state. As in the case of the English, none can, by force of evidence, prove that AEE had a distastefully elitist character.

Prince Mashele Executive Director of The Centre for Politics

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‘Black Economic Empowerment should, therefore, be assessed with this aim in mind: to eliminate poverty and inequality affecting Black people.’

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‘Is there someone who has seen massive factories, established solely by BEE tycoons, employing thousands of black workers in South Africa? If the answer is yes, we would say that BEE indeed has a productive character.’ As Anthony Edward Rupert and his fellow Afrikaner billionaires flew higher, they did not forget to lift the “masses of their Afrikaner people”, to borrow language from the ANC. Upon its unbanning, the ANC was well aware of its historic responsibility, as a majority-black-supported party. From the beginning, the ANC viewed itself as the party to lead the economic empowerment of Black people, a nation impoverished and ignored by both the English and Afrikaner economic empowerment schemes. In its Ready to Govern document, adopted in 1992, the ANC vowed to “Eliminating the poverty and the extreme inequalities generated by the apartheid system”. Black Economic Empowerment should, therefore, be assessed with this aim in mind: to eliminate poverty and inequality affecting Black people. The queerness of BEE is that, instead of Blacks acting to create their own independent space in the economy (as EEE and AEE did), BEE tycoons volunteered to be co-opted into white-owned companies as minority shareholders. By so doing, these black tycoons essentially locked themselves into white companies, leaving no room to distinguish themselves as creators of new industries in the economy. We can say with certitude that modern mining in South Africa has been developed by the English as part of their EEE. We can also say, supported by evidence, that commercial agriculture and manufacturing in South Africa have been developed predominantly by Afrikaners as part of their AEE programme. Twenty years into a black-run government, which sector of the economy can we say was developed by BEE tycoons, supported by the black government? We pose this question because it is true that a few black billionaires have been produced since 1994. Cecil John Rhodes held the collective hand of his English people and flew with them high into the economic sky. Anthony Edward Rupert did the same to his Afrikaner people. Have Cyril Ramaphosa and Tokyo Sexwale, the politically

connected poster boys of Black Economic Empowerment, lifted their black people out of poverty? We observed earlier that both EEE and AEE banished poverty and unemployment amongst the English and Afrikaners through productive work and education. What of BEE? Is there someone who has seen massive factories, established solely by BEE tycoons, employing thousands of black workers in South Africa? If the answer is yes, we would say that BEE indeed has a productive character. It is only through productive work in the real economy that poverty and unemployment can be banished amongst Black people, as it was done amongst the English and Afrikaners previously. Given that you are reading this article 20 years into democracy, a glance at our public education system is in order. In 2002, there were about 1.2 million children in Grade 1. In 2013, about 500 000 of them sat for matric exams. Of these only about 170 000 qualified to enter university. We also know that 50 percent of students who enter our universities leave without a degree. So, has BEE succeeded? Evidence says no. Unlike EEE and AEE, BEE has produced a handful of black billionaires who have done very little to improve the socioeconomic conditions of their people. In other words, BEE tycoons have flown very high, separating themselves from the penury of millions of people who share skin colour with them. Ramaphosa is no Rhodes, nor a Rupert. As Ramaphosa was flying, his black government was busy maiming the future of the Black child. What has happened to the 800 000 children who did not write the matric exam in 2013? This is the sad story of BEE, 20 years into democracy. By Prince Mashele

Prince Mashele is Executive Director of the Centre for Politics and Research, and co-author of “The Fall of the ANC: What Next?” He writes in his personal capacity. Edition 9

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Responding to regulation: the future Banks are generally moving from the evaluation of regulatory initiatives to implementation, albeit at different speeds and from different starting points.

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hat is why, in this year’s report, we focus on four key areas where regulation, combined with other pressures, is forcing banks to make changes. These are structure; conduct and culture; data and reporting; and risk governance. The emerging regulatory requirements – including structural reform, conduct, governance and the possible emergence of ‘Basel 4’ – are game-changing. The banking industry’s existing business models will in large part have to be discarded. There are likely to be losers. The winners are likely to have been relentless in how they have faced up to and implemented the change required. The relentless march of the regulatory reform agenda continues. The ‘more (and more) of everything’ series of regulatory initiatives seems unlikely to abate and will continue to radically reshape the banking sector, in particular in Europe. The waves of regulation are swirling around banks more rapidly than many can manage. This raises the prospect that there will be more casualties before the financial crisis is over. Successful banks will be those who can keep ahead of the storm by meeting the demands of customers, investors and regulators. The financial stability landscape The first set of challenges for banks, on which this report focuses, is to meet the current and prospective regulatory requirements on capital, liquidity and recovery and resolution planning. Banks caught in the headlights of Basel III implementation may miss the wider picture here, as Basel III transforms potentially into a ‘Basel IIII’ as a result of tougher requirements on the leverage ratio, risk-weighted assets and stress testing. The European Central Bank will undertake its Comprehensive Assessment of major banks in the European Banking Union, which may identify further capital deficiencies. Resolution planning will require banks to issue bail-enable long-term debt and increase their funding costs. All of this implies further deleveraging or capital raising. The report then considers four areas where a combination of regulatory and other pressures is forcing banks to reform their strategy; business and operating models; governance and culture. This will have significant impacts on the customers of banks. Structure Regulatory requirements will force radical structural change, including the split of global entities into a patchwork of smaller locally or

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separately regulated subsidiaries. Many banks have already begun to revise their legal entity structures and to reduce and restructure their balance sheets. This, combined with the impact of ‘Basel 4’, will dramatically increase the cost of doing business. Addressing the myriad regulatory and legal, compliance, capital, liquidity, funding, tax and governance considerations is a complex, multi-dimensional issue. But, in addition, banks must also consider the operational complexities. These complexities are often not considered until the implementation stage, but they can themselves preclude any number of options, or can increase the cost or lapsed time such that some options become unworkable. Conduct, markets and culture Much banking practice historically has been ‘product push’ – focused on the desire to sell rather than a more thoughtful view of what would best suit the needs of the customer. This has led in retail banking to the various mis-selling disasters of recent years, and in wholesale markets to the significant and widespread market abuse issues. From a reputation perspective, this has been a disaster for the banking industry. Financially, the issue has been focused on specific jurisdictions – but irrespective of how this is measured, it is a depressing picture. Retail banks want to become customer-centric, but are finding it hard to deliver this, given legacy systems, culture and the inertia in the industry. Wholesale banks are still getting to grips with what client centricity might mean (given the past treatment of customers for many business lines as counterparties or sophisticated investors). Supervisors in Europe are looking for radical changes in banks’ behaviours. The regulatory bar has been raised significantly, not only in terms of the outcomes to be achieved but also in terms of the clear articulation of what conduct risk means to a bank, how it is a core part of the strategy, and how clearly articulated and implemented the governance, controls and key indicators are from the board room down to front line product design, manufacturing and distribution. Only really significant change to the DNA, culture and values of banks can rebuild the organisation to meet the needs of investors, customers and regulators. This is reflected in the change programmes of many banks, but this sort of change is much harder than (even) sorting out the core operations. It is critical that this change is underpinned by a dramatic shift in culture, through tone from the top, policies, hiring practices, incentive structures, embedding values and demonstrating consequences for behaviours that are no longer acceptable. This is a huge boardroom

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challenge. For many banks, only radical surgery will satisfy all these stakeholders – few banks today have a complete answer. Data and reporting Banks face three major challenges around data management. They need to hold and use the right data to get much closer to their customers. They have to meet the wide-ranging and exponential increases in demands from regulators and others for reporting and disclosures. And they need to respond to supervisory concerns that banks do not have the right data, systems and IT architecture to enable them to understand, aggregate and disaggregate, and manage their risks effectively. Meanwhile, banks also need to address the new and unforeseeable risks in data privacy and cybercrime, conflicting national laws and the impact of retrospective investigations in an environment where vast amounts of data are indefinitely available. Key to these challenges are increasing the maturity of data analytics capabilities; a clear understanding of the ownership, roles and responsibilities for data management (including retention and

rationalisation); a clear plan to attack core data quality issues; and the implementation of more flexible technology solutions with greater sharing/re-use and better handling of unstructured data. Governance and risk The financial crisis itself, and the problems and challenges discussed above, point to a need to upgrade significantly the governance and risk management of banks. Much work is already under way on this, but much more needs to be done. As banks get to grips with their business strategy, risk appetite, risk culture and management, they will need radically different management information that only significant investments in core and critical systems, as well as emerging analytic technologies, will provide. This article is extracted from the Europe, Middle East & Africa edition of KPMG’s report Evolving Banking Regulation 2014. The full report is available at kpmg.com/za. Edition 9 BANKER SA

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TRAINING

Banking is changing – so are the skills required We need to move fast to produce the right skills in the quantities needed.

