An impact assessment of the regulation of microfinance institutions in Namibia Emma Haiyambo Thesis presented for the degree of Doctor of Philosophy in Development Finance in the Faculty of Economics and Management Sciences at Stellenbosch University Supervisor: Professor Sylvanus Ikhide Degree of confidentiality: A December 2016 Stellenbosch University https://scholar.sun.ac.za ii Declaration I, Emma Haiyambo, declare that the entire body of work contained in this thesis is my own, original work, that I am the sole author thereof (save to the extent explicitly otherwise stated), that reproduction and publication thereof by the University of Stellenbosch will not infringe any third party rights and that I have not previously in its entirety or in part submitted it for obtaining any qualification. E. Haiyambo December 2016 Copyright © 2016 Stellenbosch University All rights reserved Stellenbosch University https://scholar.sun.ac.za iii Dedication To my late mother, who until her last days in April 2016 kept on encouraging me not to quit, as “Karunga kwato eyi ayi mu vhuru” [nothing is impossible with God], and for always reminding me to do the right thing – even when circumstances dictate otherwise. To my father, a retired teacher, who since my primary school has encouraged me to always pursue higher grounds: Thank you Mom and Dad for having set the tone! My son, Jet’aime, for the maturity shown (beyond his age) during the period of preparing this thesis – I was not always available, but you understood. And Bonny, this period has yet confirmed the consistent and supportive partner I have in you – I am truly grateful. Stellenbosch University https://scholar.sun.ac.za iv Acknowledgements My thanks goes firstly to the Almighty God for enabling me to reach yet another milestone on my life’s journey. He is faithful indeed! A great debt of gratitude is owed to my supervisor, Prof. Sylvanus Ikhide, for his support, advice and patience during the preparation of this thesis. Professor, you have been more of a mentor than just a supervisor. The direction and advice you have provided will go beyond the completion of this research. I am also extremely grateful to all those who set aside time from their busy schedules to participate in this research, either as respondents to the survey or as interviewees – this research would not have been possible without the much needed data and information you provided. The process of data collection started off slow, but the support shown by the two financial sector regulators, the Bank of Namibia (my employer) and NAMFISA, by providing support letters that accompanied the questionnaires to respondents, made a huge difference in the end. Thank you very much for the support. Stellenbosch University https://scholar.sun.ac.za v Abstract This study aimed at contributing to the current debate on the regulation of microfinance institutions (MFIs), through providing important inputs for evidence-based policy dialogue and decision making, particularly on the issue relating to whether MFIs should be regulated and supervised and how they should be regulated. Using the case of Namibia, it entailed a critical evaluation of the potential impact of regulation on MFIs and hence on the microfinance sector. Through an application of the Rationale-Objectives-Indicator (ROI) methodology, an analysis of a regulatory impact assessment (RIA) was performed at two levels, namely an ex-post level using a case study of a deposit-taking MFI that has been regulated under conventional banking law and an ex-ante level of the likely impact of the proposed microfinance regulatory framework. It was found that regulation has generally had a positive impact on the operations of the regulated MFI, as reflected in improvements in most of its performance indicators (profitability, portfolio quality, liquidity and access to finance, given substantial increases in the number of savers and borrowers) during the post- licensing period. The ex-ante RIA of the proposed new microfinance regulatory framework also pointed towards a greater probability of the envisaged regulatory framework achieving its intended regulatory objectives. This will however depend on the degree to which regulatory requirements are going to be enforced and the prevailing macro-economic conditions in the country. As such, it was concluded that, while necessary, regulation alone may not be sufficient to attract relevant players into the microfinance sector and develop the sector, given the structural weaknesses of the Namibian economy. Broader policy and reform initiatives, including additional incentives, might be required to spur the development of the country’s microfinance sector. Keywords: microfinance, regulation, supervision, impact assessment, Namibia Stellenbosch University https://scholar.sun.ac.za vi Table of contents Declaration ..................................................................................................................................ii Dedication ................................................................................................................................... iii Acknowledgements ..................................................................................................................... iv Abstract ...................................................................................................................................... v List of tables ............................................................................................................................. xiv List of figures ............................................................................................................................. xv List of boxes ............................................................................................................................ xvii List of appendices ................................................................................................................... xviii List of abbreviations .................................................................................................................. xix CHAPTER 1 INTRODUCTION AND BACKGROUND OF THE STUDY ...................................... 1 1.1 INTRODUCTION .................................................................................................................. 1 1.2 BACKGROUND TO THE STUDY ......................................................................................... 3 1.3 RESEARCH AIM AND OBJECTIVES ................................................................................... 7 1.4 RELEVANCE OF THE RESEARCH ...................................................................................... 9 1.5 THE STRUCTURE OF THE STUDY ................................................................................... 10 CHAPTER 2 BACKGROUND TO THE NAMIBIAN ECONOMY WITH SPECIAL EMPHASIS ON THE FINANCIAL SYSTEM ........................................................................................... 12 2.1 INTRODUCTION ................................................................................................................ 12 2.2 OVERVIEW OF THE NAMIBIAN ECONOMY: ACHIEVEMENTS, CHALLENGES AND OPPORTUNITIES ............................................................................................................... 12 2.2.1 Policy reforms ........................................................................................................................ 16 2.2.1.1 Targeted Intervention Program for Employment and Economic Growth ................................ 16 2.2.1.2 New Equitable Economic Empowerment Framework .............................................................. 17 2.3 OVERVIEW OF THE NAMIBIAN FINANCIAL SECTOR ..................................................... 18 2.3.1 Introduction ............................................................................................................................. 18 2.3.2 The structure of the financial system in Namibia ............................................................. 19 Stellenbosch University https://scholar.sun.ac.za vii 2.3.2.1 The structure of the banking sector ......................................................................................... 19 2.3.2.2 Conclusion on the structure of the banking sector .................................................................. 26 2.3.2.3 The structure of the non-banking financial sector ................................................................... 27 2.3.2.4 Conclusion on the structure of the non-banking financial sector ............................................ 35 2.3.2.5 Public finance institutions ........................................................................................................ 35 2.3.2.6 Conclusion on the structure of public finance institutions ........................................................ 39 2.3.2.7 Microfinance institutions ......................................................................................................... 40 2.3.2.8 The evolution of microfinance activities in Namibia ................................................................ 41 2.3.2.9 The current setup and status of the Namibian microfinance sector ........................................ 44 2.3.2.10 Financial sector regulators and supervisors ............................................................................ 45 2.4 THE PERFORMANCE OF NAMIBIA’S FINANCIAL SECTOR ............................................ 46 2.4.1 Financial sector