Presentation on Zimbabwean AND South African Financial Systems

Zimbabwean Financial System

Apex institution: RBZ Financial Institutions Instruments traded Capital Market and securities Regulation of financial markets

APEX BACKGROUND

Reserve Bank of Zimbabwe at apex of Zimbabwe financial system. Operations governed by the Reserve Bank of Zimbabwe Act, Chapter 22: 15 of 1964, severally amended, with the most recent being in 2010. Its origins in the Bank of Rhodesia and Nyasaland, established in 1956 as the central bank to the then Federation of Rhodesia and Nyasaland. Despite Government ownership, the Central Bank enjoys some degree of independence that enable it to perform its functions. It was set up to regulate the nations monetary system and maintain the internal and external stability of the currency through the implementation of monetary policy. It seeks to maintain a stable financial environment within which competitive markets support the efficient use of productive resources.

FUNCTIONS OF CENTRAL BANK i. ii. To achieve and maintain the stability of the Zimbabwe dollar; Formulating and implementing monetary policy through; determining Interest rates; controlling the nation's entire money supply; and lender of last resort. iii. It acts as a banker and financial adviser to the Government; iv. the bankers' bank; v. managing the country's foreign exchange and gold reserves; and the Government's stock register; vi. regulating and supervising the financial sector; vii. To foster the liquidity, solvency, stability and proper functioning of Zimbabwes financial system, viii. to participate in international organisations whose objective is to pursue financial and economic stability through international monetary cooperation and ix. issuer of notes and coin,
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FUNCTIONS OF CENTRAL BANK

cont..

Prior to 2009, the RBZ played the lender of last resort (LOLR) function through the intra-day facility as well as through the overnight accommodation to banks experiencing short-term liquidity challenges. The Bank was able to provide the required funds due to its ability to create money. The adoption of multiple currencies in the country, in February 2009, resulted in the Central Bank failing to play the critical role of lender of last resort as its balance sheet could not allow, and the Bank could no longer issue currency. This has had marked impact on the financial sector The Government availed US$7 million to the Bank for the lender of last resort function, in December 2010. The facility was opened to the banks in February 2011, with acceptable collateral being Deeds of Transfer on immovable property. Since its inception, no draw down has been made on the facility largely due to the complicated nature of the collateral. The collateral has other inherent costs especially relating to perfection which involves bond evaluation and registration.

Instruments of Monetary Policy

Post multicurrency adoption the Central Bank has been unable to use most of its instruments in the conduct of its monetary policy. Rediscount Rate was key policy instrument whose periodic announcements signalled significant changes to the Bank's conduct of monetary policy. Rediscount rate has also been actively used to project Bank's medium-term view of inflation on the one hand, and as a primary rate through which other interest rates in the economy were influenced. Bank Rate -This replaced both the rediscount rate and the overnight rate (before dollarisation), and acted as a key policy rate for the Bank's lender-of-last-resort function.

Instruments of Monetary Policy

Moral Suasion it is a mere appeal to the banking fraternity to follow a stipulated line of action. It is not backed by law, Reserve ratio-Is the ratio of percentage of deposits that must be lodged with the central bank, Special deposits lodged with the Central Bank i.e. during periods of inflation, the government raises the amount of special deposits lodged with it.
Open Market Operations-these involve the sale or buying of government paper to the public, e.g.: Treasury Bills Repurchase Agreements (repos) OMO bills

i. ii. iii.

