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Finbond Group Limited & Finbond Mutual Bank

Integrated Annual Report

for the year ended 28 February 2014

TABLE OF CONTENTS

  • Executive Summary
  • Corporate Governance
  • Financial Statements
  • Additional Information

Vision and Mission Core Values
Risk Management

Framework

Audit Committee Report

Independent Auditors’ Report Directors’ Report

Notice to shareholders Form of Proxy

44
54 57 58
124 131 135 136 139 140
40

  • About Us
  • Basel III and Regulatory

Capital
Corporate Information GRI Sustainability index Declaration

5

What is a Mutual Bank? Our Branches

Company Secretary’s Certificate

  • 6
  • 45

47 48

Economic Risk Capital Corporate Governance Social and Ethics Committee Report

  • 7
  • 61

62

Key Performance Indicators Human Capital Development Service Standards Internal Audit
Remuneration Report Statement of Financial Position
Materials Usage

89
11 12 13 14 15 17 18 24 26 27 28 35 36
51 52
64 65

Directors’ Responsibilities

Approval of Financial Statements
Statement of Comprehensive

  • Income
  • Compliance

  • Regulation
  • Statement of Changes in

Equity

52

Financial Highlights Consumer Education Directorate

66 68 69

Statement of Cash Flow

Accounting Policies Notes to the Financial Statements
Product Offering

What’s in an icon?

Branding

79
122 122

Major Individual Holdings

  • Shareholders’ Diary
  • CEO’s Review

Social Responsibility

Chairman’s Review

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

1

The Victor

If you think you are beaten, you are.

If you think you dare not, you don’t. If you like to win but think you can’t, It’s almost a cinch you won’t. If you think you’ll lose, you’re lost. For out in the world we find Success begins with a fellow’s will. It’s all in the state of mind.

If you think you are out classed, you are.

You’ve got to think high to rise. You’ve got to be sure of yourself before You can ever win the prize. Life’s battles don’t always go

To the stronger or faster man.

But sooner or later, the man who wins Is the man who thinks he can.

- C. W. Longenecker -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

2

EXECUTIVE SUMMARY

Savings Investments Credit

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

3

VISION, MISSION & VALUES

OUR MISSION
OUR VISION

To consistently satisfy the needs of our target market by offering innovative, superior, inclusive investment, saving and credit solutions and better service that add value to

our clients’ lives by empowering them and contributing towards their financial growth,

independence and freedom.
To be the leading Mutual and Savings bank in South Africa improving the quality of

life of our clients, through their participation in saving together, growing together and ownership of their own community bank.

OUR PURPOSE

We exist to improve and transform the lives and livelihoods of our clients by availing them of modern inclusive banking products and services that benefit and empower them.

OUR CORE VALUES
OUR BELIEFS

•

Integrity

•

We believe in challenging the status quo where large corporate banks have lost touch with what their clients really need.

To maintain social and ethical norms in all activities.

•

Human Dignity

•

We believe that a bank should be owned by and managed exclusively for the benefit and in the best interest of its depositors and that all depositors should have an ownership stake in their own bank with the ability to vote at shareholders

meetings.

To at all-times treat people with respect and consideration for their unique needs,

feelings and opinions.

•••

Excellence

To be excellent in everything at all levels at all times.

•••

We believe that banking products and services should improve the quality of life of our clients and add real value to their lives and livelihood.

Accountability

  • To accept responsibility for the work delegated and execute it with excellence.
  • We believe in savings and credit solutions tailored around depositor and borrower

requirements rather than out-dated institutionalized policies and practices.

Teamwork

To strive for the greater benefit of the organization through an appreciation of

the role that each employee plays in achieving the overall goals.
We believe that savings should be encouraged through offering superior, high yield investment and saving solutions.

“Nothing is impossible, the word itself says, “I’m possible!”

