Banker S.A in January 2015

Edition12

What’s being done to solve the problem?







CONTENTS

Contents

11 14 17

11 STATE HOUSING BANKS
Is South Africa ready for a state housing bank?

Features 14 CLOSING THE GAP
Regulars Plans to meet the needs of South Africa’s housing ‘gap market’

17 GREEN ENERGY IN HOUSING
Solar heating programmes for low-cost housing at a standstill

23 BANKING SUMMIT
Building partnerships for housing delivery

05 EDITOR’S NOTE Honing in on housing
06 MD’S MESSAGE Looking back at a tough year
08 LOCAL AND INTERNATIONAL BANKING NEWS FNB partners with Silicon Cape and PayPal and eBay split
29 OPINION The importance of customer experience management in private banking
30 SMEs eCommerce opportunities for SMEs
32 WORLDVIEW Solutions for banking beyond South Africa’s borders
35 CUSTOMER STORY Helping entrepreneurs through non-financial support
36 REGULATIONS National Credit Amendment Act to help South Africans settle debt
39 LIFESTYLE Helping consumers to make wise financial decisions mid ‘silly’ season
40 TECHNOLOGY Designing the future of the digital bank
43 TECHNOLOGY Electronic signatures – the way forward
45 TECHNOLOGY Benefits of contactless payment
47 TECHNOLOGY Outdated technology is holding banks back
49 SMEs Western Cape Funding Fair
51 EDUCATION New SME Education fund launched
53 TRAINING Skills focus to solve youth unemployment
55 OPINION Transfer pricing challenges in Africa

Edition 12 | BANKERSA 3



EDITOR’S NOTE

Honing in
on housing
Publishers: Picasso Headline (Pty) Ltd According to the World
Economic Forum (WEF)
Times Media Building Global Competitiveness
Central Park, Black River Park Report 2014/15, South
Fir Street, Observatory, 7925 Africa is ranked 20th out
Cape Town 8001, South Africa of 144 countries for its
Tel: +27 21 469 2400 Fax: +27 86 6822 926 property rights. Yet, despite the delivery of
more than three million housing units to the
Banking Association Editorial Board Cas Coovadia poor over the last two decades, the country
Editor Thenji Nhlapo continues to face a severe housing backlog,
Tamara Oberholster currently estimated at 2.1 million units.
Content Manager [email protected]
Content Co-ordinator Raina Julies It’s widely acknowledged that addressing
Michéle Jarman human settlements is critical to South
Contributors [email protected] Africa’s development path, but it’s not an
Georgina Guedes easy problem to solve. Too often, the various
Copy Editor Gwen Watkins stakeholders turn to finger-pointing, with the
Trevor Crighton public sector blamed for red tape bureaucracy
Lisa Witepski and the private sector chastised for lack of
Xolisa Vuza involvement and investment.
Michael Hewson
Cas Coovadia The recent signing of the Social Contract
Benjamin Binet for the Development of Human Settlements
Andrew Cook in October 2014 proved, however, that
Yusuf Dukander there is willingness and commitment to
Tamara Oberholster address human settlements throughout the
Pierre Venter value chain. The Social Contract commits
Gys Hyman signatories to the delivery of 1.5 million
Rolf Schröder housing opportunities by 2019.
Lynn Berggren
A further step was taken at the 2014
Editorial Interns Roxanne Jones Banking Summit – hosted by The Banking
Christian Schroeder Association South Africa and titled “A
Partnership for Housing Delivery” – where
Picture Credits The Banking Association South Africa decision makers from all stakeholder groups
Thinkstock came together to thrash out a way forward.
iStock
Times Media Limited In this issue’s special focus, we examine the
themes of the Banking Summit, the current
Head of Design Studio Jayne Macé-Ferguson state of the housing “gap market”, renewable
energy in affordable housing, as well as the
Designers Leo Abrahams IT’S WIDELY concept of state housing banks.
Mfundo Ndzo ACKNOWLEDGED THAT
ADDRESSING HUMAN There is a long path to travel before South
Project Manager Andrew Green SETTLEMENTS Africa can say it’s got a handle on human
Sales Consultants [email protected] IS CRITICAL TO settlements, but honest debate between all
André Potgieter SOUTH AFRICA’S players is a good place to start in developing
Advertising Co-ordinator Alec Rompelman DEVELOPMENT PATH, trust and creating effective partnerships.
Production Editor Louise Taylor BUT IT’S NOT AN EASY
Business Manager Merle Baatjes PROBLEM TO SOLVE.
Shamiela Brenner
Robin Carpenter-Frank
[email protected]

Financial Accountant Lodewyk van der Walt
Subscriptions and Distribution Shihaam Adams
[email protected]

Senior General Manager: Newspapers and Magazines
Mike Tissong

Associate Publisher
Jocelyne Bayer

Copyright: Picasso Headline and The Banking Association South Africa. No Tamara Oberholster
portion of this magazine may be reproduced in any form without written
consent of the publishers. The publishers are not responsible for unsolicited PS: In the last issue we reported that Bidvest
Bank had acquired Grindrod Bank (which at the
material. Banker SA is published quarterly by Picasso Headline Reg: time looked like a done deal). Bidvest, however,
59/01754/07. The opinions expressed are not necessarily those of Picasso later abandoned the deal towards the end
Headline. All advertisements/advertorials and promotions have been paid for of October 2014, two months after our print
deadline. We apologise for the error.
and do not carry any endorsement by the publishers.