ZIMBABWE FINANCIAL INSTITUITIONS AND INSTRUMENTS

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ARCHITECTURE OF THE BANKING SECTOR

Type of institution Commercial Banks* Merchant Banks Building Societies Savings Bank Finance Houses Discount Houses Total Banking Institutions Asset Management Companies Microfinance Institutions Number 17 4 4 1 0 0 26 16 132

*As at 30/06/11, Excludes Barbican Bank which was re-licensed but is not yet
operational and includes Interfin Bank Limited formerly a merchant bank. 9

Commercial Banks
17 commercial banks the biggest in terms of balance sheet being CBZ, Standard Chartered, Stanbic, Bancabc and Barclays. Trend towards financial groups offering insurance, asset management and mortgage financing. E.g. CBZ Holdings, FBC Holdings, Agribank is unique in the market as it was formed with a thrust to support the agricultural sector, but now operates under Banking Act. 10

Commercial Banks
Major money market players through Treasury dept Facilitate payments through cheques, internet banking and telephone banking Issuing bank drafts and bank cheques Accepting money on term deposits
Lending money through overdraft facilities Providing letter of credit ,bankers acceptances, Guarantees and securities underwriting e.g. CBZ were underwriters for the ZECO shares. Safe custody services Cash management and investment services 11

Commercial Banks
Offer various credit facilities to individuals and corporates They deal in bankers acceptances, negotiable certificates of deposits and treasury bills Are making money through bank charges/fees and penalties.

Commercial banks also charge fees for safety deposit boxes used for keeping valuables.
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Building Societies
There 4 building societies with only one standalone Building society CABS with the rest now part of a financial group Mainly involved in fixed deposits, savings and mortgage lending. They are invariably involved in housing projects They have active Treasury departments which trade in interbank market

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Merchant Banks
There are 4 merchant banks These deal more with corporates than individuals

Merchant banks specialise in the money and capital markets, with active investment banking divisions They offer fee based services for corporate and advisory services
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Merchant Banks
They underwrite securities and manage portfolios. E.g. Renaissance Merchant Bank was the underwriter for Pearl Properties listing. They engage in trade financing through accepting short and medium term facilities and foreign exchange facilities.

They also help in project financing

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Post Office Savings Bank (POSB)

Accepts fixed deposits and savings account facilities. Now also offers loans Cash transfer facility through money and postal orders.

It has got 85 branches and is accessible in the remote areas.

It is 100% Government owned.
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Infrastructure Development Bank of Zimbabwe (IDBZ)

Took over assets and functions of Zimbabwe Development Bank Offers loans for infrastructure and long term projects e.g. housing It is currently being financed by Treasury

Also participates in money and capital markets

It is 100% Government owned.
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Insurance Companies
There are about 44 comprising short term, Life, Funeral assurers and 8 Reinsurance Companies Most business is conducted through brokers The Zimbabwean insurance market is well developed with about 29 registered short term insurance companies transacting short-term business and 5 transacting life business. Most banks now offer insurance under the ambit bancassurance. 18

Pension Funds
Pension funds help individuals save for their retirement and are expected to protect the value of their pensions. NSSA is the biggest pension fund collector and is used as a Special Vehicle Fund (SPV) for social security They invest in money market and capital market, especially equities and properties. They are prohibited from investing offshore by the Government.
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Micro-Finance Institutions (MFIs)

There are 132 registered microfinance institutions in Zimbabwe and the apex organisation is ZAMFI (Zimbabwe Association of Micro finance Institutions)

Most of the loans offered are bridging facilities for fees and other emergencies. They are usually salary based loans MFIs recover their debts from direct debits (stop orders from banks) or payroll deductions. Examples of MFIs include Micro King and FMC financial services.

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Asset Management Companies

16 licensed Asset Management Companies under the supervision of the Reserve Bank. The big three Asset Management Companies dominated the asset management sector, commanding over 60% of funds under management as at 30 June 2011.
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Zimbabwean Money market

Notably being affected by absence of Treasury Bills Securities being traded: bankers acceptances, promissory notes, NCDs

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Money market-operations
What we are supposed to be We are supposed to have Treasury bills, central bank bills, parastatal bills & municipal securities Money should be held in near liquid and interest earning accounts Money market should be deep and wide
What we are
Bankers acceptance is the only available instrument Generally subdued (narrow and shallow) due to absence of tradable instruments This has left banks with large unutilised balances in RTGS , Nostro accounts The main reason is that we are not using our own currency,

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Money market-operations cont.

