Committee Reports on Budget Hearings of National Treasury, SA Revenue Services & Statistics SA: Adoption; Financial Sector Chart

Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES
20 May 2005
COMMITTEE REPORTS ON BUDGET HEARINGS OF NATIONAL TREASURY, SA REVENUE SERVICES AND STATISTICS SA: ADOPTION; FINANCIAL SECTOR CHARTER AND MZANSI ACCOUNTS: NEDLAC BRIEFING

Chairperson:

Committee Report on the Hearing on the National Treasury’s 2005/08 Strategic Plan and Medium-term Budget
Report of Portfolio Committee on Finance on Budget Vote 8: National Treasury, Dated 20 May 2005.
Committee Report on the Hearing on the South African Revenue Service’s 2005/08 Strategic Plan and Medium-term Budget (available shortly at Committee Reports)
Term Budget Progress Report on the Financial Sector Summit Agreements
Committee Report on the Hearing on Statistics South Africa’s 2005/08 Strategic Plan and Medium
The Banking Association: Mzansi Account: PowerPoint Presentation
Government Report on Financial Sector Reform since September 2004: PowerPoint Presentation
One Million Mzansi Account Holders: Word Document
Tribunal Pension Fund Adjudicator Case: Complaint between J Schwartz and the Central Retirement Annuity Fund Sanlam Life Insurance Limited
Public Finance and Monetary Chamber: Article (see www.nedlac.org.za)
Nedcor BEE deal Exceeds Charter: Article - Mail and Guardian 18/05/2005 (see www.mg.co.za)
Declaration of the Financial Sector Summit
NEDLAC Sounds Warning Over Charter Council: Article – Business Day 27/05/2004 (see www.businesssay.co.za)
Nedlac Community Constituency presentation on Progress Report on Financial Sector Summit Agreements

SUMMARY
The Committee discussed and adopted its reports on the budget hearings of the National Treasury, the South African Revenue Services (SARS), and Statistics South Africa (StatsSA).

A National Economic Development and Labour Council (NEDLAC) delegation presented a progress report on the Financial Sector Charter and the Mzansi account. It was highlighted that a Charter Council had been established and that the overall Financial Sector Charter target had been finalised at R122.5 billion. Various Charter Committees were working towards implementing targets in specific areas, such as housing, agriculture and access. The delegation then discussed the issues surrounding the Institute of Pension Funds and its relationship to the Financial Sector Charter. Added to this, the objectives of the National Credit Bill were outlined.

NEDLAC then presented information on the Mzansi account. It was highlighted that there were approximately one million Mzansi account holders, most of whom were first time ‘bankers’. The account itself was cheaper than other entry-level accounts. In the future, the Mzansi account would be upgraded to offer account holders other related financial services. Finally, the NEDLAC delegation provided the Members with a framework, which they could use to analyse the progress of the financial sector reforms.

In the ensuing discussion, Members enquired about:
- bank charges in South Africa;
- the average cost of the Mzansi account’s transactions;
- whether the Financial Sector Charter was aligned with the Millennium Development Goals;
- whether the Mzansi accounts were high risk accounts;
- whether there had been research into how people used the Mzansi account;
- which NEDLAC community constituencies were represented on the Charter Council;
- whether 5% of the investable funds of the financial sector would be set aside for developmental investments;
- why there were delays with the agriculture and black economic empowerment (BEE) transaction financing targets;
-how NEDLAC and the Treasury were promoting a savings culture; and
- whether industry would lead the process of promoting access to the financial sector.

MINUTES

Committee Reports on the Budget Hearings of the National Treasury, SARS and StatsSA
After a brief discussion and a few minor alterations, Members adopted the Committee reports on the hearings on the strategic plans and budget of the National Treasury, the South African Revenue Services, and Statistics South Africa. The Committee, however, noted that it was not completely satisfied with the reports. The Chairperson noted this, and stated that he would inform the researcher about the quality of reports that the Committee expected to receive in the future.

