Key Highlights of the draft Cooperative Banks Bill, 2006

1
Key Highlights of the draft Cooperative Banks
Bill, 2006

• Portfolio Committee on Finance
• 05 September 2006

2
Outline

• Background Cooperatives banks/Village
  banks/Financial Services Cooperatives
• Self regulation of village banks
• Advantages and disadvantages of self regulation
• Co-operatives Banks Bill, NEDLAC Agreement
• Proposals for the redraft of the Co-operatives
  Banks Bill
• Developing capacity within village banks

3
Background Cooperatives banks/Village banks

• Definition
• Member-based financial institutions
• Basic banking businesses (in some instances
  ?insurance products)
• Community based
• Target market No alternative financial service
  providers (ruralvillage banks or FSCs
  urbancredit unions)

4
Background Cooperatives banks/Village banks

• Activities
• Deposit-taking
• Provision of micro-loan, personal and
  entrepreneurial
• Third-party payments
• Social grants payments
• Others Funeral Schemes
• Entrepreneurial activities

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Background Cooperatives banks/Village banks

• Historical background
• Bophutatswana agricultural bank African Rural
  and Agricultural finance association (AFRACA)
• Village bank project International fund for
  agricultural development
• Establishment of 3 village banks between 1994 to
  1996 in North West
• Self-regulation FSA, FINASOL and SACCOL.
• 1998 Exemption from the Banks Act

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Self regulation of village banks and other
possible ways they can be regulated

• Provisions and Conditions of the Exemption worth
  mentioning
• Pre-approved Self-regulatory bodies
• the business arrangement between a village
  bank/FSC and a link bank
• restriction on the amount of deposit from members
  a village bank can hold(limited to R10 million)

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Pros and Cons of Self regulation

• Advantages of self regulation
• Least cost to the fiscus
• Simple administration and affordable compliance
  lack of red-tape
• Industry-friendly rules and regulations
• Peer-review advantages

8

Pros and Cons of Self regulation

• Disadvantages of self regulation
• Outside lender of last resort
• Conflict of interests Support v/s
  Regulation
• Capacity problems
• Funding - Levies

9
Background Cooperatives banks/Village banks

• 2002 Collapse of Self-regulatory bodies
• Implications illegal deposit-taking
• 2002 NEDLAC Financial Sector Summit agreements
• Formalisation of the industry Legislation and
  support

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Statistics

• Source Finmark, Third-tier banking report, 2003

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Proposed banking structure
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Co-operatives Banks Bill, NEDLAC Agreement

• Aims of draft legislation
• Protect members and depositors from irresponsible
  lending or fraud
• Give co-op banks legal status with limited
  liability for both the organisation and members
• Give co-op banks the power to accept deposits and
  provide loans
• Ensure that co-op banks contribute to development
  of the local economies in accordance with the
  principles of the co-op movement
• Establish a Supervisor in the Reserve Bank to
  register co-op banks and supervise their
  activities

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Co-operatives Banks Bill, NEDLAC Agreement

• Establish a Co-op Bank Forum to advise the
  Supervisor on policy, educational work and other
  decisions

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The draft legislation

• Policy issues addressed by the legislation
• supervision of cooperative banks
• R2m capital 200 members min requirement
  pre-requisite for registration (provisional
  registration for small entities)
• capacity building
• Development Agency for Cooperative banks
• setting up a Supervisor for cooperative banks
• Two supervisors SARB and Development Agency

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Supervisor of Co-operative Banks

• S2 establishes office of the Supervisor of
  Co-operative banks in the SARB
• Supervisor appointed by the SARB with approval
  from the Minister of Finance
• Supervisor will be deputy Registrar of Banks
• Supervisor to perform all the functions assigned
  to his office by this Act

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Register of cooperative banks and Inspection
powers

• S5-Supervisor to create and keep the register of
  cooperative banks
• S6-Powers of inspection as afforded by the
  Inspection of Financial Institutions Act
• S7 empowers Supervisor to direct a cooperative
  bank and support organisation to furnish
  information on coop banks necessary for
  compliance

17
Board of Review

• S8-establishes a board of review
• Reviews decisions (proper discretion and good
  faith) taken by the Supervisor that may have
  aggrieved any person
• Minister to appoint 3 members
• Person with legal background (Chairperson)
• Person with accounting background
• Person with experience in matters relating to
  cooperative banks

18
Annual Report

• S9-Supervisor to submit annual report to the
  Minister of Finance
• Minister must lay a copy of such report before
  Parliament within 14 days
• Minister must Gazette the annual report

19
Support Organisation

• S12 establishes support organisation
• Juristic person
• assist with the application process for a
  co-operative bank license
• support a co-operative bank in the management of
  its business
• train the staff of a co-operative bank
• Provide auditing services for smaller for
  co-operative banks who cant afford auditing
  fees and
• promote the creation and development of new
  co-operative banks.

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Policy Considerations S12

• Support Organisation should be called
  Development Agency for Cooperative Banks
  (DACB)
• DACB Should be a wholesale organisation
• Current regulatory bodies such as SACCOL and
  FICOSA should be actual delivery organisations
  for cooperative banks development programmes on a
  contractual basis

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Registration and Coop Bank License

• Legal conduct of cooperative bank business (S14)
• Incorporation with Cooperatives Act (dti)
• Incorporation with Cooperatives Banks Act (Bank
  License)

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Coop Bank application process continued.

• Applicant approaches Support Organisation
  (Development Agency) for assistance with
  training, application and registration process
  (certificate of approval) (S18)
• Application made to Supervisor (prescribed form
  and fee)
• the activities of the applicant prior to the date
  of application
• the registration of the applicant as a
  co-operative under the Co-operatives Act

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Coop Bank application process continued.

