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Absa Salient Aspects

11m clients

Outstanding Portfolio (‘09) – R503b / $67b

Cap Adequacy Ratio – 14%

C to I Ratio – 49%

Return on Average Equity – 23%

Main owner Barclays PLC – 57%

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To get reach, ensure quality & responsible financial products, demanded by low-income and poor

For profit institutions operating at scale better in terms of reach rather than NGOs and State Banks Destitute poor may not benefit like the rest, and thus a range of strategies and actions needed

Approach on building an inclusive market should not be put by the wayside due to crisis

Challenges:

enabling support from governments and less intervention

focus on the cost of absent or inefficient infrastructure – a cost effective transactional platform (mobile phone banking?)

management and staff capacity and skills

From market frictions to the functions of financial markets and institutions and economic growth (Ross Levine (1997) Financial Development and Economic Growth)

“Research is making it increasingly clear that expanded financial access can increase growth, increase incomes of the poor, and reduce income inequality, but the mechanisms by which it creates those effects remains

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47 m people

45% living below Minimum Living Level Gini coefficient 0.57 in ‘02 - 0.70 in ‘08 26% of adults (16 - 64) formally employed 34% of adults unemployed

Growth slowed in ‘08, neg. to pos in ‘09 Food & energy inflation and the poor Strong conduct and prudential legislation Adults banked - 60% in ‘09, 63% in ‘08 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 and uncoordinated

100.0% 79.9% 1.2 8 100.0% 73.3% 2.5 7 100.0% 57.4% 3.7 6 98.0% 47.4% 5.0 5 87.4% 26.6% 5.1 4 50.3% 17.3% 5.1 3 10.3% 6.0% 5.1 2 1.2% 3.7% 4.1 1 Banked Formally Employed Total Population 16+ (millions) Total 32m Financial Services Measure Categories

Demand – Low Income Market

Household debt as % of disposable income

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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 and poor, whether self-employed, employed or

unemployed

It focuses on the core products: savings, transactions, credit and insurance

It emphasises quality and responsible financial products and 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 (and sometimes more profitable) than commercial banking

However, only if you have a handle on the main drivers within profit approach:

cost to the bank (including an appropriate operational model with the right systems)

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Sources: Absa, 2006, 2007, 2008 (June) / $1 = R7.50

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 - $1270 88% 95%

FSM – Financial Services Measure (2008) segments where FSM 1 is the least banked to FSM 8 the best banked

Approximately 15 million unbanked and under-banked in South Africa

Informal transactions by the low-income informal segment amount to R58bn per year Rural and peri-urban market is largely untapped

Providing a profit opportunity given an appropriate cost model

2 $32,000 32,000 Affordable Housing $62 30,000

Cash Send (trans. per month)

$200 3,000

Micro Enterprise Lending

, -$1,133 245,000 Micro Lending $5,333 104,000

Small Business Loans

$230 5,802,423

Savings

254 Direct Sales Agents

141 Core middle market sales agents 215 Personal loan lead generators 79 MEF Community Finance Officers 130 Home Loan Express Agents

External Sales Force (800) Internet banking (1,5m) Telephone banking (0.7m) Mobile banking ( 1,7m) Digital (3m plus) 692 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 and self service machines

Physical (9,211 touch points)

Detailed market research in the 90s Led to detailed market segmentation Led to product and channel design Started with savings and transaction products as first phase

Added other products, services and channels on learning by doing basis Learned from failures and 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

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• Targets employed low-income and poor with credit products

• Client evaluation focus on salary or wage income and client financial behaviour

• Primarily lending for consumption and asset accumulation

• Targets employed low-income and poor with credit products

• Client evaluation focus on salary or wage income and client financial behaviour

• Primarily lending for consumption and asset accumulation

Microlending

• Financial services targeting the self-employed, low-income and poor

• Includes savings, credit, insurance and transaction services

• Client evaluation based on business history and acumen, financial behaviour, income and expenditure

• Primarily lending for productive purposes and asset accumulation

• Financial services targeting the self-employed, low-income and poor

• Includes savings, credit, insurance and transaction services

• Client evaluation based on business history and acumen, financial behaviour, income and expenditure

• Primarily lending for productive purposes and asset accumulation

Micro Enterprise Finance

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AMEF clients are self-employed

Annual business turnovers (not income) ranges from R15k ($2k) to R500k ($67k)

Product and channel design emulates informal sector approaches and community values Outbound model - bring the service to the client (except for transactions at this stage) “Competition” from established NGOs and 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 H/S + Enterprise owners (number) 123 522 97 370 278 291 247 075 110 512 100 171 96 876

Percentage of market 12% 9% 26% 23% 10% 10% 9%

Employees 0.10 0.14 0.23 0.47 0.85 1.78 8.88

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) 2.3 2.8 4.0 5.0 7.0 7.7 10.7

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)

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Retail Enterprise Loans (Siza Loan) (BSM 3 – 7)

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Group Lending(Grameen Model) (BSM 2 – 5)

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Hawker loan– based on buying behaviour

Insurance– embedded credit life insurance on loans and inventory and premises insurance

Yanda – Step Up loan

Branchless Banking Model –bringing down cost to client and cost to serve by providing cost effective cash in and cash out options to clients

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Nokeng tsa Taemane

Kungwini Mamelodi

City of Tshwane Metro Roodeplaat Dam Nature

Pretoria Nellmapius Baviaanspoort

City of Tshwane Metro

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Mamelodi

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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 1 3 4 5 6 7

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Objective: to create a microfinance unit in Absa based on a learning by doing approach Started June 2007, rolled out 2008, reviewed and 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 stand 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 and quality), Credit and Collections Main challenge is tension between centralisation and decentralisation

After reviewed - areas where we learned and had to adjust:

in field performance management and operational model profiling and recruitment of staff

training of staff systems, platforms

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Biggest challenge is to get understanding in the bank

Important to position the unit also within inclusive banking, quality and responsible

financial offerings to majority of population

Targeted Internal Marketing:

video

master class

AMEF info distribution AMEF monthly reports

Identifying the main levers for arguments:

quality and responsible finance “New” clients and areas

cost to client and 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 and contribute even more to development

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Overall strategy – bespoke and focused value offering to lower income strata of

the market, quality financial products and services

Build on what we do already ito core products:

Cash Send and remittance service

lending to micro and small enterprises microlending

affordable housing

Enhance current channels:

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

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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 and

international microfinance best practice you need to

emphasise upside of inclusive banking

review drivers – cost to client and cost to bank

review current and create appropriate platforms

meet the internal challenges for support for inclusive banking

change mindsets away from centralisation only approach

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