Edition 12 | BANKERSA 5

Human unsettlement
This edition of Banker SA brings us to the end of a tumultuous
Cas Coovadia year for South Africa!
The year 2014 saw the fifth national elections since the
GOVERNMENT WANTS advent of our democracy in 1994. We also celebrated 20 years
TO IMPROVE THE of democracy, with joy and trepidation. We marked the first
LIVELIHOODS OF ALL anniversary, on 5 December, of the passing on of our beloved
OUR PEOPLE, BUSINESS leader, Nelson Rolihlahla Mandela, and we cherish his life and memory while
WANTS TO CONTINUE trying to live by the values he instilled in our psyche.
DOING RESPONSIBLE AND
PROFITABLE BUSINESS FOR This edition also focuses on the serious problems we have in housing
YEARS TO COME AND LABOUR our people. We also look at the progress we are making in addressing this
WANTS TO REPRESENT problem, with particular reference to the outcomes of the Annual Banking
WORKERS TO ENSURE GOOD Summit, which had human settlements as its theme. The Banking Summit
WORKING CONDITIONS. was preceded by the Human Settlements Summit, convened by the Minister
of Human Settlements, the Hon. Lindiwe Sisulu. The Summit put back on the
table the imperative for a social compact between the numerous stakeholders
in the human settlement value chain. These include financiers, construction
companies, municipal government, consumers, government and others. There
was significant support for this initiative, with a large number of organisations
signing the contract.

The Banking Summit, convened on 31 October 2014, looked at various
matters related to human settlement. The following are some of the pertinent
outcomes:
• Fast-track the release of appropriately located land, owned by the state, for

human settlement development;
• Look at different building technologies to reduce the cost of construction and

ensure environmentally sustainable products;
• Promote different housing tenure options, including rental and social

housing;
• Emphasised the importance of compact and that it is imperative that all parts

of the value chain work together;
• Emphasised the importance of enabling municipalities to the critical role they

must play in enabling delivery;
• Encouraged ongoing engagement on an appropriate regulatory environment

to enable construction and financing, including appropriate subsidies,
addressing the “gap market” and enabling private sector financiers to go
down market;
• Address the spatial development challenge, to break from the “apartheid”
development patterns; and
• Address the infrastructure needs to enable building of houses and enabling
integration of communities.
The Banking Association South Africa committed its members to intensify
efforts to address the human settlement challenge. We are a signatory to the
Social Contract and will work with other stakeholders to play a decisive role in
addressing this critical problem.
Our country can, 20 years into our democracy, boast a number of significant
achievements. A report from Goldman Sachs, alluded to in an earlier edition of
these magazines, states:
• GDP almost tripled from $136bn to $400bn today;
• Inflation fell from an average of 14% from 1980–1994 to an average of 6%
from 1994–2012;
• Gross Gold and FX Reserves rose from $3bn to a prudent $50bn today;
• Tax receipts of R114bn from 1.7m people rose to R814bn from 13.7m people;
• In the last decade, a dramatic rise in the middle class with 4.5 million
consumers graduating upwards from the lower (1–4) Living Standards