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he financial sector is one of the fastest-growing employers in South Africa, with the number of employees increasing by 24.5% since 2000. Since 2000 the sector has grown at an annual rate of 9.1%, compared to broader economic growth of 3.6%. It comprises over R6 trillion in assets, contributes 10.5% of our GDP annually, employs 3.9% of the workforce, and contributes at least 15% of corporate income tax. It has survived the financial crisis relatively well, and continues its strong performance of the last decade. The global financial crisis, entering its sixth year, has challenged policy makers to revisit long-held beliefs in traditional and commonly accepted theories and practices and demonstrated a need for fresh thinking about how the economy works. Without a sufficient skills base the banking sector faces distinct dangers in an environment dominated by the rapid introduction of new regulatory and supervisory infrastructure. New occupational classes and skill requirements have been identified within banks to address the regulatory changes,

and banks are focusing increasingly on compliance and risk management. Regulatory changes impacting the training needs of the banking sector include the introduction of the Financial Advisory and Intermediary Services Act of 2002 (FAIS ACT), which imposed strict requirements regarding the levels of experience and education of advisors in order to be licensed to give financial advice. Other regulatory changes impacting the skills needs of the sector include: • the Financial Intelligence Centre Act of 2003; • the National Credit Act of 2005; • the introduction of Basel II & III recommendations and; • the latest proposal to introduce the Twin Peaks regulatory framework for the financial sector in 2014. The draft legislation establishes two regulatory authorities a new prudential authority in the Reserve Bank, which will be responsible for overseeing the soundness of banks, insurers and financial conglomerates; and another authority to oversee market conduct in order to protect customers of financial services firms Edition 9

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TRAINING and improve the way in which financial service pro viders conduct their business. This authority will also be responsible for ensuring the integrity and efficiency of financial markets and promoting effective financial consumer education. In this changing environment, educational institutions offering qualifications in banking have to respond quickly to adapt their qualifications to address the new needs of the industry. The qualifications should require: • becoming better acclimated to the regulatory climate; • bolstering risk management practices; • deploying capital more efficiently; • innovating across multiple dimensions; • enhancing customer experience in new ways; • developing future business leaders. Training needs in South Africa’s banking sector Over the past three decades the financial system has been going through a phase of major structural change, and the pace of change seems to be accelerating. The joint influence of financial liberalisation, breakthroughs in financial know-how and advances in information technology have ushered in an era of extraordinary innovation in banking, in both products and processes. This growth and structural change in financial activities on a worldwide scale determines the variety of skills and the numbers required. The growth of local commercial banks in recent decades, their ability to offer competitive salary packages, and product and process innovations have made the banking sector an attractive employer to graduates and professionally-qualified applicants. This is not necessarily the case in all countries. In the UK the banking sector faces a negative image problem when recruiting. Retail banking, employers feel, is not a career of choice for most employees, and is a sector that young people fall into, rather than actively aspire to. ‘Retail banking faces a hostile labour market, one in which the sector and its workforce do not enjoy the status and reputation associated with other sectors.’ (Financial Services Skills Council, UK 2007: 74) At the high end of the financial-sector skills profile in South Africa at least three major industries – banking, insurance and accountancy – compete for the pool of qualified professionals and managers. Accountancy skills are currently in the highest demand in sectors that provide and use financial services. This includes government, regulatory agencies and nonprofit organisations, but the bulk of demand comes from the private sector. What is not clear is why chartered accountants are recruited for many positions that could have been filled by a commerce graduate specialising in, perhaps, treasury management or risk management. The demand for skills, particularly among professionals, professional technicians and the great variety of management across the banking sector, will continue to increase. It is of

‘At the high end of the financial-sector skills profile in South Africa at least three major industries – banking, insurance and accountancy – compete for the pool of qualified professionals and managers.’ strategic importance to mend the deficiencies in the South African education and training system. This includes the schooling system, and an assessment of the kind of graduates that higher education is producing. There is a belief that the rise in graduate unemployment is a result of inappropriate qualifications and the quality of education at schools, implying that there are a large number of functionally illiterate graduates. Some solutions include: • focusing more on practical aspects of work and work experience; • school-leavers should be given better career guidance in order to match the supply of graduates with the needs of the economy; • people with inappropriate degrees should be put on learnership programmes that bridge the skills gap by supplying learners with appropriate skills that are demanded in the marketplace; • partnerships should be set up between educational institutions and firms to enable more appropriate curriculum design and collaborative research work (vocational training). Such models are used with success in Brisbane, Australia, where students are given real-life, company-based research projects to complete as part of their courses. Job growth is not consistent with the increase in the number of university graduates, and the unemployment crisis is a major concern for many countries, including South Africa. Yet we Edition 9

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‘A large percentage of managers also say that today’s applicants can’t think critically and creatively, solve problems, or write well.’

often hear employers and business leaders complaining that their demand for talent is not being met by the current supply. A survey in the US by St. Louis Community College found that more than 60% of employers say applicants lack crucial ‘communication and interpersonal skills’. A large percentage of managers also say that today’s applicants can’t think critically and creatively, solve problems, or write well. What seems to be required is a collaborative effort by employers and educational leaders to shape the most urgent directives for the future of education, with the help of extensive two-way feedback. As the demographics of the workforce and skills-needs keep shifting rapidly, education policy leaders, university systems, and industry leaders must work together to build a competitive workforce by modifying the education system to provide market-relevant hard skills, and also proactively nurturing ‘soft’ skills. like empathy, creativity, and leadership among current and prospective employees. The author, Dr Retha du Randt, is a senior lecturer in Unisa’s Department of Finance, Risk Management and Banking.

A new qualification mix from Unisa In 2006 the Institute of Bankers in South Africa (IOBSA) entered into a co-operation agreement with Unisa to enhance the value of training in the banking sector. The relationship was strategic for both institutions because they were able to tap into each other’s strengths for the benefit of the students. Some students are still completing the four-year B.Banking degree at Unisa with credits obtained from the IOBSA. The role of IOBSA has, however, changed. Initially it was accredited as a training provider by the BankSETA to deliver bankingspecific qualifications. This status expired in 2011 and has not been renewed. In March 2013 the status of the professional body for the sector was awarded to the IOBSA. It will still play a critical role in the development of industry-specific qualifications as well as being appointed as an Assessment Quality Partner for the bank-worker learnership by the Quality Council for Trades and Occupations. From 2012 the Department of Finance, Risk Management and Banking of Unisa introduced new qualifications for banking and risk management: a B.Com degree, a diploma and a Higher Certificate in Banking. Specific technical skills are addressed in 50% or more of the modules. These include compliance management, treasury management, credit management, banking i, ii and iii, and risk management for banks. A number of criteria were used to determine the relevance and significance of these qualifications, including the strategic importance of the qualification in the national context, market share, external demand and the quality of the teaching input and research. Due to increased demand from students, the Department of Finance, Risk Management and Banking also introduced a new postgraduate qualification. The postgraduate diploma in risk management has become very popular because of the increased demand for risk managers in various industries. Practical case studies are used as a teaching method as much as possible. The diploma comprises five year-long modules: operational risk management, governance, risk and compliance management, risk financing, credit risk management and market risk management. In addition to the formal qualifications, the Centre for Business Management at Unisa offers a large number of programmes in finance, banking and risk management. This includes a short learning programme in the fundamentals of banking and risk management (a short learning programme updates or broadens knowledge in a specific area, using a ‘just-enough’ learning approach, designed to meet a specific learning need), the programme in advanced bank management, the advanced programme in risk management and the programme in investment analysis and portfolio management.

