Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to...
Transcript of Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to...
![Page 1: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/1.jpg)
IEDP 2010 Action Learning Project
Regional Integration of Financial Systems
With a specific focus on South Africa’s four major banks, namely:
Standard Bank Ltd., Absa Bank Ltd., FirstRand Bank Ltd. and Nedbank Ltd.
Coach
Desray Clark
Syndicate 4 IEDP 2010
Winnie Dweba, Nades Kandan
Adri Lubbe, Thula Ngonyama
Maxwell Pirikisi
1 | P a g e
![Page 2: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/2.jpg)
Table of Contents
1. Introduction................................................................................................................4
2. Background on Economic and Financial Integration.............................................5
2.1 The concept of economic integration......................................................................5
2.2 SADC economic integration....................................................................................6
2.3 The concept of financial integration........................................................................8
2.4 SADC financial integration......................................................................................9
2.5 Financial Intergration key considerations..............................................................10
3. Evaluating the progress that SADC has made towards macro-economic
convergence.............................................................................................................11
3.1 SADC convergence performance against MEC targets for 2012..........................11
3.2 Required reforms to meet targets in 2012.............................................................14
3.3 Consistency of the SADC MEC targets with COMESA and EMU MEC targets . .15
4. Identifying and analysing lessons learnt from the financial integration of the European Union (EU)...................................................................................................17
4.1 Failure to apply agreed qualification criteria..........................................................18
4.2 Failute to enforce the law against defaulting member states................................19
4.3 Single Euro Payment Area (SEPA).......................................................................19
4.4 Migration of bank customers.................................................................................21
5. Lessons learnt from the COMESA journey............................................................21
5.1 Multiple memberships...........................................................................................22
5.2 Fears over distribution of integration gains...........................................................23
2 | P a g e
![Page 3: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/3.jpg)
6. The South African banking sector’s readiness for change..................................24
6.1 Readiness for financial integration........................................................................24
6.2 Readiness for change...........................................................................................25
7. The impact of financial integration on the big four South African banks according to PESTEL...................................................................................................26
7.1 Single Payment System........................................................................................27
7.2 Single Currency....................................................................................................28
7.3 Loss of sovereignty...............................................................................................29
7.4 Competitiveness...................................................................................................29
7.5 Infrastructure.........................................................................................................30
8. Recommendations...................................................................................................35
8.1 Review of process flow.........................................................................................31
8.2 Scenario planning to mitigate membership risks...................................................31
8.3 COMESA and EAC involvement...........................................................................32
8.4 Private sector partnership.....................................................................................32
9. Conclusion................................................................................................................35
10. Bibliography...........................................................................................................38
3 | P a g e
![Page 4: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/4.jpg)
1. Introduction
Africa is a continent characterised by diverse socio-economic and political challenges
and immense opportunities, whose ultimate vision is to become a truly, fully functional
united continent. One way to realise this vision is to ensure the effective regional
integration of financial systems, something Africa and African leaders have
acknowledged as a necessity and are already pursuing.
According to the Economic Commission for Africa (ECA) and the World Bank, Africa is
the most subdivided continent in the world. Almost 170 borders divide 53 African
countries. Among other things, these divisions have led to limited economic growth and
development and have allowed for the creation of small markets with limited or no
bargaining power. In response, the continent has embarked on a journey to promote
regional integration and economic development through various programmes and
trading blocs, of which the Southern African Development Community (SADC) is one
example.
Established in 1992, SADC’s main aim is to ensure deeper economic integration in the
region and to facilitate the socio-economic development of member countries. A
number of programmes have been put in place, with one of the key targets being
financial integration and a single currency in the region by 2018. Financial integration
will have a huge impact on how business is currently being conducted in SADC and
even more so, on the banking sector.
This paper is a study of the proposed integration of financial systems across SADC. It
seeks to investigate and analyse the potential impact of the proposed integration on the
South African banking sector; in particular, the readiness of the big four banks, namely
Standard Bank Ltd., Absa Bank Ltd., FirstRand Bank Ltd. and Nedbank Ltd., for the
integration. It will highlight challenges and constraints the South African banking sector
faces as a result of the impending integration.
Recommendations will be made through this paper, covering tings that the South
African banking sector, specifically the aforementioned banks, can do in order to
4 | P a g e
![Page 5: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/5.jpg)
minimise the impact of the envisaged integration while maximising the opportunities and
benefits thereof. The PESTEL model, which takes into consideration the Political,
Economic, Social, Technological, Environmental and Legal implications of integration,
will be used as a tool to evaluate the possible impact of the envisaged integration.
The paper will also draw on lessons learnt in the integration of the Euro Zone and the
Common Market for Eastern and Southern Africa (COMESA)
2. Background on Economic and Financial Integration
2.1 The concept of economic integration
The basics of economic integration were promulgated by Hungarian economist Bela in
the 1960s, which indicated that as economic integration increases, barriers to trade
amongst countries diminish, which in turn could lead to economic development.
Wakeman-Linn and Wagh (2008) define economic integration as a process, whether
market driven or institutionalised, which broadens and deepens financial links within a
region, which, at the very least involves eliminating barriers to cross-border investments
and differential treatment of foreign investors.
As shown in figure 1 below, economic integration, according to Zyuulu (2008), can be
categorised into four stages:
Figure 1 Data Source: Zyuulu (2008):
Stage one: this involves a Preferential Trade Agreement (PTA) whereby
countries either agree on low tariffs for certain products or agree to eliminate
tariffs amongst themselves, maintaining their own external tariffs on imports from
the rest of the world.
Stage two: this involves a Free Trade Area (FTA) or common market where
there is free mobility of labour, goods, services and capital.
5 | P a g e
![Page 6: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/6.jpg)
Stage three: speaks to an Economic Union (EUN), with free trade, a set of
common external tariffs (custom union), common market and some regulation on
the fiscal spending amongst the member states.
Stage four: is about Monetary Union (MUN) whereby stages one to three
features are present, including a common currency among the group of member
states, which entails the formation of the Central Monetary Authority (CMA).
2.2 SADC economic integration
The commitment to economic integration as an economic and socio-economic growth
strategy in Africa can be seen in the amount of regional integration efforts currently
taking place on the continent. Other than SADC and the Common Monetary Area
(CMA) there is also the East African Community (EAC); COMESA; the West African
Monetary Zone (WAMZ); the Economic Community of West African States (ECOWAS)
and the Middle East and North Africa (MENA) regional blocs. Refer to figure 2 below.
Figure 2 - Data Source: SADC (2009)
The formation of SADC in 1992 saw member states recommitting themselves to
concerted efforts to achieve deeper regional integration as a means of attaining socio-
6 | P a g e
African Regional
Integration Initiatives
COMESA(Common
Market for East and Southern
Africa )
SADC(Southern
African Development Community)
CMA(Common
Monetary Area)
WAMZ(West African
Monetary Zone)
EAC(East African Community)
MENA(Middle East and
North Africa)
ECOWAS(Economic
Community of the West African
States)
COMESA(Common
Market for East and Southern
Africa
African Regional Integration Initiatives
![Page 7: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/7.jpg)
economic development. SADC member states include Angola, Botswana, Democratic
Republic of Congo (DRC), Lesotho, Madagascar (suspended), Malawi, Namibia,
Mozambique, Mauritius, Seychelles, South Africa, Swaziland, Tanzania, Zambia and
Zimbabwe.
