The efficiency and sustainability of co-operative financial institutions in South Africa
Date
2018-12
Authors
Journal Title
Journal ISSN
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Publisher
Stellenbosch : Stellenbosch University
Abstract
ENGLISH SUMMARY : Co-operative Financial Institutions (CFIs) are proving to be an effective tool for grass-root innovation to bring about local sustainable development. As a result, not only are financial co-operatives improving the financial well-being of their members but they are also an instrument to enhance social cohesion in societies experiencing poverty and inequalities. The power of collaboration in CFIs helps members to help themselves collectively in tackling financial exclusion. Their response to the perceived failure of the mainstream banking system to serve marginalized communities had received global recognition. CFIs’ global membership and total assets are showing a strong growth trajectory supported by deregulation in some countries. In transition and mature economies, mergers and acquisitions are becoming popular growth strategies to sustain the cooperative movement. A driving force encouraging merger activity has been the pressure to cut costs and remain competitive. Despite having a third of the world’s CFIs, Africa’s contribution to the world CFIs in terms of membership and total assets is insignificant.
The co-operative movement in South Africa has come a long way, but the results of such a long revolution are yet to be seen despite an enabling legislative environment and government incentives which increased their formation from 4,000 in 2004 to 132,000 in 2016. The sustainability of these co-operatives outside government grants is very doubtful, with most of them just appearing on paper without any meaningful economic activity happening on the ground. For co-operatives to be truly sustainable they need to work towards full implementation of the co-operative movement principles and values through a bottom-up approach to co-operative formation by reducing their overdependence on the state. In order to understand the challenges facing South African CFIs the questions addressed in the study have been organized into four empirical essays whose objectives, methodology, findings and recommendations are discussed in the following four paragraphs sequentially.
The first essay examines the financial sustainability of community-owned financial institutions in their contribution to the social and ecological well-being, which makes the research of immense interest to ecological economists. The study utilized a CFI dataset of audited financials from South Africa with 202 observations for the period 2010–2017. Evidence show that South African CFIs are financially unsustainable at 91.3% against a benchmark of 100%. The regression results further suggest that return on assets, deposits, cost-income ratio, loans-to-assets ratio, investments-to-assets ratio and grants are the major determinants of financial sustainability. To improving CFIs’ financial sustainability requires a swift enhancement in efficiency by reducing costs, credit risk and grants reliance whilst improving revenue generation through product diversification and embracing new innovative delivery channels that reduce transaction costs. The ultimate objective of financial sustainability is to help CFIs contribute effectively to sustainable development by helping more poor people. The financial sustainability of community-owned financial institutions is crucial as they are an intergenerational endowment, as current members have to pass on to future generations the accumulated commonly-owned wealth inherited from past generations.
The second essay examines the CFIs’ dual objective of attaining social and financial efficiency in their role of improving access to financial services for the poor and marginalized communities. Th study eemployed the two-stage double bootstrap data envelopment analysis (DEA) methodology on unbalanced panel. The results from the first stage give evidence that industry is socially and financially inefficient at 91.6% and 61.57% respectively. Second stage results suggest that size does matter in improving efficiency whilst age does not matter, return of assets is important but not significant, whilst average savings balance per member improves financial efficiency but has a negative significant impact on social efficiency. In addition, the capital adequacy ratio has a negative significant impact whilst the association of the CFI to a group negatively affects its social and financial efficiency but not significantly. Our findings are of interest to CFI management, regulatory authorities and the CFI trade association to implement a number of bold measures such as an industry strategy, business skills in leadership, driving growth and an effective asset allocation approach.
The third essay investigates productivity change of South African CFIs using both unbalanced and balanced panel dataset of 192 and 120 observations respectively for the period 2010-2017. The study employed a bootstrap DEA-based Malmquist Productivity Index (MPI) approach to estimate the productivity change. Results on unbalanced dataset indicate that CFIs have experienced an annual productivity regress of 3.9% on average, which is mainly attributable to technical efficiency change decline of 12.3%. Analysis by CFI type indicates that cooperative banks experienced productivity gains, whilst savings and credit cooperatives and financial services cooperatives had a productivity regress. Results on a balanced panel of 15 CFIs show productivity marginal regress of 0.2% annually. A second-stage bootstrapped regression analysis is employed to investigate the impact of some environmental variables on productivity change scores. Results reveal that financially sustainable CFIs have a higher productivity and technological progress than otherwise. Results also show that mature CFIs tend to experience lower productivity compared to their younger ones.
The fourth essay examines the performance drivers and inhibitors in South Africa`s CFIs by employing a hybrid Delphi-SWOT study. Issues generated by 36 experts over four rounds of questionnaires suggest that the sector is suffering more from internal than external inhibitors. From the 22 future developments identified by these experts, six growth strategies within the control or influence of management were drawn in the areas of technology, people, marketing, culture shift, environmental and policy interventions. The study presents a CFI performance ecosystem based on identifying key drivers, inhibitors and strategies to achieve high-performance growth.
The overarching evidence presented in this thesis suggests that CFIs in South Africa can play a significant role in improving the social and financial well-being of its members and society provided that they work toward achieving financial sustainability of their operations through cost reduction strategies, credit risk management and reducing their dependency on grants. At the same time, there is a need to put in place growth strategies to recruit more members and mobilize more savings as the current scale of operations is low resulting in marginal social impact and financial performance. The industry will need to consider reducing their asset allocation in investments to free up financial resources to lead members to improve both social and financial efficiency. More importantly, the industry needs to improve managerial capabilities, technological adoption, governance structures, public perception and its outreach for the industry to play a meaningful and significant role.
AFRIKAANSE OPSOMMING : Geen opsomming beskikbaar.
AFRIKAANSE OPSOMMING : Geen opsomming beskikbaar.
Description
Thesis (PhD)--Stellenbosch University, 2018.
Keywords
Co-operative financial Institutions -- South Africa, Financial institutions -- South Africa, UCTD