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1PageFinancial Stability Report - March 2014

Financial Stability ReportMarch 2014


Bank of NamibiaFinancial Stability ReportMarch 2014Volume 8No 1

Registered Office71 Robert Mugabe AvenueP.O. Box 2882WindhoekNamibia

IPageFinancial Stability Report - March 2014

Bank of Namibia

• DeputyGovernor(Chairperson)• TechnicalAdvisortotheGovernor• ResearchAdvisortotheGovernor• DirectorofResearchandDeputyDirectors• DirectorofBankingSupervisionandDeputyDirectors• DirectorofFinanceandAdministration• DirectorofFinancialMarketsandDeputyDirectors• DirectorofPaymentandSettlementSystemsandDeputyDirectors• DirectorofStrategicCommunications&FinancialSectorDevelopment• ChiefRiskOfficer

Namibia Financial Institutions Supervisory Authority

• GeneralManagerforProvidentInstitutions• GeneralManagerforInvestmentInstitutions• GeneralManagerforInsuranceDivision• GeneralManagerforResearchPolicyandStatistics

© Bank of Namibia

All rights reserved. No part of this publication may be reproduced, copied or transmitted in any form or by any means, including photocopying, plagiarising, recording and storing without the written permission of the copyright holder except in accordance with the copyright legislation in force in theRepublicofNamibia.Thecontentsof thispublicationare intendedforgeneral informationonlyand are not intended to serve as financial or other advice. While every precaution is taken to ensure the accuracy of information, the Bank of Namibia shall not be liable to any person for inaccurate information or opinions contained in this publication.

Published by the Bank of Namibia71 Robert Mugabe AvenueWindhoekNAMIBIATel.:+264612835111http://www.bon.com.na

Financial System Stability Committee

IIPageFinancial Stability Report - March 2014

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IIIPageFinancial Stability Report - March 2014

BoN Bank of Namibia

CMA CommonMonetaryArea

ECB EuropeanCentralBank

EMEs EmergingMarketEconomies

FNB FirstNationalBank

FSR FinancialStabilityReport

HHI Herfindahl-HirschmanIndex

IMF InternationalMonetaryFund

JSE JohannesburgStockExchange

LHS Left-handSide

NAD Namibia Dollar

NAMFISANamibiaFinancialInstitutionsSupervisory

Authority

NBFI Non-bankFinancialInstitution

NISS NamibiaInter-bankSettlementSystem

NPL Non-performing loan

NSX NamibianStockExchange

PSCE PrivateSectorCreditExtension

RHS Right-handSide

ROA ReturnonAssets

ROE ReturnonEquity

RWCR Risk-WeightedCapitalRatio

SACU SouthernAfricanCustomsUnion

SARB SouthAfricanReserveBank

WEO WorldEconomicOutlook

VIX VolatilityIndex

List of Abbreviations

IVPageFinancial Stability Report - March 2014

ThepurposeoftheFinancialStabilityReport(FSR)istoidentifyrisksandvulnerabilitiesinthefinancial

systemandassesstheresilienceofthefinancialsystemtodomesticandexternalshocks.Thereport

alsoservesasacommunication tool.Thereportpresents recommendations to the identifiedrisks.

Lastly, the report is published to inform the reader on the soundness of the financial system, and what

the regulators and government are doing in order to mitigate risks to the Namibian financial system.

Financial system stability is defined as the resilience of the domestic financial system to internal and

external shocks, be they economic, financial, political or otherwise. It can also be described as the

absence of macroeconomic costs of disturbances in the system of financial exchanges between

households, corporates, and financial institutions.

ThefinancialsysteminNamibiaconsistsoffinancialmarkets,instruments,institutionsandinfrastructure.

Theregulatorystructure,whilenotstrictlyapartof thefinancialsystem,playsan important role in

regulatingandmonitoringthesystem.UnderthemandateofSection3(a)oftheBankofNamibiaAct,

1997(No15of1997,asamended)theBankofNamibiahasanobjective“topromoteandmaintain

a sound monetary, credit and financial system in Namibia and sustain the liquidity, solvency and

functioningofthatsystem”.ThemandateofNAMFISA,withregardstofinancialstability,encompasses

the supervision of the business of financial institutions and financial services and providing advice to

theMinisterofFinanceonmattersrelatedtofinancial institutionsandservices.Thestabilityof the

financial system is critical as the system provides important services to households, corporates and

the real economy.

ThisreportisjointlyproducedbytheBankofNamibiaandtheNationalFinancialInstitutionSupervisory

Authority(NAMFISA).Thetwoinstitutions,whichareentrustedwiththeregulationofthefinancialsystem

inNamibia,workcloselytoensureahealthyfinancialsystem.Thereisalsoactiveengagementbetween

the Bank of Namibia, NAMFISA and the Ministry of Finance to ensure a comprehensive assessment of

systematic financial risks and of policy actions to ensure lasting financial system stability.

Preface

VPageFinancial Stability Report - March 2014

Content

The Bank of Namibia’s Corporate Charter ii

NAMFISA’s Corporate Charter ii

List of Abbreviations iii

Preface iv

I. Introduction 1

II. Summary of Risk Analysis 2

A.RisksStemmingfromtheExternalMacroeconomicEnvironment 4

B.RisksStemmingfromDomesticHouseholdsandCorporateDebt 4

C.RisksStemmingfromthePerformanceoftheBankingSector 5

D.RisksStemmingfromthePerformanceoftheNon-BankingFinancialSector(NBFIs) 5

E.RisksStemmingfromthePaymentandSettlementsSystem 6

III. Macroeconomic Environment 7

GlobalEconomicGrowth 7

GlobalFinancialMarkets 8

OutputandInflation 11

IV. Domestic Households and Corporate Debt Indicators 12

V. Performance of the Banking Sector 20

VI. Performance of the Non-Banking Financial Sector 29

VII.Payments Infrastructure and Regulatory Developments 34

VIII. Concluding Remarks and Policy Actions 37

APPENDICES 39

Appendix1:FinancialSoundnessIndicators 39

Appendix2:Methodology 40

Appendix3:Methodology–CorporateDebt 42

Appendix4:Estimationchallenges 43

Appendix5:Performanceofthenow-BankingSector 46


I. Introduction

1. Since the last issuance of the FSR in September 2013, the risks stemming from the external

macroeconomic environment have remained largely unchanged and may diminish going forward

on account of enhanced financial stability in emerging markets and sustained economic recovery

from advanced economies. The initial pessimistic scenario for emerging markets expected upon

announcementoftheUSFed’staperingofitsQuantitativeEasing(QE)appearstohaveabatedsofar,with

somewhatregainedstabilityofleadingemergingmarkets’currenciesandforeigncapitalflows.Advanced

economies,particularlytheUS,continuetorecover.

2. Despiteexchangeratevolatilityandseveredrought,thedomesticeconomyregisteredsatisfactory

performanceandlowinflationduringthesecondhalfof2013. Domestic engines of growth, including

sizeableconstructionactivityintheminingsector(uraniumandgold),sustainedabriskgrowthofthelocal

economy.Also,relativelyrapidgrowthofthetertiarysector,particularlywholesaleandretailtradesuggests

astronggrowthofprivateconsumption,albeitputtingpressureonthecentralbank’sinternationalreserve

position.Monthlyinflationrateshaveremainedrelativelylowwithanannualinflationrateof5.6percentfor

2013,downfrom6.7percentin2012.

3. Householddebtasashareofdisposableincomeincreasedfrom83percentinend-June2013to

87percentbyend-December2013, thuswarrantingstrongmonitoring. The rise in the household

indebtednessratioislargelyattributedtoafasterincreaseinbankcredittohouseholdsrelativetothegrowth

inhouseholds’disposableincome.AswashighlightedinpreviousFSRs,householddebtispredominantly

mortgageloans,contractedatvariableinterestrate.Assuch,goingforward,anyincreasesininterestrate

levelsmayplaceanadditionaldebtburden,whichisalreadyhighbyinternationalcomparisons.

4. Corporatedebtlevels(asashareofGDP)arehigherthanyearsback(albeitdecliningmarginally

between end-June and end-December 2013), but are, in principle, supporting valuable future

export promotion activities.Assuch,risksofcorporatedebtremain lowandunchangedfromearlier

FSRassessments,butwarrantmonitoringgoingforward,asnewcorporatedebtanddebtservicecosts

increase. Large exposures to manufacturing, as well as to transport and logistics, also warrant oversight

due to concentration risks.

5. Financialsoundnessindicatorsforthebankingsectorremainatcomfortablelevelsbyinternational

standards, although some structural patterns of the balance sheets require monitoring. The

resilienceofthecommercialbanksisregularlytestedandcurrentstresstestingresultssuggeststhatthe

commercialbankinginstitutionsareabletowithstandashocktothebankingsystem.Ofconcernisthe

assetsofbankinginstitutions,whicharehighlyconcentratedinmortgageloans,andassuch,thesituation

needs continuous monitoring in light of the high level of household indebtedness. The inherent risk of

bankinginstitutionmaturitymismatchremainunchangedforthenextsixmonth(i.e.thesameasobserved

inFSRinSeptember2013).Notwithstandingtheaboveconcerns,thebankingsectorremainscompliant

withregulatoryliquidityrequirements.

6. Since the last FSR report of September 2013, the balance sheets of non-banking financial

institutions remain healthy. This is expected to continue in the next sixmonths. NBFIs continue to

registerdouble-digitassetgrowthduringtheyear2013.Providentinstitutionsremainedwellcapitalised,

withsolvencylevelsexceedingthestatutoryrequirements.Investmentinstitutionsinvestedmostoftheir

assetslocally,inlinewithregulatoryrequirementsaswellastheriskappetiteoftheirclients.

7. Since the previous Financial Stability Report in September 2013, the payment infrastructures

continuetooperateeffectivelyandefficientlywithnomajoroutages.Someoperationalcontrolsare

beingreviewedinordertofurtherstrengthenefficiencies.


II. Summary of Risk Analysis

Thissectionpresentsananalysisofthemainriskstothestabilityofthedomesticfinancialsystem.

Consistent with sections III-VII of this Report, the analysis identifies risks arising from: (i) the external

macroeconomicenvironment,(ii)developmentsinhouseholdandcorporatedebt,(iii)domesticbankingand

non-bankinginstitutions,and(iv)thepaymentandsettlementsystem.Therisksareanalysedandratedfrom

lowrisktohighriskbasedontheirprobabilityofoccurringandthepotential impactonfinancialstability in

Namibia, should the risk develop and be realised.

ThemainriskstodomesticfinancialstabilitylargelyremainunchangedasidentifiedintheSeptember

2013editionoftheFSR.Thespider-chart(Figure1)andcomparisontable(Table1)showtheevolvingrisks

facingthedomesticfinancialsystembetweentheSeptember2013andtheMarch2014editions,andhighlight

theprobabilityandpotentialimpactofspecificrisks.

Figure 1: Domestic Financial Stability Risk Map


Table 1: Risks to Financial Stability for the upcoming six months1

Risk Change from Sep2013 Assesment

Probability Impact Probability Impact

Macroeconomic Environment risks Medium Medium Down Unchanged

Global economic slowdown Down Unchanged

NAD/ZARdepreciation Unchanged Unchanged

Exportdemandfalls Down Unchanged

InternationalReservesfall Unchanged Unchanged

Household Debt risks Medium Medium Up Up

Household debt increases Up Up

Corporates Debt risks Low Low Unchanged Unchanged

Corporates debt increases Unchanged Unchanged

Banking Sector risks Low Low Unchanged Unchanged

Bankinginstitutionmaturitymismatch Unchanged Unchanged

Payment System risks Low Medium Down Down

Securityofretailpayments Down Unchanged

Settlementinlastwindow Unchanged Unchanged

NBFI risks Low Medium Unchanged Unchanged

Contagionamongstfinancialinstitutions Unchanged Unchanged

Assetexposuretocapitalmarket Unchanged Unchanged

NSXassetpriceinflation Unchanged Unchanged

Risk analysis key High Medium Low

1The ‘Risk’ column presents the risks to financial stability as assessed going forward six months (i.e. the period Jan – Jun 2014) and the ‘Change’ column presents the change from the risk assessment, as it was presented in the previous FSR, in this case the September 2013 FSR.


