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2 '! " # $ %& ' Absa Salient Aspects 11m clients Outsting Portfolio ( 09) R503b / $67b Cap Adequacy Ratio 14% C to I Ratio 49% Return on Average Equity 23% Main owner Barclays PLC 57% " # $ &

3 ) $ * From market frictions to the functions of financial markets institutions economic growth (Ross Levine (1997) Financial Development Economic Growth) Research is making it increasingly clear that exped financial access can increase growth, increase incomes of the poor, reduce income inequality, but the mechanisms by which it creates those effects remains uncertain (Barr, Kumar & Litan (2007) Building Inclusive Financial Systems: A Framework for Analysis) To get reach, ensure quality & responsible financial products, demed by low-income poor For profit institutions operating at scale better in terms of reach rather than NGOs State Banks Destitute poor may not benefit like the rest, thus a range of strategies actions needed Approach on building an inclusive market should not be put by the wayside due to crisis Challenges: enabling support from governments less intervention focus on the cost of absent or inefficient infrastructure a cost effective transactional platform (mobile phone banking?) management staff capacity skills (

4 %, & m people 45% living below Minimum Living Level Financial Services Measure Categories Dem Low Income Market Total Population 16+ (millions) Total 32m Formally Employed Banked Gini coefficient 0.57 in in % 1.2% 26% of adults (16-64) formally employed % 17.3% 10.3% 50.3% 34% of adults unemployed Growth slowed in 08, neg. to pos in % 47.4% 57.4% 87.4% 98.0% 100.0% Food & energy inflation the poor % 79.9% 100.0% 100.0% Strong conduct prudential legislation Adults banked - 60% in 09, 63% in 08 Household debt as % of disposable income More people banked than employed Growth spurt in debt from 03 to 07 Sharp decline in debt post 07 (NCA?) Government policy on inclusive banking unfocused uncoordinated ' ())* + + +

5 ) $ $ * Overall Inclusive Banking takes its cue from the concept, access for all, or financial inclusion (counter of financial exclusion) It focuses on the low-income poor, whether self-employed, employed or unemployed It focuses on the core products: savings, transactions, credit insurance It emphasises quality responsible financial products services It combines: a development concept (inclusive) with a commercial concept (banking) stated in another way, a market based solution for development, in an area that has been proven to be as profitable ( sometimes more profitable) than commercial banking However, only if you have a hle on the main drivers within profit approach: cost to client (influences client acceptance product use) cost to the bank (including an appropriate operational model with the right systems) /

6 1/233% 45 " FSM categories FSM* average income per h/h per month % of SA population % of Absa clients (5.7m) 1 3 $295 - $386 48% 27% 1 5 $295 - $805 78% 79% 1 6 $295 - $ % 95% FSM Financial Services Measure (2008) segments where FSM 1 is the least banked to FSM 8 the best banked Approximately 15 million unbanked under-banked in South Africa Informal transactions by the low-income informal segment amount to R58bn per year Rural peri-urban market is largely untapped Providing a profit opportunity given an appropriate cost model Absa as responsible corporate citizen, contributing to economic development Sources: Absa, 2006, 2007, 2008 (June) / $1 = R7.50 0

7 6 $ $ % % * Savings - Small Business Loans Affordable Housing Micro Lending Micro Enterprise Lending Cash Send (trans. per month) Physical (9,211 touch points) Digital (3m plus) External Sales Force (800) 5,802, ,000 32, ,000 Internet banking (1,5m) Telephone banking (0.7m) Mobile banking ( 1,7m) 3,000 30,000, $230 $5,333 $32,000 $1, Direct Sales Agents 141 Core middle market sales agents 215 Personal loan lead generators 79 MEF Community Finance Officers 130 Home Loan Express Agents $ branches 9 Small Business Centres; 56 Loan Centres; 24 Micro Finance Centres; 62 Work place banking/ kiosks 10 Mobile (Bank on wheels) 7 Mobile Sales units; 8,351 ATMs self service machines $62 Detailed market research in the 90s Led to detailed market segmentation Led to product channel design Started with savings transaction products as first phase Added other products, services channels on learning by doing basis Learned from failures improved Case study on Absa Micro Enterprise Finance (AMEF) Now assessing the situation: range of activities across the bank overall inclusive banking strategy needed Integral part of Absa future strategy 2

8 895 "% : % 1% " 4 $ % % 1 % 4 $ $ % % % ; % % "$ 5% % " "% % $ % $ $ < Microlending Targets Targets employed employed low-income low-income poor poor with with credit credit products products Client Client evaluation evaluation focus focus on on salary salary or or wage wage income income client client financial financial behaviour behaviour Primarily Primarily lending lending for for consumption consumption asset asset accumulation accumulation Micro Enterprise Finance Financial Financial services services targeting targeting the the selfemployed, selfemployed, low-income low-income poor poor Includes Includes savings, savings, credit, credit, insurance insurance transaction transaction services services Client Client evaluation evaluation based based on on business business history history acumen, acumen, financial financial behaviour, behaviour, income income expenditure expenditure Primarily Primarily lending lending for for productive productive purposes purposes asset asset accumulation accumulation * Marguerite Robinson, 2001, The Microfinance Revolution, World Bank 7