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SABRIC REPORT

SABRIC: winning the fight against banking crime Collaboration is the key, says CEO of the South African Banking Risk Information Centre (SABRIC), Kalyani Pillay

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Card-skimming devices.

s the country celebrates 20 years of democracy, this year will also mark the 12th year since South African banks formed SABRIC. The organisation, formed by the major banks in 2002 to fight organised crime, started as a small company and has since evolved and blossomed into one of the key crime-fighting organisations in the country. But what was the secret of making SABRIC a success? SABRIC CEO, Kalyani Pillay, attributes the company’s success to its collaborative model and its ability to identify and respond to the ever-evolving bank crime landscape. ‘Banks, cash-in-transit (CIT) and ATM companies come together for a common purpose, which is to fight organised crime collectively,’ he states. The partnership is not only limited to private companies, but extends to government departments as well. In its effort to fight crime, SABRIC partners closely with departments such as the South African Police Services (SAPS), Department of Home Affairs (DHA), and the South Africa Revenue Service (SARS). Other key government departments SABRIC engages with on behalf of its clients are the Financial Intelligence Centre (FIC), Customs and Excise, as well as the Department of Transport, among others. Collaborating with different partners has taught SABRIC the importance of safety in numbers as well as consistency of effort. ‘Our collaborative model, bringing all banks and major cash-in-transit (CIT) companies together, is what enhances the economies of scale and brings significant benefits to the reduction and eradication of crimes affecting these industries. It also shows that if we work together we will be able to disrupt and counteract criminal behaviour,’ says Pillay. It is through these partnerships that SABRIC is able to fulfil its vital role in the banking industry. Re-affirming the importance of the partnerships, Pillay says ‘These partnerships are extremely important, and we will continue to enhance them in the broader fight against economic crimes’. SABRIC believes that strategic partnerships bring to fruition positive results. ‘It is only through sustainable and strategic partnerships with key stakeholders that we will be able to continue making a positive impact’, says Pillay. This partnership has seen SABRIC hosting successful awareness campaigns such as the Carrying Cash Safely Campaign, jointly with stakeholders such as SAPS and Crime Line. SAPS National Commissioner, Riah Phiyega, agreed with Pillay and indicated that it is only through partnering with companies such as SABRIC that the police can decrease banking crime. Speaking at SABRIC’s Edition 9 BANKER SA

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‘It is only through sustainable and strategic partnerships with key stakeholders that we will be able to continue making a positive impact.’ launch of the Carrying Cash Safely Campaign in 2013, Phiyega said, ‘As the SAPS, we have a firm belief that the flourishing partnership with SABRIC, which we actively support, is bound to assist us in many ways, and has assisted us in that way actively.’ In addition, SABRIC’s Violent Crime office, together with the banking industry’s investigators, has partnered with the SAPS task team responsible for investigating ATM attacks in Gauteng. This task team was recognised as the best SAPS detective unit in 2012. These partnerships have yielded positive results as bank crimes and ATM bombings are showing significant downward trends. Another successful collaborative project to note is with the Department of Home Affairs online fingerprint-verification project. SABRIC has partnered with the department to roll out an online solution, which enables the banks to verify the identity of their customers against the data presented by DHA. Several South African banks have made good progress towards institutionalising this crimecombating measure in their banking halls. In terms of Commercial Crimes, the arrest and prosecution of several notorious commercial crime perpetrators resulted in sentences ranging from 10-15 years. This is clear indication of the success of this model. It is through the collaborative approach that between 2007 and 2013, 177 ATM-mounted skimming devices were recovered by the banking industry and law enforcement. SABRIC fights crime by gathering incident data from the banks and CITs to identify patterns, trends, risk areas and emerging threats to support the development of the banks’ internal crime and risk management strategies. It is through this strategy that SABRIC has been able to identify risks and warn customers about banking crimes. As criminals explore new methods to rob banking customers, to counter these methods SABRIC identifies and alerts the public to safety measures which make it increasingly difficult for criminals to perpetrate their crimes. For example, when phishing first surfaced, it was easy for the banks to detect phishing e-mails due to their shoddy wording. But criminals have since progressed and have come up with new, sophisticated scams that work on the emotions of the targeted recipients. According to Pillay, criminals use methods such as social engineering to get banking customers to unknowingly part with their money. ‘Social engineering tactics have been with us for a while, but the perpetrators are constantly changing the approach of their communications, and what makes it complex for customers is that these communications are generally built on legitimate banking business processes’, says Pillay.

SABRIC’s greatest challenge lies in the fact that while the industry continues to roll out innovative technologies to fight crime, criminals are constantly working to counteract these. Unfortunately, technological advances also create opportunities for criminals and the exploitation of technology is often the basis of commercial and some violent bank crimes. Our country has the characteristics of both a developing and an advanced economy, which means that criminals are quite resourceful and use a variety of methods to commit bank crimes. To prevent card fraud, the industry has deployed diverse measures. These include the improvement of internal systems and processes within the banks. Crime trends are followed closely and adjustments to monitoring systems are made to mitigate associated risks. It is with this in mind that banking customers are encouraged to sign up for SMS notification of any transaction that occurs on their accounts so as to ensure early detection and fraud prevention where possible. In addition to this, SABRIC continues to provide the industry with a national industry view of crime threats and trends. SABRIC’s latest card fraud statistics revealed that counterfeit credit card fraud losses increased by 27% in 2013 and contributed to 39% of the overall credit-card gross fraud loss. This is why SABRIC continues to warn customers about card skimming, as counterfeit card fraud is facilitated by the theft of card data through card skimming. Skimming and cybercrimes continue to be priorities in the fight against bankrelated commercial crimes. SABRIC annually embarks on different awareness initiatives aimed at educating the public about bank-related crimes. These include the Carrying Cash Safely; Card Fraud and Festive Season campaigns. However, as criminals continue to up their criminal activities, SABRIC continues to intensify its efforts to find solutions to clip their wings. SABRIC supports its 14 member banks, three CIT companies, and one ATM service provider, by utilising relevant and current data to produce analytical reports. These reports enable clients to advance their pro-active and re-active protection mechanisms to stay ahead of criminal activity. SABRIC creates awareness through social media platforms, which carry tips on how the public can protect themselves and what to do in the unfortunate case of becoming a victim of such crime. By Kalyani Pillay For more information visit www.sabric.co.za, or Facebook on www.facebok.com/sabricza or Twitter on www.twitter.com/sabric. Edition 9 BANKER SA

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SECURITY

Innovation to protect your money Secure management of cash is vital in order to reduce risk to banks and customers.

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hen tackling a situation as complex as that of managing cash within the South African environment, each process within this cycle needs to be considered and carefully executed. Judging by the decline in the bank-related crime statistics – year on year since 2006 – the industry must be doing something right. The aggressive adoption of information and communication technology (ICT) by the cash transportation industry has helped to drive cash in transit (CIT) and cash-related robberies down to their lowest rate in years. Incidents are expected to fall even further as companies invest more money in new technologies to protect their staff and their customers’ assets. ‘The decline in the number of incidents within our business sector speaks volumes for the successful implementation of technology within our operation and a collaborative approach to combating this type of crime,’ says Albert Erasmus, Managing Director of G4S South Africa. Broadly speaking, there are three areas to consider in the cash cycle: the on-site protection of cash, the protection of CIT, and the integrity of the systems used to process cash.