NEDLAC briefing
Mr H Mkhize (Chief Executive Officer) began by providing the background history of NEDLAC. Ms C Cain (Community Constituency Representative) presented the progress report on the Financial Sector Summit Agreements. Since NEDLAC last briefed the Committee, new policies and legislation had been introduced, which included the Co-operatives Bill, the Dedicated Banks Bill, the National Credit Bill and a review of the policy process around the Pensions Act.

The composition of the Charter Council had also been finalised. To date, the Charter Council’s achievements included the adoption of a constitution, the finalisation of a budget, the establishment of an interim secretariat, and the establishment of an overall Financial Sector Charter commitment target of R122.5 billion. Various Charter Council Committees were working on implementing Charter commitments in several areas. These included access, housing, infrastructure, procurement, agriculture, BEE transaction finance, small and medium sized enterprises (SMEs), and regulatory reform. There were, however, some outstanding issues, which included: the appointment of a permanent secretariat, the confirmation of the retirement fund industry’s contribution to the overall target, the finalisation of the BEE transaction financing target, and the finalisation of the agricultural target. Even though there had been slow progress on these outstanding issues, overall, there had been significant progress. Indeed, the NEDLAC partners were fully committed to the Charter’s transformation goals.

Mr J Mahlangu (Labour Constituency Representative) discussed issues around the Institute of Retirement Funds and the Financial Sector Charter. He noted that the Institute had signed the Charter in 2004, thereby committing retirement fund institutions to the Charter’s goals. However, a number of trustees were dissatisfied with this. Meetings were then convened between the parties to resolve the issue. An agreement was brokered, and it was decided that a Conference would be held in September 2005. At the Conference, a Trustees Forum would be launched along with an Industry Association. The Charter Council would then be able to enter into consultation, with the Forum, regarding the retirement fund targets. At the conference, other related issues would also be dealt with. These included:

- an examination of the pension reform process,
- a determination of a code of conduct for trustees,
- a determination of a code of conduct for pension fund service providers,
- an examination of the trustee training programmes, and
- a consideration of investments.

Mr Mahlangu added that a NEDLAC task team had been established to analyse the retirement fund reform process.

Mr E Paulus (Labour Constituency Representative) discussed the National Credit Bill. The National Credit Bill had been tabled with the Portfolio Committee on Trade and Industry. The Bill had been formulated by NEDLAC. It included various issues, such as:
- providing for the regulation of credit bureaus;
- providing for the licensing of credit bureaus;
- stipulating the rights and obligations of credit granters and lenders in credit agreements; and
- providing for a clause, which stipulated that the interest on a principle amount loaned could not be exceeded.

The NEDLAC social partners were committed to the implementation of the Bill. Mr Paulus added that more could be done to effect economic justice, and to challenge the exploitative nature of blacklisting.

Mr Coovadia (Business Constituency Representative) briefed the Committee on the progress of the Mzansi account. He noted that since its implementation, seven months ago, the number of Mzansi account holders had reached one million. There were approximately six thousand new Mzansi account holders registered per day. Initially, this rate had been higher, but it had recently stabilised. Ninety percent of these Mzansi account holders were first time bankers. Indeed, it was estimated that since the Mzansi account’s inception, the number of un-banked people in South Africa had fallen from 54% to 50%. In terms of demographics, a large percentage of the Mzansi account holders were young black women.

Mr Coovadia reported that the Mzansi account was 15% to 40% cheaper than conventional bank accounts. In the next phase of the initiative, the Mzansi account would be upgraded to include money transfer facilities and debit order capabilities. Mr Coovadia noted that more banks would be approached to join the Mzansi account programme.

Mr E Masilela (Government Constituency Representative) discussed issues surrounding financial sector reforms, which had been implemented since September 2004. Mr Masilela commented that he would not be providing a comprehensive review, but would rather be providing a framework, which would allow Committee to assess the progress of the reform process and the inputs of government. He did, however, note that since 2001, much had been achieved, but it was still too early for government to make a conclusive judgment on the reform process. The changes that the government expected from the sector needed to be established before the relevant legislation came into effect. The most important issue during the reform process would be to ensure that the stability of the financial sector was maintained.