9 895 AMEF clients are self-employed Annual business turnovers (not income) ranges from R15k ($2k) to R500k ($67k) Product channel design emulates informal sector approaches community values Outbound model - bring the service to the client (except for transactions at this stage) Competition from established NGOs one other commercial bank Selected variables BSM 1 BSM 2 BSM 3 BSM 4 BSM 5 BSM 6 BSM 7 Business category more Informal Informal Informal Informal Informal Informal Formal Operate from Footpath Footpath Home Home Home Home Premises Cell phone (majority) No Yes Yes Yes Yes Yes Yes Education level Some High School Some H/S Some H/S Completed H/S Completed H/S Completed H/S Enterprise owners (number) Percentage of market 12% 9% 26% 23% 10% 10% 9% Employees Ave. annual business turnover R9,113 R10,723 R16,793 R24,710 R27,841 R66,597 R463,747 Our own info, gender Female Female Female Female Female Male Male Work experience (ave. years) Individual Lending Group Lending Notes: Analysis based on 2007 FinMark Trust Report for Gauteng, busy engaging with them on running a national survey. BSM Business Sophistication Measures segmenting lower end market from the least (BSM1) to more sophisticated (BSM7) H/S +.

10 895 # Retail Enterprise Loans (Siza Loan) (BSM 3 7) ' +./))) /)))01(/))) +2) %' ' 4 '4 %& &! 5 +./)))+(/3)) 6 ( &! ( +(/3))+.3/))) % ' Group Lending (Grameen Model) (BSM 2 5) Hawker loan based on buying behaviour Insurance embedded credit life insurance on loans inventory premises insurance Branchless Banking Model bringing down cost to client cost to serve by providing cost effective cash in cash out options to clients # / / # 0 / # / : +./)))+3/))) 5 ;.) < ' 4 '4 # Ya Step Up loan 3-

11 895 %& %& % % 6, 9= 8>? % % % " = "% $ 9'6 % % "9'$ % % % "$? $ % &+ 8 33

12 895 8 Dominant BSM Per Main Place for 2006 within the 10km Buffer of ABSA MESC in Mamelodi, Pretoria Legend ^_ ABSA MESC 5km Buffer 10km Buffer Dominant BSM Pretoria Roodeplaat Dam Nature Nokeng tsa Taemane Baviaanspoort City of Tshwane Metro ² Mamelodi Mamelodi ^_ City of Tshwane Metro Nellmapius Nellmapius Pretoria Kungwini ' 8 $ "% * ' " % % 6 "3/A % Source: ABSA (2008) & AfricaScope (2004) Kilometers 3&

13 895 9% " B Objective: to create a microfinance unit in Absa based on a learning by doing approach Started June 2007, rolled out 2008, reviewed adjusted 2009, stabilise 2010, scale 2011 To establish a microfinance unit within a commercial bank is a real challenge International approaches range from: internal unit in the bank to variations on external financial subsidiaries, strategic alliances or using management companies From st alone unit the thinking turned strongly to a semi-integrated model All microfinance specific issues kept in the unit while all generic support aspects integrated The areas where the most focus on a microfinance approach - Sales (or relationship management in the field resulting in portfolio growth quality), Credit Collections Main challenge is tension between centralisation decentralisation After reviewed - areas where we learned had to adjust: in field performance management operational model profiling recruitment of staff training of staff systems, platforms 8 9# "&--2 3(

14 895 % % Biggest challenge is to get understing in the bank Important to position the unit also within inclusive banking, quality responsible financial offerings to majority of population Targeted Internal Marketing: one on one briefings video master class AMEF info distribution AMEF monthly reports Identifying the main levers for arguments: profit orientation quality responsible finance New clients areas cost to client cost to serve cannot change the AMEF model, must change the bank model! upside is learning how to do banking in SA context even more cost effective Absa as corporate citizen contribute even more to development =>/())3/ % 3+

15 C $ $ * Overall strategy bespoke focused value offering to lower income strata of the market, quality financial products services Build on what we do already ito core products: savings transaction products Cash Send remittance service lending to micro small enterprises microlending affordable housing Enhance current channels: branches ATMs mobile banks external sales force Build new products: bespoke focusing on the core product requirements of the market Build new channels: branchless banking other enhancements Overall review enhancement of platforms 3/

16 Outreach needs scale - scale needs private sector Inclusive banking a reality in our SA context To do it on a comparable profitability level with commercial banking international microfinance best practice you need to emphasise upside of inclusive banking review drivers cost to client cost to bank review current create appropriate platforms meet the internal challenges for support for inclusive banking change mindsets away from centralisation only approach Upside also leapfrog innovation that benefits the whole bank 30

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