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The financial services sector can serve South Africa better

28 March 2011 Gareth Stokes

As the audience settled down for the opening address of the Association of Savings and Investments South Africa (Asisa) 2011 Conference they were painfully aware that the financial services industry was still struggling to shake off the negative sentiment

“The danger is that people’s interpretation of the financial crisis and what it means for society today could be distorted by long-held ideological prejudices and that the crisis could be used in an opportunistic way to promote positions that are essentially unrelated to it,” said Dr Johan van Zyl, chairman of Asisa and chief executive of Sanlam. “For example, the crisis is being used rather indiscriminately to question the efficacy and morality of markets and to motivate greater government intervention in the economy, even in matters unrelated to the financial crisis.” He kicked off the two day seminar with a forthright discussion on the role of financial services in the domestic economy.

The financial services sector, today and tomorrow

The financial services sector exits to provide payment services (enabling transactions) and insurance services (enabling risk management) as well as to facilitate the creation of markets and the processes of financial intermediation. We’ve had success in this regard and our financial systems are highly regarded by our international peers. But their assessments of our systems are built around first world measures and expectations. “The essence of the dilemma that local financial institutions face today is how to bridge the divide between this first world and third world dimensions,” said Van Zyl. He believes that the way forward is to identify and accept the current shortcomings in the industry before finding proactive solutions to them.

How should the financial services industry respond to today’s challenges? Van Zyl said:

· Stakeholders should recognize that the financial services industry’s – and particularly its savings and investment component – right to exist is fundamentally intertwined with people’s perceptions regarding the social usefulness of what it does;

· The financial services industry should be pro-active in identifying and rectifying short-comings in the provision of financial services to achieve its main roles;

· The industry has a duty to run financial institutions as profitable businesses; and

· The industry should argue forcefully against those statements that are blatantly untrue or incorrect.

Tackling negative perceptions

“Criticism of the financial services industry is focused on matters of access with regard to payments and insurance services, and the intermediation of savings to developmental needs,” said Van Zyl. “And until such time as the industry addresses these shortcomings we will always be seen as failing South African on the whole.” National Treasury has raised the bar with its recent white paper titled A Safer Financial Sector to Serve South Africa Better. They have set out a number of challenges to the sector under four separate headings, including financial stability, consumer protection and market conduct, expanding access through financial inclusion and combating financial crime. “Generally Asisa are supportive of the emphasis in National Treasury’s paper,” said Van Zyl.

Savings critical to future economic success

For South Africa to benefit optimally from economic growth opportunities the financial services industry, with government buy-in, must drive both the mobilisation and allocation of savings. The South African Reserve Bank has played an important role in the savings environment by keeping inflation in check, but there is still room for government to “avoid punitive taxation of investment returns, ensure the stability of the financial system through appropriate regulation, encourage self-reliance rather than dependency on the state and make saving for retirement compulsory,” said Van Zyl.

Government has to remedy its “savings” performance. In his 2011 Budget Speech finance minister Pravin Gordhan observes: “Government is currently borrowing to finance short-term consumption while long-term debt is being used to finance higher current expenditure on wages, interest and goods and services.” Various stakeholders in the industry have also criticised government for stymieing savings in the corporate segment. “Corporate saving accounts for the bulk of domestic savings and it is important that we create an environment that is conducive for them to save,” said Van Zyl. Policy uncertainty forces corporations to reconsider their capital programs.

The mining sector can be held up as an example of what happens when policy uncertainty builds. Many of the major mining houses have put South African capital expenditure on hold in favour of offshore opportunities. Van Zyl warned that a similar situation could develop in the financial sector. The recently unveiled National Growth Plan, for example, calls for many of the functions of private financial institutions to be picked up by the State.

Households will play their part

Household savings is viewed as a function of income. “It is therefore futile to target household savings explicitly as a way to promote growth and investment,” said Van Zyl. “As the economy grows, the increased level of household income that comes with growth will be accompanied by an increased level of household savings.”

Editor’s thoughts: Most individuals involved in the domestic financial services industry carry about their business blissfully unaware of what it means to be dirt poor. Imagine for a moment you earn R75/day, three times a week, and have to pay away R30 of your paltry monthly earnings for the “privilege” of banking it… And that’s before the banks take their slice for each deposit or withdrawal... Have the banks and insurers done enough to extend their product to the low income market? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Jo, 28 Mar 2011
The are costs involved in everything. When governements try to force through changes or raise the minimum wage, it actually pushes up the cost of everything. How do you propose that brokers or insurers market to the emerging market with lower costs when increased regulation is making products and servicing of clients more expensive? We are dealing with an unsophistcated market segment that dont understand insurance, let alone believe in it. As it is, most brokers have stopped marketing medical aid products because the commission was capped at a extremely low level. Banks on the other hand can do micro loaning assuming that they can bear the losses.
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