Refer to figure 3 below, depicting the current SADC member states and the states that
are members of multiple regional economic integration initiatives, which could pose as a
challenge for the SADC financial integration.
Figure 3 – Data Source: SADC (2010)
According to the SADC Regional Indicative Strategic Development Plan (RISDP), there
are a number of initiatives that have been put in place aimed at ultimately achieving
Monetary Union as referenced earlier in this paper. A SADC free Trade Area was
launched in 2008, with the intention of progressing to a Customs Union in 2010 and a
Common Market by 2015. It is envisaged that by 2016 monetary union will be formed
with the intent to introduce a regional single currency by 2018. (See figure 4 below).
Figure 4 - Data Source: SADC (1999)
7 | P a g e
SADC
CMA
COMESA
EAC
![Page 8: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/8.jpg)
SADC member states have set themselves primary targets for four macro-economic
indicators to measure macro-economic convergence. Macro-economic convergence (or
stable levels at least) is needed before Monetary Union can be formed.
The chosen four primary indicators and their targets are:
Year 2008 2012 2018
Inflation Rate <10% <5% <3%
Fiscal Deficit/ GDP <5% <3% <3%
Public Debt/ GDP <60% <60% <60%
Current Account/ GDP* <9% <9% <3%
Table1 Data Source: SADC (1999) *SADC intentions are to reduce the primary indicators to
three, by demoting the status of the current account to a secondary indicator. However, this
awaits the imminent ratification of the Protocol to legalise the revision.
Economic integration for SADC is geared towards creating larger markets with
favourable investment and business environments to allow for sustainable and equitable
economic growth in the region. It further aims at fostering socio-economic development
and improving the livelihoods of the citizens of the region. FIP (2006). Below are the
main economic integration benefits as depicted by SADC:
1. Creation of larger markets, which allow for economies of scale.
2. Creation of wider competition and increased foreign investment.
3. Opening up of economies to the rest of the world.
4. Strengthening of regional credibility through lock-in policy mechanisms.
5. Strengthening of the region’s negotiating and bargaining power with the international
communities.
2.3 The concept of financial integration
Financial integration is a subset of broader economic integration. It could be defined as
the removal of any barriers to an integrated market for financial services. Financial
systems are seen to be integrated once the regional financial markets agents face
8 | P a g e
![Page 9: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/9.jpg)
identical rules, having equal access to financial instruments or services in the market
and equally treated when active in the market. ECB (2004)
The integration of financial systems is crucial for effective Monetary Union, since
monetary policy is implemented through the financial systems. Therefore, financial
systems are to be as efficient as possible to guarantee a smooth and effective
transmission of monetary policy. ECB (2004)
Financial integration further involves the structuring of the financial intermediaries and
institutions within the region and can thus be seen as the convergence of the financial
structures. Furthermore, financial integration requires that the same access is given by
financial institutions, to clearing platforms, among other things, to both the demand and
supply sectors. ECB (2004).
2.4 SADC financial integration
In August 2006, SADC states entered into a finance and investment protocol (FIP),
which provides the legal framework towards the operationalisation of financial
integration in the region. FIP was deployed as tool to ensure harmonisation of
investments and financial policies in SADC. FIP (2006)
FIP aims at formulating and implementing stability-oriented macro-economic policies
towards the attainment of macro-economic convergence and development, as well as
the strengthening and deepening of financial and capital markets. It also seeks to
harmonise the policies, legal and regulatory frameworks relating to the financial and
investment environment. It further seeks to promote SADC as an attractive investment
destination. FIP (2006)
With reference to figure 5 below, SADC has defined a programme structure towards an
effective implementation of financial integration across the region. Different working
committees have been set up by SADC to drive and to oversee regional financial
integration. There is involvement of both the public and private sector. The public sector
is engaged through the SADC states, SADC committee ministers and the Committee of
Central Bank Governors, while the private sector is represented by the SADC Banking
9 | P a g e
![Page 10: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/10.jpg)
Association of which South Africa is a secretariat. The private sector is also involved in
a number of committees within the Committee of Central Bank Governors.
Figure 5: SADC Financial Integration Programme structure
Source: SARB
2.5 Financial Integration Key Considerations
It is envisaged that regional integration of financial systems will yield various benefits for
South African Banks, despite these benefits, consideration needs to be given to the
implications on liquidity and capital adequacy, the implications on treasury and other
related matters, principles and operational company-specific policy considerations,
retaining a competitive environment as well as legal and regulatory matters. The human
element also needs consideration and includes issues like the management of shared
resources and the integration of cultures.
10 | P a g e
![Page 11: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/11.jpg)
3. Evaluating the progress that SADC has made towards Macro-economic Convergence
The SADC Macro-economic Convergence (MEC) programme involves commitment by
member states to meet a set of macro-economic convergence criteria at three points in
time over the period 2008 to 2018. As stated earlier in the SADC economic integration
section of this paper, four primary macro-economic indicators were chosen to measure
convergence which will path the way for a Monetary Union in 2016.
It must be noted that these convergence targets have not been set as entry criteria for
inclusion into SADC, and that political pressure is the only mechanism driving
compliance.
In order to establish the level of readiness of SADC for financial integration (building
block for Monetary Union), the following are evaluated in the upcoming section:
1. SADC’s performance against MEC targets for 2012
2. Required reforms to meet targets in 2012
3. The consistency of the MEC programme with other regional macro-economic
convergence programmes, being the European Monetary Union (EMU) and the
Common Market of Eastern and Southern African (COMESA)
3.1 SADC convergence performance against MEC targets for 2012
The year 2008 was a difficult year for SADC economies with the global economy
experiencing a period of recession causing international trade volumes to fall sharply. It
is widely acknowledged to be the most serious economic crisis since the 1930s.
In 2009, SADC’s economic performance was affected by the second round effects of
the global economic crisis. Economic growth slowed down but remained positive in
most member states. The most affected sectors were mining, manufacturing and
tourism. (SADC, 2010). Consequently, performance towards the macro-economic
convergence targets for 2012 was adversely affected.
11 | P a g e
![Page 12: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/12.jpg)
Inflation
Global inflation eased throughout 2009 as a result of stable food prices combined with
improvements in food supply in the region. This resulted in downward inflation trends,
with ten states recording single digit inflation. However, the region still recorded a
double digit inflation rate averaging 10.2% in 2009 compared to 13.8% (excluding
Zimbabwe) in 2008, which was slightly above the SADC inflation targets.
Figure 6: Average annual inflation, 2009 SADC
Data source: SADC (2009) Note: Excludes Madagascar and Seychelles
Fiscal Deficit and Public Debt
With global demand and commodity prices declining, resulting in deteriorating external
balances, government revenue declined in most member states. On the other hand,
expenditures were maintained and in some cases increased to finance critical
programmes. As such fiscal deficit for the region deteriorated to 5.5% in 2009 compared
to a surplus of 2% in 2008.
These deficits were mostly financed by borrowing both from domestic and external
markets. Consequently, public debt increased, although still within ranges of target. The
region recorded a public debt of 48.6% of GDP compared to 38.4% in 2008.
12 | P a g e
104,543
![Page 13: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/13.jpg)
Figure 7: Fiscal Balance / GDP, 2009 SADC
Data source: SADC (2009) Note: Excludes Madagascar and Seychelles
Figure 8: Debt / GDP, 2009 SADC
Data source: SADC (2009), Note: Excludes Madagascar and Seychelles
Current Account
Current account deficits rose sharply in 2009, largely reflecting higher import costs. Very
limited reporting was done in 2009, due to the impending removal of current account
balances from primary MEC targets.