- Audrey Hepburn -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

4

4.8

ABOUT US

Finbond Group Limited is a leading South African Financial Services institution that

specializes in the design and delivery of unique value and solution based savings, credit and insurance solutions tailored around depositor and borrower requirements rather than institutionalized policies and practices.

Micro Credit Products are offered nationally to the under-banked and underserved market of more than 40% of the adult population in South Africa actively seeking credit solutions but remaining largely unattended and underserviced due to the traditional

banks’ concentration on the higher income brackets of the population. Finbond Micro

Credit division operates nationally through 200 branches in South Africa and has 627

employees. For the twelve months ended 28 February 2014 Finbond granted loans of

R539.3 million and received cash payments of R709.5 million from clients. 100% of customer payments are collected via advanced direct debit orders.

Finbond conducts its business through two divisions focused on: ••

Investment and Savings Products, and Micro Credit and Insurance Products.

Finbond commenced trading in 2003, was listed on the Johannesburg Stock Exchange

in 2007 and received its Mutual Banking license from the South African Reserve Bank in 2012.
Investment and Savings products, that offer a superior above average rate of return,

are offered nationally to investors and pensioners looking for guaranteed higher fixed income in the current environment of depressed yields. Finbond’s strategy is to stimulate

savings through offering superior investment and savings solutions by providing client

shareholders with better interest rates, better products and better service. At 28 February

2014 Finbond Mutual bank held deposits of R695.9 million. All investment and savings products are marketed nationally in the print and radio media, and available nationally

through Finbond Mutual Bank’s head office call centre in Pretoria.
Finbond’s management team have a long and succesful track record within the banking, micro finance and financial services sectors. This, combined with well-developed systems, unique branded product offerings, advanced information technology and a well-trained staff compliment, provide Finbond with a sound platform for future growth.

For more information refer to our website www.finbondlimited.co.za, www.finbond.co.za or our facebook page.

“Limitations live only in our minds. But if we use our imaginations, our possibilities become limitless.”

- Jamie Paolinetti -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

5

2.7, 2.8

WHAT IS A MUTUAL BANK?

A “Mutual Bank” also known as a “Mutual Savings Bank” is a bank which is operated on a mutual bank model, with the specific goal of encouraging savings and providing benefits to its depositors. When someone deposits funds in a “Mutual Bank”, she or he essentially buys an ownership stake in the bank and is entitled to vote at shareholder

and member meetings.

Mutual Bank in order to encourage his working class congregation to develop thrift. These first Mutual Savings Banks were designed to uplift the poor and working classes to teach low income individuals the virtues of thrift, and self-reliance by encouraging them to save and allowing them the security to save their money.

Mutual Banks have historically been characteristically conservative in their approach.

This conservatism is what allowed Mutual Savings Banks to remain stable throughout

the turbulent period of the Great Depression, despite the failing of some Commercial Banks. Because Mutual Savings Banks are run very conservatively, they tend to be

insulated from some of the volatility of the market. Unlike other banks, they weather financial crises much better, and may continue to return a profit when other institutions

are failing.

A Mutual Savings Bank is set up specifically to be operated for the benefit of the

depositors. The purpose of the Mutual Bank is to stimulate savings by creating a safe

place to deposit money and to offer benefits such as interest on deposits and dividends

on Mutual Bank shares, and to invest conservatively for the purpose of generating

profits. The institution most frequently identified as the first modern mutual savings bank was the “Savings and Friendly Society” organized by the Reverend Henry Duncan (1774 – 1846), the local minister in 1810, in Ruthwell, Scotland. Rev. Duncan established the
Some of the first Mutual Savings Banks still operate today, and numerous others have

been established since.

“Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with great talent.
Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence, determination alone is omnipotent.”

- Ray Kroc [Founder: McDonalds] -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

6

OUR BRANCHES

RSA Population Density – Finbond Branch Locations

Finbond has a distribution network of 200 branches nationwide.

Finbond Branches per Region

Finbond’s branch network includes access points in low populated areas in order to reach economically disadvantaged market segments.

