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WorldNovember 1 2013

Namibia’s banks tackle exclusivity

Namibia’s banks are among the most sophisticated and safest in Africa, but they are coming under increasing pressure to service the country's unbanked population and small businesses. 
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Namibia’s financial sector is one of Africa’s most sophisticated, and is world class in many aspects. A local banker likes to recall the reaction of a friend visiting the country for the first time. The friend, a Canadian, was surprised when they came across an ATM in the middle of nowhere, but was even more impressed when the banker got a text message confirming his withdrawal almost before he had put the money into his wallet. “He said they don’t have that in Canada,” says the banker. “When a Canadian compliments your banking system, you know it’s good.”

As well as being technologically advanced, the banks are well regulated. The Bank of Namibia, the central bank, stipulates that they must have capital adequacy ratios of at least 10% (the figure for the industry at the end of June this year was almost 14.5%) and leverage ratios of 6% or more. They have operated under Basel II since early 2010 and are already working towards complying with the third Basel framework. The World Economic Forum recently said they formed the second safest banking system in Africa, after South Africa.

They are highly profitable, too. The four banks that dominate the industry – First National Bank (FNB), Nedbank and Standard Bank, all of which are South African-controlled, and Bank Windhoek, majority owned by Namibians – typically make large returns on equity. That of FNB, the biggest lender by assets, was 26% last year.

The banks owe much of their buoyancy to big investments in Namibia’s infrastructure and mines. This has helped them overcome a low interest rate environment and the economy’s growth slowing to below 5% this year, mainly due to a severe drought in the north. Credit expansion is running at roughly 15%, which is almost double the rate in South Africa. “Even though interest rates remain flat and there’s a very bad drought, activities in construction, mining and real estate have led to good results for the industry,” says Mpumzi Pupuma, head of Standard Bank Namibia and chairman of the local banking association.

Interview with Ipumbu Shiimi, governor, Bank of Namibia 

Investment banking growth

The sheer size of the investments in the country’s uranium, diamond and gold deposits means that local banks, whose assets total little more than $8bn, can often only provide a fraction of the financing needed. The owners of Husab, which is set to become the world’s second largest uranium mine once it is at full capacity in about four years, are spending N$20bn ($2bn) just to get it onstream, an amount of capital that will mostly have to be sourced from abroad. Yet Namibian lenders still get involved in the mining sector, either using the balance sheets of their South African parents or by financing sub-contractors on projects.

Namibia is skewed towards asset-based lending. But there is now a focus by banks on unsecured loans to improve their margins
Mpumzi Pupuma

The development of natural resources, and the government’s strategy of using private funding to build the infrastructure that mines need, is also leading to investment banking opportunities. South Africa’s FirstRand, which owns FNB, opened a local subsidiary of its investment bank, Rand Merchant Bank (RMB), in 2011. A large part of its business involves structuring deals that can be syndicated among Namibia’s banks and that will appeal to institutional investors, including the state pension fund, which has some $6bn of assets.

“There are a number of deals that are too big for the local banks,” says Steve Galloway, managing director of RMB Namibia. “The approach we take is to bring all the balance sheets we can into play. Our role is to put Namibian savings and banking assets to work on long-term projects.”

While the banks serve the formal economy and the country’s middle class well, they are sometimes criticised for not doing enough to provide for the needs of small businesses and poor Namibians. “Our financial sector is sophisticated and has the ability to deliver services almost equal to those in the developed world,” says Calle Schlettwein, Namibia's minister of trade and industry. “But its exclusiveness leaves much to be desired. If I look at our own reports, access to financing is the number one problem for businesses.”

About 31% of adult Namibians do not have access to financial services, according to Ipumbu Shiimi, governor of the Bank of Namibia. While this is a smaller number than in most of the rest of Africa, and marks a drop from more than 50% in 2007, he says it needs to improve. “We still have some way to go,” says Mr Shiimi.

Pressure on fees

The central bank and finance ministry initiated a 10-year plan in 2011 to address the issue of inclusivity. They view the fee structures of banks, which typically charge customers when they deposit and withdraw cash from their accounts, as a barrier to reducing the unbanked population. “We do believe that we could make our products cheaper, especially for the lower income groups,” says Mr Shiimi. “A great number, about 45%, of bank income comes from fees.”