13 | P a g e
29.9
![Page 14: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/14.jpg)
Figure 9: Current Account / GDP, 2009 SADC
Data source: 2009 - SADC (2009), Data source: 2008 – IMF (2009)
3.2 Required reforms to meet targets in 2012.
The period between 2010 and the next assessment date for meeting the SADC MEC
targets in 2012 will be dominated by the fallout from the global financial and economic
crisis, and the anticipated global recovery.
The impact of the global financial crisis will make it difficult for SADC member states to
meet some of the 2012 MEC targets. The immediate outlook is for rising fiscal and
current account deficits, increased public debt with slower growth and declining inflation.
However, it is likely that the adverse trend will reverse prior to 2012, so at least MEC
indicators should be moving in the right direction.
SADC countries will require deep structural changes and policy reforms that are already
under way in many countries.
The necessary reforms include the following (SADC 2009):
1. Improving the efficiency of product, labour and financial markets through
enhanced competition and improving the effectiveness of the price mechanism
2. Higher levels of productivity through investment in education, skills and training,
and addressing legal constraints
14 | P a g e
![Page 15: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/15.jpg)
3. Reducing cost levels and improving competitiveness
4. Pursuing trade reforms, especially using tariff reform to bring down cost levels, and
implementing trade facilitation measures to reduce the costs of international trade
5. Fiscal reforms to simplify tax regimes and improve revenue mobilisation
6. Investment in economic infrastructure
7. Taking advantage of the economies of scale and potential for cost-reduction
offered by regional economic integration, and being prepared to forego national
sovereignty in order to achieve greater regional integration
3.3 Consistency of the SADC MEC targets with COMESA and EMU MEC targets
As mentioned previously, a number of Macro-economic Convergence Programmes
exist worldwide. In addition to the SADC MEC programme, there are similar
programmes in COMESA and outside of Africa; the European Monetary Union (EMU)
has MEC criteria for both existing members and as entry criteria for aspiring new
members.
Table 2 below draws a comparison between SADC, EMU and COMESA.
There is considerable variation across MEC programmes in terms of both the specific
variables included and the numerical values of the targets. The most commonly
included variables are inflation, fiscal deficit and public debt.
In the case of COMESA and EMU the inflation objective is 5% or less; the 2008 SADC
inflation objective of less than 10% is therefore relatively high with the 2012 target being
in line.
Fiscal deficits vary in terms of the specific definition of the target variable. The EMU
target is <3%, so the 2008 SADC MEC target is towards the high end (matched only by
the COMESA Stage 1 target of 5%). The 2012 and 2018 SADC targets for inflation and
fiscal deficit are more in line with those of other MEC programmes.
The SADC public debt target is in line with those used in the EMU region.
15 | P a g e
![Page 16: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/16.jpg)
Table 2: Macro-economic Targets for convergence primary target comparison
Indicator SADC 2008
SADC 2012
EMU COMESA Stage 1
COMESA Stage 2
Inflation rate <10% <5% ≤3 lowest inflation
+ 1.5%
≤5% ≤3%
Fiscal Deficit <5% <3% <3% ≤5% ≤4%
Public Debt <60% <60% <60% “Sustainable level”
(secondary)
Status of the Current Account
<9% <9% None “Sustainable level” (secondary)
Source: SADC (2009)
Beyond these three criteria, there is no consistent pattern. Only SADC of the evaluated
three have targets for the current account of the balance of payments, which might be
behind the proposal to demote it to a secondary target.
Where secondary targets are concerned, SADC and COMESA have targets for foreign
exchange reserves, but for COMESA this is a primary target. SADC and COMESA both
have investment and central bank financing of fiscal deficit targets, while only SADC
has a secondary target of domestic savings. Several countries have secondary fiscal
targets, such as the proportion of revenues spent on wages.
Perhaps the most striking contrast between SADC and other MEC programmes relates
to exchange rates and interest rates. The EMU sets criteria for prospective members,
relating to the convergence of nominal exchange rates and interest rates and being
maintained within a prescribed range for a period of time. By contrast, COMESA has
targets for real exchange rates and interest rates, although these are stability targets
rather than convergence targets.
16 | P a g e
![Page 17: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/17.jpg)
Nevertheless, the fact that SADC is the only regional integration bloc with a monetary
union objective but without exchange rate or interest rate targets suggests that this gap
should be reconsidered. (SADC, 2009)
4. Identifying and analysing lessons learnt from the financial integration of the European Union (EU)
The European Union (formerly known as European Economic Community), was formed
in the early 1990s. The requirements for participation, or more formally the accession
criteria, were established at the June 1993 European Council in Copenhagen, Denmark.
For reference purposes, the qualification criterion is:
1. Political Stability - achieved through democracy with a respect for the rule of law,
human rights and the protection of minorities
2. Economic Stability achieved through a market economy which is mature enough to
cope with competition from other EU members
3. Acceptance of the law - as defined by the EU to date
Figure 10: the Euro Area
Source: Netherlands Central bank
The learning process has been a long one for the EU, and the current economic crisis,
with many European countries at the centre of it, puts new challenges and questions old
17 | P a g e
Euro area
![Page 18: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/18.jpg)
thinking with regards to regional integration. This is an invaluable leaning opportunity for
SADC, with various learnings especially around the qualification criteria, defaulting,
payment systems and customer migration.
4.1 Failure to apply agreed qualification criteria
Aside from the Copenhagen criteria, a set of macro-economic convergence criteria was
agreed upon, being:
1. Price stability, to show inflation is controlled
2. Soundness and sustainability of public finances, through limits on government
borrowing and national debt to avoid excessive deficit
3. Exchange-rate stability, through participation in the Exchange Rate Mechanism
(ERM II) for at least two years without strong deviations from the ERM II central rate
4. Long-term interest rates, to assess the durability of the convergence achieved by
fulfilling the other criteria
A decision was reached on 25 March 1998 by the European Commission and the
European Monetary Institute (EMI), now the European Central Bank (ECB) to allow
counties that didn’t meet the convergence criteria to join the EU. Most notable, an
exception has been made for Greece. The aftermath of that decision is still unfolding.
The EMI had come to the following conclusions:
The 15 EU member states, with the exception of Greece, met the inflation and
interest rate criteria; the reference value for inflation was 2.7% in 1997, and the
maximum reference value for the interest rate criterion was 7.8% in 1997.
Twelve currencies had participated, without any severe tension, in the European
Exchange Rate Mechanism over the previous two years (the pound sterling and the
Swedish krona did not take part in the mechanism and the Greek drachma joined
the ERM on 14 March 1998)
For the 15 EU Member states, with the exception of Greece, the government deficit
was below or equal to the reference value of 3% of GDP. Progress had been made
18 | P a g e
![Page 19: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/19.jpg)
towards bringing the government debt ratio close to the reference value of 60%,
although further efforts were required from countries with a debt ratio of over 100%
of GDP.
Slovakia subsequently joined in 2002, to bring the number to 16 countries.
The lesson for SADC is that a qualification criterion is critical as the consequences of
not having one will create a Greek scenario for the region.
