There are increasing signs of strain in the banking system with some banks running out of funds to lend as tightening liquidity and a thin depositor base pull credit growth to a 20-year low.
A market report compiled by economic consultancy firm, Econsult says the banking system seems to be under pressure from a number of fronts with both demand and supply factors constraining the industry.
“Banking liquidity has been falling steadily for some time, but the decline has been particularly sharp since the beginning of 2017. Excess liquidity fell to 2.6% of banking assets in April, the lowest since the “liquidity crisis” of late 2014. “The liquidity squeeze has been driven by stagnant deposits. There has been no growth in the deposit base of banks for at least two years. With little surplus liquidity, it is not surprising that bank lending has slowed. The banks (or some of them at least) are simply running out of loanable funds,” reads the report. A bank’s liquidity refers to its ability to meet all anticipated obligations such as funding loans or debt payments using available funds without having to liquidate other assets.
At the same time, the report says that the level of bank loans in arrears has jumped sharply to 8.3% up from 6.4% a year earlier. Statistics show that businesses are more indebted and in higher arrears than households.
“Contrary to some perceptions that it is household borrowers that are debt stressed, the most striking increase in arrears has been on lending to businesses and – for the first time – on lending to parastatals,” reads the report.
Due to the combination of these developments – lack of supply of loanable funds and concerns about credit risk – combined with much
The latest financial statistics provided by the Bank of Botswana (BoB) show that the loan to deposit ratio for commercial banks has risen from about 79% in May last year to 85% in March this year before slightly reducing to 93% by may, 3017. At the peak of the liquidity squeeze in 2014, loan deposit rations for some banks reached a highs of 90% leading to some banks being penalised by the central bank after falling below the minimum liquidity threshold.
The Banking Act prescribes that commercial banks are required to keep at least 10% of the assets in cash or near cash local instruments to meet short-term depositor obligations. Following the last rate cut by the BoB in August last year, some banks have been dropping their deposit rates to very low levels, which could have forced depositors to take their funds elsewhere.
The declining returns on the Botswana Stock Exchange where the market fell 11% in 2016 and 1.7% in first half of 2017, coupled with perceptions of a deteriorating business environment and economic growth prospects, may also be driving capital outflows. The last liquidity squeeze was blamed on a mismatch between growths in deposits against rise in credit.