Where we are supposed to be The Central Bank is the regulator in the market The Central Bank issues risk free instruments e.g. TBs
Where we are

The Central Bank has its hands tied because of the use of the dollar Less supervision because of the relationship it has with players (owes banks money) Failed to honour its own bonds in Renaissance
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CAPITAL MARKET
Shares Bonds There was brief trade in share options in 2002-3 by a few players Currently No Derivatives
Futures Swaps Options
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Facts about ZSE

ZSE is the second largest in the region after SA Supervised by the Securities Commission Open to foreign investment since 1993

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ZSE History
The first stock exchange in Zimbabwe opened its doors in Bulawayo in 1896. However, it only operated for about six years. Other stock exchanges were established in Gwelo (Gweru) and Umtali (Mutare). A second floor was opened in Salisbury (Harare) in December 1951 and trading between the two centres took place by telephone. The Rhodesia Stock Exchange Act reached the statute book in January 1974. the exchange changed its name from the Rhodesia to the Zimbabwe Stock Exchange. US-Dollar was adopted as the legal tender for trading on the exchange in February 2009.

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Bond market
No active bond market Starafrica and PGI have both issued $10m convertible debenture arranged by Bancabc The PGI debenture is listed and trading on ZSE Starafrica was a private placement
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Commodities market
A vibrant commodities market existed in form of ZIMACE Had forward contracts on maize, wheat and other commodities No longer operating The Agricultural Marketing Authority has since been reactivated Possible reopening of ZIMACE may pave way for derivative markets? 29

Foreign Exchange Market

Currently virtually non existent due to multi-currency currency regime Banks and international money transfer agencies offer some exchange trading for facilitating foreign payments across currencies Zimbabwe used to have Registered Money Transfer Agencies (MTAs), and Bureau de change as active players in foreign exchange market

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Regulation
New capital requirements By 30 June 2011 19 out of 25 banking institutions had met the requirements RBZ has published guidelines for adopting Basel 2 Main tool of regulation is imposition of minimum capital requirements on all banking classes

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Regulatory Guidelines issued

Special Purposes vehicle, securitisation and structured finance Consolidated Supervision policy framework Risk Based supervision policy framework Risk Management Guideline Corporate Governance Guideline Board and Director Evaluation 32 Framework

Zim Financial Regulation Legislation

Reserve Bank ACT (Chap 22:15 Banking Act chap 24:20 Building Societies Act-chap 24:04 Pension and Provident Fund Act-chap 24:09 Insurance Act-chap 24:07 Small Enterprises Development Act-chap 24:12 People's Own Savings Bank Act-chap 24:22 Exchange Control Act-chap 22:05 Securities Act-chap 24:25 which repealed ZSE Act-chap 24:18 National Payments Systems Act-chap 24:23 Money Lending and Rates of Interest Act-chap 14:14 Collective Investment Scheme Act-chap 24:19 State Loans and Guarantees Act-22:13 Prescribed Rate of Interest Act-chap 8:10
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Implementation of Basel 2
Gradual approach to implementation Foundation laid through issuance of various guidelines on Corporate Governance, Risk Management, Securitisation, and Financial Disclosure In January 2011, the Reserve Bank issued the Technical Guidance on the Implementation of the Revised Capital Adequacy Framework in Zimbabwe to the market. RBZ has now finalised the Basel II Implementation Action Plan in which, banks shall, at a minimum, adopt the Modified Standardised Approach (MSA) for credit risk, and Alternative Standardised Approach (ASA) for operational risk. Adoption of advanced approaches is subject to satisfactory Supervisory Validation by RBZ.
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Implementation of Basel 2
With respect to the MSA banking institutions to develop or revise internal rating systems, to ensure reliable and accurate mapping to new Supervisory Rating System (SRS). 30 September 2011, deadline for submission of the mapping procedures Full Implementation of the revised framework shall commence on 1 January 2012 and finalized by 1 January 2013. Thus all banking institutions are required to commence a parallel run of the revised Framework with effect from 1 January 2012. During 2012, all banks will be required to perform three Basel II pilot runs, for which the reference dates All banks should comply with Basel 2 by 1 January 2013, 35

