The Banking Association South Africa

Inclusive Economy

INCLUSIVE ECONOMY

The National Development Plan (NDP) formulated by the National Planning Commission (NPC) in the Presidency has relatively broad support from stakeholders that include government, the private sector, civil society and development partners. The banking sector is committed to the ongoing socio-economic development of the South African society. The sector is a key enabler and participant in economic, social and political development and the NDP provides the broad vision under which the sector can fulfill this role.
The aim is to reduce inequality and eliminate poverty through an inclusive economy, enable an effective state and promote partnerships. The banking sector has supported and endorsed the NDP and has effectively aligned and contributed to the realisation of the NDP. However, the banking sector also recognises that the NDP has a finite scope, whereas the industry’s goals for an inclusive economy extend much further. These are some of the ways the banking sector is making an impact:

INFRASTRUCTURE DEVELOPMENT

Since the adoption of the National Development Plan (NDP) by Government and the Presidential Infrastructure Co-ordinating Commission (PICC) which preceded it, the focus on infrastructure has been at the heart of the on-going dialogue on sustainable, socially cohesive and growth oriented development and economic competitiveness, performance and transformation. The NDP proposes some concrete steps at the heart of the infrastructure question. It states: “The country needs to make large investments to propel economic activity. These investments need to be made in a structured, considered manner to prevent inappropriate initiatives, protect South Africa’s resources and ensure that prioritised investments are efficiently implemented.”

The pivotal role of infrastructure in economic growth is also borne out of international experience. One of the defining features of China’s rapid transformation into an industrial powerhouse has been investment-led growth. The post-war reconstruction of Germany and its on-going success are due in part to substantial investment into ports, high-speed railways, autobahns, schools and universities. Similarly, Brazil has established dedicated Development Financial Institutions (DFI’s) to support both state and private sector infrastructure financing and investment. Whilst the obvious focus for the banking sector in infrastructure may be in the realm of infrastructure financing and investment, the remit of infrastructure as it relates to banks could in fact be much broader than infrastructure finance and investment alone. A deeper understanding of the differentiated and complimentary roles the banking sector and the state can fulfill in respect of infrastructure.

Within the same context, the particular infrastructure types and classes require a deeper understanding. We need to understand the role of the banking sector in sectors such as energy, transport, education, health, human settlements, water, sanitation and information and communications technology.

The Banking Association has been part of the broad business initiative responding to the infrastructure challenge under the auspices of Business Leadership South Africa (BUSA). The focus of this initiative is the conceptualisation and implementation of the major infrastructure projects, under Strategic Infrastructure Projects 1 (SIP 1).

The Banking Association is also part of The Task Team on Private Sector Financing of Infrastructure convened by the National Treasury. This Task Team seeks to identify and create an enabling environment for private sector participation in the funding of infrastructure projects in South Africa. The Task Team also aims to identify blockages to investment, problem solving around these, and making recommendations for the private or public sector parties to resolve. The ultimate outcome is to achieve a clear set of rules, principles, processes, and structures which provide an enabling environment for private sector participation in financing infrastructure, but also to assist with building an atmosphere of collaboration, trust and confidence amongst all private and public sector players involved in infrastructure financing.

The Task Team consists of The Banking Association, Association for Saving and Investment South Africa (ASISA), Presidential Infrastructure Co-ordination Commission, Public Investment Corporation (PIC) and Finance Trade Union SASBO. There is an intention to include other key players such as the Development Bank of South Africa (DBSA).

The Banking Association is also in ongoing talks with ASISA to establish a team that will look at Public-Private financing structures.
INFRASTRUCTURE FINANCE AND INVESTMENT
Finance and investment for infrastructure development is a crucial part of raising South Africa’s growth rate. National Treasury has indicated that a one-percentage point increase in infrastructure investment will increase long-term GDP by 1, 3% and employment by 0, 7%.

