Monday, December 11, 2023

Banks finally “benefit” from BoB rates cut as firms borrows more

At last, the local business sector responded to the bait that the Central Bank had long been dangling. On Tuesday last week Bank of Botswana (BoB) Governor, Moses Pelaelo told journalists at the Monetary Policy Committee (MPC) meeting that lending to businesses excluding parastatals was recorded at 9.3 percent in April 2017, an increase from the 3.9 percent that had been registered in April 2016. 

The Central Bank has over the past three years lowered the cost of borrowing through its successive bank rate cuts to a point where a historic low was reached in 2016 at 5.5 percent. Even with this incentive to the business sector for them to take up more credit to use for productive economic activities the sector remained unyielding to the enticement. Only now at 5.5 percent is something positive coming out from the business sector. 

Giving reason to what appears to be a sudden positive response by the local business sector to the lowered cost of borrowing; BoB Deputy Governor Kealeboga Masalila said on Tuesday last week that the past lag was due in part to the fact that a response in terms of willingness and capacity to participate usually takes time. “You must be comfortable with prospects for the economy such that it’s reasonable for you to want to borrow,” he said. He alluded to the cost of lending from banks as another factor that informs the businesses’ decision to borrow. Adding to that he said that the consumers’ demand for goods and services produced by businesses depends on the extent to which they have access to credit, which also affects the businesses’ appetite to borrow. 

BoB introduced the current 5.5 rate in August 2016 following the slash from the previous 6 percent. The 6 percent was introduced a year before in August 2015 hardly six months after BoB had done another cut in the same year. Earlier in February the rate had been cut to 6.5 percent from 7.5 percent. The downward adjustments of the bank rate indicate the continuous prod by BoB to lure businesses into borrowing funds to induce their growth prospects. On the contrary credit growth in the business sector showed a declining trend amid the bank rate alterations. Case in point is that despite two bank rate cuts in 2015 that happened in the first (Q1) and third quarter (Q3) of that year respectively Motswedi Securities in its 2015 third quarter (Q3) economic analysis indicated on the contrary that credit growth in the business sector had registered a considerable decline. Explaining its finding Motswedi Securities had said “We believe the irony of this declining trend could be attributable to the deterioration of borrowers’ credit capacity and weak demand prospects, which all have dampened banks appetite to extend more credit and demand for business to take up more credit.”

In spite of the improved lending to the local business sector a certain nuance that has the potential to reverse this positive change is the finding from the BoB March 2017 Business Expectations Survey (BES) that reads “the business community would prefer borrowing from South Africa in the second half of 2017 and in the 12-month period to June 2018, while firms are skeptical about domestic borrowing for the entire survey period.” This preference and skepticism is observed by BoB as “contrary to the anticipated reduction in domestic interest rates by the business community, which is consistent with the reduction in the Bank Rate from 6 percent to 5.5 percent since August 2016.” A reason was offered at the Tuesday MPC meeting that perhaps the firms’ inclination towards South Africa is that they “can negotiate better terms” given that the parent companies of commercial banks in Botswana are based in South Africa. The March 2017 BES points out that although optimism among businesses strengthened in the first half of 2017 compared to the last half of 2016, their confidence level in the first half of 2017 declined compared to their perception in the corresponding period in previous survey. It does note however that looking ahead the confidence level for the second half of the year and the first half into 2018 shows an improvement. 


Read this week's paper