ON-SITE PROTECTION OF CASH G4S Deposita is a recognised industry leader in the development of technology that facilitates the collection, handling, processing, safeguarding and dispensing of cash. Through access to international best practice and innovative, local product development, the on-site protection of cash has developed from the traditional physical storage of cash to sophisticated devices that secure notes and coins. This instantly validates deposits and, in some instances, allow funds to be available immediately. Similarly, the advantage of innovative technology, the latest hardware and software offerings together with tried and tested processes, ensure a robust and reliable network of ATMs in South Africa. This technology is aimed at reducing the risk of cash held in-store. PROTECTION OF CASH IN TRANSIT Transporting cash will always be risky because of the nature of the commodity. It needs to be performed within a secure framework and continually adapted to meet changing circumstances. G4S operates a fleet of fully armoured vehicles equipped with electromechanical interlocking and immobilising systems. These systems Edition 9 BANKER SA

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ensure that the vehicle is secured in the event of an attack, protecting the staff as well as the customers’ assets. Recent developments in vehicle tracking systems have proven to be highly successful in deterring criminals. ‘GPS technology allows us to introduce a very high level of security to our vehicles. It allows us to track and trace our vehicles at all times. We are also able to ensure that specific doors or safes on board our vehicles can only be opened when the vehicle is secured in a predetermined safe area. Vehicles will simply shut down if they enter a high-risk area. This is just one of the systems we have implemented across our fleet, and it is very powerful in helping reduce crime,’ says Erasmus. G4S has shown its commitment to the South African market by investing more than R450 million to upgrade its fleet of over 700 armoured vehicles. This upgrade was made possible through a “sale to lease” agreement concluded with Imperial. Another example of the technology introduced in vehicles is a one-time code system used to gain access to various areas of the vehicle. The back of the vehicle can only be accessed if all the codes are entered correctly by the relevant people. The codes are generated by G4S’s National Control Centre (NCC), and are only issued to the security officers when the vehicle is secured according to operational procedure. An interlocking system ensures that only one door in the vehicle can be opened at a time. Vehicles are fitted with cameras, allowing the driver to have visual contact at all times with the

security officer in the back of the vehicle. The cameras can also be remotely accessed by the NCC via the tracking system, and all footage is digitally recorded. Transporting cash from a secured vehicle to the customer’s premises or vice versa, “cross-pavement”, is another area of concern. A cross-pavement carrier (CPC) is used to securely transport money between the customer and vehicle. The CPC is fitted with ink and dye technology that will stain the banknotes if it is stolen or forced open. This system is an effective deterrent to would-be robbers. THE INTEGRITY OF THE SYSTEM Key to the success of cash processing is the pioneering software used. G4S, in conjunction with industry experts, have developed systems for those who place importance on the pinpoint control of their cash. ‘Our software provides the level of transparency and visibility that our customers desire, and all within a secured environment,’ says Erasmus. ‘Technology is becoming more powerful all the time. We believe that investing in our operation and working together with other industry leaders and representative bodies will ensure that we continue to drive this sort of crime right down. We will ensure the protection of the lives of our staff and benefit our customers and the broader economy in the process.’ Information supplied by G4S Deposita. Edition 9 BANKER SA

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Who gets the credit? Executive Chairman of Master Currency, Zithulele “KK” Combi, talks of the imbalances within the financial services sector.

“It starts with personal banking,” says Zithulele Combi

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ape-based businessman, Zithulele “KK” Combi, has called for transformation in the credit committees of South Africa’s major banks. He alleges that 20 years after democracy these committees are still headed by people who perceive black people as

risky. Combi, who established a black-owned forex company Master Currency in 1995, is now a non-executive director of the JSE-listed investment firm, PSG Group. He is also the executive chairman of the empowerment company, Thembeka Capital. Sharing his experiences as a businessman and as a bank customer over the past 20 years, Combi says that deserving black

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people in the country have been deprived of credit much needed to buy assets and create wealth. ‘The reason is that the credit committees are still fully loaded with white males who still see black people as risky. However, if you look at the big legal cases where banks are chasing their money, most of the companies they are chasing are white-owned. Look at the houses that are on sale in (high-end suburbs) Camps Bay, Sea Point and Sandton. Look [at] who’s selling – if you look at the liquidation auctions you will find out. I have been in the property business and I know this.’ Combi says that few black people own houses in these high-end suburbs.

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Customer Story

‘The people that you interact with have no authority. Your application is sent to regional and national credit committees. They have basically removed the element of knowing the person, unless you are a high-profile black person.’ ‘It starts with personal banking,’ Combi claims. ‘The facilities granted to blacks versus whites. White people get huge overdrafts, and these excessive facilities result in their properties getting liquidated. They get easy bonds, easy overdrafts.’ Combi, whose company is invested in the mid-sized bank, Capitec, says he has had to personally confront some of the banks to get a bigger loan facility. ‘I have learnt of racism by personally confronting some of these banks. Banks are still looking at black people as high risk. They must produce the statistics to disprove that.’ He says that what has made things difficult for black people is a change in the banking system. Combi maintains that 20 years ago a customer knew their bank manager, and that the bank manager

knew the customer’s standing and business. ‘The bank manager could take a risk. That is different today. The people that you interact with have no authority. Your application is sent to regional and national credit committees. They have basically removed the element of knowing the person, unless you are a high-profile black person.’ Out of approximately seven directors listed as serving on the credit committee in Nedbank’s website, three are black and are finance directors Raisibe Morathi, Mustaq Brey and Gloria Serobe. The other members are Mike Brown, Thomas Boardman, Graham Dempster, and Ian Gladman. At Standard Bank, out of the five directors listed on the website as serving on the credit committee two of its members, Sim Tshabalala and Fred Phaswana, are black. They serve alongside Simon Ridley, Myles Ruck, and Doug Band. Barclays Africa Group’s concentration risk committee, which considers and approves the largest credit applications, is made up of Colin Beggs, David Hodnett, Wendy Lucas-Bull, Trevor Munday, and Maria Ramos. At FirstRand the set up is quite different as the group has banking and lending franchises like FNB, Wesbank and Rand Merchant Bank. These franchises have their own executives. FirstRand’s committee looking after large exposures is made up of two black people, Sizwe Nxasana and Roger Jardine. The other members are Johan Burger, Viv Bartlett, Jurie Bester and Ben van der Ross, the 2013 FirstRand annual report reveals. On the question of credit committees Gloria Serobe, who cofounded Wiphold and is a board member at Nedbank, says banks allowed for black representation on bank boards, and that people had the opportunity to participate. She cautions against griping, saying that people need to earn the space rather than just criticise. Serobe points out that black directors as board members should look to participate in committees to understand the regulatory issues and processes involved when it comes to credit. ‘First of all, banks have black board members. This is a privileged position to be in, because once you are in there you have the scope to make banking an area that you understand. ‘If you are a black person in that (credit) committee, look at where black people are struggling in lines of approval. You can’t just sit in an air-conditioned office and say “the credit committees are white and pale”.’ Serobe points out that the credit issue is not as simple as people think. She makes an example of Capitec Bank, which is headed by white males but has ensured that it understands the credit needs of black people in the lower- and middle-income segments. As a member of the credit and transformation committee, Serobe says that she has looked at ways of driving access to financial services for the previously disadvantaged. One of the issues she is currently exploring is how people in rural areas can have assets that are not currently recognised by banks taken into consideration. Another challenge in South Africa is that banks still find it hard to accept rural homes without title deeds as collateral, despite the fact that many such houses are unencumbered. ‘It is difficult to say that this or that should be done, but Edition 9

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Gloria Serobe: ‘If you are a black person in that (credit) committee, look at where black people are struggling in lines of approval. You can’t just sit in an air-conditioned office and say the credit committees are white and pale’.