A. Risks Stemming from the External Macroeconomic Environment

Therisksstemmingfromtheexternalmacroeconomicenvironmentarelikelytoremaincontainedand

may diminish during the next six months on account of enhanced financial stability in emerging markets

and sustained economic recovery in advanced economies. The initial pessimistic scenario for emerging

markets expected upon announcement of theUSFed’s tapering of itsQuantitative Easing (QE) program,

appears to have abated so far,with somewhat regained stability of leading emergingmarkets’ currencies

andforeigncapitalflows.Goingforward,theexternalenvironmentmaybebroadlystableastheUSclarified

its expected exit fromQE, largely guided by accommodativemonetary stance and a broad approach to

macroeconomicassessmentsonthefinancialhealthoftheAmericaneconomy.

ThedepreciationofthenominalRand/US$dollarexchangerateexperiencedduringthelastquarterof

2013appearstobecontained.Onaverage,theRandtradedatR9.2againsttheUSDduringthefirsthalfof

2013,anddepreciatedfurthertoR10.18duringthesecondhalfof2013.However,therandhasappreciatedin

nominaltermsintherecentpastfollowinga50basispointincreaseintheSARB’sreporateinJanuary,aswell

asdiminisheduncertaintyabouttheQEexitstrategyoftheUSFederalreserve.ByearlyApril2014,theRand

tradedataroundR10.6perUSdollar,downfromR10.9perUSdollarinlateJanuary/earlyFebruary2014.

Despiteexchangeratevolatilityandseveredroughtthedomesticeconomydisplayedasatisfactory

performanceduring the secondhalf of 2013, largely on account of adynamic construction sector

and limited pass through from the exchange rate depreciation to domestic inflation. Domestic engines

ofgrowth,includingsizeableconstructionactivityintheminingsector,sustainedabriskgrowthofthelocal

economy.Also,relativelyrapidgrowthofthetertiarysector,particularlywholesaleandretail tradesuggests

astronggrowthofprivateconsumption,albeitputtingpressureon thecentralbank’s international reserve

position.Monthly inflationrateshaveremainedrelatively low,withanannual inflationrateof5.6percentfor

2013,downfrom6.7percentin2012.Goingforward,theNamibianeconomyisprojectedtoexpandfurther

to5.3percentin2014,whileinflationisexpectedtoremainlow,beforeacceleratingmildlylaterintheyear.

In sum, in terms of the overall macroeconomic risks assessment, the risks remain unchanged since

the latest FSR,whiletheexternalenvironmentissomewhatmorebenignthanearlyassessedonaccountof

diminisheduncertaintiesaboutanabruptQE’sexitpolicyimplementation.

B. Risks Stemming from Domestic Households and Corporate Debt

HouseholdSector

Household debt as a share of disposable income increased from 83 percent at end-June 2013 to

87 percent by end-December 2013, thus warranting strong monitoring. The rise in the household

indebtednessratioislargelyattributedtoafasterincreaseinbankcredittohouseholdsrelativetothegrowth

inhouseholds’disposable income.During thesecondhalfof2013,credit tohouseholds increasedby8.2

percenttoN$36.6billion,whiledisposableincomeroseby4.3percenttoN$46.8billion.Onayearlybasis,the

credittohouseholdsincreasedby15.0percent,whilethegrowthindisposableincomesurgedby8.9percent.


AswashighlightedinpreviousFSRs,householddebtispredominantlymortgageloans,contractedatvariable

interestrate.Assuch,goingforward,anyincreasesininterestratelevelsmayplaceanadditionalburdenin

debt service costs.

CorporateSector

Corporatedebtlevels(asashareofGDP)arehigherthanyearsback(albeitdecliningmarginallybetween

end-Juneandend-December2013),butare,inprinciple,supportingvaluablefutureexportpromotion

activities.Assuch,risksofcorporatedebtremain lowandunchangedfromearlierFSRassessments,but

warrant monitoring, going forward, as new corporate debt and debt service costs increase. Large exposures

to manufacturing, as well as to transport and logistics, also warrant oversight due to concentration risks.

C. Risks Stemming from the Performance of the Banking Sector

Thereviewofthebankingsectorandstresstestingthebooksofthecommercialbankinginstitutions

reveal that the industry remains adequately capitalised, however some structural patterns of the

balance sheets require monitoring. The results of the stress testing exercise suggest that the commercial

bankinginstitutionsareabletowithstandashocktothebankingsystem2.It isalsoworthnothingthatnon

performing loansonmortgagescredit remainatvery loaw levels.Despite the testing results,monitoring is

warranted,especiallyonthehighexposureofthecommercialbankinginstitutionstomortgageloans,which

continues to remain a concern.

Theinherentriskofbankinginstitutionmaturitymismatchremainsunchangedforthenextsixmonthi.e.

thesameasobservedinFSRinSeptember2013.Thematuritymismatchisevidentinthehighproportion

ofcreditextendedtothemortgagesectorandthefactthat,ontheliabilityside,demanddepositsconstitute

themajorityofdeposits.Otherwise,thebankingsectorremainscompliantwithregulatoryliquidityandforeign

exchangeexposurerequirements.

D. Risks Stemming from the Performance of the Non-Banking Financial Sector (NBFIs)

The NBFIs predominantly manage assets to support liabilities in respect of beneficiaries and/or

policyholders. Specifically,pensionfundsandlong-terminsurersmanageassetsofaboutN$142billionto

supportliabilitiesofapproximatelyN$137billion.Theassetsoftheseinstitutionsareinvestedthroughunittrust

schemes and investment managers, although this is more prevalent for pension funds than long-term insurers.

These institutions invest their assets over a medium to long-term period and as such assume investment risk

as a result of prolonged exposure to the domestic, regional and global capital markets.

Aslumpinthedomesticcapitalmarketorwithinthecommonmonetaryarea(CMA)couldposearisk

to the assets of key NBFIs.Thiscouldforinstancebecausedbyweakeconomicperformanceintherest

ofAfricaandtheworldatlarge.Itshouldbenoted,nonetheless,thatanincreasingportionofearningoflisted

2 See the highlights on stress testing results under section V (i.e. Performance of the Banking Sector).


equityontheJSEarerelatedtoforeignactivities(miningcompanies,telecommunication,etc.),thereforeless

exposedtoeventsinSouthAfricaspecificallyonly.However,theassetsofanumberofkeyNBFIs,particularly

longterminsuranceandpensionfunds,couldpotentiallycomeunderduress.

E. Risks Stemming from the Payment and Settlements System

TherisksemanatingfromthepaymentandsettlementsystemremainasreportedintheSeptember

2013FSR.AnumberofdisruptionstoNISSwererecordedoverthesecondhalfof2013,butdidnotposeany

majorthreattofinancialstability.Conversely,twodisasterrecoverytestsweresuccessfullyconductedduring

thesecondhalfof2013,whichincreasestheavailabilityofNISS.Theinadequaciesintheoperationalcontrol

environment,asidentifiedintheSeptemberFSR,remain.Additionally,atrendtowardsmorepaymentsbeing

processedinthelastsettlementwindowintheNISS(i.e.Window3,15H00-16H40)wasobservedduringthe

lasthalfof2013.ThisiscountertotheidealofsettlementsoccurringinWindow1(i.e.08H00-12H00).The

reasonsforthisaretemporaryanditisexpectedthateffortswillbemadetoreversethetrendinthenextsix

months.Besides,therehavebeenalotofimprovementsintheregulatorysphere,whichhashelpedanchor

theriskprofileofthepaymentandsettlementsystem.Whencalculatedasaproportionofthetotalamount

transactedbyNamibians using cheques andpayment cards (i.e. debit, cheque/hybrid, credit, etc.), fraud

tosales lossesdeclined to0.01percentduring thesecondhalfof2013,witha turnoverofN$18.4billion

(comparedto0.03percentinthefirsthalfof2013whentheturnoverwasN$16.8billion).


III. Macroeconomic Environment

SincethelastFSRreportofSeptember2013,globalactivitystrengthened,withrecentdatapointing

at further improvements. Advancedeconomies,mainlytheUS,UKandJapan,havebeenrecoveringsince

mid-2013,thuscomplementingsustainedrelativestronggrowthintherestoftheworld.Followingaperiod

of heightened turbulence in foreign exchange markets in leading emerging market economies (including

SouthAfrica),exchangeratevolatilityandcapitaloutflowsappeartohavesubduedintherecentpast,with

outputinthoseeconomiescontinuingtogrowatarelativelystrongpace.TheNamibianeconomyhasbeen

somewhatshelteredfromthereportedvolatilityinglobaltradeandfinance.Factorsexplainingthedomestic

economy’sresilienceincludeindigenoussourcesofgrowth(i.e.sizeableconstructionintheminingsector)and

alimitedpassthroughfromexchangeratedepreciationontoinflation.Goingforward,risksstemmingfromthe

macroeconomic environment appear to be somewhat contained and diminishing.

Global Economic Growth

Global activity strengthened during the second half of 2013, with recent data pointing at further

marginal improvements in advanced economies.Theaccelerationofeconomicactivityinthesecondhalf

of2013was largelysupportedbyareboundof theAmericaneconomyaswellas improvedgrowth in the

Eurozone.DespiteamarginalmoderationinrealGDPgrowthinemergingmarkets,growthcontinuedtobe

relativelyhigh,comparedtoadvancedeconomies.Goingforward,globalgrowth isprojectedto improveto

3.6percentin2014,from3.0percentin2013,andtorisefurtherto3.9percentin2015largelyonaccountof

therecoveryinadvancedeconomies(IMFWorldEconomicOutlook,April2014)(Figure2).Initially,the2013

outputforecastswerenotoptimistic,astheywereovershadowedbytheFed’sannouncementtoscaledown

itsquantitative-easing(QE)program,whichheightenedvolatilityintheglobalfinancialmarkets,particularlyin

the main emerging market economies. These macroeconomic risks, however, have diminished in the recent

past,astheUSprovidedmorecomfortaboutaslowerphasingoutofitsQEtaperingapproachthaninitially

assumedbymarkets.

Asnoted,theUShasbeenanengineofgrowthsincethesecondhalfof2013,whilegrowthprospects

in other advanced economies also improved.TheUSeconomicperformanceimprovedthroughout2013,

withannualgrowthstandingat2.6percentinthefourthquarter,comparedwith4.1percentgrowthinthethird

quarter.Fortheyearasawhole,theeconomygrewby1.9percentin2013anditisexpectedtogrowby2.8

percentin2014and3.0percentin2015.Similarly,theUKeconomygrewby2.7percentinthefourthquarter,

whilerealGDPgrowthincreasedby1.8percentin2013.Itisprojectedtogrowby2.9percentand2.5percent

in2014and2015,respectively.Likewise,realGDPgrowthforEuroAreaimprovedfurtherfrom-0.3percentin

thethirdquarterof2013to0.5percentinthefourthquarter,whichmarkedaturnaroundfollowingsixquarters

ofnegativeoutputgrowth.Onanannualbasis,theEuroAreashrankby0.5percentin2013,althoughit is

expectedtogrowby1.2percentand1.5percentin2014and2015,respectively.

Economic growth in emerging markets remained robust, notwithstanding earlier expectations for a

deceleration.Chinagrewby7.7percent in the fourthquarter, despite earlierworries about ahard

landing. RealGDPgrowthinIndiaeasedto4.7percentinthefourthquarterof2014,largelyduetotighter

credit conditions that had an adverse impact on investment. South Africa, however, showed a lacklustre

performancewithgrowthofabout2.0percentinthefourthquarterfrom1.7percentintheprecedingquarter,


drivenmainly by economic activities in themining and quarrying, construction,wholesale and retail trade

aswell as transport, storage and communication sectors. Therewas also a situation of sizeable financial

imbalancesin2013.TheIMFprojectsthatSouthAfrica’srealGDPgrowthwillincreaseto2.3percentin2014

from1.9percentin2013onthebackofslightrecoveryinconsumptionandinvestment.Itisprojectedtogrow

furtherto2.7percentin2015.RiskstotheSouthAfrica’seconomicgrowthareparticularlyexpectedfromthe

effectofthecontinuousstrikesintheminingindustryandtheelectricitysupplyconstraints.

