PRESENTATION TO THE PORTFOLIO COMMITTEE ON HUMAN SETTLEMENTS 14 October 2015 Rural Housing Loan Fund ANNUAL INTEGRATED REPORT 31 MARCH 2015 JABULANI FAKAZI

PRESENTATION TO THE PORTFOLIO COMMITTEE ON HUMAN SETTLEMENTS

14 October 2015

Rural Housing Loan FundANNUAL INTEGRATED REPORT 31 MARCH 2015

JABULANI FAKAZI – CEO

BRUCE GORDON - CFO

Contents Mandate, vision, mission and values

Value creation

Operating environment

Performance 2015

Governance

Risks

Looking ahead

Mandate, vision, mission and values

Mandate

• To facilitate funding to enable rural low income earners to better their living conditions through improving their housing situation

Vision

• The Rural Housing Loan Fund is a world-class rural housing social venture capital fund that creates new financial arrangements and opportunities for rural families to improve their housing, economic and living environments

Mission

• To empower people in rural areas to maximise their housing choices and improve their living conditions through access to housing credit and government housing subsidy funds

ValuesTransparency Passion for development EmpowermentIntegrity and honesty Excellence RespectAccountability and responsibility


Value creation


Performance 2015

Governance

Risks

Looking ahead

How do we create value for better living conditions?

Capitals• Finance• People• Intellectual• Relationships• Natural

Activities• Lending• Verification• Risk Management

Outputs• Incremental

loans

Outcomes• Improved rural

housing• A better life for

people in rural areas

What does the Rural Housing Loan Fund deliver?

Rural Development

Rural Housing

Loan Fund

Housing opportunities delivered since inception

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015A. New Number of Loans Per Annum 17,992 11,122 5,553 10,536 8,006 15,202 26,648 32,028 37,644 40,537 33,112 40,289 47,043 44,812 44,610 40,185 455,319Loan Usage

New House 10.0% 12.0% 12.0% 11.0% 11.6% 8.0% 2.0% 2.0% 6.0% 8.0% 3.0% 4.0% 4.0% 3.0% 3.0% 0.9% 5%House Extension 29.0% 18.0% 19.0% 19.0% 18.4% 14.0% 7.0% 10.0% 8.0% 17.0% 8.0% 10.0% 12.0% 11.0% 8.0% 7.7% 12%Home Improvement 48.0% 54.0% 54.0% 52.0% 53.0% 49.0% 49.0% 48.0% 56.0% 50.0% 71.0% 68.0% 71.0% 76.0% 81.0% 73.5% 63%Services (water, electricity, sanitation) 7.0% 8.0% 7.0% 7.0% 8.0% 12.0% 16.0% 10.0% 4.0% 3.0% 2.0% 3.0% 3.0% 2.0% 2.0% 14.1% 6%

Total Housing Usage 94.0% 92.0% 92.0% 89.0% 91.0% 83.0% 74.0% 70.0% 74.0% 78.0% 84.0% 85.0% 90.0% 92.0% 94.0% 96.2% 86%Other 6.0% 8.0% 8.0% 11.0% 9.0% 17.0% 26.0% 30.0% 26.0% 22.0% 16.0% 15.0% 10.0% 8.0% 6.0% 3.8% 14%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100%

B. Number of loans used for: 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Cumulative

TotalBuild a new house 1,799 1,335 666 1,159 929 1,216 533 641 2,259 3,243 993 1,612 1,882 1,344 1,338 350 21,299Extend Existing Houses 5,218 2,002 1,055 2,002 1,473 2,128 1,865 3,203 3,012 6,891 2,649 4,029 5,645 4,929 3,569 3,108 52,778Improvements/Innovations 8,636 6,006 2,999 5,479 4,243 7,449 13,058 15,373 21,081 20,269 23,510 27,397 33,401 34,057 36,134 29,546 288,635Connecting to Services 1,259 890 389 738 640 1,824 4,264 3,203 1,506 1,216 662 1,209 1,411 896 892 5,664 26,663

Total number of loans used for a mandated purpose

16,912 10,232 5,109 9,377 7,285 12,618 19,720 22,420 27,857 31,619 27,814 34,246 42,339 41,227 41,933 38,668 389,375

Cumulative Total

Mandate achievement: Housing Impact Monitoring Reports

ANNUAL FIGURES2012

Our commitment to the current MTSF

Performance against MTSF targets

Previous term

targets

Previous term

achieved

Current term

targets

Year 1 Current

term

% achieved to date

Incremental Rural Housing Loans (number)