4.2 Failure to enforce the law against defaulting member states
According to professor of European Law, Dr. Matthias Ruffert each and every European
Union treaty that established the European Currency Union and the European currency
called the Euro prohibits any form of bailout of for struggling EU, its government or its
bonds, be it via direct subsidies, by co-guaranteeing its debt or in any manner
conceivable.
All the members of the Euro zone have sworn solemn oaths called the Maastricht
Stability Pact. It is this pledge that not only Greece has broken, but, by the size of Gross
Domestic Product, the vast majority of the Euro member states (currently 16) could not
enforce the law on defaulting nations because of the political will the European Central
Bank (ECB). The member states had to inform the ECB of how they were going to
overcome the defaults. The member states central banks were trusted by the ECB to
oversee the process and report back to the European Central Bank.
The learning for SADC is that a region’s Central bank has the right to enforce law on
any defaulting member state.
4.3 Single Euro Payment Area (SEPA)
SEPA aims to establish a single market for retail euro payments by overcoming the
technical, legal and market barriers stemming from the period prior to the introduction of
the single currency. This will allow customers to make euro payments throughout
Europe as easily, securely and efficiently as they do today within their own countries.
19 | P a g e
![Page 20: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/20.jpg)
Once SEPA has been completed, there will no longer be any differentiation between
national and cross-border euro payments; they will all be treated as domestic.
SEPA consists of members from 32 countries, composed of banks, banking
associations and payment institutions. Until now, migration deadlines have been
relatively loose, with no decision on a final date. Cooper, Barclays' senior product
manager on SEPA, noted that many corporates are having trouble justifying the
business case for SEPA in the absence of a firm migration deadline away from legacy
infrastructure.
Banks have to upgrade their systems to satisfy the SEPA requirements which include
the use of standardised information in payment messaging. This will comprise the
International Bank Account Number (IBAN) and the Bank Identifier Code (BIC), both of
which will enable payment routing across the SEPA area in a common format. IBAN
was launched in January 2008 and it is envisaged that it should be broadly available on
debit cards by 2013 by the bulk of EU countries.
To have an integrated payment system, major decisions still have to be made on the
following:
1. Further European standardisation
2. An end date for national payment instruments
3. Interchange fees and payment fees
4. Well organised stakeholder involvement and consultation
5. Innovation at a European level (e-SEPA, mobile payments)
The advent of SEPA will lead to cross-border consolidation of banks, which will help
deal with the costs of compliance as well as providing greater economies of scale when
it comes to payments. Banks can potentially offer services across a number of
countries, not just those where they have physical offices located.
The lesson for SADC, and in particular Banks, the implementation of a single payment
system will be costly which can lead to banks mergers.
20 | P a g e
![Page 21: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/21.jpg)
4.4 Migration of bank customers
Apart from the loss of customers and revenue, the economic events of 2009 have
shown a costly consequence of a single market – the burden to bail-out citizen money
invested in another country. The failure of Icelandic banks and the ripple effect on
Britain and the Netherlands is a classic example. In fact, given the volcanic eruptions in
Iceland, a popular phrase coined by the Dutch is: “We said send cash, not ash!”
Iceland applied to join the European Union on 16 July 2009 and the application was
accepted on 27 July. The EU announced in February 2010 that it supports the opening
of accession talks with Iceland. Iceland's government has a target date of 2012 for
joining the block. As part of the European Economic Area, Iceland is already a member
of the EU's single market. It is also a member of the Schengen Area which removes
border controls between member states.
Icesave was the name of the online banks set up in Britain by Landsbanki, one of the
big 3 banks of Iceland. When the Icelandic banks collapsed in October 2008, the
government passed emergency legislation to rescue their deposits. But those outside
Iceland were not included. The British and Dutch governments paid €3.8bn to bail-out
the depositors in their countries. The two EU countries subsequently went into
reimbursement talks with Iceland, leading to the passing of the “Icesave law”.
Not surprisingly, on 6 March 2010 Iceland’s voters resoundingly rejected the
compensation plan to Britain and the Netherlands, since the “Icesave” debts come to
more than $15,000 for each of the 320,000 people on the island.
5. Lessons learnt from the COMESA journey
A number of lessons can be drawn from the COMESA experience, including the
challenges of multiple memberships by countries, the inequitable distribution of benefits
and labour force migration.
21 | P a g e
![Page 22: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/22.jpg)
COMESA is a regional integration grouping of 21 African member states which includes
(Angola, Burundi, Comores, Democratic Republic of the Congo, Djibouti, Egypt, Eritrea,
Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan,
Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe), established in 1994, replacing
the Preferential Trade Area (PTA) that existed since 1981, in a move to eliminate all
internal trade tariffs and barriers.
The COMESA Treaty stipulates the aims and objectives of COMESA as:
Attaining sustainable growth and development of the member states by
promoting a more balanced and harmonious development of its production and
marketing structures
Promoting joint development in all fields of economic activity
Co-operation in the creation of an enabling environment for foreign, cross-border
and domestic investment
Co-operation in the promotion of peace, security and stability among member
states
Co-operation in strengthening the relationship between the Common Market and
the rest of the world
Contributing towards the establishment, progress and the realisation of the
objectives of the African Economic Community
5.1 Multiple memberships
SADC, COMESA and EAC consist of members states that belong to other regional
organizations, as can be seen in the graph below.
Figure 11: SADC, COMESA, EAC members
22 | P a g e
![Page 23: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/23.jpg)
Source: Lungelo & Mbilinyi (2009)
From a legal as well as technical point of view, a country cannot apply two different
common external tariffs and therefore cannot be a member of more than one customs
union. Hence, the current pattern of overlapping membership becomes impossible to
maintain since COMESA has already become a customs union and SADC will follow
soon.
The lesson for SADC is that regional integration is hampered by member states that
have dual membership have to choose the region they belong to with an effort to ensure
that the milestones are achieved.
5.2 Fears over the distribution of integration gains
The REC may not succeed because of the fear among partner states of the discretional
effects following an integration process. A critical issue in the success of integration
schemes is the equitable distribution of the benefits of integration between member
states. Fouroutan (1993) argues that a common reason for the failure of regional
integration in Africa is the concern among the poorest African countries that the removal
of trade barriers may cause the few industries which they possess to migrate to
industrially more advance countries.
23 | P a g e
COMESA
Egypt, Libya, Djibouti, Eritrea, Ethiopia, Sudan, Comoros
Zimbabwe, Zambia, Malawi, Mauritius, Swaziland, DRC, Seychelles, Madagascar
SADC
South Africa, Namibia, Mozambique, Lesotho, Angola, Botswana
EAC
Kenya,Uganda,Rwanda, Burundi
Tanzania
![Page 24: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/24.jpg)
Intra-trade between the members of the proposed REC is still very low. For instance
EAC exports to the SADC region in 2007 accounted to only 8.3% of the total exports
and 20.9% to COMESA. Intra-SADC trade accounted to only 20% of total SADC trade
in 2007. (Lunogelo & Mbilinyi, 2009). This cast doubt whether the move to unite the
continent will bring any substantial trade creation. The weak trade link between the
Eastern and the Southern blocs may threaten the move to form one REC as proposed.
The weak link can be explained by the structure of the economies that most of them
produce and export similar raw primary products, lack of value addition, low level of
industrialisation (except for South Africa) and poor infrastructure systems.
A lesson for SADC is that an effective legal framework needs to be in place to ensure
that the poorer member states are protected from the influx of big economies in their
states, which can hamper the progression of local firms.