Figure 2: Global Growth (2012-2015)

Source: IMF World Economic Outlook update, January 2014, *=projected

Global Financial Markets

Advanced Economies

Generally,during2013andintherecentmonths,globalequitymarketindicescontinuedtoimprove

in advanced economies, while financial volatility continued to decline. Thiswaslargelyattributedtothe

impactofbroadlyaccommodativemonetarypoliciesworldwideandimprovingglobaleconomicoutlook.The

optimisticsentimentmanifesteditselfinsubstantialgainsinequitymarkets,sizeableinflowsintoequityfunds,

and unabated tightening of credit spreads in advanced economies. Besides, risk premium on government

debtofcrisis-hitEuroareaeconomiesdeclinednoticeably.Inlinewiththesedevelopments,theVolatilityIndex

continuedtotrenddownwards,suggestingthatfinancialconditionseasedtowardtheendofthesecondhalf

of2013(Figure3).


Figure 3: Volatility Index

Source: Bloomberg

Goingforward,majorcentralbanksaroundtheworldareexpectedtosustainaforwardlookingstance

aimed at mitigating high volatility in financial markets. In this regard, theUSFederalReserveand the

Bank of England have emphasized that the monetary stance will remain accommodative despite faster-

than-expectedreduction inunemploymentrates.TheFederalReservealsoreassuredmarketsthata fall in

unemploymentpast6.5percentwouldnotnecessarilytriggeraninterestratehike.Consistentwiththisstance,

marketsappeartohavepushedbacktheexpecteddateinterestratehikesbyseveralmonths,suggestingthat

themacroeconomicriskposedbytheUSunwindingofitsQEhasbeensomewhatcontainedsofar.

Emerging Market Economies

CapitaloutflowsinemergingmarketeconomieshavebeenamainconcernsincetheFedannounced

thatitwillstarttaperingofitsQEprograminmid-2013.Althoughtheannouncementofthetaperinghad

beenexpected for long, it still resulted inportfolio shifts, capitaloutflowsandexchange rateadjustments,

particularlyinlargeemergingmarketswithsizeabledomesticandexternal imbalances.Thus,theexchange

ratedepreciationsintheemergingmarketstookafullswinginthethirdandfourthquarterof2013.InSouth

Africa,theseeffectstranslatedintheRand/USdollarexchangeratedepreciationfromanaverageofR9.21in

thefirsthalfof2013toanaverageofR10.1inthesecondhalfof2013(Figure4).


Figure 4: Currency movements of the Rand against the US Dollar

Source: Bloomberg

TheSouthAfricaReserveBank(SARB)increaseditsbenchmarkinterestrateto5.5percentfrom5.0percent

on29 January2014, in response to concerns regardingunderlying inflationary forces stemming from the

exchangedepreciationinlate-2013.ItwasthefirstinterestrateincreasesinceJune2008.Theprimaryconcern

wasthataweakerRandwouldfuel inflation,andconsequentlythreatentheBank’s3-to-6percent inflation

target.ItisworthnotingthataverageinflationinSouthAfricahasbeenhoveringjustbelowthe6.0percent

uppertargetceilingforlong(Table2).

Table 2: South Africa CPI index and annualized monthly inflation rate

2012 2013 (Index, Dec 2012 = 100)

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Index 126.1 126.4 126.7 100.3 101.3 102.5 102.9 102.6 102.9 104 104.3 104.8 105 105.1 105.4

Rate (%) 5.6 5.6 5.7 5.4 5.9 5.9 5.9 5.6 5.5 6.3 6.4 6.0 5.5 5.3 5.4

Source: Statistics South Africa

TheSouthAfricanequitymarket’s indexmarchedalongimprovementsinequity indicesaroundthe

worldduring2013andintheearlymonthsof2014(Figure5).


Figure 5: The JSE Africa All Share Index

Source: Bloomberg

DomesticEconomy

Output and Inflation

TheNamibianeconomyexperiencedarelativelystronggrowthandlowinflationduring2013,which

is expected to continue into 2014.Accordingtothepreliminarynationalaccounts,thedomesticeconomy

isestimated tohavegrownby4.4percent in2013and it isprojected toexpandby5.3percent in2014,

accordingtoBoN’sstaffprojections.Thegrowthin2013wasmainlydrivenbyinvestmentsandconstruction

activitiesintheminingsectorandpublicsectorinfrastructureprogrammes.Inflationforthesecondhalfof2013

remainedlowat5.3percentcomparedto6.3percentduringthefirsthalfof2013.Monthlyinflationrateshave

remainedrelativelylowwithanannualinflationrateof5.6percentfor2013,downfrom6.7percentin2012.This

isexplainedbytheslowdowninfoodandtransportinflation.Inflationisexpectedtoremaininthesingle-digits

fortheremainderof2014.


3

IV. Domestic Households and Corporate Debt Indicators

Household Indebtedness3

SincethelastissuanceoftheFinancialStabilityReportinSeptember2013,householdindebtedness

ratio increased further and remains relatively high by regional and international comparisons. This

increase in indebtedness ratios is largely due to a rapid rise in the bank credit extended to households,

whilehouseholds’disposableincomegrewatamoderatepace.Thehouseholddebtserviceratioroseonly

marginallyduringthelast6-7months.Theincreaseinthehouseholdindebtednessratiorepresentsariskto

thefinancialsector,whichwarrantstightmonitoringgoingforward.

Household Debt to Disposable Income

Thelevelofhouseholdindebtednessincreasedto87percentbyend-December2013,comparedto84

percentbyend-June,largelyonaccountofasubstantialriseinbankcreditextendedtothehousehold

sector (Table 4 and Figure 6). Credit extension rose at a brisk pace on account of a spike in instalment

credit(increasingatanannualrateof16.6percentbyDecember2013)andsustaineddoubledigitgrowthin

mortgagecredit(i.e.,increasingby13.3percentduringthesameperiod).

Table 4: Household Debt to Disposable Income

N$ millions 2009 2010 2011 2012 2013 2013

Dec Dec Dec Dec June Dec

Total (Disposable Income) (N$ mill) 29515 33130 36511 41991 44901 46811

Credit to Individuals/Households (N$ mill) 23256 24856 27917 31832 33858 36620

Household Debt to Disposable Income (%) 79 75 77 74 75 78

Adjusted Credit to Households (N$ mill) 25930 27714 31127 35492 37752 40831

Adjusted Credit to Disposable Income (%) 88 84 85 83 84 87

Ontheotherhand,disposableincomegrewatsingledigitsmainlyonaccountofimprovedtaxcollectionsby

theTaxRevenueauthority,whosetaxcollectioneffortsoutweighedtheimpactofareductioninhousehold/

individualincometaxatratesprovidedinthe2013/14fiscalbudget.

See Appendix 2 on the methodology


4

Figure 6: Household Debt and Disposable Income growth (by quarters)

Theratioofhouseholddebttodisposableincomeremainshighbyregionalandinternationalcomparisons

in an environment of historically low nominal interest rates(Figures7and8).HouseholddebtinNamibiais

predominatelyintheformofmortgagecredit,4 contracted at variable interest rates.

Figure 7: Selected Interest Rates 2008-2013

Over 50 percent of credit extension by the commercial banking institutions is towards mortgage loans.


5

Namibia’shouseholdindebtednessratiosremainaboveSouthAfrica’sandthegapbetweenthetwocountries

ratioswidenedduring2013 (Figure8).Namibia’shousehold indebtedness ratio isalsoconsideredhighby

international comparisons.

Figure 8: Household Debt to Disposable Income: Namibia and South Africa

The debt servicing ratio is a measure of the financial burden that the repayment of debt places on the average household, relative to its income. The measure is designed to illustrate the percentage of households’ incomes being spent on the servicing and repayment of debt. The ratio is calculated based on individuals’ gross income and total household debt, based on normal amortisation formulas using estimated outstanding loan duration, average lending rates and the outstanding balance on each class of loan.

Source: Bank of Namibia, South African Reserve Bank

Debt Servicing Ratio5

Thehouseholddebtserviceratiohasremainedvirtuallyunchangedsinceend-June2013,thetrend

that has been observed since 2009 (Table5andFigure9).Theratiostoodat20.1percentattheendof

December2013,representingamarginalincreaseof0.9percent,comparedtoend-June2013,accordingto

BoN’sstaffestimates.Thegeneralconstantdebtserviceratiolargelyreflectssustainedgrossanddisposable

income growth, attributable to sliding individual income tax, increase in compensation to employees and

accommodativemonetarypolicystancesince2009.


Table 5: Debt Servicing Ratios

Gross Income Growth (YoY)

Disposable Income Growth (YoY)

Annual Debt

Servicing Growth (YoY)

Debt Servicing to Gross Income

Debt Servicing

to Disposable

Income

Adjusted Debt

Servicing to Gross Income

Avg. Prime Rate

Dec 06 11 11 26 18 20 27 12

Dec 07 15 16 14 18 20 26 14

Dec 08 15 15 9 17 19 25 15

Dec 09 9 9 -6 15 16 21 12

Dec 10 13 12 0 13 15 19 11

Dec 11 10 10 14 13 15 20 10

Dec 12 15 15 13 13 15 19 10

Jun 13 6 4 6 13 15 19 9

Dec 13 12 9 17 14 15 20 9

Figure 9: Debt Servicing Costs


6

Corporate Debt

Afterincreasingrapidlyduringthefirsthalfof2013,totalcorporatedebtstockdecreasedfromN$54.8

billionbyend-June2013toN$53.7billionbyend-December2013. The decline in total corporate debt

reflectstrendswithforeignprivatecorporatedebt.Thereductioninforeigndebtconcealssizeableforeigndebt

reductionsonaccountofdebtconversionintoequity(swap)byaprominentminingcompanythatwasoffset

bynewcorporate indebtednesstoforeigncreditors. Corporatedebt levels (asashareofGDP)arehigher

thanyearsback,butare, inprinciple,supportingvaluablefutureexportpromotionactivities.Assuch,risks

ofcorporatedebtremain lowandunchangedfromearlierFSRassessments,butwarrantmonitoringgoing

forward, as new corporate debt and debt service costs increase. Large exposures to manufacturing, as well

as to transport and logistics, also warrant oversight due to concentration risks.

Totalcorporatedebt,which increasedsteadily (innominalterms)starting2009,declinedmarginally

betweenend-Juneandend-December2013(Table6).Thedeclineinthedebtstockreflectedacontraction

in foreigndebt,albeitconcealing importantfinancialoperationsbycorporates.The latter includedmainlya

N$11billiondebt-equityswapbyaminingcompanyduringthethirdquarter,whichcoincidedwithnewforeign

borrowingbyothercorporations.Thesewereagainpredominantlyexport-ledminingcompanies.

Table 6: Domestic and External Corporate Debt (Private Sector and SOEs)

2009 2010 2011 2012 2013 2013


Domestic (%) 52.1 47.2 39.0 44.9 40.6 43.6

Foreign (%) 47.9 52.8 61.0 55.1 59.4 56.3

Total Debt (million) 26230 32472 41867 45922 54854 53655

YoY Change in % (Total) 2.1 23.8 28.9 9.7 23.0 -2.2

GDP (Nominal, N$ mill) 75070 81016 91658 107323 114042 120760

Debt to GDP Ratio (%) 34.9 40.1 45.8 42.8 48.1 44.4

Thecompositionofcorporate’stotalindebtednesschangedsincetheissuanceoftheFSRinSeptember

2013(Table7).Theshareofdomesticdebtincreased,whilethatofforeigndebtdeclined,despiteasizeable

increaseinStateOwnedEnterprises(SOEs’)foreignindebtedness,albeitfromalowerbase(Figure10).The

foreigndebtsforSOEsarelargelyguaranteedbythegovernment.Byend-December2013,totalgovernment

guaranteeswereequivalentto6percentofGDP,whichiswithinthesetsafetytargetof10percentofGDP.

Therefore,therapidgrowthinSOEs’foreigndebt,probablyposeslimitedfinancialstabilityriskduringthenext

six months.

This is an estimated figure.

6


Figure 10: Credit to Corporations, 2005 - 2013

Table 7: SOEs and Private Sector Debt Breakdown

N$ Millions 2009 2010 2011 2012 2013 2013

Dec Dec Dec Dec Jun Dec

Private Sector (Foreign) 11065 15742 24149 23827 29709 26096

Private Sector (Local) 13155 15013 15876 20049 21110 22702

SOEs (Foreign) 1510 1401 1389 1455 2860 4129

SOEs (Local) 499 316 453 592 1176 727

Total 26229 32472 41867 45923 54855 53654

Foreign (% Total) 47.9 52.8 61.0 55.1 59.4 56.3

Local (% Total) 52.1 47.2 39.0 44.9 40.6 43.7

Corporates’foreigndebtservicepeakedinthethirdquarterof2013,beforelevellingofftoaboutN$800

million in the last quarter of the year(Table8).Theimplementationofthereferreddebt-equityswapbyalocal

miningcompanyballooneddebtservicecostsrecordedinQ3-2013.Thereafter,quarterlydebtservicecosts

convergetoaveragelevelsregisteredinthepreviousthreeyears(samequarter).

