Basa 17th

Edition 17

BANKER SA EDITION 17

Tightening

our belts PICASSO HEADLINE

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DEALING WITH GOVERNMENT AND CONSUMER DEBT

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Contents Special Report 12

The state of SA's coffers Analysing the extent of government debt

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The ABCs of credit ratings Simplifying the language of credit ratings

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Tightening our belts Are we prepared for interest rate hikes?

Inside 05

Editor's note Let's be resilient

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MD's Message SA's economic outlook

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Local and international news Developments in the South African economy and the international banking sector

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Security Unauthorised debit order hassles

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Technology Engaging with Millennials

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SMEs Funding your start-up

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Sustainability South African banks discuss efforts to be more environmentally friendly

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Insights Islamic banking products on offer in SA in 2016

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Report back The latest from the Cards and Payments Conference

Closing Opinion 48

Breaking down the Budget Analysing the 2016 National Budget

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Budget 2016 How to plan for retirement with the new Budget, and the Budget's effects on health care

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Taxing times Key points in understanding the Budget's tax implications

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ADVERTORIAL

UnionPay International has African market in its sights UnionPay International is rapidly expanding its footprint in Africa

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o date, UnionPay cards are issued in more than 40 countries outside Mainland China. UnionPay cards are now accepted in more than 150 countries and regions, covering 34 million merchants and 2 million ATMs across the world.

UnionPay, with a massive 5.2-billion cards in issue, signed a deal with Barclays Africa in January 2016 that expands its presence in 10 African English-speaking countries – Botswana, Ghana, Kenya, Mauritius, South Africa, Seychelles, Tanzania, Uganda, Zambia and Zimbabwe.

The agreement will become effective from June this year.

This follows an agreement reached last year with French banking group Société Générale, which expanded its presence in eight Francophone-African countries: Madagascar; Benin; Côte d’Ivoire; Burkina Faso; Cameroon; Guinea; Senegal; and Chad.

Also joining the UnionPay family in early 2016 was the Democratic Republic of Congo’s (DRC) Procredit Bank, which activated all its ATMs to accept UnionPay cards. Procredit Bank in the capital, Brazzaville, was the first bank to issue debit cards in the DRC. MCB in Mauritius was the first issuer of UnionPay prepaid cards.

“These agreements will provide more convenient card-using experiences for our global cardholders for travel, business and study purposes,” says Li Zhixian, General Manager of UnionPay International (UPI) Africa.

The next step for UnionPay is to issue UnionPay cards to serve the needs of the African markets, which is a major step towards financial inclusiveness, where Africa is lagging behind other continents.

According to the Washington Post, UnionPay is now the largest paymentcard-network in the world, surpassing its international competitors in terms of market share. This is based on a report by the market research firm, Packaged Facts.

The UnionPay business model is tailored for developing markets. Zhixian says its success in Africa is largely due to its understanding of developing countries’ needs. It differs in that it is a membership association that provides more growth and exposure opportunities for members.

UPI also provides competitive products that serve the needs of African markets, by making financial services available and affordable to users. The attraction for banks and merchants – not to mention cardholders – is the extensive variety of UnionPay products and services , which encourages wider and more frequent card usage.

By partnering with innovative banks across the continent, UnionPay has raised cardholders’ expectations in terms of product and service levels.

UnionPay is also cognisant of its responsibilities to protect its customers’ financial information, especially against cyber attacks. The company has invested heavily in greater security protections, such as embedding microprocessor chips in credit cards, debit cards and mobile phones.

This is now a standard security feature in all cards issued.

UnionPay’s growth across Africa in the last two years has been spectacular, and it seems set to continue in the coming years.

The emphasis will be on signing up more issuing banks and merchants to service the growing volume of UnionPay cardholders visiting and working in Africa. The company has also demonstrated – through campaigns such as its December 2015 promotion of Cape Town as one of 40 global cities for tourism – that it is serious about bringing transaction volumes to its partner banks and merchants.

“We see a great future in Africa,” says Zhixian. “As business and tourism relations between Asia and Africa continue to grow, UnionPay will be at the forefront of that trend. We aim to make it easier for visitors to Africa to transact and do business here. And we have many exciting plans to stimulate trade between Asia and Africa in the future.”

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EDITOR’S NOTE

Times Media Building Central Park, Black River Park Fir Street, Observatory 7925 Cape Town 8001, South Africa Tel: +27 21 469 2400 Fax: +27 86 682 2926

Let's be resilient

THE BANKING ASSOCIATION SOUTH AFRICA EDITORIAL BOARD Cas Coovadia, Thenji Nhlapo

EDITORIAL

Editor Dumile Sibindana - dumile@banker-sa.co.za Content: Manager Raina Julies – rainaj@picasso.co.za Contributors Anton Kriel, Solly Moeng,Sungula Nkabinde, Sizwe Nxedlana, Saroj Parbhoo, Iwan Pienaar, Leslie Primo, Dino Voulakis, Melissa Wentzel Copy Editor: Lynn Berggren-Goodwin Head of Design Studio Jayne Macé-Ferguson Designers Anja Hagenbuch, Mfundo Ndzo Production Editor Shamiela Brenner Advertising Co-ordinator Merle Baatjes – merleb@picasso.co.za Editorial and Design Interns Diana Fletcher, Nichole Liedeman, Amy Stimson

SALES Project Manager Andrew Green – AndrewG@picasso.co.za Sales Consultants Alec Rompelman, Stephen Crawford Sales Intern Debbie Zokufa

OPERATIONS Senior Bookkeeper Deidre Musha Subscriptions and Distribution: Shihaam Adams – subscriptions@picasso.co.za Business Manager Lodewyk van der Walt – lodewykv@picasso.co.za

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General Manager: Magazines Jocelyne Bayer

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ur country stands at a crossroads right now as far as our economy is concerned. Debt is at an all-time high. There is low GDP growth exacerbated by the recent drought and its negative effect on food prices and householddebt levels. South Africans are simply unable to meet their debt obligations. It’s crisis time at home – and for government.

The Banking Association South Africa’s MD, Cas Coovadia, together with business and labour leaders, joined Finance Minister Pravin Gordhan on a roadshow to the US and UK to listen to the concerns of foreign investors. He reports back on the details of this important dialogue in his MD’s note on page 6. What was certainly clear from this trip is that our political, social and economic arms must work together to create an environment that supports sustained growth.

The economists agree with this sentiment, and in this issue they share practical points on how credit ratings work, and the impact that public funding and spending has on investor sentiment and local households. Retirement funding and taxes were hugely impacted by this year’s budget breakdown. You can read more about this on pages 50 and 54.

It’s certainly not just business as usual.

Changes are needed across the business spectrum. None more so than with how our banking fraternity engages with the new group of Millennials or Generation M. They are tech savvy, know what they want, and demand a new type of engagement.

They’re slowly shaping and challenging the way in which banks interact with them, and most of our banks are responding with innovative products and services.

This year is certainly going to be filled with innovative thinking and tightening of the belts. However, Minister Gordhan has reassured us that we can turn the tide through fiscal prudence and effective governance. In concluding his Budget Speech, Gordhan said: “Let’s be resilient.”

And I think we should all hold onto that advice as we gradually dig ourselves out of this quagmire.

Copyright: Picasso Headline and The Banking Association South Africa. No portion of this magazine may be reproduced in any form without written consent of the publishers. The publishers are not responsible for unsolicited material. Banker SA is published quarterly by Picasso Headline Reg: 59/01754/07. The opinions expressed are not necessarily those of Picasso Headline. All advertisements/ advertorials and promotions have been paid for and do not carry any endorsement by the publishers.

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An important time for our nation T

his issue of Banker SA has been published at a critical time in South Africa. The political economy of the country is on the front pages of every major publication, primarily for the wrong reasons.

We have just been through the national trauma of “9/12”, and the subsequent impact on the economy. The events of 9/12 – which saw Finance Minister Nhlanhla Nene being replaced by ANC MP David van Rooyen – essentially demonstrated serious flaws in executive leadership.

The eventual reappointment of Pravin Gordhan as our finance minister, after urgent interventions by business leaders and leaders of other social partners, sent a positive message to the market after 9/12.

Minister Gordhan subsequently presented a pragmatic budget under extremely difficult circumstances. The President also delivered a State of the Nation Address (SONA) that emphasised the need for growth in the economy.

One of the critical factors confronting our country currently is the real possibility of a rating downgrade to “junk” status. Business leaders from across the economy have been meeting with Minister Gordhan and the President to impress on government that we are, essentially, in a crisis situation.

The fi rst priority of these engagements was to enable business and government to send out a clear message to rating agencies that we are taking their concerns seriously. We achieved this through the

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Cas Coovadia

SONA, the National Budget Speech, and commitments by business to invest in industries under stress, growth industries and enterprise development.

These engagements have been robust and constructive, and business leaders have expressly taken a long-term view to business sustainability. The engagements are creating an environment for SA Inc. to put national interest at the top of the agenda, and to agree that inclusive growth has got to be the top priority.

The business grouping has also engaged critical labour leaders, with a view to ensuring the involvement of labour federations in this engagement.

A critical outcome of these engagements was the joint roadshow, under the leadership of Minister Gordhan, who was accompanied by myself, business and labour leaders, to London, Boston and New York. The delegation met with more than 250 investors, rating agencies, and fund managers over a period of five days.

These investors were positive about the fact that a delegation – comprising the National Treasury and business leaders (in London and Boston) and joined by labour leaders in New York – was meeting with them. This reflected a positive message from South Africa. However, the messages we received from investors and fund managers were frank, honest and tough. They raised concerns surrounding a number of matters: 1. Concern around the political climate, as manifested by uncertainty, the 9/12 debacle, the SARS issue, state capture and other pertinent matters.

2. The state of our state-owned enterprises (SOEs), with particular reference to Eskom.

3. Confidence in Minister Gordhan and his team, but uncertainty about total support for them from the President and government.

The delegation briefed investors on commitments by business leaders to invest in critical sectors of the economy, as well as plans to address the concerns surrounding SOEs

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MESSAGE FROM THE MD

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4. Concerns about our apparent inability to concretely address structural constraints to growth.

5. Concerns about legislation impeding investment.

We responded by saying that social partners have come together to address these concerns, and that the joint delegation is an indication of this. The delegation briefed investors on commitments by business leaders to invest in critical sectors of the economy, as well as plans to address the concerns surrounding SOEs. We also informed them about the structure established by the President to look at legislation impeding investment. However, while the investors listened to what we had to say, they were clear that we need to demonstrate, through concrete action in the next three to four months, that we’re fully committed to what we are proposing.

The investors agreed that there’s still interest and commitment to invest in South Africa, provided we concretely address the concerns raised.

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It is also critical that we don't impact negatively on the confidence that markets have shown in Minister Gordhan We came back to South Africa after the roadshow committed to working together to address the concerns raised by those we met with. This commitment is a serious one, but achievement of concrete deliverables will need hard decisions, compromises, trade-offs and, above all, visionary leadership in all sectors.

It is therefore worrying that the country is, instead, seized with the nonsense around the Hawks’ issues with Minister Gordhan.

In this regard, we must emphasise that the Minister is obliged to respond to the questions raised by the Hawks, as he is not above the law. He acknowledges this.

However, we must also appreciate that we need to conduct this interaction in

a manner that does not perpetuate the negative views that investors have about our country. This is important, because we need to address these views to attract investment and get growth going. It is also critical that we don’t impact negatively on the confidence that markets have shown in Minister Gordhan.

South Africa is, yet again, at a T-junction.

We must create an environment for sustained inclusive growth at levels that are sufficient to address inequality, unemployment and poverty. We can only start on this road if we attract investment, both from global and local players. We will only attract investment if we create the environment for this and send out a single message saying, “We are open for business!” We must also address the political uncertainty impeding investment.

In addition to all of this, we must convince rating agencies not to downgrade us.

We need strong leadership that puts national interest at the top of the agenda and takes the hard decisions that are necessary for growth.

This edition of Banker SA looks at issues of debt. The country as a whole is in debt, because we are not growing our economy.

The issues raised above are thus critical to this edition’s theme.