Conversely, inadequate investment in infrastructure creates bottlenecks and slows development (The electricity outages in 2008 and the subsequent shortages have slowed down investment and production in the mining, chemical and other high energy consuming sectors). The NDP proposes that South Africa should invest in a strong network of economic infrastructure designed to support the country’s medium and long-term economic and social objectives. The economic infrastructure the NDP proffers is a precondition for providing basic services such as electricity, water, sanitation, telecommunications and public transport that are capable of meeting industrial, commercial and household needs.

The NDP argues that South Africa possesses a relatively good core network of national economic infrastructure, but maintaining and expanding this to address the demand of a growing economy is a challenge. There is some concern that the state does not possess the institutional or financial capacity to implement the investment plans needed to finance infrastructure on the required scale.

The country needs to make large investments to propel economic activity. These investments must be undertaken in a structured and considered manner to prevent inappropriate initiatives, protect vulnerable resources and ensure that prioritised investments are efficiently implemented. Better quality investment decision-making must inform the state’s financial resource allocation, ultimately stimulating economic growth.

Current investment levels are insufficient and maintenance programmes are lagging. These have been historical and system-wide legacies. Even during the significant uptick in economic growth and investment of the late 1990s and early 2000’s, finance and investment in critical economic infrastructure development and maintenance did not keep pace with the underlying economic performance through adequately leveraging prevailing capital inflows.
INFRASTRUCTURE CLASSES
As explained previously, the particular infrastructure types and classes within which the banking sector in South Africa can leverage its competitive advantages and capabilities require a deeper understanding. Priority infrastructure classes for the NDP and the PICC are; energy, transport, education, health, human settlements, water, sanitation, Information and Communication Technology (ICT) and regional infrastructure.

The latter, regional infrastructure programmes, are an important contributor to regional integration, including South Africa’s participation in the African Union’s sector specific projects that facilitate and enhance regional trade and investment performance, such as the north-south corridor, enhancing borders facilities, improving energy access and ICT connectivity and revitalising transport and logistics links. Government has identified potential projects worth about R3.2 trillion between now and 2020. Over half of these projects, about R1.9 trillion worth, are in electricity, transport, education and health.

These projects range from those already under construction, such as the R121 billion Kusile power station, those at a feasibility stage such as the Sishen-Saldanha iron ore railway line, to those that are still at a conceptual stage. Many of these projects reflect the vision of where Government envisages the country to be in 2030 – new universities, new hospitals, new railway lines, new houses, as prioritised by the Presidential Infrastructure Co-ordinating Commission (PICC) whose task is to oversee the implementation of infrastructure and to ensure that there is proper co-ordination between government departments.
INVESTMENT AND FINANCE
The NDP identifies electricity, water, transport and telecommunications as key points of departure for critical economic infrastructure that is the foundation for social and economic development.

In the transport and energy sectors, where state-owned enterprises dominate, the economy has already been constrained by inadequate investment, maintenance and operation of existing infrastructure. In the telecommunications sector, policy and regulatory uncertainty and the lack of capability remain barriers to infrastructure investment and to achieving affordable, quality services, especially for the poor.

In the water sector, delaying critical investments may result in water shortages.

Greater public-private financial partnerships involving the banking and institutional investor sectors are likely to bring about better decision-making and improved spending discipline, resulting in more rigorous assessment, shareholder accountability and reporting. This will contribute to further access to capital for infrastructure finance and investment.

The banking sector can also play a role in co-ordinating financing and investment planning in infrastructure and services that take account of and respond to climate change and other environmental performance measures that contribute to a sustainable low-carbon green economy with an aligned economic growth trajectory.

The banking sector can play a significant role in providing favourable financing and investment terms for enterprises involved in research and development, innovation, as well as dedicated financing and transaction advisory services customised to the requirements of particular entrants in the green economy, including SMEs. Banks have well developed expertise in structuring projects and financing the initial phases of the infrastructure projects. We must design a model to facilitate the participation of the banking industry, long-term savers, pension funds as well as DFI’s.

