The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2019

What does the future hold for co-operative financial institutions in South Africa?

By Master Mushonga, Thankom G. Arun and Nyankomo W. Marwa

  • June 2019
  • Tags Features, Finance
23 minutes to read


What is this study about?

All over the world, co-operative financial institutions (CFIs) play a key role in assisting financially excluded communities with lower incomes with improved access to finance. Yet, there has been a decrease in the number of CFIs in South Africa. What drives this industry and what does the future hold for CFIs in this country? To find out, this study set out to:

  • Understand the qualitative performance drivers and inhibitors of CFIs by applying the Delphi technique
  • Identify internal and external factors determining performance by applying a SWOT analysis
  • Forecast future developments that must happen in the co-operative finance industry to drive performance in the next 10 years and help craft growth strategies.


The ranking-type Delphi technique was used to gather expert opinions from those working in or with financial co-operatives. 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. In essence, this study presents a CFI performance ecosystem based on identifying the key drivers, inhibitors and strategies to achieve high-performance growth in this sector.

Not a single financial co-operative has received government recapitalisation following the recent global financial crisis.

The playing field

Financial markets failure is one of the challenges facing many economies as large banks tend to engage in credit rationing of small to medium enterprises (SMEs) and marginal communities, citing information asymmetry and transaction cost challenges. The situation has worsened over the past two decades due to mergers and acquisitions reducing the number of banks. It was found that increased bank market power resulted in increased financing constraints for SMEs across 20 European countries. It was also found that credit-constrained SMEs depend on trade credit, but not bank loans, and that the intensity of this dependence increased during the financial crisis.

A recent banking market structure study found that co-operative banks facilitate access to bank financing, reduce financial costs, boost investments, and favour growth for SMEs. It was found that regions in which co-operative banks hold a strong position are characterised by the rapid pace of new firm creation, while the opposite applies in the majority of cases for local banking markets dominated by foreign-owned banks. Unlike traditional banking institutions, co-operative financial institutions are member-focused deposit taking and loan granting institutions, and are efficient in generating borrower-specific information, which can address “informational” distance.

The role of CFIs in providing ethical and social finance is a loud call for researchers to understand their qualitative performance drivers and inhibitors by engaging co-operative finance experts to enhance their performance.

A number of studies have looked at how CFIs, which are grassroots innovations, have performed during and after the global financial crisis compared to investor-owned banks. Not a single financial co-operative has received government recapitalisation following the recent global financial crisis. Statistics from the World Council of Credit Unions, a global trade association for credit unions and financial co-operatives, shows CFIs’ total assets reached $1,8 trillion and served 236 million members in 2016, up from $1,2 trillion and 177 million respectively in 2007. The one member, one vote system ensures CFIs serve common needs rather than the needs of a handful of individuals as in the case with traditional banks. However, effective governance depends more on the willingness of members to exercise their ownership rights by expressing their views to the board of directors and holding them accountable for value creation. CFI performance is targeted towards optimising value, service and profit, and minimising costs.

The one member, one vote system ensures CFIs serve common needs rather than the needs of a handful of individuals as in the case with traditional banks.

The CFI penetration rate in South Africa is the lowest in the world at 0.06% compared to Kenya (13.3%), Rwanda (13.8%), Togo (26.7%), Australia (17.6%), Canada (46.7%), United States (52.6%) and Ireland (74.5%). The worldwide average is 13.5%.

South Africa passed the Co-operative Banks Act in 2007 and formed the Co-operative Banks Development Agency (CBDA) in 2009 with a mandate to formally regulate, supervise and develop the sector. There has been a decrease in South African CFIs and membership from 121 and 59,394 in 2011 to 30 and 29,818 respectively in 2017. The decrease can be partly explained by the CDBA’s prescribed minimum membership and share capital contribution at 200 and R100,000 respectively. The implementation of the regulation could have been harsh to small but growing CFIs.

Financial inclusion in South Africa and the role of CFIs

In South Africa, nearly 8.5 million adults are excluded from the formal financial system. In total, 77% of all adults have a bank account. However, if the social grant beneficiaries (nearly 5.1 million) are excluded, only 58% are banked. About 51% of adults are borrowing from various sources to supplement their limited resources – 46% from non-bank financial institutions (NBFIs), while only 14% are borrowing from banking institutions. Only 5% are using credit for developmental reasons. In 2016, 33% of adults were saving, with 15% saving through banks, 14% saving with NBFIs, 8% with informal institutions and 11% saving at home. Previous attempts to increase financial inclusion through the Mzansi account (an entry-level bank account targeting the mass population in 2004) failed. The Mzansi accounts were perceived as not meeting the aspirations of those aiming to climb up the financial services ladder, making CFIs a suitable alternative.