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LOCAL BANKING NEWS

Barclays leaves Absa

BRICS New Development Bank to open in Gauteng Finance Minister Pravin Gordhan announced in this year’s National Budget Speech that the BRICS New Development Bank is due to open its Africa Regional Centre in Johannesburg soon. The BRICS Bank is looking at local funding solutions, such as tapping fi nancial and capital markets in BRICS nations. South Africa’s fi rst instalment of R2-billion (about 132-million US dollars) was paid in December last year, and the Budget makes provision for SA’s commitments over the medium term, Gordhan added. “Th is initiative gives impetus to our role as a fi nancial centre for Africa, and will facilitate access to global fi nance by African investors and institutions,” he said.

Improvement in unemployment rate in SA Unemployment in South Africa fell to 24.5% in the fourth quarter of 2016, compared to 25.5% in the third quarter. Statistics South Africa says this amounts to 5.2 million unemployed people, as opposed to 5.4 million previously. In the National Budget Speech, Finance Minister Pravin Gordhan said the government was undertaking a number of measures to promote job creation.

He also said the Small Business Development Department would receive R475-million to assist small and medium enterprises.

Nedbank looks for growth on African continent Nedbank said it would seek growth on the rest of the African continent, after the bank’s profit increased from R9.8-billion, to R10.83-billion, compared to the previous reporting period, and its net income climbed to R10.72-billion from R9.8-billion. The bank’s customer base has increased by a massive 76% in the past five years, reaching a total of 7.4-million in December 2015.

This, explains Chief Financial Officer Raisibe Morathi, is due to a strong balance sheet and wellmanaged expenses.

Huge potential for private equity industry One of the directors at ENS Africa, Lydia Shadrach-Razzino, says there's lively interest in private equity across Sub-Saharan Africa, with many investors viewing various African markets as an attractive source of returns. “We continue to see strong focus on Africa from investors and, during 2015, there was a surge in fundraising by private equity funds, with a mandate to invest in Sub-Saharan Africa,” she says. CEO of the Southern African Venture Capital and Private Equity Association, Erika van der Merwe, says that, given the increasing regulatory hurdles and cost of raising funding in Europe and the US, it is critical for new local investors be brought into private equity and venture capital in the Southern African private equity industry.

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IMAGES: GIL C/SHUTTERSTOCK.COM, CHRISDORNEY/SHUTTERSTOCK.COM, CIENPIES DESIGN/SHUTTERSTOCK.COM, FLORENCE-JOSEPH MCGINN/SHUTTERSTOCK.COM

Barclays Africa recently announced that it would be leaving Absa. The British bank's divestment out of SA would be its second in 30 years. Barclays Africa also moved to reassure customers that it was an independent entity and well capitalised, “with a track record of generating strong returns”. In South Africa, Barclays Africa operates as Absa, but in the rest of Africa, operations are largely branded as Barclays. With many of the African operations branded Barclays, questions remain about the naming of its operations should Barclays sell out of Africa entirely.

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INTERNATIONAL BANKING NEWS

Nigerian commercial banks may be forced to recapitalise

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The sharp decline in the value of the naira and sustained regulatory pressure may be forcing some Nigerian commercial banks to recapitalise. Recently, Sterling Bank's CFO Abubakar Suleiman told Reuters that the bank is aiming to buy one or two mid-sized lenders. The bank expects a further 20% devaluation in the naira, which it says could erode capital ratios for several of Sterling's rivals exposed to foreign currency assets, potentially triggering mergers.

Top 500 banking brands 2016 While the growing strength of Chinese brands has been a noteworthy trend for many years, 2016 marks a qualitative breakthrough, with a number of the country’s banks consolidating their positions at the top of the rankings.

The US remained in overall first place, with an aggregate banking brand value of almost $225-billion. However, China’s brand value grew by 42% to $206.9-billion, putting it within reach of overtaking the US. In comparison, the US and UK’s total banking brands increased in value by 12% and 5.1%, respectively. Rounding out the top five countries, Canada maintained fourth place, despite its brand value dropping by 11.6%; France gained 2.7% in brand value and managed to nudge Japan out of the top five.

HSBC remains in the UK The Hong Kong and Shanghai Banking Corporation (HSBC), after a yearlong review, has chosen to keep its headquarters in the UK. According to HSBC CEO Stuart Gulliver, it was a choice between Hong Kong and Britain. Britain won in the end, due to its status as one of the world's leading and largest financial centres, as well as being “home to a large pool of highly skilled, international talent”. Around 48 000 of HSBC's 257 000 global staff are employed in Britain, making it the UK's biggest bank.

US banks to cut credit lines for energy firms Cash-strapped energy firms are coming under increasing pressure from US bank lenders and, on average, could see a 15-20% cut in their credit lines, says the CEO of Commercial Banking at JP Morgan Chase & Co., Doug Petno. Until now, banks could be more lenient with their energy clients, despite a prolonged slump in the price of oil, but Petno says that is now changing.

Citi withdraws from LatinAmerican markets Leaving a 71-strong franchise of retail banks, Citi has announced a decision to exit retail banking in Brazil, Colombia and Argentina.

This follows the deepening recession in Brazil, where international banks have struggled to retain profitable banking operations, such as HSBC recently selling its retail bank in Brazil to Bradesco.

According to BankFacil founder and Chief Executive Sergio Furio, Citi damaged its brand for wealthmanagement clients by trying to target the mass-affluent sector in Brazil, and in failing, was unable to build a profitable business. There is no clear favourite in the running for the purchase of Citi’s franchise.

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The state of SA's coffers Growing government debt is an economic phenomenon that shouldn't be taken lightly, writes Dumile Sibindana

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SPECIAL REPORT

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n recent times, South Africans have been reminded that global market forces wield incredible influence over our microcosmic economy, when compared with larger global players. We live in an interconnected world, interwoven with a global financial ecosystem that, in the absence of sensible policies, inflicts harsh lessons on governments.

Look at the happenings of December 2015 – better known as the Nenegate saga – when President Jacob Zuma replaced two finance ministers in the space of a couple of days. This resulted in equities listed on the JSE plummeting, and listed companies losing a cumulative value of R500-billion.

Financial markets run on sentiment, and if the market ‘smells trouble’, it more often than not results in runs and withdrawals.

It’s safe to assume that, in some instances, the effects of our policymakers’ actions are not readily identifiable – however, one of the few measures that the state has control over is government spending patterns and habits.

The National Treasury has been spending more money than it receives through tax collection, and borrowing to fund the shortfall, resulting in a growing budget deficit. If the economy was growing at an acceptable level (3% real GDP level or higher), the spotlight from international investors, governments and global ratings agencies wouldn’t be as blinding as it is currently. The truth can no longer be avoided – South Africa is in trouble. In order to get out of this dilemma, difficult decisions need to be made. Moreover, government’s commitment to stick to the reforms announced in the National Budget Speech will be tested, and will invariably determine whether we can turn the corner from the calamitous path we’re presently headed on.

Lessons from the European Sovereign debt crisis

In 2010, the European Union experienced one of the most perilous government-debt crises in recent times – the European Sovereign debt crisis. This crisis epitomised the paradox underlying the challenge of 21st century global governance: there is greater reliance on governments, global and regional institutions at a time when their authority and the extent of their direct influence in the market economy is still questionable. It is important to note that the European debt crisis did not occur in isolation; it was as much a result of the 2008/9 global crisis as it was reckless government expenditure.

Since the global recession of 2008/9, which had a ripple effect on the South African economy, our country has employed a fairly loose fiscal policy regime, which relies heavily on budget deficits to fund national spending The cost of bail outs issued to financial institutions by the European Union and the fiscal measures, in the form of increases in government expenditure by individual countries in the Eurozone, resulted in budget deficits to GDP ratios surpassing the generally accepted maximum of 3%, and the debt to GDP ratio of no more than 60.

Now, the question is whether South Africa may be on the same downward spiral of fiscal disaster. ›

A debt trap is a situation in which debt becomes difficult to pay and eventually impossible – for example, when a country cannot service its interest debt repayments and interest is charged on the outstanding interest. This compounded interest effect means that it becomes virtually impossible to pay the principal debt, because the country is stuck in a perpetual cycle of debt.

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Development Programme (RDP) Economic Policy Framework. This focus became increasingly conspicuous between 1996 and 2009, under the leadership of then-Finance Minister Trevor Manuel, when the national budget deficit was significantly reduced from a 50% debt to GDP ratio to around 27% prior to the global financial crisis. In the years since 2009, the debt to GDP ratio has started rising again, and is currently sitting at around 45%. Although our debt to GDP is relatively lower (according to global standards), the international community, particularly the credit ratings agencies, will continue to look at this figure with keen interest. The issue is less about the level of debt, but rather about the ability of the National Treasury to service its debt and, possibly more significant, whether the economy can grow again at levels last seen under the presidency of Thabo Mbeki.

Indeed we should learn from the mistakes of the Europeans during the Eurozone crisis, be cognisant of the ramifications, and at all costs, avoid being caught up in the ‘debt trap’ – a situation we really cannot afford. South Africa can avoid this debt trap if government prepares for a world in which it lives with smaller budget deficits – which, with the reassurance of Minister Gordhan, is possible.

The situation right now Fiscal policy history in SA

Since the global recession of 2008/9, which had a ripple effect on the South African economy, our country has employed a fairly loose fiscal policy regime, which relies heavily on budget deficits to fund national spending. This has been funded through the issue of government bonds and government borrowing from foreign institutions.

To understand the fiscal spending patterns of South Africa, it is important to take a look at the country’s history.

When South Africa became a democratic country in 1994, the new ANC government inherited an administration that had an incredibly large government deficit, including a faltering economy that needed

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to be steered on a sustainable growth path.

Aside from the political landscape at the time, and the international pressures placed upon the National Party, the terrible state of our economy contributed to the new democratic dispensation.

At the inception of democracy, it became evident that fiscal prudence would be the cornerstone of the National Treasury’s mandate, amid the Reconstruction and

Minister Gordhan announced during the 2016 National Budget Speech that the National Treasury was aiming to reduce the government budget deficit to 3.2% (calculated as 3.2% to GDP). While this is an ambitious target, all evidence points to the fact that this may not be as easily attainable as the finance minister suggested.

Nonetheless, say we achieve this figure in the current financial year, it is still above the general public finance norm of 3%.

South Africa's debt to GDP ratio of around 45% is measly when compared with some other nations, such as the USA and Japan, who are sitting at around 103% and an astonishing 240% respectively..

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SPECIAL REPORT

The National Treasury assertion that it will lower the budget deficit to 2.4% in 2017/18 should be less a consequence of the self-imposed fiscal wastage over the years, which have resulted in ‘forced’ fiscal cuts in spending. Rather, this should be a fiscal paradigm shift that will underpin all government expenditure going forward.

IMAGE: SINISA BOTAS/SHUTTERSTOCK.COM, SUPPLIED

PwC: budget and tax projections

Having attended a PricewaterhouseCoopers (PwC) Budget Predictions media briefing leading up to the National Budget Speech, there was a sense that Minister Gordhan’s speech was going to be one of the most eagerly anticipated budget speeches in recent times. Individuals and businesses alike were anxiously predicting an array of measures that the National Treasury was likely to take, in part to raise the estimated R20-billion shortfall in tax revenues for 2016. There’s been a significant slowdown in revenue collections since the Medium Term Budget Policy Statement (MTBPS) last year, particularly in the busy month of December, as far as filing company tax returns is concerned.

PwC made a number of projections pertaining to the 2016 National Budget Speech, many of which were informed by the current bleak economic outlook: • A projected shortfall against the MTBPS forecast of between R12- and R22-billion; • A shortfall of as much as R20-billion in tax revenue estimates for 2016/17. This has largely been affected by lower real GDP growth for the 2015/16 period, which then translates into lower tax revenues than previously estimated; • No change in the corporate income tax rate of 28%; • No introduction of the carbon tax in 2016; • Repeal of the withholding tax on service fees; • A continuation of basic erosion of profitsharing initiatives; • Increasing the personal income tax rate by 1% to raise an additional R10-billion; • No increase in VAT at this stage;

Minister Gordhan announced a R5.5-billion tax relief within the low- to medium-income brackets – a move that was unexpected by most pundits, including PwC • Possible increase in securities transfers tax from 0.25% up to 0.5%, in order to raise up to R5-billion in additional taxes; and • Above-inflation increases in general fuel levies to raise as much as R6-billion.