Mr Masilela proceeded to outline some of the policy interventions since 2001, which included the Co-operatives Banks Bill and Dedicated Banks Bill. He sketched out some of the reform developments that would take place in 2005 and beyond. Amongst others, these included a reform of the retirement industry. He added that the reform programme would be extensive and cautioned that it would be difficult to meet all the deadlines on time. If the pace of the proposed changes were forced, there would be a danger that their credibility would be threatened. Mr Masilela noted that the government’s regulatory philosophy had focused heavily on the stability of the sector. In the future, the government’s regulatory philosophy would emphasise the need for greater access to the financial sector. The government, however, would avoid compelling the industry to adopt reforms; rather the reforms needed to be industry led. Some of the challenges facing government, as the regulator, would be to manage the market perception of the Charter, provide certainty to the market, provide swift decisions, protect the credibility of the financial sector policy, and promote a third tier of financial institutions.

Discussion
Mr M Stephen (DA) noted that the Mzansi account was only 15 to 40% cheaper than other bank accounts. This simply was not cheap enough. He highlighted that in other countries, such as the United States and the United Kingdom, cheque accounts did not carry any bank charges. In the light of this, he stated that certain bank accounts, such as the Mzansi account, should be free from bank charges. Moreover, Mr Stephen and Mr M Johnson (ANC) questioned why any bank account should include bank charges. Mr Stephen enquired whether bank charges were the result of a lack of expertise to raise profits in a traditional manner in the South African banking sector.

Mr C Coovadia responded that the banking industry was seeking to address the problem of high banking charges. The banking sector was also co-operating with the National Treasury around this issue. Mr Coovadia added that the Banking Council would be willing to brief the Committee, at a later stage, around the steps that had been taken to address high banking charges.

The Chairperson asked how the figure, that the Mzansi account was 15% to 40% cheaper than other accounts, was measured. Were the banking costs of other entry level accounts used to make this comparison?

Mr Coovadia replied that the figure of 15% to 40% was measured against other entry-level bank accounts offered by various banks. This included Standard Bank’s E-Plan account and accounts offered by the People’s Bank.

Ms J Fubbs (ANC) commented that some accounts aimed at the middle-income group provided a certain number of free transactions. Could such a facility be included in the Mzansi account?

Mr K Durr (ACDP) enquired what the average transaction costs for a Mzansi account were.

Mr Coovadia responded that the average costs were related to the usage of the account. On a low transaction account (an account that had an average of one deposit and two withdrawals a month), the average banking costs were between R6.50 and R8 a month. For a medium transaction account (an account that had an average of two deposits and four withdrawals a month), the average cost was between R16.30 and R19.30 a month. On a high transaction account (an account that had an average of four, or more, deposits a month and sixteen, or more, withdrawals a month), the average cost was between R22.85 and R27.50 a month.

Mr Johnson highlighted that many pensioners continued to use the book banking system rather than ATMs. This was because they felt unsafe and vulnerable to robbery at the ATMs. He also noted that some pensioners used the book system in an attempt to stop ‘loan sharks’ gaining access to their accounts. He felt that it was not fair that pensioners were being further disadvantaged due to the very high banking charges of the book system.

Mr Coovadia responded that the reality was that electronic banking was cheaper than the book system. If safety at ATMs was a problem, then this needed to be addressed.

Ms J Fubbs (ANC) enquired whether there were plans to increase the number of pensioners who were Mzansi account holders. This was important, as pensioners received a steady income through the grant system and, therefore, needed some form of banking facility.

Mr Johnson enquired whether the Financial Sector Charter, and the Financial Sector Summit Agreements were aligned with the Millennium Development Goals.

