TCFI-01 Transitional Arrangements for Co-operative Financial Institutions

Prudential Standard TCFI-01 Ref.: 15/8/4/4 Transitional arrangements for co-operative financial institutions Contents

1. Commencement and transitional provisions ...................................................... 2

2. Legislative authority ........................................................................................... 2

3. Application ......................................................................................................... 2

4. Roles and responsibilities .................................................................................. 2

5. Application to register as a co-operative financial institution under the Act........ 2

6. Reporting on financial performance ................................................................... 3

7. Application to be a co-operative bank and thresholds for a co-operative
   financial institution ............................................................................................. 3

8. Changes to the constitution of co-operative financial institution......................... 3

9. Financial soundness requirements .................................................................... 3

10. Fit and proper directors and management......................................................... 3

11. Inspections of co-operative financial institutions ................................................ 4

12. Non-compliance with standards and requirements of the Prudential Authority.. 4

13. Structure of this Standard .................................................................................. 4
    Attachment 1: Definition of terms ............................................................................... 6
    Attachment 2: Requirements for registration.............................................................. 8
    Attachment 3: Application for registration................................................................... 9
    Attachment 4: Membership share register ............................................................... 10
    Attachment 5: Directors’ commitment ...................................................................... 11
    Attachment 6: Minimum prudential standards for co-operative financial institutions 12 Attachment 7: Governance and operational requirements for co-operative financial
    institutions..........................................................................................14
    Objectives and key requirements of this Prudential Standard This Standard provides for transitional arrangements for co-operative financial institutions until the finalisation of operational, prudential and governance standards under the co-operative financial institutions regulatory and supervisory framework being developed by the Prudential Authority. It is the responsibility of the board of directors of a co-operative financial institution to ensure that the institution meets the requirements of the Transitional Arrangement Standard on a continuous basis. The Transitional Arrangement Standard sets out the requirements for registration with the Prudential Authority and the basic principles relating to the maintenance of effective risk management by co-operative financial institutions. Transitional arrangements for CFIS –TCFI-01. Commencement and transitional provisions This Standard commences on 26 September 2018. Version number Commencement date 01 26 September 2018

14. Legislative authority
    This Prudential Standard is made in terms of sections 46(1) read with 44(4)(b) of the Co-operative Banks Act, 2007 (Act No. 40 of 2007) (the Act) and sections 105 and 108 of the Financial Sector Regulation Act, 2017.

15. Application
    This Prudential Standard applies to all co-operative financial institutions and provides for transitional arrangements until the finalisation of operational, prudential and governance standards under the co-operative financial institutions regulatory and supervisory framework being developed by the Prudential Authority.

16. Roles and responsibilities
    The board of directors (board) of the co-operative financial institution is ultimately responsible for ensuring that the co-operative financial institution complies with the principles and requirements of this Prudential Standard.

17. Application to register as a co-operative financial institution under the
    Act
    5.1. The requirements and pre-conditions for registration with the Prudential
    Authority are set out in Attachment 2.
    5.2. All applications for registration as a co-operative financial institution, including
    any relevant supporting documents, must be provided in the form and manner set out in Attachment 3 (Form PA001), Attachment 4 (Form PA002) and Attachment 5 (Form PA003).
    5.3. A prospective co-operative financial institution must comply with all the
    relevant requirements to be registered as a co-operative in terms of the Co-operatives Act, 2005.
    5.4. All co-operative financial institutions currently registered by the CBDA must,
    apply for registration to the Prudential Authority in terms of the Act on or before 1 August 2019.
    5.5 As of 1 October 2018, every co-operative financial institution that immediately
    before that date was registered as a co-operative financial institution by the CBDA under the Exemption Notice continues to exist as a registered co￾operative financial institution as if it had been registered under the Act and may continue to conduct the business for which it was so registered until its application under paragraph 5.4 is finalised by the Prudential Authority. Transitional arrangements for CFIS –TCFI-01 2

18. Reporting on financial performance
    6.1. The financial year-end for all registered co-operative financial institutions is
    the last day of February of each year.
    6.2. Subject to the provisions of paragraph 6.4, all registered co-operative financial
    institutions must report to the Prudential Authority on their financial performance on a quarterly and cumulative basis at the end of May, August, November and February each year.
    6.3. The report referred to in paragraph 6.2 must be made in the form and manner
    determined by the Prudential Authority and published on its website.
    6.4. The Authority may require a co-operative financial institution to submit
    information and reports on a more frequent basis.

