Wednesday, July 24, 2024

Citizen economic empowerment in the financial sector

ÔÇó I could not resist the temptation to revisit the matter of citizen economic empowerment. The recent publication by one of the local newspapers, based on the Joint IMF and World Bank Financial Sector Assessment report on Botswana dated August 2008, prompted this short contribution.

ÔÇó The Botswana financial system has largely been immune to a discussion on the subject matter of citizen empowerment. This is so to the extent that the localisation of managing director positions within the financial sector has only recently been pursued by the Bank of Botswana. This, in my view, though welcomed, is only symbolic. The Bank of Botswana had in the recent past expressed a view that CEDA’s provision of subsidised funding was crowding out private financial institutions. I always wonder what would have become of this country if we had believed such logic.

ÔÇó It is common knowledge that commercial banks do not finance start-ups; this void has as a result been filled by CEDA’s investments of P2 billion over its lifetime. Even so, there are projects that are expanding which have been financed by CEDA, which could not be funded by commercial banks. According to the IMF/World Bank report, “profits in the banking sectors have grown much faster than GDP over the last five years, in great part supported by the relatively high interest rates. Growth in lending to the corporate sector has, however, lagged behind the growth in the household personal and mortgage credits and investments in high yielding Bank of Botswana Certificates (BoBCs)”. This is about risk appetite and the monetary policy environment and more importantly development and citizen empowerment. ÔÇó Some of us were shocked when about 4 or so years ago, the Bank of Botswana restricted the holding of BoBCs to commercial banks under the guise that parastatal organisations were not spending their budget provisions and channeling the balances to BoBCs. The net effect of the decision has been to transfer public funds to the private sector without a resultant increase in lending to the business sector and thus defeating the very intentions of government. How the BOB managed to convince the whole government let alone the MFDP remains a mystery to me. According to the Joint IMF/World Bank report “the interest paid to service and maintain the stock of BoBCs is significant as BoBC stock has reached almost a quarter of GDP and more than a third of total assets of Bank of Botswana. If the BoBCs were to continue to grow at the current pace, the BOB would eventually have to show losses. Commercial banks’ holdings of BoBCs amounted to P16.8 billion at the end of June 2009. BOB’s profits have already fallen more than fifty percent over the last five years mainly due to interest expenses accrued on the BoBC stock.

ÔÇó According to the IMF/World Bank report, the cost of BoBCs is not limited to interest paid, changes in the stock and their pricing level are the biggest factors in determining the behaviour of all financial institutions and financial prices in the system. The relatively higher interest rates of BoBCs caused higher rates for lending purposes. Consequently Botswana’s banks have been spectacularly profitable as these banks have had returns on equity of around fifty percent, making commercial banks in Botswana the most profitable in Africa in spite of the small population, as confirmed in the Joint IMF/World Bank report.

ÔÇó Indeed, commercial banks in this country encourage savings so that they can invest savings in BoBCs or in Government bonds to amass large profits rather than provide credit to citizen businesses. As at the end of June 2009, according to the Bank of Botswana, commercial banks’ holdings of BOBCs amounted to P16.8 billion whilst loans and advances amounted to P17.4 billion. This supports the long held view that interest from BoBCs contributes significantly to profitability of commercial banks. It is my view therefore that Government should deliberately re-commit/revamp NDB to its original development mandate to bridge the gap.

ÔÇó Unfortunately there is a tendency too for some Batswana in positions of responsibility in the public service and financial institutions who do not have faith/trust on Batswana entrepreneurs in this field. As a result of this lack of trust since independence there has not been a licensed citizen owned commercial bank that would support other Batswana in businesses. This is serious indictment. What will happen to this country if foreign owned commercial banks were to quit the country, just like oil companies BP and Shell Oil. Do we, as Botswana, learn anything from these companies and many others which simply left the country in 2003/04 when Botswana Government reduced public spending.

ÔÇó These companies had invested pretty little in this country; so it is no big deal to walk out of this country. The commercial banks have insignificant assets in the country. In fact in recent years these commercial banks have disposed of their immovable assets and have generally become tenants. Why, because they are not married to this country. They are here to make quick returns for their shareholders elsewhere. It is common for a bank manager to tell you in the face that London/Dubai or South Africa has refused further credit facilities. No risk. They are here to make money and the Bank of Botswana allows them to be the only equity participants of BoBCs, and are allowed to clear customer’s cheques after 4 ÔÇô 7 days. Saving your money with commercial banks is not a viable move.

ÔÇó Allow me to return to the role that Government is expected to play in order to promote enterprise development. This, I would like to state upfront, is not about financing, although funding is important, but about translating some of the catch phrases like diversification, privatisation and others that reflect the commitment to a private sector driven economy into action.

ÔÇó The pronouncement by His Excellency, the President, that local procurement preference will be one of the tools used for employment creation and that public institutions will be directed to procure from local companies to promote citizen empowerment through local sourcing is a welcome departure from the tacit support of the past. To me leadership of Government in this matter is important to signal to the private sector the shift towards citizen empowerment and this unwavering message on local procurement should act as a catalyst to a change in procurement systems of private companies (often foreign) who are the major beneficiary of government procurement. This will support the bold departure from poverty alleviation to eradication. The absence of deliberate citizen empowerment is as immoral as tolerating any level of poverty, I would add, in support of the Vice President BTV address. Citizen empowerment is not wishful thinking. It is an imperative in a country where a substantial portion of the wealth is in the hands of foreigners.

ÔÇó The financial sector, especially commercial banks as one of the largest beneficiaries of Government, should therefore also be expected to embrace citizen economic empowerment. The BOB should be compelled to require a more rigorous programme of citizen economic empowerment from commercial banks and not just restrict their efforts to localisation of MD positions.

ÔÇó It is my considered view that Government should explore putting in place a two tier tax system for commercial banks and tax earnings from BoBCs more.

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