Transformation in the financial sector: 2005 Financial Sector Charter Council Portfolio Committee on Finance 15 November 2006

Transformation in the financial sector: 2005Financial Sector Charter CouncilFinancial Sector Charter Council

Portfolio Committee on FinancePortfolio Committee on Finance15 November 200615 November 2006

Financial Sector Charter: annual reviewFinancial Sector Charter: annual review

Background to the 2005 reviewBackground to the 2005 review

Financial Sector Charter derives from Financial Sector Summit Declaration in 2002

In effect since 1 January 2004

10-year transformation process (interim targets set for 2008, final targets 2014)

Dual focus: The sector itself Sector’s contribution to broader social transformation

Primary objective:

‘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 2005 reviewBackground to the 2005 review

7 performance pillars

Sector focused Human resourcesHuman resources: Employment equity in senior, middle and junior management +

skills development OwnershipOwnership: Black ownership in the financial sector ControlControl: Black and black women directors and executives

Broader focus ProcurementProcurement: From BEE accredited suppliers AccessAccess: Access to retail financial products and services by 80% of historically

unbanked (LSM 1-5) + financial literacy and consumer education Origination & targeted investmentsOrigination & targeted investments: Transformational infrastructure, low-income

housing, agricultural development, black SMEs BEE transaction financingBEE transaction financing Corporate social investmentCorporate social investment Broader focus = +R100 billion in transformation funding 2004-2008


Charter Council composition and operationCharter Council composition and operation

Board: 5 constituenciesBoard: 5 constituencies

Financial sector

Government

Absip

Community

Labour Board sets annual targets, performance standards and provides framework for

transformation

ExecutiveExecutive

Principal Officer Responsible for annual review, ratings and annual report to BEE Advisory

Council Responsibility defined in Charter to ensure independence


Annual review processAnnual review process

All financial institutions submit comprehensive reports based on reporting form prepared by Council Executive

Council Executive Receives, considers and approves each report Confirms provisional scoring and BEE rating of each institution

Ratings Provide BEE credentials for use in tenders etc AA = high … EE = poor

Charter targets subject to alignment with BBBEE Act Codes of Good Practice Charter targets will equal or better Code targets

Charter to be gazetted as Financial Sector Code of Good Practice


2005 review objectives and process2005 review objectives and process

Phased in 2004-2006

Baseline study – snapshot of transformation to use for measuring future transformation

Identify transformation strengths and weaknesses Feedback enables institutions to re-focus, re-prioritise and redeploy resources

to achieve targets

No scoring or rating

Retirement funds not required to report (IRF undergoing transformation)

9 trade associations Banks, short-term and life insurance, re-insurance collective investments,

asset management, investment management industries


2005 review: reporting2005 review: reporting

372 institutions due to report

50 institutions exempted from reporting

More than half participated in 2005 review

Participants accounted for +70% of sector by market capitalisation and +90% of designated investments1

Statistically reliable sample for assessment of the sector

Baseline study as yardstick for future transformation

1 Estimates only because of exclusion of retirement funds from 2005 reporting

Exempted

13%

Non-reporting

49%

Reported

38%

Financial Sector Charter: annual reviewFinancial Sector Charter: annual reviewEmployment equity and black skills developmentEmployment equity and black skills development

Directors & executives

Black directors: 30% (2008 target: 33%)

Black women directors: 7% (11%)

Black executives: 22% (25%)

Black women executives: 4,9% (4%) Alignment with the codes will present a challenge

Management

On track to meet 2008 black management targets (25% senior management, 30% middle management, 50% junior management)

Already met or close to 2008 black women manager targets (4% senior management, 10% middle management, 15% junior management)

Again the issue of alignment will be a challenge

Skills development

Sector reported spending 1,2%1,2% of total basic payroll on black skills development Annual target: 1,5%1,5% Review identified correlation between skills spend and employment equity progress


Procurement R16 billion to BEE accredited

suppliers (36% of total procurement)