Gloria Serobe, Chief Executive Officer of Wiphold

if government is serious about dealing with racism, it should look at ways of examining these accusations that I’m making,’ says Combi. ‘Government must look at the number of liquidations between houses owned by black and white people. That will tell you who the banks favour.’ Combi believes Postbank could become a solution for advancing more credit to black people and their businesses; however, they would have to be creative, he notes. ‘Postbank has to be more aggressive and not simply act like a post office.’ Combi thinks that starting a black-owned bank in 2014 would be quite difficult as the capital requirements are high. He adds that there is no real competition in banking in South Africa. ‘It took Afrikaners from Stellenbosch to identify the need to service the so-called unsecured and low-end black market,’ he says. ‘They changed the banking dynamics. Because of their sustainability as a business, it proves that more lending can be done for black people.’ Combi says he had enquired who the bulk of loans are made to, and was told that the bulk goes to black communities who use the funding for home improvements. On the future of Thembeka Capital at Capitec, Combi says he sees it as a long-term investor in the Stellenbosch-based group. When the deal matures, he says, Thembeka will sit down with other shareholders and see what their views are. Combi says it is unfortunate that in South Africa there has to be pressure from government before things change. But despite his criticism of transformation of the banking sector, he says the Financial Services Charter (FSC), which has now evolved into a Financial Sector Code, has had an impact in introducing black ownership in the banking sector. Combi says that through transformative initiatives like the Charter, Thembeka Capital was able to invest in JSE Limited, the operating company of the stock exchange. ‘Such initiatives accommodated Thembeka to become shareholders. After that we made huge profits and were able to invest elsewhere,’ Combi concludes. By Phakamisa Ndzamela Edition 9

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INFORMATION TECHNOLOGY

Financial services move to the cloud

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enior IT executives in the financial services industry understand that cloud computing infrastructure can boost the value of their services and offerings by greatly reducing the problems of managing what has become commoditised infrastructure. In addition, cloud can ensure that resources that are already stretched can be used for strategic and other initiatives that will add value. To successfully harness the power of cloud, businesses need to run mission-critical applications in the cloud with enterprise-class levels of availability, security and connectivity. And they need to do this while remaining flexible, and having the capacity to expand when needed. Richard Vester, Director at EOH cloud Services, says cloud technologies are very attractive and becoming more and more relevant to the financial services market. ‘These companies want a model that lets the business assets be used optimally, often by many people at once, whenever possible.’ Historically, he says the larger banks have migrated less of their activity to the cloud than newer, smaller ones. ‘There are several

reasons for this. Legacy systems play a role, as do the compliance and regulatory issues around data privacy, and, of course, security. However, the constant pressure to lower spending is changing this, particularly in today’s tough economic climate. There can be no doubt that moving services and systems into the cloud will greatly reduce spend.’ For example, says Vester, banks are beginning to outsource the processing of data that is not particularly sensitive, but still requires a lot of processing power and resources. In addition, larger financial institutions are also using the cloud as a means to test their systems and processes. In this way, the cloud can function as a safe environment, which can mirror the bank’s systems, and make changes, or run updates without the possible risk of crashing the entire bank’s systems. However, he says there are still many stumbling blocks to the wider adoption of cloud in financial services. ‘I’ve already mentioned the security and privacy implications. For smaller entities this isn’t as big a concern, as the larger cloud providers are most likely more stable and secure than an environment they would build themselves. Larger banks that have already invested hugely in top security measures, Edition 9 BANKER SA

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INFORMATION TECHNOLOGY

Banking in the cloud ‘If cloud providers had to build multiple data centres in every country, it would nullify any savings that would be made by going the cloud route.’ and have built bullet-proof data centres, are extremely reticent when it comes to handing over private client data to outside providers.’ Another inhibitor of cloud computing among financial services organisations is the question of data residency. ‘Many countries have regulations and laws in place that prohibit client data from leaving the country. If cloud providers had to build multiple data centres in every country, it would nullify any savings that would be made by going the cloud route,’ says Vester. These jurisdictional issues are proving a serious obstacle in the path of storing and processing data in the cloud, as cloud providers more often than not, store, process and back up data in several different locations around the world. Data security and privacy is a mammoth task, that is both time-consuming and expensive. Growing regulatory challenges, data residency issues and the growing sophistication of attacks, have seen CSOs investing in multiple security disciplines in order to combat attacks and protect themselves. These include several data-centric security solutions that see data encrypted at the source. ‘Either way, these issues may slow down the pace but certainly not the direction,’ Vester says. ‘The advantages of cloud far outweigh the benefits, as evidenced by the increasing take-up of cloud solutions by large financial services organisations internationally.’ Improvements in cloud security and a wider variety of applications, as well as investment in cloud, by vendors and purchasers alike, are on the up and up. ‘cloud technology adoption in the financial services sector has grown over the last few years. In the future, we think it will grow even faster. Although there are security and privacy concerns, and costs involved with the process of migrating services to the cloud, ultimately the adoption of cloud is readying the financial services sector, and building a platform for future innovations.’

Robert Grimes, who works on the SAP Financial Services Network, says that banks realise that they have to ‘move with the times’. ‘With (online payment services) eBay and PayPal, there are commercial markets out there that are in the cloud … and if banks want to be able to compete, they need to find ways to make it work within the cloud,’ he said. Regulators, in turn, need to understand how the Cloud works and make necessary changes, he says. Banks have started moving peripheral systems into the cloud, such as analytic capabilities. Mobile banking has issues similar to cloud banking as it also involves moving core systems out of the bank and onto a mobile network, but fears about the security of a bank’s data in the cloud are unfounded, says Simon Paris, global head of financial services for SAP. ‘The fear is driven by misunderstanding … banks are already operating in the virtual world.’ He says regulators’ main fear was that confidential data would be exposed, but security issues have already been addressed. Paris says it is more important for banks to ask what they should put into the cloud. Many banks choose to place secondary business processes — such as human capital management or procurement — in the cloud. ‘So if the system goes down, the world does not end,’ he says. Paris also says first-tier banks are the most reluctant to move their core banking services to the Cloud, while smaller banks are moving to the Cloud out of necessity, as they cannot afford customised services. © BDlive Edition 9 BANKER SA

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OPINION

South Africa’s banking sector a catalyst for economic growth South Africa’s financial regulations and banking industry are world-class. They are pioneering growth and advancement, not only here on local turf, but well into the continent. Donna Oosthuyse, Managing Director, Citi Country Officer South Africa, calls on all growth industries to collaborate for economic viability.

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outh Africa boasts one of the world’s most sophisticated financial systems. It provides a platform to hundreds of domestic and foreign institutions conducting business here, and throughout the African continent. However, for South Africa’s economy to fully meet the needs of both its citizens and enterprises in a sustainable manner, an appropriate regulatory framework and contributions from all sections of the economy must be in place. South Africa’s government has clearly defined the objectives and plans required to achieve this vision of an adaptive economy characterised by growth, employment and equity. The South African banking system has been through some dramatic changes in the past two decades. It is, however, well developed and comparable to those of industrialised countries, according to the last World Economic Forum (WEF) Global Competitiveness Report conducted for 2013/14. It is generally viewed as world-class, with adequate capital resources, technology and infrastructure and a strong regulatory and supervisory environment. The banking sector has many opportunities, such as improving efficiency by investing in technology, expanding reach by focusing on mobile banking, growth by expansion into Africa and targeting lower income market accessibility. Currently, South Africa’s financial sector has over R6 trillion in assets, of which the banking sector assets represent just over 50%. The financial services sector contributes about 10.5% to overall GDP. According to the WEF Global Competitiveness Report, South Africa rated third out of 148 countries for financial markets development, and did well in terms of its financial institutions. Over the past 20 years, the financial sector has pioneered transformation and growth through consolidation, technology and legislation. The result has been a number of foreign banks establishing branches or representative offices in the country and others acquiring stakes in local major banks. Competition and Foreign Direct Investment (FDI) – both from a domestic and an international front, are healthy. FDI into South Africa not only encourages economic growth but also positions South Africa favourably for tourism, trade and investment. Ultimately, it also works towards alleviating the ‘evil triplets’ of poverty, inequality and unemployment. These issues have fostered great debate in the country as to the future of economic policy, the role of the state in the economy and the

