IMF criticises local banks

Staff Reporter

The local commercial banks are a large source of domestic economic leakage as they withdraw money from Lesotho and transfer it to South Africa, according to the International Monetary Fund (IMF).

The leakage reduces the money available for domestic consumers and businesses to purchase and manufacture goods and services and this results in a reduction of the national income.

The IMF Selected Issues Paper titled: Policy Coordination in Lesotho, prepared by Yibin Mu, indicates that any increase in money supply in Lesotho tends to find its way out of the country.

“In the case of Lesotho, any increase in money supply tends to find its way out of the economy, leaving monetary aggregates unchanged and reserves depleted,” reads the document.

“For example, should the government draw down deposits to finance public procurement, a large proportion of these funds would eventually find their way out of the economy,” it adds.

According to the paper, this happens through businesses depositing payments from the government in bank accounts “at the large foreign-owned banks, which then transfer the money to their parents in South Africa”.

The money also leaves the country when businesses make payments for imports that are input to the provision of contracted goods and services.

Lesotho’s banking sector is small and comprises only four commercial banks offering traditional personal and corporate banking services through branches around the country.

The sector is largely foreign-owned and three of the four commercial banks, First National Bank (FNB) Lesotho, Nedbank Lesotho, and Standard Lesotho Bank are subsidiaries of South African banks with headquarters in Johannesburg, Gauteng.

The fourth bank, Lesotho PostBank, is the only domestic bank, fully owned by the government.

FNB Lesotho, Nedbank Lesotho, and Standard Lesotho Bank together accounted for 91 percent of the banking sector assets as of 2020.

The flow of capital out of the economy is a big issue as the economy cannot be able to grow without the capital it needs to sustain itself.

Thus, the leakage of money affects an entire nation.

This is not the first time that IMF has blamed the three banks for bleeding the economy by taking money from Lesotho and stashing it away in South Africa, out of the reach of many Basotho who desperately need credit to finance their existing businesses or start new ones.

In March 2018, IMF published the selected issues paper that was highly critical of the local commercial banks’ lending to Basotho.

It said the banks lend very little to the local private sector but hold an unusually large share of liquid foreign assets in South Africa.

“Banks in Lesotho hold an unusually large share of liquid foreign assets (liquid assets are assets that can easily be converted into cash within a short amount of time) placed at banks in South Africa,” read the 2018 report.

The IMF released another report in June last year, again criticizing the banks’ contribution to the local private sector credit.

“The well-capitalized, highly liquid, and largely foreign-owned banking sector’s contribution to private sector credit remains limited,” read the report.

The IMF said while the supply of funds to banks – measured by deposits to Gross Domestic Product (GDP) – was comparable to Lesotho’s peers at 30 percent, only about half went to the private sector as credit.

“Banks prefer to invest heavily in South Africa, likely reflecting home bias within the parent banks of the three foreign bank subsidiaries, deeper financial markets and better investment opportunities in South Africa, and a lack of bankable projects in Lesotho,” it said.

The Central Bank of Lesotho (CBL)’s 2020 supervision annual report (latest available) substantiates these IMF claims.

According to the CBL’s supervision report, the local banks’ assets held abroad increased by 59.9 percent from 2.4 billion in 2019 to M3.9 billion in 2020.

In a frantic effort to improve access to credit and ensure that the banks lend more to Basotho, CBL in April last year issued a directive on loans to deposit ratio.

It requested banks to extend at least 70 percent of their deposits to credit. “This limit is expected to be fully attained by 31 December 2023,” it said.

Basotho have limited access to financial services and use informal methods to meet their needs. They tend to rely on family and friends to borrow.

Their startups are underfunded and are, as a result of lack of access to finance, stagnant or even failing. Most small business owners finance start-ups using their own savings.

Last year the government had to borrow money from the World Bank to finance Micro, Small, and Medium Enterprises (MSMEs) and entrepreneurs.

On June 28 last year, the World Bank Group announced that its board of directors approved a $45 million (about M835 million) loan for the government of Lesotho to increase access to business support services and financial products targeted at MSMEs and entrepreneurs, especially women and youth.

The Bankers Association of Lesotho (BAL) disagrees that banks prefer investing heavily in South Africa.

“This is not the case. What should be taken into account is the fact that there are currently limited investment instruments in the country for banks to invest excess liquidity in,” BAL chairperson, Delekazi Mokebe, told a local weekly last year.

“This is seen in the bi-weekly CBL treasury bills and quarterly bonds auctions where there is always oversubscription, indicating that banks compete for limited investments instruments with all other participants in the market, thereby driving banks to seek alternative investments elsewhere, not because it is a preference to invest in South Africa,” Mokebe added.

She is the chief executive officer of FNB Lesotho.

She further told the publication that recent numbers from the CBL confirmed that banks invested 56 percent (M4.5billion) in Lesotho, made of balances with all local banks, the central bank, and government of Lesotho securities (bonds and treasury bills), “whilst only 44 percent (M3.6billion) is placed with banks in South Africa and in the region”.

“It should be noted that South Africa is Lesotho’s biggest trading partner, therefore it follows that part of balances with banks in South Africa are held to facilitate and settle payments and transfers by Lesotho businesses and individuals,” she said.