The CFI penetration rate in South Africa is the lowest in the world at 0.06% … The worldwide average is 13.5%.

CFIs help to bridge the financial exclusion gap by pooling members’ financial resources together for on-lending to the same members. As member-driven organisations operating within a common bond, they are better placed to reduce informational opacity and high transaction costs which usually result in credit rationing in credit markets.

This enables members to break the poverty trap caused by lack of economic opportunities and low productivity due to lack of access to financial services. Since CFIs are owned and operated by members, they have an objective to maximise the services provided to members. This suggests that profit maximisation is not an ultimate objective, since there are no non-member suppliers or customers to exploit.

What does the literature say about CFI performance drivers and inhibitors?

Seven streams of empirical papers are dealing with the performance dynamics of CFIs: industry professionalisation (governance), policies, technology diffusion, social capital, outreach, economic trends and sector perception. Various studies reveal that co-operatives established with the social purpose of serving poor communities have the real possibility of becoming sustainable and effective – but only if they adopt a radical commercial approach to organisational development. Professionally managed CFIs are found to be attractive to middle-income earners.

CFIs … enable members to break the poverty trap caused by lack of economic opportunities…

From the literature review, we summarise that each of the seven forces can be either a driver or inhibitor depending on its strength or weakness in influencing CFI performance, as depicted in Figure 1 below. CFIs thrive on a community’s social capital: if social ties are weak, that will affect their performance. Social networks and technology enable financial innovation at grassroots and swift financial solutions delivery in a cost-effective manner, while its low adoption raises costs and restricts convenience. A wider membership outreach is therefore important for meaningful capital and savings mobilisation. In addition, professionally managed co-operatives attract membership as institutions with weak governance structures and incompetent staff perform poorly.

Figure 1: Forces that drive and inhibit CFI performance

Using the Delphi method as research methodology

Quite a number of studies have compared traditional surveys and the Delphi method regarding their strengths and shortcomings. Based on these studies, we judge the Delphi method to be a stronger methodology to carry out a rigorous inquiry from co-operative finance experts on complex questions requiring collective judgement. Rather than attempting to assemble a statistically representative sample, the Delphi method uses a purposely selected panel of experts to comment on a problem or situation. The rationale for this design choice is that a non-representative sample of experts is more equipped to arrive at a correct decision than a representative sample of non-experts.

This study used the ranking-type Delphi, which identifies and ranks key issues – typically used in business to guide future management action or research agendas.

The selection of experts is the most critical requirement to improve the credibility and the validity of the process. We divided experts into four panels: CFI management, regulators, CFI associations, and consultants or capacity builders. The advantage of multi-panel Delphi studies is that they account for multiple expert perspectives. We ended up with 36 experts of which 50% were CFIs managers. Our experts are quite mature, averaging 44.7 years in age, with 10.8 years of working experience in the CFI sector.

The questionnaires sent out to the experts contained a maximum of six questions to avoid overburdening them given their time constraints. The administration of the ranking-type Delphi involved three steps: brainstorming of factors; narrowing down the original list to the most important ones; and two rounds of ranking important issues. We then use the Wilcoxon Ranked Pairs Signed-Rank Test recommended for Delphi studies to assess convergence across two rounds.

…the sector needs to address deficiencies in corporate governance, technology and negative perceptions … to attract a mixture of membership

We based the study findings on the final rankings of the mean score in Rounds III and IV. All issues are ranked based on Round IV mean scores, starting with the lowest mean score, that is, ranked as the most important in descending order. Mean scores in Round IV are lower than in Round III, which is an indication that collectively the experts revised their rankings downwards considering the opinion of others, as expected in a Delphi study.

The drivers of CFIs’ performance

The identified drivers (strengths) to CFI formation and performance are quite diverse. However, the major drivers seem to be leveraging on social capital to eradicate poverty. These drivers were:

  • Pooling more savings together for on-lending to members
  • Strengthening the community bond for development
  • Improving the savings culture through CFI formal mechanisms
  • Using CFIs to create community businesses through access to finance
  • Providing easy access to credit for CFI members compared to banks
  • Using CFIs to meet community financial needs at low cost
  • Using CFIs to pool capital together for on-lending profitably
  • Giving members ownership and control of CFIs effectively
  • Offering competitive pricing of loans compared to moneylenders
  • Improving financial literacy among CFI members
  • Facilitating positive economic impact as members’ well-being improves
  • Growing membership and savings from organised groups (like rotating savings and credit associations or stokvels)
  • Helping to fight the debt trap caused by moneylenders
  • Providing capacity building support from CBDA on CFI governance