standards that should be applied to employment, procurement and inward investment. For job creation to start, a GDP rate has to be approximately 3% – South Africa’s GDP is currently around 2.4%. As an important economic frontier for international companies South Africa is not only a compelling market in its own right, representing over 25% of Africa’s GDP, but it is also a staging ground for international business into the rest of the continent. Just as South Africa’s banking and financial sector is showing a propensity for growth, so too are other sectors of the economy. Africa currently represents a unique opportunity for this growth. But banking cannot do it alone. There is probably no other place in the world where a partnership for business engagement is more important than here in South Africa. Government policy is beginning to add thrust to their development plans. In the Minister of Finance, Pravin Gordhan’s last budget speech, he announced the proposed relaxation of a number of cross-border financial regulations, and tax requirements on companies will make it somewhat simpler for banks, financial institutions and foreign companies looking to invest in African countries. A definitive step in the right direction and with it, South Africa becomes more appealing to foreign investment. The National Development Plan (NDP) is another positive step; it provides a policy blueprint for eliminating poverty and reducing inequality in South Africa by 2030. Foreign companies have also historically experienced challenges with regard to skills development, broad-based black Economic Empowerment (B-BBEE), labour, specific industry regulations and policy uncertainty. It is vital that the banking sector as well as the public and private sectors at large maintain engagement with the government. This will provide constructive input on policies so that this country is competitively positioned to attract trade, investment and tourism and that South Africa’s industry, infrastructure and economy continue to grow and develop. Banking can play its part, but it requires skills transference, business incubation, training and development, social support and mentoring. And the support needs to come from all contributing industries. By Donna Oosthuyse Edition 9

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FUTURE OF BANKING

The bank of 2030 and beyond It’s not enough to change customer interfaces – banks will require new business models.

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he financial crisis set the scene for a fundamental rethink of the role of modern banking and led to profound regulatory and business model changes. The consequences of these changes are far from clear. However, it is clear that a number of business models today are no longer fit for this purpose, and that substantive change is required across large parts of the banking industry.

Some of the challenges that bank executives are grappling with are: • How can banks completely transform their cost bases, and therefore core processes, to realign their business models to the new normal?

• What are a bank’s fundamental value proposition and core service offerings to be — does a bank now have to articulate a clear social purpose as well as acknowledge its stakeholder obligations? It is important not to underestimate the role of aligning cultures, behaviours and rewards in a manner that is satisfactory to all stakeholders. The types of service, functionality, experience and customer fulfilment provided by industries other than banking, are evolving rapidly and setting a high bar of expectation for banks to meet in the coming years. This raises important questions about how banks come to understand the costs of providing all of this in the rapidly evolving and costly regulatory environment of the future. Edition 9

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FUTURE OF BANKING

‘Small, innovative players have begun to develop and take ground from traditional players in a range of areas including lending and payments.’

Innovation will be an important driver of change. The socalled financial engineering of complex financial products, along with challenges of legacy IT systems, have detracted from the industry’s reputation as an innovator of “socially useful” services in recent years. Banks are mostly large, complex organisations, which inherently presents certain barriers to their ability to innovate. However, innovation is nonetheless high on the agenda of many, including new ways to streamline operational processes and improve customer experience. Small, innovative players have begun to develop and take ground from traditional players in a range of areas including lending and payments. So much is written about the growth in trade between developed countries and emerging ones, that it is easy to forget that most trade flows take place within regions rather than between them. Trade financing services offered by banks are the lifeblood of international trade, allowing firms to finance and transact business globally. A 2013 EY report, Successful corporate banking: Focus on fundamentals, highlights that while executives are pleased overall with their current core team of banks, a lack of consistency in the quality and delivery of services across geographies was seen as a challenge in working with banks. This challenge of meeting customers’ expectations across a wide range of markets comes at a time when many global banks are rationalising their footprint to focus on core geographies. As trade volumes grow in future decades, this must be seen as a key challenge to address. A new investment boom has started in the emerging world. This trend contrasts with a general decline in investment – as a Share of Gross Domestic Product (GDP) – in much of the West. By 2030, many markets that we currently refer to as “emerging” will have reached maturity. The emergence of Africa as a stronggrowth region is underpinned by a host of factors, including strong Foreign Direct Investment (FDI) flows, increases in the quality and quantity of educational provision, the availability of natural resources and growing domestic demand. Retail banking is changing, with customers taking more control of the relationship. They are changing their bank more frequently, buying products from more than one bank, and demonstrating a preference for tailored products and services. By 2030, banks will look very different from today as technology provides ever-greater possibilities to broaden and deepen them. They will use deep data analysis and new techniques for the cost-efficient experimentation to provide high levels of customisation. Technological change is occurring at such an extraordinary pace that many developments that will occur by 2030 are unimaginable today. These developments will impact the speed and flexibility with which products and services can be provided to customers, as well as reducing the cost of providing them. Payments are one area where these trends are already beginning to take shape. By Emilio Pera, Lead Financial Services Director at EY

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Project bonds Unlocking African infrastructure development

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n a report prepared in collaboration with PricewaterhouseCoopers (PwC), the Organisation for Economic Co-operation and Development (OECD) and the World Economic Forum estimates that around 3.5–4% of global gross domestic product (GDP) (or around US$53 trillion from 2010 to 2030) needs to be invested in infrastructure for electricity distribution, transportation, telecommunications, and water infrastructure annually. For subSaharan Africa, the World Bank estimates infrastructure funding requirements at US$93 billion per annum for the next 10 years, of which at least 50% must be financed from non-government sources. Policymakers, governments and banks are refocusing their efforts on how infrastructure needs to be financed in the wake of the global financial crisis. Budgetary constraints have left many governments financially constrained and unable to pay for large infrastructure projects on their own. ‘Although banks are continuing to lend, they are unlikely to meet the demands of a growing project pipeline. New banking regulations, such as Basel III, are also making long tenure project finance loans challenging’, says Jonathan Cawood, capital projects leader for PwC Africa. ‘Based on our recent research in this area, The rise of non-bank infrastructure project finance, we think there is an opportunity for the private sector to provide infrastructure financing by way of project bonds and non-bank lending.’ Project bonds, still largely unexplored in South Africa and the African continent, are a debt instrument usually issued by the government or private companies to raise funds from capital markets for infrastructure projects. Infrastructure bonds can also be issued by private companies without government assistance. To date, no dominant project-bond model has yet emerged. There are numerous financing solutions for investor and procurer attention, each with different benefits and challenges. Discussions at the 14th IMF-OECD World Bank Global Bond Market

