How regulators and lenders trap Batswana in debt
At the glitzy Gaborone International Convention Centre (GICC) on Wednesday morning, Botswana Insurance Holding Limited’s (BIHL) top executive, Catherine Lesetedi, stepped up to the podium to present the group results for the year ended December 2019. Although these were a pleasing set of results, she was bothered by something else at the back of her mind: the debt trap holding households in a chokehold while yet more credit is being extended to them.Despite civil servants’ salary increases in the past year she was still concerned that households are struggling. BIHL is not in the business of lending or is it planning to go there, at least in the near future. Lesetedi’s concern is that when the household is struggling as it presently is, this impacts the group’s life business, Botswana Life, negatively. In the past, policyholders have terminated their policies seeking to ease their financial burden.
Macro-level data shows a household debt to GDP ratio of 20.3 percent and a household debt to income ratio of 48 percent in 2019, according to the Bank of Botswana (BoB). The reserve bank further shows that the default rate (household non-performing loans to total household loans) was at 3.2 percent at the end of 2019. But despite the general feeling that Batswana are over-indebted, the Bank of Botswana argues that this is within acceptable risk parametres for bank lending.
“Therefore, by these measures, there is no indication either that households in Botswana are highly indebted on a system-wide basis or that their ability to meet their repayment obligations is compromised,” Dr. Seamogano Mosanako, the bank’s Head, Communications and Information Services, told this publication before admitting that the macro data may obscure individual cases of excessive debt burden.
Just a week ago, First National Bank of Botswana raised red flags about over-indebtedness and an increasing number of impairments. During the results presentation for the half-year ended December 2019, the bank’s CEO, Steven Bogatsu, revealed that as at the reporting period, the number of houses repossessed by the bank had risen from 180 to 400. It is an unusual amount that even the banks’ CEO drew an analogy of FNBB competing with BHC which builds and sells houses.
In its reporting period, total loans advanced by FNBB to its individual customers rose 9.6 percent. A visibly concerned Bogatsu remarked, “People close to retirement still borrow to support family members. BOMAID increased dependents in reaction to people remaining unemployed for too long. That why we see parents borrowing.”
He noted that this is a serious concern as it leads to impairments. Mosanako argues that the observation is that excessive debt burden and distress at the individual level is mostly attributable to lack of adequate financial planning and evaluation of prospects for borrowing, as well as over-borrowing through use of multiple institutions and padding of income sources, leading to inability to repay. In her view, this, therefore, requires an improvement in financial literacy and awareness for individuals and, in general, financial discipline.
One gap that has been found by Antwi Kwabena, investment analysist at Kgori Capital, is that borrowers need to be educated more in order to encourage healthy borrowing habits.
While responding about FNBB’s role in promoting credit affordability, Boga Chilinde-Masebu, the bank’s communications and PR manager, explained that its retail customers are segmented according to income level and have specific products designed for each segment level to ensure customers are not incorrectly targeted and that there is less pressure on their income. This is what the bank calls use of PRTI (product to total income) and use of CRTI (customer to total income).
Chilende-Masebu said this restricts the percentage of the customer income which can be used for loan repayment in order to lessen their financial burden and allow customers enough excess funds to take home and service other financial obligations. FNBB was also asked the steps they take to assess the proposed consumer’s general understanding and appreciation of risk and cost of the proposed credit and of the right and obligation of a consumer under a credit agreement. Chilinde-Masebu responded by saying their standards included disclosing APR (annual percentage rate) to the customer and disclosing total cost of debt to the customer, including other costs such as insurance and admin fees.
“This allows customers to make informed decisions,” she said. “To ensure that customers are aware and accept the disclosures, the bank requires customers to sign for the disclosures and terms and conditions of the loans. Additionally, a loan summary is provided with details of the most important disclosure information for the customer to sign.”At Absa, the bank’s spokesperson Spencer Moreri said a key principle in extending credit is to ensure that the bank thoroughly assesses the ability and capability of the customer to repay the credit facility without putting the customer’s future in distress by over leveraging the customer’s salary commitments. “It is important for the bank to utilise all necessary tools and methods to assess the customer’s affordability prior to extending lending. The bank is very rigorous in this part of the customer journey,” Moreri said, adding that there is an affordability assessment tool that is used to determine the monthly repayment, as well as documentations required to assess customer’s ability to repay such as the latest original pay slip, bank statements and settlement balances of other loans along with monthly expenses of the customer.
“We are required by law to ensure the customer understands the risks involved and discloses all costs associated to transactions to the customer,” he said.
