Broad-Based Black Economic Empowerment Act, 2003 (Act No. 53 of 2003)
Financial Services Charter
Code Series FS600: The Measurement of the Enterprise Development and/or Empowerment Financing Element of Broad-Based Black Economic Empowerment
Statement 602: The Measurement of the Empowerment Financing and Enterprise Development Element for Measured Entities that are not exempted from contributing towards Empowerment Financing
3. Definitions, Key Measurement Principles, Standards and Target
3.1 Empowerment Financing
3.1.1 Targeted Investments (TI)
Targeted Investments means:
Debt financing of, or other forms of credit extension to, or equity investments in South African projects, in areas where gaps or backlogs in economic development and job creation have not been adequately addressed by financial institutions. It specifically means financing of, or investment in:
|•||Transformational Infrastructure projects that support economic development in under-developed areas and contribute towards equitable access to economic resources. Such infrastructure projects could be in the following sectors:|
|•||Water, waste water and solid waste;|
|•||Social infrastructure such as health, education and correctional services facilities; and|
|•||Municipal infrastructure and services.|
|•||Agricultural Development involving integrated support for black farmers through enabling access to and sustainable use of resources.|
|•||Affordable Housing for households with a stable income, the amount of which will be determined annually by the Financial Sector Council.|
Delivery will be against a combined target with fungibility over the various sub-components as per the individual organisation's business model. Should an organisation not be able to deliver on any of these sub-categories, delivery of the value of Targeted Investments will have to be done under the Enterprise Development element of this Code and the points of that element will then be adjusted accordingly.
The overall Banking Sector target for targeted investments will be R48 billion new balances (for Banks including IBA members).
Transformational Infrastructure means:
Debt financing of, or other forms of credit extension to, or equity investments in South African projects in areas where gaps or backlogs in economic development and job creation have not been adequately addressed by financial institutions. It specifically means financing of, or investment in:
|•||Transformational Infrastructure projects that support economic development in underdeveloped areas and contribute towards equitable access to economic resources. Such infrastructure projects could be, but are not limited to the following sectors:|
|•||Water, waste water and solid waste;|
|•||Social infrastructure such as health, education and correctional services facilities; and|
|•||Municipal infrastructure and services.|
Tl projects will be measured, based on the Municipal index or as per the specific project rating allocated, based on the target market, submitted for evaluation.
Tl will be any infrastructure that will promote the social and equitable economic development of a specific location, community, region or district. This will include but is not limited to:
|•||Education which includes schools, learning centres, higher education, etc.|
|•||Road and rail infrastructure which will include new access roads, upgrading of existing roads, etc.|
|•||Community infrastructure such as water, electricity, sewerage, drainage, purification and treatment, amongst others, except those that are specific to Affordable Housing projects in which case they will be included under that sub-element.|
|•||Safety and security, which includes police stations, prisons, etc.|
|•||All telecommunications infrastructure whether that be land, cellular, or data.|
|•||Health, which includes hospitals and clinics etc.|
|•||Municipal infrastructure and services including Government buildings.|
|•||Industrial Development Zone type infrastructure including logistics hubs.|
Categories of Tl funding recipients and/or participating in Tl implementation:
|•||Municipalities and Government departments.|
|•||Parastatals and public entities.|
|•||Financial intermediaries such as INCA, DBSA, TCTA, and the African Infrastructure Investment Fund.|
|•||Private companies and participants in Public-Private Partnerships (PPP).|
All forms of financing and / or investment. Instruments used to finance Tl vary in nature and term throughout the project cycle, but will, inter alia, include:
|•||Construction period loans.|
|•||Senior or subordinated medium- and long-term loans or bonds.|
|•||Guarantees of the above and other instruments.|
|•||Working capital such as general banking facilities or revolving credit facilities.|
|•||Performance guarantees or bonds.|
|•||Mezzanine finance, which may include participating instruments such as participating debentures, convertible loans, etc.|
|•||Equity finance, which may take the form of ordinary shares and shareholder loans.|
|•||The basis of measuring the qualifying funding to Tl will be the stock measure. This is effectively a measure of the amount (or 'stock') of financing shown on the balance sheet of a measured entity at the measurement date. A weighted average of the monthly balances over the 12 months prior to the measurement date is to be used to smooth out seasonal and other distortions.|
