Discussions
Banking in Namibia – closing the doors?
Ashly Hope, tralac Research Advisor, discusses financial sector development in Namibia
The financial system in Namibia is sophisticated and well regulated. The financial sector is stable, and the major banks are profitable.
While the banking sector is dominated by South African headquartered banks – with Standard Bank, FNB and Nedbank being three of the four largest banks in the country, the existence of local institutions, such as Bank Windhoek, and Ebank suggest that there is both capacity and competitiveness available in the local market.
New banks, such as Botswana’s Letshego and Angola’s Bank BIC, have entered the market in the past few years. The funds management industry is large, and Namibian institutions like Capricorn are expanding in the region.
It is in this context that new localisation goals for the financial sector as proposed in the Financial Sector Development Plan 2011-2021, and further articulated in the draft Banking Institutions Amendment Bill 2013 could be risky step for both sectoral development, broader economic development and regional integration.
The Banking Institutions Bill will, when promulgated, provide essential updates to banking regulation, including, importantly, implementing rules around microfinancing institutions, resolution of banks and new rules around illegal financial schemes and credit bureaus.
But alongside these updates to the regulatory environment, the draft bill also includes a 55 per cent foreign ownership restriction. This would be a significant change from the existing unrestricted regime. Foreign banks are currently restricted to a single branch, and data localisation rules are in place for subsidiaries, but under the existing law ownership has been unrestricted – at least formally, upon entry.
This draft bill has now been languishing for four years – perhaps an indication that the ownership provisions are proving troublesome to bed down. This means that, for example, microfinance businesses continue to operate under outdated laws and that international standards for bank recovery and resolution (winding up) are not yet in force. Microfinance operators, who play a critical role in small business financing, household income smoothing, therefore face an uncertain and ill-fitted regulatory regime, which can only have a discouraging effect on the ambitions of potential new operators.
More broadly, holding up legislation for such a long period of time generates uncertainty therefore discourages both incumbents and new businesses from investing, as well as providing an advantage for incumbent businesses who are at least already part of the system.
This localisation requirement is part of a broader economic transformation agenda, and while economic transformation is a worthy and desirable goal, it is a very real question as to whether imposing foreign ownership restrictions in the banking sector is an effective way to do this. The risk is that the restriction – particularly if it is either strictly mandated, or worse, subject to Ministerial discretion, with all the political risks that that would entail – would decrease economic opportunity more generally. Reducing potential competition in the sector, which is dominated by high-earning incumbents is not likely to improve outcomes for individuals, households or small businesses – those users and consumers of financial services who are generally not in a position to negotiate good deals with large financial institutions.
In the banking space, lack of access to finance for small and medium businesses right across Africa remains an enormous drag on growth. This restriction will make it more difficult for new entrants to come into the market and challenge incumbents, to compete on price and service as well as to supply finance to underserved market segments. It also invites regulatory arbitrage and therefore encourages shadow banking operations. While certainly market-based and other financing mechanisms are an important part of the financial eco system, the artificial encouragement of non-bank financing as an unintended consequence of this legislation may increase risks, especially for consumers.
This move would also seem to be at odds with Namibia’s commitments to regional integration. The ownership restriction is not necessarily consistent with other recent actions – particularly in the context of trade agreements where Namibia has, as recently as August, signed the SADC Protocol on Trade in Services. Financial services is one of the six priority sectors intended to be liberalised in the first round of negotiations under the Protocol. Namibia is also an active participant in the tripartite free trade area, and the continental free trade area negotiations - which will also cover services, with financial services likely to be prioritised here too. Like all trade agreements these agreements aim to substantially liberalise trade – including trade in financial services. While there is no obligation on Namibia to make commitments in areas such as banking, until now it has been open to foreign investment in the sector. In addition, the SADC protocol includes, among other things, an undertaking that during negotiations parties will not introduce new and more discriminatory barriers to trade in services. It is hard to see that this ownership restriction would not fall into this category.
The fact that the legislation has not yet been finalised is perhaps an indication that this proposal is somewhat controversial on the ownership provisions. In fact, a softer approach already seems to be in place. While the current law does not restrict ownership, according to reports, recent banking licences have been conditional upon divestiture plans that would result in at least 45 per cent local ownership within four years. That is, the same or similar restrictions under consideration in the new legislation. However, like any restriction in legislation this also favours incumbents who are not subject to the same conditions.
An industry led approach is also already in place with respect to broad-based economic empowerment. The Financial Sector Charter sees local banks committing to at least 25% ownership by BBEE beneficiaries by 2019. While voluntary, those institutions that are part of the Charter have already committed to at least 25% Namibian ownership – and have done so without the force of legislation.
A new investment promotion bill is also currently before Parliament – this legislation aims to encourage foreign investment under certain conditions that focus on the contribution of that investment to Namibia’s development. These include factors such as ownership by Namibians, the transfer of technology and skills, the advancement of disadvantaged people, the contribution towards redressing social and economic imbalances and increasing employment. The banking ownership requirement would add an additional layer on top of this and would be a much blunter instrument for attempting to capture the benefits of foreign investment for Namibians.
It therefore remains unclear whether an additional, strict 55% foreign ownership restriction is the best approach to achieve Namibia’s goals for the financial sector and, in particular, whether it will do more harm than good to a small economy like Namibia’s and more importantly the implications for the majority of Namibian individuals, households and small businesses. With Namibia’s ease of doing business ranking recently dropping four places, and difficult investment conditions globally, the administration may well be better off focussing attention on improving the business environment more generally. This, combined with a voluntary, incentive-based approach to financial-sector ownership and the passage and implementation of updated financial sector laws might create an environment where sustainable transformation is more likely to take place, rather than an environment that discourages, or creates an unnecessary barrier for new foreign entrants to the financial sector.
Further reading
Financial Stability Report – May 2016