Table 8: Foreign Private Sector Debt and Debt Servicing N$ Million 2009 2010 2011 2012 2013 2013 2013*

Q4 Q4 Q4 Q4 Q2 Q3 Q4

Total Foreign Private Sector Debt 11065 15742 24149 23827 29709 18925 26096

Total Foreign Private Sector Debt Servicing

1402 304 473 576 1763 12741 792


Large Exposures

CommercialbanksinNamibiaoftenlendalargeportionoftotalcorporateloanstoindividualcompanies

and/orgroupsofcompanies inasinglesector.Bysodoing, these loanshavethepotential tobecome

asystemic risk tooverall financial stability, as thiscouldamount toexcessconcentration risk to individual

companies or sectors.

AsnotedintheSeptember2013FSR,largeexposurestothedomesticcommercialbanksgrewstrongly

duringthefirsthalfof2013.Thetotalexposuregrewby37.5percentbetweenDecember2012andJune

2013,fromN$3.8billiontoN$5.2billion(Table9).Largeexposuresofthedomesticcommercialbanksstabilized

towardstheendofDecember2013,butstillremainedsignificantforspecificsectors. Largeexposuretofishing

and tourism unwind, while exposures to manufacturing remained sizeable, but unchanged with respect to

levels reached by end-June 2013.Overall, large exposures to themanufacturing & food and transport &

logisticssectorsmadeup56percentoftotallargeexposuresduringtheperiodunderreview(Figure11).This,

per se, constitutes concentration risk for domestic commercial banks and warrants monitoring.

Table 9: Large Exposures by Sector

N$ millions 2009 2010 2011 2012 2013 2013


Fishing(5) 385 238 228 180 65 0

ManufacturingandFood(4) 167 1024 1264 1413 1598 1512

Miningandminerals(8) 283 550 188 285 754 657

Property/Construction(10) 329 277 757 597 588 529

Tourism(2) - - 74 38 257 0

TransportandLogistics(7) 1521 785 718 913 1293 1484

Other(16) 316 1390 1212 340 619 1215

Total (52) 3 001 4 263 4 440 3 765 5 175 5 396

(Percentagechange)

Fishing(5) 35 -38 -21 -21 -64 0

ManufacturingandFood(6) 4 513 23 12 13 -5

Miningandminerals(8) -38 94 -66 52 165 -13

Property/Construction(11) -31 -16 174 -21 -1 -10

Tourism(2) 0 0 0 -49 580 0

TransportandLogistics(7) 6 -48 -9 27 42 15

Other(17) -25 339 -13 -72 82 96

Total (56) -12 42 4 -15 37 4


Figure 11: Large Exposures by Category

AttheendofDecember2013,largeexposuresasashareoftotalprivatesectorcreditremainedbelow

10percent,butwashigherthanthelevelregisteredatend-December2012(Table10).Theincreaseinthe

latter ratio warrants monitoring to detect possible concentration risks to commercial banks.

Table 10: Large Exposures

2009 2010 2011 2012 2013 2013


Total Largest Exposures (million) 3 001 4 263 4 440 3 765 5 396 5 396

TotalPSC(million) 37751 41838 44575 51881 54968 59323

PSCtoBusinesses(million) 13155 15013 16411 20049 21110 22702

LargeExposurestoPSC(%) 7.9 10.2 10.0 7.3 9.8 9.1

LargeExposurestoBusinessPSC(%) 22.8 28.4 27.1 18.8 25.6 23.8


7

V. Performance of the Banking Sector

Since the review inSeptember2013,commercialbanking institutions remainsound,profitableand

adequately capitalised as shown in the aggregated indicators of the banking sectors. Going forward,

thecommercialbankinginstitutionsareexpectedtoremainsoundandhealthy.Profitabilityindicatorsincreased

inthelatterhalfof2013,whileatthesametimetheratioofnon-performingloansdecreasedsincethereview

in September 2013. Therewere nomajor changes observed in the sector’s structure and the fourmajor

commercial banking institutions continued to dominate the Namibian banking sector with a Herfindahl-

HirschmanIndex(HHI)of2729inDecember2013,comparedto2734pointsJune20137.

Overview of the Banking Sector Landscape

AswasalludedtointheFSRofSeptember2013,thebankingsectorlandscapegrewwiththecentral

bank granting provisional authorization to E-Bank to conduct business as a banking institution in

NamibiainJuly2013.Theprovisionallicencewasvalidforaperiodofsixmonths,duringwhichE-Bankwas

requiredtoreadyitselftocommencebankingoperations.Theprovisionallicencewasextendedforanothersix

monthsin2014.

During2013thecentralbankcarriedoutareviewtoconsolidatethecurrentlegislationsconcerning

banking institutions.ThereviewconsolidatedtheBankingInstitutionsAct,1998(ActNo.2of1998)andthe

consequentBankingInstitutionsAmendmentAct,2010(ActNo.14of2010).Thereview,amongstothers,

aims to strengthen provisions relating to foreign shareholding in banking institutions in line with the Namibian

FinancialSectorStrategy.Otheradditionalregulatoryamendmentsrelatedtodefinitionsofbankingbusinesses,

resolutionmeasuresandrecoveryplansoftroubledbankswerealsoincorporated.TheBillisexpectedtobe

tabledinParliamentin2014.

Balance Sheet Structure

Inthelasthalfof2013,thebankingsectorcontinuedtobecharacterisedbyanupwardtrendintotal

assets (Figure12).Thetotalassetsofthebankingsectorrosebyanannualgrowthof14.7percentatend

December2013,ascomparedto12.7percentatendJune2013.Netloansandadvances,whichconstitutes

over75percentoftotalassets,continuestobethemaindriverofassetgrowth,risingby7.6percentbetween

thefirsthalfandsecondhalfof2013.Withinthislendingcategory,residentialmortgagesandinstalmentsdebt,

with41percentand16.2percentshareofnetloansandadvancesasatendDecember2013respectively,rose

annuallyby15.5percentand13.5percent.

A score tending to zero is deemed extremely competitive, while a score tending to 10 000 points is deemed extremely uncompetitive (monopoly).


Figure 12: Banking Sector Assets and Growth Rate

Depositscontinued todrivegrowthon the liabilitysideof thebalancesheet.Deposits roseannually

by12.4percent, raising theshareof total funding-related liabilities to97.1percent in thefirsthalfof2013

ascompared to96.3percentduring thefirsthalfof2013.Currentaccounts,calldepositsandnegotiable

certificatesofdepositsrepresentedacombined80percentoftotaldepositsasatend2013(Figure12).During

theperiod,currentaccountsandsavingsaccountsgrewannuallyby22.5and15.3percentrespectively,while

fixedandnoticedepositsdeclinedby25.2percent.Thebiggestchangewasobservedfromforeigncurrency

deposits,whichincreasedby68percent.

Figure 13: Composition of Banking Institution Deposits


Earnings and Profitability

Profitability indicators of the banking sector continued to remain relatively high by international

standardsandreachedtheirhighestlevelsfor2013duringtheendoftheyear.Bankingsectorprofitability,

asmeasuredbyReturnonAsset(ROA)andReturnonEquity(ROE),increasedfrom2.11percentand21.98

percentattheendofJune2013to2.37percentand24.82percent,respectively,asattheendofDecember

2013(Figure14).

Netinterestincometototalincomedecreasedfrom69.67asatJune2013to68.43asatDecember2013,

while expenses8grew6.09percentforthesixmonthsendingJune2013comparedto11.99percentannual

growthforthesixmonthperiodendingDecember2013.Thecostswereattributedtoariseinstaffingcosts,

consultant and managements fees, administration and overhead, and auditing costs.

Figure 14: Return on Assets and Return on Equity

Capitalisation

In linewithpreviousperiods,during the lasthalfof2013, thebankingsector remainedadequately

capitalised, supported by retained profits9.Therisk-weightedcapitalratio(RWCR)remainedat14.4percent

forbothJune2013andDecember2013,whileTier-1risk-basedcapitalratiorosefrom10.7percentto11.5

percentduringtheperiod.TheprevailingsupervisoryfloorsfortheRWCRandTier-1capitalremainedat10.0

percentand7.0percent,respectively.

9

8 The sum of interest and other expenses.

Retained profits for the industry doubled between June 2013 and December 2013


Liquidity

The banking sector remained above the regulatory liquidity and asset holding10 requirements,

respectively, during the end of the year.Theliquidassetratio(liquidassetstoaveragetotalliabilitiestothe

public),acoreindicatoroffinancialsoundness,rosefrom11.1percentattheendofthefirsthalfof2013to

11.7percentattheendofthelasthalfof2013,whichremainsabovethe10.0percentrequiredlevel(Figure15).

Thebankingsectoralsoremainedabovetheregulatoryminimumassetholdingrequirements,andincreased

surplusstockbetweenJune2013andDecember2013byapproximatelyN$500million.

Figure 15: Liquid Assets and Liquid Ratio

ThecompositionofliquidassetsunderwentsomechangesbetweenJuneandDecember2013.The

largest liquid asset category continued to be the Government Treasury Bills, which increased from 54.0

percentoftotalliquidassetsasattheendofJune2013to58.7percentattheendofDecember2013.The

representationofnotesandcoinsalsoincreasedbetweenthetwoperiods,from10.9percentto12.5percent.

ThemostnoticeablechangeinliquidassetcompositionwascashbalancesheldatBankofNamibia,which

madeup3.22percentasatendDecember2013,comparedtozeropercentatJune2013(Figure16).Lastly,

a declinewas observed in the relative holdings of other liquid assets, namely strip bonds, Public Sector

Enterpriseandothersecurities,aswellasotherliquidassets.

10 The minimum asset holding requirement is 10 percent of average total liabilities to the public.


Figure 16: Composition of Liquid Assets

Asset Quality

Creditrisk,asexpressedbytheratioofnon-performingloans(NPLs)tototalloans,startedtodecline

during the second half of the year.TheNPLratiodeclinedby0.17percentagepointsbetweenJune2013

andDecember2013,from1.46percentto1.29percentrespectively(Figure17).Thisdevelopmentisinline

withthegeneraloveralldownwardtrendinNPLsobservedsinceatleast2009.Creditriskremainedthemajor

riskontheassetsideofthebankingbalancesheet,withbanklendingcomposingapproximately76percentof

bankingassetsasatDecember2013.

Figure 17: Banking Asset Quality


TheoveralldeclineinNPLsatendDecember2013wasduetoadeclineinmortgageNPLs,thoughan

increase in in the weight of other forms of credit extended was observed. The weight of mortgages as

aproportionoftotalNPLsdecreasedbetweenJune2013andDecember2013,from55.7percentto53.7

percent(Figure18).However,anincreaseintheweightofinstalmentcreditasaproportionoftotalNPLs(from

12.53to13.75),overdraftsasaproportionoftotalNPLs(from13.79to14.90)andunsecuredlendinginthe

formofcreditcardloansasaproportionofNPLs(from1.40to1.86)overthesameperiodwasobserved.The

representationofpersonalloansaswellasotherloansandadvancesintotalNPL’salsodecreasedoverthis

period.

Figure 18: Non-Performing Loans by Category

ReversingthegeneraltrendobservedbetweenDecember2012andSeptember2013,theamountand

rateofdefaultrateswithintheMortgageLoanscategorydeclinedinDecember2013whencompared

toJune2013(Figure19).Thedeclineisinlinewiththeoverallfive-yeartrendobservedindefaultrateswithin

thecategorysince2009.Thedevelopmentcouldbeasaresultofmorestringentlendingrequirementsbythe

commercial banks.


11

Figure 19: Non-Performing Mortgage Loans

Overview of the Resilience of the Banking Sector

Thecommercialbankinginstitutionscontinuetooperate inamannerwhichensuresthat indicators

used to measure the health of the institutions remain within accordance of regulatory requirements. The

BankofNamibiaemploysdata,marketintelligenceandstresstestingmethodologytoascertainthelikelihood

ofdeviationfromtheregulatorylimits,whichcouldposeathreattothehealthyfunctioningofthecommercial

bankinginstitutions,andtakesthenecessarystepsshouldsuchascenarioarise.

