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2012 ANNUAL SADC DFI CEOS FORUM

IN WALVIS BAY, NAMIBIA

EXPERIENCE IN THE

IMPLEMENTATION OF THE

PRUDENTIAL STANDARDS,

GUIDELINES & RATING SYSTEM

(PSGRS) – THE CASE OF FINCORP

6 - 7 DECEMBER 2012.

Walvis Bay, Namibia

DUMISANI J. MSIBI

MANAGING DIRECTOR

STRUCTURE OF PRESENTATION

FINCORP Background Information.

DFI Regulatory Environment in Swaziland.

Implementation of PSGRS - Observations.

Implementation – Governance.

Independence

Commercial Principles.

Corporate Social Responsibility.

Implementation – Financial Standards.

Asset Quality

Key Weaknesses as identified by PSGRS.

Implementation – Operational Standards.

Loan Appraisal.

PSGRS Implementation Challenges

Conclusions and Observations.

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SWAZILAND DEVELOPMENT FINANCE

CORPORATION (FINCORP) The Swaziland Development Finance Corporation (FINCORP) has just

celebrated its 15th ANNIVERSARY having commenced operations in 1996 as a national DFI with the main aim of economically empowering Swazi people at grassroots level through the provision of access to sound and sustainable financial services. Tenor of facilities generally range between 6 and 60 months.

FINCORP is a registered private corporation with two shareholders namely the Swaziland Government and a local investment company, Tibiyo TakaNgwane, holding 80% and 20% shares respectively. The main objectives of FINCORP are:

To finance and promote the development of Swazi-owned Enterprises;

To support the expansion of loan financing to SMEs and To create jobs;

To make a meaningful contribution to the eradication of poverty among people at grassroots level.

To support the provision of business advisory services, training, monitoring, technical transfers and development of other products and services for SMEs;

Cumulative disbursements to date exceed E1.6 Billion since inception to over 60 000 SME Clients transcending across all sectors of the economy.

MISSION STATEMENT

To empower our clients by providing broad-based financial

services to enable their growth and success.

Through

◦ fostering supportive client relationships

combined with

◦ prudence and competence

to become

◦ a financially self-sustaining institution.

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SWAZILAND DEVELOPMENT FINANCE

CORPORATION (FINCORP)

HIGHEST ASPIRATION

“To be recognized and acknowledged by our

stakeholders nationally and internationally as the

foremost business development institution providing

financial services.”

STATEMENT OF PURPOSE

“To economically empower Swazi entrepreneurs through the

provision of accessible and sustainable financial services.”

OUTREACH & SECTORAL

DISTRIBUTION

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Economic Environment

Swaziland is a small landlocked country measuring 17 000 square kilometers with a low population of + 1.012 million people.

Agricultural oriented economy. Basically everybody is a farmer in the

rural areas. 24% of total domestic national debt represents agriculture.

In July 2007, Government convened a National Agricultural Summit which underscored the importance of agriculture as a strategic tool for economic development for the country.

Manufacturing Sector largely dominated by large sized corporations.

70% of the population live in rural areas. 66% of the population live below poverty line.

High rate of unemployment – 42% Dual unique legal environment – Civil and Traditional. (i.e Land

Tenure).

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DEVELOPMENTAL FINANCIAL

INTERMEDIATION

Most DFIs financing agriculture in Swaziland

are Government owned but predominantly source funding from multilateral financing organisations.

Presently very low numbers of small businesses (SMEs). Far less than 20% of the population is involved in small businesses – GEMINI STUDY 2005.

Well developed commercial banking system which however has low interest in financing agriculture and small business in general hence the great significance of DFIs.

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DFI REGULATORY ENVIRONMENT IN

SWAZILAND

Central Bank only regulates deposit taking institutions – Banks.

Financial Services Regulatory Authority (FSRA) in the pipeline – meant to regulated all non bank financial institutions and Co-operatives – BUT UNCLEAR WHETHER DFIs SHALL BE INCLUDED – PSGRS COULD COME IN AS A GOOD FOUNDATION FOR FSRA.

Non Deposit taking DFIs self regulated with passive oversight by the Ministry of Finance – Public Enterprise Unit.

So far there are only three (3) DFIs in Swaziland as the rest take the form of MFIs.

