Viability of Second Tier Banks in Namibia
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VIABILITY OF SECOND TIER BANKS IN NAMIBIA JUNE 2005 BANK OF NAMIBIA BANKING SUPERVISION DEPARTMENT TABLE OF CONTENTS LIST OF ABBREVIATIONS AND ACRONYMS........................................................ IV EXECUTIVE SUMMARY................................................................................................ V INTRODUCTION CHAPTER 1: DEFINITION AND PROBLEM STATEMENT 1.1 PROBLEM STATEMENT........................................................................................... 2 1.2 DEFINITION OF STBs............................................................................................... 2 CHAPTER 2: METHODOLOGY Phase 1: LITERATURE REVIEW4 Phase 2: SURVYE & ANALYSIS OF FINDINGS................................................................. 4 Phase 3: FACT-FINDING MISSIONS.................................................................................. 5 Phase 4: VIABILITY STUDY AND RECOMMENDATIONS................................................. 5 Phase 5: IMPLEMENTATION.............................................................................................. 5 CHAPTER 3: THE BANKING SYSTEM IN NAMIBIA6 3.1 LICENSING, SUPERVISION, & REGULATION OF BANKS....................................... 6 3.2 SURVEY ON NAMIBIAN BANKS................................................................................. 7 CHAPTER 4: LITERATURE REVIEW 17 CHAPTER 5: STUDY OF SUPPLY: SURVEY FINDINGS20 5.1 MICROLENDERS....................................................................................................... 20 5.2 CO-Ops...................................................................................................................... 22 5.3 NGOs.......................................................................................................................... 23 5.4 NSB............................................................................................................................. 24 CHAPTER 6: FACT-FINDING MISSIONS TO KENYA & UGANDA.................... 27 6.1 MFI ENVIRONMENT, OPPORTUNITIES, & REGULATORY FRAMEWORK......... 27 6.2 INSIGHTS FOR NAMIBIA.......................................................................................... 29 CHAPTER 7: CONCLUSIONS AND RECOMMENDATIONS............................... 31 7.1 CONCLUSIONS....................................................................................................... 32 7.2 RECOMMENDATIONS............................................................................................ 34 REFRENCES AND BIBLIOGRAPHY........................................................................ 38 LIST OF TABLES Table 1: Commercial banks SMEs loans by regions Table 2: Forms of collateral Table 3: Total deposits to SMEs (2003) Table 4: Interest rates charged to SMEs and rural areas in general Table 5: Commercial banks branch network (2003) LIST OF FIGURES Figure 1: % share of loans accounts of SMEs per region............................................... 10 Figure 2: Default rates per region11 APPENDICES Appendix I: Fact-finding missions to Kenya and Uganda................................ 39 Appendix II: List of interviewees on surveys and study tours......................... 50 LIST OF ABBREVIATIONS AND ACRONYMS AMFI Association of Microfinance Institutions AMFIU Association of Microfinance Institutions in Uganda ASDSET Adult Skills Development for Self Employment Trust ATM Automatic Teller Machine BOU Bank of Uganda BoN Bank of Namibia BSD Banking Supervision Department CFM Commercial Microfinance CERUDB Centenary Rural Development Bank DFID Department for International Development FINCA Foundation for International and Community Assistance FIRST Initiative Financial Sector Reform and Strengthening Initiative FSDP Financial Sector Development Program FSDT Financial Sector Development Trust FSLTAP Financial Sector Legal and Technical Assistance Program FTBs First Tier Banks FU FINCA Uganda KWFT Kenya Women Finance Trust MDI Microfinance Deposit-taking Institutions MFEP Microfinance Outreach Program MFI Microfinance Institutions MIS Management Information Systems MTI Ministry of Trade and Industry NBFI Non-Bank Financial Institutions NDP2 National Development Plan 2 NEPRU Namibian Economic Policy Research Unit NGO Non-governmental Organizations NSB Nampost Savings Bank SACCO Savings and Credit Co-operatives SBCGT Small Businesses Credit Guarantee Trust SME Small and Medium-sized Enterprises STBs Second Tier Banks STRs Second Tier Regions UCSCU Uganda Co-operative Savings and Credit Unions Limited UMU Uganda Microfinance Union VISION 2030 Namibia’s national vision for the year 2030 EXECUTIVE SUMMARY Following the findings of the FinScope Namibia 2003 survey conducted by Namibia