Stress Testing for Capital Adequacy

StresstestingwasundertakentodeterminetheextenttowhichCoreTier1capital11 would be able to

withstand an increase in credit risk in the form of an increase in default rates. The tests were conducted

onthefourmaincommercialbankinginstitutionsinthecountry12.Stresstestingisconductedthroughamodel

which linkscreditrisktotheexpected lossesbytrends inProbabilityofDefaultandLossGivenDefault for

varioussectorsoftheeconomy.Thus,givenacommercialbankinginstitution’sexposures,themodelshocks

default rates originating from each of the sector to which it is exposed. These rates are combined with balance

sheetdata, incomestatementsandcapital returns inorder togetanestimateof the institutionsregulatory

capital level.

ForfinancialdataasatDecember2013,thestresstestexerciseindicatesthatthebankingindustryas

a whole is adequately capitalised in the event of an increase in the default rate of the sectors to which

the commercial banking institutions are exposed(Figure20).TheBankofNamibiarequiresthebanking

institutionstocarryhighercapitalbuffersthanexpectedbytheBaselIIqualifications.

Core Tier 1 capital is considered the ‘first line of defence’ capital buffer for the commercial banking institutions in an event of stress. 12 See Appendix B for stress testing methodology in the September

2013 edition of the Bank of Namibia’s Financial Stability Report.


Figure 20: Results of Core Tier 1 Ratio after shock administered, on an aggregate level

Interest Rate Risk

Earningswoulddecreaseovera12-monthperiodbyN$441.6million,comparedtoN$317.8millionas

atendJune2013.Thesimulationresultsalsorevealedthata200basis-pointdeclineininterestrateswould

lead toanN$9.02million increase in thebanking industry’seconomicequityvalueor,equivalently,0.0104

percentincreaseoftheindustry’scapitalvalue.Ontheotherhand,anincreaseininterestrateofthesamesize

wouldresultinequivalent,thoughoppositemovementsinearningsandeconomicvalue.

Foreign Exchange Risk

Thenetopenpositionremainedbelowthe20percentregulatorylimitandwasdeemedadequateto

safeguardthebankingsectoragainstmovementsinforeignexchangeratesinthelasthalfof2013. The

ratioofforeigncurrencyassetsandliabilitiestocapitalinthebankingsectordeclinedfrom3.0percentatthe

endofJune2013to0.15percentattheendofSeptember2013,beforeincreasingto0.64percentattheend

ofDecember2013(Figure21).


Figure 21: Net Open Position as Percentage of Tier-1 capital


13

VI. Performance of the Non-Banking Financial Sector13

SincethelastFSRreportofSeptember2013,thebalancesheetsofnon-bankingfinancialinstitutions

remain healthy. This isexpectedtocontinue in thenextsixmonths.NBFIscontinuetoregisteradouble-

digitgrowthduringtheyearof2013.Theprovidentinstitutionsremainedwellcapitalised,withsolvencylevels

exceedingthestatutoryrequirements.Investmentinstitutionsinvestedmostoftheirassetslocallyinlinewith

regulatoryrequirementsandtheriskappetiteoftheirclients.

Thenon-bankfinancialsectorperformsasignificantroleofchannellingsavingsandtransferofriskof

the public and corporate bodies.TheassetsoftheNBFIarerelativelylargeconstituting149percentofthe

country’snominalGDPor259percentofthemoneysupply(Table11).AsofDecember2013pensionfunds

and long term insurersoriginatedacombined80percentof theassetsof the industry,mostofwhichare

administeredbyunittrustmanagementcompanies,investmentmanagersorbythemselves.

ComparedtothesizeoftheassetsoftheNBFIsasreportedintheSeptember2013FSR,theindustry

grewby 19.5 percent. The growthwas driven by Pension Funds,which increased their asset size from

N$85.8billiontoN$105.3billion(Table11),mainlyonthebackofimprovedreturnsoninvestments.Similarly,

Long-term insuranceassetsgrewfromN$31.7billionasreported in theSeptember2013FSRtoN$36.4

billion.Thethirdlargestcomponent,NaturalPersons,alsogrew-fromN$17.8billiontoN$19.1billion

Table 11: NBFI assets and relative size, December 2013

Figures in N$ Millions Unit Trusts Investment Managers

Other/Direct Total % of Total

LongTermInsurance 1259 18796 16369 36424 20%

ShortTermInsurance 182 373 2906 3461 2%

MedicalAidFunds 49 320 633 1002 1%

PensionFunds 2388 71551 31328 105267 59%

Companies 8292 808 --- 9100 5%

Natural persons 19096 46 --- 19142 11%

Other 1484 3019 --- 4503 3%

Total 32 750 94 913 51 236 178 899 100%

Measure N$Millions %ofmeasure

GDP 120058 149%

Moneysupply 68958 259%

Source: NAMFISA, BON

---: No data.

This section analyses data up to December 2013 only, unless otherwise stated, due to data availability


Duetotheirrelativelargesizeintheeconomy,NBFIsshouldbecloselymonitoredtomitigateagainst

potentialrisks(Table12).Althoughtherewillbedoublecounting,Table12providesanoverviewofhowthe

balancesheetsofdifferenttypesofNBFIshavegrownsince2011,andtheirassetsizesrelativetoGDP.Asis

illustrated,noneofthebalancesheetdecreasedwithrelationtoGDPfortheperiodunderreview.Nevertheless,

constant monitoring is warranted.

Table 12: Size of Balance Sheets of NBFIs

Dec 2011 Dec 2012 Dec 2013

Asset Values N$ million Assets % of GDP Assets % of GDP Assets % of GDP

LongTermInsurance 26736 29 31654 29 36424 30

Short Term Insurance 2 624 3 3 001 3 3 461 3

MedicalAidFunds 768 1 858 1 1002 1

Pension Funds 69 478 76 85 757 80 105 267 88

UnitTrusts 27526 30 32106 30 37267 31

Investment Management 91 665 100 109 110 102 123 322 103

Micro-lending 1501 2 1753 2 2616 2

Nominal GDP (N$ mill) 91 658 107 323 120 058

Source: NAMFISA

GrowthwithintheNBFIsectorremainsrobust.Asat31December2013,theyear-on-yearassetgrowth

(includingloansoutstandingformicro-lenders)forNBFIsallhadpositivegrowth,from17percentformedicalaid

fundsto23percentforpensionfunds.Incomefromcontributionsandpremiumsfortheprovidentinstitutions

(long-terminsurance,shortterminsurance,pensionfundsandmedicalaidfunds)increasedby4.8percentto

N$14.9billionfortheyear2013(Figure22).

Figure 22: Premium and Contribution Growth of Provident Institutions

0

1000

2000

3000

4000

5000

6000

7000

2011 2012 2013

N$

mill

ion

Long Term Insurance Short Term Insurance Medical Aid Funds Pension Funds

Source: NAMFISA


SimilartotheSeptember2013FSRreport,providentinstitutionsremainadequatelycapitalised,with

the solvency levels remaining above the statutory requirements and thus sufficient to withstand any

risk.Thisisexpectedtocontinuegoingforward.Asubstantialproportionoftheliabilitiesofpensionfunds

andlong-terminsurersareassociatedtoinvestmentperformance,thuscapitalmarketvolatilitiesareborneby

policyholdersormembers.Consequentlytheseinstitutionsaresparedfrompotentialsolvencyproblems(the

onlyexceptionisthedefinedbenefitfundswhichareguaranteedbytheirrespectiveemployers).Short-term

insurersandmedicalaidfundsontheotherhandsetasidesolvencycapitaltocaterforanycapitalmarket

volatility.

About50percentoftheassetsofNBFIsareinvestedinthedomesticmarket,includingdual-listingson

the NSX.Pensionfundsinvestaround40percentinNamibia,30percentinCMA(almostexclusivelySouth

Africa) and30percentoutsideof theCMA.However,most assetsofNBFIs (includingpension funds) are

placedwithUnitTrustsandInvestmentmanagers.RefertoFigure23foranoverviewofthejurisdictionalasset

allocationofinvestmentmanagersandunittrustschemesandFigure24fortheassetallocationinformation

ofpensionfunds.Accordingly,investmentmanagersandunittrustsinvests,about50percentinNamibia,40

percentinCMA(almostexclusivelySouthAfrica)andonlyabout10percentoutsidetheCommonMonetary

Area(CMA).

Figure 23: Jurisdictional Asset Allocation of Unit Trusts & Investment Managers (Combined)

Source: NAMFISA


Figure 24: Jurisdictional Asset Allocation of Pension Funds

Source: NAMFISA

SincethelastFSRofSeptember2013,theassetallocationcontinuestoreplicatetheliabilitiesandrisk

appetite of institutions and investors(Figure25).Unittrustsinvestedmorethan55percentoftheirassets

inmoneymarketinstruments.Thisisinlinewiththeriskappetiteofandinstructionsfromtheirmainclients

(naturalpersons).Investmentmanagersontheotherhandinvestedabout50percentoftheirassetsinequity

andapproximately30percentinmoneymarketinstruments.Thiswasexpectedgiventhefactthatmostof

their clients arepension fundsand long-term insurers.Similarly, pension funds investedabout65percent

oftheirassetsinequityand20percentinfixedincome.Theseassetclassessuits(explicitandimplicit)their

liabilities.TheassetallocationoftheseNBFIisexpectedtocontinueinthenextsixmonths.

Figure 25: Asset allocation of unit trusts, investment managers and pension fund, December 2013

Source: NAMFISA


Thegrowthofthecapitalmarketremainslacklustre.Despitethatthemarketcapitalisationoflocallylisted

shares (NSX listings) increasedby69percentduring2013, theaggregatedomesticmarketcapitalisation

remains lowatslightlyoverN$18.7billionat31December2013, in relation to theassetswhichprovident

institutionsaremandatedtoinvestinNamibia.Providentinstitutionsareobligedtokeep35percentoftheir

assets locally.Asat31December2013,pension fundsand long-term insurersexceededdomesticassets

(inclusiveofduallistedshares)requirementbyapproximatelyN$11billion(Figure26).

Figure 26: Domestic Asset Requirement of Pension Funds and Long-term Insurers versus Available Local Investments 14

Source: NAMFISA

Goingforward,thestronggrowthofprovidentinstitutions’andthelimitedstockoflocalequityonthe

NSX may inflate the prices of assets and reduce liquidity on the NSX. Despite the fact that provident

institutions are the largest investors in Namibia, there are other institutions which compete for the same

assetsandconsequentlyputfurtherpressureontheprices.Thusthereisaneedtocontinuemonitoringthe

developments of these assets, however it is expected that the excess assets of pension funds and long term

insurer will be absorbed into the banking sector.

Going forward, the exposure of the banking sector to NBFIs is expected to continue to increase.

Domesticassetrequirementsonprovidentinstitutions,robustgrowthinNBFIsandthebiasofunittruststo

moneymarketinstrumentswill increaseNBFIs’investmentinbankingproductsandthiswarrantcontinuous

monitoring.

14Domestic Assets are calculated to include of NSX free float available

for trading, Government stock, Treasury bills and other corporate

paper. Dual listed shares bought through the NSX are also included.


15

VII. Payments Infrastructure and Regulatory Developments

The payment and settlement systems have performed satisfactorily and exhibited a high degree

of availability since the previous Financial Stability Report (FSR) in September 2013. The payment

infrastructurescontinuetooperateeffectivelyandefficientlywithnomajoroutages.Someoperationalcontrols

arebeingreviewedinordertofurtherstrengthenefficiencies.

The Bank continues with its normal on-going off-site monitoring oversight activities aimed at the

management and resolution of identified operational issues as per the Risk Based Oversight Framework.

TheBankparticipatesonanon-goingbasisinincidentanalysistoidentifywaystopreventsuchincidentsin

the future.

NISSpaymentsduringthesecondhalfof2013increasedcomparedtothefirstsemesterof2013.NISS

paymentsduringthesecondhalfof2013averaged4104paymentspermonthsettled,ata totalvalueof

N$268billion.ThevolumeofpaymentssettledinNISSdecreasedby5percentwhereasthevalueincreasedby

5percentwhencomparedtothesameperiodin2012.Thevalueoftheshareofgrosspayments15 processed

inNISSwas59percentoftotalvaluesettledinNISS,whilstthatoftheretailsystems16was41percentoftotal

valuesettledinNISS(Figure27).

