A draft black empowerment charter for banking and insurance sets no targets for black ownership in the sector, while acknowledging that the “banking of the unbanked” must follow sound business practice.
The lack of specific asset-transfer targets stands in marked contrast to the mining charter, which requires 26% of the mining industry to pass into black hands over 10 years. In this and other key respects, the empowerment guidelines in financial services are likely to diverge sharply from their counterparts in other sectors.
The Mail & Guardian was given selective insights into the draft financial services charter by an impeccable source.
They are the first glimpses into the thinking of the “transformation
committee” that is negotiating the charter, and on which all the sector’s heavyweight interests are represented. They include the Life Officers Association, the Banking Council of South Africa, the South African Insurance Association, the Institute of Unit Trusts, the Institute of Retirement Funds and the Association of Black Securities and Investment Professionals (Absip).
The Banking Council’s general manager (transformation), Cas Coovadia, refused to comment on the M&G’s information. “The discussions are sensitive and not yet finalised,” Coovadia said. “We have to maintain strict protocol.”
He said the committee hoped to finish its work by mid-year and
present its proposals to the Treasury.
The charter process has its roots in the financial services summit staged by Nedlac in August last year.
However, sources insist it was greatly spurred by the mining
charter process, and particularly the battle in that industry over equity transfer targets. “Instead of being forced into concessions like the mining houses, the Banking Council decided to be proactive, to steal a march on government,” said one observer.
It had also been decided to draw black professionals — Absip — into the process from the outset. “It made a lot of sense to get black buy-in up front,” the observer added.
The draft charter is framed in generic terms, apparently to give
financial services institutions some leeway. It is specifically directed at
uplifting black South Africans, in
contrast to the mining charter’s concern for “historically disadvantaged South Africans” — a broader category.
The draft avoids quantitative ownership targets, instead binding institutions to “exercise their best endeavours” to make increased share capital available to black people over the period 2003 to 2014. Underlining that this will not be in the form of hand-outs, it says it should be in response to “effective demand”.
In line with the new government policy of “broad-based empowerment”, the charter proposes a “score-card” method of assessing empowerment track-records. Institutions would be separately evaluated, based on a range of criteria weighted for significance.
Among these are equity transfers, to be negotiated with each institution and its regulator, taking account of its responsibilities to shareholders and despositors, some set by statute. Other criteria are employment equity, affirmative procurement practices, past funding of black empowerment initiatives, social responsibility programmes, and existing “passive ownership” by black people through, for example, retirement funds.
Significantly, the draft charter insists that the last-mentioned should be “through structures that make ownership meaningful”.
An industry insider said it was possible that the final document might enshrine quantitative ownership targets. But, there had been a tendency in the empowerment field to overstress asset-transfers to individuals.
“Individual ownership accounts for less than 3% of our industry — most of it is institutionally owned,” the source said. “How do you change that? And in bringing about empowerment, is ownership more important than control?”
Black people indirectly owned between 16% and 23% of the sector through such institutions as the Public Investment Commission (PIC), which manages the pensions of a million public servants, and the Transnet pension fund. But such passive ownership did not imply the power to transform.
“The issue for the PIC is to insist, for example, on representation on Stanbic’s board. Black people should have a substantial proportion of directorships on the boards of institutions, both at holding and subsidiary level,” another source said. “That is the fulcrum of power.”
An additional difficulty with quantitative equity-transfer targets in
banking and insurance was the enormous amount of capital required. The combined market capitalisation of Old Mutual, Stanbic and First Rand, the three financial services groups in the JSE’s top ten, is about R115-billion.
Not surprisingly, the draft charter notes that account must be taken of the size of institutions in evaluating equity transfers. “The bigger the institution, the more difficult it is to achieve a percentage change in ownership,” it notes.
Reg Rumney, executive director of BusinessMap, pointed out that the tendency in financial services had been to use subsidiaries for empowerment deals, because less capital had to be mobilised. Nedcor, for example, had used the Perm as a
basis for its empowerment venture with the People’s Bank.
The charter, a source said, would have to deal with the role of the
financial services sector in transforming the whole economy — which was why “it is so hellish sensitive”.
There were concerns that the banks were expected to finance equity in their own structures as well as empowerment in other sectors. They could not easily do both.
The draft charter avoids being overly prescriptive in dealing with one of the government’s prime gripes — the commercial institutions’ perceived failure to “bank the unbanked”.
It calls for the banks and government to co-operate in delivering
savings and transmission services to “as many South Africans as practical”. However, it also enshrines the principle of best international practice “in the custody of the nation’s savings and the acceptance of risk”.
Colin Reddy, BusinessMap’s empowerment director, emphasised that only 10% of the banks’ assets came from shareholders — with the balance supplied by ordinary depositors. “None of us wants our money put at risk for the unbanked,” he said.
Lending institutions had to balance social needs against their fiduciary duty to provide good asset management. The PIC was required to walk the same tightrope.
However, he added that in a country like South Africa, the problem of access to financial services had to be addressed through “creative models”. A study by the research company SAtoZ, released this week, finds that 37% of urban South Africans do not have bank accounts.
A senior banking insider said there was an unfortunate tendency in South Africa to focus on the commercial banks as the sole means of access.
“The problem is not just risk, it is the cost element — banking is very
expensive in South Africa. We need to diversify the financial sector, to have a range of delivery mechanisms and institutional forms that understand particular markets better than banks.”
These included the micro-loan sector and cooperatives, which operated through an exemption to the Banks Act and were unable to take retail deposits.
The trick was to create the appropriate regulatory environment. Four years ago, the banks fought shy of the micro-lending sector, arguing that there was no regulation and the risk was excessive.
The Micro Finance Regulatory Council had since registered 1 800 organisations, representing in value terms close to 97% of the sector. These included the banks, which now catered for more than 40% of the market.