Although the 2011 Bank of Botswana report gives banks a clean bill of health, the latest diagnosis from the International Monetary Fund expresses some scepticism.
The latter warns that the high level of exposure of the banking system to household debt is a significant source of vulnerability that warrants close monitoring.
Positive aspects of the IMF report note that the recent entry of new domestic banks in the market is expected to spur competition, and that Botswana’s commercial banks, the largest of which are subsidiaries of South African and British banks, appear to be well capitalised and profitable, and have little direct exposure to the current financial stress in the euro area.
On the downside, these banks “are still heavily exposed to households, which now account for 53 percent of bank lending and whose balance sheet is beginning to show signs of stress.” The report attributes this to the decline of households’ real incomes in recent years due to three consecutive years of public sector wage freeze. These households are said to be increasingly running down their savings.
“The excessive leveraged nature of households and the related financial stability issues are now becoming even more relevant in light of the authorities’ reform agenda on financial sector development,” the report says.
Against such analysis, a view is taking hold that banks purposefully expose themselves to such risk in their battle for the public service market. On the basis of their job security and the liquidity of the government, public servants are seen as the most desirable clients by banks which have entered into a symbiotic relationship with public sector unions. In an effort to attract members, the latter could be evolving into veritable cash-loan operations as they lay out a literally rich menu of benefit schemes they operate through banks.
In a public welcome message to the new Botswana Nurses Union, Martha Molema, the Publicity and Education Secretary of the Trainers and Allied Workers Union (TAWU) alerted the former to the treachery that lies ahead.
“… we hasten to warn the new union about the hostile local trade union environment, which is characterised by intense competition in the public sector, driven by businesses and union benefit schemes. Private business, especially the financial sector, depends on government employment and income to drive their growth. So, they selfishly cause a lot of confusion and divisions in the labour movement in their profit drive,” Molema stated, warning in one part that the big unions will entice BONU members with loans.
Addressing the same issue in a separate forum, TAWU’s vice president, Edward Tswaipe, also accused the banking sector for its lending practices through a series of rhetorical questions.
“What about the banking sector? What is the ratio of lending to savings of poor households? Doesn’t this debt trap contribute to the vicious cycle of poverty and inequality by which the poor borrow for non-investment which enriches financial institutions?” he said last week.
The IMF also says that there is an urgent need to strengthen the capacity of the non-bank financial institutions’ regulator to deal with rapidly expanding non-bank institutions which have become an important component of the financial system.
“The cross-linkages between the bank and non-bank parts of the financial system constitute potentially an additional risk to the financial system,” the Fund says.