Domestic financial system remains strong-report
Koobonye Ramokopelwa
The domestic financial system which comprises of banks and non-bank financial sectors remains robust despite the existence of Covid -19 which has shattered the domestic and world economy to record lows. This is the message coming out clearly from the Financial Stability Council (FSC), which recently met to deliberate on key financial and banking services matters.
The Council which was formed last year met in August 2020, amid rising Covid 19 cases. “Overall, notwithstanding the challenges engendered by the onset of the COVID-19 pandemic, the domestic financial system continues to be resilient, characterized by strong capital buffers, liquidity position and profitability. The enduring stability of the financial system is supported by a sound macroeconomic environment, efficient market infrastructure and effective legal and supervisory frameworks. Therefore, these favourable conditions enable the financial sector to perform its role and support economic activity in different economic cycles,” said the Council formed for the purpose of information sharing, cooperation and communication in the implementation of a macro prudential policy framework within the country.
Major commercial banks and financial services firms continue to post mixed financial results, with strong growth in loans and deposits ratio. Banc ABC Botswana, Absa Botswana, Letshego, among others recently posted encouraging financial results. Banks and the financial services have thrived on lower benchmark rates. Despite the strong show by the sector, the Council which is chaired by Moses Pelaelo is worried as Covid-19 continues to take centre stage. The country is, in particular, concerned about the impact the economy continues to have across all sectors. “The FSC noted emerging vulnerabilities and elevated risks requiring close monitoring. These risks are associated with the structure and performance of the economy, as well as the impact of the Covid-19 pandemic,” said the Council which is made up of Bank of Botswana, Finance and Economic Development ministry and Non-Bank Financial Institutions Regulatory Authority (NBFRA).
The Council said some of the risks that can negatively affect the bank is that there is strong sectoral interlinkages that involve a relatively large exposure of banks to Non-bank Financial Institutions (NBFIs) in terms of significant sources
BoB governor Moses Pelaelo and NBFIRA CEO, Oduetse Motshidisi
of funding and bank lending that is dominated by credit to the retail and household sectors, including a significant proportion of unsecured personal loans; the household sector is vulnerable to sudden and sharp increase in borrowing costs. In April 2020, benchmark interest rate was cut from 4.75 percent to 4.25 percent in bid a to bolster economic activity.Meanwhile, the Council has also observed the COVID-19 pandemic and the necessary disease containment measures will continue to have an adverse effect on economic performance in the short term and could, if protracted, further elevate risks to financial stability. The statement issued after the Council meeting late last month said there is also particular potential increase in default of bank loans and insurance premium payments or contributions to pension funds, as well as, early pension withdrawals emanating from loss of employment and, constrained liquidity for some institutions which were not able to underwrite new business during lockdowns, as well as, lower profits and investment returns. According to the latest Econsult report, annual bank credit growth increased over the first quarter to 10.7 percent in March 2020, up from 7.6 percent in December 2019. This was due to an increase in debt being taken up by households. Annual credit growth to households rose from 13.8 percent in December 2019, to 15.1 percent in March 2020.
The recent report also noted that total arrears on bank lending as a proportion of total credit increased during the first quarter of 2020. Arrears rose from 6.2 percent in Q4 2019, to 6.5percent in Q1 2020. “This was driven by a sharp increase in arrears on lending to households which rose to 5.5 percent in Q1 2020, up from 4.4 percent in Q4 2019,” said the report which covers the first quarter of the year.