Figure 27: Value of Payments Processed in NISS

Source: Bank of Namibia

Interbank and customer payments 16 The EFT, Cheque and NamSwitch systems


Settlement Windows

Since the last FSR, the likelihood of operational and settlement risks increased slightly as the proportion

ofpayments, intermsofvalue,settledinWindow3increased (Figure28).Settlementwindowperiods

forpaymentssubmittedandprocesseddaily indicatethataround38percentorN$107billion inpayments

wassettledinWindow1(08h00to12h00);21percentorN$56billion,inWindow2(12h00to15h00)and

37percentorN$102billion, inWindow3 (15h00 to16h40).Thus,more thana thirdof thesettlement in

termsof value tookplaceduringWindow3, attributedmainly to theextensionsgranted in thesettlement

ofdiarisedElectronicFundsTransfers(EFT)andcreditcardbatchesthatusuallysettleinWindow1,dueto

operationalissuesexperiencedbytheserviceprovideraftertherecentmigrationofthesepaymentstreams

tonewsystems.Tominimizeoperationalandsettlementrisks,itisidealthatthemajorityofallsettlementtake

placeintheearlierwindows,i.e.Windows1and2.

Figure 28: Values Settled Per Settlement Window in 2013

Source: Bank of Namibia

Disruptions to the Namibia Interbank Settlement System (NISS)

AnumberofdisruptionstoNISSwererecordedoverthesecondhalfof2013,butdidnotposeany

majorthreattofinancialstability.Theoverseerswerepromptlynotifiedofoperationalproblemsaffecting

NISSandthesolutionsthereof.TheNISSavailabilityratiowas99.68percentwhichwasabovetheacceptable

availability levelof98.5percent.Thesystemwasnotavailable for a total of14hoursattributedmainly to

connectivityandcommunicationsoutages(Figure29).Thenon-availabilityofthesystemwasofatemporary

natureandwasovercomewithinareasonableperiodoftimeandposednomajorthreattofinancialstability.

Twodisasterrecoverytestsweresuccessfullyconductedduringthesecondhalfof2013.


Figure 29: NISS Performance Outages

Security of Retail Payments

When calculated as a proportion of the total amount transacted by Namibians using cheques and

paymentcards(i.e.debit,cheque/hybrid,credit,etc.),fraudtosaleslossesdeclinedto0.01percent

during the secondhalf of 2013with a turnover ofN$18.4 billion (compared to 0.03percent in the

first half of 2013when the turnoverwasN$16.8 billion).The payments industry continues tomonitor

signs of emerging fraud trends and maintains collaborative efforts with enforcement agencies and consumer

associations to avert fraud incidents involving retail payment systems. This has contributed to on-going

enhancements to business practices to better protect consumers against new methods of perpetrating fraud,

while a sustained consumer education programme has also helped to increase public awareness on fraud

prevention measures.

Future Developments in Payment and Settlement Systems

TheBankhasundertakentoobtainaccurateandup-to-dateinformationabouttherelativecostsof

payment services in order to attain the objective of cost-effectivenesswhile ensuring the smooth

functioning of payment systems, which is a primary responsibility. The information on the costs of the

provisionofpayment services is critical to theBank in termsof ascertaining theefficiencyof theNational

PaymentsSystem(NPS).Assuch,duringthecourseof2014thecentralbankwillbedevelopinganindustry-

basedpaymentservicescostingmodelbasedontheactivitybasedcosting(ABC)method.

Additionally, in line with improving the effective functioning of the NPS a determination providing

theguidingprinciplesforassessingefficiencyoftheNPSwasgazettedinDecember2013,effective

31 December 2014. Furthermore, during the second half of 2013, the Bank signed a Memorandum of

Understanding(MoU)governingtherelationshipbetweentheBankofNamibiaandthreeothercentralbanks,

i.e.SouthAfricaReserveBank(SARB),theCentralBankofLesothoandtheCentralBankofSwaziland, in

termsof theperformanceof jointoversightof theSADCIntegratedRegionalElectronicSettlementSystem

(SIRESS). This is the regional system catering for cross-border settlement and time critical or high value

paymentsbetweentheSADCcountries.


VIII. Concluding Remarks and Policy Actions

Concluding Remarks

Risks toNamibia’sdomesticfinancialsystemremainbroadlyunchangedsince the issuanceof the

September2013FSR.Theexternalenvironment,whilestillfragile,appearsmorebenignthaninitiallyprojected,

with diminished concerns over Fed’s abrupt exit from itsQEpolicy thatwould pose extremeburdens on

emergingmarkets’exchangeratesandcapitalflows.Improvedeconomicperformanceinadvancedeconomies

andsustainedrelativelyhighgrowthinleadingemergingmarketsbodewellforglobaltradegoingforward.On

the domestic front, the rapid rise in household indebtedness ratios warrants monitoring, although the evidence

fromthecommercialbanks’balancesheetsindicateslimitednon-performingloans,whilethehouseholds’debt

serviceburdenremainsrelativelystable.Corporateindebtedness,particularlyforeignborrowingbydomestic

residents,hasalsobeenstablesincelate2013,butanumberoffinancialoperations,includingasizeabledebt-

equityswapbyaminingcompanyandnewforeignborrowing,meritoversightbytheregulator.

The commercial banking institutions remain stable, profitable and adequately capitalised, as was

indicated by the developments in the sector and confirmed by stress testing exercises. During the

periodunderreviewprofitability indicators increasedwhiledefaultratesfellwhencomparedtotheprevious

FSR.Thesefactors,coupledwithgrowingliquidassets,indicateanimprovedsituationintermsofcreditrisk

and liquiditymismatch compared to the assessment in theSeptember 2013FSR. Lastly, the commercial

banking institutions have also increased their core tier ratios. Notwithstanding the above, the concentration of

banking assets in mortgage assets remains a concern.

BalancesheetsoftheNBFIsremainrobust,butdeemedcontinuousgoingforward,duetotheNBFIs’

linkages to the regional and foreign capital markets.NBFIsremainascreditorsontherestoftheworld,

withsizeablenetforeignassetpositions.Thus,anyforeignfinancialmarketcontagionmightaffecttheirforeign

assetholdings.Onthedomesticfront,investorscitethelackofdomesticassetstoinvestinamajorconstraint

for the sector.

The payment infrastructures continue to operate effectively and efficiently withoutmajor outages.

Someoperationalcontrolsarebeingreviewedinordertofurtherstrengthenefficiencies.

Policy Actions

PrivateSectorDebt

Households

• ThelevelofhouseholdindebtednesswarrantsmonitoringasnotedinSeptember2013FSR.

Corporations

• RisksofcorporatedebtremainlowandunchangedfromearlierFSRassessments,butwarrantmonitoring

going forward, especially taking into account new corporate debt and debt service costs increase .

Large exposures to manufacturing, as well as to transport and logistics, also warrant oversight due to

concentration risks.


17

Banking Sector

• Routineandconcertedworkonliquiditystresstestingisrecommendedasawaytodeterminetheresilience

againstvulnerabilitiespresentedbymaturitymismatching.

• Exposure risk, especially to themortgagemarket, remains a concern and as such thework into the

feasibilityof introducingamacro-prudential tool tomitigate the risk (in the formof loan-to-value limits)

shouldcontinueasitwasannouncedintheMarch2013FSR.

Non-Banking Financial Sector

• InlinewiththeFinancialSectorStrategy,effortstodevelopthedomesticcapitalmarketarestillnecessary.

AdeepenedfinancialsectorcanallowNBFIstoinvestinthedomesticfinancialmarketsandhencereduce

the foreign risk exposure.

• Extendingtheyieldcurveonlong-datedsecuritiesisrecommendedtomitigaterisksstemmingfromNBFIs’

sizeableinvestmentsinshort-termmoneymarketinstruments.Anextendedyieldcurvecouldalsoserve

as a leading indicator to private sector issuance of long-term debt.

Payment Infrastructure and Regulatory Developments

• Duringthefirsthalfof2014,theBankwillconductaNISSComplianceAssessmentwiththenewPrinciples

ofFinancialMarketInfrastructures(PFMIs)andanon-siteriskassessmentbasedontheBank’sRiskBased

OversightFramework.ThiswouldensurethatNISSaddressalltheidentifiedtechnical,managementand

operationalcontrolgapstofullycomplywithinternationalbestpractice.

• Aspartof itscontinuedmulti-layeredapproach to tackling fraud, theBank fullysupports theFinancial

InstitutionsFraudandSecurityCommittee(FIFSC)17 with its on-going efforts to reduce fraud in Namibia.

Inthisregard,investmentsinfraudpreventionremainimportant,andshouldcontinueinordertoreduce

fraud losses over the longer term.

The Committee consists of the Bank of Namibia, the Police, representation from the long-term insurers, representation from the Mobile Network Operators, the commercial banking institutions and representation from the non-banking financial institutions forum.


Appendices

Appendix 1: Financial Soundness Indicators

Table 1: Financial Soundness Indicators

Jun ‘12 Dec ‘12 Jun ’13 Dec ‘13

Number of banking institutions 5 5 6

Total assets of banking institutions

(N$‘000000) 62,886 67,068 70,068 76,989

Assets/GDP 65.5 65.0 61.4 63.8

Capital Adequacy (%)

Tier1leverageratio 8.5 8.0 8.0 8.5

Tier1capitalratio 11.5 10.9 10.7 11.5

TotalRWCR 14.5 14.2 14.4 14.4

Asset Quality

NPL/Totalgrossloans 1.4 1.3 1.5 1.3

Grossoverdue/Totalloansandadvances 3.9 3.6 7.3 4.1

Provisions/Totalloans 1.3 1.2 1.3 1.2

Provisions/NPLs 93.0 91.6 86.6 92.3

Specificprovision/NPLs 32.0 29.4 26.5 29.5

Earnings and Profitability

Returnonassets 2.0 2.2 2.1 2.1

Returnonequity 20.2 22.7 22.0 20.9

Net interest margin 5.4 5.6 5.4 4.1

Cost to income ratio 61.4 52.6 56.9 55.6

Liquidity (%)

Liquidassetstototalassets 11.1 10.9 10.2 10.7

Totalloans/Totaldeposits 84.5 85.6 87.8 86.4

Totalloans/Totalassets 73.0 74.5 75.4 74.8


18

Appendix 2: Debt Methodology - Household Debt

HouseholdDebt

This paper uses two measures to attempt to estimate the extent of household indebtedness in Namibia.

Firstly, theratioofhouseholddebt tohouseholddisposable income;andsecondly, thedebtservicingcost

of householddebt togrosshousehold income.As there isnomeasureof household indebtedness, there

iscurrentlynomeasureofnationalhouseholddisposable income,sobothmustbecalculated,orproxied.

Similarly,thereiscurrentlynoaccepteddebtservicingcostcalculated,sothistoomustbeestimated.

Disposableincome

Usingdata from theNationalAccount andNationalBudget a broad indicationof disposable incomewas

calculatedfromthefollowingequation:

Nationaldisposableincome=wagesandsalaries+inwardremittances+pensions+subventiontoveterans

+othersocialgrants–personalincometax………………………………………………………………..(1)18

Wagesandsalaries,personalincometaxes,andinwardremittanceswerecollectedfromthenationalaccounts

publishedbytheNationalStatisticsAgency(NSA).Thisdataincludessalariespaidbythepublicandprivate

sectors,howeverdoesnotcaptureinformalsectoractivitiesorsubsistencefarmingintheirentirety.Pensions,

subvention to veterans, and other social grants data were collected from the National Budget documentation

from2003to2013,andcapturealltransfersfromgovernmenttohouseholds.

Given that not all income is captured in the national accounts and budget documentation, an effort was

madetoestimatetheexcludedpartofsuch.Acomparisonwascarriedoutbetweenthe2009/2010National

HouseholdIncomeandExpenditureSurvey(NHIES2009/2010)withregardstoincomeandconsumption,and

thefigurescalculatedinequation1above.

Householddebt

Ameasureof householddebtwas taken fromBONstatisticsonhouseholdcredit from formal institutions

(includingFirstNationalBankofNamibia,StandardBankofNamibia,NedbankNamibia,BankWindhoek,

AgribankofNamibia,NationalHousingEnterprise,andtheNamibiaPostOfficeSavingsBank).

