Key Highlights of the draft Cooperative Banks Bill, 2006

1. Key Highlights of the draft Cooperative Banks Bill, 2006 Portfolio Committee on Finance 05 September 2006

2. Outline • Background: Cooperatives banks/Village banks/Financial Services Cooperatives • Self regulation of village banks • Advantages and disadvantages of self regulation • Co-operatives Banks Bill, NEDLAC Agreement • Proposals for the redraft of the Co-operatives Banks Bill • Developing capacity within village banks

3. Background: Cooperatives banks/Village banks • Definition: • Member-based financial institutions • Basic banking businesses (in some instances insurance products) • Community based • Target market: No alternative financial service providers (rural=village banks or FSCs; urban=credit unions)

4. Background: Cooperatives banks/Village banks • Activities: • Deposit-taking • Provision of micro-loan, personal and entrepreneurial • Third-party payments • Social grants payments • Others – Funeral Schemes • Entrepreneurial activities

5. Background: Cooperatives banks/Village banks • Historical background • Bophutatswana agricultural bank – African Rural and Agricultural finance association (AFRACA) • Village bank project – International fund for agricultural development • Establishment of 3 village banks between 1994 to 1996 in North West • Self-regulation – FSA, FINASOL and SACCOL. • 1998 Exemption from the Banks Act

6. Self regulation of village banks and other possible ways they can be regulated • Provisions and Conditions of the Exemption worth mentioning • Pre-approved Self-regulatory bodies • the “business arrangement” between a village bank/FSC and a link bank • restriction on the amount of deposit from members a village bank can hold(limited to R10 million)

7. Pros and Cons of Self regulation • Advantages of self regulation • Least cost to the fiscus • Simple administration and affordable compliance – lack of red-tape • Industry-friendly rules and regulations • Peer-review advantages

8. Pros and Cons of Self regulation • Disadvantages of self regulation • Outside lender of last resort • Conflict of interests – Support v/s Regulation • Capacity problems • Funding - Levies

9. Background: Cooperatives banks/Village banks • 2002 – Collapse of Self-regulatory bodies • Implications – illegal deposit-taking • 2002 – NEDLAC Financial Sector Summit agreements • Formalisation of the industry – Legislation and support

10. Statistics • Source: Finmark, Third-tier banking report, 2003

11. Proposed banking structure

12. Co-operatives Banks Bill, NEDLAC Agreement • Aims of draft legislation: • Protect members and depositors from irresponsible lending or fraud • Give co-op banks legal status with limited liability for both the organisation and members • Give co-op banks the power to accept deposits and provide loans • Ensure that co-op banks contribute to development of the local economies in accordance with the principles of the co-op movement • Establish a Supervisor in the Reserve Bank to register co-op banks and supervise their activities

13. Co-operatives Banks Bill, NEDLAC Agreement • Establish a Co-op Bank Forum to advise the Supervisor on policy, educational work and other decisions

14. The draft legislation • Policy issues addressed by the legislation • supervision of cooperative banks • R2m capital & 200 members min requirement pre-requisite for registration (provisional registration for small entities) • capacity building • Development Agency for Cooperative banks • setting up a Supervisor for cooperative banks • Two supervisors – SARB and Development Agency

15. Supervisor of Co-operative Banks • S2 establishes office of the Supervisor of Co-operative banks in the SARB • Supervisor appointed by the SARB with approval from the Minister of Finance • Supervisor will be deputy Registrar of Banks • Supervisor to perform all the functions assigned to his office by this Act

16. Register of cooperative banks and Inspection powers • S5-Supervisor to create and keep the register of cooperative banks • S6-Powers of inspection as afforded by the Inspection of Financial Institutions Act • S7 empowers Supervisor to direct a cooperative bank and support organisation to furnish information on coop banks necessary for compliance

17. Board of Review • S8-establishes a board of review • Reviews decisions (proper discretion and good faith) taken by the Supervisor that may have aggrieved any person • Minister to appoint 3 members • Person with legal background (Chairperson) • Person with accounting background • Person with experience in matters relating to cooperative banks

18. Annual Report • S9-Supervisor to submit annual report to the Minister of Finance • Minister must lay a copy of such report before Parliament within 14 days • Minister must Gazette the annual report

19. Support Organisation • S12 establishes support organisation • Juristic person • assist with the application process for a co-operative bank license; • support a co-operative bank in the management of its business; • train the staff of a co-operative bank; • Provide auditing services for smaller for co-operative banks who can’t afford auditing fees; and • promote the creation and development of new co-operative banks.