South African Financial System

Apex institution: SARB Financial Institutions Instruments traded Capital Market and securities Derivatives Market Regulation of financial markets

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Apex Background
Established & operates in terms of the South African Reserve Bank Act, 1989 Primary monetary authority and custodian of country's gold and foreign exchange reserves Managed by a board of fourteen directors, seven representing major commercial and financial institutions, industry, and agriculture, and seven appointed by Govt. Technically independent of Govt control Helps to formulate and implement macroeconomic policy.
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Objectives & Functions

Regulates the money supply Regulation & supervision of banking services Managing stability of the financial system Systematic risk management Oversight of payments, clearing and settlement systems Inflation management Issues bank notes and is responsible for the sale and purchase of foreign exchange for the government Administration of the treasury-bill tender system Assists banks that experience liquidity problems Authorized buyer of gold bullion & acts as agent for the gold-mining industry.
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Financial institutions in South Africa

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Commercial banks
Primarily concerned with receiving deposits and lending business Allow for deposit accounts Run to make a profit and owned by a group of individuals

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Banks in south Africa listed

Locally owned banks African Bank Ltd Bidvest Bank Ltd Capitec Bank Ltd First Rand Bank Grindrod Ltd Imperial Bank South Africa Investec Bank Ltd Nedbank Ltd Sasfin Bank Ltd Teba Bank Standard Bank of S.A
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Foreign Controlled Bank

Absa Bank Ltd Albaraka Bank Ltd Habib Overseas Bank ltd Habib Bank A.G Zurich Mercantile Bank ltd South African Bank of Athens Ltd
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Branches of foreign banks

Bank of Baroda Bank of China Bank of Taiwan Calyon Corporate & investment Bank China Construction Bank Corporation Citibank N.A Deutsche Bank AG JP Morgan Chase Bank

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Branches of foreign banks

Societe Generale Standard Chartered Bank State Bank of India Hong kong & Shangai Banking Corporation Royal Bank of Scotland
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Mutual Banks
Can also be referred to as Mutual Savings Bank. Is a financial institution chartered through a state or federal government to provide a safe place for individuals to save & to invest those savings in mortgage, loans, stocks, bonds and other securities.

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Investment Banks
Standard Bank Rand Merchant Bank Citi Bank FNB

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Mutual Banks in SA
GBS Mutual Bank VBS Mutual Bank

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Postal saving system

National post office operate postal savings systems to provide depositors who do not have access to banks a safe, convenient method to save money & to promote saving among the poor. In S.A this is done by Postbank
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Development Finance Institutions

Land and Agricultural Development Bank Development Bank of S.A Industrial Development Corporation

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Functions of Development Banks

Accelerate sustainable socio-economic development by funding physical, social and economic infrastructure To contribute to the creation of balanced, sustainable economic growth in S.A and on the rest of the continent. Promote entrepreneurship through the building of competitive industries based on sound business principles. Aims to be the primary source of commercially sustainable industrial development & innovation to benefit both S.A and the rest of Africa.
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Summary on Banks
Combined Assets of all banks is just below ZAR2,000,000 8 banks act as primary dealers in the bond market. The 4 big banks and the Reserve Bank of South Africa are settlement agents of the bond exchange of South Africa. There are 7 banks listed on the JSE.

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INSURANCE
There is a bewildering range of insurance companies in South Africa, offering both short and long term insurance. Long term insurance includes Term Life which covers you for a specified period of time. Whole Life which remains in force until death or surrender of the policy. Universal Life which includes an investment component. Provision for retirement and disability insurance also falls under this category.