Research and Development in new, innovative infrastructure is very crucial. The banking sector could contribute to, and undertake greater investment in research and development around the green economy and identify more structured collaboration with state-funded developmental finance institutions, incubation programmes and centres of excellence involved in enterprise support and project development in the green economy. For example:

The Development Bank of Southern Africa Green Fund
The National Cleaner Production Centre of South Africa
The Climate Innovation Centre (at the Blue IQ Innovation Hub)
Industrial Development Corporation (IDC) Green Energy Efficiency Fund

Government should also be bold in examining the possibility of existing sectors and industries where the private sector can play a more constructive role, and determine an appropriate role for State Owned Enterprises (SEO’s). It should also deal with turn-around times and uncertainty that tend to impact negatively on major infrastructure projects.

FINANCIAL SERVICE CHARTER CODE

INTRODUCTION TO THE FINANCIAL SECTOR CHARTER
The Financial Sector Charter came into effect in January 2004 as a transformation policy based on the terms of the Broad-based Black Economic Empowerment [BBBEE] Act (53 of 2003).

The Financial Sector Charter (FSC) is a voluntary agreement by all National Economic Development and Labour Council (NEDLAC), a multilateral social dialogue forum on social, economic and labour policy, members to promote social and economic integration and access to the financial services sector.

The Financial Sector Charter commits its participants to “actively promoting a transformed, vibrant, and globally competitive financial sector that reflects the demographics of South Africa, and contributes to the establishment of an equitable society by effectively providing accessible financial services to black people and by directing investment into targeted sectors of the economy”.
BACKGROUND TO THE FINANCIAL SECTOR CHARTER
In 2002, at the Financial Sector Summit, NEDLAC negotiated the Financial Sector Summit Agreement to transform the financial sector. NEDLAC partners – represented by government, organised business, organised labour and organised community constituencies – committed to the development of a Black Economic Empowerment [BEE] Charter to remove inequalities and create a robust financial services sector.

On 1 January 2004, the Financial Sector Charter (FSC) came into effect. The FSC was the first voluntary BEE Charter that represented commitment from an entire sector of the economy to transform the financial services industry in line with the Broad-Based Black Economic Empowerment (BBBEE) Act to reduce inequalities that prevent people and South Africa from reaching its potential.

In 2007, the dti gazetted Generic Codes under section 9 of the B-BBEE Act thus giving the Codes a superior legal status to that of the Charters gazetted under section 12. From 2007 to 2011, the Charter constituencies were engaged in discussion to align the FSC to the Codes with the aim of gazetting the FSC under section1 of the Act to have the same legal status as the Codes. In December 2011 phase 1 of the draft sector code was gazetted for public comment. In November 2012 a Financial Sector Code was gazetted.
FINANCIAL SECTOR CHARTER VS. GENERIC CODES
The Financial Sector Charter and Generic Codes of Good Practice are used to monitor economic transformation in South Africa. The Charter, now the Sector Code, represents a comprehensive approach by the financial sector to address black economic empowerment.

The charter embodies the financial sector obligation to specific transformation goals and defines key commitments that enable institutions to maximise their contribution toward economic growth and sector transformation.

The FSC provides a credible quantitative measurement of progress. These measurements make it possible for the general public, the Charter Council and government to assess the impact the Charter makes to address the fundamental challenges facing the South African economy.

The diagram below represents the current reality of economic participation vs. demographics compared to the future goal in terms of black economic empowerment.
ECONOMIC IMPACT ON FINANCIAL SECTOR
The FSC adds to the rising costs of compliance, however, this is viewed as a necessary “evil” that will be outweighed by the long-term benefits to banks and other financial institutions.

As the process to align the Financial Sector Charter (FSC) to the Department of Trade and Industry (dti) Codes of Good Practice for Broad-based Black Economic Empowerment was still under way, duel reporting was required between 2008 and 2012. Reporting under the dti Codes was required to comply legally and was used to develop and maintain systems in anticipation of the FS Code. Now that the FS Code has been gazetted, institutions will be required to report under the FS Code and the Generic Codes will no longer be applicable. The dti is still in the process of establishing a repository for Generic Codes performance reporting and no aggregated figures are available.