Over the years, South African tax revenue has increased from approximately R100-billion in 1994 to over R1-trillion in 2016.

PwC Partner Kyle Mandy, who hosted the media briefing, held the view that the National Treasury had little option but to increase taxes, not only to raise the projected shortfall in tax revenue, but also to ensure that the gap between actual government spending and tax collections is narrowed this year. “Pravin Gordhan is caught between a rock and a hard place,” Mandy asserted. This situation is made worse by the fact that Minister Gordhan will be cutting government expenditure while increasing taxes, a move that is likely to dampen public sentiment.

National Budget Speech: tax changes in 2016

Some of the predictions that PwC and a number of other organisations made were not implemented, such as a 1% increase in the personal income tax rate across the board. Surprisingly, a sugar tax was introduced, as well as a reduction in personal income tax for the majority. Minister Gordhan announced a R5.5-billion tax relief within the low- to medium-income brackets – a move that was unexpected by most pundits, including PwC. And although the tax savings for each individual would be inconsequential

at best, the move was welcomed by many.

Individuals in the higher income brackets (individuals earning more than R701 301 per annum) would, however, be subjected to a 1% tax rate increase. The corporate tax rate was left unchanged at 28%.

A number of international developmental economists hold the view that South Africa has one of the highest tax ratios in the world – a view confirmed by PwC: South Africa has a 25.5% tax to GDP ratio, which is the 10th highest in the world. Our policymakers within the National Treasury should look at reducing this excessively high tax burden, and explore reducing the corporate tax rate in the medium to long term. By creating an environment that imposes less cost (in the form of taxes) on the allocation of capital, we can encourage substantial foreign direct investment. However, changing the image of South Africa as a costly place to do business will take time.

Despite an eloquently presented speech

by Minister Gordhan, the road ahead is long, and will arguably be our sternest test since democracy. Without question, our economic outlook appears to be bleak in the short term, and keeping inflation within the 3-6% target band will be challenging for the South African Reserve Bank. However, all is not lost. At the end of the day, Minister Gordhan sent out the right message during his delivery of the National Budget Speech.

Now the question arises whether the National Treasury has the political will and muscle to effect the proposed changes?

Only time will tell.

According to the Open Budget Index, South Africa ranks third in the world with the most transparent national budget, behind New Zealand and Sweden.

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The ABCs of credit ratings Dino Voulakis simplifies and makes sense of the language of global credit agencies, while explaining what all the terms and letters mean

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credit rating is the assessment of the creditworthiness of a country, organisation or person and is usually based on prior dealings with credit lending institutions.

In business terms, this measures whether an entity is suitable to receive credit and what the risks of defaulting are. Banks measure their loan clients in this way, and investors measure issuers of debt instruments in this way. In essence, debt

instruments act as an agreement between the issuer and the purchaser.

The state, government entities and private companies have increasingly become significant issuers of debt instruments as a primary source of funding, and the efficient deployment of debt instruments should enable them to satisfy their operations and obligations. When these funding requirements cannot be satisfied domestically, as is the case in economies

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where savings rates are low and deficits high, they result in compounded increases in debt-servicing costs, as well as resulting in higher rates of return. All of this has a negative effect on economic growth.

As capital has become more globally mobile, countries with budget deficits often seek to cultivate a global source of funding to lower the cost of borrowing. By so doing, the rates of return (or hurdle rates) required on financed projects or operations are lowered, with the end result of boosting economic growth to a higher rate and thus meeting developmental objectives.

Global credit ratings agencies, which enjoy evolving significance on the global financial stage, have emerged in response to greater global protective regulation of originated capital or home loans. Credit ratings are put together and distributed by information brokers known as credit rating agencies. There are three major international agencies of this sort: Standard & Poor’s; Moody’s; and Fitch.

This is where the distinction between junk and investment grade comes into focus. Not only does this definition determine the cost of borrowing, but it also affects the desirability of firms and other institutions wishing to participate in the field of investments.

On the whole, credit ratings agencies have relationships with the sovereign states and the private entities they rate, as these can be directly solicited to cultivate the most optimal source of funding. This relationship requires a regular exchange of information and access, to fully appreciate the dynamics at hand without compromising the objective integrity of the rating. In South Africa, for instance, ratings agencies use data from the National Treasury, the South African Reserve Bank, Statistics South Africa, any other pertinent information, and diagnostic source to ascertain growth prospects, policy rigour, institutional health and structural balance for sovereign debt. These are an important overlay and compliment financial statements, and other pertinent analyses in assessing corporate debt.

Credit ratings assigned by the three major agencies are opinions based on established criteria and methodologies, which are constantly evaluated and updated.

Ratings agencies are also aware of the effect of exchange rates and foreign exchange reserves, to the extent that they provide both foreign currency ratings and domestic currency ratings thus providing a level playing field for both global and local issuers.

To assist investors to quickly gauge the risk presented by a debt instrument, credit ratings are issued in letters, such as AAA (the best credit rating that can be given to a borrower and shows the least possible risk of missing a payment) or the worst being CCC (the lender has no real idea of the likelihood of getting paid back). The three major agencies differ in their ratings and as such it is vital to know which letter rating comes from which rating agency.

In 1995, South Africa acquired its BBB- investment grade rating from Moody’s, which was the first major international credit ratings agency to engage with the country shortly after democracy in 1994. Standard & Poor’s and Fitch held South Africa below BB+ (junk) before following Moody’s lead in 2000 and 2001 respectively. Currently, Standard and Poor’s and Fitch maintain a sovereign rating at BBB-, one scale above sub-investment grade, while Moody’s Baa2 rating is two scales above sub-investment grade.

Should South Africa manage to avert a downgrading to sub-investment grade by any one or all the credit ratings agencies within the next 12 months (or longer), this would signify the stabilisation if not the reestablishment of the path to the structurally lower costs of capital we need, to lower the minimum rate of return. In so doing, in time we can expand the economy, creating more jobs and employment.

While there might always be appetite for junk bonds from global speculators, should the country not manage to avert a downgrading to sub-investment grade, such interest and positioning would be highly volatile and could seriously hurt economic growth and development prospects. This would mean that SA fell far short of its potential economic growth.

Credit ratings are based on a huge number of variables and involve some market-based, historically estimated, firm-level information.

Long-term capital commitment in the form of fixed direct investment would be significantly affected, moving to other emerging markets competing with SA for funding and investment. In turn this could mean some existing funding and investment sources from multinational corporations could phase out their economic operations within the country – or (although this is highly unlikely) these firms could shut down their operations completely and move to other African regions.

The credit rating of a rating agency is reflected by the qualitative and quantitative information on the debtor from various sources, often including non-public information obtained by the rating agency's analysts.

Assessments range from business attributes to underlying investments, and are all designed to offer a picture of the likelihood of the borrower to be repaid.

Users of such ratings should refer to the definition of each individual rating for guidance on the dimensions of risk covered by such a rating.

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Tightening our belts 18

Consumers need to prepare for the impact of interest rate hikes on the economy, as they will feel them most, writes Sungula Nkabinde

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ith the South African Reserve Bank (SARB) having increased the repo rate to 7% at the last monetary policy committee in March, it is clear that the current interest rate cycle is accelerating.

“We expect a further 150 basis points rate increase during this year,” says Owen Sorour, Senior Vice President of Analytic and Decisioning Solutions at credit bureau TransUnion. This hike will have a negative impact on the country’s growth prospects, not least because of the burden it will put on those consumers with little discretionary income. It will be worse for those who are paying home and vehicle loans.

Sorour says higher income earners are able to save or cut back on certain luxuries, and can dip into their savings or spend less on entertainment, for example, in order to make up for debt repayment increases.

People with lower earnings and/or less discretionary income, however, do not have that buffer and are more vulnerable.

Credit cards and numerous personal loans are calculated as a percentage of the outstanding balance, so the interest rate hike will not impact the required instalment for these products that have no contractual fixed term. All that will happen is the debt repayment period will be extended.

A higher repo rate automatically increases the prime lending rate, which is currently at 10.25%, and means consumers looking to get into new credit agreements will be put through a stricter affordability test. This is because the monthly repayments on loans will now be higher, and individuals will be expected to increase their repayments in the short term, which affects the interest rate offered by banks to individuals (based on their credit ratings). In other words, consumers are less likely to repay their debt, as far as the banks are concerned.

Gcina Ntsonga, Managing Director at debt advisory firm Financial Reach South Africa, says over-indebted consumers – defined as those whose disposable income cannot cover both their living expenses

Despite the escalating cost of debt, South Africans keep taking on more – at least according to the SARB's data on the growth in credit extended to the private sector and debt repayments – will become increasingly desperate.

“With the possibility of being turned away from formal credit, consumers usually turn to low-quality credit providers and loan sharks,” he says, adding it is best to try to avoid unsecured debt at this time, as the hike will demand bigger monthly instalments to service the new debt.

“To protect yourself from the effects of rate hikes, a consumer could possibly ask the bank to change their free-floating interest rate on their mortgages for a fixed rate, and possibly export their bond, through refinancing, to another bank to get a new fixed interest rate in place,” he advises.

SA's indebtedness

Despite the escalating cost of debt, South Africans keep taking on more – at least according to SARB’s data on the growth in credit extended to the private sector, which includes households and corporates. Year-on-year growth in credit extension increased steadily from 10% in September last year to 11.1% in December. Meanwhile, the South African Human Rights Commission (SAHRC) last year said that more than half of the country’s 19 million credit-active consumers were over-indebted. Because interest rates have risen by 100 basis points since then, there are bound to be more

In terms of macroeconomics, consumer debt refers to debt that is used to fund consumption rather than investment.

This includes debt that is incurred on the purchase of goods that are consumable and/or do not appreciate.

people sucked into over-indebtedness.

When it comes to consumer accounts, the situation is not as bleak, but is worrisome nonetheless.

“There are 56.4 million consumer accounts in South Africa, of which 950 000 are three months or more in arrears, and 3.4 million are at least one month in arrears,” says Sorour. He advises consumers in financial difficulty to approach credit providers to negotiate reduced instalments, whenever they feel they may be unable to meet their monthly commitments.

“As it is not in their best interests, credit providers will only commence legal action and sell assets as a last resort,” Sorour explains. “Should they be unable to negotiate reduced payments, they can approach a debt counsellor to assist. It is, however, imperative not to wait until you are too far in arrears, as this makes it more difficult to find a solution. Going into debt counselling, or being declared insolvent, has significant negative consequences to the consumer, and should only be considered when there is no other option.”

In terms of household debt to GDP, the picture is slightly better. NFB Financial Services Group’s Asset Management Analyst Matthew Chapman says the ratio is improving, as it was down to 36.9% as of June 2015, from around 44% in 2008.

He remarked that this is an encouraging statistic, particularly when compared to other nations such as the USA, Japan and those in the Eurozone, which have significantly higher debt-to-GDP ratios of 79.1%, 65.6% and 60.6% respectively.

“However, when compared to other emerging markets with similar interest rates, we do not rank as highly as India (9.5%), Mexico (15.2%) and Turkey (21%),” says Chapman. ›

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Threat of bankruptcy

“The increased burden of higher debt repayments, on the back of interest rate hikes, may well lead to a number of people being unable to afford their repayments, and some eventually filing for bankruptcy,” says Chapman.

“What we need to look at is one’s net asset value (or NAV), which is your assets, less outstanding debt. If you have a negative NAV, this may be compounded by increases in rates. In other words, those at a level where their income does not cover their expenses (including debt repayments) will be under the most pressure.”

Unfortunately, given all of the above factors, Chapman says, invariably those who are most vulnerable to interest rate hikes are the less affluent, as they tend to have less favourable credit ratings and have more debt in proportion to their wealth or income. Therefore, while largely affecting the financial markets, currency, economy and inflation, the unintended consequence of interest rate hikes is the burden on those already under the most pressure, and this inevitably increases the likelihood that financial institutions will repossess their home or car. Though it may be challenging, saving up for something you want is the best way to go about avoiding debt.