6 BANKERSA | Edition 12

MESSAGE FROM THE MD

Measure (LSM) and in total 10 million programme. This means we will have to and government to consider what is in the
consumers added to the middle higher raise capital in the global market. national interest. These central stakeholders
LSMs (5–10); and • This last point, above, raises another meet often, but we usually talk to our own
• Social grant beneficiaries rose from 2.4 critical issue. The country appears to be agendas and from our comfort zones. We
million to 16.1 million people today. on a rating downgrade trajectory. We are not engaging on the hard issues, around
However, we have a number of were spared a further downgrade on which trade-offs will be necessary in the
seemingly intractable problems we must, 12 December, but we are on a negative national interest! This manifests itself in a
as a country, address. The South African watch by the bigger rating agencies. This lack of trust between these stakeholders. A
economy continues to chug along on a raises the cost of borrowings from the current example is the call, from various
very low growth trajectory. The IMF and global markets and thus raises the cost quarters, for a state bank. A reason for
National Treasury GDP forecasts of 2.9% of the infrastructure programme. The this call is a view that the private financial
and 3% respectively of a year ago have ratings environment also inhibits foreign sector is not willing to finance emerging
been reduced to 1.4% for both today. Our direct investment and makes it extremely entrepreneurs and sectors of the housing
unemployment rate, according to STATS difficult for the country to attract much- market. The reality is that there are issues
SA, remains stubbornly at 25.4% (narrow) needed investment, particularly of a in these sectors that inhibit responsible
and 33.8% (broad). There were numerous type that build factories and creates jobs. financing, and a state bank will face the
occurrences this year that militated against The negative outlook on the sovereign same issues, unless the intention is to
increased growth, some in the global arena, rating has an impact on banks because throw tax money to such a bank to bail
but many in our control. These include a downgrade in the sovereign rating is it out when it needs funds. This would
the slow recovery in our trading partners, followed by a downgrade of banks. This not be sustainable. The debate should,
the protracted labour strikes, ongoing has a negative impact on sentiment and instead, focus on the role of state-owned
uncertainty on policy implementation and confidence, even though our banks are enterprises in risk leading, in order to
interpretation and the ongoing problems in sound and stable. address market inefficiencies so that private
education, health, skills and infrastructure. • The uncertainty in our policy sector financing can take place. This would
The following critical issues are pertinent: environment, particularly in the be the appropriate debate if we consider
• The crisis at Eskom! The recent load implementation of policy and mixed national interest! If the debate focuses on
shedding has led to very serious issues in messages from the ruling party, is that, both government and private financial
the economy, with businesses experiencing one of the reasons proffered by rating institutions would have to get out of their
losses and constraints on their ability to agencies for the negative outlook. comfort zones and address the national
grow. This situation is exacerbated by a Business needs certainty in the policy interest.
seeming denial from Eskom management environment and consistency in policy
about the crisis the institution is in. implementation to invest in the economy. Our country demonstrated to the world
We also see differing responses from We must also recognise that we operate in 1994 that a relatively peaceful democratic
government. The latest response, which is in a very competitive environment and transition could be made by forces that were
to give Deputy President Cyril Ramaphosa countries are aggressively competing for violently opposed to each other for decades.
the responsibility to address the crisis is investment. This is especially evident in Leadership across the board looked at
welcome, but does not address the critical other countries on the African continent, the national interest then, and made the
issues. These include a co-ordinated thrust which are making good progress in policy necessary trade-offs to promote the national
from government to bring in independent stability, implementation and creating a interest. South Africa has tremendous
power producers urgently, look at conducive environment for investment. potential and can rise to the challenges
alternative funding structures for Eskom, • We continue to face serious challenges we have. It has to be in all our interests to
clarify the mandate for Eskom, appoint in improving the lives of the majority of address these challenges in a sustainable
appropriate skills to deal with the crisis, our people. We have issues in our public way. Government wants to improve the
cut through blockages in the construction health and education systems and service livelihoods of all of our people, business
of the new power stations and commit to delivery challenges remain. wants to continue doing responsible and
making people seriously accountable. These are some of the critical challenges profitable business for years to come and
• The ongoing delay in getting the we have as a country in this, our 20th year labour wants to represent workers to ensure
infrastructure programme implemented. of democracy. We raise these because we good working conditions. These goals are
Private sector financiers stand ready to are patriotic corporate citizens and our common to all of the stakeholders. We need
bid for projects, but these are not coming members are committed to contributing a growing, thriving and inclusive economy
to market. The private sector is also ready to inclusive economic growth. Banks to improve the living conditions of our
to make the necessary skills available to want to grow in SA and want to be doing people and create jobs.
government to structure critical projects responsible and profitable business 20 years
to bring them to market. We must find from now. However, the environment to Let us celebrate 20 years of democracy,
a smarter way to get government and do business can only be sustainable and and recognise the sacrifices many people
the private sector to pull together the conducive if we substantively address the made for this, by committing to rise above
necessary human capacity and skills to problems we face. our individual agendas and get out of our
bring the projects to market. We must One of the critical impediments to comfort zones to put national interest at the
also realise local capital markets will not addressing these problems appears to be centre of a common agenda. The president
be sufficient to finance the infrastructure an inability on the part of business, labour should appeal to the country to rise to this
one challenge in his State of the Nation
Address in February 2015!

Edition 12 | BANKERSA 7

LOCAL BANKING NEWS

Consumers warned about Landmark Sukuk
virtual currencies and transaction for South Africa
fake Facebook profiles
South Africa recently concluded its debut US$500 million 5.75-year Sukuk
The National Treasury, the South African Reserve (Islamic) bond issuance in the international capital markets, informed by a
Bank, the Financial Services Board, the South drive to broaden the investor base and set a benchmark for state-owned
African Revenue Service and the Financial companies seeking diversified funding sources for infrastructure development.

Intelligence Centre issued a warning to members Based on an Al-ijara structure, the Sukuk was priced at a coupon rate of
of the public to be aware of the 3.9 per cent, representing a spread of 180 basis points above the corresponding
mid-swap (benchmark) rate. The transaction was oversubscribed by more
risks associated with the use of virtual than four times, with an order book of US$2.2 billion. The bond will be
currencies for transactions or investments. listed on the Luxembourg Stock Exchange.
While virtual currencies are becoming
popular, the technology is still very new and The recent dual tranche issued in July had an investor distribution of 62% US,
therefore may unwittingly expose users to 19% UK, 17% Europe and 2% from the rest of the world. The Sukuk transaction
investor distribution comprised 59% from the Middle East and Asia, 25% from
fraudulent or other criminal activity. Europe, 8% from the USA and the balance from the rest of the world. The lead
The Ministry of Finance has also warned arrangers for the transaction were BNP Paribas, KFH Investment and Standard
the public about numerous Facebook accounts Bank Group.
purporting to be those of the Minister of Finance
Nhlanhla Nene, saying these accounts are part FNB partners with
of ongoing attempts to con the public, both in Silicon Cape
South Africa and abroad, of their hard-earned
First National Bank and Silicon Cape
money. They recently announced a three-year
include bogus strategic partnership in funding
letters or emails and resource support to boost business activity in South Africa. Worth R1
claiming to be million per annum, this is Silicon Cape’s first long-term partnership since
from the Ministry its inception. Silicon Cape is a non-profit organisation aiming to improve
and associated the ecosystem for technology businesses through providing a platform for
community collaboration, sharing of resources and amplification of tech
institutions. innovation. With over 8 500 members, Silicon Cape is one of the
largest entrepreneurial networks in Africa.