6. South African banking sector’s readiness for the change
6.1 Readiness for financial integration
It is important to state that the road to integration of any sort will have to overcome at
least five important hurdles, which almost all the major banks in South Africa accept:
1. The fear or possible loss of sovereignty, especially by smaller financial institutions
2. Potential loss of revenues, including fees and other traditional income streams.
3. Lack of financial resources to create and sustain integrated structures and other
operational mechanisms
4. Potential difficulties in managing the wide variation in the socio-economic
development of various communities and market segments
5. Fear of the unknown regarding economic benefits
Major South African financial institutions acknowledge that integration should indeed be
a deliberate process, focusing on clear principles and operational guidelines.
6.2 Readiness for change
24 | P a g e
![Page 25: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/25.jpg)
South African banks will face resource constraints, and an increase in resources
envelops will be required to allow for effective support of the regional integration agenda
to succeed.
Deeper regional trade integration will require the strengthening of financial integration.
This in turn will require a comprehensive program aimed at strengthening and
streamlining financial sector policies and financial infrastructure (regulatory framework,
payments systems). This will also help in the development of strong financial institutions
(banks, non-bank financial institutions bond and capital markets) and enhance the
financial system’s ability to mobilize and allocate resources, especially medium and
long-term resources for development financing. This is critical for supporting private
sector development, regional and international trade and, ultimately, growth and poverty
reduction.
Figure 12: SADC Modernisation 2010
Source: SADC (2010)
According to SADC (2010), each SADC member is in the process to prepare for an
efficient and effective payment system which will be internationally acceptable,
interlinked within the region and will support free trade. Figure 12 above indicates the
readiness of SADC members for such a payment system.
25 | P a g e
IMPLEMENTATION
LAUNCH
SENSITISATION
INFO & STOCKTA
KING
VISION & STRATEG
Y
CONCEPTUAL
DESIGN
BUS. PROC SPECS
TECHNICAL
SPECS
DEVELOP/
PROCURE
IMPLEMENTATION
ANGOLABOTSWANA
DRCLESOTH
OMADAGASCARMALA
WIMAURITIUSMOZAMB
IQUENAMIBIA
SOUTH AFRICASWAZIL
ANDTANZANIAZAMBIA
ZIMBABWE
SEYCHELLES
![Page 26: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/26.jpg)
7. The impact of financial integration on the big four South African banks according to PESTEL
South Africa’s integration into the global economy after the first democratic elections of
1994 had important implications for the South African banking sector. The official policy
has since been to open up the South African banking sector to foreign participation. As
a result of this policy, 15 foreign banks have registered branches in South Africa and 60
foreign banks do business in the country through representative offices. According to
BIS Review 95/2000, the South African banking sector remains sound and well-
managed. The South African Reserve Bank is responsible for bank regulation and
supervision which is based entirely on the recommendations of the Basel Committee.
New technologies, improved infrastructure and political stability are some of the
contributing factors that will make the world a smaller place. Evidence has showed that
elimination of obstacles to free trade has led to greater market efficiency and better risk-
and-return combinations for investors. This is largely due to greater financial market
integration. However, there are though disadvantages associated with integration of
financial markets to the extent that it can reduce the ability of domestically focused
policies to deal with the problems arising in the respective domestic financial markets.
Integration comes with various challenges and complexities, bringing along with it
serious threats and opportunities. The next section will focus on analysing these threats
and opportunities according to the PESTEL model, which takes into consideration the
Political, Economic, Social, Technological, Environmental and Legal implications of
such integration.
7.1 Single Payment System
If one has to travel from one African country to another, one can easily trade in cash.
The challenge is paying cashless, for example with a card, outside your home country.
26 | P a g e
![Page 27: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/27.jpg)
This is mainly due to economic; technical and legal market barriers, proving that the
individual elements of the PESTEL model can often not be isolated.
The challenge of a cashless environment was addressed by the European Banking
Industry through a single payment system namely, the Single Euro Payment Area
(SEPA), whose main objective is to overcome these barriers. SEPA was discussed in
section 4.3.
According to Dave Mitchell (Head: National Payment Systems), the plan for SADC is to
set up systems that will result in a single payment system for the zone. It is reported that
12 countries have already implemented gross real-time settlement systems, which
means that they have the means to conduct immediate electronic settlements. This
project is largely aimed at addressing the technological aspect of the SADC regional
integration.
The other three countries which had not yet achieved this level of service are the
Seychelles, Madagascar and the DRC. These countries still maintain a largely unbaked
population and conducted mostly cash transactions. This is a classic example where
the political and social development of countries acts as a technology inhibiter.
The aim of the payment project is to mirror the European Union’s economic integration
model, which would ultimately include one central bank, one multinational payment and
settlement system and one currency. No firm dates have been committed to although
SADC aims to have the systems integration done by 2015 and the single currency by
2018. The lesson from the EMU is that they first embarked on a single currency, and
now more than 10 years into the future is still in process to establish a single payment
system. The order and timelines of the SADC model might therefore be unrealistic.
Figure 13 below sketches out the proposed rollout plan of the SADC single payment
system.
27 | P a g e
![Page 28: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/28.jpg)
Figure 13: Proposed Rollout Plan
S
ource: SADC (2010)
7.2 Single currency
Financial regional integration in SADC without having a single currency can translate
into economic and legal risks. This is mainly due to the risks of various floating
exchange rates and currencies that are not convertible. This in turn will call for most of
the African regional blocks to have separate clearing houses. This is what currently
exists between The Economic Community of West African States (ECOWAS) which is a
regional group of sixteen countries, and COMESA.
Integration can bring along instability in financial and money markets, especially in
cases where countries are trading with a single currency as with the Euro-zone.
Employment levels could increase or decrease depending on the strength of institutions.
Bigger banks could easily destroy or even buy out smaller competitors in under
developed countries. Depending on the model, cultural intrusion becomes a huge
challenge on its own.
28 | P a g e
Develop centralised collateral management system
12 Months ending June 2015 – Develop the interfaces and have them tested
18 Months ending December 2016 – Test the system with the selected countriesIntegrated system tests for participants going live
18 Months ending June 2018 – Activate the system in the selected countries
Roll out to selected countriesBeyond June 2018 – Implement the system in the other countries as and when they are
readyPhased-in roll out to remaining countries
![Page 29: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/29.jpg)
7.3 Loss of sovereignty
One of the biggest challenges amongst the many already listed is of political nature:
loss of sovereignty. The local industry faces the risks of political instability and
inconsistent governments. This could ultimately lead to drastic change in policy and also
poor uptake of the system. Most countries in the SADC region depends heavily on
donor funds, and in some instances they show little or no financial growth and also lack
of innovation.
7.4 Competitiveness
Legal challenges that face integration projects are over or under regulation of markets.
Quite often over regulated markets leave no room for competition. This is sometimes
necessary in countries where the state has to play a bigger oversight role to ensure
some form of competitiveness and control of the markets.
However one has to look at the benefits and opportunities that come with integration.
These include widening the consumer choice across borders and new entrants into the
market. The consumer has a competitive advantage with more available choices. The
introduction of new technologies will benefit the less privileged countries. Investment
choices across our borders will be much easier and accessible. The creation of
knowledge economies will be greatly enhanced through information and communication
technology.