In 2008, the financial sector had originated loans in excess of R60.3 billion for low income housing, agriculture and black SMEs. In addition, R64.6 billion was achieved under the Targeted Investments element of Empowerment Financing and a further R101.2 billion under BEE transaction financing. Significant amounts were also spent in skills development training, Enterprise development and CSI initiatives.
THE PILLARS
The Financial Sector Code is built on 7 core pillars of empowerment in which companies can score and be given credit. These include:

POLITICAL IMPLICATIONS AND CONTEXT
The Generic Codes and, more notably, the FS Code have to pass the following acid test in order to be relevant politically and socially.

Legitimacy – the FS Code and Generic Codes must be meaningful to and be accepted by the majority of citizens.
Stability – the FS Code and Generic Codes should contribute to the political stability and minimise riots (labour or political).
Economic Growth – by monitoring transformation, one should be able to see a positive correlation with the economic growth.
Economic Development – economic development should focus on healthy, educated and discerning people and not things.

Tools or models used to measure economic transformation should reflect the benefits South Africa receives from the presence/existence of its corporate citizens.
STRUCTURE OF THE FINANCIAL SECTOR CHARTER
The Financial Sector Charter consists of 16 sections:
Section 1: Preamble
Section 2: Interpretation
Section 3: The Challenges Facing the Financial Sector
Section 4: Application of the Financial Sector Charter
Section 5: Human Resource Development
Section 6: Procurement Policies
Section 7: Enterprise Development
Section 8: Access to Financial Services
Section 9: Empowerment Financing
Section 10: Ownership in the Financial Sector
Section 11: Control in the Financial Sector
Section 12: Shareholder Activism
Section 13: Corporate Social Investment
Section 14: Regulatory Issues
Section 15: Implementation
Section 16: The Scorecard
The Financial Sector Charter also has 1 addendum
Addendum: The Scorecard
THE PURPOSE AND POLICY OF THE FINANCIAL SECTOR CHARTER
The purpose of the Financial Sector Charter is to “actively promot[e] a transformed, vibrant, and globally competitive financial sector that reflects the demographics of South Africa, and contributes to the establishment of an equitable society by effectively providing accessible financial services to black people and by directing investment into targeted sectors of the economy”.

The Financial Sector Charter does this by; creating a framework and establishing principles for Broad-based Empowerment implementation in the financial sector, providing a platform for stakeholder engagement with the financial sector, establishing principles, targets and unquantified responsibilities, and outlining processes for implementation for the Charter as well as mechanisms to monitor, measure and report on progress.
WHO DOES THE FINANCIAL SECTOR CHARTER AFFECT?
The Financial Sector: Natural or juristic persons involved with business, trade or profession operating in the financial sector of the Republic of South Africa. This includes, but is not limited to banks, long-term insurers, short-term insurers, re-insurers, underwriting management agents, financial intermediaries and brokers, managers of formal collective investment schemes in securities, investment managers and other entities that manage funds on behalf of the public, including retirement funds and members of any exchange licensed to trade equities or financial instruments in South Africa and entities listed as part of the financial index of a licensed exchange.

Any other institution in the financial sector may opt to participate in the Financial Sector Charter.
WHAT ARE THE RESPONSIBILITIES OF FINANCIAL SERVICES SECTOR IN TERMS OF THE FINANCIAL SECTOR CHARTER?
The Financial Sector Charter, developed in consultation with the financial services industry, is a voluntary set of guidelines for promoting transformation of the South African financial services sector. The Charter has developed a scorecard used to measure quantifiable responsibilities of financial institutions as defined by the FSC.

In terms of the FSC, financial institutions are responsible for achieving employment, ownership and control equity; promoting preferential procurement practices; developing and financing black owned enterprises, low-income housing, transformational infrastructure and agriculture; and providing effective access to financial services.
KEY POINTS OF THE FINANCIAL SECTOR CHARTER
HUMAN RESOURCE DEVELOPMENT
Human resource development seeks to redress past inequalities in the work place that resulted from discriminatory practices and laws that had negative implications for economic efficiency, competitiveness and productivity. To develop a broad-based and diverse pool of skills, financial institutions commit to: creating a non-racial, non-sexist environment and enhance cultural diversity and gender sensitivity; investing in human resource and future leadership development aimed at increasing the participation of black people in skilled, strategic and operational leadership.