The existence of widespread fees is partly a result of the banks trying to make up for their net interest margins (NIMs) being low, at least by African standards. Most operate with NIMs of between 3% and 4.5%, which compares to the margins of 10% or higher that Kenya’s big lenders enjoy.

Bankers add that Namibia’s large size – it is well over double the area of Germany – and small population of 2.2 million make it hard for them to make justify the expense of building branches outside the main cities. “There’s the expectation of high delivery,” says Ian Leyenaar, chief executive of FNB Namibia. “But to supply it to small numbers is challenging for the banks. We don’t always have the economies of scale.”

The banks have expanded their range of products in recent years, including those catering to unbanked people. Some products have been created voluntarily; FNB’s electronic wallet, launched in October 2012 and which allows small amounts money to be transferred to people without bank accounts, being one example. Others have been pushed by the Bank of Namibia. In July this year, it made lenders start offering so-called basic bank accounts, for which there are no fees on the first N$2000 deposited each month. Mr Leyenaar says banks struggle to make money from these accounts, but that they could lead to the holders taking on more lucrative services.

“Clearly, they’re a loss leader in an absolute sense,” he says. “But we must go beyond that. There are cross-selling opportunities. And the type of person that takes on this account could develop and grow [their income] over time.”

Another way the industry is extending its reach is by offering more unsecured lending, which is making it easier for Namibians who lack collateral to access credit. Asset-backed lending still dominates, with about 40% to 50% of banks’ loan books comprising mortgages and one-quarter being made up of vehicle and other secured loans. But this is slowly changing as lenders look to raise their NIMs, even if they remain cautious and tend to target people in formal employment.

“Namibia is skewed towards asset-based lending,” says Mr Pupuma. “But there is now a focus by banks on unsecured loans to improve their margins. The idea is to start with the employees of their corporate customers.”

Branchless banking

Branchless banking is increasingly crucial for Namibian lenders as a means of tapping the unbanked population and reducing their costs. Exemplifying this, in August the central bank granted a provisional licence to e-Bank, a joint venture between Point Break, a local investment firm, and Tyme Capital, which operates telecoms group MTN’s mobile money service in South Africa.

E-Bank, which hopes to get a full licence by January 2013, will, rather than build a branch network, provide its services through mobile phones, the internet and retail outlets such as supermarkets, where people will be able to withdraw cash or put it into their accounts. Monica Kalondo, e-Bank’s chair, says it will be able to charge lower fees than existing banks by keeping operating costs down. “E-Bank is about inclusive banking,” she says. “It’s the new model of banking. By using technology, we can build a banking system cheaply and without putting physical structures in place.”

Namibia’s economy is expected to remain buoyant over the next few years, growing at rates of 4.5% or more. Its banks will doubtless benefit from such an outcome, but the ones that gain the most will be those that manage to develop ways of profitably tapping the country’s unbanked population and informal businesses. Those that fail to will likely come under increasing pressure, not just from regulators and politicians, but from their own shareholders as they get left trailing by more nimble and innovative rivals.

Standard Bank and Nedbank: to go public? 

Standard Bank and Nedbank: to go public?

The government’s financial inclusion strategy involves encouraging greater Namibian ownership of local banks. In August, policy-makers proposed a 55% ceiling on foreign control of commercial lenders, although they later said this would only apply to new banks. They have, however, made it clear that they want all the country’s four major banks to be listed. FNB Namibia and Bank Windhoek, which launched an initial public offering in June, trade on the Namibian Stock Exchange, together making up over half its market capitalisation. Standard Bank and Nedbank, each of which is almost 100% owned by its South African parent, have so far been reluctant to follow suit, although most analysts think they will in the next few years.

“If we can move these two banks to at least a minority ownership within Namibia, the goodwill will be much better,” says Calle Schlettwein, Namibia's minister of trade and industry. “They are profitable institutions and they should be prepared to share some of their proceeds with Namibians. A listing is something we would look upon very favourably.”

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Read more about:  Africa , Namibia , Regulations