Closed market structures are very common in the case of many African countries. The
state usually plays an important role in major industries and will not let go of certain
institutions as this is usually a ‘cash cow’ for many African governments. The challenge
the South African banks will face is gaining market share in countries that will not easily
privatise or liberalise these financial institutions.
At present there seems to be little or no competition in the local domestic market by the
big four market players. New policies will have to be developed to ensure proper and
29 | P a g e
![Page 30: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/30.jpg)
well managed competition. Plans must be in place to provide for proper regulation,
oversight and implementation. Transfer of skills and training will have a huge impact on
regions that are already ahead in information, communication and technology.
South African banks could possibly be the only ones in the region with access to
sophisticated technology and substantial assets. This already poses a threat to smaller
financial institutions in the SADC region. The threat to the region could be far greater
than anticipated. This could lead to larger South African banks replacing existing extra-
regional banks.
It is cited in a study by African Development Bank (1999) that ‘control of the region’s
banking market by South African institutions is unlikely to be beneficial to other
countries. This is largely due to the fact that effective banking regulation must be in
place to ensure that banks act competitively. However, for integration to work
successfully all regions must be included as this will also allow the financial industry to
become more innovative and competitive to stay in business.
7.5 Infrastructure
According to a study conducted by the African Development Bank (1999), there are
significant differences within the region in the structure of financial sectors. In some
regions like South Africa and Zimbabwe, the financial sector is privately owned and
controlled. These regions also have highly sophisticated systems in place. Malawi and
Zambia has substantial state ownership and control and in some regions like Angola
and Mozambique until recently, it was entirely state-owned.
Currently the banking systems in South Africa are rated very highly in the international
banking industry. Most of the developing countries in SADC lack proper infrastructure
and modern technologies. This will have an impact on timelines and costs to upgrade so
as to be able to interconnect with the rest of the region. The question arises on how to
finance this model internally and across the various regions.
30 | P a g e
![Page 31: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/31.jpg)
8. Recommendations
8.1 Review of process flow
The European Union embarked on attaining a single currency which was then followed
with the single payment system, whilst SADC is planning to do a single payment system
prior to a single currency. Integrating economic and monetary markets without having
one currency has proven to be possible. However, having one currency is believed to
further strengthen the internal market by allowing for a smoother and free movement of
goods, services, capital and people. This was the main reason the Euro was introduced
in 1999 as the accounting currency, and in 2002 Euro banknotes and coins were
introduced into the Euro Zone. The approach taken by SADC to integrate the financial
systems first is therefore workable, but with lots of technology and infrastructure
changes.
The implication for the big four SA banks is that they will be pulled into work team to
develop the various requirements to enable the payments environment as soon as
2011. Given the technology and infrastructure challenges for a single payment system
without a single currency, the big four should start building up specialised resources to
face these challenges, while still providing in-house support.
8.2 Scenario planning to mitigate membership risks
The European case study is a classic example of how politics reigned supreme over
agreed economic principles. Countries failing to meet the MEC criteria were allowed to
join the EU, and when the economic crisis of 2008 hit, countries were bailed out, which
is against the principles of the European Union treaty. The consequences of these
decisions are still unfolding today.
It is recommended that SADC does a detailed scenario plan with possible economic
and political scenarios, and draw up an action plan to mitigate this risk. The big four SA
banks would then need to translate these risks into individual balance sheet risks. For
31 | P a g e
![Page 32: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/32.jpg)
example, rapid expansion strategies into Botswana might be at risk, should Botswana
decide not to become a member of SADC.
8.3 COMESA and EAC involvement
Currently, SADC, COMESA and EAC are competitive regional programmes, despite
multiple member overlaps. Many countries are using “wait and see” tactics before
making a final call on their preferred partners in trade or regional bloc. For example,
Tanzania is a member of the EAC as well as COMESA and they do not seem to be in a
hurry to cement their allegiance. From a legal as well as technical point of view, based
on available literature, a country cannot apply two different common external tariffs and
therefore cannot be a member of more than one customs union. It is therefore clear that
SADC cannot embark on the journey towards a monetary union alone.
It is recommended that SADC seeks consultation and involvement from COMESA and
EAC. Should the three entities continue to exist in their current format, it will have
severe implications on South African Banks. South African banks are embarking on
aggressive expansion strategies into Africa, and three different RECs will add
substantial complexities in payments systems, regulatory requirements and customer
relationship on the banks.
8.4 Private sector partnership
The current SADC roll-our plan is centrally organised by the central banks of each
member. The corporate, business and retail banking sectors have been involved to a
very limited extend, although the changes required from them are substantial. It is
recommended that the South African Reserve Bank embark on a greater inclusion
strategy, for private sector expertise to be utilised more effectively.
Lessons learnt from the European integration project were a combination of different
and potentially contradicting factors. According to (Kühnhardt, 2008) the following two
factors should be taken cognises of by the big four banks:
32 | P a g e
![Page 33: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/33.jpg)
1. The recognition that a joint will requires compromises which are not always based
on a speedy “return on investment” but need to be understood as a long term
commitment of all partners.
2. The understanding that different interests can be coupled through mutual trust in the
overall usefulness of a project in spite of existing differences in motivation and
objectives.
9. Conclusion
This paper explored the definitions and meaning behind both economic and financial
integration, including some background on SADC as an economic region and what the
union seeks to attain. Analysis on the progress to date in all the SADC initiatives and
set targets was undertaken and documented as part of this paper. Lessons learnt from
the Euro Zone economic integration process and other economic integration initiatives
in the African continent were investigated. On the basis of the Euro zone case study in
conjunction with other current economic integration initiatives studies done as part of
this research paper, economic integration could be a complex and a lengthy process,
which requires political will and commitment from all the parties involved. Economic
integration requires the parties involved to have a common drive and interest; benefits
should be visible and attainable to all the parties involved. The economic integration
process is also characterised by lots of fears from parties involved, in many instances
fear of loss of economic value by the countries with bigger economies whilst the smaller
countries have the fear of ‘big brother’; taking over. Most countries also demonstrate the
fear of losing their sovereignty, particularly where a monetary union is envisaged.
Financial integration as a subset of this process is by and large impacted by the
economic integration broader processes. It is largely dependent on the agreements
reached by the head of states and the head of central banks. This makes financial
systems integration an even more complex process mainly because of the
dependences and the minimum control the parties required.
33 | P a g e
![Page 34: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/34.jpg)
This also holds true in the case of SADC, the discussions and the processes towards
economic integration have been ongoing from as early as the mid-1990’s yet the
implementation strategy and plans are yet to be finalised. As a result as recent as July
2010, the SADC central bank only unveiled the road map towards the financial system
integration with an expectation that the commercial banks should be ready for the
monetary union in 2016. This does not give the stakeholders, mainly commercial banks
much time to work.
Therefore the commercial banks have limited time to undertake necessary steps
towards meeting the 2016 monetary union vision. The key for the big four banks in
South Africa is to work very closely with the Reserve Bank through the defined
structures to ensure that their input is taken into account as the strategy and plan
towards financial integration is being defined. Their commitment and partnership with
the South African Reserve Bank will make the process much bearable and will give
them a platform to influence decisions and plans.
Given the technological, infrastructural and operational impact the financial integration
brings; the banking sector needs to start prioritising initiatives towards financial
integration such that they are included in as early as their 2011 budgets. Programmes
to drive the process should be established to ensure an integrated means of driving the
process. The scoping process to establish the required initiatives should be one of the
big four bank’s priority programme’s in 2011, clarity on the costs and the effort involved
at an early stage will allow them for better planning and even better collaboration
wherever required and possible.
