Now for the difficult bit: implementation
Following the gazetting of the new amended Financial Sector Code late last year, the sector’s old charter council renamed itself the Financial Sector Transformation Council last week, giving us an opportunity to interact with the new BEE rules for banks and insurers, all aimed at accelerating transformation in the most critical sector of our economy.
The likes of the Banking Association of SA and the Association of Black Securities and Investment Professionals have recognised the powerful leverage the financial services industry carries in driving the type and pace of transformation South Africans want to see.
Many elements, though not new, have been sharpened for a more targeted impact. For example, two unique elements exist in the Financial Sector Code that are not in the generic codes: empowerment financing and access to financial services.
The concept of finding ways to “bank the unbanked” is not new. The sector has in the past tried to address this by launching all sorts of products, all of which tanked.
Going through the amended Financial Sector Code, however, it is clear the sector has learnt from its mistakes, and has this time around put together a set of rules that can hold banks and insurance companies accountable for their role in supporting investments that benefit the majority of South Africans, and supporting and financing black-owned businesses. The targets are quite aggressive, especially in the sector-specific elements, and that is encouraging.
However, one wonders to what extent the industry is ready to meet these targets, and, perhaps more important, to what extent the black people the rules are intended to serve are ready to take advantage of the new opportunities offered.
Take, for instance, empowerment financing, which comprises targeted investments and black business growth funding. In summary, banks and insurers will be measured and incentivised to finance or extend credit for “transformational infrastructure projects aimed at supporting economic development in underdeveloped areas and contribute to equitable access to economic resources”.
The infrastructure projects include major transport, energy and water projects, telecoms and municipal services. Targeted investments in the code specifically include agricultural development — which is all about providing integrated support and finance to black farmers — and affordable housing. The target for such investments is R48bn for banks and R27bn for long-term assurers.
The sector is also incentivised to provide broad-based BEE transaction financing. This is not new, and is something of an anomaly. If there is a BBBEE deal to be done, banks by their nature will always be the ones to fund it, outside of a few development finance institutions. It makes no sense that we “praise the fish for swimming”.
The other thing learnt about BBBEE deals is that they focus only on a change of shareholding, typically from whitecontrolled to black-empowered. There is, on its own, no value add when shares change hands. Value is created when new businesses start or existing ones grow — hence this new concept of black business growth funding.
It is an attempt to focus the sector on supporting and funding black-owned and blackmanaged business to grow and, in the process, employ more people. Why does this make sense? Well, 92% of our population is black. If you want the economy to grow and absorb its labour force, you want to get black people economically active. This also gives the government a better chance at solving issues in health care and education, and addressing lawlessness.
But there is a smallanyana problem with this 92%. The vast majority of them will not land any bank finance as they don’t bring with them any social capital or collateral. The entire system needs to be overhauled if banks are genuine about extending credit to black people and helping to transform this economy.
For one, the risk matrix needs to be looked at, and those banks that take on more risk than others in extending credit should be rewarded with more BBBEE points. This would ensure that we are not simply rewarding lenders for throwing money at the same black people, but are recognising those lenders who are solving the problem at its core — how to increase the pool of economically active black South Africans, and get more people outside the economy into the economy.
The amended Financial Sector Code is, for many, reasons, a progressive document that has been put together by sober minds. That is to be commended.
Now for the really hard work: implementation.
It is clear that the financial services sector has learnt from its mistakes