Inflation targeting in question

Loane Sharp, Director of Economics at Prophet Analytics, says it is exactly for this reason that the SARB is less strict about adhering to its mandate of inflation targeting. In fact, he has some strong views on what he believes is a flawed monetary policy of keeping inflation strictly within the targeted 3-6% range, particularly in situations such as the

current environment, where inflation is not being driven by demand side factors.

External factors – such as the rand’s depreciation, rising electricity and labour costs, as well as the El Nino drought, which has led to higher food prices – are least affected by reducing domestic demand. Furthermore, such a move would only worsen the economy’s already sluggish growth. Sharp believes raising the rate under such circumstances undermines the growth that is so central to South Africa’s long-term economic and political stability.

`Over the past 20 years, more than 85% of the pattern of inflation has been connected to periodic crises in the exchange rate. The idea that inflation can be reduced by people tightening their belts will lead to political disaster' “There is no economic basis for raising interest rates in a sharply slowing economy.

The Reserve Bank is an undemocratic institution that is unaccountable to anyone other than itself. This kind of monetary policy can only be described as political and economic sabotage,” says Sharp.

“Over the past 20 years, more than 85% of the pattern of inflation has been connected to periodic crises in the exchange rate. The idea that inflation can be reduced by people tightening their belts will lead to political disaster. There are no more holes left in the belt.”

According to the SARB website, the demand for funds (or price of interest rates) depends on the opportunities available for using borrowed funds efficiently and profitably. The more profitable the usage of funds, the greater the demand for funds.

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Government also indebted

Meanwhile, as the trend with households has decreased, Chapman says the government debt to GDP ratio rose from 27.8% in 2008 to 39% in 2014. “We see a similar situation in terms of a relative basis, with the developed world having higher ratios of debt – Japan (233%); the USA (103%); and the Euro area (86.8%) – while our emerging market peers, India (66.1%), Turkey (33%) and Mexico (30.7%), are less leveraged, although in this case at a level higher than South Africa (39%),” says Chapman.

He adds, however, that in these developed markets mentioned above, interest rates are near zero and decreasing, with the exception of the United States, who just recently began a very gradual process of hiking rates.

Recession

The ultimate consequence of the current interest rate cycle is that it is extremely likely to plunge the economy into a recession – that is, negative GDP growth for two consecutive quarters – with some economists putting the likelihood of a recession at 75%. The South African economy is at a low point, following four years of decelerating economic growth, from 3.2% year-on-year GDP growth in 2011 to 1.5% in 2014, and with 2016 projected to show further deterioration, according to Annabel Bishop, Chief Economist at Investec.

And the International Monetary Fund (IMF) has already revised its forecast for South Africa’s growth in 2016 down from 1.3% to 0.7%. Bishop says the severity of the slowdown is reflected in the collapse of real income per capita, as individuals become poorer. This is undermining financial stability.

“The consumer is depressed, expenditure is in the majority on necessities and most households cannot cut back on spending any more, and need improved employment prospects via a lift in business confidence,” concludes Bishop.

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The era of unauthorised debit orders may be over How protected is your bank account? asks Solly Moeng

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or far too long in South Africa, bank account holders have been at the mercy of unscrupulous companies that seem to enjoy easy access to their accounts (and information), treating them as feeding troughs, ostensibly with the help of unsuspecting banks. On the other hand, some customers suspect that their banks are in cohoots with these unscrupulous companies, granting them easy access to their accounts. Going by the many frightful experiences related in the

media in recent years, one could be forgiven for thinking that these companies did not have to submit a lot of information to the banks in order to be allowed access to the accounts of unsuspecting clients.

However, the reality is more complex.

The abuse of the system by users (beneficiaries) has been either in the form of debit orders or non-authenticated early debit order (NAEDO) payment instructions, with either no legitimate mandate from the account holders or deficient mandates.

Banks often depend on account holders to personally come forward and deny any knowledge of the said debit orders, before they can be stopped or reversed.

The situation is further exacerbated by account holders who do not routinely scrutinise their bank statements, thereby ensuring that all deductions – especially the small, seemingly insignificant, amounts – taken off their accounts are legitimate.

According to the Payment Association of South Africa (PASA), the system has ›

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SECURITY

also been open to abuse by customers, who manage to get their banks to reverse debit orders, even in cases where these were legitimate. Many did this as a form of ‘cashflow management’, when they did not have enough money in their accounts to service their commitments to creditors.

The current system makes it easy for indebted account holders to dispute a debit order or NAEDO, which results in them being refunded immediately by their bank.

It is known as the ‘homing’ or ‘paying bank’, because in the event of a dispute, the account holder is given the benefit of the doubt, and the funds are reimbursed.

What is at stake?

Commenting through CEO Walter Volker, PASA says that “the EFT debits or ‘debit order’ system was introduced during the 1970s, as a very effective means of collecting recurring payment obligations from consumers. It has proven to be highly reliable over the decades, acting as a lowcost and efficient system that has served corporates and individuals very well.”

PASA further explains that in 2006, an enhancement to the standard EFT debits/debit order system was introduced – something unique to South Africa.

This is the early debit order (EDO) system, which is characterised by priority early-morning processing of payment instructions (directly after the EFT credits or salary run).

EDOs come in two ‘flavours’: NAEDOs, authorised by means of a paper (signature) or telephonic (voice) mandate; and authenticated early debit orders (AEDO), which are authorised electronically by means of card and PIN. To date, the status of adoption of these two enhancements is 4% of total retail volumes (about 14 million transactions per month), but only about 1% of the value (roughly R9-billion per month) for NAEDO. AEDO usage is at approximately 1 million transactions per month.

The growth in the general abuse of the debit order system, according to PASA,

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could be attributed to the early years, when the EFT debit system was made available for the exclusive use by low-risk, large organisations – e.g. so-called ‘blue chip’ organisations, such as insurance companies, banks, and the like. Its effectiveness has led to it being attractive to other industries and organisations, which subsequently demanded access.

Today, it has become relatively easy to submit debit order payment instructions into the system via a choice of eight user-sponsoring banks.

It is difficult to determine from the types of disputes reported what proportion is actual fraud (i.e. abuse by users), as opposed to unethical behaviour by consumers (with regard to `cash-flow management') Extent of the abuse

The most objective way to ascertain the extent of the abuse in the system is to measure disputes as a percentage of the total transactions, and to monitor the levels of failed or unpaid transactions.

In terms of dispute levels, PASA reports that the current percentage is at about 0.5% for EFT debits (or just under 200 000 disputes per month), while that of NAEDO is at a more alarming 7% or 8% (representing more than 700 000 disputes per month).

However, the problem is that it is difficult to determine from the types of disputes reported what proportion is actual fraud (i.e. abuse by users), as opposed

to unethical behaviour by consumers (with regard to ‘cash-flow management’).

The organisation’s assessment of ‘mandate samples’ indicates that disputes reflecting true incidents of fraud are a small part of the total number. Success levels constitute the second measure of determining the health of the system, as the trend has been deteriorating in the past few years, and is a direct reflection of the inability (and/or unwillingness) of many consumers to meet their fi nancial obligations. Many AEDO, NAEDO or debit order payment instructions fail due to insufficient funds, or even worse, the abandonment of accounts. At present, the levels of unpaid accounts are about 10% for EFT debits, and 24% for AEDO. In order to help counter negative trends, PASA introduced short-term measures, such as: • Abbreviated short names (ASN) to identify corporate beneficiaries to enable account holders to identify which company would be paid when a debit order comes off their account.

• Monitoring of (unpaid and disputed) ratio thresholds of each user (as identified by the ASN).

• Unpaid ratios: 10% of total transactions • Dispute ratios: 0.5 % of total transactions • Debit order review list – any user that was found to be in breach of the above thresholds could be placed on a review list for further investigation by the sponsoring bank and/or PASA. • The debit order abuse (DOA) list ensures that a user could either be given a clean bill of health, or, in the event that fraud has occurred, placed on the DOA list.

• Penalties for no mandates or deficient mandates (a fine of R1 000 per instance to the sponsoring bank). ›

PASA's formation emanated from global efforts to address risks associated with payment systems, and South Africa's reintegration in the world economy in the early 1990s. It was recognised that an asset as important as the National Payment System required better organisation and regulation.

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Banking, FNB Banking App, FNB Cellphone Banking, and call centres). As a proactive system, FNB customers receive an SMS whenever the bank identifies a debit order that could potentially be unauthorised, regardless of the amount.

No fees are charged for reversals.

Standard Bank

Banks' responses IMAGES: JOHNKWAN/SHUTTERSTOCK.COM, WEST COAST SCAPES/SHUTTERSTOCK.COM

The country's banking institutions have put numerous measures in place to eradicate abuse of the debit order system

Nedbank

Nedbank says it is committed to working with PASA to combat the abuse of its debit order system. Like other banking institutions, Nedbank is aware of the SARB directive for PASA to introduce an authenticated collections (AC) system, to replace the much abused early debit order payment system, as this would offer better protection for account holders. The new system would ensure that debit order mandates are authenticated by account holders, thereby ensuring that the payment instruction only gets presented to the bank if it's in accordance with the customer's wishes.

Nedbank warns its customers that since the AC payment system is not yet fully completed and implemented, bank customers should carefully check their

bank statements every month for any unauthorised debit order deductions, and to contact the bank immediately if they find any unwarranted changes.

FNB

Ryan Prozensky, FNB's Chief Executive of Value Banking Solutions, says the bank fully supports the rights of consumers to dispute, stop and reverse debit orders without inconvenience.

Unauthorised debit orders can be refunded almost immediately if customers ask for assistance at a branch or via FNB's call centre within 40 days from the debit occurring.

Customers can also stop debit orders on any FNB electronic platform (FNB Online

Standard Bank explains that “a debit order is an agreement between the account holder and an external company, in which the customer would authorise such a service provider to debit an amount from his/her bank account for services provided.

A debit order is not a contract between the account holder and the bank, and the bank is not a party to the agreement at all. This mandate could be in writing or on a call recording.�

The bank considers its role to be limited to that of a payment facilitator, where debit orders are presented for payment.

It insists that it doesn't initiate any external debit orders. In the event of a disputed (or unauthorised) debit order, it will readily query the validity of the transaction with the beneficiary company, as per the existing processes and PASA rules (i.e. under/over 40 days).

Standard Bank account holders are reminded to exercise the responsibility to regularly scrutinise their account statement(s), and bring to the bank's attention any unauthorised debit orders.

Unauthorised debit orders brought to the attention of the bank within 40 days of the debit order being processed will be reversed immediately. In the case of it being notified after the stipulated 40 days, the bank will contact the external company, calling for the mandate referred to above, and give 30 days for an answer.

Account holders will be safer in the future

The above mentioned banks agreed that the proposed Twin Peaks regulatory framework will protect all players, account holders, banks and honest company beneficiaries, but all have a role to play in making the new system work.

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PwC Global Economic Crime Survey

South African organisations report the highest rate of economic crime in the world over the last two years, according to the PwC Global Economic Crime Survey

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outh African organisations reported a considerably higher frequency in the occurrence of economic crime, in comparison to their African and global peers. More than two in three organisations (69%) indicated that they had fallen victim to economic crime in the last 24 months, according to PricewaterhouseCoopers’ (PwC) biennial Global Economic Crime Survey issued at the beginning of March 2016.

Louis Strydom, Forensic Services Leader for PwC Africa, says: “Economic crime remains a serious challenge to business leaders, government officials, and private individuals in South Africa. In this survey,

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we have found that the trend has remained unchanged from 2014, with 69% of South African respondents reporting that they had experienced economic crime in the last two years.

“When compared to the global statistic of 36%, we are faced with the stark reality that economic crime is at a pandemic level in South Africa. No sector or region is immune from economic crime.”

