Innovations in Innovations in BankingBanking

Professor Mthuli NcubeProfessor Mthuli NcubeWits Business SchoolWits Business School

BANKSETA conferenceBANKSETA conference11-12 October 200611-12 October 2006

The role of banking The role of banking institutions?institutions?

Mobilizing savingsMobilizing savings Matching borrowers and saversMatching borrowers and savers Selecting positive NPV projectsSelecting positive NPV projects Promoting allocative efficiencyPromoting allocative efficiency Risk managementRisk management Smoothing consumption by allowing Smoothing consumption by allowing

borrowing against future income streamsborrowing against future income streams Reducing uncertainty in resource allocationReducing uncertainty in resource allocation Conduit of the “conduct of monetary policy”Conduit of the “conduct of monetary policy” Vehicles of socio-economic transformationVehicles of socio-economic transformation

Banking issues to be Banking issues to be tackled in SAtackled in SA

Low savingsLow savings Servicing the “under-banked” Servicing the “under-banked”

populationpopulation Low entrepreneurship levelsLow entrepreneurship levels Collusive banking sectorCollusive banking sector High transaction feesHigh transaction fees Low-cost housing provisionLow-cost housing provision

Total Entrepreneurship Total Entrepreneurship Activity 2004Activity 2004

Low TEA CountriesLow TEA Countries Japan:Japan: 1.51.5 SloveniaSlovenia 2.62.6 Hong KongHong Kong 3.03.0 South AfricaSouth Africa 5.45.4 UKUK 6.36.3 USAUSA 11.311.3 High TEA CountriesHigh TEA Countries EcuadorEcuador 27.227.2 UgandaUganda 31.631.6 PeruPeru 40.340.3 Global AverageGlobal Average 9.3 9.3

South African Total South African Total Entrepreneurship Entrepreneurship

ActivityActivity SA EntrepreneurshipSA Entrepreneurship

activity on downwardactivity on downward

trend since 2001trend since 2001 Downward trendDownward trend

despite fallingdespite falling

Interest rates and Interest rates and stablestable

Rand and low inflationRand and low inflation

South African TEA Index

0.0

2.04.0

6.08.0

10.0

2001 2002 2003 2004

Years

Wide Interest Rate Wide Interest Rate Spreads (%):2002Spreads (%):2002

Interest rate Interest rate spread in spread in sub-Saharan sub-Saharan Africa is 13 Africa is 13 % compared % compared to 7% for to 7% for the rest of the rest of the worldthe world

Spreads too Spreads too wide costly wide costly for businessfor business

Interest Rate Spread (Lending - Deposit Rate) % : 2002

7

4.9

8.29.9

5

7.3

13

3.8

02468101214

Servicing the “under-Servicing the “under-banked”banked”

Financial Services Charter and BEE policyFinancial Services Charter and BEE policy Mzansi accounts…3 million accountsMzansi accounts…3 million accounts Unit trusts: Money, Equity, Balanced and Unit trusts: Money, Equity, Balanced and

Guaranteed FundsGuaranteed Funds Unit trusts linked to borrowing…micro-Unit trusts linked to borrowing…micro-

lendinglending Access to remote areas using “virtual Access to remote areas using “virtual

money”money” ““Virgin money”….lower transaction feesVirgin money”….lower transaction fees

Derivative and Structured Derivative and Structured ProductsProducts

Derivative products on equitiesDerivative products on equities Equity-linked notes paying interestEquity-linked notes paying interest Fixed-to-floating mortgage loan productsFixed-to-floating mortgage loan products Mortgage loans linked to pension savingsMortgage loans linked to pension savings Interest rate and forex SwapsInterest rate and forex Swaps Caps, Floors and CollarsCaps, Floors and Collars Credit Derivatives: CDOsCredit Derivatives: CDOs Asset-backed securities, eg mortgagesAsset-backed securities, eg mortgages

SA Housing Backlog by SA Housing Backlog by Province: 2004Province: 2004

In 2002 the housing In 2002 the housing backlog was 2 581 000 backlog was 2 581 000 houses, nationally. In 2003 houses, nationally. In 2003 the backlog increases the backlog increases slightly to 2 619 000 slightly to 2 619 000 houses and in 2004 the houses and in 2004 the backlog was 2 409 000. backlog was 2 409 000.

0

100

200

300

400

500

600

700

800

900

1000

CE FS GP KZN LP MP NC NW WC

NUMB

ER '0

00

Housing Backlog Housing Backlog ProblemProblem

Rough estimates reveal that 1.8 million dwellings are Rough estimates reveal that 1.8 million dwellings are classified as inadequate and account for a large part of the classified as inadequate and account for a large part of the housing backlog.housing backlog.

The number of households living in informal settlements The number of households living in informal settlements and backyards are about 2 million by 2004 estimates. If the and backyards are about 2 million by 2004 estimates. If the average household has 4 members, then the approximate average household has 4 members, then the approximate number of people needing proper housing in the urban number of people needing proper housing in the urban areas is 8 million people.areas is 8 million people.

The progress on housing supply has not kept up with the The progress on housing supply has not kept up with the demand but significant progress has been made. In the last demand but significant progress has been made. In the last 10 years to 2004, the government-assisted housing 10 years to 2004, the government-assisted housing initiatives has resulted in about 1.6 million subsidy-houses, initiatives has resulted in about 1.6 million subsidy-houses, and transferred title of old stock of housing to 500 000 and transferred title of old stock of housing to 500 000 families, all from the R29.5 billion that has been made families, all from the R29.5 billion that has been made available through government initiatives.available through government initiatives.

Housing subsidy grants increased from R2.692 billion in Housing subsidy grants increased from R2.692 billion in 1996/97 to R4.5 billion in 2004/05, and expected to 1996/97 to R4.5 billion in 2004/05, and expected to increase to R5 billion in 2006/07.increase to R5 billion in 2006/07.

Securitized GuaranteeSecuritized Guarantee International Lender (IL) provides guarantee International Lender (IL) provides guarantee

against default to local banksagainst default to local banks Guarantee to carry a “premium” payable Guarantee to carry a “premium” payable

monthly along with interest onmonthly along with interest on IL issues yield notes whose payments are IL issues yield notes whose payments are

funded by “premium payments” (securitization)funded by “premium payments” (securitization) Yield notes are sold to investors such as asset Yield notes are sold to investors such as asset

managers, insurance companies, pension funds, managers, insurance companies, pension funds, banksbanks

Demand for yield notes driven by “black Demand for yield notes driven by “black economic empowerment” drive for which economic empowerment” drive for which holders of notes will earn BEE pointsholders of notes will earn BEE points

Thank YouThank You

Final Thought:Final Thought: Banks should manage Banks should manage risk rather than avoid itrisk rather than avoid it