• what type of co-operative bank license as
  contemplated in section 22(3) is being applied
  for and
• whether the applicant is in a position to provide
  the services contemplated in section 22(3) as the
  case may be, or any part thereof
• a business plan for a co-operative bank
• a management plan for managing a co-operative
  bank
• a constitution for a co-operative bank

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Coop Bank application process continued.

• list of at least 200 members of the applicant,
  and their prescribed details (5 members in the
  case of Coops Bill)
• confirmation regarding the suitability of the
  premises identified for the business of a the
  applicant
• a report that the prescribed training in respect
  of the directors and manager for a co-operative
  bank had been completed

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Coop Bank application process continued.

• Supervisor acknowledges receipts within 14 days

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Granting of Coop Bank license

• S19-The Supervisor grants license to an applicant
  who
• has the received a certificate of approval from
  a Support Organisation
• has access to financial resources
• has the technical ability to conduct the business
  of a co-operative bank
• will conduct its business in accordance with
  co-operative principles as contemplated under the
  Co-operatives Act and
• is not in contravention of any relevant provision
  of this Act.

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Types of Coop Bank Licenses

• S21(3)(a)-Savings Coop Bank
• Provides the primary services of
• primary deposit taking
• transmission services (including third-party
  payments)
• S21(3)(b)-Savings and Loans Coop Bank
• provides all services provided by savings coops
  as well as advancing secured and unsecured loans
  to members and other services prescribed or
  approved by the Supervisor.

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Powers of a Coop Bank

• S30(1)-A coop bank may
• conduct the business of a co-operative bank as
  from the date of the issuing of certificate to
  conduct such business
• solicit or advertise for deposits from members of
  that co-operative bank
• make prescribed investments
• open cheque and savings accounts with a bank

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Powers of a Coop Bank Continued.

• make, draw, accept, endorse, or negotiate cheques
  that are paid to the order of or made out and
  endorsed by that co-operative bank
• accept donations or other forms of financial
  assistance subject to prescribed conditions
• conclude a management support agreement with a
  support organization
• institute or defend legal proceedings

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Restricted Activities

• S31-A Coop bank must not
• make loans to any director, employee, or agent of
  any co-operative bank except under the prescribed
  conditions
• allow a member that is in arrears to be or remain
  as a director of a co-operative bank
• borrow money other than by taking deposits from
  members or under the prescribed conditions
• issue bonds or debentures to any person other
  than under prescribed conditions and with the
  approval of the Supervisor

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Restricted Activities Continued.

• trade in foreign currency
• have equity or voting rights in any company,
  juristic person, partnership, other than a
  secondary co-operative bank, to the extent
  permitted in prescribed investments
• act as an agent except in respect of a burial
  scheme underwritten in accordance with applicable
  law
• indemnify directors or employees of that
  co-operative bank against grossly negligent,
  reckless, or intentional acts

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Restricted Activities Continued.

• act as surety or guarantor on behalf of any
  person
• provide security or collateral to any person
• merge or amalgamate with any other person, except
  as described under Chapter XI
• directly or indirectly participate in any trust
  other than as a beneficiary
• effect any transaction as an undisclosed
  principal or in any other manner other than in
  the name of that co-operative bank or conducting
  a burial scheme conducted under applicable law
• hold assets other than in the name of that
  co-operative bank.

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Prudential Requirements-Capital

• S63(2)-Minimum capital requirements prescribed
  by regulation,
• Generally 8 of risk-weighted assets (UK and
  Germany)
• Coop banks may seek an exemption (Conditions)
• Duration of the exemption
• Manner in which funds can be sourced and from
  who
• How coop bank may utilise its funds

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Prudential Requirements-liquid assets requirements

• S64(1) Minimum liquid asset prescribed by
  regulation
• Usually between 5-25 of short-term liabilities
  (100 in this Bill)
• Liquid assets may not be pledged or encumbered

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Large Exposures

• S65(1) Investments and/or loans to any single
  person or entity restricted to a percentage
  prescribed by regulation
• Usually not exceeding 25 of primary and
  secondary share capital and reserves

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Other sections

• S68-76 Conversion of Coop banks
• S77-85 Amalgamation, winding-up and dissolution

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Institutions created by this Act

• Office of the Supervisor of Coop Banks(S2)
• Support Organisation (Development Agency) (S12)
• Advisory Council (S93)
• Board of Review (Committee)(S8)

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Developing capacity within village banks

• Major Points
• Deposit payouts
• Charter Business support
• Bank Seta skills training
• SACCOL (FSA FINASOL) Administration and
  compliance Start-ups.
• Communities Self-help projects
• Government Funding

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Lessons from international Experiences

• Formalisation of the sector
• Germany, Canada, the US and the UK
• Examples Credit Union Act of 1979 as the
  principal Act in the UK. There is a move to a new
  regime of regulation to allow for reduced
  regulatory requirements for credit unions
  offering a limited range of services relative to
  those offering a wide range of services
• Another Example Cooperative Act of 1889 is still
  applied in Germany

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Lessons from international Experiences

• Structuring the sector
• international norm three-tier structure
• With primary cooperative banks at the first tier
  cooperative centres at the second tier, and a
  central cooperative at the national level

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Lessons from international Experiences

• Setting and implementing prudential and liquidity
  requirements
• Example in the UK, credit unions are subject to
  prudential and liquidity requirements,
• 5 of total liabilities in liquid asset,
• Capital requirement of 8 is imposed.

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Conclusion

• 2002 -Nedlac Agreements
• 2002 Collapse of self-regulatory bodies
• Legislation
• Support
• Regulations

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QUESTIONS