Unexploited potential (opportunities) for CFI performance is dominated by social, governance and economic drivers:

  • The ability to diversify financial services to meet member needs
  • The ability of CFIs create an opportunity for the community to own their bank
  • The ability of CFIs to expand by incorporating informal savings clubs
  • The adoption of financial technology to improve efficiencies
  • The ability to reduce poverty, unemployment and social inequality
  • The potential of CFIs to expand the market to the unbanked
  • Improving discipline in the community on financial matters
  • The potential of CFIs to dominate in financially excluded areas
  • Improved governance of the CFI as members are owners
  • Avoiding exploitative neoliberal bank charges
  • The opportunity to receive social grants on behalf of members
  • The ability to provide high interest rates on savings
  • The possibility of issuing transactional cards for convenience
  • Free capacity building from CBDA and BankSETA
  • Helping members out of the debt trap of moneylenders
  • The ability to create a middle class through improved access to finance
  • Favourable legislation allowing registration as a cooperative bank (CB) or secondary cooperative bank (SCB).

… the sector needs to address deficiencies in corporate governance, technology and negative perceptions … to attract a mixture of membership

The inhibitors of CFI performance

The inhibitors to CFI performance are split into internal (weaknesses) and external (threats) factors. The major inhibitors are technological, economic, governance, social and perception factors. Specifically, the major internal weaknesses were:

  • Low adoption of technological banking systems
  • The weak capital base of CFIs, which means they cannot absorb credit risk
  • Low managerial skills to lead CFIs profitably and sustainably
  • The poor marketing of the CFI concept to the greater public
  • Lack of strong cooperative movement, leading to a fragile sector
  • A poor savings culture among members
  • Lack of participation on the National Payment System (NPS)
  • The inability to retain talent through competitive market salaries
  • Weak membership and savings growth
  • CFIs are banking with banks, so they risk losing members
  • Weak corporate governance structures
  • Weak risk management systems
  • Tight cash flow positions
  • Low innovation to develop appropriate financial products
  • Poor activism by members in the governance system
  • No deposit insurance guarantee to protect members
  • Unattractive premises appealing to middle and upper class


CFIs also face external threats:

  • Stagnant membership growth due to poor public perception
  • The high failure rate of CFIs, which affects community confidence
  • Wrong perception that CFIs are for the poor only
  • Policymakers’ interest in banks, which cause them to neglect CFIs
  • High unemployment, which affects the ability to save
  • Economic challenges, which affect savings
  • Competition from loan sharks, which leads to over-indebted members
  • The weak performance of the economy, which affects savings
  • The high cost of the banking system, which CFIs cannot afford
  • Competition from informal schemes and pyramid schemes
  • Competition from commercial banks on member savings
  • The inability to attract qualified staff due to poor perception
  • No special tax rate for social enterprises such as CFIs
  • High insolvency of CFIs
  • Lack of deposit insurance to attract the middle and upper classes

The recent call for more ethical and socially responsible banking … positions CFIs to play an important role going into the future

Developments to drive CFI performance over the next 10 years

The ranking of 17 out of 22 future developments changed significantly during the various rounds of expert opinions, suggesting that our experts are more concerned with the sector’s future. The experts gave the rankings much attention by reconsidering their previous rankings after learning from each other. The top-ranked propositions are technological, marketing, human, policy, environmental and economic in nature. These were the future developments they considered:

  • The adoption of technology to improve convenience and efficiencies
  • Effective publicity of CFIs’ real social impact in communities
  • CFI-specific qualifications for the leadership and staff
  • Improving transparency through internal and external audits
  • Enabling CFIs to participate in the National Payment System to appeal to all
  • Improving CFIs’ corporate governance structure through training
  • Creating a common national CFI brand such as Volksbank
  • Diversifying financial services to appeal to all
  • Improving members’ saving culture through financial literacy
  • Launching national campaigns to encourage people to join local CFIs
  • Enhancing CFIs’ financial sustainability to attract stakeholder interest
  • Improving CFI location appearance to appeal to all
  • Implementing a national CFI sector strategy to guide players
  • Providing tax exemption status for CFIs as they are social enterprises
  • Rebranding the CFI concept to appeal to all classes
  • Targeting organised groups to boost membership
  • Requiring government entities to also save in CFIs as juristic members
  • Strengthening the National Association of CFIs in South Africa (NACFISA)
  • Establishing a secondary cooperative bank (SCB) to act as CFIs’ bank of last resort
  • Strengthening CFIs’ capital base through member contributions
  • Recognising that a performing economy and political stability are necessary
  • The contribution of CFIs towards the deposit insurance protection

… co-operatives established with the social purpose of serving poor communities have the real possibility of becoming sustainable and effective – but only if they adopt a radical commercial approach to organisational development.

