Sunday, May 16, 2021

Banking sector influence on economy reduced by compressed profits

Because of its importance to the economy, the banking sector always attracts keen interest from pundits, and the dramatic permutations that it has undergone compel close scrutiny from experts and captains of industry.

The recently published Bank of Botswana (BoB) supervision report highlights that the banking sector remains small relative to the size of the economy as measures of its financial depth and development indicate that it possesses insubstantial financial muscle in terms of influence and impact on the economy. Compared to the global benchmark, Botswana’s financial depth was found to be shallow. The reports highlights that the ratio of banking credit to GDP improved the banking sector’s financial depth marginally, indicating the banks’ ability to mobilise savings in the economy. On the other hand, the private sector credit to GDP remained unchanged at 12 percent, which is very shallow when compared to the 67 percent average across the globe, as reported by the World Bank’s 2014 Global Financial Development Report. Botswana’s private sector credit to GDP ratio was also well below the sub-Saharan average of 17 percent.

Similar assessments of the banking sector by financial analysts have also not been encouraging, as it was found to have moved from a glittering state to the current gloomy and shaky situation. The commercial banks’ jostling for market share is expected to take on an intriguing turn as competition heightens in the face of declining profits.

“There is no more scope for an ordinary commercial bank to enter the market unless it offers specialised banking services,” says Alphonse Ndzinge, Chief Investment Officer at Afena Capital.

Therefore any bank that can identify a niche market will stand a much better chance of survival, as the whole sector is under pressure from squeezed profitability occasioned by the slowdown in economic growth, declining interest rates and high costs of funding. According to the BoB report, profits after tax in the local banking sector decreased by 16.7 percent to P1.5 billion for the period ended December 2014, down from P1.8 billion in 2013. The decline contrasts with the positive growth rate of 0.1 percent in 2013. The decline in profits was a result of prevailing low interest rates and a 31.2 percent increase in the total provisions charge for loan impairments, which rose to P760 million in December 2014 from P579.4 million in 2013. The increase in total provisions charge was consistent with the rise in non-performing loans (NPLs), especially in the household sector. However, the report highlights that the provisions were inadequate as they could only cover 48.1 percent of NPLs, which resulted in dented profitability for local banks.

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