20. Policy Considerations – S12 • Support Organisation should be called “Development Agency for Cooperative Banks” (“DACB”) • DACB Should be a wholesale organisation • Current regulatory bodies such as SACCOL and FICOSA should be actual delivery organisations for cooperative banks development programmes on a contractual basis

21. Registration and Coop Bank License • Legal conduct of cooperative bank business (S14) • Incorporation with Cooperatives Act (dti) • Incorporation with Cooperatives Banks Act (Bank License)

22. Coop Bank application process continued…. • Applicant approaches Support Organisation (Development Agency) for assistance with training, application and registration process (certificate of approval) (S18) • Application made to Supervisor (prescribed form and fee) • the activities of the applicant prior to the date of application • the registration of the applicant as a co-operative under the Co-operatives Act;

23. Coop Bank application process continued…. • what type of co-operative bank license as contemplated in section 22(3) is being applied for; and • whether the applicant is in a position to provide the services contemplated in section 22(3) as the case may be, or any part thereof; • a business plan for a co-operative bank; • a management plan for managing a co-operative bank; • a constitution for a co-operative bank;

24. Coop Bank application process continued…. • list of at least 200 members of the applicant, and their prescribed details (5 members in the case of Coops Bill); • confirmation regarding the suitability of the premises identified for the business of a the applicant; • a report that the prescribed training in respect of the directors and manager for a co-operative bank had been completed;

25. Coop Bank application process continued…. • Supervisor acknowledges receipts within 14 days

26. Granting of Coop Bank license • S19-The Supervisor grants license to an applicant who: • has the received a certificate of approval from a Support Organisation; • has access to financial resources; • has the technical ability to conduct the business of a co-operative bank; • will conduct its business in accordance with co-operative principles as contemplated under the Co-operatives Act; and • is not in contravention of any relevant provision of this Act.

27. Types of Coop Bank Licenses • S21(3)(a)-Savings Coop Bank: • Provides the primary services of : • primary deposit taking; • transmission services (including third-party payments); • S21(3)(b)-Savings and Loans Coop Bank • provides all services provided by savings coops as well as advancing secured and unsecured loans to members; and other services prescribed or approved by the Supervisor.

28. Powers of a Coop Bank • S30(1)-A coop bank may: • conduct the business of a co-operative bank as from the date of the issuing of certificate to conduct such business • solicit or advertise for deposits from members of that co-operative bank; • make prescribed investments; • open cheque and savings accounts with a bank;

29. Powers of a Coop Bank Continued…. • make, draw, accept, endorse, or negotiate cheques that are paid to the order of or made out and endorsed by that co-operative bank; • accept donations or other forms of financial assistance subject to prescribed conditions; • conclude a management support agreement with a support organization; • institute or defend legal proceedings

30. Restricted Activities • S31-A Coop bank must not: • make loans to any director, employee, or agent of any co-operative bank except under the prescribed conditions; • allow a member that is in arrears to be or remain as a director of a co-operative bank; • borrow money other than by taking deposits from members or under the prescribed conditions; • issue bonds or debentures to any person other than under prescribed conditions and with the approval of the Supervisor;

31. Restricted Activities Continued…. • trade in foreign currency; • have equity or voting rights in any company, juristic person, partnership, other than a secondary co-operative bank, to the extent permitted in prescribed investments; • act as an agent except in respect of a burial scheme underwritten in accordance with applicable law; • indemnify directors or employees of that co-operative bank against grossly negligent, reckless, or intentional acts;

32. Restricted Activities Continued…. • act as surety or guarantor on behalf of any person; • provide security or collateral to any person; • merge or amalgamate with any other person, except as described under Chapter XI; • directly or indirectly participate in any trust other than as a beneficiary; • effect any transaction as an undisclosed principal or in any other manner other than in the name of that co-operative bank; or conducting a burial scheme conducted under applicable law; • hold assets other than in the name of that co-operative bank.

33. Prudential Requirements-Capital • S63(2)-Minimum capital requirements – prescribed by regulation, • Generally 8% of risk-weighted assets (UK and Germany) • Coop banks may seek an exemption (Conditions) • Duration of the exemption • Manner in which funds can be sourced; and from who • How coop bank may utilise its funds

34. Prudential Requirements-liquid assets requirements • S64(1) Minimum liquid asset prescribed by regulation • Usually between 5-25% of short-term liabilities (100% in this Bill) • Liquid assets may not be pledged or encumbered

35. Large Exposures • S65(1) Investments and/or loans to any single person or entity restricted to a percentage prescribed by regulation • Usually not exceeding 25 % of primary and secondary share capital and reserves

36. Other sections • S68-76 Conversion of Coop banks • S77-85 Amalgamation, winding-up and dissolution

37. Institutions created by this Act • Office of the Supervisor of Coop Banks(S2) • Support Organisation (Development Agency) (S12) • Advisory Council (S93) • Board of Review (Committee)(S8)

38. Developing capacity within village banks • Major Points: • Deposit payouts • Charter: Business support • Bank Seta: skills training • SACCOL (FSA & FINASOL): Administration and compliance; Start-ups. • Communities: Self-help projects • Government: Funding

39. Lessons from international Experiences • Formalisation of the sector • Germany, Canada, the US and the UK • Examples: Credit Union Act of 1979 as the principal Act in the UK. There is a move to a new regime of regulation to allow for reduced regulatory requirements for credit unions offering a limited range of services relative to those offering a wide range of services • Another Example: Cooperative Act of 1889 is still applied in Germany

40. Lessons from international Experiences • Structuring the sector • international norm: three-tier structure • With primary cooperative banks at the first tier; cooperative centres at the second tier, and a central cooperative at the national level

41. Lessons from international Experiences • Setting and implementing prudential and liquidity requirements • Example: in the UK, credit unions are subject to prudential and liquidity requirements, • 5% of total liabilities in liquid asset, • Capital requirement of 8% is imposed.

42. Conclusion • 2002 -Nedlac Agreements • 2002 – Collapse of self-regulatory bodies • Legislation • Support • Regulations

43. QUESTIONS