Monday, December 4, 2023

Botswana is a credit driven society

The notion that Botswana is a credit driven society is lent credence by the surge in household debt, which runs parallel to clogged savings. Below, TLOTLO LEMMENYANE gives a few reasons to support this argument.

High bank impairments

Recent financial reports by a number of commercial banks that operate in the country indicate that many of them continue to record high levels of impairments. While a few banks have recorded a notable decline in impairments, the figures remain at unacceptably high levels, which taint their financials as it reflects a lack of stringent internal controls in assessing the borrower’s capability to repay the loan. The surge in household borrowing also indicates that many people use borrowing as a means of survival. In other words, they borrow to consume, not to invest. While it is appreciated that borrowing by its nature is not a bad thing, eyebrows are raised when it is so widespread that it compromises the general wellbeing of the borrower.

Stagnant growth in income against rising cost of living

Available data suggests that a growing number of households find it difficult to sustain their upkeep without compensating for the shortfall in their incomes through borrowing. Over the past few years, the minimal increase in salaries fell below the rate at which prices for goods and services were rising, such that salary increments did not have a real impact on consumers’ spending power. Analysts however suggest that the recent fall in inflation to a record low of 2.8 percent will make a difference to public officials’ spending power as it falls below their six percent salary increase.

Household borrowing and savings mismatch

According to the Bank of Botswana (BoB) 2013 annual report, household indebtedness has been growing at a faster rate than the rise in personal incomes. At the same time, indebtedness was identified as the main cause of escalation in impairments. The squeeze in personal incomes leave nothing or very little to put aside as extra.

The report states that financial intermediation (transformation of deposits into credit) is lower in Botswana compared to comparator countries like South Africa, Mauritius, Malaysia and Chile, which proves that the flow of savings into banks is significantly lower than the outflow of loans to prospective borrowers. The annual report further disclosed that households borrow more from banks than they save citing unsecured lending as a major component of household debt.

“Unsecured credit increased at an annual rate of 22% between 2006 and 2012, while growth in mortgages was 19% per annum, both rising at a more rapid rate than increases in national income and inflation,” read the report. The credit surge which runs parallel to clogged savings supports the idea that Botswana has become a credit-feeding society.

Lack of legislation that guides responsible borrowing

The imbalance in borrowing and saving is a potential threat to financial instability. The Reserve Bank acknowledges that Botswana lacks a robust and comprehensive regulatory strategy which can help prospective borrowers to make informed decisions based on the understanding of their total loan costs. Regulation of credit in Botswana is limited to monetary policy variables that affect demand and disclosure requirements to inform and protect consumers. This is unlike in other jurisdictions such as South Africa, where there is dedicated legislation (National Credit Act) and institutional framework focusing on social and economic welfare of borrowers and the promotion of fairness and transparency, as well as guidelines on debt sustainability.

“Exit opportunities from chronic indebtedness are also limited in Botswana,” stated the BoB report.


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