BANKS’ ASSET QUALITY’S SHARP DECLINE

MBABANE – While the country’s banks are well capitalised and profitable, their asset quality has been deteriorating.

With the COVID-19-induced economic crisis, credit risk will increase further and banks’ asset quality will decline sharply. This is detailed in a report on the financing model for micro, small and medium-sized enterprises (MSMEs) in Eswatini.
Non-performing loans (NPLs) as a proportion of total gross loans stood at 9.2 per cent in June 2019 compared to 6.6 per cent in 2015. A non-performing loan is a sum of borrowed money whose scheduled payments have not been made by the debtor for a period of time–usually 90 or 180 days. NPLs crossed the highly symbolic E1 billion mark in 2019. The household sector (44 per cent) and the distribution and tourism sectors (15.1) account for the largest share of NPLs. The upward trend in the NPLs ratio indicates increased credit risk, much of which is attributed to subdued economic growth. Eswatini’s banking sector consists of four banks, one of which is State-owned (EswatiniBank).

oligopolistic

In addition to being oligopolistic in structure, the banking sector is also said to be highly-concentrated on both the lending and deposit sides. By 2019, non-bank financial institutions like savings and credit cooperatives and pension funds, among others, were said to be holding about 10 per cent of bank deposits. Such high levels of concentration, according to the report, may expose the banking system to liquidity shocks. However, stress tests show that the banking sector is, as a whole, rather resilient. “Some institutions need to be redirected to original mandate. For example, EswatiniBank can take on more the role of a development bank by tweaking its operations,” recommended the report based on a study conducted by a consultant and economist Vinaye Ancharaz from Mauritius.

challenges

Meanwhile, as a way forward to financing challenges faced by MSMEs, the report further challenges government to set up new institutions like a public credit and collateral registry to strengthen information infrastructure. Despite the existence of a credit guarantee scheme which is meant to bypass collateral requirements; MSMEs continue to complain of lack of collateral as a major constraint to financing. “The root of the problem is the mismatch between the assets that firms hold and those that banks accept as collateral.

receivable

“Over 75 per cent of MSMEs’ assets in developing countries consist of movables such as machinery and accounts receivable whereas about the same percentage of banks collateral is in the form of land and buildings,” highlighted the report. There are further calls for the promotion of greater firm participation in the capital market. The Eswatini Stock Exchange (ESE) is said to be small, with just eight listed companies and a market capitalisation of E3.8 billion (May 2020). More importantly, listing on the market has been rather slow during the three decades existence of the ESE. The trend suggests that initial public offerings are an extremely rare occurrence in the country.

investigate

“The government should set up a working group to investigate barriers to entry in the capital market and take remedial measures to promote greater participation in the ESE,” stressed the report. Meanwhile, when launching the financing model in the past week, Minister of Commerce, Industry and Trade Manqoba Khumalo had said many potential MSMEs, raised their concerns with the ministry that the financial products availed in the country were not favourable for them. As a result, the ministry felt that there was a need to diagnose the problem. 

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