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IMPLEMENTATION OF PSGRS

Observed that while there are different classes of DFIs in the continent, the standards tend to be one size fits all. Some DFIs are regional whilst others are domestic and small in scale and scope.

Some will forever be state owned with no prospects of diversified shareholding.

Non deposit taking institutions are prejudiced as things stand. It may be necessary to separate Deposit Taking and Non Deposit Taking Institutions for benchmarking purposes.

Recommended risk mitigating ratios not entirely in tandem with Development Finance Expectations namely making finance more accessible to marginalized sectors of the population - i.e recommendation of at least 110% collateral.

SMEs at the lower end of the economy may find such compliance requirements onerous which may limit growth of the DFI.

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IMPLEMENTATION OF PSGRS – cont

In order to bring credence to the implementation of the PSGRS, we

strongly advocate for External Verification of results notwithstanding

the cost associated with this.

Indeed External Auditors charge high fees

for the verification exercise - For FINCORP

additional 6% of audit fees was incurred.

Would strongly advocate for a central verification point within

the AADFI Secretariat in order to ensure uniformity.

Interesting to note that SADC DFRC & AADFI are predominantly all

about institutional strengthening and capacity building yet standards

conspicuously ignore that aspect. A DFI is as good as its Human Capital

(101).

Board Appraisal is also omitted (YET GOVERNANCE IS KEY).

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PSGRS - GOVERNANCE:

INDEPENDENCE FROM GOVERNMENT

State ownership legacy has dictated that DFIs be generally funded by Governments of the economies in which they operate.

PSGRS creates the urge and awareness to diversify capital base and funding sources of the DFI thus enhancing effectiveness and sustainability – FINCORP already talking to external investors and Gvt.

The starting point should be to move away from being established by way of an Act of Parliament to Privately Registered Corporations which properly positions a DFI for divesting shareholding. (Refer FINCORP)

Government supervision of DFIs through line ministries not at all effective.

National Non Bank unregulated DFIs should advocate for a local supervision and regulatory authority that will constantly monitor their activities – Govt Ministries have inadequate capacity !

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PSGRS - OPERATING ON

COMMERCIAL PRINCIPLES

Non Performance Based Reward Systems pose serious dysfunctional consequences for DFIs.

A recent salary survey found salaries to be quite competitive at FINCORP.

Performance based incentive scheme in place.

However recent salary caps imposed by Governments are counter productive. FINCORP currently battling with this phenomenon as the Swaziland Government issued a circular placing a cap on salaries for executives in state owned enterprises.

Performance related remuneration approach promotes effective service delivery.

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PSGRS - : CORPORATE CITIZEN

GOVERNANCE

There is often the temptation to undertake Corporate Social Responsibility (CSR) initiatives on an adhoc basis with no policy in place.

PSGRS has pushed FINCORP to develop a policy on CSR which was approved by the Board and now forms part of the annual budget.

Tendency to have old and static DFI mandate charter from the Shareholders (Govt) which is hardly / never reviewed is a challenge.

PSGRS - : OPERATIONS

STANDARDS - POLICIES FINCORP obtained the lowest of all scores in

2009 which was 25% and this prompted organization to pay particular attention to this shortcoming. (99 &100)

Consequently consideration for possible diversification of income streams through other sources than interest income to other fees and product offering i.e Invoice Discounting.

In April 2011 the Board commissioned a wide ranging inventory and review of all operational policies which were later approved.

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PSGRS - : OPERATIONS STANDARDS

– LOAN APPRAISAL

Asset Quality a challenge to most DFIs due to volatile operating environment.

Use of standards prompted FINCORP to review upwards collateral and other risk mitigating requirements such as partial collateral and promoting much secure contract farming financing.

Improved Credit Committee composition by involving support departments such as I.T and HR to balance objectivity – as suggested by PSGRS.

110% suggested collateral requirement a big challenge – In fact recently reduced collateral requirement to 70%,

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PSGRS - : FINANCIAL STANDARDS

– ASSET QUALITY

FINCORP quite rigorous on application of loan

provisioning policies.

Current Bad Debt Provisions covers 57% of

contaminated loans.

Institution faced with a big challenge on FUNDING

as it primarily relies on its Shareholders and

lending institutions for additional equity and

medium term lines of credit and facilities with local

and international funders.

