Report of the South Africa Financial Inclusion Workshop 22 November 2017 The Wanderers Club Illovo

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1. OFFICIAL WELCOME

1.1 MR BRENDAN PEARCE, FINMARK TRUST

The day’s proceedings were officially opened by Mr Pearce, who served as MC for the day. Mr Pearce noted the uncertain political and economic times South Africa finds itself in. These include the cloud of corruption and state capture hanging over our state owned enterprises, the continued slide in the value of our currency, looming credit downgrades and low levels of investor and consumer confidence. Mr Pearce remarked that citizens are not immune to these political and economic challenges, as reflected in the results of the 2017 FinScope Consumer survey, which showed an increasing tread of greater dependency, credit strain and informality. On a more positive note, Mr Pearce acknowledged the winds of change blowing through Zimbabwe and expressed hope that this marked the dawn of new era of prosperity and development for our neighbours to the north. 2. KEY NOTE ADDRESS

2.1 MR ISMAIL MOMONIAT, NATIONAL TREASURY

The key note address was delivered by Mr Momoniat. Continuing the theme of focus on the current political and economic uncertainty Mr Momoniat reminded us of the many impacts these developments have on the poor. He drew a clear line of connection between the loss to the fiscus due to corruption and our inability to deliver to the development mandate, with poor citizens especially being impacted. Mr Momoniat addressed several financial inclusion topics such as ensuring grant recipients are not forced to use providers they don’t wish to, the negative impacts of predatory lending and the problem of low account usage. Lastly, Mr Momoniat encouraged us to ensure that as we debate policy formulations, we have the discipline to base our dialogue on evidence rather than populist sentiment. 3. PANEL DISCUSSION: POLICY MAKERS AND REGULATORS

4. TOWARDS A MORE ENABLING ENVIRONMENT FOR INCLUSIVE

FINANCIAL SERVICES

4.1 KATHY GIBSON

Ms Gibson highlighted the emerging culture of consumer consumption. Treasury thus seeks to promote a balance between promoting financial inclusion and crafting policies that ensure vulnerable consumers are protected. Furthermore, in promoting financial inclusion, policymakers must focus on both the demand and supply sides. Demand side challenges include educating consumers and promoting savings and the use of credit for productive

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purposes. Supply side policy initiatives include encouraging innovation from new, smaller financial service providers. Ms Gibson also provided a concise summary of the following National Treasury focus areas:

• Promoting access for all • Promoting competition and market based solutions • Promoting financial inclusion in the context of consumer protection and financial

integrity • Promoting innovation • Promoting proportionality in regulation • Coordination of stakeholders • Developing evidence based policies • Focus on financial sector deepening • Promote the development of SMEs through funding, access to markets and skills

development

4.2 TIM MASELA

Mr Masela gave a broad overview of the National Payments vision 2025 strategy which is closely linked to the National Development Plan. The strategy promotes a collaborative approach across all stakeholders and begins the move towards and confirms the move towards an activity based regulatory framework that provides access to the payments system based on activity rather than licencing category. The focus areas of the strategy are:

• A clear and transparent regulatory framework • A stable and secure payments system • Ensuring accountable service providers • Cost effective systems • Promoting interoperability • Promoting competition and innovation • Promoting and facilitating regional integration • Focus on financial inclusion

4.3 TENDANI MATHOBO

As Mr Mathobo highlighted, the industry has improved access to financial serves but this is not enough as we now need to promote productive and sustainable use f financial products. To achieve this the industry must focus on meeting consumer needs and also on educating consumers on the benefits of financial inclusion. The FSB will focus on enforcing consumer protection as enshrined in the Treating Customers Fairly regulations. They will ensure that financial advice is appropriate and in line with the financial circumstances of the consumer.

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One area that needs regulator attention is the funeral parlour industry which will be more closely regulated in line with the incoming micro insurance bill. 5. PANEL DISCUSSION: FINANCIAL SERVICES PROVIDERS

6. PROVISION OF RELEVANT, COST EFFECTIVE AND COMMERCIALLY

VIABLE INCLUSIVE FINANCIAL PRODUCTS

The industry panel featured engaging presentations from Andre Ferreira from Mukuru, Thembisa Mapukata from Old Mutual and Frank Schutte from MobiLife. Mr Ferreira highlighted how Mukuru had successfully penetrated the bottom of the pyramid by finding innovative ways to meet KYC requirements. Mukuru agents will visit prospective clients at their homes to verify their addresses and thereby remove the requirement for an official proof of residence document. Ms Mapukata gave an overview of Old Mutual’s efforts to support SMEs through various products and funds such as the Masasizane Fund which provides both grant and debt funding as well as skills development. Mr Schutte spoke about the need to find innovative solutions to premium payments given the irregular nature of income for many at the bottom of the pyramid. One such innovation is the premium flexibility built into the MobiLife insurance product which allows clients to skip premiums without losing the cover they have already paid for. 7. BREAKAWAY SESSION: HOW CAN MARKET PARTICIPANTS, POLICY

MAKERS AND REGULATORS BETTER ALIGN THEIR EFFORTS TOWARDS

INCLUSIVE FINANCIAL SERVICES?