|•||Measurement and calculation of Tl projects will be through the use of a Municipal index. Projects funded but not measured using the Municipal index approach will be considered to be "ring-fenced" projects and require the provision of detailed information on transformation impact focusing on economic beneficiaries in order to justify how the scoring will be done if higher than the general Municipal index method. To avoid confusion the ring fenced projects means a funding method which provides for a rating of up to 100% where a municipality conducts a fundraising exclusively for transformational infrastructure in an under-developed area of the municipality as defined by the Financial Sector Council . Such funding may be raised by way of an earmarked bond or facility or by way of a ring-fenced project financing.|
|•||The current matrix will be reviewed and adjusted accordingly. This will include some blanket project multipliers included for some of the critical infrastructural developments such as access roads, railway upgrades, low-cost telecommunications including Telkom, electricity generation and supply, water supply pipelines, reservoirs and dams, etc.|
|•||An adjudication committee consisting of experts to be established to adjudicate marginal projects or new types of project financing.|
|•||Should funding be syndicated, each member will score on their individual contribution subject to any multiplier applicable on the project as a whole.|
Due to the fungibility of delivery over the sub categories by the delivering organisation, targets will be set for Targeted Investments (TI) only and not sub categories. Therefore, Transformational Infrastructure as a sub-category of Tl will not have a specific target.
Home lending standards for qualifying loans are defined as set out below and seek to define a voluntary:
• Affordable Housing target market;
• Product definition guidelines.
a) Types of Lending
Affordable Housing constitutes both mortgage and non-mortgage backed lending for housing purposes and includes the following product categories, which may expand in the future:
• Unsecured personal loans;
• Personal loans secured by a pension or provident fund;
• Residential development loans;
• Wholesale loans.
b) Qualifying Loans / Investment Standards
Loans qualifying for inclusion must conform to the following standards:
The purpose of the loan should be for housing (as set out under Product Category Definitions);
|•||Loans should conform to the requirements of the National Credit Act;|
|•||Loans should be priced in line with regulated interest rate and fee limits specific to the various loan types.|
Measurement of Loan Activity
The target market is defined to be the approximate cost of bonded entry housing in South Africa adjusted annually by the midpoint of the Consumer Price Index (CPI) and the Building Cost Index (BCI). The average annual CPI figure is obtained from published reports from SA Statistics and that of the BCI figure from the Bureau for Economic Research (Stellenbosch University).
For 2011, the Affordable Housing market as calculated by the Banking Association, comprises households earning up to R15, 738 per month. (See Note 4 under Affordable Housing for further details).
Monthly household income is the primary criteria used to determine whether the lending activity may count towards the Affordable Housing origination and Targeted Investment targets.
Income as defined in terms of the National Credit Act, 34 of 2005:
"Household income means the combined gross income of the Applicant/s, which may include the income of any major person who shares their financial means/obligations with the Applicant/s.
Gross income includes income or any right to receive income, but excludes monies received that the person receives, has a right to receive or holds in trust for another person."
Loans are deemed to have been written by a financial institution when a mortgage bond has been registered or in the case of non-mortgage loans when these loans are disbursed.
The gross monthly applicants income is determined when the loan is approved. For target market upper income qualification purposes the date of approval of loans, both mortgages and non-mortgages, is based on the quantum of the applicant/s income as at time of approval of a loan.
Business written within the target market
The following table contains the various target markets.
Residential development loan finance
Wholesale loan finance/equity
Residential property loans to end users collaterialised by registering a mortgage / indemnity bond over the property
Personal loans equal to or greater than R1000 with a term of more than 12 months
Short or long term finance to developers for the creation of housing stock
Short- or long-term finance to corporates or intermediaries who on-lend to individuals or other entities for housing purposes.
An equity stake by a financial institution in a legal entity, limited to the extent that the legal entity lends to the target market as per the respective product definitions.
First and further mortgage / indemnity bonds. Client driven switches. Further loans without registration.
Fully or partially secured by pension/ provident fund. Unsecured loans used for housing purposes. Further advances.
Housing stock for any form of tenure, e.g. ownership, instalment sale, rental. New developments, conversions or upgrading of existing stock.