Sixty-eight percent of French respondents and 55% of UK respondents also reported high increases in the rate of economic crime in the past 24 months, both up by 25% since to 2014. Sixty-one percent of Zambian respondents reported that economic crime

is up by 31% over 2014. “The fact that developed countries are included in the list of the top 10 countries reporting the highest rates of economic crime brings home a clear message: economic crime is a global issue, and one that affects developed markets as much as it does emerging ones,” adds Strydom.

According to the survey findings, South Africans also exhibited significantly low levels of confidence in local law-enforcement agencies, with 70% of organisations believing agencies are inadequately resourced and trained to investigate and fight economic crime.

This is almost twice the global rate of 44%.

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ADVERTORIAL

The 2016 Global Economic Crime Survey interviewed 6 337 participants in 115 countries. In South Africa, 232 organisations, from a broad spectrum of industries, took part in the survey.

The main aim of the survey is to inform South African business leaders about developments in the continuously changing landscape of economic crime in the country, and to encourage debate around strategic and emerging issues in this sphere.

The survey found that asset misappropriation remains the most prevalent form of economic crime, as reported by 68% of respondents, followed by procurement fraud (41%), and bribery and corruption (37%). Cybercrime has risen to the fourth most reported type of economic crime in South Africa (up by two places from 2014), with 32% of organisations affected, on par with the global average.

Overall rates for economic crime

Globally, the overall rate of reported economic crime has fallen for the first year since the financial crisis, but only marginally – to 36% from 37% in 2014. Regionally, lower levels of economic crime are reported in North America (37% vs 41%), Eastern Europe (33% vs 39%), Asia-Pacific (30% vs 32%), and Latin America (28% vs 35%).

The rate of economic crime rose in Africa (57% vs 50%), Western Europe (40% vs 35%), and the Middle East (25% vs 21%).

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Cost of economic crime

Economic crime is costing businesses billions. While more than half of the global organisations surveyed reported having lost less than $100 000 to economic crime over the last 24 months, only 43% of South African organisations could make that claim. Almost a fifth of local respondents experienced losses of between $100 000 and $1-million, and one in four respondents indicated having suffered losses of more than $1-million.

The fraudster profile

For the first time since 2009, external actors exceeded internal actors as the

dominant profile of fraudsters acting against an organisation (46% external vs 45% internal). South African organisations were reported to be more than twice as likely to be defrauded by vendors, compared to the rest of the world. Reports of senior management perpetrating economic crimes against the organisations they work for more than halved from the previous survey (from 41% to 15%), while middle management appears to have taken centre stage, with 39% of fraud being perpetrated by internal actors emerging from this band.

Cybercrime

Incidents reported were up 23%, when compared to the previous survey conducted in 2014. More than half of organisations (57%) believe it is likely that their organisations will experience cybercrime in the next 24 months. Most companies are still not adequately prepared for or even understand the risks faced, with only 35% of organisations reporting they have a fully operational cyber-incident response plan in place. It is concerning to note that should a cyber crisis arise, only 34% of organisations have personnel that are “fully trained” to act as first responders, and 20% of companies indicated that they will make use of outsourced personnel.

Bribery and corruption

More than half (56%) of South African respondents say that top management would rather allow a business transaction to fail than have to use bribery.

Fifteen percent of respondents, who hailed from mainly private sector

Louis Strydom (left), Forensic Services Leader for PwC Africa and Trevor White (right), Forensic Services Partner and Global Survey Leader.

organisations, had been asked to pay a bribe in the past two years, and another 12% believe they lost an opportunity to a competitor that may have paid a bribe. More than half of South African respondents believe that it is “likely” that they will experience bribery and corruption in the next two years.

Anti-money laundering (AML)

Poor data quality and skills shortages are undermining the efficacy of AML systems.

Only 50% of money-laundering and terrorist-financing incidents in financial services organisations were detected by system alerts. One in three South African organisations experienced difficulty in sourcing personnel with skills in the areas of AML or combating the financing of terrorism. More than a third of financial services respondents who have undergone inspections by regulators had to address major findings.

Conclusion

Overall, the report finds that business detection and response plans are not keeping pace with the level and range of threats now facing organisations, with a potential trend of too much being left to chance.

Trevor White, Forensic Services Partner and Global Survey Leader, says: “While it is a positive sign that there has been increased detection by means of whistle-blowing hotlines, far too much is being left to chance by organisations – economic crimes discovered by accident more than doubled from 6% in 2014 to 14% in 2016. Another 8% of respondents could not even tell us how serious economic crimes against their organisations were detected.

“With a greater focus in recent years on the responsibility of management and boards, in so far as good corporate governance practices are concerned, ignorance of matters affecting your company, and in particular a passive approach to detecting and preventing economic crime, is an open invitation for disaster, not only from a corporate perspective but also on a personal level.”

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Big Headline Millennials: A customised service approach Millennials are forever changing the way companies interact with their customers.

Melissa Wentzel explores what Millennials want from service providers, and how banks can use big data to inform their approach

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inancial services firms collect and store a particularly vast volume of data. In July 2015, EY, formerly Ernst & Young, announced the launch of a new global innovation centre in Madrid, Spain. The centre forms part of the company’s $500-million investment in analytics, which aims to highlight the uses of big data for banks and other financial institutions.

According to Andy Baldwin, EY’s Managing Partner for Financial Services, in a recent article on bankingtech.com, the financial services industry is facing significant technology and business model disruptions, driven by digital innovation and the emerging financial technology (fintech) industry it has birthed.

The new middle class

Millennials (or Generation Y), born roughly between the early 1980s and early 2000s, is the first generation to grow up with the Internet of Things (IoT). More informed than their predecessors, Generation X (1960s – 1980s) and the baby-boomers (1940s – 1960s), they sport smart devices and have access to the world at their fingertips.

In the US, Millennials are the largest generation in history, making up more than one in every three adults by 2020, and up to an estimated 75% of the US workforce by 2025. In South Africa, these digital natives make up close to 20% of the population.

At the 2015 Chief Digital Officer Summit in New York, Jeremy Owyang, founder of Crowd Companies, described the collaborative economy as an economic model where “technologies enable people to get what they need from each other, rather than from centralised institutions.”

As such, the Brookings Institution reports that the Millennial cohort’s distinctive culture and set of values – from their greater reverence for the environment to their value of community and peer-topeer services – promises to cause seismic shifts in the financial sector. They will become an increasingly larger share of the adult population and gather more wealth,

changing consumer markets, and the purpose and priorities of companies.

The South African landscape

The nature of financial services is changing in South Africa – not only in response to the greater regulatory burden on service providers by the Retail Distribution Review, but also in the transformation of the marketplace, which is being triggered by constantly evolving customer expectations, digital technology, and a flood of new entrants into the market.

“Millennials are an informed generation that brings to us an entirely new set of expectations,” says Yasaman Hadjibashi, Chief Data Officer at Barclays Africa, adding that the digital revolution has changed the way banking maintains its relationship with customers.

In the 2015 Brookings Financial and Digital Inclusion Project Report and ›

In the US, Millennials are the largest generation in history, making up more than one in every three adults by 2020

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Scorecard, which evaluated 21 developing countries against a number of criteria relevant to financial inclusion, South Africa ranked second overall. The country was also the first in the world to set up a faster payments system, and all of the five major banks now incorporate a banking app. However, solutions may still only be used by their own customers, pointing to a lack of cooperation between banks.

Vodacom and MTN, two of South Africa’s telecommunications giants, have already taken advantage of traditional banking’s weakness by introducing mobile financial services to the quarter of the population that remains unbanked, with real-time, person-to-person payment capabilities. This is in addition to the flood of fintech start-ups gunning for market share.

Data: the new infrastructure

Millennials have come of age in an environment dominated by the rise of online and mobile activity, and the demise of brick and mortar. Companies such as Amazon have changed the game by customising a customer’s entire online experience, from pre- to post-purchase, and shaping Millennials’ demand for more personalised services, which is in turn changing the consumer landscape.

“Digital brings with it a huge amount of data,” says Andrew van der Hoven, Head of Relationship Banking at Standard Bank.

Van der Hoven reports that one of the ways in which the bank utilises big data to better serve and attract Millennials is to profi le those customers interacting with them through digital mechanisms, and answering the following questions: where they were before; what they were doing; and what were they interested in when interacting with Standard Bank?

Millennials enjoy unparalleled access to data and they’re also willing to share information about themselves in order to enjoy a more convenient and intuitive experience. They expect retailers to predict what they want before they do, based on their daily habits.

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Retail-banking institutions, through utilising big data and analytics, have an enormous opportunity to attract the biggest generation since the baby-boomers “This insight has led us to open up new channels to foster relationships with Millennials on platforms such as WeChat,” adds van der Hoven. “Doing this also allows us to understand these interactions on a more granular and close to real-time level.”

Dave Woolnough, Head of Retail Digital Banking at Nedbank, says that through big data, the bank is able to know where Millennials shop, what they like and what they don’t, what their needs are, and how best to meet them. “Generally, we’re able to draw behavioural insights,” he says.

He adds that these insights inform value propositions and offerings, as well as how they should craft advertising and select distribution channels.

According to Austin Wentzlaff, from Credit Union Insight (CU Insight), retail-banking institutions, through utilising big data and analytics, have an enormous opportunity to attract the biggest generation since the baby-boomers. He highlights the following four examples of how banks can use big data: • Predict the next best product by uncovering common customer purchasing patterns, which enables more accurate marketing alerts.

• Lenders can price loans more competitively if they replace the traditional meet-the-market models, which are based on risk categories, with

WHAT IS BIG DATA? Big data refers to the massive increase in the amount of incoming information needing to be processed by companies in the 21st century. Big data is driven, in part, by improved computing power, greater connectivity, and the growth of real-time data feeds and services.

new data-driven models that expose missed opportunities in the high-risk categories, where many non-creditworthy Millennials are found.

• Affinity/market basket analysis pairs certain products, such as shampoo and conditioner, which consumers normally purchase together. This concept can easily be applied at retail banking.

• Retail-banking institutions can personalise their marketing process by identifying all products and services that a current member has or lacks, and posting offerings for either a new product or a transfer of a product from another financial institution.

Millennials are currently entering the workforce, starting families, and becoming the largest consumer group.

Failure to address this segment of the market threatens the future viability of most banks and credit unions, across the globe. Fortunately, the retail financial services industry sits on vast troves of data about their customers and how they use their services.

According to Hadjibashi, Millennials want things tailored to them, “at the right time, any time, and all the time”.

Thus, Absa is grooming a new profi le of ‘data wunderkinds’ – reflecting the demographics of the Millennial generation for whom they would like to innovate – who are paired with data scientists focused on delivering the next generation of personal interactions to Millennials.

“Data and its power is the catalyst that will help take us back to the roots of an intimate banking relationship: closeness and connection with our customers through dynamic, personalised experiences, thanks to the field of data science and the latest open-source technologies,” concludes Hadjibashi.

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Raising capital for start-ups in SA Despite the great opportunities offered by the continent, many African start-ups are still figuring out how to attract venture capital, writes Iwan Pienaar

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frica in general, and South Africa in particular, has positioned itself very well in recent years for foreign direct investment. But, despite market sentiment that reflects growing optimism in the opportunities presented on the continent, start-up businesses are still struggling to raise capital.

In fact, research published by Seed Academy last year showed that only 3% of South African start-ups get their funding from angel and venture capital. Most

survey respondents (83%) said they used their own money to get their businesses off the ground, and 70% said they needed more funding to grow.

Despite this, money is available for funding. The Disrupt Africa Tech Startups Funding Report for 2015 shows that 125 technology start-ups raised in excess of $185 785 500 last year, with South Africa, Nigeria, and Kenya being the favoured destinations for funding.

More recently, SweepSouth, a South African on-demand home-cleaning

start-up, made headlines when it secured R10-million in new funding from the Vumela Fund and its existing investors, Vinny Lingham and Newtown Partners.

The Vumela Fund is capitalised by the First Rand Group and the Jobs Fund, and is managed by FNB in an alliance relationship with Edge Growth.

Clearly, money is accessible if a business is willing to investigate all its options.

Silvertree Capital, an Africa-focused business builder, invested in excess of R20-million in start-ups during the ›

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fi rst seven months of 2015. In February this year, it was quoted in the media as stating that it plans to invest $10-million into African economies, targeting, you guessed it, South Africa, Nigeria, and Kenya.