19. Application to be a co-operative bank and thresholds for a co-operative
    financial institution
    7.1. A co-operative financial institution must, once it has maintained at least
    R5 million in members’ deposits for a period of at least six consecutive months, apply for registration as a co-operative bank in terms of the Act, unless specifically exempted by the Prudential Authority.
    7.2. A co-operative financial institution that does not qualify to be registered as a
    co-operative bank may not hold more than R50 million in members’ deposits.

20. Changes to the constitution of co-operative financial institution
    A co-operative financial institution must obtain the prior written approval of the Prudential Authority to make any changes to the constitution of the co￾operative financial institution.

21. Financial soundness requirements
    9.1. Co-operative financial institutions must comply with the prudential
    requirements set out in Attachment 6 and such further prudential requirements that are specific to a co-operative financial institution as may be specified in writing by the Prudential Authority.
    9.2. Full compliance with the governance and operational requirements set out in
    Attachment 7 may be achieved over time. The co-operative financial institution, at the request of the Prudential Authority, must demonstrate how compliance with these requirements has been incrementally achieved.

22. Fit and proper directors and management
    10.1. The co-operative financial institution must annually submit to the Prudential
    Authority a return in the form and manner determined by the Prudential Transitional arrangements for CFIS –TCFI-01 3

Authority and published on its website confirming that:
10.1.1. board members of the co-operative financial institution individually and
collectively have the appropriate educational qualifications, experience or expertise, relevant skills and knowledge required for the effective and prudent oversight of the co-operative financial institution;
10.1.2. executive officers appointed by the co-operative financial institution are
competent to prudently manage the business of the co-operative financial institution;
10.1.3. the necessary development and training of members in terms of the
constitution of the co-operative financial institution and the co-operative principles has taken place;
10.1.4. the Authority has been advised of any changes that have taken place in the
co-operative financial institution’s board of directors membership and executive officers; and
10.1.5. all relevant developments with regards to related person relationships
within the co-operative financial institution at a board, management and general staff level have been reported to the Prudential Authority.
10.2. The manager or person to be appointed to the position of manager must
possess appropriate educational qualifications, experience or expertise, relevant skills and knowledge requirements for the prudent management of the co-operative financial institution.
11. Inspections of co-operative financial institutions
Co-operative financial institutions registered with the Prudential Authority will, among others, be monitored through onsite inspections, as well as offsite reviews and assessments of all relevant reports and information submitted in terms of this Standard or such further requirements as may be specified in writing by the Prudential Authority.
12. Non-compliance with standards and requirements of the Prudential
Authority
12.1. A co-operative financial institution must immediately report any non￾compliance with any relevant provision of this Standard or requirements
specified by the Prudential Authority to the Prudential Authority.
12.2. The co-operative financial institution must in its annual report to be tabled at
its annual general meeting, disclose all enforcement action taken against it by the Prudential Authority.
13. Structure of this Standard
13.1 This Standard includes Attachments that set out supporting details such as
definitions and requirements. These Attachments must be complied with.
13.2 This Standard is organised as follows:
Attachment 1: Definition of terms
Transitional arrangements for CFIS –TCFI-01 4

Attachment 2: Requirements for registration Attachment 3: Application for registration Attachment 4: Membership share register Attachment 5: Directors’ commitments Attachment 6: Minimum prudential standards for co-operative financial institutions Attachment 7: Governance and operational requirements Transitional arrangements for CFIS –TCFI-01 5