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KEY WEAKNESSES AS IDENTIFIED

BY PSGRS APPLICATION

STANDARD ACTION

Governance: # 1 & 5

Sufficient Independence from

Government (75%)

• Actively lobbying and looking for private

strategic partners (Pension Funds) – ongoing

discussions.

• Appointment of Board Members skills base

fairly balanced / diversified over last 15 years but

criteria not policy but has simply been practice by

current Minister.

Financial: # 55 & 58

Asset Diversity & Safety (64%)

• Largest single exposure of one extreme

investment – Hotel Investment.

• No equity investment as yet but included equity

investment in new business strategy.

• Currently looking at investing in own office

block. Already purchased two plots in the Capital

City and looking at investing E36 Million ($4.5M)

in office buildings. 18

KEY WEAKNESSES AS IDENTIFIED

BY PSGRS APPLICATION

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STANDARD ACTION

Operational: # 86,87 & 100

Loan Appraisal Policy &

Procedures (72%)

• 110% Security requirement not compatible

with SME Lending.

• No equity financing as yet but part of new

strategy.

• Projects predominantly assessed on viability than

propensity to create new jobs / impact.

•Already engaged a Consultant through

Commonwealth Secretariat to review and

strengthen policies.

Operations Strategy Policies

(75%)

• Non deposit taking owing to regulation but have

mitigated such by taking deposits and keeping them

with a local bank – which however does not rectify

problem.

• New Products have recently been developed to

diversify income streams as part of new strategy i.e

Invoice Discounting; Property Development; and

Insurance Agency.

PSGRS – GENERAL CHALLENGES

Compliance with environmental requirements for

low end financed small & medium enterprises.

Cap placed on interest rates prevents proper

pricing for risk thus compromising optimal risk

management.

Unclear performance contract / mandate from

Shareholders – Shifting regime priorities.

Prevalence of unclear criteria for appointing Board

Members among state owned DFIs.

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IMPLEMENTATION OF PSGRS:

CONCLUSIONS DFIs in the continent are quite diversified in nature and

application of standards ought to somehow recognize

that.

The Standards are a powerful medium of raising

awareness among DFIs on key operations and governance

principles. Should be institutionalized – As FINCORP we

are certainly now more aware / conscious of critical best

practice elements than we were before.

The Standards present a good foundation for the

development of regulatory guidelines for countries not yet

supervising & regulating DFIs. 21

IMPLEMENTATION OF PSGRS:

CONCLUSIONS

Standards will in the long run bring immense credibility to the operations of African DFIs historically associated with lackluster financial performance, impact and outreach.

Standards will enhance ability to attract more capital and investment into DFIs.

FINCORP’s 2009 assessment results enhanced the resource mobilization efforts locally and internationally. Most creditors derived confidence – over last 3 years raised over E200 Million.

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IMPLEMENTATION OF PSGRS:

CONCLUSIONS

Benchmarking against one another should in the long run bring uniformity and positive impact on performance and delivery of respective mandates.

FINCORP fully supports ANNUAL AWARDS in order to provide an incentive to DFIs to adopt standards as they are destined to strengthen the Domestic Financial Systems.

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IMPLEMENTATION OF PSGRS:

CONCLUSIONS

The direct interest and partnership of AfDB on the PSGRS should be maintained going forward as it brings immense credence to the process.

More focus for DFIs should be on reported areas of weakness identified by the PSGRS in order to improve.

FINCORP has managed to involve key structures of the organization on the PSGRS namely Executive Management and the Board. The Board directed that standards should form part strategic planning and monitoring tool.

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IMPLEMENTATION OF PSGRS:

CONCLUSIONS Efforts should be made to get national Central Banks to

embrace the PSGRS and incorporate them into their regulation and supervision efforts for national DFIs.

Year on Year results comparison:

Above results largely due to improved profitability; adoption and formalization of policies; strengthened provision policies (Risk Management) and product diversification.

FINCORP sees great value in the implementation of PSGRS and has institutionalized the process by allocating responsibility over the key components of the PSGRS to senior executives (MD; GM & FM).

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2009 2011 2012

79% (B) 84% (A) 87% (A+)

AWARDS – IMAGE BUILDING

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2011 AADFI AWARDS 2012 EURO BID AWARDS >>>>>>>>>>>

>>>>>> 2012 GLOBAL TRADE LEADERS

CLUB (GTLC)

IMAGE BUILDING !!!

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