Local banking to ride out Euro crisis - IMF

Staff Writer | Friday May 25, 2012 00:00

In its sub-Saharan outlook released recently, the International Monetary Fund (IMF) noted that Botswana is among four African states, including South Africa, Zambia and Mauritius where British institutions held more than 30 percent of deposits.

For Botswana, these institutions are Barclays and Standard Chartered, which by 31 December 2011 held P17.2 billion in deposits and were owed another P10.2 billion outstanding loans by customers. The level of loans owed to Barclays and Standard Chartered by December 2011 was equivalent to 37 percent of total loans outstanding to all banks in Botswana. Rating agencies have downgraded several banks in France, Portugal, and the United Kingdom since September 2011, the latest being 16 Spanish banks. By Press time, international media was reporting a downtrend in the equities of listed banks in the UK and elsewhere in Europe, with investors opting out due to possible contraction. In its report, the IMF said despite the dominance of British banks in Botswana and other African states, the availability of funding for banks and their output of credit was unlikely to be affected by the emerging problems in Europe. The institution said the risk of contagion or the Euro crisis spilling over into Botswana and other states was lessened primarily by the fact that most countries' did not rely extensively on European bank credit lines. Only Cape Verde, Gambia, Sierra Leone and two others could significantly have project and other economic funding cut short as their under-developed financial markets mean they often fund large investment needs with lending from European banks.

In addition, the IMF said funding of banks in most countries was not from European sources. 'On average, about 95 percent of liabilities are to domestic residents in the form of deposits,' the IMF's report said.

'Financial deepening implies that borrowers are increasingly able to borrow from local banks and fund themselves on local markets.' In Botswana, commercial banks are traditionally highly liquid and fund themselves from these deposits. Some have issued local bonds in the past, while the largest micro-lender, Letshego, is the rare example of a financier funding its lending activities from outside Botswana.

'Most of the region's banking systems are liquid and local deposits often exceed domestic credit with loan-to-deposit ratios well below one,' the IMF said. 'Reserve requirements are high and some countries have structural liquidity positions that result in persistent excess reserves. 'Sub-Saharan African banking systems are thus robust to liquidity shocks, at this stage, although standard liquidity indicators have declined slightly in the last few years.' Indicative of the high liquidity and costs of mopping it up, the Bank of Botswana last May raised the primary reserve requirement from 6.5 percent to 10 percent of total Pula deposits.

Despite the generally positive assessment, IMF researchers noted that sub-Saharan African banking sectors were not totally insulated from the events unfolding in Europe. One of the threats, the IMF said, would come from subsidiaries of European banks tightening lending in the event of financial difficulties in their home markets, as part of risk management guidelines for the group. However, the researchers said this risk would be lower in cases where the sub-Saharan African subsidiaries contribute a significant share of the global bank's profit and growth prospects. A major risk will also come via the significant assets sub-Saharan African residents hold in European banks. In Botswana, a sizeable portion of national savings and pension funds are held or invested in Euro-denominated and European-domiciled assets.

The Bank of Botswana, the custodian of national savings, adheres to strict guidelines which require it to prioritise safety before liquidity and return in terms of investments.