When a golden goose stops laying eggs
Mbongeni Mguni | Friday May 12, 2017 12:11
“What we are doing to people in this country, giving them loan after loan, bo machonisa and others also involved, without giving them advice, is killing our people. People have very high debt and garnish notes are all over their payslips.
“And yet some dubious fathers have five homes and banks are helping them support those.”
Debswana managing director, Balisi Bonyongo had suddenly gone off-script during a recent business update to a roomful of key stakeholders, including several CEOs of banks and microlenders.
With a workforce of more than 5,000 spread across the country, Debswana’s “Show We Care” principle means the diamond giant is intimately involved in its employees’ health, both physical and financial.
Bonyongo was explaining the company’s Sedimosa Financial Wellness initiative, when he suddenly broke away to reveal an intimate portrait replicated in other companies across the country.
“Our employees are highly indebted, I don’t know about yours, but ours are,” Bonyongo said to pin-drop silence in the packed conference room.
“In those communities are loan sharks and I’m not calling banks loan sharks at all. But what we are doing to people in this country, giving them loans after loans, machonisa after machonisa without taking their livelihood into cognisance, is killing our people.
“No one is talking about this but I’m free to stand here and say this must be called to order. I know there’s no clapping of hands to this or ‘Amen’ to this, but someone out there must understand that we are over-consuming and overstretched by wants and not needs.”
The depths of the crisis among Debswana’s workers can be seen in that the Sedimosa initiative is led by consultants who worked with South African miners in the aftermath of the Marikana tragedy. The tragedy stemmed from a strike which in part was due to the desperation of miners with zero-nett pay and huge obligations to loan sharks.
“The consultants are talking to workers to help recreate their balance sheets and they do talk to the banks and machonisa where they do find them, so that we help the employees walk home with money in their pockets,” Bonyongo said.
Elsewhere, households are feeling the hangover of years of high credit uptake. And the banks are too. Credit growth, or the rate of uptake of credit products, dropped to a record low last year at 7.6 percent, weighed not by a lack of desire among consumers, but their inability to take on more credit. Essentially, consumers are tapped out. Many have multiple loan products with multiple institutions, including banks and informal lenders and are simply unable to take on more credit, even if they would love to.
All commercial banks in Botswana rely on interest income for profits, most of which comes from the retail space or households, where they are able to dangle products attracting high double digit rates, set against low deposit rates for the same sector.
For banks in the retail space, stagnant economic growth, which averaged two percent in the last two years, has essentially meant marginal growth of the formally employed component of the working class, the prime target for banks.
The same component, meanwhile, has been battling with restrained growth in incomes, a reflection of overall constrained conditions for businesses in the economy.
Analysts say the low credit growth is also a result of higher risk aversion by banks, which have seen arrears among households rise, largely as a result of the overconsumption of credit products noted by Bonyongo.
The result has been that while the Bank of Botswana (BoB) has dropped interest rates to record lows in order to boost credit uptake particularly from businesses, households have been unable to join the party due to the excess baggage they are already carrying. BoB deputy governor, Kealeboga Masalila explained the Catch 22 in the low credit growth situation.
“I think you can surmise the factors that contribute to deceleration in credit growth despite the reduction in the bank rate, from both the supply and demand side,” he said in the last Monetary Policy Committee brief.
“On the demand side, especially with business activity, businesses will usually look to invest or increase their operations when they see prospective economic activity or demand by consumers and there are pockets of businesses that are not seeing this. They are not ready to borrow to invest or increase operations.
“On the household side, an educated guess says with slow growth in incomes and where people are already highly leveraged or where borrowing is at a high level, there’s less scope to increase borrowing as it is constrained by the level of income.
“If for example I’m borrowed to the limit of 65% of my income, if that does not grow, I cannot increase my borrowing.”
At the same briefing, the governor of the Bank of Botswana alluded to a “debt overhang” on households. “The debt overhang on the household sector obviously speaks to how much additional capacity you have to borrow.
“Even with the lower interest rate, your cash flow does not allow you to borrow more and that’s always a problem where your capacity to borrow is simply not there,” he said.
The debt overhang (or hangover as affected consumers would say) is not new to the local banking sector. The most striking credit bubble in Botswana occurred between 2005 and 2008, a frenetic time when economic growth was bubbling at an average of 5.3 percent and inflation around 9.1 percent as banks aggressively marketed easy and high credit with lax risk assessment.
One bank lowered its threshholds and offered credit cards to those earning P750, while others similarly competed with a range of credit products and terms, as banks raced for interest incomes.
Demand was heating up, consumption was at historic highs and the banks with their credit were at the heart of it all, ensuring that the economy was surfeit with cash. Money was chasing goods!
And then the bubble burst, quite extraordinarily, as the global financial crisis reached local shores in late 2008, resulting in a diamond-mining led recession that threw thousands onto the streets and blew up the arrears on banks’ books.
While more circumspect since then, credit growth to households has slowly picked up since then, averaging 17.8% between 2011 and 2015, from a high of 29.4% in 2007.
The damp credit growth rates today are not due to a bubble burst, but rather a goose that simply cannot lay any more golden eggs for now. One sign of this has been the rising levels of household arrears as a percentage of total outstanding loans.
In 2015, arrears made up 4.8 percent of total loans to households, rising to 8.7 percent in 2016 and while banks have insulated themselves in the personal loan arena by focussing on scheme loans, they have suffered from the goose’s exhaustion.
Prominent economist, Keith Jefferis estimates that the level of arrears on bank lending has doubled in the last four years, leading banks to institute several interventions.
“Banks seem to be dealing with the problem through risk management, cost control and by being cautious with new lending,” he said in a recent brief.
“As a result, return on equity after tax for the banking sector increased from 12.6% in 2015 to 15.3% in 2016, although even this higher figure is still low by historical standards for Botswana’s banks.”
As much as banks would like to ignore the golden goose till it recovers, they have troubles in raising the type of interest income provided by the retail sector. In addition, parastatals, which were a handy source of interest as well, have cut back strongly on the levels of their borrowings from banks.
“Parastatals are increasingly relying more on government funding such that there’s less resort to borrowing from the commercial banks.
There’s repayment by them, but less borrowing by them,” Masalila explained.
It is estimated that by the end of February this year, credit growth borrowing among was down by 25.4%, having fallen by 19.5% in the same period last year.
With businesses equally hesitant to borrow due to the low prospects for investment or expansion, banks will have to hope the golden goose recovers soon.