with Cas Coovadia, Managing Director, Banking Association of South Africa
Several of our interviewees in South Africa have praised the strength of the nation’s banking sector and financial system as a key contributor to building a more attractive investment climate. Can you introduce the key strengths of the banking system in South Africa?
South Africa has a very appropriately regulated system. Our banking regulator has had a very pro-active approach, while we also have other legislation –other than the Banks Act- that has created a conducive environment for banks to conduct business. One such example is the National Credit Act, which puts severe requirements on banks to check people’s affordability. This brings along a more responsible credit market. We also have a traditionally conservative banking sector that does not enter into very risky products. It is thus a mix between this historic conservativeness and a very good banking regulatory environment supported by various pieces of legislation beyond the banking sector alone.
Despite the global financial crisis in 2008-2009, South Africa coped relatively well with the external environment. Was it a good test for the system?
The first part of the crisis did not really affect us badly at all. Once the crisis led to a downturn in the real economy, our economy contracted by roughly 6.7%. As a result of that, we also saw contraction in the business of the banks. Nonetheless, we managed to maintain a profitable situation and had absolutely no capital or liquidity problems. It thus showed that in circumstances of severe economic downturn, the South African banking sector was still able to maintain a strong liquidity and capital position, while remaining profitable albeit at a lower level. This emphasized the robustness of the sector.
When you took up your role as Managing Director of the Banking Association in 2005, one of the statements you made was to build a more dynamic relationship between industry, government and other social parties. What exactly has been achieved in this respect and how far are we standing on this journey?
The creation of partnerships between industry and government is a dynamic and ongoing process. I think we have made significant progress. One of the critical challenges in this country is broadening access to financial services to a big chunk of the market that simply did not have access before. Through an instrument called the Financial Sector Charter, we have made considerable progress in this respect. This has been negotiated in cooperation with the government.
In the last 5 to 8 years, we have lent close to ZAR 70 billion for low income housing and ZAR 20 billion for the financing of small to medium enterprises (SMEs). Close to 90% of low income people now have access to a point of banking within 10 km from where they work or stay.
We are also a member of Business Unity South Africa (BUSA), and through BUSA we have entered into a number of interactions to look at infrastructure financing. We are also having discussions with the Development Bank of South Africa to see how we can work together to package private and public sector funds for some of the social and economic infrastructure challenges.
One of the bigger events in infrastructure financing has been the World Cup in 2010. Was this a big step for South Africa to showcase what it can achieve in a very short time?
Absolutely! The World Cup was extremely successful, not only from the infrastructure we put in place, but also from the point of view of our capacity to organize something of this magnitude. It has been one of FIFA’s most successful World Cups!
There was also a lesson to be learned. The World Cup showed that if you have a proper focus and proper decision-making structures that cut through the red tape, you can make things happen. We showed that we have good project management skills. Ideally, we can reflect this in our overall infrastructure program now.
2012 has been declared as the “Year of Infrastructure” by President Zuma. Is this going to be a big year for the banking sector?
This is a 3 to 5 year infrastructure program, so I do not expect significant investments this year. I think a lot of the building blocks now need to be put into place. We need to begin to see how the public and private sector will put partnerships into place to ensure that this infrastructure program is successfully implemented. We need to ensure that the state also has the project management capacity to make all of this happen. We will certainly be talking to the government in this regard.
I think the government will need to cut a lot of the red tape that is still in place. It is good to say that the private sector needs to be involved, but the private sector is profit-driven, and we need to structure these developments in such way that they make sense for the sector. I have no doubt the private sector will take a long-term profitability perspective to the program. Engagement between the private sector and government must now start to reach agreement on an implementation program and ensure a “win-win” outcome for all parties.
Do you have any particular examples of where you see some key bottlenecks when it comes to red tape?
There are significant implementation challenges within the government itself. For the government to begin to interact with the private sector in a real way, they need to develop their capacity to do so. Government needs to be open to accepting private sector capacity, project management skills, etc. without feeling that the private sector may want to dominate the process.
There needs to be a clearer definition of the roles of development finance institutions in infrastructure finance and development, and that of the private sector institutions. We have often found ourselves competing with development finance institutions, which I find to be counter-productive. There are numerous regulatory issues that could be seen as bottlenecks. The engagement between government and the private sector must tackle these.
Following a successful COP17 in Durban in 2011, the United Nations also declared 2012 as the Year of Universal Access to Energy in Africa. Minister of Energy Dipuo Peters saw a role for South Africa to support these developments. How do you see this role playing out from a project financing point of view?
While I have absolutely no doubt that we have a role to play on the continent, we still have some serious challenges in the energy field here at home. We need create a balance between efforts to address SA specific issues and our role in addressing continental issues. In doing so, we must interact with the other African states to agree our role.
When it comes to water for instance, the Democratic Republic of Congo has sufficient water for the entire region. The continental engagements need to identify such opportunities and facilitate cutting through red tape and politics to get to structuring real projects that benefit Africa.