Attachment 1: Definition of terms
In this Prudential Standard, any word or expression that is defined in the Act has that meaning. The following table sets out definitions of additional terms used throughout this Standard:
Term Definition
Capital Mandatory membership shares, indivisible reserves, retained earnings and any other non-distributable funds of a permanent nature as approved by the Authority. capital adequacy ratio Means capital over total assets. CBDA Co-operative Banks Development Agency established in terms of the Co-operative Banks Act, 2007 (Act No. 40 of 2007). CIPC The Companies and Intellectual Property Commission, established in terms of section 185 of the Companies Act, 2008 (Act No. 71 of 2008). co-operative Means a co-operative as defined in the Co￾operatives Act. Co-operatives Act Co-operatives Act, 2005 (Act No. 14 of 2005) co-operative principles The internationally accepted principles of co￾operation, exemplified by the principles adopted by the International Cooperative Alliance. executive officer Means any employee of the co-operative financial institution that reports directly to the manager of the co-operative financial institution. Financial Sector Regulation Act, 2017 The Financial Sector Regulation Act, 2017 (Act No. 9 of 2017). investments As prescribed in regulation 3.2 of the Co￾operative Banks Regulations, No 32357, Transitional arrangements for CFIS –TCFI-01 6

1 July 2009. liquid assets Are defined as investments, as prescribed in regulation 3.2 of the Co-operative Bank Regulations, No 32357, 1 July 2009, as amended, with tenure not exceeding 32 days and convertible into cash at any time, without incurring any penalty. Prudential Authority The Prudential Authority, a juristic person within the administration of the South African Reserve Bank, established in terms of
section 32 of the Financial Sector Regulation
Act, 2017. Also means the ‘Authority’ referred to in the Co-operative Banks Act. Registrar of Co-operatives The Registrar of Co-operatives Commissioner appointed in terms of section 189 of the Companies Act, 2008 (Act No. 71 of 2008). related person As defined by the Regulations made in terms of section 86 of the Co-operative Banks Act, 2007, published under Government Notice R712 in Government Gazette 32357 of 1 July 2009, being a person or member who is directly or indirectly controlled by the same person or member; and a person or member who is so interconnected with another person or member that should one of them experience financial difficulties, one or all of them would be likely to experience a lack of liquidity. sustainability The ability to generate sufficient income to be able to cover operational expenses and set aside required reserves after paying a fair interest or dividend on deposits. Transitional arrangements for CFIS –TCFI-01 7

Attachment 2: Requirements for registration Requirements for registration as a co-operative financial institution Applications Form/Notes CIPC (registrar of co-ops) CR1 Application form including:
CR4 Appointment of auditors
CR5 Reservation of name
Form Prudential Authority
PA 001
Attachment 3
Application for registration form (include CIPC customer code number) Members resolution Proof of bank account PA 002 Attachment 4 Membership Share Register confirming 200 fully paid up active members At least R100,000 in shares on registration. PA 003 Attachment 5 Signed Director’s commitment Transitional arrangements for CFIS –TCFI-01 8

1. Forms CR1, CR4/CR8 and CR 5. 11. Business plan which INCLUDES:
2. Member Share Register (PA Form 002) with a minimum of 200 fully paid
   up members.
3. A short description of the background of the organization,
   experience in the sector and overall strategy to serve the target market.
4. Its human and operational capacity to operate efficiently and
   competently.
5. The board of directors and management experience,
   knowledge and qualifications.
6. 3 year financial forecast showing viability plan of the
   entity.
7. Product Sheet.
8. Signed Directors’Commitment (PA Form 003).
9. Two (2) certified copies of the CFI’s constitution that meets the
   requirements of constitution guidelines issued by the PA.
10. Certified ID copies of all founder members.
11. Latest certified bank statement.
12. Member Resolutions to register with the PA.
13. Savings policy.
14. Credit/loans Policy (if applicable).
15. National Credit Regulatory certificate of registration (if applicable).
16. Certificate of Membership to a registered Representative Body.
    INSTRUCTION FOR COMPLETION OF FORM
    Form 001
    Application for Registration
    Co-operative Financial Institution
17. Write or print in legible characters with deep permanent black ink, and lodge one set of the
    documents (of international size A4) with the Prudential Authority at SARB-PA@resbank.co.za.
18. The application form and every page of every document attached must be signed by the
    chairperson of the proposed Co-operative Financial Institution (CFI). 3. 4. Provide an explanation and motivation in respect of any of the required documentation listed below which is not submitted. Please note that the Prudential Authority may require a proposed applicant to furnish additional information/documents, or a report by an auditor/or any other knowledgeable person approved by the Prudential Authority, on aspects relating to the application. BACKGROUND: Co-operative Financial Institution CONTACT INFORMATION: NB: Two duly appointed directors SUPPORTING DOCUMENTATION CHECK LIST:
    Name of Organisation: Name Abbr.:
    Registered Office physical address:
    Postal Code
    Postal Address:
    Postal Code
    Tel No. Cell No. eMail:
    Common Bond Description:
    Representative Body Membership No. CIPC Customer Code Number of Members: Total Member Shares: R Total Member Savings: R Mr Mrs Ms: Full Names: Position:
    Tel No. Cell No. eMail:
    Mr Mrs Ms: Full Names: Position:
    Tel No. Cell No. eMail:
    Name:
    Position:
    1
    2
    Date:
    Signature:
    D D M M Y
    Attachment 3: Application for registration 9