“Whatever the mind of man can conceive and believe, it can achieve.”

- Napoleon Hill -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

7

2.5, FS 13

KEY PERFORMANCE INDICATORS

Finbond’s Key Performance Indicators are: • to maintain social and ethical norms in all activities; • to always add value; • to supply solutions not just products; • to provide excellence of service; and • to ensure consistency and constancy of the first four. Finbond’s identity and culture is centered upon achieving results. Finbond strives for excellence and is passionate about achieving goals. High goals are set and, once achieved, these become benchmarks for the future. All tasks are undertaken in a harmonious and creative way, constantly measuring results against the Key Performance Indicators.

Finbond is not focused upon making quick and short-term profits but sets out to build critical market momentum that will secure long-term rewards and sustainable profits. Our business strategy is to exceed our clients’, shareholders’, business partners’ and regulatory stakeholders’ expectations and, in so doing, sustain the organic growth of Finbond.

Ethics and Integrity are treated as essential core fundamentals in Finbond, and not just words. Finbond is committed to: • The highest standard of service and professionalism; • Duty to protect the public, clients, depositors and the industry and adhere to all laws; • Client confidentiality; • Equality and non-discrimination; • Best interest of the clients; and

• Transparency and disclosure of information in order for clients to make a rational decision.

Seven Steps to Success:
1) Make a commitment to grow daily; 2) Value the process more than events; 3) Don’t wait for inspiration;
4) Be willing to sacrifice pleasure for opportunity; 5) Dream big; 6) Plan your priorities; 7) Give up to go up.

- John C. Maxwell -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

8

1

HUMAN CAPITAL DEVELOPMENT

The Finbond Human Capital Development department facilitates, supports, guides and supplies advice and information to the various regions within Finbond on people effectiveness,

development and succession planning. Emphasis is placed on ensuring that employee competency levels are up to the required levels through training and development and that every

employee has the correct business tools to be able to perform their work functions at exceptional levels. Training and development of our staff remains a core focus area and one of our

business priorities.

Staff Complement

As at 28 February 2014 Finbond employed 627 staff members. Depicted in the charts below are graphical representations of the gender, geographical region split and the apportionment

of management vs. non-management functions of the employees employed in Finbond at 28 February 2014.

The graphs below show the gender comparison based on Basic Salary at branch level and Manager/Head Office level.

New Employees in 2014

The following graphs show the gender-demographic and geographic statistics for new employees across all regions. The trend to employ more female employees continued in this financial year as 71% of new staff appointed were female. New employees are trained and evaluated before they start working with clients, this aims to achieve the best possible service to our customers. The graphs below show the gender comparison based on Basic Salary at branch level and Manager/Head Office level.

“The only way of finding the limits of the possible is by going beyond them into the impossible.”

- Arthur C. Clarke -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

LA 1, LA 2, LA 14

9

HUMAN CAPITAL DEVELOPMENT...

Finbond has a comprehensive Policy and Training manual to guide managers and employees in best practice. Employees’ performance is measured monthly with continuous feedback to them. All employees are trained on policies, compliance and processes that ensure that everybody is equipped to fulfill their functions to the best of their ability. Annual salary reviews are performed based on the results of each individual’s monthly scorecard performance and achievement of the desired end result.

Finbond expects level 5 leadership of all Senior Managers. Level 5 leaders are modest and wilful, humble and fearless. Level 5 leaders are self-effacing and display a fierce resolve to do whatever needs to be done to make the company great. Level 5 leaders embody a paradoxical mix of personal humility and professional will. Level 5 leaders are ambitious, first and

foremost for the Company and not for themselves.

Level 5 leaders: ••••••••••
Display compelling modesty, are understated, self-effacing; Are fanatically driven with an incurable need to produce sustained results; Are resolved to do whatever it takes to make a company great, no matter how big, hard or difficult the decision is; Enforce agreed standards relentlessly; Cannot stand and are utterly intolerant of any form of mediocrity; Do not accept the idea that good is good enough; Display workmanlike diligence – more plough horse than show horse; Look out the window to attribute success to factors other than themselves but when things go poorly, they look in the mirror and blame themselves taking full responsibility; Are servant leaders; and Are ambitious, first and foremost for the company and not for themselves.