“The partnership with Silicon Cape advances our contribution to creating
an enabling environment for SMEs in South Africa,” said Stephan Claassen,
FNB Business Provincial Head: Western Cape. “Through its diverse
membership, Silicon Cape has been at the forefront of efforts to minimise
barriers in doing business among tech-entrepreneurs. The partnership
will also enable us to share best practice and contribute towards better
positioning of tech businesses to potential investors.”

Deputy president pushes for state bank

Deputy President Cyril Ramaphosa has joined the call for the creation of a state bank to
fund entrepreneurs, following the Gauteng ANC’s decision to lobby for the creation of a
state bank to fund black industrialists.

Speaking at a township economic revitalisation summit at Orlando Stadium, Soweto,
Ramaphosa said the idea of a state bank had been around for a long time and was a
response to the need for a “key role player” to fund emerging businesses.

8 BANKERSA | Edition 12

INTERNATIONAL BANKING NEWS

Standard Bank named Most Nigerian eID cards: the
Innovative Investment Bank widest financial inclusion
programme in Africa
from Africa
Currently in pilot phase, the Nigerian Identity
Global financial publication The Banker magazine has named Standard Bank the Management Commission (NIMC) will issue
“Most Innovative Investment Bank from Africa”. Standard Bank attributes this MasterCard-branded identity cards with electronic
payments functionality to 13 million Nigerians.
award to its deep sector expertise, skills and relationships across the continent, The eID card is a core component for NIMC in its
noting that its Investment Banking franchise also played a role in key deals in the mandate to maintain and operate Nigeria’s first
continent’s mining and metals, oil and gas, and power and infrastructure sectors. central National Identity Database, providing proof
David Munro, Chief Executive, Corporate and Investment Banking (CIB), Standard of identity to Nigerians of 16 years and older.

Bank, said the award was appreciated because it is an The eID card boasts 13 applications, including
external, objective assessment of what the bank is trying to achieve at CIB: MasterCard’s prepaid payment technology
and Cryptovision’s biometric identification
“Ensuring that large global multinational corporations and technology, and will provide millions of Nigerians –
South African companies are able to do business in Africa; and most of whom have never had access to a banking
product – with access to electronic payments, and
providing access for African companies to the international the associated security, convenience and reliability.
capital markets.”
Nigerian President Goodluck Jonathan said the
CIB’s top six markets are said to be South Africa, Nigeria, Kenya, Angola, card builds a window to a social security benefit
Mozambique and Ghana. system and therefore, every Nigerian should get
one. Using the card as a payment tool, Nigerians
Paypal and eBay to split can deposit funds, receive social benefits and
save, as well as pay for goods and services and
Despite previously insisting that its two businesses withdraw cash at merchants and ATMS that accept
would continue together, eBay’s board of directors MasterCard payment cards in Nigeria and globally.
and CEO John Donahoe have announced that Along with the security of biometric verification, the
the PayPal and eBay marketplace businesses card also has the added safety of the EMV Chip and
will be split into separately traded public Pin standard.
companies by the middle of 2015. Donahoe will
step down as CEO of eBay once the split takes place.

Australia to
curb risky
mortgage
lending

The Australian Prudential
Regulation Authority (APRA)
warns that it is cracking down on
lending and will force banks to
hold more capital if they engage
in risky lending. Institutions
like the International Monetary
Fund have also warned of the
danger of asset price bubbles
due to low interest rates.
APRA will review banks’ lending
practices during the first quarter
of 2015, focusing on areas
including higher-risk mortgage
lending, accelerating credit
growth and loan affordability.

Edition 12 | BANKERSA 9



SPECIAL FOCUS

Should
South Africa
create a
state housing
bank?

IF GOVERNMENT There are numerous examples of countries creating
INTENDS THE SHB TO state housing banks (SHBs), some of which date
BE A “MARKET MAKER”, back to the mid-20th century. Most outcomes have,
THEN ITS DESIGN however, been disappointing in terms of both financial
SHOULD MEET SOME and social impacts. By Pierre Venter
CRITICAL CONDITIONS
TO ENSURE IT Confronted with “market failure”, generally the absence of adequate provision
EFFICIENTLY FULFILS of finance or an insufficient coverage of housing mortgage markets across
ITS SOCIAL AND household income distribution, governments tend to choose interventions that
ECONOMIC PURPOSES. yield quick results, or are at least a visible sign of political will to implement
housing solutions.
The involvement of the state in market finance is often the backdrop for an
SHB. In some cases, the creation of an SHB reflects a specialist bank implementing a centrally
planned economic policy. This SHB model does not, however, offer an appropriate answer to the
issues underlying market failure. Like many other state-owned banks, SHBs often fail to achieve a
balance between conducting efficient and sustainable banking operations and pursuing social goals.

GLOBAL EXAMPLES
In Latin America, SHBs combined refinancing facilities, some regulatory powers and direct
lending. However, SHBs have for the most part not survived financial crises in their countries.
In Brazil, an SHB called Caixa Economica Federal is a hybrid of a development bank and a retail
bank, and is the largest mortgage lender in Brazil today. In central and eastern Europe, state-owned
savings banks have a large share of the mortgage market. These SHBs have evolved into commercial
banks competing in the open market with private sector banks. In some countries, state entities
combine retail housing loan services with real estate development, for example Thailand, Indonesia,
Pakistan, and Egypt. In Sub-Saharan Africa, where the commercial banking sector is small and
the mortgage finance infrastructure is only partially in place, there is now considerable interest in
establishing or revitalising SHBs in countries such as The Democratic Republic of Congo, Namibia
and Rwanda.