181,811 209,866 233,636 40,185 17.2%Higher is better

Percentage used for housing 80% 94% 88% 96% NAHigher is better

Percentage to people earning over R15,000 (R9,800 in previous term)

20.00% 12.70% 12% 2% NALower is better

Percentage to people earning under R3,500

60% 72% 60% 75% NAHigher is better


Value creation


Performance 2015

Governance

Risks

Looking ahead

Government development policy Government Development Policy Priorities as set out in the National Development Plan:

◦ Sustainable human settlements◦ Rural development◦ Mining towns◦ Supporting Small Medium and Micro Enterprises

Economic conditionso Low economic growth—revised downwards throughout the yearo High unemploymento Interest rates: REPO rate is still low, the interest rate for unsecured credit is still high, hence RHLF’s

Pricing Policy designed to lower interest rate our borrowers payo Inflation (CPI): although largely within the set target during the year, most relevant inflation indices for

RHLF end users are:o Food inflationo Transport o Rural inflation

Interest rates

Maximum microlending rate allowed by National Credit Act (2005) – REPOx2.2+20%

RHLF end user interest rates

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 150%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Most common interest rate charged by RHLF clients

By ensuring that RHLF clients charge discounted rates we increase market competitiveness

RHLF client inflation compared to CPIX

Source: StatsSA

Credit Industryo Collapse of African Bank put pressure on the microfinance business environmento Tightening of the credit granting criteria by lenders—RHLF lenders includedo High levels of consumer indebtedness remains a concerno High rejections rates—ranging between 45% and 90%o Demand for housing loans is there, but affordability is a challenge


Value creation


Performance 2015

Governance

Risks

Looking ahead

Stakeholder perspective: Broaden and deepen the reach of housing finance

Housing opportunities delivered - 2015

Stakeholder perspective: Achieving visibility

Actual Budget Variance Commentary

Value of loans in place (R000) 387,443.2 430,990.6 (43,547.4) Lower disbursements lead to this. An anticipated large drawdown did not occur in March

Impairment provision (%) -10.5% -15.5% 5.0% Better position than budgeted as clients pay

Disbursements to retail intermediaries (R000)

58,915 198,000 (139,085) Many clients were rolled over instead of drawing new funds and a large drawdown was not made

Disbursements to retail intermediaries including mezzanine (R000)

261,499 298,000 (36,501) An anticipated large draw down in March was not made

Stakeholder perspective: Building lending capacity


Number of retail intermediaries (units) 11 8 3 Budget exceeded

Number of community based intermediaries (units)

5 6 (1) Community based orgnanisations could not afford loans

Financial perspective: Real capital preservation


Income from core business (R000) 42,110 39,063 3,048 Not as many concessionary loans are being drawn as RHLF wants.

Income from financial investments (R000)

12,200 5,405 6,795 Budget exceeded as disbursements are not as high as planned

Impairments on loans and investments (R000)

(8,687) 1,764 (10,451) Due to the difficult market prudent provisions have been considered necessary

Expenditure excluding debtors provision (R000)

(15,123) (17,519) 2,396 There are savings being reflected

Operating expense ratio (%) -28% -39% 12% Higher than budgeted income and lower than budgeted expenses

Operating surplus after taxation (R000)

49,916 13,273 36,642 The reversal of taxation backdated to 2004 is reflected here

Total capital (R000) 427,646 384,691 42,954 Increased profitability as well as better start to the year than budgeted

Return on equity (%) 8.8% 2.5% 6%Reflects the positive effect of the income tax reversals

Business process perspective:Sharpen portfolio risk management


Full client due diligence reviews 13 10 3 Budget exceeded

Loan verification visits 12 10 2 Budget exceeded

Single issue site visits 4 6 -2Reassignment of tasks as clients were compliant

Business process perspective:Accelerate client acquisition


Credit committee proposals - new clients

6 6 0 Budget achieved

Credit committee proposals - existing clients

9 12 -3Poor market conditions led to less demand for new facilities by existing clients

Business process perspective:Targeted positioning and branding


Targeted media briefings 0 4 -4Target not achieved as focused more on editorials

Paid editorials and advertisements 10 6 4 Budget exceeded

Information briefings 47 30 17 Budget exceeded

Learning and growth: Skills development and capacity


Training expense 235 138 97Skills of employees enhanced more than budgeted

In house workshops 1 3 -2Used budget for individual training and annual workshop covering many topics

Fulltime posts 14 16 -2A Development Monitoring post was not filled

Interns 1 3 -2Appointment of client management intern postponed


Value creation


Performance 2015

Governance

Risks

Looking ahead

Audit outcomes

Audit opinion of financial statements

Comment on predetermined objectives

Compliance with legislation

Internal control

Clean (no qualifications or emphases of matter)