Communication is the cornerstone of a productive work environment therefore all employees are urged to use any of the following avenues to raise concerns: ••••
Annual Employee Satisfaction surveys to encourage employees to voice their ideas and other matters with Senior Management; A Fraud telephonic hotline where suspicious or fraudulent actions by fellow employees can be reported; The employment equity forum where employees as representatives of the workforce discuss matters of concern to employees; and General, Regional and Area Managers visit the branches at regular intervals to ensure that employees are aware of company vision and strategy and to address all concerns of staff.

The Finbond Compass monthly e-magazine is distributed on a monthly basis to all staff to highlight achievements and events in all the regions. This is also used to inform everybody of

projects that are driven to enhance the productivity and employee satisfaction.

The age distribution of Finbond employees is indicated in the graph below. The largest portion of our employees is between the ages of 25 and 39.

“It’s no use to decide what’s going to happen unless you have the courage of your convictions. Many a brilliant idea has been lost because the man who dreamed it lacked the spunk or the spine to put it across. It doesn’t matter if you don’t always hit the exact bulls-eye, the other rings in the targets score points, too.”

- AP Giannini (Founder: Bank of America) -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

10

EC 7, LA 5, LA 10, LA 12, LA 13

SERVICE STANDARDS

WARM & FRIENDLY

The customer is our most important asset.

WARM & FRIENDLY

QUICK & EFFICIENT

Never make promises you cannot keep.

QUICK & EFFICIENT

RESPECTFUL

A lasting relationship starts with respect.

RESPECTFUL TRUSTING INVITING

TRUSTING

A customer that trusts you, will keep coming back.

INVITING

Nothing is more inviting than a neat and tidy environment.

“If you can’t describe your strategy in twenty minutes, simply and in plain language, you haven’t got a plan. ‘But,’ people may say, ‘I’ve got a complex strategy.
It can’t be reduced to a page.’ That’s nonsense. That’s not a complex strategy. It’s a complex thought about the strategy.”

- Larry Bossidy -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

11

INTERNAL AUDIT REPORT

The internal audit function reports functionally to the Audit Committee and administratively to the Chief Executive Officer. The primary objective of the internal audit function is to ensure that adequate measures and procedures are in place for adequate, effective, efficient and economic management. Internal audits are risk-based and Internal Auditors submit assessments to the Audit Committee on the system of internal controls. The Internal Audit function also fulfills the requirements of Regulation 48 of the Banks Act as enforced by the South African Reserve Bank. The internal audit charter approved by the Audit Committee defines the purpose, authority and responsibility of the internal audit activity and is consistent with the

standards of the Institute of Internal Auditors and Regulation 48 of the Banks Act, No 94 of 1990.

Role and function of internal audit

Internal audit focuses on adding value to the operations of the Group as part of its combined assurance model, by examining and reviewing, amongst others, the following:
•••••the adequacy and effectiveness of the Bank’s internal control systems; the application and effectiveness of the Bank’s risk management procedures and risk assessment methodologies; the accuracy and reliability of the Bank’s accounting records and financial reports; the manner and means in terms of which the Bank safeguards its assets; the systems and processes established by the Bank in order to ensure compliance with any relevant legal and regulatory requirements, codes of conduct and the implementation of policies and procedures;
••the Bank’s compliance with policies and risk controls; and the reliability, integrity, accuracy, completeness and timeliness of financial and management information.

Scope of internal audit

The department annually submits a coverage plan, that encompasses the entire business of the organization, to the Audit Committee for approval. During risk-based reviews, emphasis is placed on the adequacy and effectiveness of the control environment as part of Internal Audit’s assurance function. Control deficiencies that are detected are referred to management for corrective actions. The extent to which recommendations emanating from internal audit reviews have been implemented is measured

continuously.

