South Africa Financial Inclusion Paper

8/6/2019 South Africa Financial Inclusion Paper

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South Africa: Committed to an Inclusive Financial Sector 1

South Africa: Committed to an Inclusive Financial Sector

1. Summary:

The advent of democracy in 1994 has accelerated efforts to include allsegments of the population in the development process. The Financial sector

actively engaged on the Black Economic Empowerment agenda and signed atransformational voluntary Charter in 2004. The Charter commits to specificand ambitious financial inclusion targets to be met by 2008. Policy makershave actively supported this market-based approach to financial sectordevelopment and use the newly constituted Financial Sector Charter Councilto track progress relative to stated targets. Arising out of Charter process, thebanking sector has introduced an easy-to-use and affordable basic bankaccount (Mzansi), which currently reaches over two million customers, 60% ofwhom are first-time banking users. The policy makers are finalising legislativechanges to enable Tier 2 and Tier 3 institutions (Co-operatives and Savingsand Loan Banks) to expand access. The National Credit Act has beenpromulgated to tackle predatory lending and provide protection to consumers.Public-private partnerships are being used to rapidly expand disbursement ofsocial grants through banks.

FinMark as anindependent trust hassupported this process bydeveloping tools, providingmarket research data andcommissioning analyses ofthe potential impact ofproposed legislative

changes on access.FinMark conducts anannual, nationallyrepresentative financialsurvey (FinScope) that

tracks the number and proportion of adults who use financial services inSouth Africa. According to this survey 51% of adults (aged 16 or more)currently make use of banking services (Figure 1). 67% of adults, termed thefinancially served, make use of at least one financial product, be it a bankaccount, another formal product (such as formal insurance or credit) or aninformal product (such as a stokvel,an informal savings association in whichmembers contribute regularly and receive payouts in rotation). However, 33% of

adults remain financially excluded in South Africa.

This paper was prepared by Sukhwinder Arora based on extensive analysis undertaken byFinMark Trust, South Africa and other sources listed at the end of the paper. Jeremy Leachand other FinMark colleagues have provided valuable support.

This paper was commissioned by Financial Sector Team, DFID as background material forthe DFID and HM Treasury Financial Inclusion Conference, London (19 June 2007) and doesnot constitute official DFID views or policy.

Figure 1: Number and % of Banked in South Africa

Source: Finscope 2003-06

10

11

12

13

14

15

16

17

2003 (18+) 2004 (16+) 2005 (16+) 2006 (16+)

million

44%

46%

48%

50%

52%

number banked % banked


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2. Background

South Africa has one of the most unequal1 income distributions in the world.The advent of democracy in 1994 has accelerated efforts to include allsegments of the population in the development process. In many sectors, theGovernment established Black Economic Empowerment (BEE) regulations toreduce unequal access to economic opportunity in the post-apartheid era andinvested significantly to increase access to basic services. Over the period1993 to 2004, a significant number of households joined the national grid. Theproportion of households using electricity for lighting increased from 52% to80% while the proportion of households with access to piped water increasedfrom 59% to 68%2. Since 1994 over 2 million houses have been constructedunder the Reconstruction and Development Programme. Within the privatesector, the cell phone industry which emerged in 1994 has had a significant

impact. 69% of households in South Africa now have at least one cell phonecompared to 22.5% who have a land line3.

The financial sector acknowledged that access to first-order retail financialservices is fundamental to BEE and to the development of the economy as awhole. However there were complex issues of prioritisation and sequencingas well as important debates about the role of the State and markets; Shouldthe State play a more activist (coercive) role or mainly guide and facilitate thealready well-developed private sector? During 2002-03, the key stakeholdersin the financial sector debated these issues and voluntarily signed a historicCharter.