WHY SHBs?
SHBs attempt to provide an institutional answer to three types of relevant issues:
• Providing a financial service to market segments that the market fails to deliver to (to jump-start

▶the market), by acting as a pioneer in demonstrating the commercial feasibility of such lending.

• Catering for the needs of segments underserved by the commercial sector. Lending to lower

Edition 12 | BANKERSA 11

State housing banks aim to provide a financial service to market segments to which the market fails to deliver.

or informal income groups or to households operations in countries such as France, Brazil, go into “corrective shock mode” when this ratio
in rural areas, where commercial lenders Indonesia, and numerous African countries. reaches about 10%.
do not have networks, involves higher The quantum of bail outs, compared to
origination and servicing costs, higher on-budget welfare housing subsidies, has As a public policy tool, SHB goals tend to
risks, lower incomes and fewer cross- been much higher. For example, the cost of the focus on new loan production (new housing
selling opportunities. As SHBs have lower Brazilian Caixa Economica Federal (SHB) bail opportunities), as opposed to improving the
profitability goals and because of their state out in 2001 was $8 billion, which equated to loan repayment performance of existing loans.
backing, they are seen as a natural substitute. 25 years of welfare housing subsidies.
• Providing a useful policy implementation A major motivation for establishing
tool. SHBs can react to instructions from SHBs are far more vulnerable than SHBs is to create long-term fixed rate loans
the state. For example, Thailand selected commercial lenders are, due to poor risk (advantageous for consumers), as the private
housing as one of the drivers for economic management/operational policy, administrative sector on its own cannot manage such liquidity
recovery after its 1997 economic crisis. It weaknesses and the predominance of a and interest rate risks. However, creating an
created an SHB to channel below-market rule-based (as opposed to a risk-based) culture. SHB specifically for this purpose does not
mortgage loans to stimulate construction create the necessary source of long-term
and absorb excess housing stock. Similarly, Specialisation can also increase this financial resources, and a significant amount
France used an SHB to provide subsidised susceptibility, as an SHB focuses solely on the of financial risk is transferred to the taxpayer
housing loans and varied the quantum housing market. This may lead to excessive (through the state as the SHB shareholder),
of subsidies available to either enliven or exposure during property market downturns. especially if there is also currency (foreign
dampen demand cycles. exchange) risk involved (e.g. long-term funding
WHERE SHBs GO WRONG Other reasons for the failure of SHBs loans in a foreign currency).
A striking feature of the vast majority of include weak corporate governance and lax
SHBs is the frequency of bail outs and rescue management of credit risk. On average, Often SHBs become the exclusive vehicles of
non-performing loans within SHBs range rationed subsidies, given limited state financial
between 20% and 30% of an overall loan resources and competing demands. South
portfolio. In some instances, this is as high as Africa implements a rationed capital subsidy
70%. On the other hand, private sector lenders policy. Rationed subsidies tend to promote

