1. 2 nd African SACCO Regulators Roundtable Pretoria, South Africa 24 -25 November 2008 D.de Jong: Samaf: Regulator Financial Services Co- operatives Designing a (developmental) Supervisory System for Co-operative Banks

2. Outline  Objectives of the Supervisory system  Basil core principles for effective banking supervision  The Role of the CFI supervisory system and developmental objectives  The design of the supervisory system Legislative and regulatory mapping Sector review mapped to the stages of development and regulatory requirements Designing the application process Design an examination, diagnostic and feedback process  Drafting Supervisory guidelines  Holding Information sessions with CFIs  Conclusion

3. Objectives of supervisory system  CFI are safe, sound and stable  SARB “its purpose is to achieve a sound efficient banking system in the interest of the depositors of banks and the economy as a whole  Supervision - enforcing regulation  Supervisors – also design regulations  Supervisory system informed by regulation

4. Co-operatives Financial Institution (CFI)  Includes Credit Union, Savings and Credit Co-operative, Co-operative Banks and Financial services Co- operatives.

5. Basel Core principles for effective banking supervision (2006)  Objectives, independence, powers, transparency and co-operation (P1)  Licensing and structure (P2-P5)  Prudential regulations and requirements (P6- P18)  Methods of ongoing banking supervision (P19- 21)  Accounting disclosure (P22)  Corrective and remedial powers of supervisors (P23)  Consolidated cross border banking sup.(24-25)

6. Objectives, independence, powers, transparency and co-operation (P1)  Whose responsible for what  Operational independence  Legal framework to operate under  Adequate resources  Powers to address compliance with laws  Legal protection for supervisors  Sharing of information

7. Licensing and structure (P2-P5)  P2: Permissible activities Use of the word bank  P3: Licensing criteria Set criteria for applications and rejection  P4: Transfer of significant ownership  P5: Major acquisitions

8. Prudential regulations and requirements (P6-P18)  P6: Capital adequacy  P7: Risk management process  P8: Credit risk  P9: Problem assets, provision and reserves  P10: Large exposure limits  P11: Exposures to related parties  P12: Country and transfer risks  P13: Market risks  P14: Liquidity risk  P15: Operational risk  P16: Interest rate risk in the book  P17: Internal control and audit  P18: Abuse of financial services

9. Methods of ongoing banking supervision (P19-21)  P19 Supervisory approach Know you banks  P20 Supervisory techniques Onsite and off site supervision  P21 Supervisory reporting Collecting, reviewing analyzing prudential reports and statistical returns

10.  P22 Accounting and disclosure Adequate records fairly reflect situation  P23 Corrective and remedial powers of supervisors Tools at supervisors disposal  P24 Consolidated supervision  P 25 Home host relationship

11. Preconditions for effective financial supervision  Sound macro economic framework  Well developed public infrastructure  Market discipline and  Appropriate safety net  Banks are subjected to market  Will see failure  CFIs will fail

12. Is the Basel framework relevant for developing movement supervisory framework  Yes  Developing CFIs: Not P4, 5, 12, 24 and 25  Most have been taking into account and addressed  But…..

13. Need a subset of considerations  Proportionality of regulation in relation to size and scope  Capacity to be regulated and to regulate CFIs  Structural characteristics of CFIs (ownership, governance and operations)  Strength of the movement to support CFIs  Technological uptake  Regulatory burden

14. Role of the CFI supervisor and developmental objectives  Newly supervised movement requires a set of supplementary objectives  Assist CFIs become  Competitive  Adequately capitalized  Viable and sustainable  Innovative  Mainstream/legitimate deposit takers  Championing savings culture  Model/ideal CFIs  Educated and trained in financial regulations concepts and ideas

15. Design supervisory to include  Providing expertise on all aspect of CFI operations  Reducing moral hazard  Helping to build capacity  Simplifying across supervisory agencies  Unified, scaleable supervisory regime  Building a CFI movement  Will be debated as to the social / developmental role of supervisor – I will argue needed until movement can support itself

16. Design of the supervisory system  samaf – simplified into the RRSS framework Rules Registration  Supervision Stabilisation  Followed the following process:

17. Legislative and regulatory mapping  Collated primary Act the affect CFIs  Co-operatives Act (2005)  National Credit Act (2005)  Co-operatives Banks Act (2007) More to come  Financial Intelligence Centre Act (FICA)  Financial Advisory and Intermediary Services Act ( FAIS )  National Payments System Act (PASA)

18. Legislative and regulatory mapping  Objective: Synchronize application and reporting requirements to reduce regulatory burden  Use same forms to apply to Register of coops as to the samaf  One additional form for additional information required by supervisor

19. Sector review mapped to stages of development and regulatory requirements  How many registered CFIs  Active and operating  Level of operations  Mapped 4 stages of development  Will reduce to 2 staged approach  Helps to have good relationship with Representative bodies

20. Designing the Application Process  Can now design appropriate depositing taking application  Dictate forms, policies, plans, reports require to register  Distinction between start ups and operating applications  Many operating not meet minimum requirements but required to register  Condone applicant and provide provisional registration

21. Design an examination, diagnostic and feedback process

22. Examinatio n cycle 9.Deadlaines and follow up dates 6.Commucatin g findings 7.Formalising infringements 1.Design Examination Process 2.Exam work papers 3.Doing examination 4.Doing diagnostics 5.Findings 10. Follow up 8.Entertain appeals

23. Examinations tools  Onsite inspectors: Follow up to detailed “institutional assessments”, to include ratio and prudential requirement assessment  Offsite: Returns to be analysed, rated

24. Diagnostic tools  Monitoring systems: custom made or off the shelf samaf: utilize PEARLS to track trends  Rating systems: Useful to prioritizing e.g.. A1: Sound, healthy and growing A5: Needs corrective action

25. Feedback mechanisms  Very NB with CFIs Inspection comments or feedbacks Annual board/supervisory meetings Issuing guidelines (to be discussed) Issuing directives Issuing of non compliance notices – periods to rectify

26. Corrective Actions  First follow process of non-compliance notices  Extreme consider options of: De-registration (strongest sanction SACCOL and samaf have) Removal from office Mergers Administration Liquidation  Should plan and document for such eventualities

27. Drafting guidelines  Alluded to the need for the Supervisor to be an enabler as well. Found checklist and guidelines to be useful Prudential guidelines Legislative guidelines Operating guidelines Accounting, audit and financial statement requirements Supervisory and reporting guidelines

28. Conclusion  Holding information sessions with CFIs  Written confirmation received guidelines  Supervisory system beyond safety and soundness  Developmental Supervisory framework