1 South Africa has Ginni co-efficient of 58 in 2000 as compared to Kenya 42 (1997) and India37 (2004)2

Shifts in Non-Income Welfare in South Africa: 1993-2004, Haroon Bhorat, PranushkaNaidoo, Carlene van der Westhuizen Development Policy Research Unit May 2006 WorkingPaper3 Source: AMPS 2006 RA

Table 1: Key Country DataPopulation 47 million Land Area 1.22 million km2GDP $ 240 Billion GDP (average annual

growth)2.5% 1995-20003.7% 2000-05

Population below thepoverty line

11% population below $1/day34% population below $2/day

Domestic Credit to theprivate sector

144% of GDP in 200581% of GDP in 1990

Bank Branches 6 per 100,000people

Phones 825 Per 1,000people (2005)

Formally Included 57% adult population has access to financial products supplied bylegally governed institutions (50% formal banks and 7% others)

Informally served 9% adult population is served by informal arrangements such asburial society or smaller savings clubs.

Financially Excluded 33%Source: World Development Indicators 2006, online; Finscope Data 2006


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3. Financial Sector Charter

In August 2002, government, business, labour and community representativescommitted themselves to the development of a BEE Charter in the financialsector. They noted that:

Despite significant progress since the establishment of a democraticgovernment in 1994, South African society remains characterised byracially based income and social services inequalities. This is not onlyunjust, but inhibits the countrys ability to achieve its full economicpotential;

BEE is a mechanism aimed at addressing inequalities and mobilisingthe energy of all South Africans. It will contribute towards sustainedeconomic growth, development and social transformation in SouthAfrica;

A positive and proactive response from the (financial) sector throughthe implementation of BEE will further unlock the sectors potential,promote its global competitiveness, and enhance its world class status;

Equally, the financial stability and soundness of the financial sector andits capacity to facilitate domestic and international commerce is centralto the successful implementation of BEE.

The objectives of the Charter are to:

Constitute a framework and establish the principles upon which BEE

will be implemented in the financial sector; Provide the basis for the sectors engagement with other stakeholders Establish targets and responsibilities in respect of each principle; and Outline processes for implementing the Charter and mechanisms to

monitor and report on progress.

The transformational Charter is effective from January 2004. The Charter hascommitted its participants to 'actively promoting a transformed, vibrant, andglobally competitive financial sector that reflects the demographics of SouthAfrica, and contributes to the establishment of an equitable society byeffectively providing accessible financial services to black (ie previouslydisadvantaged) people and by directing investment into targeted sectors of

the economy'. Financial institutions affected by the Charter include banks,long -term insurers, short -term insurers, re-insurers, collective investmentschemes, investment managers, retirement funds, and licensed exchanges.Other financial sector institutions may also opt to participate in the Charter.

4. Financial Sector Charter Commitments and Monitoring

The Charter confirms specific commitments in the financial sector. An 18%weighting has been placed on access to financial services (the focus of this


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paper)4. The access targets relate to the population in Living StandardMeasure5 (LSM) groups 1 to 5. To put this in context, those in LSM 1-5constitute 63% of the adult population and have an average monthlyhousehold income of R 1,7006 (less than 121). Within the LSM 1-5 adultpopulation, 14% rely upon child grants, 10% on old age pensions, 1% ondisability grants and 4% on other types of state grants. 77% of this market has

electricity in their homes, 27% have flush toilets but only 3% have access tohot running water. 7% of the adults in LSM 1-5 report loss of the main wageearner in their households in the last year.

By end of year 2008, the financial sector Charter commits to ensure that:o 80% of LSM 1-5 have effective access to transaction products and

services;o 80% of LSM 1-5 have effective access to bank savings products and

services;o 80% of LSM 1-5 households have effective access to life assurance

industry products and services (22% usage for long term insurance);o 1% of LSM 1-5 plus 250,000 have effective access to formal collective

investment savings products and services; ando 6% of LSM 1-5 have effective access to short term risk insurance products

and services.

Each of these terms has been defined in the Charter. For example first ordertransaction products and services is defined as enabling a basic and securemeans of accessing and transferring cash for day-to-day purposes whileInsurance products and services has been defined as basic risk mitigationproducts - life insurance, funeral insurance, household insurance and healthinsurance. Effective access means being within a distance of 15 Kilometres 7of the nearest service point at which first-order retail financial services can beundertaken, and includes ATM and other origination points, except in the caseof the products and services of the long term assurance industry.