“A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.”

- John C. Maxwell -

Finbond Group Limited & Finbond Mutual Bank Integrated Annual Report 2014

12

PR 9

COMPLIANCE

In line with Regulation 49 of the Banks Act No 94 of 1990 (the Bank’s Act) Finbond Mutual Bank has an independent compliance function as part of its risk management framework and corporate governance structure managing the Bank’s compliance risk. An independent compliance function is also considered to be a valuable contributor to good corporate governance and is supported by the King Code on Corporate Governance (King llI).

Compliance risk is defined as “the current and prospective risk of damage to the Bank’s business objectives, reputation and financial soundness arising from non-adherence with Legal or Regulatory requirements, Codes of Conduct and Standards of Good Practice applicable to its business.”

Compliance risk is managed through internal policies and processes which include legal, regulatory and business-specific requirements. Regular training and advice is provided to ensure that all employees are familiar with their compliance obligations. Compliance Monitoring Officers, Internal Audit and Area Managers independently monitor the business units and/or regions to ensure adherence to policies and procedures and business-specific requirements.

The Finbond Mutual Bank Compliance Governance Structure is in line with the generally accepted compliance practice framework of the Compliance Institute of South Africa, which in

turn incorporates sound practices recommended inter alia by the Basel Committee on Banking Supervision and the King III Report on Corporate Governance. This structure facilitates the

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    A Vector Error Correction Model of the South African Banks Stock Prices By Sophie Kasse-Kengne1 and Stephen Hosking Faculty of Business and Management Sciences Cape Peninsula University of Technology, Cape Town This version: August 2019 Abstract This paper investigates the long-run equilibrium relationships between selected economic fundamentals and banks’ stock prices in South Africa between 2010 and 2018. It further evaluates the predictive power of these stock prices on the economic growth. Johansen co-integration tests, vector error correction models and granger causality tests were utilised. The findings revealed that in the long run, each bank’s stock price is co-integrated with two macroeconomic indicators. Industrial production has a long run positive effect on all the banks’ stock price, except one where the impact is negative. Exchange rate also has an ambivalent outcome. However, M2 and export constantly exhibited a long run but a negative effect. Furthermore, there is no dynamic co-movements between banks stock prices themselves, suggesting greater diversification despite these banks’ monopoly position. Finally, South African Banks Index has a co-integrating relationship with industrial production and exchange rate. While the index does not as a stand-alone unidirectionally cause the two variables, it jointly with industrial production granger causes exchange rate, implying an effective but weak predictive power. In a short run, only industrial production has a statistically significant positive or negative relationship with banks’ stock prices, corroborating its equivocal effect. Money supply, exchange rate and export have no significant explanatory influence. Key words: Banks stock prices; Johansen Co-integration; Vector Error correction; Impulse response function; Granger causality; South Africa.
  • International Executive Development Programme

    International Executive Development Programme

    INTERNATIONAL EXECUTIVE DEVELOPMENT PROGRAMME 2015 IEDP INVESTMENT BANKING Enabling Skills Development In The Banking And Microfinance Sector BANKSETA INTERNATIONAL EXECUTIVE DEVELOPMENT PROGRAMME (IEDP): INVESTMENT BANKING 2015 (USA AND GHANA) The International Executive Development Programme (IEDP) Investment Banking 2015 is one of BANKSETA’s flagship development programmes. It is designed to assist with accelerating the development of senior managers in the banking and microfinance sector. This eight month programme is facilitated by the Gordon Institute of Business Science (GIBS), Ghana Institute of Management and Public Administration (GIMPA) in Accra, Ghana and the NYU Stern Business School, New York University, USA. The programme commences with a one week preparation period at GIBS, in March/April. The delegates then travel to New York in June and thereafter depart for Ghana in October 2015 for their one week African experience in Accra. This will provide key insights into the changes taking place in the global and local environment. The delegates will be exposed to best practice in investment banking and broader financial services whilst sharing their South African experience with executives. The delegates are tasked with researching industry relevant topics that add value to the sector. They will present their research to a panel, drawn from senior executives of South African banks. The benefits of the IEDP include personal and professional growth through engagements with executives; exposure to top local and international business schools; being ambassadors for South Africa in a variety of social settings; and living and working in an international city. BANKSETA proudly presents the 2015 delegates! IEDP PROFILES 2015 BANKSETA INVESTMENT BANKING PROGRAMME ALAN JOFFE Current Title: Head of Portfolio Management _________________________ Institution: PERSONAL INFORMATION: FirstRand Bank Limited Alan is married and has three children, with whom he spends the majority of his spare time.
  • The South African Reserve Bank's Assessment of Systemic Risk in The