12 BANKERSA | Edition 12

SPECIAL FOCUS

fraud or corruption amongst SHB staff who good loan credit management) and funding RATIONED SUBSIDIES
can demand bribes for allocating the scarce (i.e. raising new funds for sustained lending). TEND TO PROMOTE
resources. Often, a portion of the state In Thailand, the SHB has been operating on FRAUD OR CORRUPTION
subsidies end up supporting the SHB itself a commercial basis without any dependence AMONGST SHB
for its operational costs and/or financial upon state financial support. Its leadership STAFF WHO CAN
losses incurred. in low - income housing reflects its strategic DEMAND BRIBES
position as compared to private sector FOR ALLOCATING TO
SHBs can become obstacles to the growth of lenders. SCARCE RESOURCES.
housing finance markets. This is particularly POLICY ALTERNATIVES
prevalent where the SHB has preferential Given the dismal performance of SHBs in most to the needs of underserved households
access to subsidies, which prevents the private instances, some preferred policy alternatives through institutions such as co-operatives
sector from competing in this market. It may include: or housing micro-finance institutions. This
also introduce market distortions by being • Credit extension by market contract has become popular in Africa and Central
able to offer products which the private sector or regulatory dictate. This refers to the America (e.g. Kenya, Congo and Paraguay).
cannot match (i.e. it “crowds out” the private regulatory framework within which housing
sector). Such offerings tend to be unsustainable, credit is extended to borrowers, and by whom SOUTH AFRICAN FRAMEWORK
however, due to low profitability and a poor (e.g. the Community Reinvestment Act in the Within South African human settlements, there
track record in managing credit risk. This US). This legislation directed certain financial are both institutional and policy framework
promotes “market creep” by the SHB into the institutions to extend housing credit within shortcomings that inhibit the housing supply
middle-income market in direct competition the communities in which they provided value chain, to which beneficiary affordability
with private sector lenders. other financial services or raised retail constraints need to be added. The creation of an
SHB SAFEGUARDS deposits, provided such credit was based on SHB will be ineffectual until supply constraints
Before creating an SHB, government should normal commercial lending principles. This are addressed.
determine what type of “market failure” is created a sub-prime market in the US, with
constraining the market government needs to catastrophic implications for homeowners While an SHB may be able to address
stimulate. If this is due to structural deficiencies and lenders. Another example is an early beneficiary affordability constraints by
and not the existence of more profitable and Nigerian model (terminated in 1993) where increasing the quantum (value) of subsidies it
easier lines of business, an SHB will stunt rather 5 to 6% of total lending by a bank had to be distributes to beneficiaries, this will necessitate
than foster the development of housing supply in housing. the state transferring scarce financial resources
or macroeconomic conditions. • A better approach is to recognise lending from other equally deserving and pressing
constraints in the relevant housing markets socio-economic priorities.
If government intends the SHB to be a and then, through contractual arrangements,
“market maker”, then its design should meet have a social contract with lenders to serve What South Africa needs is a holistic review
some critical conditions to ensure it efficiently lower income groups (e.g. in South Africa, of its human settlements institutional and
fulfils its social and economic purposes. The the Financial Sector Charter of 2004, or policy framework, which promotes sustainable
design must also include an exit strategy, once the Social Contract between multiple human settlements – from both a beneficiary
government’s objectives have been met. stakeholders and the Department of Human and state perspective.
Preconditions for creating a good SHB: Settlements in 2005, revitalised in 2014, or An SHB will be unable to achieve more than
• Good governance, including strong corporate the Memorandum of Understanding between what public-private sector partnerships have
commercial banks and the Department of already accomplished over the past 20 years,
governance principles and insulation Human Settlements in 1995). especially because an SHB will be required to
from short-term political interference. • Second tier institutions. Here, government comply with the National Credit Act, which
Management and the board should be supports second tier lenders by providing forces lenders to only afford loans to consumers
accountable and independent and the SHB liquidity facilities or a market conduit (e.g. within the confines of their affordability.
should be subject to oversight by the banking Malaysia, Jordan and in South Africa, where In addition, an SHB will fail if the supply
(prudential) regulator. wholesale funds are made available to constraints are not addressed. Establishment of
• Autonomy of funding. The SHB must be able alternative lenders operating in urban or an SHB will simply translate into an ongoing
to access savings through a retail deposit- rural areas). burden for the state and hence taxpayers,
taking network and/or wholesale funding via • Public-private partnerships, whereby the devoid of meaningful improvements in
capital markets. If such facilities do not exist, government makes a strategic investment addressing the housing needs of the poor.
it will be entirely dependent on state support, in, or initially supports, dedicated housing
which could lead to abuse and market finance companies. This promotes a Pierre Venter is the Head of Human Settlements
distortions, and to inefficiencies (constrained combination of private sector governance at The Banking Association South Africa.
lending volumes and funding uncertainty). and managerial efficiency with government
• Alignment of corporate interest with market policy goals (e.g. the HDFC in the country,
development, separating subsidies from the biggest mortgage bank in India, which
finance. An SHB’s success is defined by its now operates as an autonomous, fully-fledged
contribution to overall market development private sector bank).
and providing finance to underserved • “Double bottom line” (social and commercial),
categories of housing need, while at the same whereby entities take business-based solutions
time achieving self-sustainability both in
terms of financial results (i.e. profitability,

Edition 12 | BANKERSA 13

Closing the gap

With a public/private sector partnership formally

established to provide more homes for South
Africans, where to next? By Trevor Crighton

The Social Contract for the employers and mining companies, bulk The second issue is that in order for people
Development of Sustainable services development for townships and to afford homes, they need to get access to
Human Settlements, signed human settlements, upgrading of current finance, and we need to come up with more
in October at the conclusion informal settlements infrastructure and innovative financing solutions to make the
of the National Settlements community infrastructure like schools monthly repayments cheaper.”
Indaba by government and and churches.
other human settlements stakeholders, On the cost-cutting side, Patel says that
saw the public and private sector commit to Executive Director of Basil Read the regulatory framework must change in
delivering 1.5 million housing opportunities Developments and former president of the terms of approvals needed with regard to
by 2019. The contract – a commitment by South African Planning Institute, Yusuf town planning, environmental issues and
big employers, banks, mining companies Patel, says that while it’s no ‘silver bullet funding. “If we could cut down on the time
and developers – effectively declares South solution’, the Social Contract is at least a taken to grant those approvals, we could cut
Africa the largest construction site in Africa firm foundation for a public/private sector costs significantly,” says Patel.
and the developing world, and is estimated partnership on a scale never attempted
to be worth over R250 billion. before. “The key to meeting the targets set The availability and cost of bulk
by the Minister of Human Settlements, and infrastructure also play a major role. “We
That value will see multiple markets indeed in providing homes for people who need better planning when it comes to bulk
addressed, including the ‘gap market’, desperately need them, comes down to infrastructure. Without proper planning
in terms of affordable bonded cost,” he says. “Firstly, we need to produce and cost containment on the back-end
housing investments by banks, rental homes with a selling price that’s in the right elements, like water treatment plants,
accommodation developments, government range, and to get the selling price down, power supply etc., the final selling price of
subsidies, housing investments by big we need to get our building costs down. the units will be prohibitive to the market
we’re trying to serve,” he adds.

14 BANKERSA | Edition 12

SPECIAL FOCUS

Fountainhead Blue Downs is a new affordable housing development in the Western Cape developed by Motlekar Cape in partnership with the Western Cape
Government. All Units under R300 000 qualify for the Finance Linked Individual Subsidy Programme.

