The rapid increase in household credit that exceeds growth of incomes could result in future repayment difficulties that would impact on the performance of financial institutions and on macroeconomic stability, policy makers at the central bank have warned.
The Monetary Policy Committee (MPC) of the bank, led by Governor Linah Mohohlo note in the 2014 Monetary Policy Statement released on Friday that any possible future changes in interest rates will have an impact on indebtedness and prospects for sustained financial stability.
“Therefore, the Bank’s monetary policy stance in 2014 will involve evaluation of prospective developments with respect to these factors,” Mohohlo said on Friday.
The reserve bank, which regulates the 13 commercial bank operating in the country, says that credit expansion is currently higher than the increase in nominal GDP.
The expansion, according to Mohohlo is considered to be reflective of improvements in financial intermediation and greater financial inclusion.
At the same time, Mohohlo admits that credit is dominated by lending to households which is more likely to be for consumption and, therefore, inflationary in contrast to lending to businesses, which tends to generate durable and employment creating economic activity.
Markets data indicate that the burden of household borrowing has been rising, with the ratio of debt to disposable income increasing from 24 percent in 1999 to 33 percent in 2012.
Figures show that the ratio also increased to 17 percent of the country’s GDP in the same period ÔÇô that is, from eight percent in 1999 to 17 percent in 2012.
Bank of Botswana data show that the annualised credit growth stood at 22 percent in April 2013, compared to 28 percent in April 2012. In contrary, the growth rate of credit to firms sharply declined from 31 percent in April 2012 to 8 percent in April 2013.
Inversely, the growth rate of credit to households continued to rise; reaching 32 percent in April 2013, up from 22 percent in April 2012.
Latest data shows that the 13 commercial banks, account for the vast majority of household credit from financial institutions, with an estimate of 80 percent of the total, while the country’s leading micro lender Letshego Holdings is believed to be accounting for nearly 10 percent. The remainder is said to be spread between government institutions such as BSB, BBS and NDB.
In its last visit to Botswana, a team from the International Monetary Fund (IMF) warned that the high concentration of banks’ loans to households and the acceleration in the growth of unsecured lending warrants close monitoring.
“The mission recommends that appropriate measures be put in place to tamper with the rate of increase in household unsecured borrowing.”
With the last recent reductions in the bank rate by the reserve bank, there is likelihood that more households could still be flocking to commercial banks to borrow money.
Mohohlo and her team however assure that, “The Bank’s monetary policy stance in 2014 will involve evaluation of prospective developments with respect to these factors.”