The Financial Sector Charter Council has been constituted and is responsiblefor overseeing the implementation of the Charter between 2004 and 2014. Itwill conduct reviews in 2009 and 2015 to assess achievements and documentthe impact on financial sector transformation. The 2005 Annual Reviewconcluded that the financial sector performed reasonably against the targetsset by the Charter and that it is in a position to achieve the cumulativeinvestment and funding targets set for achievement by the end of 2008.

4 Other Charter commitments include Human resource development (based on an estimatedratio of 10% for 2002, each financial institution will have a minimum target of 20% to 25%black people at senior management level by 2008; Ownership and control (for example, eachfinancial institution will have a target of a minimum of 25% black ownership by 2010,measured at holding company level; 33% black people on the board of directors by 2008); fulldetails at http://www.fsCharter.co.za/5

Consumer durable ownership is taken as a proxy for wealth and income for LSMcategorisation.6 This average excludes 19% of respondents who do not provide household income data7 Initially 20 kms, now reduced to 15 Kms.


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From 2007 performance by individual institutions will be rated. These ratingswill be considered by all State institutions when they conduct business withthe sector, thereby providing an incentive for financial institutions to transformand promote broad-based black economic empowerment. Banks have startedpreparing their own assessment of performance against commitments.Standard Banks self-assessment records progress made against Charter

targets and is presented in annexure 1.

5. Role of FinMark Trust

FinMark Trust is a Johannesburg based independent trust committed toMaking financial markets work for the poor. DFID has provided core fundingsupport since its inception in 2002. Set up at a time when the Blackempowerment agenda was forcing attention on financial inclusion, FinMarktrust has emerged as an influential catalyst by generating independent andhigh quality market research and discussions papers and by facilitatinginformed dialogue (material available at www.finmarktrust.org.za). In 2003,FinMark trust analysed key drivers and constraints in improving access to

financial services and supplemented this with the launch of a nationallyrepresentative consumer perception study (FinScope box 1 provides moredetails). This study provides national data on the formally included, informallyserved and financially excluded markets (presented at the beginning of thispaper). FinMarks commissioned research to assess the potential impact ofproposed legislative changes on access has contributed to the nationaldebate.

Independent reviews have highlighted the substantial impact FinMark Trusthas had on access debate in South Africa and at a global level. The followingfeedback to a recent DFID review team captures the nature and extent ofFinMarks contribution in South Africa.

Nkosana Mashiya: Chief Director, Banking Development and Financial Access, NationalTreasury The definition of financial inclusion comes from FinMark they are the only crediblesource. Every politician borrows from Finscope. In National Treasury, we use it for policy, andto derive access indicators; in the business community, new products are based on Finscopedata. When the National Credit Regulator set new interest-rate caps the decisions werebased on indicators taken from Finscope. There is no other credible source of indicators.

Enoch Godongwana, Executive Director, the Financial Sector Charter Council FinMark iscritical in shaping the debate about access to financial services they do it via FinScope,which covers most of the sectors we deal with, and comes out every year. We use it to track

progress on access issues.

Cas Coovadia, Executive Director, the Banking Association Finscope data were a criticalinput into the work the banks did to design the Mzansi account.

The FinMark Trust was initially active in Southern Africa, but is now scaling upits activities elsewhere in Africa.


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services, those who are not included and reasons for exclusion. Some keyfindings from FinScope are noted below:Overall Population

There appears to have been a rapid expansion of banked adults (16+)from 46.6% in 2005 to 51% in 2006 (Figure 1 on page 1). This means

that banking sector has reached 1.6 million additional9 adults in oneyear.

With 51% banked and another 7% accessing other formal providers,58% of the adults are formally included.

Over 67% population is using financial services, including 9% beingserved exclusively by informal providers.

33% of adults are currently financially excluded in South Africa. The proportion of Black adults accessing banking has gone up from

40% in 2005 to 45% in 2006. Women have significantly narrowed the gap with men on formal

product usage. In 2006, 50% of women as against 52% men had a

bank account. The corresponding percentages for 2005 were 44% forwomen as against 50% for men. 35% of adults earning between R1 and R 499 ( 36) per month and

38% of those earning between R 500-R 999 ( 36-72), currently usebank accounts. This percentage rises sharply to 74% for those earningbetween R1000-R1999 ( 72-143) a month.

