- Even so, while total lending to households increased by 6% in the past year, BoB says trends point to the ability of households to repay
The substantial size of unsecured loans has the potential to cause household financial distress, the Bank of Botswana (BoB) has warned.
According to the Financial Stability Report for June 2022, household credit grew by six percent and continues to dominate total commercial banks’ lending that currently sits at a staggering P45.9 billion or 66 percent of total credit extended by commercial banks as at March this year. The bulk of this credit is concentrated in unsecured loans at 72.5 percent, a situation that BoB says has the potential to cause financial distress to households because of the inherently expensive nature of unsecured credit.
To put this into perspective, the central bank says the proportion of unsecured loans to total credit remains higher than the 24.4 percent and 30.8 percent for South Africa and Namibia respectively. “Therefore, households are vulnerable to sudden and sharp tightening of financial conditions,” the report states. Even so, while total lending to households increased by 6 percent in the past year, the report says trends show that households also possess the ability to repay. As a proportion to household income, household debt in the fourth quarter of 2021 was estimated at 45 percent, a decrease from 58.6 percent in the same period last year.
This trend, according to the central bank, implies increasing borrowing capacity and ability to repay, which remains relatively strong when compared to the 77.4 percent and 75 percent for Namibia and South Africa respectively. Further, the report says the ratio of household Non-Performing Loans (NPF) to total household credit was 3.2 percent in March 2022, which was a decrease from 3.5 percent in March last year, and better than the industry average of 4.2 percent recorded in March this year. Most importantly, households are considered net savers when their non-discretionary contractual pension funds are factored in.
Even though pension funds may not immediately alleviate short-term cashflow constraints or meet immediate financial needs, they are nonetheless considered important as they may improve the long-term financial welfare of households in addition to supporting wealth creation and financial security of retirees. Significantly, apart from the challenges associated with the COVID-19 pandemic, BoB has concluded that the domestic financial system is resilient and continues to perform its expected function, which is to finance other sectors of the economy.