However,theFinScopesurveyof2011indicatesthatonly65percentoftheNamibianpopulationiscurrently

banked with formal financial institutions. As such, approximately 35 percent of the population remains

unbanked.Whileasignificantpercentofthepopulationisunbanked,thisisnottosaythattheydonothave

debtinsomeformorother.Astherearenodataonnon-bankcreditextensiontohouseholds,itwasassumed

thatonly65percentofthecountry’shouseholdshaveabsorbedthetotalhouseholddebtrecordedbyBoN.

Also,weassumethatthosewhoareunbankedaremorelikelytobelowerincomeearnersthanthosewho

arebanked.Assuch,whileweassumethatonly65percentofthepopulationarebanked,usingdatafromthe

NHIESonincomedeciles,weassumethatthoseunbankedformthethreeandahalflowestincomedeciles.

Further,duetoalackofdatainformingthecontrary,weassumethattheunbankedpopulationhasthesame

Outward remittance data was unavailable


incometodebtratioasthebankedpopulation(implyingsignificantlylowernominaldebthowever).Finally,as

wehavenoevidenceotherwise (anddespitecommonperceptionand/oranecdoticevidence);weassume

thatthereisnotsubstantialhouseholddebtinthebankedpopulationthatisnotcapturedbycreditfromformal

institutions to households.

Debtservicetoincomeratio(DSR)

Inordertocalculatethedebtservicetoincomeratio,thefollowingstandardformulawasusedtoestimatethe

repaymentcostofdebt(principalandinterest).

.....…………………………………………………………......……..………..(2)

WhereAistheannualdebtservicingcost,ristheannualinterestrate,pistheprincipal(outstanding)andnis

theperiodoftheloan(outstanding).

TheabovecalculationwasestimatedforthedisaggregatedhouseholddebtfigurescollectedbyBON,using

different values for the interest rates, outstanding principal and outstanding period of loan. The outstanding

principalamountsweresimplythoserecordedbyBONineachofthefollowingcategories:mortgageloans,

overdrafts, other loans and advances, leasing, instalment credit and other. Outstanding period of loans were

estimated based on the average duration of the class of loan, under the assumption that loans are paid off

over the period rather than rolled over. The average interest rates for the various classes of loans are collected

byBON,andwereusedunaltered.Forthoseloanclassificationsforwhichnoaveragerateexisted(i.e.,other

loansandadvancesandother),theprimeratewasusedasabenchmark.

Oncethecostofservicingdebthadbeencalculated,thiswasdividedbythegrossincome(unadjusted)based

onthecalculationinequation1,excludingthesubtractionofincometax(soastoderivegross,ratherthannet

income).

DSR=A/IG ……………………………………………………………………………......………(3)

WhereDSRisthedebtservicetoincomeratio,Aistheannualdebtservicingcost,andIGisgrossincome.

Asitisbroadlybelievedthatarelativelysmallpercentofthepopulationholdsthevastmajorityofthenation’s

formalsectordebt,anadjustedratiowascalculated.Thisadjustmentassumedthatthewealthiest30percent

ofthepopulation(representing68percentoftheincome19)heldalloftheformalsectordebt.

19 NHIES, 2010

A=12( r12 p

1 - (1+ )r

12- 12n (( (


20

Appendix 3: Methodology – Corporate Debt

Broad corporate debt levels

InordertoassesstheoveralllevelofcorporateindebtednessinNamibia,asimplecalculationwasdoneadding

corporatedebttolocal institutions(privatesectorandparastatals,ascollectedbyBoN)totheinternational

investmentposition(IIP)figuresonprivatesectordebttoexternalinstitutions.Itwasassumedthatallprivate

sectordebtowedtoforeign institutionswasborrowedbycorporationsratherthanhouseholds.Theoverall

debtfigureswerethencalculatedasashareofnominalGDP.

Large exposuresThe sample of the largest exposures to local commercial lending institutions encompasses on average

approximatelytenpercentoftotal(locallyissued)privatesectorcreditextensionfortheperiodunderreview.

InformationontheselargeexposurestotheNamibiancommercialbankinginstitutionswasaggregatedand

assessedbysector.Atotalof52companieswereassessed, includingfivefishing, fourmanufacturingand

food,eightminingandminerals,tenpropertyandconstruction,twotourism,seventransportandlogisticsand

theremaining16fromvariousothersectors.

Whilethe largestexposurestothecommercialbanking institutionsarecertainly importantfor localfinancial

stability,itmustbecautionedthatanumberofthesebigcorporateclients(andothercorporates)tendtohave

otheravenuesoffunding,usuallyfromoutwiththecountry.Assuchitisnotpossibletocaptureeveryaspect

andnuanceofcorporatedebttogiveaperfectpictureanditshouldthusbenotedthatthesizeandinfluences

oftheenterprisesinthesampleunderreviewissuchthattheirdebtwillnotbewhollycovered,asdebtissued

instruments and funding from sources outside of the commercial banking institutions are not available - for that

arigorousstudyofthecompleteauditedfinancialstatementswouldbeneeded,somethingwhichiscurrently

not possible20.

Not all the companies in the sample make their balance sheets and income statements publically available. Few of the sample companies are public companies.


Appendix 4: Estimation challenges for household indebtedness

The challenges that surround determining the level of household indebtedness in Namibia are numerable,

butnotinsurmountable.Aswithmanysuchexercises,theprimarychallengeisovercomingdataconstraints,

irregularitiesand(perceived)inaccuracies.Asaresultofthis,alargenumberofassumptionsmustbemade,

whichmay,ormaynotbecorrect.Someoftheseassumptionsmayhaveadramaticimpactoncalculations

anddata,thusifincorrect,mayyieldinaccurateresults.

More specific challenges include:

Currentlythereislimitedinformationonthebreakdownofcredittoindividuals,whetherbankedorunbanked.

Theassumptionthatismadeisthatallhouseholdssharethesamedebtburden,whichclearlymaynotbethe

case.Itispossiblethat(intheextreme)10percentofthehouseholdsholdallthedebt,and90percenthave

none.Thisisunlikely,butequallyunlikelyisthatallhouseholdshaveequaldebt.GiventhatNamibiaisavery

unequalsociety,itislikelythatdebtissimilarlyunevenlydistributed(possiblyintheinverse,ifoneassumesthat

thepoorneed,andthuswithdraw,moredebt)

Currently,thereisnomeasureoftheextentofinformalsectordebt,andthusitisunclearwhethersuchdebt

issignificant incomparisontoincomesandformalsectordebt.Shouldsuchdebtbesubstantialrelativeto

either,theremaybecauseforconcern.Measuringsuchinformalsectordebtischallenging,ifnotimpossible,

particularlyincaseswhensuchdebtisinformalloansbetweenfamilyandfriends.Inacountrywithasignificant

unbankedpopulation,suchasNamibia,itislikelythatsuchinformalsectordebtwillberelativelylarge(relative

toformalsectordebt)whencomparedtomoredevelopedcountrieswithhigherpercentageofthepopulation

banked(assumingthatindividualsprefertoborrowfrombankinginstitutionsifpossible).

Householddebttodisposableincomedoesnotanalysethefullbalancesheetofindividuals,andthusdoesnot

necessarilyillustraterisk.AsmanyNamibiansholdsubstantialassets,beitlivestock,propertyorotherwise,

theirdebtlevelsmaybehighlysustainable.Shouldsuchindividualsholdasubstantialshareoftotalhousehold

debt, there is perhaps less cause for concern than if such debt was in the hands of those without assets.

Similarly, comparing the debt to disposable income ratio ofNamibians to that of other nationsmaybe ill

advisedasNamibiansmayhavemore,orfewer,assetsontheirpersonalbalancesheets.

Furtherchallengessurroundtheassumptionsmadeinthecalculations,moredetailsofwhichcanbefoundin

the next section.


Key Assumptions

Income

Challenge Assumptions Shortcomings

Determining disposable income Itisassumedthatthemajorityofthesources

ofincomeinthecountryiscaptured.

It is possible (likely) that some sources of

income might be missed.

Calculating the extent to which our the calculations underestimate disposable income over time

It is assumed that thedifferencebetween

theNHIES2009/2010 incomefiguresand

staff estimates are constant (or close to)

over time.

It is highly unlikely that this differential is

constant over time, however it may be

close. On the other hand, it is possible that

thesimilaritybetweenourestimateandthe

NHIESmaybe the exception, rather than

the norm.

Debt


65 percent of the population is banked, but does this mean 65 percent of the income is banked?

It isassumedthatwhile65percentof the

population is banked, significantly more

than65percentof thehousehold income

is banked. It is assumed that thepoorest

35percentofthepopulationareunbanked,

and thus (with NHIES data) only 11.5

percent of the income is unbanked.

It is highly likely that the penetration of

bankinginthepoorestsectorsofsocietyis

lower than in the richer sectors, however, to

assume thatallof thepoorest3.5deciles

ofpopulationareunbanked is likely tobe

inaccurate.

It is likely that the unbanked population is leveraged to some degree, however no data exist on such.

Due to lack of data indicating otherwise,

an assumption is made that the unbanked

population has the same debt to income

ratio as the banked population.

Itisunlikelythatthisisthecase.Itmaybe

that borrowing from banking institutions

is easier than borrowing from informal

lenders, which would suggest that the

debt to income ratio for those borrowing

fromformallendersmaybehigher.Onthe

otherhand,itmaybethecasethat(asper

previous assumptions) the poorer sectors

ofthepopulationareunbanked,butrequire

credittosurvive,andarethusmorehighly

leveraged than the richer, banked, sectors

of population.

It is possible that those sectors of society that are banked may have formal and informal sector credit.

Theassumptionisthattheydonot. Simply given the lack of evidence to the

contrary,itisassumedthatindividualswith

access to bank credit, do not borrow from

theinformalsector.Thismaybewrong.


Other


It is unlikely that the debt and income of the nation are shared equally.

As limiteddataexists toshed lighton the

distributionofhouseholddebt,Itisassumed

that it is equally distributed amongst all

household. It is further assumed that

incomeissimilarlyevenlydistributed.

While it is known that income is unevenly

distributed, it is not known how household

credit isdistributed. It isunlikely thatdebt

isdistributedequally,orrelativetoincome.


Appendix 5: Performance of the Non-Banking Financial Sector

Long-TermInsurance

Table 2: Income and Expenses

2012 2013

(N$000) Q4 Q1 Q2 Q3 Q4

PREMIUM INCOME

“SinglePremiumsRA 181713 177166 221918 345668 232277

“SinglePremiumsOther 536639 525544 270014 590277 294255

“RecurringRA’s 55072 55023 63383 58675 66285

“RecurringOther 781647 808690 849551 878244 951230

“TOTAL PREMIUMS 1 555 071 1 566 423 1 404 866 1 872 864 1 544 047

“INVESTMENTINCOME 1363984 899631 507863 1783728 1146148

OTHERINCOMEANDFEES: 103130 150012 177208 123345 99280

TOTAL INCOME 3 022 185 2 616 066 2 089 937 3 779 937 2 789 475

“BENEFITS

“Death 116 366 118 492 144 447 165 611 136 829

“DisabilityandHealth 44311 34740 48630 57260 36810

“Maturityclaims 424107 201777 491028 375398 274942

“AnnuityBenefits 130643 129892 130727 138419 157154

“RetirementBenefits 62230 94 0 3766 1175

“Group member withdrawals -15870 178767 164775 277691 250879

“Surrenders 154048 155951 186454 153381 439041

“TOTAL BENEFITS 915 835 819 713 1 166 061 1 171 526 1 296 830

“SalesRemuneration 98620 89808 94205 125563 131295

“Adminandmarketing 168405 160482 190330 185347 242266

“AssetManagementFees 10875 9674 11975 17517 29008

“Re-insurance 22544 18362 16722 20009 46200

Other expenses -95 -93 366 -324 1215

“TOTAL EXPENSES 300 349 278 233 313 598 348 112 449 984

“IncomeTax 19336 15925 15977 14599 21109

“Stampduties 8520 11334 7720 6692 11315

“VATonimportedservicesnotrecoverable 2147 1650 2258 1957 2743

“OtherinputVATnotrecoverable 2131 2261 1027 1151 1277

“TOTAL TAXATION 32 134 31 170 26 982 24 399 36 444

“

“Excessofincomeoverexpenses 1773867 1486950 583296 2235900 1006217

“Transferto(from)shareholderfund -312988 -74659 -317454 -209696 -405652

INCREASE/(DECREASE) IN LONG-TERM FUND

1 460 879 1 412 291 265 842 2 026 204 600 565


Table 3: LTIIndustryBalanceSheet

2012 2013

(N$000) Q4 Q1 Q2 Q3 Q4

Assets

Cash 389757 339848 258509 409136 387073

Balances with banks 3653333 4184773 4319727 4498959 5727477

Gilts/Bonds 3476853 3807986 3311617 3198025 3717377

Policyloans 302640 307857 317136 331712 339551

Mortgagebonds 156 167 407 693 1163

Debentures 195871 281509 259726 279505 6052

Claims/Debtors 1160791 1473751 1235220 1599686 1160819

Shares:Listed 4685570 5680666 7599738 8551665 4968265

Shares:Unlisted 1924060 1979977 2008927 2863644 2619994

Fixedassets 543237 545159 569676 599379 384676

Foreignassets-CMA 11798195 12022727 9976168 10379938 13484239

Foreignassets-Offshore 3520816 2771879 2710814 3068093 3408184

Other 2545 4049 21717 202895 218886

Total Assets 31 653 824 33 400 348 32 589 382 35 983 330 36 423 756

“Liabilities:

