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Household credit grows but remains relatively low

Although household credit grew by 6.2 percent in 2018, Botswana’s household debt relative to the economy and by international standards is said to be low.

According to the Financial Stability Report prepared by the Bank of Botswana in collaboration with the Ministry of Finance and Economic Development as well as the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), when measured using household debt to GDP, household debt is very low.

Indeed, last year’s household credit growth was in fact lower than the 7.2 percent growth recorded in 2017.

The larger portion of this credit came from commercial banks at P36.9 billion by June 2019, representing 61.3 percent of total bank credit, most of which is concentrated in unsecured lending.

The report states that local households borrow mainly in Pula in order to minimize any foreign exchange risks which may arise from banks’ foreign currency exposure.

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The low household debt, according to the report, suggests scope for the growth of the household credit market, especially in terms of development and welfare improvement needs.

Nonetheless, structural challenges relating to economic diversification, land tenure, income growth and strategic preference for unsecured credit by banks are believed to pose a challenge to further expansion.

Additionally, it is thought debt services ratios and marginal propensity to borrow will constrain further growth in demand for household credit.

Analysis of available data is said to depict a controlled and sustainable household debt situation, but not including estimates of the extent of household indebtedness outside the regulated financial system.

However, it is expected that the proposed Credit Information Act will go a long way to closing this gap.

Meanwhile, the report suggests that credit by micro lenders have increased.

These Non-Bank Financial Institutions (NBFIs) comprise a large, diverse group of institutions such as pension funds, insurance and capital markets.

Credit extension in this sector is offered by insurance companies, micro-lenders and pawnshops as well as leasing companies.

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By December 2018, micro-lending business loan book is reported to have amounted to P3.6 billion, with an annual average growth rate of 11.5 percent in the last three years.

The micro-lending business in Botswana is dominated by the Letshego Financial Services Botswana with a loan book of P2.4 billion as of June 2018.

With these figures, it is noted that the micro-lending business in Botswana is too small to pose any significant financial stability risk.

But there are concerns that the sector exposes households to high levels of indebtedness and thus requires regular monitoring.

Going forward, the regulating authority says it will also monitor lending by other NBFIs, which is commonly known as shadow banking.

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