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Forum focused on how capital markets can help enhance infrastructure financing. Issues such as the role of banks, other financial intermediaries and local currency bond markets in financing infrastructure are on the agenda. In South Africa, local currency infrastructure bonds have not been issued to date as the government is of the view that such bonds are far removed from infrastructure projects. Instead, parastatal bonds have been issued and, in some instances, the government has provided guarantees for certain projects. Implementation of Basel III and a growing pipeline of projects are expected to spur greater demand for capital markets financing. In Africa, many countries will need to deepen sovereign and multilateral bond issuance as a precursor to corporate and project issuance. Across most of the continent, reforms to date have focused on getting sovereign bonds issued, often to finance infrastructure development. Many sovereigns are not rated, and those with naturalresource revenues often need to set-up a sinking fund committing future revenues to secure financing. Nonetheless, 2012 and 2013 saw significant Eurobond issuances, notably Ghana, Rwanda, Zambia, Tanzania, Angola, Nigeria and Kenya. South Africa has a developed bond market in place, and sizable life insurance and pension markets. Some institutional investors have bought into projects post-completion, but have not yet shown much appetite for construction risk. The infrastructure market in the country is dominated by state-owned utilities such as Transnet and Eskom, who finance infrastructure on balance sheet. The largest project-finance programme to date is to support investment in the ambitious renewables Private Public Partnership (PPP) programme, which the domestic banks have so far financed comfortably, to the surprise of some international investors. In particular, round three of the renewables programme will drive R30 billion to R40 billion of capex. Emerging economies such as Chile are also using project finance bonds as a means to attract investor interest in large-scale infrastructure projects. ‘However, it is important to bear in mind and understand the different policy measures and governments regarding the creation and processes in place for these project bonds,’ adds John Gibbs, PwC advisory partner. ‘In addition, different markets have varying degrees of receptivity to institutional debt and different norms.’ The PwC study identifies four preconditions that should exist for a project bond market to take root: • Available capital outside of the banking system. In most cases, this implies a stable and well-structured private, public or third-sector insurance and savings industry with retirement savings and pension funds managed by investment professionals. Such a system creates a competitive pool of capital, which generally seeks a wide range of debt investment opportunities. • Sufficient governance and transparency in financial reporting. A functioning bond public market requires a significant amount of financial infrastructure, including adequate disclosure and reporting rules. The provision of additional information for investors needs to be balanced against public market information disclosure rules, which require time dissemination to all participants. • Balanced tax and commercial policies. The key needs here are clarity

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SA Banking NEWS of policy and whether there is a level playing field between bank debt and bonds. • Project-specific credit support. The degree of credit support for infrastructure projects varies substantially by market. Not all markets have a certain class of investors seeking highly rated infrastructure debt. For many markets, project credit enhancement is not relevant. In these markets, a significant amount of infrastructure is either built by government directly or funded by state-owned banks. Where infrastructure is privately financed, it is usually done so through corporate guaranteed loans or bonds. These four areas represent clear priorities for governments looking to establish a private infrastructure project bond market in order to get infrastructure ventures financed. With these four prerequisites in mind, the PwC study analyses the current conditions in markets around the world to determine the feasibility and attractiveness of financing infrastructure projects. The

study shows that African countries need to look at alternative forms of financing infrastructure. Across most of the continent reforms have been focused on getting sovereign funds issued, usually to finance infrastructure development. PwC maintains that it is important for African issuers to appeal to investors by focusing on the “basics” of increasing transparency in the financial markets and co-ordinating more effectively across borders. According to the report, commonly needed reforms include deregulation, a lifting of capital controls, and stronger governance and disclosure. ‘Given the regulatory pressure on banks, it is difficult to see them continue financing at pre-global financial crisis volumes or terms should investment levels recover. This gap will need to be filled by capital market products – directly or indirectly – continuing the recent evolution of the project finance market. ‘It is evident that infrastructure bonds hold clear appeal for institutional investors, project sponsors, and governments seeking to get projects funded,’ concludes Gibbs.

Rivalry in retail banking

The retail banking industry in South Africa is a highly competitive market. The depressed credit market coming out of the financial crisis of 2009 has resulted, according to KPMG South Africa, in local banks ‘embarking on a more focused undertaking to increase revenue. This is either through increased growth into the “high-risk, high-return” market of unsecured lending, or supplementing the low growth in interest income with other fee income’. The unsecured lending market, KPMG said in a statement in January 2014, has been shrouded with allegations of reckless lending practices that are non-compliant with the National Credit Act (NCA). ‘Not surprisingly, the major banks are moving away from this market. Amendments to the NCA are expected to further curtail growth as fixed-cost structures and credit amnesty are introduced. ‘Banks are striving to grow customer volumes and to generate feeincome through services (card fees, administration fees, transaction

fees). One of the big four local banks is one case in point – through a digital media strategy, including social network marketing or above the line marketing. The bank is clearly on an aggressive customer campaign. On the other hand, another local bank has taken a different approach with the recent introduction of a new bank loyalty programme, offering attractive incentives to clients. ‘These two banks have identified that customers are no longer only focused on traditional banking products, but on the value-add that they receive hassle-free.’ The flow of customers from one bank to another is also dependent on the ease with which a customer can open a new account or switch an existing account. The banking industry in the UK recently launched new switching rules aimed at making their retail banking sector more competitive by allowing customers to switch more easily between banks. The latest rules aim to cut the transfer time from up to a month, down to seven days, and oblige the bank to oversee all incoming and outgoing payments. Ahead of the launch, UK banks have started to roll out new incentives to woo customers. This trend will increase focus on the affordability and competitive nature of banking fees in South Africa. ‘While the country has a mature financial services industry, the relative monopoly that the four big local banks operate has not allowed or made it viable for foreign branches to open retail banking operations on our shores,’ KPMG stated. ‘While some of the smaller local banks have started to eat into the customer base of these four, based on simple bankingfee structures catering to the lower end of the market, banking fees are still considered relatively high compared to those in developed markets. Time will tell whether or not the banks will start a price war to gain clients. Although with the value-add that banks are marketing to customers, banking costs may still remain low on the customers’ radar.’ Edition 9

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Consumer confidence in global banking bounces back There is a real opportunity for alternative providers to dominate the digital offering, personalise the experience, and become primary providers.

“Traditional banks are most vulnerable in areas with the highest growth potential.”

After a number of years of sharp decline, confidence in the banking industry is on the rise. Trust in individual banks is high and most customers across the globe are satisfied enough to recommend their main banking provider, finds EY’s 2014 global consumer banking survey. The study, Winning through customer experience, which surveyed over 32 000 banking customers in 43 countries, shows that banks are providing traditional banking services well. However, they are viewed as falling short on important aspects of the customer experience, and are also increasingly vulnerable to competition from new providers of banking services. ‘Despite another challenging year in the banking industry, consumer confidence has actually gone up,’ says Heidi Boyle, EY’s principal of financial services customer practice. ‘However, banks still have some way to go to improve this – for example, increasing transparency around fees and charges. Additionally, improving how they deal with resolving problems or complaints will be critical if banks are to continue to win confidence and build trust,’ she adds. Confidence and trust are rising Globally, one-third of customers reported an increase in confidence in the banking industry compared to a year ago. The number of customers whose confidence in the industry has declined in the last 12 months is at 19% – down from a high of 40% in 2012. Confidence is increasing most in India, where 77% of respondents expressed increased confidence. Overall confidence fell most noticeably in Spain (by 60%) and Ireland (62%). 60

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Most customers (93%) said that they trust their primary financial services provider, nominating ‘the way I am treated’ as the secondmost important reason for having complete trust in their bank, after “financial stability”. ‘The survey finds customer experience to be a main driver of trust, and also the single most common reason that customers open and close accounts. Trust is more important than fees, rates, locations, press coverage or convenience,’ says Boyle. Of the 60% of respondents not planning to close or move their accounts, it is not necessarily because they are confident that they are with the right provider. Twenty-two percent of those who plan to maintain their current relationships feel that all companies are the same, while 17% say it is just too difficult or time-consuming to change. ‘Bank customers are not being actively retained, they simply remain with their current provider through inertia and are therefore vulnerable to competitors. Meanwhile, new types of financial services providers with new technologies and customised services are penetrating the global marketplace and cannot be ignored,’ adds Boyle. Despite improving confidence, customers feel that banks do not always have significant advantage over newer types of banks and technology companies, even for providing financial advice. More than 30% of respondents believe alternative banking providers are better able than traditional banks to improve how customers conduct business and reach financial goals. ‘Traditional banks are performing well on basics like branch access and ATM availability,’ Boyle says. ‘But they are most vulnerable in areas with the highest growth potential.’ Handling problems well wins customers

Approximately one-third of bank customers contacted their bank about a problem in the past 12 months with 25% feeling very satisfied, 42% satisfied and 33% less than satisfied, with the outcome of their complaint. Of the customers who were very satisfied, 58% gave the bank more business, while 32% of the customers who were very dissatisfied with the problem-resolution experience closed some or all of their accounts. Transparency about fees, charges and guidance on how to avoid them are consistently one of the biggest issues for banks across the globe to tackle. ‘The high level of customer complaints is a strong signal that banks need to get better at communicating their fees and charges with their customers. The good news is that solving a problem or addressing a complaint creates a critical customer interaction, which, if done well, can actually increase a customer’s business,’ concludes Boyle. For the full report, visit www.ey.com/globalconsumerbankingsurvey.