Policyliabilities 27127614 28206973 28115780 30120341 30937929

Current liabilities 924998 1132870 984280 1209637 1158579

CAR 623724 578015 604405 616635 648783

Excess Assets 2 977 488 3 482 490 2 884 917 4 036 717 3 678 465


Short-Term Insurance Table 4: Income and Expense

(N$ 000)

2012 2013

(N$000) Q4 Q1 Q2 Q3 Q4

Gross premiums written 589989 715600 666647 736536 669369

Net reinsurance expense 187928 195386 184492 231288 221912

Net premiums written 402061 520214 482155 505248 447457

Premiums earned 408 334 559 511 448 569 481 199 447 434

Claims incurred 247921 372276 287281 305392 239809

Commissions 46357 67731 49624 67335 67154

Expensesincurred 61529 71545 63275 78905 68616

Administrationfees 17583 19387 16681 6369 15679

Underwriting surplus 34 944 28 572 31 708 23 198 56 176

Investmentincome 31408 33013 33191 36117 34454

Capital gains 22946 10418 3704 19937 41981

Otherincome/(expenses) -2681 -2335 -2689 -2623 -5836

Reservedecrease/(increase) -5363 -3031 -10934 -1571 -4173

Profit before tax 81 254 66 637 54 980 75 058 122 602

Performance ratios

Cession ratio 32% 27% 28% 31% 39%

Net loss ratio 61% 67% 64% 63% 54%

Expenseratio 31% 28% 29% 32% 34%

Net combined ratio 91% 95% 93% 95% 87%


Table 5: Balance sheet

2012 2013

Q4 Q1 Q2 Q3 Q4

(N$000)

Assets

Cash 82649 96393 91579 95463 97800

Balances with banks 1197463 1291407 1319945 922266 1335926

Bonds,Securities,Bills 228499 209868 424259 733238 256517

Outstanding premiums 99591 185959 203089 110388 209771

Reinsurancedeposits 1975 1972 9541 114895 4325

Mortgagebonds 71685 61364 50268 50507 63239

Debentures - - - - -

Debtors 282476 242103 311191 299375 306824

Shares-Listed 162807 114697 106531 114905 121529

-Unlisted 171106 204686 194774 195236 279419

Unitsinunitstrusts 309073 343607 171901 468262 429118

Land&buildings 3462 1350 3641 3633 1126

Fixedassets 15790 17412 20855 22100 25439

Other assets 352141 309765 305378 292061 330447

Total Assets 2 978 717 3 080 583 3 212 952 3 422 329 3 461 480

Liabilities Q4-2012 Q1-2013 Q2-2013 Q3-2013 Q4-2013

Unearnedpremiumprovision 824565 898878 931742 972620 965968

Outstanding Claims 199034 216876 222760 243374 206092

IBNR 125380 98703 111324 115888 117833

Contingencyreserve 163298 159959 170893 172466 176334

Unexpiredriskprovision 272284 274349 302318 297592 291510

Duetoinsurers&reinsurers 38762 49149 40150 60866 66515

Reinsurancedeposits - - 7 7 7

Bank overdrafts - 243 225 18 -

Provisionfortaxation 13022 43403 15942 19254 5202

Provisionfordeferredtax 25650 23183 22341 24781 27581

Contingent liabilities 42 201 159 159 133

Other(Specify): 300986 275690 285848 336794 350450


Total Liabilities 2 234 019 2 274 821 2 388 994 2 565 333 2 555 771

Total Industry Equity 744 698 805 762 823 958 856 996 905 709

Solvency Ratio 25.00% 26.20% 25.60% 25.00% 26.20%


Medical Aid Funds Table 6: Income and expense

2012 2013

Q4 Q1 Q2 Q3 Q4

(N$000)

Contributions received 508188 571408 578345 578884 586937

Savings Plan Contributions 19 496 20 747 20 932 21 093 20 780

Reinsurance (596) 7420 8255 (380) 4959

Net Contribution 489288 543241 549158 558171 561198

Claims 431 291 454 275 503 284 556 644 448 009

Underwritingsurplus 57997 88966 45874 1527 113189

Administration fees 43 822 45 492 44 890 50 105 47 344

Operational expenses 10216 9735 9049 8861 11199

Managed Care: Management Services 7 918 7 356 9 733 9 455 8 962

Consultantfees/professionalfees 1177 834 1057 773 792

Total Expenses 63 133 63 417 64 729 69 194 68 297

Surplusoperations (5136) 25549 (18855) (67667) 44892

Other income 10 870 579 510 10 029 4 651

Investmentincome 23103 25907 10158 31792 41585

Net Surplus 28 837 52 035 (8 187) (25 846) 91 128


Table 7: Balance sheet

2012 2013

Q4 Q1 Q2 Q3 Q4

(N$000)

ASSETS

Non-currentAssets 715938 739806 744134 770504 819397

Property,Plant&Equipment 11747 11756 11751 11738 11736

Investments 704191 728050 732383 758766 807661

Current assets 142335 198849 164535 144854 182598

Accountsreceivable 47676 64247 61782 63024 34704

Cash&cashequivalents 94659 134602 102753 81830 147894

Total Assets 858 273 938 655 908 669 915 358 1 001 995

FUNDS AND LIABILITIES

Members’Funds 660968 707460 701443 670439 759829

Accumulatedfunds 660968 706142 700080 670439 759829

Revaluationreserve–investments - 1318 1363 - -

Non-current liabilities - - - - -

Long term loans - - - - -


Accountspayable(creditors) 49671 54167 57125 54546 77107

Provisionforoutstandingclaims/IBNR 125234 169719 145954 179440 139957

Bank overdraft - - - - -

Savingsplanliability(otherliabilities) 19801 1320 (2326) 7098 22923

Provisionforbaddebt 2599 5989 6473 3835 2179

Total Funds and Liabilities 858 273 938 655 908 669 915 358 1 001 995


Pension funds Table 8: Incomeandexpenses(N$Million)

2009 2010 2011 2012 2013

Contributions received 2496 2942 3109 3874 4414

Net investment income 7033 4561 4857 11143 13288

Capital appreciation 782 845 582 866 2298

Insuranceproceeds 67 68 81 92 93

Other income 43 38 39 37 11

Total Income 10 421 8 454 8 668 16 012 20 104

Administrationexpenses 110 131 147 161 262

Investmentfees 150 140 139 140 215

Insurancepremiums 168 177 181 206 223

Other expenses 64 98 103 98 45

Total expenses 492 546 570 605 745

Netincomebeforetransfersandbenefits 9929 7908 8098 15407 19359

Net transfers -1 -135 -374 -377 -288

Benefitspaid 2088 2720 2704 3257 3885

Nettransfersandbenefitspaid 2087 2585 2330 2880 3597

Net income 7 842 5 323 5 768 12 527 15 762 Table 9: Balancesheet(N$Million)

2009 2010 2011 2012 2013

Non-current assets 53681 62960 68306 84434 103997

Current assets 2189 943 1172 1323 1270

Total assets 55 870 63 903 69 478 85 757 105 267

Fundsandreserves 53175 62696 68365 84659 103886


Total funds, reserves and liabilities 55 870 63 903 69 478 85 757 105 267


Unit Trusts Table 10: FundsunderManagement(N$Million)

2012 2013

Q4 Q1 Q2 Q3 Q4

Countryallocations

Namibia 16771 17899 18072 18122 18742

CommonMonetaryArea 14301 14512 15022 15707 16559

Offshore 1034 1246 1358 1603 1966

Total asset allocation 32106 33657 34452 35432 37267

Assetallocation

Moneymarketinvestments: 24658 25461 25193 24835 21395

Treasurybills 1797 2128 1996 1731 1454

Negotiablecertificatesofdeposit 9806 10005 9984 8907 9310

Banker’sAcceptances - - - - -

Debentures - - 3 - -

Notice, call and other deposits 4855 4621 4635 5146 5594

Other 8200 8707 8575 9051 5037

Listedequity 3602 4159 4492 4817 9179

Listed debt 2981 3160 3199 3992 3658

Unlistedequity 187 190 636 658 1704

Unlisteddebt 231 154 343 464 574

Unlistedproperty - - - - -

Other assets 447 533 589 666 757

Total Funds Under Management 32 106 33 657 34 452 35 432 37 267

Table 11: SourceofFunds(N$million)

2012 2013

Q4 Q1 Q2 Q3 Q4

Pensionfunds 1511 1971 1994 2245 2388

Short-terminsurancecompanies 198 231 286 106 182

Long-term insurance companies 1101 1121 1085 1280 1259

Medicalaidfunds 46 48 48 41 49

Unittrustschemes 4129 4332 4171 4104 4517

Companies 5413 6543 7623 8968 8292

Natural persons 17817 17954 18213 17335 19096

Other 1891 1457 1032 1353 1484

Total 32 106 33 657 34 452 35 432 37 267


Investment Management Table 12: FundsunderManagement(N$million)

2012 2013

Q4 Q1 Q2 Q3 Q4

Countryallocation

Namibia 55086 57601 55992 57710 58571

CommonMonetaryArea 41737 42420 43344 45290 48467

Offshore 12317 14098 14771 15726 16284

Total asset allocation 109140 114119 114107 118726 123322

Assetallocation

Moneymarketinvestments: 34036 35389 34216 34475 35280

Treasurybills 13817 14706 14651 14587 15180

Negotiablecertificatesofdeposit 4522 4176 4395 4394 4396

Banker’sAcceptances - - - - -

Debentures - - 8 - -

Notice, call and other deposits 11549 12367 11166 11073 11096

Other 4148 4140 3996 4421 4608

Listedequity 53101 55956 56104 60344 58027

Listed debt 15540 16450 16948 16704 17552

Unlistedequity 1168 1155 1350 1540 1152

Unlisteddebt 241 164 176 546 255

Unlistedproperty 376 574 602 632 650

Other assets 4678 4431 4711 4485 10406

Total Funds Under Management 109 140 114 119 114 107 118 726 123 322

Table 13: SourceofFunds(N$Million)

2012 2013

Q4 Q1 Q2 Q3 Q4

Pensionfunds 62400 65357 64698 68395 71551

Short-terminsurancecompanies 770 786 817 366 373

Long-term insurance companies 16134 16916 17040 17984 18796

Medicalaidfunds 320 293 297 309 320

Unittrustschemes 26183 27249 27072 27278 28409

Companies 555 553 755 742 808

Natural persons 24 40 327 41 46

Other 2754 2925 3101 3611 3019

Total 109 140 114 119 114 107 118 726 123 322


Micro-Lending Table 14: CreditExtension

2012 2013

Q4 Q1 Q2 Q3 Q4

Value of loans disbursed (N$000) 444 720 447 582 452 030 652 744 682 046

Term lenders 306467 301021 309364 513950 516430

Paydaylenders 138254 146561 142666 138794 165617

Number of loans 161 516 168 253 155 612 158 599 179 003

Term lenders 24925 26504 23770 32200 32322

Paydaylenders 136591 141749 131842 126399 146681

Average loan amount

Term lenders 12296 11358 13015 15961 15978

Paydaylenders 1012 1034 1082 1098 1129

Total value of loans (N$000) 1 752 556 1 842 390 1 977 263 2 293 735 2 615 536

Term lenders 1685290 1772657 1920250 2233283 2538299

Paydaylenders 67266 69733 57013 60452 77237


Notes

financial stability report march 2014 - namfisa · financial stability report march 2014 page 1 i....

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