The management team of a start-up should show possible investors not only the potential of the company, but also the founders experiences' Adding fuel to the fi re of investment opportunities for start-up businesses, WeChat Africa launched a R50-million seed fund in December last year, to help promising technology start-ups get off the ground. Partly owned by Naspers, WeChat has entered into several interesting partnerships to highlight this focus, concluding deals with Money4Jam, Picup, OrderIn, and Rush.

But how does a start-up go about approaching such a fund or business?

In general, the criteria for start-up funding can include having a strong founding team with a solid business plan in place to show long-term targets.

Often, there ought to be some sort of fit with the private equity approached.

In other words, if the company targets

mobile start-ups, then the business should tick that box. One of the trickier factors come into play when the time comes to discuss equity stakes.

Frequently, start-ups are blinded by what they read in the newspapers (or online sites) or see on certain reality television shows. In truth, discussing equity investment involves a lot of back and forth, with start-ups making the mistake of over-valuing themselves.

Much of the valuation is determined by the uniqueness of the solution, and how it solves a particular market problem.

However, when approaching a venture capitalist or private equity, the start-up should be cautious about going into too much detail. Obviously it needs to be comfortable in describing the bits and bytes of the solution, but most funds want to understand the broad strokes first, before taking the relationship any further.

The management team of a start-up should show possible investors not only the potential of the company, but also the founders’ experiences. However, one of the most fundamental mistakes any start-up can make in its approach for funding is failing to come up with a proper business plan. Typically, a business plan needs to show investors a multi-year income statement and capitalisation strategy, which includes the amount of money that they propose to raise. Of course, how the start-up utilises that money should be reflected in the business scheme as well.

DEFINING A START-UP At its most basic level, a start-up can be described as a company that is in the first stage of its operations. Often, it is funded by its founders who attempt to capitalise on developing a product or service for which they believe there is a market demand.

In theory, that describes just about any company. After all, is there really such a big difference between Uber and General Electric? Most people tend to agree that a start-up is generally determined by its age, growth, revenue, profitability, and stability. Some also argue that a too simplistic definition makes every mom-and-pop shop a start-up.

Despite the subjective nature of trying to define one, many analysts and industry pundits tend to agree that a start-up should be seen as a technology company that could either achieve greatness overnight or fail.

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A FEW PLACES TO START LOOKING FOR FUNDING ABSA WOMEN EMPOWERMENT FUND Designed for business women in the small to medium enterprise space with the skills and expertise to make a success of their business. absa.co.za/Absacoza/Commercial/ Your-needs/Alternative-finance/ Absa-Women-Empowerment-Fund BUSINESS PARTNERS This investment company aids small and medium enterprises looking for funding. businesspartners.co.za DEPARTMENT OF TRADE AND INDUSTRY (THE dti) The dti provides funding to qualifying businesses from a range of sectors. thedti.gov.za INDUSTRIAL DEVELOPMENT CORPORATION (IDC) The IDC has multiple funds offering financial support to start-up businesses needing capital for equipment, working capital, and buildings. idc.co.za STARTME A crowdfunding site designed to give start-ups the opportunity to market themselves and secure funding from the general public. startme.co.za

One of the challenges in all of this is to put all the necessary information in a document that is quick to view and easy to read. The advantage of this is that it forces the start-up to think more critically around the business and what it hopes to achieve.

Despite concerns that funding is limited in the South African (and African) start-up environment, there are opportunities to be had. With careful research and a willingness to prepare as much detail as possible, start-ups can find their niche, as well as the funds to grow.

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ADVERTORIAL

Mercantile Bank meets the home loan needs of entrepreneurs Financial institution creates specific products and services for self-employed clientele

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ercantile Bank, a bank catering exclusively to entrepreneurs, also looks after the private banking needs of self-employed individuals, through Mercantile Bank Private Bank.

“We identified a glaring need for home loans that meet the specific requirements of small business owners,” explains Tom Stilwell, Head of Mercantile Bank Private Bank. “For example, 2014 statistics from several large mortgage originators indicated that only 30-50% of self-employed applicants were getting their bonds approved.

Mercantile Bank thought it was time for banks to take into account the realities of the entrepreneur’s world,” Stilwell says that the bank takes a unique approach to financing self-employed individuals – not using a traditional scorecard approach – because their income is structured differently to those who receive a regular salary. “We recognise that entrepreneurs are not necessarily riskier than salaried individuals,” he says. “Our processes are built for the entrepreneur, because we

know they often have multiple sources of income. In addition, our interest rates are on par with the market, and our loan-to-value rates are relatively better.”

How you can qualify

Mercantile Bank has granted bonds for entrepreneurs, ranging from R600 000 up to R22-million. To qualify, applicants must meet some basic criteria: • Be an entrepreneur whose business has been trading for at least two years; and

• Receive a personal income of R500 000, or more, per year.

The application process

In order to apply for a bond, entrepreneurs can go directly to Mercantile Bank or go through a bond originator.

Once the bank has received all the documents in good order, they are able to approve or decline the application within 24 hours, provided all the required documentation is received.

A holistic view of self-employed individuals

“We are a relationship-based, single-pointof-contact bank, giving our clients the best part of traditional face-to-face interaction, supported by technology,” says Stilwell. “We approach the needs of the entrepreneur holistically, and look at the client’s multiple sources of income, as well as the performance of their business.”

Tom Stilwell, Head of Mercantile Bank Private Bank.

Visit privatebank.mercantile.co.za for more information.

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Banking with a green conscience The efforts of SA banking initiatives to save the environment are commendable, writes Solly Moeng

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outh African banks have taken to contributing to sustainable banking, and their methods are quite impressive. Efforts include: solar-powered ATMs; paperless banking, envelope-free cash accepting devices (CADs); increased funding for government’s roll-out of its Renewable Energy Independent Power Producer Procurement Programme (REIPPPP); screen options for viewing balances without the need to print; Green Savings Bonds; increased reliance on biometrics to capture customer details; and a general move away from paper contracts.

There’s no doubt that reducing toxic gas emissions and humanity’s carbon footprint is everyone’s responsibility. And while there are industries that emit more gases into the atmosphere than others, banks also have a role to play, especially through initiatives aimed at encouraging others to participate in the creation of a low-carbon future.

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Going by the leadership demonstrated by the South African banking sector, it seems reasonable to hope that global threats to the environment can be reversed, sector by sector.

There are lessons to be shared with other economic sectors and, if adapted with success, will go a long way in safeguarding the integrity of the environment for future generations.

NEDBANK Speaking on behalf of Nedbank, Brigitte Burnett, Head of Sustainability, says the bank ensures that every aspect of the institution's activities is informed by how decisions impact on its stakeholders.

“Leadership in this regard starts right at the top,” she says. “Our Chief Executive, Mike Brown, once said that to operate and succeed as a financial institution, it is imperative that the decisions and actions we take are informed by a clear understanding of their impact – positive or negative – on each of our stakeholders. Understanding and embracing this interconnectivity is at the core of our sustainabilitycentred business strategy, and is key to our ability to create and deliver resilient value.” This approach enables the bank to manage three core areas that help it deliver on its promise for a green economy: 1. Facilitation through products and services. Since 2015, Nedbank has set a lending target of R6-billion per annum

for new products and offerings that intentionally focus on the socioeconomic and environmental outcomes addressed by the bank's long-term goals. This is part of its Fair Share 2030 strategy.

Nedbank's funding of government's REIPPPP translates to 54% of the total renewable-energy capacity awarded by the Department of Energy thus far.

Energy generated through this initiative amounts to some 2 198 megawatts.

Other Nedbank initiatives include its Green Savings Bond and Green Affinity Programme.

2. Leading through collaboration. With institutions such as the WESSA EcoSchool Programme, which involves the integration of environmental education and sustainable development into all levels and phases of the education and training system, the bank is able to work together to improve the state of the environment.

3. Managing its own impact. Nedbank ensures that its own banking practices, starting with the environmental impact of its building, energy consumption, etc. are in line with its overall drive to reduce its carbon footprint.

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ABSA Absa's Allen Mahadeo, Head of SelfService Channels, points out that the bank's Citizen Plan is a key driver in its sustainability approach, and revolves around core three areas: 1. The way we do business: ensuring our decisions take account of stakeholder needs in the short and long term.

2. Contributing to growth: delivering products and services to help more people and society progress.

3. Supporting our communities: helping disadvantaged young people develop the skills they need to fulfil their potential.

CAPITEC BANK Capitec Bank Executive for Marketing and Corporate Affairs Carl Fischer says there's significant “green value” on offer in its paperless processing.

“We have no application forms or administrative documents in our banking processes,” he says. “The only paper we generate is a contract for a client to sign. We are, however, in the process of changing this to a system-based signature, supported by biometrics. We also have photo recognition and biometric verification for all our other processes in branches.”

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INVESTEC BANK Despite not being a retail bank, Investec Bank is also doing its part to save the environment. Investec's Tanya dos Santos says that in terms of green investing and funding green developments, the bank's 2015 Sustainability Report details a number of its environmental activities.

“The area in which we believe Investec can make the most meaningful contribution to the environment is through responsible financing, and investing and supporting businesses involved in renewable energy and green developments,” she says.

She provides examples such as Investec's partnership with Aurora Wind Power and Kagiso Tiso Holdings, which enabled the development of a wind farm in the Western Cape.

Abdul Aziz Cassim, Head of FNB SelfService Delivery Unit, says the bank has always strived to enhance technology and processes that deliver efficiencies, from both a cost and environment perspective. The bank's ATM selection is also underpinned by its green initiatives and considerations aimed at reducing power consumption.

“We work closely with ATM vendors to ensure that new ATM devices have the latest power-saving technology,” he says.

“Optimising components such as LED lighting and opting for printers that use less idle power are some of the vendor improvements contributing to an overall greener approach for FNB. Overall, power consumption by the latest ATMs has decreased on average by more than 50% compared to 10 years ago.”

Cassim adds that FNB's practice of proactive diagnostics on hardware components, as well as optimised cash operations, has also enabled the bank to decrease the amount of travel time required for servicing or loading ATMs, resulting in less CO2 emissions and a greener environment. The bank is also testing solar-powered ATMs for possible future mainstreaming, encouraging its clients to opt for paperless banking, and, importantly, keeping an eye on developments in the renewableenergy sector in order to integrate this increasingly affordable source of energy for its operations.

IMAGE: TZIDO SUN/SHUTTERSTOCK.COM

STANDARD BANK Senior Manager for Engineering and Energy Management, Keith Cassie, says the bank has a network of energy-saving ATMs, inspired by Stanbic Bank in Ghana, which introduced eight solar-powered ATMs, giving new meaning to the phrase `smart money'.

The bank intends to continue investing in energy sustainability, water saving and green initiatives in the short to medium terms. It is expected that by 2020, Standard Bank would have cut its carbon footprint by a further 15%, using 2014 as a baseline.

Furthermore, the bank is committed to making investment in sustainability schemes a priority. “As a major South African property owner and tenant, we have proved that our considerable investment in green initiatives is helping to reduce operating costs and, in 2015 alone, the institution saved almost R4.34-million,” says Cassie. “The urgency of having an appropriate sustainability programme will also intensify during 2016 and into the future, as business in South Africa absorbs the full significance of the provisions in the draft Carbon Tax Bill, which was released for comment by government in November 2015.”

AFRICAN BANK In a statement, African Bank says it believes sustainability is about ensuring long-term business success, while contributing towards economic and social development, a healthy environment, and a balanced society.

“We strive to embed sustainability into all aspects of the business,” the statement reads. The bank cites technological choices and energy use as some of its key sustainability approaches.

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Islamic banking:

What's new in 2016 Given the rising popularity of Islamic finance options, customers of Islamic banking are spoilt for choice with a range of products and services, writes Saroj Parbhoo

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hile Al Baraka is the only fully fledged Islamic bank in South Africa, some of the regular banks have introduced Islamic Windows that operate in deposits and transactional banking. Islamic finance is a fast-growing sector, in both the local and global markets, with a large demand for sharia-compliant financial instruments from the Muslim and non-Muslim population.

