Typical banking not as profitable anymore

LAZARUS AMUKESHE and MICHAEL THIKUSHONAMIBIAN banks are said to be moving away from just being deposit taking and loaning institutions – all thanks to low interest rates.

This is expected to come at a heavy price for consumers, who will be charged an arm and a leg in fees, say analysts.

“Local banks have resorted to driving growth in non-interest revenue streams, given the low interest rate environment that is expected to persist. Among these initiatives will be new product developments in the transactional banking and digital product offering space,” say analysts at Simonis Storm.

The analysts warned that consumers can therefore also expect higher banking/admin fees and charges as a result.

“This is a natural response given that households and businesses remain cautious in their spending and investment decisions. Insights from local banks indicate that clients are paying off debts and reducing their debt exposures,” reads the commentary by Simonis.

The global banking industry has been undergoing a revolution for the past few years. With the dawning of Covid-19, interest rates nosedived drastically and credit uptake has seen stunted growth.

The benchmark repo rate now sits at 3,75%, the lowest it has ever been but a new message has emerged from the central bank, raising hopes for a possible interest rate hike sometime later this year or in early-2022.

These low rates have been something of a breather for many Namibians, leading some to repay their loans faster, and others not keen to take up new loans due to the economic uncertainties caused by the pandemic and its accompanying trade restrictions.

This year growth in credit extended to the private sector has not even gone above 3,5%.

Recent data from the Bank of Namibia shows that for July – credit extended grew by 2,7%, to reach N$104 billion.

In 2020, that balance was at N$102 billion.

According to the central bank – this minimal growth was due to an increase in demand for credit by businesses particularly in the short-term lending space.

Short-term credit has been driving credit uptake most of this year – with households and companies only looking to patch up finance needs and not really invest in long-term assets.

The July data from the central bank shows that N$61,2 billion worth of bank loans sits with individuals and N$43,2 billion with corporates.

The central bank this year told The Namibian that the country’s economy at this stage appears to have reached a borrowing peak, especially for households.

“Household debt to disposable income stood at 89,1%” the bank said in July. This means an average indebted person only has 10% to manoeuvre with per month.

IJG analysts commenting on the recent numbers said Namibian individuals continue to take on the most debt in this low-interest rate environment. Until larger businesses are in a financial position, and develop an appetite to take on more debt it is unlikely that low interest rates and moderate increases in private sector credit extension will have a major positive impact on the macro economy.

Apart from First National Bank, we see an increasing trend in investment security holdings by local listed banks. Secondly, besides Standard Bank Namibia, we also observe a steady decline in the loan to deposit ratios across local listed banks, reads Simonis’ commentary.

“These two trends can signal that banks have become risk averse and unwilling to lend, however, we do know that certain banks are eager to lend to their clients despite lower profit margins, but clients are not forthcoming,” the commentary reads.

In 2019, The Namibian reported on the findings of the International Monetary Fund (IMF) that Namibia’s banking sector was greatly funding the non-productive sector such as properties which make up the lion’s share of the sector’s loan book.

Small businesses, agriculture and manufacturing, which are known to push for sustainable growth, have, however, been neglected.

The IMF said this skewed funding model would not support long-term economic growth.

“Credit is concentrated in household mortgages and in corporations operating in the non-tradable sectors, thus having limited effects on long-term growth dynamics. Enhancing credit allocations towards more productive sectors would support stronger growth,” the IMF said.

It was just a matter of time until the banking sector reached its peak point – with rates now low, productive sectors unfunded and showing little growth, the sector is seeking greener pastures elsewhere.

Email: bottomline@namibian.com.na

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