Form 002 member share register
Co-operative Financial Institution
NAME AND SURNAME
TOTAL
VALUE OF SHARES
R
SA ID or Other ID NO. DATE JOINED
1
17
9
25
5
21
13
29
33
3
19
11
27
7
23
15
31
35
2
18
10
26
6
22
14
30
34
4
20
12
28
8
24
16
32
Attachment 4: Membership share register
10
Name:
Position:
Date:
Signature:
D D M M Y

Form 003
BOARD OF DIRECTORS’ COMMITMENTS
Co-operative Financial Institution acknowledge that:
Failure to comply with any of the conditions of the registration may result in action taken by the Prudential Authority.
2. We owe our members a duty of care and may be held liable should the CFI misuse member savings during our term of office.
We further commit ourselves to ensuring that:
3. Board of Directors, Audit/Supervisory Committee Members, Credit Committee members and full time staff will complete designated course/courses within
one year of being elected as directors.
4. As directors we further commit to ensuring that the person employed as the General Manager, Managing Director, Manager, administrator or person ultimately
responsible for the day-to-day running of the CFI will be competent and employed in a fair and transparent manner.
5. We commit to ensuring that the Co-operative Financial Institution operates within the terms of the Co-operatives Act, Co-operative Banks Act, the
co-operative principles and prudential standards.
6. We undertake to ensure that our members are made aware, at least once a year, on the activities of the CFI and the co-operative principles.
7. We undertake to inform the Prudential Authority of any operational changes in the CFI within one (1) month of such a change.
D D M M Y
SIGNED: At least five (5) duly appointed directors must sign on behalf of the board Mr Mrs Ms Name:
Surname: Signature:
CHAIRPERSON
1
Mr Mrs Ms Name:
Surname: Signature:
VICE CHAIRPERSON
2
Mr Mrs Ms Name:
Surname: Signature:
TREASURER
3
Mr Mrs Ms Name:
Surname: Signature:
SECRETARY
4
Mr Mrs Ms Name:
Surname: Signature:
DIRECTOR 1
5
Mr Mrs Ms Name:
Surname: Signature:
DIRECTOR 2
6
Mr Mrs Ms Name:
Surname: Signature:
DIRECTOR 3
7
Mr Mrs Ms Name:
Surname: Signature:
DIRECTOR 5
8
Mr Mrs Ms Name:
Surname: Signature:
DIRECTOR 6
9
Mr Mrs Ms Name:
Surname: Signature:
DIRECTOR 7
10
Attachment 5: Board of Directors' Commitments 11

Attachment 6: Minimum prudential standards for co-operative financial institutions No. Standard Descriptor Minimum 1 Registration Companies Intellectual Property Commission (CIPC)  SARS  National Credit Regulator (NCR)  Unemployment Insurance Fund (UIF)  Prudential Authority  2 Outreach No of active savers Min 200 Minimum monthly savings growth of average of R50 per member per month once registered 3 Compliance Financial statements (returns)  Audited financial statements  Board meetings  Annual general meetings  4 Portfolio quality Delinquency <5% Loan loss provision 1-6 months 35% 6-12 months 50% 12 months and above 100% 5 Sustainability Savings to total assets Max 80% Loans to total assets Max 80% External credit Max 15% Solvency*(total assets/total liabilities) 100% Non-earning and fixed assets to total assets Max 5% CFI will be sustainable within 3 years 6 Capital structure Member share capital Min R100,000 Capital adequacy ratio Min 6% 7 Liquidity Liquid assets to total deposits ratio Min of 10% 8 Exposures (as a percentage of assets) Board member loans collectively Max 25% Loan per member Max 10% Individual share investment Max 20% Individual savings deposit Max 10% Investments See definitions Transitional arrangements for CFIS –TCFI-01 12

