Thursday, May 23, 2024

How high can Botswana’s household debt go before harming the financial sector?

Botswana’s banking industry is famously solid and well regulated.

The banks are well capitalized. And the Bank of Botswana keeps a good tab on them, further storing away more of their money for use in case it is needed.

That is not all. Bank of Botswana acts as the ultimate buffer for them in case they run of the ability to stand on their own.

In the same breath, the household credit in the country has been growing straight upwards for many years.

It cannot be that it grows on and on without any impact on the financial sector.

Household debt growth has real impact on the macroeconomics, but more fundamentally on the financial sector.

Financial crises are often preceded by excessive credit in the market.

Across the world, episodes of financial instability have started as a response to excessive credit.

It is important to point out that save for a few banks, credit demand and appetite among lenders has often not followed the country’s economic fundamentals.

This is scary and even dangerous.

The exposure is not just to commercial banks, but also to microlenders and hire purchase stores, among others.

Demand for household loans keeps growing.

And with very little exception, the lenders feed off it and fuel it.

To an extent that a majority of the loans issued are unsecured, surely that would represent a greater danger going forward.

Credit so issued is of course very expensive to household. It in the end it engenders poverty as it has effect on consumption and disposable income.

The interest and the charges on these loans are very high.

For many of these loans, early repayment is not only discouraged but even penalty.

The bigger trouble is that people often borrow from multiple sources at the same time.

And these impedes the ability to repay.

The exposure as a result of household indebtedness was best shown during the pandemic.

Many people had their source of income literally wiped out.

Lockdown meant that there was no economic activity.

That went on for stretched periods of times.

And many people never went back to work.

And as such banks and other lenders were not able to recover their money.

Economists believe that large household credit imbalances are often associated declines in GDP, especially in a financial crisis.

For Botswana, the argument might be that while household credit has been growing for a long time, it is still nowhere compared to the GDP growth.

Once credit growth is in excess of GDP growth, then everything becomes unsustainable.

There is evidence that credit could also have an impact on the growth prospects of the country.

Excessive debt is often a drag on the economy of the country.

Our view is that policymakers should be concerned.

In doing so, Bank of Botswana should lead in providing guidance on both regulatory front as well as how the fiscal stream should respond.

Redflags should be shown where there is guarantee for such.

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