The forum then broke into four breakaway sessions to discuss measures for addressing a number of financial inclusion challenges facing South Africa. Attendees were challenged to consider appropriate interventions for addressing low account usage, greater inclusion of SASSA grant recipients, low insurance penetration and productive use of credit. 7.1 STIMULATING INCREASED ACCOUNT USAGE

Attendees highlighted a number of varied factors contributing to low account usage. These include unavailability of account based payment mechanisms in townships and rural areas,

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lack of financial education and understanding of banking products and regulatory red tape that impedes opening of bank accounts. There was wide consensus that further research is needed to better understand the drivers of account usage and the barriers that are preventing greater use. 7.2 GREATER FINANCIAL INCLUSION OF SASSA GRANT RECIPIENTS

Digital distribution of grant benefits was seen as a key enabler to greater financial inclusion of recipients. However, this itself raises risks which need to be managed such as the risk of debit orders for inappropriate financial products that the recipient cannot control or cancel and the risk of predatory lending into this segment. Attendees recommended greater research in order to understand blockages to greater use of SASSA provided bank accounts, and accessibility of payments infrastructure such as ATMS and bank branches. 7.3 STIMULATING INCREASED INSURANCE UPTAKE

Attendees remarked that the high insurance penetration rate for SASSA grant beneficiaries showed that there was appetite for insurance in the lower segments but current product structures required regular income to fund premiums, which was the differentiating factor between grant recipients and other lower income segments. Further evidence of the latent popularity of insurance was the continued growth in the uptake of funeral insurance. As such, it was clear that there is a need for industry innovation around products and premium collection mechanisms. Products need to speak to the true customer needs and be culturally relevant. Furthermore, there is an opportunity to leverage popularity of funeral cover by bundling other risk covers to make the product more compelling. 7.4 ENCOURAGING PRODUCTIVE USE OF CREDIT

Attendees highlighted the need to segment the SME universe in order to derive better insights about the blockages affecting each segment. Suggested segments include “survivalist SMEs”, small business and medium businesses. Data gathering by stakeholders such as DTI and DSBD must do so in line with the identified segments in order to provide a strong evidence base for policy formulation. Many of the “survivalist” and small businesses were thought to operate informally which naturally cuts them off from most SME support programs and formal credit. Policy makers must craft innovative ways of incentivising formalisation of these businesses without burdening them with cumbersome red tape and tax liabilities.

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Lastly, attendees highlighted that credit was a component of a more holistic program of support that is required by SMEs. In addition to credit, skills development and access to markets were necessary for the success of SMEs. 8. TAKEAWAYS AND NEXT STEPS

The South Africa Financial Inclusion Workshop successfully brought together policy makers, regulators and the financial services industry for a focused discussion on the challenges impeding greater and more beneficial financial inclusion in South Africa. The discussions surface three areas emerged as key focus areas for our work going forward:

1. There was a resounding call for more in-depth research on the dynamics behind the declining usage of bank accounts and the increasing levels of cash based and informal financial relationships. FinMark Trust, in partnership with the Banking Association of South Africa, will be kicking of a study to understand the qualitative drivers and barriers behind account usage. A key component of this study will be immersive engagements with both consumers and SMEs operating in the cash based economy to derive a greater understanding of the needs of those in this environment and challenges in meeting those needs.

2. The need for innovation to unlock latent demand and take up of insurance products was another clear takeaway from the workshop. While this will require action from the industry itself, policy makers have a role to play in creating a conducive environment for innovation. To that end FinMark Trust in partnership with Cenfri will be assisting National Treasury in developing policy roadmaps for the creation of a vibrant and robust insurance environment that speaks to the poor and excluded.

3. Lastly, the workshop highlighted the need for greater support for SME access to funding and development assistance. In this area, FinMark Trust has partnered with SACCRA to support the building of a credit information sharing system for SMEs. Successful implementation of the project will allow credit bureaus to provide a verifiable credit history for SMEs thereby allowing suppliers to more readily extend credit.

FinMark Trust wishes to thank all who attended the workshop as well as all our speakers for a day of engaging, thought provoking and impactful discussions. We would like to express particular appreciation for the support received from National Treasury. It is our intention to convene such financial inclusion focused workshops on a regular basis and will look to schedule the next workshop in the first half of 2018.