Based on the discussions held with different stakeholders in the banking sector, it was
clear that the current structures set out to achieve the financial integration are not yet
utilised to their capacity. The payments committee came up as the only committee that
is currently active in pursuing its goal towards financial integration whilst others are not
yet that active in the process. The SADC central bank needs to ensure that these
committees are well established and driven to ensure progress and buy in from all the
parties involved.
34 | P a g e
![Page 35: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/35.jpg)
It is safe to conclude that most, if not all, SADC stakeholders are not oblivious of the
challenges and opportunities presented by the expected integration of financial systems
across the region. Certain milestones have already been achieved en-route to full
integration. In the words of Mshiyeni Belle (The Times, Times LIVE, 21 July 2010), the
head of the secretariat of the SADC's committee of central bank governors, though the
task may be daunting, it is not impossible, as shown by the amount of preparatory work
currently underway. However, coordinating the work being done and communicating al
actions appropriately remains a challenge.
As stated earlier, SADC planned to have a single currency by 2018 and a single central
bank by 2016. Already, 12 countries have implemented real time settlement and 12
countries have implemented at least one electronic clearing system. About eleven of the
15 countries have real time gross settlement systems. Challenges remain especially
around the harmonisation of banking supervision regulation, general banking laws,
ensuring uniform IT systems and a framework that engenders good corporate
governance.
10. BibliographyAfrican Development Bank. (1999). Economic integration in Southern Africa. Tunisia: African Development Bank.
Akukwe, c. (2002, March 7). The Perspective. Retrieved July 7, 2010, from Africa & Regional integration moving forward: http://www.theperspective.org/movingforward.html
Bank of International Settlement. (2008). Convergence in the SADC and African economic integration process: prospects and statistical issues.
Banque-France. (2006). Situation of the EU countries upone joining the Euro Area.
COMESA Programmes. (2009). Retrieved July 30, 2010, from COMESA Customes Union: http://programmes.comesa.int/index.php?option=com_content&view=article&id=119&Itemid=73&lang=en
EU business. (2010, April 12). Euro zone will not allow any member to default. Retrieved June 20, 2010, from EU buiness: http://www.eubusiness.com/news-eu/finance-economu.43z
35 | P a g e
![Page 36: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/36.jpg)
European Central Bank. (2004, April). Measuring financial integration in the Euro area Occasional Paper Series 14. Retrieved June 15, 2010, from European Central Bank: http://www.ecb.int/pub/pdf/scpops/ecbocp14.pdf
European Central Bank. (2004, April). Occasional Paper Series 14. Retrieved June 15, 2010, from European Central Bank: http://www.ecb.int/pub/pdf/scpops/ecbocp14.pdf
Fouroutan, F. (1993). Regional integration in Sub-Saharan Africa: past experience and future prospects. Cambridge University Press.
IMF. (2008). Regional Economic Outlook: Sub-Saharan Africa. Washington, D.C.: IMF.
IMF. (2009). The Southern Afican Development Community's Macroeconomic Convergence Program: initial performance. Washington, D.C.: African Department.
Kühnhardt, L. (2008). African Regional Integration and the Role of the European. Germany: Center for European Integration Studies.
Lunogelo, B., & Mbilinyi, A. (2009). Convergence of COMESA-SADC-EAC regional frameworks. Tanzania: Economic and Social Research Foundation.
Maruping, M. (2005). African in the world economy - The national, regional and international challenges, Chapter 11. The Hague: Fondad.
Mboweni, T. (2002, October). Central Bank Articles and Speeches. South Africa's integration into the global economy .
Mitchell, D. (2010). SADC Integration Project Feedback to commercial banks. Centurion: SADC.
Nokaneng, S. (2009). The concept of economic integration with specific reference to financial integration in Southern Africa. University of Pretoria.
Nuti, M. (2010, March 9). Three cheers to democracy. Retrieved June 20, 2010, from Transition: http://dmarionuti.blogspot.com/2010/03/iceland-three-cheers-for-democaracy.html
Pressly, D. (2009, April 14). SADC central banks work towards single payment system. Retrieved July 10, 2010, from Business Report: http://www.busrep.co.za/index.php?fSectionId=566&fArticleId=4933426
SADC. (2006). Finance and Investment Protocol. Botswana: SADC.
SADC. (1999). Regional Indicative Strategic Development Plan. Botswana: SADC.
36 | P a g e
![Page 37: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/37.jpg)
SADC. (2010). Review of Macroeconomic Convergence Performance for 2009. Botswana: SADC.
SADC. (2009). Review of the SADC Macroeconomic Convergence Programme for 2008. Botswana: SADC.
SADC. (2009). Update on the Impact of the Global Economic Crisis on SADC. Botswana: SADC.
Wakeman-Linn, J. &. (2008). Regional Financial Integration: It’s Potential Contribution to Financial Sector Growth and Development in Sub-Saharan Africa. Tunisia: IMF.
Word Bank. (2007). Convergence Financial Sector intergration in two regions: How creating scale in Financial markets can support growth and development. Washington D.C.: Word Bank.
Zyuulu, I. (2008). Convergence in the SADC and African Economic integration process: prospects and statistical issues. Switzerland: Bank of International Settlement.
ANNEXURE 1
THE PESTEL MODEL GUIDING QUESTIONS
POLITICAL QUESTIONS
1. What are the envisaged political and economical policy changes in SA as a result of SADC financial system integration? How could this impact the banking sector in South Africa?
2. Is there a political willingness to integrate?
3. What are the dynamics (positive and negative) within the SADC region that could impact the financial integration?
4. What factors could lead to an exclusion of some of the SADC states? Including voluntary exclusion.
37 | P a g e
![Page 38: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/38.jpg)
5. Sovereign monetary policy vs. Domestic momentary policy, what is the impact? Will this work for SADC.
6. How would SADC financial system integration impact on the existing trade embargos and treaties that SADC countries have entered into with other states? What could be considered as the critical success factors and prerequisites for the SADC integration from the political perspective? Other than the ones that SADC has already defined.
7. What are countries that are most likely to meet the pre-requisite set by SADC towards financial integration?
8. Given the current dynamics within SADC, is financial system integration a viable move for the region?
9. Do you think South African banks have any reasons to worry about the envisaged SADC financial integration?
ECONOMIC QUESTIONS
1. Based on the current economic growth levels in the SADC region and within individual SADC states, is financial system integration an appropriate strategy for the region? Would it lead to economic growth and development for the region and countries within the region or could it destroy values for some of the countries?
2. What could be the envisaged political and economic policy changes in SA as a result of SADC financial system integration? How could this impact the banking sector in South Africa?
3. Could the financial system integration call for the alignment of both the political and economic policies in the SADC states? What could be challenges or benefits towards this alignment?
4. How will the relaxation in exchange controls amongst SADC countries impact the South African banking sector? Positive and Negative?
38 | P a g e
![Page 39: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/39.jpg)
5. SADC plan is to have a single currency by 2018, in your view is this achievable given that the pre-requisites could quite be a challenge for some of the SADC countries? Which countries will more likely not qualify? What could be the implications?
6. Could there be an envisaged impact on the SA Banks’ rating as a result of the integration?
7. Could there be an impact on the banks’ market capitalisation and asset value as a result of the integration?
8. The SADC integration would be a costly exercise for banks? Is there a plan to engage the shareholders, particularly ICBC?