In addition to the obligations of the financial sector in terms of Employment Equity and Skills Development legislation, the financial services sector established a number of transformation targets based on percentage ratios. Financial institutions have devoted 1.5% of their payroll per annum to train black employees. These skill development programmes promote black skills in line with skills audits undertaken by financial institutions, the sub-sectors or by the respective SETAs. The Learnership Programmes that result from the skill audits will be used to employ and train up to 4.5% of each financial institution’s total staff in the form of black matriculants or the National Qualification Framework (NQF) Level Four equivalent.

Each financial institution is committed to develop and report on: career paths and the provision of support to black people at all levels; the implementation of appropriate mentorship programmes; targeted recruitment to expand the base of potential recruits; cultural diversity and gender sensitivity programmes that promote a vibrant and diverse institutional culture; and where possible, in conjunction with institutions of higher learning, introduce training programmes in line with the NQF requirements and establish undergraduate and post graduate diplomas and degrees in financial services.
PROCUREMENT
Financial institutions will implement a targeted procurement strategy to reach 70% by 2014 of total procurement from BEE accredited companies. The break down includes two thirds of procurement expenditure flowing to BEE accredited companies as the primary vendor and one third channelled to BEE accredited companies via the primary vendor, which is not a BEE accredited company.

Financial institutions will provide: support to black Small and Medium Enterprises (SME) through programmes designed to assist in tendering processes and creating reserved or preferred areas for black SMEs only; early payment for services provided by SME’s; existing suppliers with help to address BEE and become BEE accredited; reports on all spend that falls within the definition of BEE accredited; and, meaningful ways of supporting the Proudly South African Campaign.
ENTERPRISE DEVELOPMENT
The FSC defines Enterprise Development as fostering new, and developing existing, BEE accredited companies through improving the levels of assistance provided to BEE accredited companies/suppliers in the financial sector and other sectors of the economy. This is done through skills transfer, secondment of staff, infrastructure support, and providing financial, technical and administrative support and assistance for the establishment and growth of BEE accredited companies/suppliers as broking agencies and/or enterprises through which the sector sells its products and services. In addition, where appropriate, financial institutions will refer business opportunities to, and procure from, black owned financial institutions.

Enterprise development is bundled in with procurement and as such Enterprise Development has no separate target.
ACCESS TO FINANCIAL SERVICES
The Financial Sector Charter acknowledges that access to first-order retail financial services is fundamental to BEE and to the development of the South African economy. First-order transaction products and services are defined as basic and secure means of accessing and transferring cash for day-to-day purposes; savings products and services for accumulating funds over time such as savings accounts, contractual savings products, collective investments and community-based savings schemes; credit for low-income housing, financing agricultural development, or establishing, financing or expanding a black SME; and insurance products and services for mitigation of risks such as life insurance, funeral insurance, burial society, household insurance and health insurance.

Effective access to financial services is defined in terms of availability and proximity of a sufficiently wide range of first-order financial products and services. Access to financial services seeks to provide affordable and sustainable access to banks, ATMs and other origination points within 20 km of all individuals who fall into the All Media Product Survey (AMPS) categories of LSM 1-5. In addition, accessibility seeks to dispense appropriate and affordably priced products and services in a non-discriminatory way by structuring and describing financial products and services in a simple and easy to understand manner.
EMPOWERMENT FINANCING
The FSC makes provision for BEE empowerment financing that is geared toward mobilising proper resources and promoting the productive and sustainable participation of black companies and black people. To achieve this all parties are committed to working in partnership with the Government and DTI to provide resources for empowerment financing. This includes identifying the total amount of empowerment financing broken down into four targeted investment components, namely, low-income housing, black SME, transformational infrastructure and agriculture; appropriate risk mitigating measures and risk sharing arrangements; the period over which the empowerment financing will be done; the institutional framework and financing models for the mobilisation of the various resources; and, the extent to which and how past empowerment financing transactions will be taken into account.

