PART C: Banking Supervision

INTRODUCTION

The number of regulated institutions under the purview of Banking Supervision remained unchanged; no new licenses were approved during 2023, but an application was under consideration. The Bank of Namibia is responsible for regulating and supervising banks, of which four are Domestic Systemically Important Banking Institutions (DSIBs);1 the remaining institutions were four second-tier banks, one of which is a branch of a foreign banking institution, and one a representative office.

Despite a strained economic environment, Namibia’s banking sector remained profitable, liquid, and adequately capitalised in 2023.
Although the economic environment remained subdued, banking institutions continued to bounce back in 2023, as evidenced by the rise in liquidity holdings and growth in the balance sheet, albeit at a lower rate than the growth reported in 2022. The core risk indicators that underpinned banking activities, particularly credit risk, deteriorated in line with the challenging credit environment. However, capital and liquidity levels remained predominantly resilient. Earnings improved during the period under review due to higher net interest income and non-interest income, although higher non-interest expenses curtailed this growth. The banking sector’s capital adequacy remained robust, and the capital base continued to grow during 2023. It is noteworthy that the Bank introduced credit relief measures in 2020 to assist struggling individuals and businesses in recovering financially; due to the long-lasting fallout from the COVID pandemic, these measures were extended and will remain in place until 1 April 2024.

¹ DSIBs are classified on the basis of the impact that their failure may have on the domestic economy, based on an assessment of factors such as (i) size, (ii) interconnectedness, (iii) substitutability, and (iv) financial market infrastructure.

PERFORMANCE OF THE BANKING SECTOR

The banking sector experienced higher profitability levels coupled with robust capital levels above prudential limits, while credit risk remained a key financial risk. The banking sector recorded a solid capital base for DSIBs under the Basel III framework, indicated by a Total Eligible Capital ratio of 16.6 percent in 2023, which declined from 16.9 percent in the previous year. The industry’s common equity Tier 1 capital ratio increased from 13.0 percent to 15.0 percent and stood significantly above the required 7.0 percent limit, while at 9.7 percent, the leverage ratio stood above the 6.0 percent regulatory limit. The non-performing loan (NPL) ratio picked up from 5.6 percent to 5.9 percent year-on-year, and is bordering the trigger ratio of 6.0 percent due to the high inflation and interest rate environment that prevailed. The deterioration was mainly driven by the public’s continued financial difficulties in servicing their loans due to the subdued economic environment. This level of elevated credit risk has the potential to negatively impact income through higher provisions which ultimately reduce capital levels.

BALANCE SHEET STRUCTURE

The banking industry experienced lower growth in its balance sheet during 2023 than it did during 2022. The balance sheet stood at N$174.4 billion, an increase of 6.1 percent, which was positive, but significantly lower than the 11.0 percent growth recorded in 2022 (Figure C.1) and only marginally above the concurrent inflation rate of 5.9 percent. Investments in short-term negotiable securities and cash holdings improved the banking sector’s asset position. Similarly, credit extension improved, as evidenced by the increase in net loans and advances.

ASSET STRUCTURE

The significant increase in foreign currency holdings led to an expansion in the balance sheet size.Cash and balances with banks increased from N$26.5 billion to N$31.2 billion owing to higher foreign currency holdings following the diamond sales that occurred during the year. Similarly, net loans and advances increased from N$105.8 billion to N$107.9 billion as a result of the utilisation of overdraft facilities coupled with instalment sales and finance leases. Driven by investments in treasury bills, short-term negotiable securities which increased from N$20.6 billion to N$22.8 billion. The total investment portfolio increased from N$5.9 billion to N$6.9 billion driven by trading and investment securities which further contributed to the growth of the balance sheet as the category increased from N$3.1 billion to N$3.5 billion, driven by investments in fixed-income securities. Banking institutions opted to invest a large portion of their funds in investment securities rather than extending loans and advances. The high interest rate environment also contributed to the reduced credit uptake.

Net loans and advances remained a key asset class for banks. In terms of the composition of assets, net loans and advances held the majority share at 61.9 percent (68.5 percent in 2022), followed by cash and balances with banks at 17.9 percent (16.1 percent in 2022) and short-term negotiable securities at 13.1 percent (12.5 percent in 2022). Both trading and investment securities, and property, plant and equipment occupied negligible portions of total assets at 4.0 percent (3.6 percent in 2022) and 1.6 percent (1.7 percent in 2022), respectively. Lastly, other assets remained unchanged from the previous year at 1.6 percent. The composition of the banking sector’s balance sheet was a good reflection of banking activities, as seen in the large portions held by net loans and advances, and cash holdings.

During the 2023 financial year, the banking sector saw an improvement in credit uptake. Total loans and advances stood at N$112.6 billion, growing by 2.6 percent in contrast to the 1.4 percent recorded in 2022. Residential mortgages constituted 39.8 percent of the loan book, followed by other loans and advances (18.1 percent). Overdrafts accounted for 11.7 percent of total loans, whereas commercial mortgage loans accounted for 11.5 percent. Instalment sales and finance leases took up 10.9 percent of the loan book and personal loans took up 8.0 percent (Figure C.2).

FUNDING STRUCTURE

The total funding mix of the banking industry consisted of bank funding, non-bank funding, and capital and reserves, with non-bank funding remaining the dominant source. Non-bank funding increased by N$11.1 billion to N$130.8 billion, led by commercial deposits. Bank funding decreased by N$1.1 billion to N$9.7 billion by the end of 2023 due to a drop in intergroup deposit holdings. Capital and reserves increased by N$809.3 million to N$20.7 billion due to an increase in general reserves (Figure C.3). Non-bank funding continued to dominate, accounting for 75.0 percent of total funding, an improvement over the 73.0 percent registered in 2022. It was followed by capital and reserves at 11.9 percent, bank funding at 5.6 percent, and other liabilities at 7.5 percent.

The principal source of non-bank funding was demand deposits, followed by negotiable certificates of deposits. Demand deposits increased by N$10.5 billion to N$73.9 billion, due to the rise in commercial deposits, whereas foreign funding expanded by N$3.2 billion and stood at N$9.6 billion, as a result of the diamond sales that occurred during the year. Fixed and notice term deposits decreased by N$2.2 billion to N$20.7 billion, a similar trend to that in negotiable certificates of deposits, which decreased by N$ 807.7 million to N$22.5 billion.