First National Bank (FNB) and Absa are the two leading South African banks with an Islamic Window. While both have plans to introduce a host of exciting new products and services to their existing Islamic offerings soon, Standard Bank is due to launch their first Islamic banking product in July.

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Product offerings

FNB’s Islamic Savings Pocket allows customers to receive a monthly profit share. This account is linked to the primary Islamic Cheque Account, and allows for free transfers between the Savings Pocket and Cheque Account, enabling the flexible transfer of funds between the main and linked accounts.

Meanwhile, Absa’s Islamic Savings Account provides a pre-agreed profitshare ratio, and a card that gives any-time access to earned profits, while their Islamic Cheque Account is interest free.

All FNB’s transactional products are eligible for the eBucks rewards programme.

This rewards programme lets you earn eBucks for selected day-to-day transactions.

Absa’s Islamic TargetSave, however, is based on the Mudarabah pre-agreed profit-share principle, in which one partner gives money to another to invest in a commercial enterprise. It produces yearly returns, with the added benefits of no administrative fee, and a R100 minimum monthly contribution.

Smartphone app

As well as online banking and cellphone banking, Islamic banking transactions are now accessible through the FNB smartphone app. The app, available for download on the FNB website, provides customers with an extra channel through which to use funds, and gives the freedom to engage in a variety of banking activities.

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INSIGHTS

According to Amman Muhammed, Chief Executive Officer of FNB Islamic banking, FNB is “probably the only Islamic banking unit in the world that offers its customers a cellular network offering, which links with on-line, app usage and access to mobile devices”.

Absa, meanwhile, offers an Islamic Value Bundle – a cheque account with affordable Silver, Gold or Platinum pricing options.

Customers also get unlimited free electronic statements, transfers, NotifyMe alerts and withdrawals, as well as a discount on the monthly fee for set positive balances.

Asset Finance

While FNB customers are able to apply online for Islamic Commercial Moveable

Asset Finance, and receive approval almost immediately, Absa’s Islamic Vehicle and Asset Finance provides financing for vehicles and other moveable assets. Absa’s deal has the benefit of having payment amounts adjusted via bullet or balloon payments. This option is available via bank branches, Absa approved dealerships, the bank’s contact centre and the internet.

FNB’s iContract is a new, secure web-based system for the signing of finance-agreement documentation online.

The first of its kind in South Africa, it allows customers to sign contracts from anywhere at any time, which makes this online electronic contracting process convenient, hassle free and 100% eco-friendly, as the entire process is paper free.

Term-deposit structures According to EY, although Islamic banking still makes up only a fraction of the banking assets of Muslims, it has been growing faster than banking assets as a whole.

Absa and FNB have introduced options for term-deposit structures – an investment with a fixed term that yields returns over the period of investment.

With the increase in demand, innovation in the field Islamic banking products is a trend that is sure to continue.

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REWARDS LOYALTY Sunday Times Rewards and Loyalty SA will allow respective role players to showcase their contributions and initiatives in the sector, and educate our vast reader base in the following categories:

• • • • • • • • • •

Gamification loyalty User experiences Corporate social responsibility initiatives linked to loyalty Customer and data analytics Innovations Financial services Food services Travel Mobile services Health and wellness

Customer-loyalty programmes in South Africa generate an estimated R12-billion per annum, with more than 10 million South Africans carrying at least one loyalty card.

(Figures from the International Business & Economics Journal – December 2013.)

Moreover, the significant financial contribution that this sector contributes towards the national GDP, the Sunday Times Rewards and Loyalty SA publication will present an in-depth look at the local rewards and loyalty industry. Sunday Times Rewards and Loyalty SA will be a large-format, glossy publication of 70 000 copies inserted into Sunday Times subscriber copies in major metropolitan areas.

Brands are becoming more and more important in today’s competitive economic environment, and the Sunday Times Rewards and Loyalty SA will be designed to afford role players the opportunity to explain their system to the potential consumer, with a view to increasing their market share. Similarly, the publication can be used to impart relevant knowledge to end users, thus increasing their awareness and financial literacy.

Insertion date: August 2016

For more information or to advertise in this publication, please contact Project Manager Andrew Green, on Direct: 021 469 2469, Cell: 061 915 8191, or email AndrewG@picasso.co.za.

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The official quarterly publication of The Banking Association South Africa, Banker SA gives you a glimpse into the workings of microeconomics, and unique insight into the world of banking within a South African context. Banker SA is broad, authoritative, intelligent and sometimes controversial. Our editorial is topical and focuses on developments in macroeconomics, banking and financial services. We will introduce you to the ``movers and shakers'' in the banking and financial services sector, their business acumen and lifestyles.

COLLECT YOUR COMPLIMENTARY COPY FROM THE BANKER SA TABLE IN THE MEDIA LOUNGE AREA.

To advertise in Banker SA or to subscribe, please contact Andrew Green at: AndrewG@picasso.co.za Tel: 021 469 2400 (switchboard), 021 469 2469 (direct) Cell: 061 915 8191

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REPORT BACK

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2016 Cards and Payments Conference Africa's leading payments and banking exhibition proved to be the perfect platform for technology innovators, start-ups, and companies of all sizes to showcase some of their latest ideas, writes Dumile Sibindana

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taged from 1-2 March, the annual Cards and Payments Conference showcased the latest opportunities, trends, and innovative technologies from more than 80 companies across the globe. Our continent has one of the fastestgrowing payments, retail, and banking sectors in the world, presenting vast opportunities for companies keen to create value for consumers.

Like many prior conferences, this year’s expo was held at the lavish Sandton Convention Centre, in a region we’ve come to know as the ‘richest square mile in Africa’.

At this year’s event, there was a particular focus on enhancing mobile-banking platforms and solutions. There’s a growing trend for companies that are partnering with banking institutions and various other role players to provide enhanced solutions.

Many of these companies have been able to create solutions that are not only better, but also save them costs. Thus, it only makes sense that these technological innovators are growing exponentially in number, and are disrupting traditional payment systems.

The information age has not only gained traction over the past decade or so within the African context, but is also driving a new breed of entrepreneurs who are passionate about changing the lives of people by creating improved payment products and systems. Since the emergence of global giant PayPal, we (as the African continent) have

gradually immersed ourselves in the global mobile-banking revolution. PayPal and other maverick companies proved that traditional payment systems, as we knew it, would be disrupted by more efficient payment methods. The Cards and Payments Conference has unequivocally demonstrated that those companies who do not move with the times through constant improvement and innovation are likely to lose their market share or, even worse, become obsolete over time.

A significant proportion of the companies at the Conference were multinational firms from Europe, Asia and other African countries One of the key objectives of the Conference is to connect businesses, matching them with other businesses that can strategically leverage economic and other benefits. Through networking, individuals were given the opportunity to interact with businesses at the exhibition, which may add or create value for their businesses by forging strategic partnerships that deliver a mutuallybeneficial business relationship.

The event placed an estimated 3 000 senior executives under one roof from

all over the world. In fact, a significant proportion of the companies at the Conference were multinational firms from Europe, Asia and other African countries.

Some of these international firms have already established a presence in South Africa, while for others it was the perfect occasion to get a sense of the business opportunities the country and the rest of Africa have to offer.

One of the highlights of the event were the on-floor seminars that took place – many of these were informative and engaging, while broadening perspectives on the expansive opportunities for enterprisesupplier-development chains present in the retail banking and payments spheres.

Most of the companies on show are not necessarily the best-known brands, but they are key suppliers of products and services to larger global brands such as Maestro/ MasterCard, the big five banks in South Africa, and other multinational brands.

This is indicative of the opportunities that exist within the enterprise and supplierdevelopment space throughout the African continent, an opportunity that some commentators deem to be underutilised.

Over the past few years, the Cards and Payments Conference has grown in leaps and bounds to become the pre-eminent and best-supported payments, banking and retail exhibition and conference in Africa. We look forward to the 2017 event, and organiser Terrapinn has assured us that it will be even bigger and better.

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Breaking down the Budget Finance Minister Pravin Gordhan's first Budget Speech since his reappointment contained ambitious fiscal consolidation targets. While it is a step in the right direction, the odds of a downgrade by at least one rating agency in December 2016 remain high, writes Sizwe Nxedlana Changes to macroeconomic outlook

As expected, the National Treasury revised its expectations for economic growth, as well as its inflation forecasts for the next three years, relative to what was projected in October’s Medium Term Budget Policy Statement (MTBPS). Economic growth is now expected to average a more realistic 0.9% in 2016 (MTBPS 1.7%), 1.7% in 2017 (MTBPS 2.6%), and 2.4% in 2018 (MTBPS

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2.8%). Consumer inflation is expected to be above 6% over the next two years. The Treasury remains relatively optimistic about the economic outlook, compared to our expectations.

Stabilising government debt Against the even weaker economic outlook, government has proposed fiscal policy consolidation that is intended to lead to a more aggressive

deficit reduction path over the Medium Term Expenditure Framework period (MTEF) – government’s rolling threeyear budget cycle. The expenditure ceiling has been reduced by R25-billion over the next three years, compared to what was proposed in the 2015 MTBPS. The additional spending cuts will commence with a R10-billion reduction in fiscal year 2017/18, followed by an additional R15-billion cut in 2018/19.

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CLOSING OPINION

The new tax increases are set to raise gross revenue by R48.1-billion over the next three years, relative to projections contained in the MTBPS. For the current fiscal year 2016/17, tax revenue is expected to be R18.1-billion higher, and is expected to rise by R15-billion per year for the following two fiscal years. The consequence of the proposed fiscal consolidation measures will be a stabilisation in government debt at 46.2% of GDP in 2016/17. Debt is expected to decline thereafter.

Compared to projections contained in the 2015 MTBPS, the combined revenue and expenditure steps are expected to lead to additional fiscal consolidation of R18billion in 2016/17, R25-billion in 2017/18, and R30 billion in 2018/19. This adds to the R42-billion of consolidation measures (R25-billion in spending reductions and a R17-billion tax increase) announced in the 2015 Budget Speech.

Revenue projected to rise by R48bn over three years

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Tax revenue for the last fiscal year, 2015/16, is likely to be R11.6-billion lower than what was expected in last year’s projections.

The lower than expected tax revenue collection outcome was due to far lower than expected corporate income tax (below R13-billion) and VAT (below R5.7-billion).

Personal income tax collections also underperformed at below R1.9-billion.

There is likely to be partial offset from an overshoot of R4.3-billion in customs duties.

Fiscal drag entails the adjustment of income tax brackets and rebates for inflation so that an individual's purchasing power remains the same from one year to the next.

Government proposes several measures to raise tax revenue by an additional R18.1-billion in 2016/17. A combination of higher excise duties, the general fuel levy and other environmental levies will raise

revenues by R9.5-billion. An increase in capital gains tax and transfer duties will raise revenues by R2-billion. Allowing individuals only partial compensation for fiscal drag will account for R7.6-billion in additional revenue. Providing full compensation for fiscal drag would have reduced tax revenue by R13.1-billion. The partial adjustment for fiscal drag amounts to R5.5-billion, leaving government with R7.6-billion in additional revenue.

The details on raising the additional R30billion in tax revenues projected for 2017/18 and 2018/19 will be provided, following consultation and reviews, drawing on the work of the Davis Tax Committee as part of the decision-making process.

Further reduction in the spending ceiling coupled with reprioritisation

The expenditure ceiling has been reduced by a further R25-billion over the MTEF period. Spending for the 2016/17 fiscal year is unchanged relative to the 2015 Budget and MTBPS projections. However, spending is projected to decline by R10-billion and R15-billion, respectively, over the next two years.

Government plans to lower its spending ceiling by containing its wage bill.

From April 2016, appointments to fill administrative and managerial vacancies will be blocked on government’s payroll system, and may be considered only after departments have submitted staffing plans that are in line with reduced staff budgets.

Government plans to trim noncritical personnel, eliminate surplus positions, and establish a sustainable level of funded posts.