    The South African Reserve Bank's Assessment of Systemic Risk in The

    Introductory remarks by Francois Groepe, Deputy Governor of the South African Reserve Bank, at the Financial Stability Forum and release of the first edition of the Financial Stability Review for 2018 South African Reserve Bank, Pretoria 25 April 2018 Members of the press, guests and colleagues, ladies and gentlemen. Welcome to the release of the first edition of the Financial Stability Review (FSR) for 2018. The FSR has been published twice a year since 2004. Through this publication, the South African Reserve Bank (SARB) communicates its assessment of systemic risk in the domestic financial system. Your presence at this Financial Stability Forum is appreciated, as the forum intends to encourage informed debate on, and therefore to enhance the understanding of, the complex and challenging matters related to financial stability. Consensus is growing globally that regulatory frameworks should focus more on mitigating the risks to the financial system as a whole, as significant risks can build up and threaten the stability of the financial system while individual financial institutions seem stable and sound. In pursuing this goal, the Financial Sector Regulation Act 9 of 2017 (FSR Act) confers on the SARB an explicit statutory mandate to protect and enhance financial stability. The SARB and National Treasury have consequently developed new legislation that will facilitate the orderly resolution of systemically important financial institutions that are failing, which is an important pillar of the SARB’s expanded mandate. This legislation will be effected through amendments to the FSR Act. A key component of the resolution framework is the establishment of an explicit deposit insurance scheme for banks in order to protect depositors from losses in the event of a bank failure.
  • Conduct Risk in South African Banks: Aligning Regulatory Compliance with Business Sustainability

    Conduct Risk in South African Banks: Aligning Regulatory Compliance with Business Sustainability

    Article Conduct Risk in South African Banks: Aligning Regulatory Compliance with Business Sustainability Antje Hargarter Gary van Vuuren https://orcid.org/0000-0003-0064-751X https://orcid.org/0000-0001-6811-0538 North West University, South Africa North West University, South Africa [email protected] Abstract Regulators have imposed heavy penalties on banks for conduct failures since the global financial crisis occurred in 2007/2008. Banks play an important role in the economy, and it is therefore in the interests of both the public and government that banks have an effective conduct-risk approach in place; one that complies with reg- ulation and ensures business sustainability. Current conduct-risk approaches are in- adequate, and literature is sparse—especially regarding developing economies. The goal of this research was to explore ways in which banks can manage and mitigate conduct risk, while ensuring sustainability. The qualitative design of this study used South Africa as an example of a developing market; and it employed primary and secondary data. The analysis shows that banks have been focused on developing a suitable high-level strategy but have neglected the lower level (where employees and customers meet). Consequently, they have exposed themselves to conduct risk. Based on these findings, this article suggests that banks’ strategies should be tackled in a top-down fashion, while they simultaneously pursue customer outcomes from the bottom-up. This study is crucial, as banks must prepare for new legislation, avoid fines, and strategically position themselves to satisfy clients and remain sus- tainable. Since the last self-assessment by the (then called) Financial Services Board in 2013, no formal assessment of conduct risk in the South African banking industry has taken place.