3.58 million (i.e 23% of the 15.27 million currently unbanked) previouslyused banking services but no longer do so.

LSM 1-5 Population

35% of adults in LSM 1-5 were banked in 2006 as compared to 32% in

2005. 44% of those in LSM 1 5 do not have access to any formal or

informal financial products. This proportion of financially excludedincreases as we go further down the LSM groupings (56% in LSM 1 2)

50% of the LSM 1-5 adults say that they can live without a bankaccount.

9% of adults in LSM 1-5 currently use long term insurance (lifeinsurance, formal funeral cover10, loss of earning insurance, andretirement cover) as against 2008 targets of 22% usage and 80%access.

Less than 1% of the population currently use short term insurance(asset insurance, travel insurance and credit insurance) as against2008 targets of 6% usage.

9from 14.3 to 15.9 million (11% increase)

10 This includes funeral insurance from an insurance company, a bank, a retailer, a broker, anadministrator or an employer. If undertakers or funeral parlours are included the percentageincreases to 17%


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7. What is being done?

The 1993 mission statement of the Policy Board for Financial Services andRegulation articulated the vision for financial inclusion The Board wishes topromote and maintain a safe and sound financial system which will be fair toinvestors and effective in supplying financial services to all. The 2003

financial Charter provides the specific commitments for an inclusive financialsector. The Charter was gazetted in 2004 and is being monitored by theFinancial Sector Charter Council. The table below provides examples ofactions being taken to support financial inclusion in South Africa.

Table 2: Stakeholders actions to enhance financial inclusion

Stakeholder Examples of actions to support Financial Inclusion1. Policy Makers

(NationalGovernment/South AfricanReserve Bank)

Prioritising financial inclusion Macro-economic management to control interest rates, inflation

and currency fluctuations. Continued reliance on market based Financial Sector

Development through the Financial Sector Charter. The National Credit Act (2005) and Regulations (2006) to tackle

predatory lending and consumer abuses Finalising legislative changes to enable Tier 2 and 3 institutions to

enter and expand access (Dedicated bill elements to beincorporated into Banks Act amendments; Recent introduction ofCo-operative Bill in parliament)

Competition enquiry regarding retail banking and national paymentsystems

Proposed micro-insurance discussion paper and focus oninsurance industry re disclosure and unfair charges

Participation in the FinScope survey2. Banks,

Microfinanceand otherfinancial

institutions

1.6 million additional adults access banking during 2005-06 Product Innovation (see box 2) and use of technology (box 3) to

reduce costs and improve distribution. Rapid Expansion of products and distributions points Assessment and reporting against Charter commitments (Annex

1) Fund and steer the annual FinScope survey Public / private participation in social grant payments

3. Civil Society Actively participate in the discussions on Financial Sector Charter,regulatory changes and in interpretation of results.

Participation in the FinScope survey. Provide financial literacy and debt counselling, especially in

remote rural areas Monitor cost and appropriateness of financial services

4. Donors andInternationalFinancial

Institutions

Supporting innovative models of financial services such as mobilebanking

DFID support to FinMark Trust

IFC SME initiatives Focus on market research such as Financial Diaries Project Focus on transparency in remittances and financial services

Recognising that different types of formal providers are needed andmainstream banks have limitations in serving large number of marginalcustomers, a co-operative banking bill has just been introduced in parliament.A dedicated banks bill was drafted in November 2004. The bill provided forsavings and savings and loans banks with much lower capital requirement


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and other regulatory requirements to ease barriers for entry and to reflect thelower risk to the financial sector. Plans are now being finalised to allow thiswithin the banking act, with needed amendments.

Consumer credit legislation has harmonised outdated and piecemeallegislation on consumer credit. South Africa now has one of the most

advanced regimes among developing countries for consumer protection sincethis has been a key area of concern for sometime. A Competition Commissionis enquiring into bank fees, which could also have long term impact onaccess.