All loans as per mortgage loans, non-mortgage loans and residential development loan finance.
Income to be adjusted annually by the midpoint between the average CPI and BCI indexes for the previous year. The Banking Association will advise members annually of the adjusted target market.
Minimum loan amount and income to be adjusted annually by the midpoint between the average CPI and BCI indexes for the previous year. The Banking Association will advise members annually of the adjusted target market. Lenders will be required to demonstrate the usage of the funds through a client self certification process.
Target market to be adjusted annually by the midpoint between the average CPI and the BCI indexes for the previous year. The Banking Association will advise members annually of the adjusted target market. Where housing units are to be sold, lenders to determine the maximum unit price that qualifies for target market inclusion purposes at time of pay away of residential development finance funds. Where units are being developed for rental purposes, the developer will be required to certify that expected rentals are affordable to the target market (maximum of 30% repayment to gross household income) parameter to be used.
Minimum loan amount and income to be adjusted annually by the midpoint between the average CPI and the BCI indexes for the previous year. The Banking Association will advise members annually of the adjusted target market.
Household income is a foreign term to banks as it is the applicant's income that determines affordability and the legal relationship between bank and client. None of the banks record household income on their application forms or systems. There is also a strong view that self-declared household income is not reliable and would be an impractical and costly exercise to validate. In an analysis undertaken by the banks in 2004, it was found that there is a strong correlation between applicant income (comprising both individual and joint applications) and household income. It was therefore felt that applicant income, whether single or joint, is a strong proxy for household income and a reliable and transparent measure.
For unsecured and guaranteed personal loans, the borrower's income and not the joint income will be used for qualification purposes as these loans are granted to individuals based only on their own income and affordability, not joint income. Joint income, on the other hand, is generally recognised for mortgage loan lending purposes.
Residential Development plays the role of an 'enabler' as it increases the supply of housing stock. Lender funding is of a short-term nature.
The average cost of a primary market bonded entry home was deemed to be approximately R 250 000 based on member market experience, coupled with research undertaken by The Banking Association with both developers and an external research company (Finmark Trust). In addition, this upper income definition is aligned to that of the draft "lnclusionary Housing" draft policy document as was produced by the Department of Human Settlements. An upper income limit of R15, 142 was therefore deemed to be appropriate by The Banking Association in 2009.
For 2011, the upper income limit is calculated as follows:
• CPI: average CPI for 2010, 4.3%
• BCI: average BCI for 2010, -1.2%
• The midpoint for CPI and BCI for 2010 was 1.55%
The upper income limit for 2011 is R15, 738 (R15,498 + (R15,498 x 1.55%)
Going forward, on an annualised basis, The Banking Association will continue to provide members with written confirmation of the target market definition for Affordable Housing as defined in Note 4 above.
Due to the fungibility of delivery over the sub categories by the delivering organisation, targets will be set for Targeted Investments (TI) only and not sub categories. Therefore, Affordable Housing as a sub-category of Tl will not have a specific target.
Additional Notes relating to Affordable Housing
There is general acknowledgement that there is a lack of "stock" of housing units available to finance for the "Gap Market" segment (R10,000 and less monthly income) of the target market due to a multitude of challenges in our country. To this end Trade Associations shall, together with Government, Community and Labour representatives, establish a working committee post gazetting of this Code, to develop a coherent strategy/strategies that will seek to address this problem. Solutions may include Public Private Partnerships between financiers, developers, Government and community-based organisations and could include co-operative housing schemes and/or development rebates, etc.
Black SME financing
Black SME financing means:
|•||Debt financing of, or other forms of credit extension to South African qualifying organisations to address the gaps or backlogs in economic development and job creation. It specifically means financing of or investment in Black-owned SMEs.|
Black SME means:
|•||Both Exempt Micro Enterprises (with a turnover of less than R5 million per annum) and Qualifying Small Enterprises (with a turnover of between R5 million and R35 million per annum), having Black ownership of 50% or more.|
The basis of measuring the qualifying funding for Black SME's will be the stock measure. This is effectively a measure of the amount (or 'stock') of financing shown on the balance sheet of an affected entity at the measurement date. A weighted average of the monthly balances over the 12 months prior to the measurement date is to be used to smooth out seasonal and other distortions.
