In a mission to better understand and to highlight and promote South Africa’s financial cooperatives sector, new media platform Ujuh established the Financial Cooperative & Stokvel Empowerment Platform. It has also commissioned an editorial survey to help unravel the dynamics of the sector. As part of an unfolding series we put some questions to the Cooperative Banks Development Agency (CBDA).
The frame of our action is as follows: South Africa is recognised for being blessed with an extraordinarily high number of stokvels –informal financial cooperatives. It has about 800 000 stokvels catering for about 11 million members who save about R50 billion a year.
But the truth is that the country’s informal financial cooperatives sector suffers from stunted growth and yet there is so much potential. There is virtually no feedthrough from stokvel to the formal financial cooperatives or cooperative banking sector.
Here follows the Q&A content from our interaction with the CBDA.
Is there a place for co-operative banking in South Africa and for what role?
Financial co-operatives can be used as a tool to tackle poverty, unemployment, and inequality in the country and as well as create synergies between the formal and the informal sectors of the South African economy. They bridge the financial exclusion gap by pooling members’ savings for on-lending to the same members.
CFIs operate through a common bond which means they are better placed to reduce information asymmetry and high transaction costs that often result in credit rationing in the credit markets. Co-operative banking can also assist ordinary members of communities with debt rehabilitation and debt management and encourage a culture of saving.
Recently, the Standing Committee on Finance and the Portfolio Committee on Trade and Industry held joint public hearings on the transformation of the financial sector, and from those discussions it became very clear that cooperative banking has a role to play in the transformation agenda, addressing the following issues:
Cooperative banks are owned by community members within which they operate. They are made of ordinary South African citizens. They are ideal for stokvel members that want to grow their base and own their own financial institution, where they can determine the interest rates charged on loans, the products and services offered but more importantly where they have a say in terms of how the “bank” is run, putting member needs first before profit. They can achieve all this whilst deriving some form of financial benefit from the proceeds of their own financial institution.
Access to financial services
They serve to give access to financial services to a large number of people who become members. This is critical in the South African setting as 8.5 million adults are excluded from the country’s formal financial system. Access could be just a simple, affordable savings channel, or proximity as these cooperative banking institutions are right at the doorstep of their members (customers). And to some it could be the medium of language used in these institutions.
Inclusive Economic Growth
Cooperative banking institutions as financial intermediaries could afford SMMEs, cooperatives, and other entrepreneurs in their local economies (township and rural economies) capital to start and/or expand their business, which they wouldn’t otherwise have access to, thereby resulting in more jobs being created, self-reliant and self-sustainable communities.
How should financial co-operatives activity relate to mainstream commercial banks?
Co-operative banking and mainstream banking relate to each other in the sense that they all harness savings from the population into the financial system of the country thereby increasing the national savings, national investment and ultimately economic development and growth.
The only difference between the two is that co-operative banking gives ownership to the members, ordinary people, whereas in mainstream banking ordinary people are just mere clients. The financial benefit of commercial banks is just for the few shareholders of the bank, whilst in cooperative banking the value created by the organisation flows to a broad based of members. Cooperative banking institutions are made of a minimum of 200 members (who are also clients and owners).
List the biggest obstacles faced by financial co-operatives?
- They run on manual operational systems which limit members to only transact with their institutions and only during trading hours. Other than that they cannot access their funds even for emergencies.
- Many suffer from low skills levels of their leaders; the board of directors and management;
- They run on poor infrastructure that does not inspire confidence;
- There is lack of political will from the government and a fragmented support framework for cooperative banking in the country;
- There is a strong perception in the country that the financial co-operatives are for the poor;
- They have no access to the National Payment System;
- They are unable to do payroll deductions;
- And they face a double taxation system.
What can be done to help financial co-operatives tackle these obstacles and thrive?
- The CBDA is busy implementing a banking platform and central support services that will enable the cooperative banking sector improve operational efficiency in their institutions, through fully automated operations, back-office support and access to the national payment system, thereby enabling convenient transacting within South Africa;
- The establishment of a National Cooperative Bank, which will be formed by stokvels, taxi industry, SMMEs, Agri-business etc will help the situation. This is such that the existing cooperative banking institutions will become branches of the national structure, offering convenience to their members. This will address the skills issue, at all levels of the cooperative banking sector, from governance, management whilst ensuring meaningful participation in the mainstream banking sector of the country;
- Public Private Partnership should be tapped to improve operational infrastructure;
- The development of a National Cooperative Banking Strategy will ensure adequate and well-coordinated support is provided to start-ups – just like the mining department is helping new entrants in the mining sector and the department of trade and industry is helping new black industrialists;
- A complete mind-set shift is required to move away from the attitude that financial co-operatives are for the poorest of the poor. For instance in the US, Kenya and other parts of the world parliamentarians, medical practitioners and bankers have their own Credit Unions and/or SACCOs (Savings and Credit Cooperatives). Examples of such could be made of the Mondragon Corporation of Spain, the SKOK of Poland, Raiffeisen Bank and some of the big Credit Unions in the US;
- The implementation of the banking platform and central support services for the sector by the CBDA is a good start. The development of a National Cooperative Banking Strategy resulting in a more deliberate approach to use cooperative banking as a tool to transform the financial services sector and for inclusive economic growth;
- South Africa needs to work towards allowing the co-operative banking sector Payroll Deductions
- The country also needs tax concessions for the cooperative banking sector.
What becomes of CBDA under the prevailing shift in regulatory framework?
The Supervision of Co-operative Financial Institutions (CFIs) rested with the CBDA and was guided by the Banks Act Exemption Notice (No. 620 of 2014), that was provided by the South African Reserve Bank (SARB) together with National Treasury. Now with the implementation of the Financial Sector Regulatory Act that requires a Prudential Authority, the supervision of CFIs will be done by the SARB.
The CBDA’s dual mandate of regulation and development was an anomaly to begin with. And so the shifting of the regulation role to the SARB is actually rectifying that anomaly and is a positive move. It eliminates the conflicts that arise from supervision and development being under one roof.
The shifting of the regulation and supervision roles to the SARB leaves the CBDA as a development agency that offers capacity building support to the cooperative banking sector.
Any other thoughts?
The cooperative banking sector needs to be more organised in order to be able to lobby for more government recognition and support. The sector also needs to create more awareness by developing a strong top-of mind brand that will give ordinary South Africans an option to have a cooperative bank as a financial services institution of choice.