The late 1990s has seen rapid expansion of social transfers. By 2006, 7million children were receiving child care grants though 4 million parents andguardians. To reduce costs and fraud during delivery and to increase choicefor beneficiaries, the recently established SA Social Security Agency seeks tohave 50% social transfers paid through bank accounts by 2008 as against21% in 2006 (see www.sassa.gov.za).

The private sector has worked together to introduce the Mzansi bank account(see box 2 for more details). Different private sector providers are alsoimproving their offering to customers. In 2005, WIZZIT was launched to offerbanking to unbanked and underbaked customers through cellphones. A cellphone network operator and service provider (MTN) created a joint venturewith Standard Bank to launch MTN Banking (see box 3).

Box 2: Mzansi Account an amazing success so farThe Mzansi account, designed to offer an easy-to-use and affordable banking product primarily forthe unbanked in South Africa, has proved a success. Mzanzi was launched in 2004 by the bankingindustry to fulfil commitments made in the Financial Sector Charter to broaden financial access. The

Charters access targets include the commitment to ensure that 80% of adults in LSM 1-5 haveeffective access to retail banking products by 2008. According to FinScope, in 2005, 4% of thebankedpopulation was making use of Mzansi bank accounts. This increased to 12% in 2006. 6% ofthose in LSM 1 5 , or almost 1.2 million people have a Mzansi account. Mzansi has also foundacceptance outside its core target market, having been adopted by around 760,000 people who fallinto the higher LSMs.

However the FinScope survey itself may be an under-estimate as only 1.9 million adults wererecorded as using Mzansi as against 3.3 million claimed by the financial sector. The significantdifference may be explained by either lack of user awareness (using the product without knowingthe brand) or unwillingness to admit using a poor mans account (a perception held by 41% of thosewho have heard of the product and 49% of those who have the product).

Sixty percent of people with a Mzansi account claim this to be their first bank account, a

confirmation that the product is meeting the target market needs. Most Mzansi users are black andreside in urban areas. Main transactions conducted with an Mzansi account are cash withdrawalsand, to a far lesser extent, deposits. 49% of the population was aware of the product in 2006 asagainst 44% in 20051. However, almost 60% of South African residents who have heard of it claimnot to know enough about this account. 11% of the market claims that although they do not currentlyhave an Mzansi account, they have considered opening one. In its primary target market of LSM 1 5, the reasons for not opening a Mzansi account among people who had heard of it arepredominantly income related. They are either unemployed or do not have a regular income.

Mzansi account has achieved its aim of positioning itself as a product for all South Africans.

Source: Summarisied from FinMark research.


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However as progress is made in financial deepening, the nature of thechallenge will become more difficult.91% of the currently unbanked areunable to access banking servicesdue to demand side factors (lack ofsufficient income, job), as against 15%

not participating due to supply sidefactors (such as lack identitydocuments, do not meet the bankcriteria, service fee affordability,

minimum balance required etc). A small proportion of adults are happy tostay out of the financial sector out of choice.

Increasing and effective access to appropriate and affordable financialservices, along with rising incomes will increase the proportion of adults usingfinancial services. As noted earlier, few persons will choose not to usefinancial services if features and costs are relevant to their context. Howeverpoor people, like others, rarely find that one financial product will meet

their consumption, investment and emergency needs in the short, mediumand long term. Policy makers should therefore focus on enabling a range ofproviders to offer increasing choice to users. Over time both users andproviders might wish to graduate from one level to the next; akin to the roadnetwork - rural roads, connected to bigger and better roads including thewider, faster national highways open to residents as well as the visitors. Thefinal indicator of success is whether over time more people are moving on theACCESS-USAGE-CHOICEcontinuum.