2008 target: Annual 50% from BEE accredited suppliers

27% of BEE procurement from >50% black-owned suppliers 73% from <50% black-owned

Enterprise development 2% equivalent of BEE procurement spent on enterprise development

(23% of this went to white-controlled companies) Some enterprise development could have been claimed under procurement

Procurement and enterprise developmentProcurement and enterprise development

>50% black-owned

> 50% white-owned > 75% white-owned


Access to retail financial servicesAccess to retail financial services

Mzansi initiative Mzansi ‘affordability’ and

‘appropriateness’ assumed for 2005

Other products Standards agreed for short-term

insurance, life assurance, banks and collective investment schemes from 2006

Products deemed compliant for 2005

Consumer education Standards still being negotiated Annual target: 0,2% of post-tax operating profit Reported 2005: 0,39% = R117m Qualification: LSM 1-5 audience not tracked

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

LSM 1-5 accounts with non-Mzansi bank

Active Mzansi accounts

Total at 31 December 2005


Reported performance against targets

Transformational infrastructure: R6,7 R6,7 billionbillion (cumulative 2008 target: R25 billionR25 billion)

Low-income housing (<R7 900 household income): R19 billionR19 billion (R31,8 billionR31,8 billion)

Agricultural development (resource-poor farmers): R0,5 billionR0,5 billion (R1,5 billionR1,5 billion)

Black SMEs (<R20 million turnover pa): R7,5 R7,5 billionbillion (R5 billionR5 billion)

Qualifications Performance includes non-transformational infrastructure and non-Charter agricultural funding

Housing borrower household income not accurately tracked

Government risk mitigation initiatives not finalised to release additional R10 billion for housing

Funding clusters in Gauteng, Western Cape and KZN

Retirement funds not included on the performance while included in targets

Origination & targeted investments)Origination & targeted investments)

Infrastructure

Housing

Agriculture

Black SMEs

0

5

10

15

20

25

30

35

2008 target 2004-5


BEE transactionsBEE transactions

2008 target: R50 billion

Reported by 2005 year-end: R47 billion

Best performance in transformation categories


OwnershipOwnership

2008 Ownership target: 25% direct black ownership

2005 reported sector average:16% direct black ownership (linear average)

54% of institutions report any black ownership, 46% report no black ownership

2008 target achievable

Ownership statistics are calculated on linear average

0

10

20

30

40

50

60

70

80

90

100

%DirectB lackOwnership

2008 target: 25% 2005 average: 16%


Corporate social investmentCorporate social investment

CSI annual target: 0,5% of post-tax operating profit

2005 reported: 0,81% of post-tax operating profit

CSI reported for 2005 = R240 million

Financial Sector Charter: annual reviewFinancial Sector Charter: annual review2005 review: overall findings 2005 review: overall findings

Subject to the qualifications raised

BEE transaction financing 2008 target (R50 billion) nearly achieved

Targeted investments Ahead on black SME funding, lagging on transformational infrastructure and agricultural

development, uncertain on low-income housing Skewed to major urban centres (Gauteng, Western Cape, KZN)

Procurement On track for 2008, but skewed towards ‘black influenced’ and ‘black empowered’ suppliers

HR On track to meet 2008 management, executive and director targets – Charter acknowledges

targets low

Access to retail services Baseline study in 2006 only

CSI Reported ahead of annual targets

Financial Sector Charter: annual reviewFinancial Sector Charter: annual review2005 review: conclusions2005 review: conclusions

Adequate start to 10-year transformation process

Support from majority of institutions Demonstrated by 50%+ reporting, 75%+ by market capitalisation, 90%+ by designated

investments

Baseline study in place to measure future transformation progress Statistically valid reporting sample in most aspects Others measured in 2006 (Access to retail services, consumer education)

Best performance areas – traditional commercial financing (BEE transactions and black SMEs)

Interventions and re-focusing by Charter Council and sector Housing Skills development Procurement and enterprise development Agriculture development

Documents

Transformation in the financial sector: 2005 Financial Sector Charter Council Portfolio Committee on Finance 15 November 2006