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INTERNATIONAL BANKING Forecast for Eurozone 2014 business lending drops by €211 billion

European SME’s need capital, “but banks will struggle to provide it this year”.

This year the Eurozone will experience annual gross domestic product (GDP) growth for the first time since 2011. However, at just 0.9% the growth will not be strong enough to support a level of uplift in financial services that will drive further economic recovery, according to The EY Eurozone Financial Services Forecast (EEFSF). The growth in business lending has been revised significantly down, with €211 billion less to be lent in 2014 than previously predicted in October. Consumer credit is also flagging – it shrank by €29 billion in 2013, as households felt pressure to reduce their debt in the face of high unemployment. The forecast for consumer lending in 2014 has dropped by €26 billion, and consumer credit will not recover to 2012 levels until 2016. The outlook is more balanced for financial services sectors outside banking. Assets Under Management (AUM) will continue to rise, hitting €5 trillion for the first time this year. However, low economic growth, low inflation, and historically low interest rates will limit the scope for further gains. Business investment combined with a more cautious attitude from banks towards lending, means that business lending is now expected to grow by just 1.6% in 2014, instead of 3.8% as previously estimated. Consumer credit forecasts have also fallen significantly. Robert Cubbage, Banking and Capital Markets leader for EY in Europe, Middle East, India and Africa (EMEIA), says: ‘While projections for overall lending over the next few years remain positive in most markets, they have fallen significantly since the last forecast’. He adds that ‘The Eurozone’s slow recovery from recession is one driver of weak lending growth, but the growing realisation of the Asset Quality Review’s (AQR)

likely effects is also a major factor. Applying common EU standards will inevitably create shocks, and it is no secret that a number of Eurozone banks are already increasing their provisioning’. ‘Balancing the demands of the AQR with the need to deliver growth and support business lending is definitely going to be a challenge for the banks this year,’ Cubbage concludes. According to Andy Baldwin, Global Head of Financial Services at EY, ‘with the benefit of hindsight, the timing of the AQR programme, (coming alongside such a sluggish recovery), is less than ideal.’ Economic recovery depends on a banking system that is not only well capitalised, but also able to extend credit where it is needed. Right now Europe’s SMEs need it more than most, but banks will struggle to provide it this year.’

Byline

The two-speed Eurozone The forecast for 2014 shows that the prolonged macro-economic differences between countries in the Eurozone are having a noticeable effect on the ability of financial services industries in those countries to support economic recovery. The forecast for Germany predicts an increase of 3-4% in lending to business, consumers and on mortgages. In France, an increase of 2% is forecast across all three categories. In the Netherlands, business lending rose 2.9% in 2013 despite a contracting economy. It is forecast to fall 2% this year, but consumer credit and mortgage lending are both expected to increase by 4% and 1.5% respectively. However, in Italy, lending will remain broadly flat. In Spain, business lending is forecast to fall another 3.2% in 2014, bringing the total fall since 2008 to 35%. Mortgage lending will fall 3% and consumer credit will fall by 2.4%. Lending forecasts in the Eurozone reflect the impact of NonPerforming Loans (NPLs). The European Central Bank’s (ECB) AQR appears to have triggered an early recognition of NPLs in Italy. Bad loans were higher than expected in the first three quarters of 2013 and are estimated to have peaked at 11.8% of all loans at the end of 2014. In Spain, there has already been a significant review of balance sheets, so no significant negative surprise is expected from the AQR. However, very high unemployment (26.6% at the end of 2013) means that NPLs will continue to rise during 2014, when they are expected to peak at 13.6%. In contrast, recorded low unemployment, robust growth and sound corporate balance sheets in Germany, mean that NPLs should fall steadily from 3.2% in 2013 to 2.8% in 2017. Non-life premium growth also strongly reflects national economic outlooks. In Germany, non-life premium growth will be strong, averaging 3.2% over the next four years, in comparison to 2.4% Eurozone average. This is underpinned by a stronger domestic economy, faster house price inflation, and a stronger corporate sector. By comparison, premium growth in Spain and Italy is expected to average 1.1% and 1.7% respectively over the same period. Marie Diron, Senior Economic Advisor to the EEFSF, comments:‘There is now a very real prospect of the two-speed Eurozone becoming a longterm issue. The divergences we see in lending and insurance premiums are linked to macroeconomic factors, namely unemployment and nonperforming loans. And the gap continues to widen. While GDP growth rates are forecast to start to converge in 2015 or 2016, the cumulative effect of the widening gap between the Eurozone economies will be felt for much longer.’ Edition 9

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LIFE STYLE

Meet the bankers

Lesetja Kganyago, Deputy Governor of the South African Reserve Bank

‘B

anking has always been my passion,’ says Lesetja Kganyago. And as a man who sees public service as a calling, his work has for nearly 20 years now made a difference to every banker in South Africa, and to every

citizen too. Kganyago has come a long way from Alexandra, where he was born, to his appointment as a Deputy Governor of the Reserve Bank, and a long way from his first job in banking – as a clerk at FNB. He also worked as an accountant for COSATU, as a regional accountant and national co-ordinator of the ANC’s economics department, and did an earlier stint at the Reserve Bank as assistant manager, investment dealing, before joining the Treasury in 1996 and rising through the ranks. He became Director of international commercial financing, and then Chief Director of liability management, before being appointed Director-General in February 2004, at the age of 39. In his 15 years at the Treasury, Kganyago presided over the drafting of 15 national budgets, and was credited with a key role in helping South Africa to build the reserves that cushioned its journey through the 2008 recession. As Director-General of the Treasury, he was also responsible for managing the government’s financial assets and liabilities, overseeing accounting policies and standards, developing appropriate fiscal policy and financial management, and improving financial management throughout government. While at the Treasury he also represented the country at the G20 and International Monetary Fund meetings, and served as South Africa’s Alternate Governor to the World Bank and the African Development Bank. The reputation he earned in these international forums ensured that his appointment as Deputy Governor of the Reserve Bank in 2011 – announced by President Zuma personally – was greeted with marked enthusiasm by investors and analysts. ‘Kganyago has extensive experience in financial markets and is highly regarded for his extensive knowledge and expertise of the South African and global financial systems,’ the president said. ‘Kganyago is well known to investors and has commanded a great deal of respect for achievements during his time at the Treasury,’ said Razia Khan, regional head of research, Africa, of Standard Chartered Bank. ‘He is seen as a key figure in the reforms implemented in South Africa over the years, is well-attuned to market thinking, and has played a key role in establishing South Africa’s reputation for sound fiscal policy.’ ‘He has considerable standing of his own within the ANC, and is seen to be in touch with the challenges facing the grassroots.’ Kganyago earned his first degree, a BCom in economics and accounting, at UNISA, and followed it in 1994 with an MSc in

Lesetja Kganyago, Deputy Governor of the South African Reserve Bank.

Economics from the prestigious School for Oriental and Asian Studies (SOAS) at London University. He has also studied external reserve management at JP Morgan in New York, US money and capital markets on an ANC senior economists’ training programme, macroeconomic management at the University of the Western Cape, fixed-income analysis at the World Bank Institute, financial programming at the IMF Institute and the Central Bank of Swaziland, and completed senior executive programmes at Harvard and Wits business schools. Now 49, Kganyago is married with two sons, and in what little spare time he has he enjoys hiking and golfing. Edition 9 BANKER SA

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BANKER SA

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Edition 9

2014/04/07 12:37 PM


BankerSA Edition9