In addition to targeted investment, the Financial Sector Charter aims to provide BEE transactional financing for acquisition, by Black people, of direct ownership in an existing or new entity, other than SMEs, in any sector of the economy; and joint ventures with, debt financing of, other form of credit extension to, or equity investments in BEE companies. Facilities that represent financing risk, but that do not involve a flow of funds to BEE entities, such as guarantees, are not counted as BEE transaction financing.
EQUITY OWNERSHIP AND CONTROL
Equity ownership and control is based on the concept of “once empowered, always empowered”, which is a central pillar of the Financial Sector Charter. The FSC aims to transfer a minimum of 25% at holding company level to black ownership, of which at least 10% must be direct ownership by black people and the remaining 15% through indirect ownership. Direct ownership in the financial institution may be achieved through BEE transaction financing; broad-based ownership; disposal of any assets, operations, businesses or subsidiaries by the financial institution as a going concern to black people; direct shareholding or ownership with control, commensurate with the level of ownership concerned, at subsidiary or divisional level; or joint venture or partnership arrangements. These ownership targets apply to foreign banking groups with South African branches but they will be given a wider range of transaction options to achieve their targets.

Control centres on the authority and power to manage assets, the determination of policies and the direction of business operations. The FSC requires that financial institutions cede control by targeting 33% for black directors, this includes 11% black women directors. In addition to equity control, the Financial Sector Charter targets, based on a formula, a minimum of 25% black executive management and 4% black women executives.
CORPORATE SOCIAL INVESTMENT
The FSC requires each financial institution to direct 0.5% per annum of post-tax operating profits to corporate social investment (CSI) projects aimed primarily at black groups, communities and individuals. CSI projects such as education, training, youth or other target group development, environment, job creation, arts and culture, health, sport and others should have a strong developmental approach and contribute towards transformation.
SCORECARD
The scorecard forms an integral part of the FSC and provides an objective and broad-based set of indicators for measuring implementation and success of the FSC by financial institutions. The scorecard will be used by the financial institutions for self-assessment, Charter Council to evaluate the implementation of BEE, and, government and private sector for awarding contracts.
MECHANISMS OF THE FINANCIAL SECTOR CHARTER
The Charter Council is an independent body established to: oversee the FSC implementation; address issues of principle and review conduct and make decisions based on reviews, and if or when the environment changes, decide if targets and implementation strategies are still appropriate and how they should be revised; fairly represent the interests of financial institutions and industry associations; make consensual decisions or refer decisions to dispute-breaking mechanism or arbitration or mediation.

In addition, the Charter Council will establish and finance the executive to: receive, consider and approve annual audits; confirm ratings of financial institutions; issue guidance notes on the interpretation and application of the Charter; prepare an annual review which outlines progress and evaluates new areas of intervention; submit the annual review to the BEE Advisory Council for publication; prepare interim reports at appropriate intervals; undertake industry reviews as per the Charter; accredit agencies to perform audits; and engage with Government, public sector finance institutions, the BEE Advisory Council and other regulatory agencies to promote the implementation of the Charter.

THE BANKING INDUSTRY’S APPROACH TO BEE

The banking industry is committed to the development of Broad-Based Black Economic Empowerment (B-BBEE) in the South African economy, the promotion of a globally competitive banking sector that reflects the demographics of South Africa, the provision of easy access to banking services and direct investments to certain areas of the economy.

Inequalities still manifest themselves in our economy despite the progress of democratic government, which is why the implementation of B-BBEE will further unlock our economy’s potential. To broaden the financial transformation there are various ways in which the Banking industry has encouraged black economic participation.

The banking industry plays a vital role in the economic development of South Africa and we will continue to address the racial and social inequalities within the banking sector. Our goal is to continue providing accessible financial services and encourage more black economic participation in the economy through our commitment to B-BBEE.