Besides reducing the expenditure ceiling, government has reprioritised R31.8-billion to support new spending requirements. The reprioritised funds will be used to alleviate pressure in higher education, fund the New Development Bank, and top up the contingency reserve. These funds will be obtained from the savings derived from the Wage Bill, reduced nonessential operational expenditure, and capital programmes with a history of underspending.

Budget deficit and government debt

The proposed revenue increases and spending cuts are expected to lead to a faster reduction of the budget deficit. The budget deficit is expected to narrow from a revised 3.9% of GDP (MTBPS 3.8%) in 2015/16 to 3.2% in 2016/17 (MTBPS 3.3%), declining to 2.4% (MTBPS 3.0%) in 2018/19.

Net loan debt is expected to stabilise, but at a higher level of 46.2% of GDP.

Is this achievable?

There are several risks that could impede the more aggressive fiscal consolidation path, and prevent the stabilisation of government debt at a level below 50% of GDP. First, growth is likely to be weaker than the Treasury’s forecasts, leading to lower than expected tax revenue collection.

Second, distressed state-owned entities may need to use state guarantees in order to stay solvent in the short-term, and to enable them to execute turnaround plans.

Third, while the Treasury has either met or outperformed previous expenditure ceilings, the proposed reduction in the ceiling targets the wage bill, which government has previously failed to contain within set boundaries. Finally, while the tone of the Budget Speech suggested a commitment to pursuing supply-side reforms aimed at improving business confidence and aiding growth, we have heard this all before, and it’s time for the results to prove themselves.

Impact on ratings

The outcome is likely to have shifted a downgrade to sub-investment grade by at least one agency to December from June.

While the proposed fiscal consolidation targets are ambitious, it’s not sufficient to support a conclusion that a downgrade in December is unlikely. The main reason is that while we are showing renewed commitment, we are probably too late to implement and display evidence of growthenhancing structural reforms in time to save an investment grade rating from all three major agencies.

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Budget 2016:

Leslie Primo looks at highlights from the 2016 National Budget Speech, and how it affects two important sectors

Impact on retirement funding and health care

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n the whole, the 2016 Budget Speech placed much emphasis on the need to foster economic growth in South Africa. It also focused on fiscal consolidation, aimed at reducing debt as a percentage of the country’s gross domestic product (GDP) by means of more ambitious budget-deficit targets, reduced spending plans, and tax increases.

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With regard to the retirement fund and health care industries, the highlights can be summarised as follows:

Retirement funding

• During the Budget Speech, Finance Minister Pravin Gordhan emphasised government’s commitment to achieving universal health coverage and comprehensive social security,

which forms part of the National Development Plan. While acknowledging the complexity of retirement and social-security reform, given that existing arrangements create long-term obligations, he nonetheless affirmed government’s willingness to confront these challenges.

• The ministers of Finance and Social Development will be jointly responsible ›

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for the social-security-reform programme, which has to draw on both international best practices and interdepartmental work of recent years.

• Tighter regulation of the retirement fund industry is part of the broader socialsecurity-reform effort. The intention is ultimately to protect members’ interests, and ensure that funds are not dissipated by unnecessary administration and financial costs, and that an income in retirement is assured. In this regard, the National Treasury has issued a number of technical papers over the last few years, which, among others, touched on the level of costs and charges in the retirement fund industry. The Treasury’s engagements with stakeholders (including industry) will continue this year.

• Minister Gordhan once again assured public servants that the reform of the retirement system will not affect their accrued pension rights, notably in the Government Employees Pension Fund.

• As expected, Minister Gordhan introduced the Revenue Laws Amendment Bill 2016 to give effect

to government’s decision, announced on 18 February 2016, to postpone the annuitisation requirement for provident fund members for two years, until 1 March 2018, to allow for further consultation with key stakeholders.

• All other provisions put forward in the 2015 Taxation Laws Amendment Act (the so-called T-day changes), in respect of all retirement funds and all other tax laws, will continue to be implemented

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The amendments proposed in the Bill include the following: a. Postponement of the annuitisation requirement for provident funds for two years, until 1 March 2018. Contributions made by provident fund members to their funds before 1 March 2018 will not require annuitisation.

from 1 March 2016. These include, among others: - The tax deduction for contributions to all retirement funds (including provident funds) will increase to 27.5% of the greater of taxable income or remuneration, up to a maximum of R350 000 per year.

- The minimum threshold required for annuitisation for pension and retirement annuity funds will still be increased from R75 000 to R247 500.

Health care

TAX AMENDMENTS

The purpose of the Revenue Laws Amendment Bill 2016 is to amend certain provisions of the 2013, 2014 and 2015 Taxation Laws Amendment Act, in order to provide for: a. The postponement of certain provisions in respect of taxation of retirement benefits; and b. The calculated amount of a deduction is to be included in taxable income in respect of deductible contributions to defined benefit-retirement funds.

b. A correction of the value of the fringe benefit in respect of employer contributions to defined benefitretirement funds that must be deemed to be an employee contribution. It provides that the deemed employee contribution will be equal to the value of the fringe benefit under paragraph 12D of the Seventh Schedule to the Income Tax Act, even if the value is greater than the actual contribution paid by the employer. c. Postponement of the inclusion of the compulsory annuity paid by a provident fund or a provident preservation fund from the definition of the term “compulsory annuity” in section 10C of the Income Tax Act, until 1 March 2018. d. Postponement of a tax-free transfer from a pension fund to a provident fund, until 1 March 2018.

• Health Minister Aaron Motsoaledi has published the White Paper on National Health Insurance (NHI), and proposals for comprehensive social security will be released by June 2016. He has further emphasised that public-health service-delivery improvements must be prioritised, and a reform of the private health and medical scheme environment is needed.

• In order to further the White paper’s proposals, the National Treasury will shortly release further details on financing aspects.

• Tax credits on medical scheme contributions have been increased by 6% to: - R286 each for the individual who paid the contributions and the first dependant on the medical scheme; and - R192 for each additional dependent.

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Taxing times Anton Kriel discusses how this year's tax announcements increase the burden even more.

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fter the rand dropped, the slowdown in the economic growth of the country, and the double replacement of finance ministers in December 2015, the whole of South Africa waited with bated breath for the National Budget Speech on 24 February 2016.

Leading up to the Budget, there was widespread speculation about increases in tax rates, including the possibility of a hike in the VAT rate. Quite surprisingly, there were no drastic increases in tax rates.

True to form – and to which we have become accustomed – Finance Minister Pravin Gordhan announced a number of tax proposals, and other aspects of the tax legislation that will be subject to further analysis, in an attempt to tighten up the tax-compliance process.

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In 1997, the then-minister of Finance, Trevor Manuel, said: “The simplification of the Income Tax Act is an important part of our vision. This year, the Ministry of Finance will embark on a project to consolidate and simplify the Income Tax Act in a manner that ensures that the contents are easily understandable by all South Africans.”

Almost 20 years later, South Africa is still burdened with very complex tax legislation, which (at most times) even the experts battle to understand.

Here is a summary of some of the more significant tax announcements made in this year’s Budget Speech: Income tax rates • The rates for companies and trusts will remain unchanged.

• The top marginal rate for individuals remains at 41% for earnings exceeding R710 300 per year. However, the relief for fiscal drag – i.e. the adjustment of tax rates to compensate for the effect of inflation on taxpayers’ earnings – has been slowed down. This means that in terms of real value, taxpayers’ after-tax income will be less. Marginal increases in the primary rebate and medical credits will apply.

Capital Gains Tax • The capital gains tax inclusion rates have been increased.

• For individuals, the inclusion rate will increase from 33.3% to 40%, increasing the effective tax rate to 16.4%.

• For companies and trusts, the inclusion rate increases from 66.6% to 80%.

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This increases the tax rate to 22.4% for companies, and 32.8% for trusts.

• The chances of capital gains becoming taxable in full, for non-individuals at least, is a real possibility.

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Retirement fund savings • With effect from 1 March 2016, the deduction of pension, provident and retirement annuity fund contributions are treated in the same manner, and subject to one universal threshold.

Minister Gordhan announced that some elements of the retirement reforms previously announced will be delayed until 1 March 2018. This only relates to the annuitisation of provident fund payouts.

• For provident fund members under the age of 55 on 1 March 2018, the annuitisation of benefits will only apply in respect of contributions made after that date. Provident fund members that are over the age of 55 on 1 March 2018 will be allowed to continue making contributions to that fund, and will not be required to purchase an annuity when they retire.

Taxation of trusts • A couple of years ago, the National Treasury issued a draft bill containing proposed amendments that would have changed the manner in which income and capital gains that flow through trusts would be taxed. Essentially, the proposal was that trusts would have to pay tax on all income, even if the income was distributed to beneficiaries. After consultation with various stakeholders, these proposals were shelved.

• Following on recommendations from the Davis Tax Commission, the South African Revenue Service (SARS) and the Treasury are now once again looking at the manner in which income distributions from trusts are taxed, and also the manner in which personal wealth is transferred to trusts to avoid estate duty and donation tax.

• The tax proposal documents make it clear that the legislation will be changed to counter the transfer of wealth. It is also proposed that interest-free loans should be regarded as donations, and that the value of assets acquired by a trust by way of interest-free loans be included in the estate of the lenders/donors on death.

Employee share-based incentives • Certain dividends received on restricted equity instruments are not exempt from tax. Currently, employees that receive these dividends are subject to tax on assessment. The legislation will be amended to classify these dividends as remuneration, and employers will have to deduct PAYE when these dividends are paid to employees.

Employer-provided bursaries • Currently, bursaries provided to employees and their relatives are exempt from tax if the employee’s earnings do not exceed R250 000 per annum, and the bursaries do not exceed R10 000 for NQF levels 1 to 4, and R30 000 for NQF levels 5 to 10. It is proposed to increase the earnings threshold to R400 000 per annum, and the bursary thresholds to R15 000 and R40 000, respectively.

Share buy-backs • If a company buys back shares from a shareholder, the payment is generally classified as a dividend, and subject to 15% dividends tax. If the shareholder is a company, the dividend is not subject to tax. Because of the difference in the tax rates, transactions involving the sale of company’s shares are often structured to involve a buy-back of the exiting shareholder’s shares. SARS does not like such arrangements, and indicated that they would review the current legislation and possibly introduce counter measures.

Tax and exchange control voluntary disclosure • Between October 2016 and 31 March 2017, South African residents with

undisclosed foreign investments and income will be provided with an opportunity to come clean. This will be a joint SARS and South African Reserve Bank initiative. Successful application under this programme will exonerate errant taxpayers from criminal prosecution and understatement penalties, but applicants will have to pay a fairly substantial penalty and income tax bill when disclosing these investments and income.

• The draft legislation that was published is very restrictive. Successful applicants will be required to pay an exchange control levy of 5% or 10% of the value of unauthorised assets, depending on whether they repatriate the funds or elect to leave it offshore. They will also be required to pay income tax on 50% of the seed capital that was used to fund the purchase of the foreign assets, and pay income tax on income and capital gains derived from 1 March 2010. Unravelling all of the information needed to meet the approval requirements could be a very costly and time-consuming exercise, which unfortunately may force certain potential applicants to look at alternative resolutions or to remain under the radar and rather chance their luck.

Conclusion

We all know that our government is on a very tight budget, and one of the ways to increase revenue is to implement tighter tax laws to prevent leakage, counter-tax avoidance arrangements, and impose penalties to enforce better compliance.

Unfortunately, this legislation, which was once envisioned to be simple enough for the man on the street to understand, has become more complex than ever before.

Together with a very strict, and sometimes overly authoritarian, enforcement of these laws by SARS, this is placing a greater burden and cost on taxpayers and businesses to remain compliant.

Anton Kriel is Director and Head: Tax at Grant Thornton Cape.

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Unravelling The Cost of Bank Regulation The South African banking industry has been consistently recognised amongst the top 10 banking sectors in the world by the World Economic Forum.

The Banking Association South Africa has developed a model explaining how the Basel regulatory costs imposed on the banking sector are translated into a selection of banking products.

For more information and to download the introductory tutorial of the model, go to www.banking.org.za

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Tightening

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DEALING WITH GOVERNMENT AND CONSUMER DEBT

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