Economic Research Unit (NEPRU) that rural areas of Namibia have less access to formal financial services; the study on competition in the Namibian banking sector by the BSD of the Bank of Namibia that concluded that the extent of competition in the banking sector is limited; and the baseline survey on SMEs by the MTI that found that the majority of informal SMEs have no access to bank credit, the Bank of Namibia embarked on a project to study various models of banking with the poor with a view to improve access to financial services for the rural under-banked areas of Namibia and to increase credit to SMEs. Overall, the project aimed at exploring the viability of introducing a second tier banking system in Namibia as a way of improving access to finance. The conclusion of this report is that STBs would not be viable in Namibia. In reaching this conclusion, the paper outlines the findings of a literature review on operation of STBs in other countries, surveys on co-operatives (Co-ops), microlenders, NGOs, NSB, and commercial banks, fact-finding missions to Kenya and Uganda, and highlights some insights for Namibia. It concludes on the viability of STBs in Namibia and suggests alternative solutions for Namibia. The literature review discusses the key preconditions determining the success of second-tier type banks in Bangladesh, Ghana, Uganda, and Kenya and attempts to tie this to the Namibian environment. The identified benchmark factors are: macro-economic situation; political stability; profitable investment opportunities; population density, and a culture of savings clubs. Comparing Namibia to these benchmarks found that: Namibia’s low economic growth (2004: 4.5 percent) is likely to curtail the emergence of SMEs, resulting in the unsustainability of STBs for which SMEs and low-income households are the target clientele. Political stability appears not to be a critical factor to the success of MFIs. Political stability appears not to be a critical factor to the success of MFIs. Namibia’s well developed financial infrastructure could benefit the STBs in terms of low risks and costs on provision of financial services. However, the well developed commercial infrastructure could impose a lot of competitive pressure on SMEs and hence impede their progress. The small population size and density of Namibia is also a negative point since a sizable population and high density are crucial for STBs to attain a critical mass and economies of scale. With a high level take up and variety of SMEs and other savings accounts at commercial banks, and NSB, Namibia appears to have a relatively good savings culture. The objective of the surveys was to evaluate the capacity and ability of the existing Namibian MFIs to graduate to STBs, and the provision of financial services by banks to SMEs. In particular, the surveys explored the strategies of banks to enter the currently under-banked rural areas and improve access to financial services. The key findings from the surveys were that the microlenders, Co-ops, and NGOs are not, at the moment, fit to transform into STBs. In contrast, NSB appears to be having adequate capacity and well developed infrastructure to convert to a STB. However, NSB is skeptical about the idea of conducting banking business. NSB would, reportedly, only consider acquiring a banking license of a limited scope, provided that there is assurance that the existing tax benefit would remain intact, and that it would not carry credit risks or be subject to liquidity requirements. During the past two years, all commercial banks in Namibia operated a microfinance portfolio which provided loans to salaried individuals and SMEs in different sectors. Since SMEs are subject to bank’s normal lending procedures, many SMEs failed to access credit from banks. In recent years the Government of Namibia introduced the SBCGT scheme to provide collateral for SMEs to access bank loans. However, numerous SMEs, especially in the informal sector who can not meet the banks’ requirements do not qualify for SBCGT. Commercial banks are making inroads into the currently under-banked rural areas by opening up new branches. However, while this is commendable, it is doubtful whether increasing the number of branches alone without the provision of products tailor-made for SMEs and the poor would alleviate the plight of the poor and informal SMEs presently neglected by banks and microlenders. The principal findings of the study tours to Kenya and Uganda were that the MFIs environment in these countries differs from Namibia. The two countries have a large number of SMEs and greatly higher population densities than Namibia. Uganda, particularly, has a high rate of entrepreneurship, a key attribute which Namibia lacks. In both countries donor funds played a significant role in financing emerging