IMPROVING FINANCIAL INCLUSION: HOW THE CENTRAL BANK OF LESOTHO HAS INFLUENCED ACCESS TO BANKING AND THE CREDIT LANDSCAPE.
Concerns over access to finance and credit have always been at the top drawer of Lesotho financial inclusion policy. While pushing for economic reforms in which the private sector is the lead player in steering economic growth, the protection of interests of the poor and vulnerable members of society has also been a priority of the government policy. In recent policy shift, financial inclusion has not only been interpreted in mere participation terms, but also in ensuring that previously unbanked citizens do so in a fair but yet competitive market space.
The International Monetary Fund (IMF) released the Lesotho Country report on the status of the economy based on information available as at 16 May 2022. The report highlights several issues across various components of the economy, including the financial sector, which is regarded as highly liquid, but falling short on extending that liquidity into the mix of broader national initiatives to drive economic growth. This section highlights the intent of the financial institutions directives that were announced by the Central Bank of Lesotho (CBL), which came into effect on 1 April 2022. Focus will also be on the status of the financial sector to highlight progress to date with regards to financial inclusion, especially in the mobile money sector and some of the key challenges on credit extension that Lesotho has to address towards improving the economy.
The CBL issued new pricing directives to the industry pursuant of section 72 of the Financial Institutions Act of 2012. The introduction of the directives followed extensive research, consultations and a regional banking review exercise initiated by the Central Bank of Lesotho (CBL) as the regulator of the banking industry, which was aimed at reviewing the entire banking sector on how it can make further contributions to the economy. These directives were intended to broaden financial inclusion, which is a policy objective of the government as outlined in the National Strategic Development Plan II. The directives, which mainly target banking institutions, are also intended to harmonise and bring parity to the financial intermediation metrics with other countries in the Common Monetary Area (CMA) countries. The countries of CMA are Lesotho, South Africa, Namibia and eSwatini, whose currencies are pegged 1:1 to the South African Rand. The new directives are also intended to encourage competitive pricing on banking services and products, where the sector, currently dominated by only four banks is viewed as wielding significant market power, rendering the cost of banking expensive at the detriment of efforts towards financial inclusion.
Starting with the intention by the CBL to make banking accessible to all, the regulator has issued a directive that makes it mandatory for banks to provide a low-income savings account for members of the public earning income of less than M3 000 per month. This compulsory account comes with zero management fees and no minimum account balance. It also has many other free benefits and waivered costs that are intended to attract the unbanked and underbanked sections of the population to embrace and join mainstream banking as part of initiatives towards financial inclusion. The Central Bank has also directed banks to market this account similar to other products and also provide documentary evidence that the product is known and penetrating the market.
Another directive issued by the Central Bank relates to fees and service charges on personal and business accounts across the entire spectrum of services in general. To make banking affordable and to the wider market, the Central Bank has directed for the reduction of cash deposit fees for personal and business accounts at varying levels of thresholds. The CBL has declared a moratorium on cash deposit fees on Automatic Teller Machines (ATMs) applicable up to a maximum of M3 000 monthly. For businesses, the directive instructs banks to provide one free cash deposit equivalent to M20 000 monthly for Small, Medium and Micro Enterprises (SMMEs). The directive further instructs banks to provide a limit of three free cash deposits up to a minimum of M20 000 in instances where the values are split in smaller values. Any amount above the M20 000 threshold shall be processed at standard charges which shall not exceed 0.5% of the deposited amount.
The key component in the new directives is a policy decision on lending, which seeks to address systemic challenges related to access to finance for both individuals and businesses. The prime lending rate has been linked to the Central Bank of Lesotho (CBL) lending rate. The prevailing prime lending rate is therefore, the CBL rate plus 350 basis points per annum. This intervention has regularised the banking sector to provide a uniform prime lending, which for the first time, is on par with the South African standard. The Central Bank has also set loan initiation fees at 1% of the loan amount for personal, vehicle, asset finance as well as property finance by 1% of the loan amount with a cap for higher thresholds. This implies that the regulator has effectively made borrowing cheaper and attractive to customers.