Ms Cain responded that the NEDLAC partners were serious about reducing poverty and unemployment. Some measures to achieve this had been incorporated into the Financial Sector Charter. She noted that, where measures were not incorporated into the Charter, a review process was being undertaken by NEDLAC. Even so, she admitted that it was going to be difficult to attain the objectives of the Millennium Development Goals.

Mr Mnguni observed that during the Mzansi account presentation, it had been stated that it was essential to maintain the stability of the financial sector. He enquired why the delegation had stated this. Were the Mzansi accounts high risk accounts?

Mr E Masilela replied that Mzansi accounts were not high-risk accounts. As such, they were not a possible risk to the stability of the financial sector. He did explain that when deposits increase in an economy, it was important to regulate the banking environment. This was undertaken to ensure that banks had enough assets to cover the demands of depositors. This form of regulation was already well established in South Africa. He highlighted that, over and above regulation, new initiatives were being implemented to safeguard the money of depositors. One such initiative would be depositor insurance.

The Chairperson and Ms R Joemat (ANC) enquired whether, in the future, the Mzansi account would provide people with access to services, such as debit orders and affordable credit. Ms Fubbs enquired whether the Mzansi account could include aspects of a cheque account.

Mr Coovadia replied that the banking sector, and the other NEDLAC social partners, viewed the Mzansi account as the first step for previously un-banked people towards accessing further financial services. Mr Coovadia added that there were plans to enhance the Mzansi account in the future. These included providing debit order facilities and providing access to credit.

Mr Durr enquired whether any other products, which related to the Mzansi account, were being sold to the account holders by the various banks.

Mr Coovadia responded that the banks were not selling any other products, which related to the Mzansi account.

The Chairperson asked whether any research had been conducted into how people used the Mzansi account. Were people using the Mzansi accounts as savings accounts or current accounts?

Mr Coovadia answered that from the available information it appeared that people were mostly using the Mzansi accounts as saving accounts.

Ms Joemat asked which community constituencies were represented on the Charter Council.

Ms Cain replied that the NEDLAC community constituency representatives on the Charter Council were the Financial Sector Campaign Coalition, the National Co-operatives Association, and the South African Youth Council.

The Chairperson noted that a target had been established at the Financial Sector Summit, and the Growth and Development Summit, that five percent of investable funds would be channeled into developmental investments. The Chairperson added that the NEDLAC delegation had stated that R74 billion had been set aside for developmental purposes in the Charter. Did the R74 billion represent five percent of investable funds?

Mr Masilela responded that the target of channeling five percent of investable funds into developmental investments was one of the major agreements reached in NEDLAC and the Growth and Development Summit. Currently, the targets agreed to in the Financial Sector Charter were slightly lower than five percent of the assets of the financial sector. It had been calculated that five percent of the assets of the financial sector amounted to R168 billion, which was above the amount targeted in the Charter. However, there was a possibility of double counting and it was likely that the amount of R168 billion was inflated. Currently, a process was underway to establish accurate figures for the financial sector’s assets.

Mr Masilela added that, with regards to the target of 5% investable funds, it was important to clarify definitional issues. This was an imperative for monitoring the 5% agreement as part of the implementation process of the Growth and Development Summit. The nature of the types of investments that would allow institutions to qualify to earn points, in this environment, also needed to be defined. Importantly, five categories of investments qualified as developmental investments. These were:

- Investments that increased the productive capacity of enterprises that created sustainable jobs;
- investments in infrastructure;
- investments in under-serviced areas;
- investments in small and medium sized enterprises;
- and investments that encourage the growth of blacks involvement in agriculture.

These areas of the economy were important because they linked up to the Financial Sector Charter and were consistent with the government’s policy of increasing access to services in disadvantaged areas. This was the basis on which the 5% agreement would be monitored.

Ms Fubbs noted that the NEDLAC business constituency delegation had stated that the rate of new Mzansi account holders was stabilising. She asked why the NEDLAC business constituency viewed this development positively. She felt that they should rather be promoting as many new Mzansi account holders as possible.