Figure 2 below shows the performance of CFIs to be a coevolution of different forces affecting each other at the same time. The width of the arrows reflects the response weights, with the largest being the most important.

CFI performance ecosystem
Figure 2: CFI performance ecosystem with arrow width indicating level of importance

What did the study find?

The key contribution of this study has been the identification of drivers and inhibitors of CFI performance. Based on the identified issues, it is clear that the sector requires collective stakeholder efforts to move it forward. The major drivers for CFI formation and performance are social ties and the need for economic empowerment followed by outreach from organised groups and the members’ need for organisation self-governance. Given the social networks in stokvels, the common bond is strong, making it easier for the formation and growth of CFIs.

With South Africa’s history characterised by exclusion, CFIs are seen as one of the instruments for economic empowerment through improved access to financial services. Members feel equally empowered to govern their CFI without the dominance of certain individuals. Although policies do not appear to be more important in driving performance, they do provide an enabling regulatory environment for the formation and performance of CFIs.

On the other hand, negative perceptions of the sector and low technology adoption have been identified as the biggest inhibitors to CFI performance. CFIs are not currently viewed as an alternative banking solution for a cross-section of society. Negative perceptions hinder them from penetrating affluent market segments, a situation worsened by low technology adoption which would enable them to offer members cost-effective diversified financial solutions. Further outreach is also affected by the poor appreciation of the CFI concept and its value proposition. While poor governance and restrictive policies seem to have moderate impact on performance, they will have a huge effect when left unattended. Hence, the sector needs to address deficiencies in corporate governance, technology and negative perceptions as a matter of urgency to attract a mixture of membership from the broader population.

The second objective was to identify strategies that can be implemented to position CFIs for future success. Our experts agreed on these seven strategic alternatives to focus on in the next decade: technology, people, marketing, culture shift, policy, environmental and economic. Since technology was identified as the second most inhibitor to performance, it is ranked as the most urgent priority for implementation followed by having competent human capital from the board of directors to floor staff. Perception transformation can be achieved through effective marketing and brand awareness campaigns. Unfortunately, economic fortunes in South Africa are unlikely to improve soon given the drought, high unemployment, weakening exchange rates and rising food prices.

The resignation of President Jacob Zuma in 2018 was expected to restore some confidence in the economy. Investment drives and reforms have been launched to attract new foreign direct investments. Also, having a vibrant National Association of CFIs in South Africa (NACFISA) and setting up a deposit insurance scheme are unlikely to be achieved soon. The implications might be that the sector will remain unattractive to the middle-class, and policies advocacy is difficult given an ill-funded association body. There is a need to pay attention to these issues including having a lender-of-last-resort for liquidity support. However, culture transformation is likely to require more effort to build better capitalised and more responsive CFIs which are member-centric through targeted financial literacy programmes. Beyond 10 years, culture transformation and environmental issues are likely to be more important given their role in building a resilient sector.

In the aftermath of the global financial crisis, CFIs provide a fundamental perspective on how proper financial intermediation should be conducted in a non-speculative way after most bank customers were disappointed by investor-owned banks. The recent call for more ethical and socially responsible banking takes into account the balanced needs of society, the environment and the economy, and positions CFIs to play an important role going into the future. To play this increasing role, CFIs will need to understand their performance drivers and inhibitors and develop alternative strategic options to achieve sustainable growth.

  • Find the original journal article here: Mushonga, M., Arun, T. G., & Marwa, N. W. (2018). Drivers, inhibitors and the future of co-operative financial institutions: A Delphi study on South African perspective. Technological Forecasting and Social Change, 133, 254-268.
  • Master Mushonga is a PhD candidate in Development Finance at the University of Stellenbosch Business School. His research interests lie in the field of inclusive financial innovations, financial systems development and the implications of disruptive innovations, especially in smallholder farming.
  • Prof Thankom Arun is a Professor of Global Development and Accountability at the University of Essex Business School. He is also a Professor Extraordinaire at the University of Stellenbosch business School.

Dr Nyankomo Marwa is a senior lecturer in Development Finance and Econometrics at the University of Stellenbosch Business School. He also teaches at academic institutions in Canada and Tanzania. He is a founder of Maige Management Consultancy, a firm focusing on SMMEs and family business development and consultancy.


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