CHAPTER 4 1) TERMINOLOGY Microcredit| The granting of credit, often without collateral, to low-income individuals or entrepreneurs. Microcredit also refers to microloan| Group lending| Group of individuals provide collateral for loans to members of that group through a group repayment pledge| Collateral| Asset pledge by a borrower to secure a loan| ROSCAs| Rotating savings and credit associations (Stokvel)Associations formed by a group of participants who agree to make regular contributions to a fund.
The fund is given in part or in total to each contributor| Micro savings| Deposit services that allow low-income individuals to accumulate small amounts of money for future use. Often without a minimum balance| Micro insurance| Provision of insurance to low-income households| NASASA| National Stokvel Association of South Africa| SACCOL| Savings and Credit Cooperative League| SAMAF| South African Microfinance Apex Fund| 2) Motives behind savings decisions Insurance against disability, illness, sudden income losses * Protection against uneven income streams due to seasonal variations * Wealth accumulation to finance a household’s long term goals such as acquiring productive assets like land or housing, or consumer durables refrigerators * Savings for future investments and retirements 3) MEMBER-BASED FINANCIAL SERVICES * Stokvel * Cooperative financial institutions * Cooperative banks * Friendly societies * Mutual banks 4) STOKVEL
A Stokvel is a group or association of individuals who make regular contributions to a pool of savings or common fund. Generally on a weekly, fortnightly or monthly. In many stokvels the pool is given total or in part to each contributor on a strictly rotational basis. 4. 1 FEATURES OF STOKVEL * The arrangement between the members of a stokvel is rarely formalized in a written agreement * Stokvel is directed by the common bond that exists between members * Strong social motives to participate The key economic reason for participation is to accumulate cash and obtain credit * Members of as stokvel who receive the pool of funds early in the stokvel cycle are in the position of borrowers * Members receiving the pool at a late stage of the cycle lenders 4. 2 TYPES OF STOKVEL * TRADISIONAL STOKVEL: Earliest form of stokvel and are general savings clubs that rotate pooled funds to members on a mutual agreed basis BURIAL SOCIETIES: Is established to assist members with funeral cost. Formed between people with a common bond such as same church. * INVESTMENT STOKVEL: save or bank the pool of savings with the objective of carrying out capital projects or investing in a business venture. Members are generally more affluent and make higher contributions 4. 3 LEGAL AND REGULATORY FRAMEWORK According to the common bond exemption notice could be formal or informal rotating scheme , with social or economic functions * mutual support to each other towards the attainment of specific objectives * establishes a continuous pool of capital by raising funds with the subscription of its members * grant credit to and on behalf of the members * provide for members to share in profit and nominated management * relies on self-imposed regulation to protect the interest of the members The conditions applicable to stokvel Purpose of self-regulation, a stokvel must be a member of or affiliated to the NASASA * Must not allow a member at any time to withdraw his/her contribution * Benefits of the members of the stokvel shall not be provided exclusively by ways of loans * Must keep accounting records that reflect the state of affairs * Must produce annual financial statements within 120 days of its financial year end * If the subscription from members is less than R3 million a report by an accountant and auditor is not required ) COOPERATIVE FINANCIAL INSTITUTION A association of persons who are united voluntarily to meet their common economic, social and cultural needs and aspiration through a jointly owned and democratically controlled enterprise. The values are self-help, self-responsibility, democracy, equality, equity and solidarity. Cooperative members believe in the ethical values of honesty, openness, social responsibility and caring for others Cooperative financial institutions are offering banking related services to their members.