Table 3: Reasons for not having a bankaccount

Reason 2004 20061 Income Reasons 78 912 Access Related 13 153 Choice 9 7

4 Others (includingdont know)

3 2

Source: David Porteous analysis ofFinscope data


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Box 3 Cell phone banking

Figure: African cell phone subscribers, BMI-T

Much has been said about the potential for cell phone banking as it rides on the back of theremarkable explosion of cell phone usage in Africa (as demonstrated in Figure above) andbeyond, and how it could dramatically lower the cost of banking and more effectively reach the

mass market. Early banking pioneers such as WIZZIT and MTN Banking in SA, as well as Globe(Philippines), and Celpay (Congo & Zambia) have all been showcased as leading innovators whoare using technology to expand access to financial services in their various jurisdictions. In SouthAfrica, all the main banks have joined the rush to provide a cell phone banking channels as can beseen from their respective websites.

What is clear is that the drive to use a lower cost and accessible channel is not just about the lowincome market. Many of the providers mentioned above in fact focus on using cell phones as alower cost channel for existing customers rather than think of it as a mechanism to bring in new(low-income) customers. On this basis, WIZZIT in SA could be seen to be the exception in termsof its stated target market of the low income market. However, FNB has surprised itself in findingthat over 50% of its new cell phone banking customers are from the entry level market thusdemonstrating that the low income market are not technology averse which is reinforced throughthe FinScope Africa surveys.

As cell phone usage explodes, the difference between cell phone and banking usage will grow.Across Southern and Eastern Africa, FinScope Africa surveys find that over 20% of the unbankedhave cell phones, and it is over 30% in Southern Africa. In terms of transactions, the FinScopeAfrica supported FinAccess survey shows that over 20% have transferred airtime via their cellphone a close proxy for a remittance. It will be interesting to see how the financial sectordecides to embrace the opportunity that cell provides and how the policy makers decide torespond to these models in terms of opening up or closing the space.

Contributed by Jeremy Leach, FinMark Trust


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References

The impact of the Dedicated Banks Bill on access to financial services: A reportprepared for The FinMark Trust July 2005

Alan Gibson Impact assessment of FinMark Trusts activities, 2002-2005,November, 2005

Eighty 20Access to savings in LSM 1-5January 2007

FINMARK TRUST, Vision 2010: Scenerios of the SA Financial System in 2010

FINMARK TRUST, Survey Highlights including FSM Model: Finscope South Africa2006

David Porteous Making Financial Markets Work for the PoorOctober 2004

David Porteous The Access Frontier as an approach and tool in Making Financial

Markets Work for the PoorMay 2005

David Porteous Just How Transformational is M-Banking?February 2007

FinMark Trust: Mid-term Review September 2005

2005 FEASibility (Pty) Ltd.

RP Goodwin-Groen and Prof M Kelly-Louw The National Credit Act and itsRegulations in the context of Access to Finance in S Africa Nov. 2006

Rudolph Willemse, Evaluating the Co-operative Banks Bill through the FinMark Lens,March 2005

Web Resources

Financial Sector Charter Council www.fsCharter.co.zawww.finmark.org.za.www.finscope.co.zawww.financialdiaries.com


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Annexure 1: Standard Bank Reporting against Financial Sector Charter

Access to financial services summary scorecard

Audited Audited

Target Audited Audited Max score score

Access to financial services 2008 2005 2004 score 2005 2004

1.Access to financial services 8 6,20 0Transactions products(Mzansi):

(Effective access for LSMs 1-5) 652 179 358 369 Not audited 2 1,10 0

Savings products (Mzansi):

(Effective access for LSMs 1-5) 652 179 358 369 Not audited 2 1,10 0

Transactability (POR) 72,5% 74,85% Not audited 2 2,00 0

Full service (POR) 72,5% 73,26% Not audited 2 2,00 0

2.Origination 8 3,77 1,38

Low income housing (Rm) 13 500 5 493 2 041 4 1,51 0,24

(Property (Income

value level

criteria) criteria)

Black SME (Rm) 3 300 2 651 2 018 2 1,48 1,14

BAgriculture (Rm) 375 168 0 2 0,78 0

3.Consumer education spend 2 2,00 2,00

% of post tax operating profit 0,20 0,20 0,23 2 2,00 2,00

Total score 18 11,97 3,38

Source: http://www.standardbank.co.za/site/investor/sr_2005/bee/pillar2.htm

Documents

South Africa Financial Inclusion Paper