Financial Services Charter Financing It was quite refreshing to see some progress made when the Financial Services

Charter announced its empowerment financing proposals. In a report released in July 2003 by Empowerdex on the impact of the financial services charter, it examined the potential amount that could be dedicated to empowerment financing. This financing was estimated to range between R62 billion to R123 billion, which translates into 5% to 10% of targeted investments. At that time there was an estimated R1.23 trillion of wealth that was managed by the South African financial services companies. The proposed empowerment financing of R122.5 billion translates to approximately 10% of the wealth managed by the financial services industry, using July 2003 amounts. This is good news for the following reasons: This may be in line or even exceed the desired targets of The Growth and Development Summit. It alleviate some of the empowerment deal financing crunch which ranges between minimums of R162.4 billion to R355.6 billions (using the JSE as a base) to be able to reach 25% black ownership targets. The financing available for low-cost housing, infrastructure and black agriculture represent market access opportunities for black construction companies and black farmers. This forms a good compliment to the construction and the AgriBEE charters. Furthermore these proposals ensure that approximately 10% of the financial services asset allocation is dedicated to developmental financing over the next five years. The question that arises in ones mind is whether this is enough to satisfy the financing needs. The answer is no, it is not enough but it does help in addressing the empowerment financing shortage. It is heartening to see that the committed amount may actually increase. The allocation of the funds will be based on the market shares, which could use funds under management as a benchmark. This would effectively have two implications. The first is that more responsibility is placed on those financial services companies that have more funds under management. Secondly, the entities that are currently setting aside funds for the empowerment financing may meet their allocated target much sooner thus scoring highly in the first years of the charter. The different types of financing have different impact on economic growth. There is financing of equity deals that result in shares shifting from whites to blacks without necessarily creating new jobs or new opportunities. But this financing is necessary to ensure that the equity ownership profiles of companies change over time. Furthermore the financing of the acquisition of operational assets by black people has a much more impact in the economy in that it may result in job creation and facilitate much more robust participation of black people in the mainstream of the economy. Infrastructural finance has multiplier effects on the economy and thus proves to be a good catalyst for growth. The financing of the operational capacity of black SMEs is critical to economic

growth due to the number of jobs that may be created through this sector of the economy and the size of this sector makes it a potential backbone of the South African economy. The analysis of the financing shows that black empowerment deals will have a 41% allocation, low cost housing (34%), infrastructural projects (20%), small black business (3%) and black agriculture (1%). There is a potential underweighting (3%) of financing earmarked for the small black businesses. The need for financing by small black businesses relates mostly to the acquisition of assets that could drive their growth and also to the building up of their operational capacity to ensure their sustainability over the long term. One assumes that the underweighting of small black business is there because the financial services companies will continue to finance the assets acquisition and operational capacity of these businesses as part of their day-to-day business. One also assumes that the financing of the small black business under the charter will have more favourable terms that facilitates an accelerated repayment of those debts without compromising the sustainability of these businesses. One hopes that the financing of BEE deals will results in lower cost of financing for black people participating in the transactions. One hopes that the terms attached to the financing will facilitate the faster accrual of greater economic interest to black people for their own benefit after paying off the interest and capital portion of the loans. One hopes that the usually onerous security requirements over the shares or equity instruments will result in black people having real unencumbered ownership much sooner.