Banks in lowest profitability in 10 years

• By Hilary Mare

THE banking sector has recorded its lowest profitability in 10 years despite the liquidity and capital adequacy of the sector remaining above the prudential requirements, Bank of Namibia governor, Johannes !Gawaxab has said.

Releasing the central bank’s 2020 annual report last week, !Gawaxab bemoaned that the ratio of Non-Performing Loans (NPLs) reached an unprecedented level of 6.4 percent of total loans and breached the Bank of Namibia’s crisis benchmark of 6.0 percent from a level of 4.8 percent in 2019.

Despite this however, !Gawaxab noted that the banking sector remained resilient and sound during 2020.

“Although lack of liquidity was expected to become a significant risk due to market uncertainty, the lower demand for credit, coupled with the fiscal stimulus to support the economy ensured that the liquidity position for the banking industry remained strong for most of 2020,” he said.

During 2020, the Bank’s Monetary Policy Committee (MPC) lowered its benchmark rate to its historically lowest level to help cushion businesses and households from the devastating effect of the Covid-19 pandemic. The MPC cut the Repo rate by a total of 275 basis points to 3.75 percent, down from 6.50 percent at the beginning of 2020. The commercial banks also reduced their prime lending rates from 10.25 percent at the end of 2019 to 7.50 percent at the end of 2020. In addition, the Bank of Namibia introduced further regulatory and policy relief measures which complemented the monetary policy stance. Growth in broad money supply rose to 11.4 percent, compared to a lower average growth rate of 8.5 percent over the same period in 2019.

The increase was mainly because of a rise in domestic claims, particularly net claims on central government. Growth in private sector credit extension (PSCE) slowed on average during 2020, due to lower demand for credit and net repayments by businesses as a result of the sluggish economic environment that prevailed in the domestic economy.

Also during 2020, the stock of international reserves held by the Bank of Namibia increased. The stock of foreign reserves rose by 9.7 percent over the year to N$31.8 billion at the end of December 2020. The increase in reserves was supported by inflows of the third tranche of the AfDB loan, higher SACU receipts, lower imports of goods and services, and the depreciation of the local currency against major international currencies. The reserves at the end of 2020 were estimated to cover 5.1 months of the country’s imports of goods and services, higher than the 4.2 months recorded at the end of 2019.

Looking forward, !Gawaxab explained that the domestic economy is expected to recover in 2021, owing largely to base effects, as well as the anticipated positive growth in key sectors.

“The Namibian economy is expected to record a 2.7 percent growth rate in 2021, as a result of broad-based base effects and better growth prospects for the mining, agriculture, and transport sectors. Downside risks to the outlook include uncertainty around the impact of the Covid-19 pandemic, particularly regarding the tempo and success of vaccinations in Namibia and around the globe. Other risks include travel restrictions that are still in place for many countries, persistently low international prices for some of Namibia’s export commodities, and the possibility of drought in some parts of the country,” !Gawaxab said.