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Savings & Credit cooperatives (SACCOs)/ Credit Unions

It is a democratic, unique member driven, self help co-operative Owned, governed & managed by its members who have the same common bond; working for the same company, belonging to the same church, labour union, social fraternity or living/working in the same community. Decisions made in a structured democratic way Members elect a board that in turn employ staff to carry out the day to day activities of the SACCO. Providing credit at competitive rates & other financial services to the members.

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Stokvel Sector
Community based savings clubs Substantial role in SA economy Approx ZAR12 billion per year is invested in stokvel. Mainly for Black adults in SA. Controlled by the National Stokvels Association of SA (NASASA) setup to organise and empower stokvels. Members contribute fixed sums of money to a central fund on a weekly, fortnightly or monthly basis.
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South African Exchanges

JSE Limited- the only equities exchange in SA. SAFEX (South African Futures Exchange)owned by JSE Securities Exchange. It is the exchange for trading listed futures and options on futures contracts. BESA (Bond Exchange of South Africa)independent financial exchange responsible for regulating the long term debt securities in South Africa
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Financial Instruments
Money Market Treasury Bills Certificates of Deposit Commercial Paper Bankers Acceptances Letters of Credit Repurchase and Reverse Repurchase Agreements
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Financial Instruments cont

Capital Market Long Term Bank loans and deposits Bond Market Equity Market These are well developed in SA.

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Financial Instruments cont..

Government Stock Refers to the long term debt obligations of the government. Issued for purpose of:
Financing Govt Capex Rollover of maturing government stock influencing monetary policy.

Has an active secondary market

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Financial Instruments cont

Municipal Stocks Long Term fixed interest loan stocks issued by municipalities and other local authorities. Finance capital projects involving infrastructural development. Issues are conducted by merchant banks or stock broking firms.
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Derivatives Market
SA has an active derivatives market. Ranked 10th in 2008 by the futures industry association (FIA) using the number of contracts traded. JSE is the largest operator of single stock futures (SSF) market in the world in terms of volumes of contracts traded.
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Types of Derivatives in the Market

Futures Options Warrants (Shares) Swaps Forwards

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Securitisation
1. 2. 3. Creation of Asset backed securities Debt securities backed by a stream of cash flows. Money market activities are strengthened by securitization e.g. Asset Backed Commercial Paper Auto Loan Securitization Trade Receivable Residential Mortgage Backed Equipment Leases Public and Project Finance Securitization Cross border future cash flows

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SA-REGULATION FRAMEWORK

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CLASSIFICATION
Financial institutions are regulated according to their activities/class i.e.
Banks and mutual banks (deposit-taking institutions) Microfinance institutions: credit unions; village banks; stokvels; banks (microfinance activities) Long-term and Short-term insurers Pension, retirement and provident funds Friendly societies Medical insurance

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Regulation of Investment services

Wholesale services:
Financial exchanges, securities firms, portfolio managers and collective investment schemes

Retail services:
Investment advisers and marketers of financial products

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Detection and prevention of unlawful activities

Market abuse (e.g. insider trading) Money laundering (Anti-Money laundering Advisory Council Anti-Terrorism

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Financial regulatory structure

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Legislation Used in Financial Regulation

Banks Act, [No. 94 of 1990] to address the prescriptions of the Basel II accord. Mutual Bank Act [No. 124 of 1993] Home Loan and Disclosure Act [No. 63 of 2000] Bills of Exchange Act [No. 56 of 2000] Currency and Exchanges Act National Payment Systems Act [No. 78 of 1998] National Credit Act, [No. 34 of 2005] March 2007, The Banking Association South Africa Supervision of Financial Institutions Rationalisation Act, [No. 32 of 1996] Financial Institutions (Protection of Funds) Act [No. 28 of 2001] Inspection of Financial Institutions Act
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Insurance and related services