Stanchart’s Acting Head, Corporate Affairs and Brand & Marketing, (STATE NAME) said the bank has a robust framework and tools for assessment of the client’s income profile and debt serviceability. “Our loans are sourced through face-to-face interaction with our fully trained sales staff and relationship managers,” he asserted. “We have embedded, within our sales processes an effective client financial needs assessment procedure. We make all necessary upfront disclosures, including total cost of credit to the customer upfront.”Perhaps the question now is whether borrowers understand their obligation to a loan agreement. Kwabena argues that the main gap is consumer education.
Although the Bank of Botswana has the necessary legal and institutional capacity to exercise its oversight role over the operations of licensed commercial banks in Botswana, Mosanako said the central bank does not participate in the credit decision-making processes of banks, which is a business decision. Both banking laws and international principles for effective banking supervision require the Bank of Botswana to confine its oversight role to ensuring that banks operate within sound, well-defined credit-granting criteria.
The criteria should entail sufficient information to support the credit-granting decision. The central bank routinely monitors and affirms implementation of the credit policy through on-site and off-site monitoring and assessment of individual banks.In its financial stability report, the Bank of Botswana conducted a survey on the household sub-sector indebtedness for the period 2015 to 2017. According to the Financial Stability report, the survey examined the demographic profile of borrowers, the purpose of household credit, the cost of credit, as well as lending and risk mitigation strategies. In addition, the survey looked at the different measures applied by banks to assess capacity of households to service loans, such as loan to value (LTV) ratio, debt to income ratio (DTI) and debt service ratio (DSR). The findings of the survey were envisaged to highlight the extent of vulnerability of the financial system to risks emanating from the household sector.
The reports shows that in terms of level of income, most borrowers (71 percent) earned between P3 001 and P20 000 per month, while 8 percent of borrowers had a monthly income above P20 000. During the three-year period under review, the Bank of Botswana report shows that most banks maintained the same loan to value (LTV) ratios, ranging from 50 percent to 100 percent. The report found that the banks reported a debt to income (DTI) ratio for the households ranging from 40 percent to 70 percent.“A rough estimate by the bank indicates that household debt as a proportion to income rose sharply from 25 percent in 2009 to 50 percent in 2015, before easing to 46 percent in 2016 and 2017,” the 2018 fancial stability report showed.
The micro-lending business loan book amounted to P3.6 billion in December 2018, with an annual average growth of 11.5 percent in the past three years. The Financial Stability report found that the micro-lenders were also moderately leveraged at about 54 percent in 2016 and 2017. “There are concerns that the sector exposes households to high levels of indebtedness, hence it warrants regular monitoring,” the Bank of Botswana wrote in the report.
Micro lenders are regulated by the NBFIRA, which has set the Minimum Take Home Pay (MTHP) at P600 for Industrial Class (both married and single), and P1300 and P1500 for singles and married customers respectively. This is way below cost of living. The micro-lending business in Botswana is heavily dominated by Letshego Financial Services (Pty) Ltd (Botswana), with a loan book of P2.4 billion19 as of June 2018. Letshego did not answer questions sent to them. Bayport, which comes second after Letshego, responded: “As Bayport, we have been SMART CERTIFIED since 2016 and this means we adhere to being a responsible financial inclusion organisation by being fully transparent in pricing, terms and conditions of all our financial products. We ensure our customers do not borrow more money than they can repay or use products that they do not need.”
Although the Bank of Botswana says it does not get involved in banks’ lending decisions, banks are apparently required to leave at least 40 percent net pat as take home. In South Africa, the National Credit Regulator was setup to protect the consumer from unscrupulous tactics from some micro lenders. In Botswana, the consumer is protected by NBFIRA. There is a general view that the lack of a national credit law in Botswana allows micro-lenders to be predatory on consumers.
But NBFIRA spokesperson Boa Chombah argues that most of what would ordinarily be in the National Credit Act already exists in various pieces of legislation. She says the government has begun a process of consolidating various pieces of legislation and to legislate some specific areas to address the gaps, such as an Information Sharing Act and an Immovable Collateral Register Act. “Further details on these could be sought from the Ministry of Finance as the custodian of these initiatives,” she wrote, adding that regulation addresses aggressive or coercive sales practices, as well as predatory lending designed to take advantage of borrower’s lack of education or experience.
For her part, Mosanako noted: “It is expected that the promulgation of the Credit Information Bill would add to the existing infrastructure for improving information on prospective borrowers, thus better credit granting decisions.” Furthermore, she said, the proposed credit bureaux under the proposed law would complement efforts towards improving financial literacy and awareness, contributing to enhanced productivity and benefit of household credit to the welfare of individuals and the economy broadly. The finger pointing continues, the family slowly sinks into further debts, and financial companies continue to aggressively pursues profit targets.
By Kitso Dickson