While the directives are based on sound policy objectives to address the longstanding issues on affordable, easier access to banking and credit extension, these directives come at a significant cost to the banking sector. Albeit still early days, it is expected that the sector’s profitability is under threat. The potential dip in profitability comes at the back of Covid-19 induced strain on the financial performance of banks, where notable declines were recorded at the end of the 2021 financial year. The sector has been affected by many shocks that present different turbulences in their financial performance.
A fair measure of the performance of the banking sector can best be analysed based on the results of Standard Lesotho Bank (SLB), which accounts for 53% of the market share. SLB also accounts for a 72% average in the share of total profits in the sector to provide a good benchmark to measure the performance of the banking sector in Lesotho. In 2020, Standard Lesotho Bank recorded an 8% decline in profit after tax from M263 million in 2020 to M243 million in 2021. This performance is a far cry from the M362 million profit after tax recorded in 2019. This analysis of profits is indicative of the profitability status of the entire sector before the global calamity caused by Covid-19.
Despite potential to negatively impact the banking sector profitability, the directive is poised to improve Lesotho’s economy. The most significant item of the directive that has potential to influence the fortunes of Lesotho’s economy is the mandatory Loan to Deposit Ratios (LDR) of no less than 70%. The implication of this directive is that banks have to review their lending appetite, lending parameters as well as their turnaround times, thus increasing credit extension and spurring the economy. The average Loan to Deposit Ratio for the four commercial banks currently sits at a combined 48%. The bank with the highest lending appetite is Lesotho PostBank with 72% LDR and the least is FNB at 27%. With a lending book in excess of M4 billion, Standard Lesotho Bank is at an average of 50%, which is above the market median. The Central Bank expects the directive limit to be fully attained by 31st December 2023.
While the directives provide a springboard towards economic development, these measures will significantly reduce the profitability of the banking sector in the short to medium term. It is expected that returns will be realised in the long run. However the only ace in the sleeve of commercial banks to regain profitability is to increase the appetite to advancing loans as directed. For this to be effective, a consideration on the regulation of collateral, insolvency and the management of non-performing loans has to be the country’s biggest priority, where the market has seen banks shying away from taking radical pro-economy lending risks because of the inadequacy of the legal instruments to safeguard their investments.
The 2022 IMF Country Report acknowledges that Lesotho’s banking sector is well-capitalised, and highly liquid. For the sector to turn this liquidity into assets that can make a difference in the economy, local business and the private sector have to make concerted efforts to create bankable projects. This will come with the support of the sector itself as well as other government agencies with vested interests.
Other players with a significant role to play in boosting economic development, especially to capacitate businesses include the Lesotho National Development Corporation (LNDC, which is already administering the Partial Credit Guarantee Scheme and BEDCO, both of whom must accelerate the training of the entire business sector on financial management, as well as to help them to develop bankable projects. While the supply of funds to banks (measured by total deposits to GDP) is comparable to Lesotho’s peers at 30%, only about half of these funds go to individuals and the private sector as credit, which is very low compared to the other countries in the CMA area.
The IMF has further advised the country to focus on a number of measures to improve the credit landscape and access to finance. Such measures include the enhancements to the Partial Credit Guarantee Scheme and supporting the development of capital markets, especially the completion of the collateral property register and the implementation of the Insolvency Act. Moreover, the IMF suggests that including businesses in the credit bureau and creating credit scores for individuals could also facilitate lending to SMMEs by allowing information on the entrepreneur to serve a proxy for their business.
While the country is undergoing challenges in the banking sector as demonstrated above, rapid growth in mobile money remains a success story of note. The IMF Country report states that active accounts have increased by about four and a half times since 2015, which has improved access for the previously excluded sectors of the population such as the rural poor. To further illustrate this development, as at end of 2020, there were 2.2 million registered mobile money accounts in Lesotho, of which 882 000 were 30-days active and 920 000 were 90-days active. These numbers equate to around two-thirds of the adult population of 1.4 million. In this market where there are currently five players in the mobile money issuers, Vodacom dominates the sector with 87% market share. Lending in the mobile money space is still at its infancy, but has been pioneered by Vodacom with the launch of Ntlatse low value loans on their M-Pesa platform. Other players in this sector include Econet Telecom Lesotho, Chaperone, Lesotho PostBank and Standard Lesotho Bank.