Patel feels that the target of 1.5 million selling price of around R350 000. In order to “Ultimately, a home comes with a price
housing opportunities is achievable if it’s afford that, your household income would tag and we can work hard to reduce that,
broken down into its components. Those have to be around R11 500 per month. Our but if people are under pressure in a
opportunities don’t only mean “new homes”; mission is therefore to produce homes that difficult economy, we’re chasing a moving
they encompass informal settlement target the right market, and that’s where target,” he says. “I believe that banks also
development, making serviced stands costs need to be lowered so that they’re need to look at this situation slightly
available, addressing housing challenges in affordable,” says Patel. Government has differently. Obviously they have their own
mining towns and much more. a backlog of around 1.8 million ‘subsidy’ constraints, since they’re loaning money
houses (effectively RDP homes), and Patel on behalf of their investors, but at the same
“If you look specifically at the gap believes they’re not going to be able to time, they need to realise that the money
housing market, where a lot of the housing deliver enough free housing, so the focus they lend against also belongs to ordinary
developments operate, the target is to make is now on getting purchase prices down South Africans. They need to look at
about 300 000 units available,” says Patel. Is enough to be able to offer people in the this in the long term and think about
it enough, though? When the first Banking lower income brackets the chance to get it as a socio-economic investment into the
Charter was signed in 2006, the requirement into the property market. country to build up a long-term client base,
was for around 600 000 homes. “Due to and ensure that we improve the real estate
urbanisation and delivery, despite the rate Patel says that the provision of housing is in the country as an economic driver.”
over the last five years not being what it one thing – costs can be cut, red tape can be
should have, we’re probably still looking reduced – but there needs to be a broader Patel’s research shows that the economic
at similar figures in the gap market. The economic intervention which improves impact of housing developments includes
problem is that a typical unit that can be people’s income levels and allows them to
produced in the gap market would have a access finance for homes in the first place. ▶aspects like job development, which should

encourage banks to help the country

Edition 12 | BANKERSA 15

SPECIAL FOCUS

Yusuf Patel, MD of Basil Read Developments get into a virtual cycle where affordable affordable housing sector with the same
housing becomes a driver for the economy cost constraints as the top end of the
WE NEED TO MOVE to improve job creation, and generate more market, yet an affordable housing owner
BEYOND RDP MODE household income. “In the long term, that is consuming much less water and power
– TO STOP LOOKING means people will take out more loans, than a homeowner in a house in Sandton,
AT THE PROBLEM AS banks are going to have better clientele, and for example. That’s unfair and it needs
A BACKLOG – AND the overall picture will slowly improve,” he to change. Pursuing renewable energy
ENSURE THAT WE says. “It’s not an easy ask, but I think that options in affordable housing is a definite
START LOOKING AT everybody is going to have to start looking option and could enable people to access
WAYS TO PROVIDE at doing things slightly differently if we’re energy more quickly and cheaply, but we
COST-EFFECTIVE, going to solve this challenge. Developers need the regulatory framework in place
INCLUSIVE need to look at innovative ways to cut to feed energy generated by solar or wind
OPPORTUNITIES costs, government needs to address the back into the grid – that’s the only way
FOR PEOPLE. regulatory costs, and banks are going to to make sustainable energy viable. It’s
have to come up with innovative financing something which could definitely assist us
methods – whether it’s reducing interest with our challenges, but the frameworks
rates, increasing loan terms or even making need to either be clarified, or established
it an aspect of their CSI projects – to make in the first place.”
investments more attractive over a
longer-term period.” Alternative building technologies –
materials and innovative solutions – are
Patel says that it would be easy for all another option, but Patel says that the
parties to sit back and wait for the others long-term cost-reduction benefits have yet
to jump in first, but warns that delays lead to be properly illustrated due to the high
to social unrest, as seen in mining towns initial costs. He says the market needs
over the last few years. “If we don’t find to call on suppliers of these technologies
solutions for providing adequate housing, to package them in a way that reduces
proper services and the like, action like upfront costs, with an eye on the overall
that is only going to spread, which, apart affordability of a home.
from the effects it has on people’s lives,
affects the overall economy of the country This housing problem is not uniquely
and makes it harder for people to earn a South African. In London, much of what
living,” he says. is considered to be multi-million pound
prime real estate today, started off as social
It sounds like the South African housing housing stock after World War II. “There
market is depending on a lot of players was a level of social housing investment,
to do each other ‘favours’ in terms of and over time it became an economic effort
reducing costs, so that savings can be on the part of the household, the broader
passed on to consumers. Patel says that city and the broader economy,” says Patel.
this question of affordability is critical “Germany had the same issue, where they
because, ultimately, the country needs to had to provide mass housing. They looked
produce housing options that people can at it in terms of solving social problems,
afford to stay in, and invest in for the long but also ensuring that this housing became
term, so that people see their long-term part of the city’s broader plans. The real
futures there. “It will help people to make estate’s value kept rising and eventually
wise spending choices. We need to ask turned the economy around.”
how much of household spending is going
towards housing, and how we get people Patel says the South African situation is
to direct more of their spending toward positive, but that things could reach crisis
housing as an investment, rather than levels if problems like rapid urbanisation
other consumable products,” he says. aren’t addressed. “We need to move beyond
RDP mode – to stop looking at the problem
In terms of the country’s infrastructure, as a backlog – and ensure that we start
what effect do these 1.5 million housing looking at ways to provide cost-effective,
opportunities have on elements like inclusive opportunities for people. On
the thinly-stretched power grid? “The the rest of the continent, countries are
rising cost of energy is one of the major still way behind because there isn’t much
bulk infrastructure challenges,” adds government subsidy and cities aren’t
Patel. “Electricity connection costs for investing enough in infrastructure. We
developments are rising quite substantially have a decent base to work from, but need
because of the situation with our to look at our context and how we deal with
power supply, and we’re burdening the our own challenges,” concludes Patel.

