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Banks record lending spread decline

Publishing Date : 21 January, 2019

Author : TSHEPISO GABOTLHOMOLWE

The Botswana banking sector which has historically been characterized by high rates of profitability has recorded a decline in deposit which is often characterized or accompanied by high bank lending interest rates.


According to a report by E Consult, Botswana has registered a lending spread decline from its peak in 2009 and is now below the average. The report which was compiled by Sethunya Sejoe and Keith Jefferis observes that although at an average the decline is not at its lowest these changes have been associated with a dramatic improvement in the efficiency of financial intermediation, with banks now holding far fewer BoBCs and lending out a much greater proportion of deposits.

Amongst the drivers of these changes, E Consult highlights the increased competition in the banking sector; and lower policy interest rates.


They also note that despite increased competition, larger banks can still charge higher spreads than smaller banks. The bulk of the deposit-lending spread is now accounted for by operational costs and non-performing loans, rather than profit. Further reductions in spreads would therefore require more efficient banking operations at lower costs and reduced loan losses.


The report analysis highlights that while the above characterisation of the Botswana banking sector was accurate in the early years of the period examined, it is no longer the case today.It continues to highlight that Profitability has declined substantially, and 2016-17 period was amongst the lowest in the ten countries reviewed. Average bank lending rates have also dropped significantly and are similarly now around the lowest in the country group


In a study the combined deposit-lending spreads for the ten Southern African Development Community (SADC) and the East African Community (EAC) countries is included in the comparative analysis for the period 2007 to 2017. Of the countries considered, South Africa and Namibia had the lowest average spread of 3.6 percent and 4.4 percent over 2007-17 respectively. Uganda and Zambia are reported to have had the highest average spread of 13.8 percent and 11.1 percent respectively during the period.


Deposit -lending spreads in Botswana hoover around the average compared to other countries’ spreads over the years. The spread is noted to have declined sharply in 2013-2015, from 9.4 percent in 2012 to 7.3 percent in 2015, before rising slightly in 2016. It has been reported that capital as a percentage of liabilities is lower in Botswana than in most of the other countries, although commercial banks in Botswana remain adequately capitalised in accordance with statutory requirements.


Jefferis and Sejoe note that the highest levels of capitalisation are seen in Uganda, Zambia and Kenya, where banks are arguably over capitalised, which may in turn contribute to high spreads in those countries. “It may also be that risks are lower in the countries with lower bank capitalisation which include but are not limited to South Africa (SA), Botswana, Namibia and Mauritius.”  The report also states that another explanation of the decline may be that commercial banks in Botswana are more efficient in the use of expensive Capital than other banks in other countries.

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