Mr Coovadia replied that the NEDLAC business constituency had merely presented the findings that the rate of new Mzansi account holders had stabilised. It was not viewed as being positive or negative. NEDLAC, however, was planning to investigate why the rate had stabilised.

Ms Fubbs commented that NEDLAC needed to conduct more work around the agriculture and BEE transaction finance targets. Why had there been such delays with these targets?

Ms Cain replied that the targets for agriculture and BEE transaction finance had originally been formulated by the drafters of the Financial Sector Charter, who were mainly from the NEDLAC business constituency. When the labour and the community constituencies entered into the Charter Council, they immediately called for a review of the agriculture and BEE targets. The reason was that the targets were too low. Labour and the community constituencies, therefore, suggested that the targets for agriculture and BEE be reviewed. An agreement was then brokered between the NEDLAC social partners, which led to the establishment of new targets for agriculture and BEE transaction finance.

Ms Fubbs asked how the NEDLAC labour constituency felt about the National Credit Bill, the licensing of credit bureaus and the problem of blacklisting.

Mr E Paulus responded that the National Credit Bill had a long history. Amongst some NEDLAC partners, there had been a belief that the credit bureaus would be able to regulate themselves. COSATU, as a member of the NEDLAC labour constituency, viewed this notion with skepticism. Since then, the ideal of self-regulation proved to be impossible. COSATU was pleased that the state became involved in regulating the credit bureau industry. It was the beginning of a process that would bring economic justice to the majority of South Africans.

Ms Fubbs asked how NEDLAC, and the Treasury, planned to measure the progress made in promoting a savings culture amongst the public.

Mr Masilela acknowledged that the Treasury did not possess any quantifiable measures to monitor the progress made in promoting a savings culture. There were, however, procedures in place to promote a savings culture. Savings could also only be sustained and increased if people had sustainable incomes, which was the objective of job creation targets. In the Pension Reform document, a national savings fund was also discussed. This was an additional instrument that aimed to promote greater savings amongst the public.

Ms A Mchunu (IFP) noted that any attempt to promote a savings culture would need to include extensive education amongst communities on how to save effectively, and how to use the money they saved efficiently.

Ms Cain replied that all the NEDLAC partners viewed the promotion of financial literacy as an important exercise. NEDLAC needed to ensure that it did not implement initiatives that people failed to understand or benefit from. Therefore, financial literacy programmes needed to be an integral part of the Mzansi account. Indeed, NEDLAC was currently working on financial literacy programmes.

Ms Fubbs questioned whether the staffing capacity of the National Treasury was sufficient.

Mr Masilela responded that when the Director-General visited the Committee he could provide an answer to this question.

Ms Fubbs noted that the NEDLAC government constituency had stated that industry would take the lead in formulating a regulatory framework that focused on access to the financial sector. Ms Fubbs questioned whether industry would take the lead in implementing such plans, without being compelled to do so.

Mr Masilela replied that as a regulator, government was very cautious about compelling institutions to implement policies, which they may view as unsustainable. If a regulator compelled an institution to implement certain policies, and the institution failed financially, then the responsibility of the failure rested with the regulator. That was why the Treasury believed that the changes in the financial sector needed to be driven by the sector itself. Hence, government allowed the financial sector to define the optimal options, which would be incorporated into the Financial Sector Charter. However, government had stipulated that certain parameters needed to be maintained. One of the parameters was that the financial sector needed to be sustainable.

Mr Durr asked how many transactions were carried out during a month by the average Mzansi account holder.

Mr Coovadia answered that over the last 30 days, 44.5% of the Mzansi account holders had made withdrawals, while 37.7% had deposited money in their accounts.

Mr Mkhize highlighted that NEDLAC remained a contested terrain. However, the aim of NEDLAC was to find convergence between the social partners. The future challenge facing NEDLAC would be to become more proactive and creative in order to be a useful resource for Parliament.

The meeting was adjourned.