TRANSFORMATION IN THE FINANCIAL SERVICES SECTOR: Impact on economic growth in South Africa Charles Okeahalam Managing Di

1. TRANSFORMATION IN THE FINANCIAL SERVICES SECTOR: Impact on economic growth in South Africa Charles Okeahalam Managing Director Africa Growth Holdings

2. Transformation in the financial services sector: Impact on economic growth in South Africa Presentation at the 2nd BANKSETA International Conference Dr. C. Charles Okeahalam, Managing Director, AGH, Johannesburg, South Africa Venue: The Forum / The Campus, Wanderers Building, 57 Sloane Street, Bryanston Johannesburg. Date: 6th October, 2004. 1

3. This presentation focuses on the following: 1. Introduction 2. An overview of SA’s financial services sector. 3. Aims & Objectives of transformation in SA’s financial services sector 4. An evaluation of recent transformation 5. Expected effects of transformation on the the financial sector 6. Challenges to transformation 7. Summary 8. Policy recommendations 2

4. 2. An overview of SA’s financial services sector • SA’s financial sector is the most highly sophisticated and technologically advanced financial market in Africa eg. JSE and BESA. • Banking sector – ‘Four pillars’: Nedcor, ABSA, First National Bank and Standard Bank • Entry by Barclays Bank - what are the implications? • Possibly greater competition – reduced margins - commitment to transformation • Key regulators of SA’s financial services sector are namely: SARB - Registrar of Banks, National Treasury, Financial Services Board (FSB). 3

5. 2. An overview of SA’s financial services sector continued • The financial sector’s share of national output has increased from 12.4% in 1991 to 19.6% in 2003 • The financial and business services sector had the highest labour productivity index of all economic sectors during 1999-2001 and 2003 • The JSE is the 17th largest stock exchange in the world • SA is gradually becoming the financial capital of Africa. • SA’s economic sectors are dependent on the financial sector for investment capital and banking and insurance services thus making the financial services sector central to economic growth. 4

6. 2. An overview of SA’s financial services sector continued Focus on the Banking sector: • The banking sector had assets totaling R1,349 billion as at June 2004 • Banking sector is highly concentrated with ‘four pillars’: Nedcor, ABSA, First National Bank and Standard Bank • Retail and wholesale banking products such as deposit-taking, provision of credit and investment banking are essential to economic growth • Banks provide liquidity and mobilize savings to profitable investment projects • Banks diversify financial and investment risks through basic and innovative banking services and products • Accordingly - A key role of financial intermediaries is to reduce costs of conducting business and enhance the efficiency of financial intermediation 5

7. 3. Objectives of transformation in SA’s financial services sector The financial sector charter is expected to have a major impact on the financial services sector in various ways: • Human resource development – training • Gender balance and sensitivity • Procurement policies - BEE • Enterprise development • Increased access to financial services • Increased empowerment financing – broad based? 6

8. 3. Objectives of transformation in SA’s financial services sector continued • Increased shareholder activism, ownership and control in the financial sector • Alter the regulatory structure and address regulatory issues • REAL - corporate social investment 7

9. Objectives of transformation contd. Transformation involves a business process re-engineering of financial services sector staff, consumers, stakeholders and MINDSETS to: • Provide services relevant to the financial service needs of consumers • Provide a service-based operational culture • Reduce costs of financial services • Increase competition in the financial services sector 8

10. 4. Recent transformation in SA’s financial services sector cont. • Legislation - Changes in industry regulations such as the Financial Advisory and Intermediary Act (FAIS Act) and Financial Intelligence Centre Act (FICA) aim to curb illegal financial transactions and increase confidence in SA’s financial markets • Relaxation of foreign exchange controls foster international investments and transactions via portfolio and foreign direct investments (Africa / non-Africa) • Formulation and implementation of the financial sector charter. • Increased use of technology in providing financial services such as mobile and internet banking • Entry of foreign financial services firms such as Barclays Bank – what are the implications for transformation? • Key question? Is BEE in the Financial Services Sector Transformation? YES and NO Depends on the nature of the deal. 9

11. 5. Expected effects of transformation on the financial sector • Increase competition and reduced costs • Increased variety of products with the entry of foreign banks (such as Barclays Bank) and the implementation of appropriate financial sector regulation • Enhance delivery of the objectives of financial services firms • Increase financial intermediation at the lower end of the market eg. the success of CAPITEC. • Increase market efficiency and output • An increased understanding of the market environment particularly for low income households- particularly PDI • Accrual of ownership to a broader base of PDI shareholders 10

12. 6. Challenges to transformation • Oligopolistic and concentrated market structure in the financial services sector • Limited incentives to enter certain markets such as low envisaged profit opportunities at the lower end of the market • Lack of adequate consumer knowledge • Large number of un-banked: over 13 million adults are un-banked in SA • Difficulty in implementing financial sector charter and other regulations • Shortage of financial market specialists and expertise 11

13. 7. Summary • SA’s financial services sector is central to domestic growth • Recent transformation will increase output and reduce cost • Certain market segments are under-developed especially the lower end of the market • There is still a need for more transformation in the financial sector such as increased competition in different sub-markets • Implementation of the financial sector charter will promote a welfare efficient banking and financial sector 12

14. 8. Policy recommendations: • Change of mindset – perhaps entry by foreign players will enhance this – lets see. • Effective monitoring of the implementation of formulated regulations and charters. • Effective implementation of financial sector charter through public private partnerships and cooperation • Foster SMMEs in the financial services sector • Increasing access to education of financial services consumers 13