They accept savings from their members and in turn provide them with credit facilities 5. 1 PRINCIPLES * voluntary and open membership and non-discriminatory membership * democratic member control * member economic participation * autonomy, independence, self-help organisation * education and training for cooperative members * elected representative * information provision to the pubic * cooperation among cooperatives to strengthen the cooperative movement by working together through local, national regional and international structures * concern for community
The also adopt additional principles because they are operating as financial intermediaries * mutual aid * margin management * risk management 5. 2 LEGAL AND REGULATORY FRAMEWORK According to the common bond exemption notice * Have a similar occupation or profession or common employer * Have a common membership in an association. Religious, social, cooperative, labour or educational group * Reside in the same defined community or district Conditions applicable to savings and credit cooperative Must be a member of SACCOL * Rules must not allow a member to withdraw his or her contribution at any time * Benefits must not be provided exclusively by way of loans that must be repaid * Must keep accounting records that reflect the state of affairs and business * Must produce annual financial statements within 120 days of the end of financial years * If the subscription from members is less than R3 million a report by an accountant and auditor is not required
The COOPERATIVE FINANCIAL INSTITUTION are exempted from the Bank Act if they follow the conditions * Activities of financial services must be performed solely in respect of its members * Members must be of a defined geographical area. * They may not refer to itself as a bank * They may not hold deposits from members of more than 20 million * Must comply to the Cooperative Act They must submit itself to the supervision and regulations of the SAMAF * They must register as a Credit provider with the National credit Act 6) COOPERATIVE BANKS Cooperative banks: provide its members with a range of banking and financial services. The members are at the same time the owners and the customers of the bank. 6. 1 CHARACTERISTICS OF COOPERATIVE BANK * are of similar occupation or profession * are employed by a common employer * are employed within the same business district have common membership in an association or organization, including a business professional, religious, social or educational group * reside within the same defined community or geographical area 6. 2 FEATURES OF COOPERATIVE BANKS * Cooperative banks are customer-owned entities * Cooperative banks are under democratic member control * Cooperative banks allocate net profit to members * Cooperative banks are deeply rooted in their communities 6. 3 LEGAL AND REGULATORY FRAMEWORK All Cooperative banks and cooperative financial institutions must be registered with the registrar of cooperative * Cooperative banks that have 200 members or more and that hold members deposits in excess of R20 million must be supervised by the Supervisor of Cooperative banks appointed by the SARB * Cooperative banks that have 200 members or more and that hold members deposits in excess of R1 million but less than R20 million must be supervised by the Supervisor of Cooperative banks appointed by the CBDA * Savings and credit cooperatives with 200 or less members and member deposits less than R1 million are supervised by SACCOL * Financial service cooperative with 200 or fewer members and member deposits of less than R1 million are supervised by SAMAF 7) FRIENDLY SOCIETIES Also known as mutual aid societies are mutual assistance; the members share a common bond and are the owners of the society 7. 1 SERVICES INCLUDED * Providing relief during minority, old age, widowhood and sickness * Granting annuities and endowments * Payments on the birth of a child or death of family members * Payments of funeral expenses * Insurance of tools used in members trade * Financial assistance on resignation or dismissal * Unemployment relief * Provision of funds for education or training 7. 2 LEGAL AND REGULATORY FRAMEWORK May offer relief in old age but may not provide retirement benefits * They are permitted to grant annuities, but the amount of the premium for which an annuity is provided may not exceed R5000 per member * They may offer long-term policies, including death, funeral , life, health and endowment policies, but the value of policy benefits may not exceed R5000 8) MUTUAL BANKS As with banks mutual banks accept deposits from the general public, provide payment services such as cheques and electronic transfers and make available credit such as overdrafts, home, term or asset-backed loans. There are only two mutual banks in SA V GBS Mutual bank in Grahamstown and VBS Mutual bank in Mthatha 8. MUTUAL BANKS DIFFER FROM BANKS A) Ownership * Mutual banks are not required to be a public company as a bank. * Banks are owned by shareholders and shares are traded on the JSE. * Shareholders in banks share in the profit through dividends. * Mutual banks are owned by their members. * Members of mutual banks receive returns on their investments B) Minimum capital requirement * Mutual banks require R10 million * Banks require R250 million C) Basel 11 * Mutual banks are still being regulated and supervised under the 1988 Basel capital Accord * Banks are regulated under the amended capital accord 26 June 2004 8. 2 LEGAL AND REGULATORY FRAMEWORK Meet certain capital adequacy requirements * Maintain a minimum reserve balance of approximately 2,5 % * Hold liquid assets of not less than 5% of its liabilities to the public * Carry on its business subject to certain restrictions. May not be exposed to any individual person in excess of 10% of qualifying capital and reserves without board approval and in excess of 25% without approval of the Registrar of bank * Give detail monthly and quarterly returns showing various risk exposures 9. OTHER MICRO FINANCE INSTITUTIONS Micro lenders make small amounts of credit available to low-income individuals. Loans are generally unsecured. Number of reasons why people do need loans.
But in SA the micro lenders industry has a reputation for poor governance unsound credit risk management, exploitive and predatory lending practice All non-bank credit providers must register with the National Credit Regulator and comply with the National Credit Act accept if * Credit provider have fewer than 100 credit agreements * Credit provider has an outstanding loan book less than R500 000 9. 1 FUTURE DEVELOPMENT * A micro-insurance regulatory framework that strives to establish well supervised micro-insurers * Legislation to encourage greater completion in the retail banking sector * Deposit insurance to protect bank depositors in the event of a bank failure 10. CORPORATE GOVERNANCE AND RISK MANAGEMENT
A TYPICAL RISK MANAGEMENT FRAMEWORK of the MFI WOULD ADRESS THE FOLLOWING * Risk philosophy: The MFI belief, how do you do business * Risk appetite: This describes the amount of risk the MFI is willing to accept * Risk culture: This is the shared attitude, values, beliefs and practices how the MFI manage risk * Risk policies and principles: Principles that guide the MFI to provide a basis for consistent decision making and resource allocation * Risk management structure: This states the report line, roles, responsibilities and authority of the board * Staff and other resources: Competent and adequate staff with technical knowledge and experience
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