Credit extension by banks in Botswana is not unduly constrained unlike in major economies and therefore the situation does not require special measures akin to those adopted by the Bank of England and the European Central Bank, Finance minister Kenneth Matambo has insisted.
Matambo was responding to a question by Gaborone West North Member of Parliament Robert Masitara, who had wanted to know whether the minister would consider instructing Bank of Botswana to introduce a “United Kingdom equivalent of the European Central Bank’s Long Term Refinancing Operation” to encourage increased bank lending at competitive rates.
The minister explained that as of September 2012, credit in the UK contracted by 0.3 percent year-on-year while lending to businesses in the Euro area fell by 1.4 percent. In contrast, commercial bank’s credit in Botswana increased by 25.1 percent with lending to businesses growing by 28.9 percent or P3.2 billion, while borrowing by households rose by 22.5 percent or P3.4 billion over the same period.
However, in a late interview with Botswana Guardian, Masitara maintained that the figures the minister quoted were “dismally low.” He said at P3, 2 billion, lending to businesses was also very low and that the same was true for P3, 4 billion, which accounts for borrowing by households.
Pouring water on Masitara’s suggestion Matambo had told parliament that the local central bank has in place “structures and instruments” that would enable it to respond appropriately to prevailing monetary and economic developments in the country on an on-going basis. But while not loathing the local central bank’s regulatory environment, Masitara insists that transparency of European banks is very high, that it is rated as the fifth in the world, which cannot be said for local banks.
He said the European banks are transparent in the conduct of their affairs, for example in calculating growth of business and borrowing to businesses. Such transparency by European banks confounds as well as “casts doubts” on transparency of our local commercial banks.
Matambo explained that the schemes undertaken by UK and European Central Bank were designed to address “specific monetary and economic circumstances” in the Euro area and the United Kingdom notably, “severely constrained funding by the banking sector arising from uncertain economic prospects in the United Kingdom and the Euro area as a consequence of the recent banking crises.”
He said in the first instance, normal flow of liquidity among financial institutions is restrained due to concerns about health and soundness of counterparty banks/institutions and that secondly, banks are finding it difficult to raise additional capital to meet the stringent regulatory requirements introduced following the financial crisis. Further borrowing by both businesses and households is subdued in the light of weak economic prospects, which conditions were non-existent in Botswana.
Not so, said Masitara in the interview, as he defended his question, which he said was designed to ‘check if our systems can adapt to situations persisting elsewhere” or alternatively to “check if we have systems in place to deliver proper deliverables.’ Lending to businesses and individuals is low because commercial banks have been struggling with funding in the aftermath of the recession, says the MP.
“If the minister were to instruct the Bank of Botswana to adopt the long-term refinancing operation, this would help banks to improve their balances (which are in most instances window-dressed) and make more money as well as allow businesses that were staffed during the recession, an opportunity to “pledge a wide range of assets as collateral for loans.” In this way, says Masitara, the economy would grow.
But the minister refuted the MP’ ssuggestion on the further premise that historically low interest rates in European countries have also not been successful in encouraging borrowing. Therefore, he said it would be neither desirable nor appropriate for Botswana to emulate what is being done in other countries when the circumstances are completely different at home. Masitara says long term refinancing provides opportunities for banks to lend at low rates.
And in a parting shot the MP indicates that it is “doubtful” whether the minister’s answer contains an assessment of the extent to which businesses and individuals have been denied credit by banks. And on that basis he suggests that the mandate of the Committee on Statutory Bodies should be extended to cover commercial banks to ensure compliance with corporate governance principles as well as to ensure that the interests of ordinary Batswana that have invested in these banks are protected.