Insurance Act, [No. 55 of 1989 Long-term Insurance Act, [No. 52 of 1998] Short-term Insurance Act, [No. 53 of 1998] Pension Funds Act [No. 24 of 1956] (format html) - under review - see Draft Pension Funds Amendment Bill (html) Closed Pension Fund Amendment Act [No. 41 of 1999] Friendly Societies Act, 1956 Medical Schemes Act, [No. 131 of 1998 Financial Supervision of the Road Accident Fund Act, [No. 8 of 1993]
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Investment services
Wholesale services Securities Services Act; [No 36 of 2004] Public Investment Corporation Act, [No. 23 of 2004] Retail services Collective Investment Schemes Control Act [No. 45 of 2002] Financial Advisory and Intermediary Services Act [No. 37 of 2002]

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Detection and prevention of unlawful activities

Insider Trading Act, [No. 135 of 1998] Financial Intelligence Centre Act, [No. 38 of 2001] Prevention of Organised Crime Act, [No. 121 of 1998] Prevention and Combating of Corrupt Activities Act, [No. 12 of 2004]
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Authorities Responsible for Financial Regulation and Supervision

South African Reserve Bank, Bank Supervision Department Financial Stability Department and Committee National Payments System Department

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Financial Services Board (Registrars)

Established as a statutory body by the Financial Services Board Act, 97 of 1990 Operations financed by the financial services industry, Supervises the activities of non-banking financial services providers e.g. Longand Short-term Insurance, Friendly Societies, Pension Funds, Collective Investment Schemes, Securities Services. Those functions resort in the office of the Executive Officer acting with other members of the executive and heads of the various departments. Included in such functions are a Directorate for monitoring of market abuse (e.g. insider trading); the participation bonds industry; certain trust and depository institutions; and central security depositories responsible for the safe custody of securities. The FSB is also responsible for the financial supervision of the Road Accident Fund. Excluded from the FSBs responsibilities are some areas involving listing requirements or public issues and takeovers and mergers. The Registrar may also regulate or prohibit the sale of unlisted securities. Absolute (hedge) fund products are not regulated at this time. The FSB is assisted by an advisory board on financial markets, and advisory committees on long- and short-term insurance, pension funds, collective investment schemes, and financial services providers.

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The National Credit Regulator

The National Credit Regulator (NCR) was established under the National Credit Act 34 of 2005 Responsible for the regulation of the South African credit industry. It is tasked with carrying out education, research, policy development, registration of industry participants, investigation of complaints, and ensuring enforcement of the Act The Act requires the Regulator to promote the development of an accessible credit market, particularly to address the needs of historically disadvantaged persons, low income persons, and remote, isolated or low density communities. NCR tasked with the registration of credit providers, credit bureaux and debt counsellors; and enforcement of compliance with the Act The National Credit Regulator is independent and governed by a Board. The NCR advises the Minister on matters of national policy relating to consumer credit and reports to the Minister annually.
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Financial exchanges (selfregulating organisations)

JSE Limited JSE (formerly the Johannesburg Stock Exchange)
Bond Exchange of South Africa (BESA)

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Coordination of financial regulation

Policy Board for Financial Services and Regulation The need for coordination arises from
the existence of more than one regulatory authority development of multi-functional institutions and cross-border operations

The Policy Board for Financial Services and Regulation, a statutory body in terms of the Policy Board for Financial Services and Regulation Act, 1993, it includes representation from stakeholders of the financial system in South Africa. Main task is to advise the Minister of Finance on policy matters with regard to the regulatory framework for financial services. The coordination relates to
financial regulation policy, aimed at competitive neutrality in terms of principles, standards and practices execution of regulation policy and supervision, aimed at consolidated supervision of financial groups, financial conglomerates and multi-national institutions

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Coordination of financial regulation cont...

Financial Markets Advisory Board (FMAB) established in 1990, mandated in terms of the Securities Service Act, 2004 Role of the FMAB:
Conducts investigations on matters relating to financial markets and stock exchanges Advises the Registrar of Securities Services Makes recommendations to the Minister of Finance

Advisory committees Provide counsel in the areas of:

Appeal Boards Established for adjudicating in appeals against decisions of the different Registrars.

Short and long-term insurance Pension funds Collective investment schemes Financial services providers

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THANK YOU!!
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