• Solvency: Formula: [(a-b)-(c+d)]
  (e+f)
  Where:
  a. Total Assets b. Provision for bad debts
  c. Total External Credit
  d. Total Non-Interest Bearing Liabilities e. Total Savings f. Voluntary Shares A co-operative financial institution must obtain the prior written approval from the Prudential Authority to introduce any other form of capital. All other forms of capital must as a minimum preserve the co-operative principles of a co-operative financial institution as well as the safety and soundness of the system within which it conducts the business of co-operative financial institution. Transitional arrangements for CFIS –TCFI-01 13

Attachment 7: Governance and operational requirements for co-operative financial institutions No Descriptor Standard Minimum 1 Governance Constitution Compliant with constitution  Board of Directors Number of fit and proper board members 9-15 Term of office (3 years per member) Maximum 2 terms Meetings At least quarterly Minutes  Board committees Governance committee  Credit committee  Supervisory/Audit committee  Education and training committee  Strategic plan and business plan Documented, implemented and reviewed  Mission, Vision, Organogram, Key strategic issues, Objectives, Targets, Timelines and Responsible people  Financial reporting, Audit and AGM Financial reports  Income statement  Balance sheet  Audited financial report  Annual General Meeting  No Descriptor Standard Minimum 2 Policy and procedures Documented, adhered to and reviewed Savings  Loans, loan write off  Membership and recruitment  Liquidity Management  Investment  Human resources  Performance management  Succession planning  Training and development  Staff recruitment, contracts and job descriptions  Maintain management and staff CVs  Procurement  Health and Safety  IT  Security  Code of conduct for board and management  Risk management  Review of policies  Transitional arrangements for CFIS –TCFI-01 14

No Descriptor Standard Minimum
3 Management
Signs of growth
Membership Positive + inflation
Assets growth Positive + inflation
CFI Physical structure
Office Established and reviewed
Office furniture, computers 
Banking hall 
Security 
Safe and strong room 
Fire detector 
Alarm system 
Human resources management
Staff training programs 
Job descriptions 
Contract/conditions of service 
Performance management system 
Qualified management and staff 
Organisational chart and salary structure  Record keeping Financial reporting to board  Recruit bookkeeper/accounts clerk  Minutes  Member documents  Source documents Monthly Financial Records  Information back up  Management information systems Integrated banking and accounting system  System access control  Back up  Disaster recovery plan  Internal controls Segregation of duties  Authorisations  Access controls  No Descriptor Standard Minimum Financial Management 4 Accounting Financial statements analysis Monthly Bank reconciliation statement Monthly Register of assets Current Investments  Compliance Financial reporting – PA Annually Financial reporting – CIPC Annually All other requirements above (1-6)  All other legal requirements  Minimum prudential requirements Quarterly Transitional arrangements for CFIS –TCFI-01 15

No Descriptor Standard Minimum
Marketing and Products Developed and
Implemented
5 Marketing budget 
Marketing Task team/officer 
Marketing plan 
Signage 
Branding 
Member recruitment plan 
Advertising – print and electronic media  Research member product needs  Product development and review  Product pricing and costing  Product prototype and test run before roll out  Member feedback mechanisms  Enhance branding, marketing plan  Intro advance banking e.g. ATM  No Descriptor Standard Minimum 6 Co-operative principles Open and voluntary membership Members join without discrimination  Democratic member control Members to attend meetings  Members influence how the CFI is run  Autonomy and independence Non-availability of outside influence in the management and operations  Education, training and information Display principles at CFI office  Hand out principles to members and prospective members  Educate all members about co-ops  Regularly update members on progress of CFI  Financial literacy, budgeting, business development training for members  Member economic participation Members to save continuously  Members to access loans for provident and productive purposes  Co-operation amongst co￾operatives Financial co-op forums  Participation in local and international forums  Financial co-op conferences  Concern for the community Education, reserve fund before dividends  Scholarships, bursaries, orphanage etc.  Community development plans  Transitional arrangements for CFIS –TCFI-01 16