9. Could SADC financial integration affect the bank’s global positioning & competitiveness? If yes, how?
10.Some of the countries in SADC have a currency that is not tradable internationally, would this be a factor?
11.The impact to the banking sector as a result of the devalued rand? Dilution of the asset base as a result of the single currency. How will the international partners respond, Barclays for ABSA? ICBC for Standard Bank?
12.How will the big 4 banks respond to the changes on transaction clearing as there would be more clearing house to choose from?
13.What would be the impact as a result of an increased inflation rate, which could have impact on the repo and lending rates.
14.Who will carry the currency risk?
15.Can banks handle/absorb the impact, comply and qualify and defined times?
16. Is EMV part of the requirement for the integration?
39 | P a g e
![Page 40: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/40.jpg)
17.How involved are the banks in the SADC financial integration planning and process.
18.How would the SADC financial integration impact on the grading of the South African banks? And possible impact on the share prices? How could the impact be minimised?
SOCIAL QUESTIONS
1. What would be the impact on the bank due to free movement of labour in the SADC region? Do you foresee any impact on retaining skills and knowledge?
2. Given the potential clients can now be citizens of any SADC country, who owns the customer? What will be the impact of bank location being remote from physical customer location?
3. What will be the impact on current customers?4. Given the multiplicity of languages across the SADC region, what communication
policy will be adapted to target new clients in the region?
5. What will the impact of SADC integration on Social responsibility for banks? Investing local or global?
40 | P a g e
![Page 41: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/41.jpg)
TECHNOLOGICAL QUESTIONS
1. Single payment system, similar to that of Europe (SEPA) or are we looking a totally different model.
2. Information security, fraud cases and forensics. Who takes ownership, responsibility?
3. Infrastructure – readiness of level. Who determines the standard?
4. How is the cost determined to invest in the technology?
5. How do we get to a decision on where this would reside, country?
6. Clearing houses. Sufficient to cater for an integrated system. Do we need country specific?
ENVIRONMENTAL (business)
1. How will the SADC financial integration impact the business environment for SA banks?
2. What Expansion opportunities will the SADC financial integration bring?
3. What opportunities does the bank see in regional and domestic competitiveness? Will the bank launch an aggressive new business acquisition strategy?
4. Are the any other banks (apart from SA banks) in the SADC region which is considered as competition?
5. Will Banks compromise on fees – loss of cross boarder revenue
LEGAL / REGULATORY
41 | P a g e
![Page 42: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/42.jpg)
1. Will this impact on policies? Fiscal, Capital requirements, Consumer laws, compliance. How will this impact on the Registrar of banks.
2. What will happen to current regulatory authorities after integration?
3. Post integration, will exchange controls and the monetary policy be determined by SADC, or still maintained by each participating country? Will the repo rate be centrally determined?
42 | P a g e
![Page 43: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/43.jpg)
ANNEXURE 2
EURO ZONE GUIDING QUESTIONS
INTERVIEW WITH NETHERLANDS CENTRAL BANK
Objective of the interview
1. In understanding the journey to the Euro Zone Integration; what would you describe as the key milestones that had to be achieved for the Euro Zone Financial Integration to be a success?
2. How many states needed to be on board for the Euro Zone Integration to be a success?
3. What were the qualifying criteria set for the different states? Was it the same for all the states?
4. What were the key political considerations that needed to be taken into account during the Euro Zone Integration?
a. Different political agenda’s may be? b. Language Issues?c. Labour force?
5. Was there governance was put in place to drive the Euro Zone Integration and for arbitration? If yes what was it?
6. The United Kingdom; what was their main reason for not being part of the integration?
7. Did their exclusion impact the Euro Zone Integration in anyway?
8. What governance is now in place to ensure that the member states keep to their commitments and qualifying criteria.
9. What would be the consequences if the member states default?a. How is the issue of Greece being dealt by the Euro Zone and what has
been the impact thus far?
43 | P a g e
![Page 44: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/44.jpg)
10.How is alignment in economic and political policies driven or enforced within the Euro Zone?
11.Did the Euro Zone financial integration change any regulations relating to the financial sector? If so, what were the changes?
12.Are the central bank lending rates centrally determined?
13.How did the banking sector respond in Netherlands / Euro with regards to the Euro Zone integration? Any set demands?
a. What were the envisaged opportunities? Have they been realised?b. What were their main concerns? How were these overcome?
14. In reality how was the banking sector impacted in terms of the Euro Integration; in terms of the
a. Market; did the banks take advantage of the broader market? What could be defined as impact to banks that were already broadly operating or represented in Europe?
b. Competition; was the competition broadened?c. Did the banking sector incur any loses as a result? Did some banks lose
any value as a result? Any changes on the market share?d. Cost of Integration; what was the cost of integration in terms of the
information systems and infrastructure (Both for the financial sector and the central banks)?
15. In your view is the Euro Zone Integration working for the financial institutions; Netherlands in particular?
44 | P a g e
![Page 45: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/45.jpg)
ANNEXURE 3
INTERVIEWS HELD
# Interviewee Organisation Title
1 Mike Turner Standard Bank Africa Operations director
2 Joleen Young Standard Bank Africa Manager Payment Business Systems
3 Charl Ackerman Standard Bank Africa Manager Payment Business Systems
4 Brian Le Sar Standard Bank Africa Director Card and Payments
5 Ballim Goolam Standard Bank Group Group Economist
6 Arthur Cousins Private – Former Director Standard Bank
SADC Financial Integration Consultant
7 Juliet Kanuki South African Banking Association
General Manager Banking Financial Services
8 Stuart Grobler South African Banking Association
Senior General Manager Banking Financial Services
9 Paul Sitotombe Standard Bank Africa IT Head of Solution Design
10
Michael van Central Bank Netherlands Director Policy Making
11
Project Manager SEPA
Central Bank Netherlands Project Manager SEPA
12
Gops Pillay South African Reserve Bank
Project Manager SADC Financial Integration
45 | P a g e
![Page 46: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/46.jpg)
Glossary
# Abbreviation Definition
1 BIC Bank Identifier Code
2 CMA Common Monetary Area
3 COMESA Common Market for East and Southern Africa
4 EAC East African Community
5 ECB European Central Bank
6 ECCU Eastern Caribbean Currency Union
7 ECOWAS Economic Community of West African States
8 EMI European Monetary Institute
9 EMU European Monetary Union
10 ERM II Exchange Rate Mechanism
11 EU European Union
12 EUN Economic union
13 FIP Finance and investment protocol
14 FTA Free trade area
15 GDP Gross Domestic Production
16 IBAN International Bank Account Number
17 MEC Macro-economic Convergence
46 | P a g e
![Page 47: Introduction - BANKSETA Website Web viewtegration on the big four South African banks. according to PESTEL. 2. 6. ... South Africa’s integration into the global economy after the](https://reader035.fdocuments.in/reader035/viewer/2022070606/5a795c7a7f8b9ad3658d120c/html5/thumbnails/47.jpg)
18 MENA Middle East and North Africa
19 MUN Monetary union
20 PTA Preferential trade agreement
21 REC Regional Economic Community
22 RISDP Regional Indicative Strategic Development Plan
23 SADC Southern African Development Community
24 WAMZ West African Monetary Zone
47 | P a g e