SWAZILAND COMPETITION COMMISSION RETAIL BANKING MARKET INQUIRY DATE – January 2019 Status of Report: Non-Confidential Draft Report Non-Confidential Table of Contents Acronyms ............................................................................................................................................... 4 EXECUTIVE SUMMARY .................................................................................................................... 5 Importance of the Banking Sector ...................................................................................................... 11 Rationale of the market inquiry ........................................................................................................... 11 Methodology .......................................................................................................................................... 12 Format of the report .............................................................................................................................. 13 PART II: REGULATION OF THE BANKING INDUSTRY IN THE KINGDOM OF ESWATINI ........................................................................................................................................................ 14 Financial Institutions Act of 2005 and the Building Societies Act of 1962 ................................... 14 Requirements by the Central Bank for Entrants .......................................................................... 14 The National Clearing and Settlement Systems Act, 2011 ............................................................ 16 Money Laundering and Financing of Terrorism Act 2011 .............................................................. 16 PART III: MARKET DEFINITION ..................................................................................................... 17 Relevant Market .................................................................................................................................... 17 Relevant Product Market ..................................................................................................................... 17 Relevant Geographic Market .............................................................................................................. 25 Relevant Market .................................................................................................................................... 25 PART IV: MARKET STRUCTURE .................................................................................................. 26 Number of players ................................................................................................................................ 26 Level of Concentration ......................................................................................................................... 27 Cost Structure ....................................................................................................................................... 29 Barriers to entry and exit ..................................................................................................................... 30 Countervailing Buyer Power ............................................................................................................... 30 Conclusions, concerns and recommendations ................................................................................ 31 PART V: PERFORMANCE AND COMPETITION IN RETAIL BANKING ................................. 34 Introduction ............................................................................................................................................ 34 Earning/Profitability ............................................................................................................................... 35 2 Non-Confidential Profitability ............................................................................................................................................. 36 Capital Adequacy .................................................................................................................................. 41 Asset quality .......................................................................................................................................... 42 Liquidity .................................................................................................................................................. 43 Management Efficiency ....................................................................................................................... 44 Conclusions, concerns and recommendations ................................................................................ 45 PART VI: CONDUCT AND COMPETITION IN RETAIL BANKING ........................................... 48 Introduction ............................................................................................................................................ 48 Non-pricing decisions ........................................................................................................................... 48 Pricing Decisions .................................................................................................................................. 53 Source: Survey Results ....................................................................................................................... 54 Methods of setting price in the banking industry .............................................................................. 54 Pricing with respect to deposit facilities ............................................................................................. 56 Conclusions, concerns and recommendations ................................................................................ 63 PART VII: OVERALL CONCLUSIONS, COMPETITION CONCERNS AND RECOMMENDATIONS ............................................................................................................... 66 Appendix 1 .......................................................................................................................................... 73 Appendix 2 ............................................................................................................................................. 74 Appendix 3 ............................................................................................................................................. 75 Appendix 4 ............................................................................................................................................. 78 Appendix 5 ............................................................................................................................................. 79 Appendix 6 ............................................................................................................................................. 89 3 Non-Confidential Acronyms ATM Auto Teller Machine CBE Central Bank of Eswatini CMA Common Monetary Area EU European Union FIA Financial Institutions Act (2005) FNB First National Bank HHI Herfindahl Hirschman Index IRS Interest Rate Spread NIM Net Interest Margin NPSS National Payment and Settlement System MSCs Merchant Service Charges ROA Return on Assets ROE Return on Equity RTGS Real Time Gross Settlement System SACCOS Savings and Credit Co-operatives SADC Southern African Development Community SAECH Swaziland Automated Electronic Clearing House SCP Structure Conduct Performance paradigm SIRESS SADC Integrated Regional Electronic Settlement System SMMEs Small Medium and Micro Enterprises SSNIP Small but Significant Non-transitory Increase in Price SWIPSS Swaziland Interbank Payment & Settlement System USA United States of America 4 Non-Confidential EXECUTIVE SUMMARY The purpose of the banking market inquiry was to analyse the state of competition in the banking industry, following public concerns through the media about the impact of prices of banking services on their welfare. For example, consumers described bank charges as „exorbitant‟1 and unfair in that they reduce balances even in inactive accounts. Banks also charge to reactivate dormant accounts2. Also, the CBE registered its concerns on bank charges that remained on the higher side compared to other Common Monetary Area (CMA) member states. The market inquiry followed the Structure Conduct Performance (SCP) paradigm which shows that each of the three parameters have some effects on each other. The inquiry was executed on the basis of Section 11 (2) (f)3 of the Competition Act of 2007. The objectives of the inquiry were to identify: (i) the relationship (if any) between the structure of the market, the conduct of the incumbent firms and their performance; and (ii) competition concerns based on the direct and indirect effects of the market structure, performance and the conduct of banks. The findings are summarised below: Conclusion SCC Concern Recommendations Structure of the retail banking market Conclusion 1 Concern - Recommendation - The Commission established None. None. that the retail banking market in the Kingdom of Eswatini is oligopolistic with five players. The market inquiry analysis has taken into account issues of the size of the population (approximately half a million bankable people) and the stability of the industry. It can be concluded that 1 Hlatswayo, N. (2010, June 3). South African Banks agree to lower fees. Times of Swaziland, Retrieved from http://www.times.co.sz/index.php?news=15727&vote=5&aid=15727&Vote=Vote