Any EME or QSE having 50% black ownership or more, being
|•||EME (with a turnover of less than R5 million per annum); and|
|•||QSE (with a turnover of between R5 million and R35 million per annum).|
Includes but are not limited to:
|•||Term loans of any length, including asset-based finance (includes leases and rentals) in the name of the business|
|•||Overdraft facilities (measured on the usage)|
|•||Equity investments by the organisation|
|•||Property finance, including commercial mortgages|
|•||Invoice discounting including commercial debtor finance|
• Indemnity backed loans such as Khula, Enablis, USAID, UY Fund, etc.
A Black SME must meet the legal definition of a "business" and therefore must be a company ((Pty) Ltd) close corporation (cc) partnership, sole proprietorship, or co-operative.
Will be a "stock" target, i.e. it will be measured as incremental growth in balance sheet exposure. An average exposure method to be used based on monthly balances as submitted to the South African Reserve Bank (SARB).
Overdraft facilities: overdrafts to be measured based on utilisation, rather than limit authorised. The metric for overdraft financing will be the average overdraft utilised over the reporting period.
Equity investments: will be valued at cost.
Property finance: will EXCLUDE personal property finance. Commercial property finance will be measured only if it meets the following criteria:
|•||Finance is registered in the name of the business or in any other legal entity but the shareholder(s) will need to prove conformance.|
|•||Financing is 100% reserved on the bank's / entity's balance sheet.|
Invoice discounting will be subject to the same rules as overdraft facilities. Therefore, discounting as at the end of the measurement period will be the average monthly utilisation of the invoice discounting facility over the measurement period.
• In all instances scoring will be based on actual exposures, not authorised limits.
|•||In all instances finance obtained in a personal capacity not to be counted except in the case of a sole proprietorship, obtained in a personal capacity "trading as".|
Turnover rule: for Black SMEs who move outside the upper end turnover definition, a maximum exposure limit be set beyond which any finance provided will not be scored. The maximum exposure limit will be R5m subject to any adjustment allowed.
Due to the fungibility of delivery over the sub categories by the delivering organisation, targets will be set for Targeted Investments (TI) only and not sub categories. Therefore, Black SME financing as a sub-category of Tl will not have a specific target.
Black Agriculture Financing
Black Agriculture Financing is the financing of Agricultural Development involving integrated support for Black farmers, which is 25% black owned or more and / or at least a Level 4 B-BBEE contributor, through enabling access to and sustainable use of resources.
Agricultural Development funding relates to the funding of farming production requirements and the necessary infrastructure to enable farmers to deliver products to market, but excludes industrial processing of agricultural products unless it can be defined as pre-production. That means inputs to production are included as well as cooperatives as providers of both finance assistance and goods / services.
The aim is to encourage financial institutions to design and distribute products for existing and new entrants into the agricultural sector.
Any enterprise that comprises:
|•||Black farmers, including black owned entities (Exempted Micro Enterprises (EMEs) and Qualifying Small Enterprises (QSEs) with 25% or more of black ownership. The definition includes large entities (i.e. entities with > R35m turnover) if 25% black owned.|
|•||The level 4 B-BBEE contribution can be retained; but this will be in addition to the 25% black ownership, and which derives the majority of its turnover from:|
|•||Primary agricultural production|
|•||Provision of inputs and services to agricultural production enterprises|
|•||Storage, distribution and / or trading and allied activities related to non-beneficiated agricultural products.|
Includes but are not limited to:
• Overdraft facilities
• Agriculture Production Loans
• Term loans
• Asset finance
• Lease agreements
• Commodity finance
• Silo certificate finance
• Insurance products and services .
• If 25% black owned or more -claim 100% funding
|•||This will be as per the current FS Charter with agreement that it would include the farmer and one up level of activity - e.g., a dairy farmer with a cold storage facility that he makes available to other farmers|
• The principle of "see through" financing / credit to be upheld.
Due to the fungibility of delivery over the sub categories by the delivering organisation, targets will be set for Targeted Investments (TI) only and not sub categories. Therefore, Black Agriculture financing a sub-category of Tl will not have a specific target.