16 BANKERSA | Edition 12

SPECIAL FOCUS

Renewable
energy for
low-cost
housing is
in crisis
Solar heating has become a major focus of renewable
In June this year, Deputy President energy projects for low-cost housing. Unfortunately,
Cyril Ramaphosa addressed the not a single solar water heater has been installed for
AGM of the Black Business Council, nearly two years under the Department of Energy and
discussing South Africa’s economic Eskom programmes, and the industry is at a standstill.
progress over the last 20 years. He By Georgina Guedes
chose to highlight the solar water
heating industry as one example of a to low-cost housing around South Africa “The raw material – silica sand – would
manufacturing success story. (higher income homes pay for and install need to be imported into South Africa,” says
“In 2008 there was very little or no local high-pressure geysers and receive an James Green, Chairman of the Sustainable
manufacturing to support the production of Eskom subsidy). As water heating is one Energy Society of Southern Africa’s Solar
solar water heating panels. Today we have a of the biggest drains of electricity in any Water Heating division. “The cost of a
thriving solar water heating manufacturing household, it has received the greatest focus complete EVT is cheaper imported, than
industry. More than 60% of the content among renewable energy projects. the parts imported and effectively glued
towards solar water heating panels is locally together, as the complete unit is subsidised
produced,” he stated. According to the Preferential by the Chinese government.”
While this story is often mentioned by Procurement Regulations, all low-pressure
municipal and national government as a solar water heaters had to be 70% locally In light of this, it is not possible for this
shining example of how South Africans manufactured to receive approval for component of a solar water heater to be
have taken our unique characteristics and installation. This shouldn’t have presented manufactured locally, and even though the
built a working model that can be replicated a challenge, as 80% of the parts of the remaining 80% can be, the dti definition
around the world, in truth, the solar water low-pressure heaters in production were doesn’t allow for this. What seems like a
heater industry – which was once poised manufactured locally, except for a small tiny ribbon of red tape has brought the solar
for success – is stagnating. And it’s all problem with definitions. water industry to a standstill.
because of a small problem with the official AN INDUSTRY IN CRISIS
definition of what constitutes a solar water The Department of Trade and Industry “The market is in a state of total stagnation,
heater. (dti) informed National Treasury of a and is turning rapidly into a cadaver,” says
The heaters in question are the low- definition of solar water heaters that broke Green. “It is catatonic as the result of inter-
pressure systems that were being installed the geysers down into two component ministry fighting. Since the end of 2012, not
as part of a mass roll-out by government parts. The way that the definition was a single low-pressure solar water heater has
interpreted meant that 70% of both been installed in a low-cost house, around
components had to be manufactured 250 companies have gone bankrupt and up
locally. And that’s where the problem lies. to 6 000 people have lost their jobs.”
The evacuated tubes (EVTs), which make
up only 20% of the total solar water heater, Never mind the crippling loss to the
are manufactured mainly in China. South
Africa cannot cost effectively make these ▶individuals and companies involved, this
parts here.
inactivity is hobbling government’s ability

Edition 12 | BANKERSA 17

Solar water heating systems are not being installed in low-cost housing units as planned due to the dti’s interpretation of what constitutes 70% locally manufactured.

to meet its own goals. In June 2009, Dipuo While many organisations and industry water heating programme, and I think that
Peters, the then Minister of Energy, stated in groups have lobbied government to there’s a lack of commitment to manage
her budget speech that “the Department will resolve the issue, a resolution between the the thing properly or move it forward,”
ensure that one million solar water heaters Department of Trade and Industry, the says Zeenith Williams, an independent
are installed in households and commercial Department of Energy and Treasury has not consultant on energy issues, who has been
buildings over a period of five years”. been forthcoming. At the time of writing, attempting to mediate between government
another solar water heating tender was departments and industry. “Eskom is like
By the end of 2012, 330 000 low-pressure about to be announced (two have already any other business; it sells a commodity. If
solar water heaters had been installed in been awarded and cancelled), but with no everything goes over to solar, their business
low-cost housing. An additional 75 000 end in sight to the conflict arising from the will go down.”
high-pressure solar water heaters had been dti definition.
installed in middle and upper income homes, TROUBLE WITH ESKOM And as Green points out, a large part
so 600 000 were needed to reach Peters’ One of the major problems with the of the water heater installations in low-
target. Of these, 500 000 were intended for government’s solar water programme is that cost housing don’t replace existing on-
low-income homes, and were tabled for it is run by Eskom, the South African power grid geysers, but rather become those
completion by March next year and the utility. “There’s a huge dissonance between households’ first water heating appliances.
budget was made available. Eskom’s lifeblood being to sell electrons and So they also fall outside of Eskom’s
its mission of trying to get people to save secondary priority of getting installations off
But then the dti’s restrictive definition was electrons,” says Stephen Forder, the founder the grid.
passed on to Treasury and all new solar water of The Energy Blog.
installations were invalidated. The number of Even so, Eskom is amenable to finding
geysers installed into low-cost homes since “What needs to be resolved is that a solution. “In order to expedite the solar
then? “Not one,” says Green. “Currently there currently Eskom is the custodian of the solar water heater problem, the current minimum
are 24 000 systems sitting in stock in factories thresholds on local content need to be
that have been there for over a year.” revised,” says Andrew Etzinger, Senior

18 BANKERSA | Edition 12