Co-operative financial institutions can help end financial exclusion faced by township-based SMMEs
The CFI model reduces dependency on state funding for enterprise development
Most Gauteng communities cannot access banking services offered by commercial banks, and access to credit facilities is notoriously expensive. This form of financial exclusion also affects those in the informal sector as well as small traders, the majority of whom operate in townships.
Research conducted by Finscope in 2015 indicated that 15% of adults around Gauteng did not have bank accounts – the main reason being the hidden costs private banks charge for such services.
Gauteng premier David Makhura identified co-operative financial institutions (CFIs) as one of the vehicles the province needs to address financial exclusion in all its manifestations. The umbrella term refers to member-based, deposit-taking financial co-operatives; these institutions are owned and controlled by the members who share a common bond.
The CFI model is building on the tradition of self-financing, self-helping and self-sustaining organisations that manifest through community-initiated schemes such as burial societies and stokvels, which reduces dependency on state funding for enterprise development. In other countries, CFIs are also known as credit unions, savings and credit co-operatives (Saccos) or financial service co-operatives (FSCs).
The CFI model has done well around the world. Statistics from the World Council of Credit Unions reveal that the movement is growing at a faster rate: total assets have shot up from $1.2-trillion to $1.8-trillion between 2007 and 2015, while membership surged from 177m to 223m.
This is partly attributed to the fact that people realised during the global financial crisis that CFIs performed better than the private banks. This has also changed the perspective of policy-makers around the world. SA has not bucked the global trend, either, as the National Treasury has an agency dedicated to supporting and developing CFIs, known as the Cooperative Banks Development Agency (CBDA).
The CBDA aims to grow the sector to at least 150,000 members and increase its savings base to R500m by 2020. Currently, the sector has 30,000 members who command R236m in savings. According to CBDA projections, about 100,000 potential members should have joined the sector between 2016 and 2018. If the present performance of the sector is anything to go by, Gauteng will clearly contribute significantly to the national targets. Existing and future CFIs hold this potential.
The Gauteng provincial government, through its Township Economic Revitalisation strategy, is supporting CFIs as a vehicle that can play a significant role in empowering its members and building social capital for them. It can help remove the hurdles that township-based small, medium- and micro-sized enterprises (SMMEs) and co-operatives face when they seek access to finance. The enterprises in the townships have the potential to reduce unemployment and boost economic growth, bringing the country closer to realising the goals set out in the National Development Plan.
Both communities and enterprises stand to gain a lot if they can join forces and form CFIs.
CFIs offer the same financial services provided by mainstream banks while providing a safe, convenient environment for members to deposit or save money and obtain loans and other financial services at a low cost. It applies the philosophy of high interest rates on savings and low interest rates on loans. Interest rate on loans set by the organisation must be sufficient to cover operation costs, pay interests on savings and improve services.
A CFI is a voluntary and democratic institution, meaning that members are its main driver. The Gauteng department of economic development will continue to lend a helping hand to ensure that collective community initiatives are successful.
The Gauteng government is supporting CFIs as potential avenues for financial inclusion. Moreover, to promote and ensure that community members know about the CFI sector, it will embark on a promotional and marketing campaign to position registered and non-registered CFIs (including organised groups of Gauteng such as stokvels and burial societies, religious groups, social groups among others) for inclusive growth and to raise awareness of the benefits.
The Gauteng department of economic development held a successful CFI roundtable discussion on February 27 and 29 2019 focused on the changing regulatory environment in the country emanating from the “Twin Peaks” regulations. These basically established two regulatory authorities, and the first peak is known globally as the “systems stability regulator’’ – mainly focusing on prudential regulations.
The second peak focuses on market conduct and is meant to protect consumers’ financial products. It usually takes a bit of time for a regulation of this nature to permeate and influence the system but “Twin Peaks” will certainly go a long way towards restoring consumer confidence in the financial sector, especially banking following the VBS saga.
For more information on the Gauteng Cooperative Banks Growth and Development Programme, visit www.gauteng.gov.za and click the "Economic Development" tab.
Moyasi Mvelase is chief director: inclusive economy at Gauteng Department of Economic Development.
This article was paid for by the Gauteng department of economic development.