No material findings

No material non-compliance

No significant deficiencies

GovernanceBOARD OFDIRECTORS

Human Resources, Ethics and Remuneration Committee – meets

at least 3 times / annum

Credit and Development Committee - meets at least 4 times and as

needed

Audit and Risk Committee – meets at least 4 times per annum

Internal Audit has a comprehensive 3 year

rolling work plan

Changes in BoardBoard member Roles at 31 March 2014 Changes since then

Thembi ChilizaChairperson of the Board and Member of Human Resources, Ethics, and Remuneration Committee

Added Credit and Development Committee membership

Adrienne EgbersDeputy Chairperson of the Board, Chairperson of Credit and Development Committee and member of Audit and Risk Committee

No change but acted as Chairperson of Audit and Risk Committee for a period

Knowles Oliver Chairperson of Audit and Risk Committee Deceased

Molefe Mothibe Chairperson of Human Resources, Ethics and Remuneration Committee

Added Audit and Risk Committee membership

Reginald Hamman Member of Audit and Risk Committee Became Chairperson of Audit and Risk

Committee

Nancy Sihlwayi Member of the Human Resources, Ethics, and Remuneration Committee

Resigned upon appointment as MEC in Eastern Cape

Jabulani Fakazi Chief Executive Officer and member of Credit and Development Committee No change

Stakeholder engagementSTAKEHOLDER

Ministry

Presidency – Performance Monitoring

Parliamentary Portfolio

Other departments (Treasury / Rural Development)

Local government

Intermediaries

Funders

Other DFIs

Borrowers

Employees

TYPES OF ENGAGEMENTS

Meetings and presentations


Presentations


Briefings

Regular

Meetings and submissions

Consultations

Interviews at their homes

Various


Value creation


Performance 2015

Governance

Risks

Looking ahead

Risks Risk description Cause Mitigation Future

Insufficient funding National budget constraints, lack of prioritisation of the Rural Housing Loan Fund

Ongoing selling of the Rural Housing Loan Fund’s mandate to all stakeholders

Integrated reporting, research into the Rural Housing Loan Fund outcomes,

Selling of the benefits of the mandate

Development Financial Institution merger

Policy decision Protection of the Rural Housing Loan Fund’s mandate throughout the process

Selling of the benefits of the Rural Housing Loan Fund’s mandate

Debt levels of retail borrowers Overenthusiastic lending by consumption lending businesses

Looking for intermediaries who can deliver in areas where indebtedness is lower

Educating consumers on the management of their finances

Inability to earn an adequate Return on Equity

The need to reduce interest rates to retail borrowers

Additional funding is required, ideally grant funds that can earn the Rural Housing Loan Fund additional funds

Income tax exemption

Relaxation of Development Bank of Southern Africa / KFW liquidity covenant

Further relaxation of covenant

Exemption from requirement to deposit spare funds with the Corporation for Public Deposits

Inability to achieve success with community based organisations

Lack of resources well skilled in successfully working with these organisations

Using Junior Clients Executives to manage these

KFW funds will be used to support community based organisations


Value creation


Performance 2015

Governance

Risks

Looking ahead

Looking aheadoDevelopment finance institution merger

oIndividual Rural Housing Voucher programme

oResearch projects:o New products to enhance sustainable rural human settlements and the size of the needo Impact assessment (the effect on peoples living conditions)

oBuilding loan distribution channels:o Investing in start-up micro-lenders to enhance their sustainabilityo Continue targeting co-operatives

Concluding remarksoMarketing conditions remain a challengeo Economic growth, unemployment, indebtedness levels, etc.

oDemand for incremental housing finance remains high, but affordability levels remain low

oRHLF is an established working business model.

oBuilds self reliance by empowering people to incrementally realise their housing dreams (and right of adequate).

oRoom to scale up delivery of loans by:◦ Supporting emerging black owned housing lenders◦ Supporting Housing Co-operatives and other co-operatives involved in income generating activities (e.g.

Co-operative Financial Institutions under Cooperatives Bank Development Agency)◦ => Success in working with these new partners complements existing delivery channels and contribute to

delivery of MTSF targets.

Thank you

Documents

PRESENTATION TO THE PORTFOLIO COMMITTEE ON HUMAN SETTLEMENTS 14 October 2015 Rural Housing Loan Fund ANNUAL INTEGRATED REPORT 31 MARCH 2015 JABULANI FAKAZI