Secondly, there is no doubt that South Africa has valuable skills, from project management skills to financial skills and so on. We need to share these with the continent in a sensitive way, such that we remain sensitive to the potential of being seen as wanting to dominate. The recent reaction to S A putting up a candidate for the position of Chairman for the African Union (AU) Commission shows that the rest of Africa is not waiting for us to come and do everything. They want us to interact with them in such a way that capacity is also being built in those parts of the continent. There is some serious political sensitivity that needs to be dealt with and addressed.
I am Chairman of the National Business Initiative, which was central to organizing the private sector’s participation at COP 17. I believe we lost an opportunity to really mobilise African interests and an African agenda towards COP 17. We need to learn from this.
Through the Banking Association, you have also been conducting research on the banking sector in the SADEC region. What have been some of the key points to take away from there?
There are many countries in Southern Africa that have fairly basic financial infrastructure and -markets. There is growing intra-regional trade in this region. The SADC Banking Association, of which we are the Secretariat, is working under the auspices of Central Bank Governors in the region to coordinate the private banking sector towards establishing an integrated regional payments system. This is what we are now concentrating on. The Committee of Central Bank Governors in SADC are doing the legislative and regulatory requirements for such a system, while we are interacting with the private banking sector to identify what makes sense from a business point of view.
The Rand is already a common currency in the Common Monetary Area, so we are starting with that area and looking at building a system for the area, but in a way that enables the other countries in the region to link to the system. By 2014, we will have put together the basic structure for such an integrated System for the common monetary area, in such a way that the other SADEC countries can join in. We are probably spending 70 to 80% of our time on this. We have made quite a lot of progress and every country -with the exception of Mauritius- is party to this.
Other issues we want to look at are aspects the establishment of viable credit bureaus in the region, as well as coordination of critical regulations. We are also working with the regulators to see whether we can identify key areas of regulation that can be uniform across the region.
Finance Minister Pravin Gordhan has also promoted South Africa as an Islamic financing hub. What is your take on this?
Islamic finance is happening slowly in South Africa. The authorities just recently agreed to look at legislation to allow Islamic Sukuks. Each of the big banks has an Islamic banking unit and al Baraka bank –the only genuine Islamic bank in the country- is doing very well. I think becoming such a hub is something we need to look at in the medium to long term. We are still at a rudimentary stage in South Africa and do not yet have the regulatory environment in place to enable it to grow to scale. Given that the South African banks are developing a footprint across Africa, it is not unlikely for them to take Islamic banking into Africa on the back of that footprint.
To what extent do you also see the opportunity for international banks to use South Africa as a springboard to doing business into the region?
South African banks have the largest presence of any country in Africa. Some banks are partnering banks already operating in Africa and indigenous to the continent. A prime example of this is the partnership between Nedbank and Ecobank. The equity stake Barclays has in ABSA positions that group to use the footprint Barclays has already established across the continent. Standard Bank has developed a substantial footprint, and given that they are now 20% owned by the Industrial and Commercial Bank of China, they will also promote this partnership in Africa. Given our infrastructure, our level of sophistication and our regulatory environment, we clearly are the springboard, albeit that this role is being leveraged in many different ways.
To what extent do you also see other countries attracting such banks and developing a second or third financial hub on the continent?
In the long-term this must be a possibility. Mauritius already sees itself as a type of financial hub, although I do not think it has the scale to make a significant impact. There are also interesting developments taking place in Kenya, while Nigeria also has a clear potential in the long run, simply because the market is there. In the short to medium term however, I do not see any other country competing with South Africa as a financial hub. It will take the other countries a long time to get where we are.
What will remain your key priorities with the Association in the coming 5 years?
Priority number one is regulation. We are getting flooded by regulation now, exacerbated by the regulatory response to the global crisis. Even though we fared reasonably, we will be subjected to new regulations. Over and above that, one of our key discussions with government in this country is that there are some 200 pieces of legislation impacting the South African banking sector in one way or the other. There are also very tough money-laundering and financial intelligence center regulations in this country, which make it very difficult for us to broaden our services because of the increasing costs of banking. We have a first world regulatory environment that makes it very difficult for us to meet some of our developing country challenges.
Besides the international aspects, the National Treasury has put on the table a document that will lead to significant regulatory changes in the country. There is also “financial inclusion” debate playing out at the moment. All the major banks now have some sort of community banking units to broaden access to financial services to as many people as possible. The retail banking opportunities are in the emerging market. Finally, the whole “market conduct and treating customers fairly environment” is globally driven and going to be big here.
Would you have a final message for the different international readers and the South African stakeholders?
South Africa is a good investment destination. From a banking point of view, I can say without a doubt that we will be able to service international investors appropriately, and provide them with first-world sophisticated banking services to back-up their investments. With regards to South Africa, one of my issues at the moment is that we have an increasingly uncertain policy environment. We need to tighten this up and it is now up to government to take some hard decisions and be totally clear about what our policies are. Government needs to say very clearly that we are a good investment destination, that investments are protected here, that dividends and profits can be repatriated, that we will not nationalize, that we will create a stable regulatory environment for companies wanting to invest here, etc. Corruption, in turn, also remains a big elephant in the room.
We have a lot of work to do to enhance the environment, yet it is still a good environment to invest in: returns are good, we are a springboard into Africa, we have relatively good infrastructure, a strong financial sector and a strong stock exchange. Come and knock on the doors!