The Bank of Namibia is exploring the implementation of a countercyclical capital buffer (CCyB) as an additional layer of resilience for the banking sector.
The CCyB is a forward-looking macroprudential policy tool which acknowledges the cyclical nature of financial markets, economic activity and aims to fortify banks against potential losses during periods of pronounced economic stress.
“In essence the CCyB is a capital requirement that banks need to build during economic expansion, which is witnessed by periods when credit is growing rapidly, on top of the existing capital adequacy requirements. This buffer can be released during economic downturns to cover credit losses or to lend to the real economy without the banking sector’s resilience being jeopardised. The Bank will commence consultations with the industry on the implementation of the CCyB in Namibia,” Governor of the Bank, Johannes !Gawaxab said last week.
These remarks were subsequent to the Macroprudential Oversight Committee (MOC) of the Bank of Namibia (the Bank) holding its second and last meeting of the year on the 07th of December 2023, to assess potential risks and vulnerabilities in the Namibian Financial System. Following a comprehensive assessment of domestic and global economic conditions, the Committee deemed the domestic financial system as stable, sound, and resilient. This is despite increasing risks and vulnerabilities stemming from both the domestic and global sphere. In addition, the financial sector demonstrated resilience through maintaining adequate capital and liquidity buffers to absorb the impact of shocks, while simultaneously ensuring that the payment infrastructure operated efficiently.
The banking sector’s balance sheet growth remained strong, reflecting an improved liquidity position and adequate capital levels. On a quarterly basis, total assets for the sector increased by 1.5 percent to N$174.6 billion in the third quarter of 2023, mainly ascribed to increases in cash and balances at banks, short-term negotiable securities, as well as net loans and advances. The liquidity ratio of the banking sector stood at 18.5 percent during the third quarter of 2023, from 18.1 percent in the second quarter of 2023, due to an increase in cash balances on the back of higher diamond sales, and government payments.
“Furthermore, the banking sector maintained adequate capital levels to meet the regulatory requirements and absorb potential losses. Both the Return on Equity and Return on Asset ratios increased during the review period mainly due to an increase in net-interest income earned by the banking sector. Asset quality deteriorated slightly but remained below the supervisory intervention trigger point of 6 percent. Going forward, the pressure on households and businesses due to higher interest rates and slow economic growth could further deteriorate asset quality,” !Gawaxab further said.
He went on to say that Namibia’s payment system and infrastructure continue to operate efficiently. The payment system has been operating effectively during the review period, with financial market infrastructures such as the Namibia Interbank Settlement System and Namclear operating with no major interruptions.
On another note, he highlighted that the Non-Bank Financial Institutions (NBFIs) sector exhibited resilience despite the challenging macroeconomic conditions. The total assets held by the NBFIs increased by 1.3 percent on a quarterly basis and 11.8 percent on an annual basis to N$399.2 billion, effectively withstanding the cooling off in global equity markets during the third quarter of 2023. In addition, the sizable year-on-year growth is due to base effects. Benefits paid continued to exceed contributions received, in line with the maturity level of the retirement funds (RF) subsector.
“In the short-to-medium, this is not expected to threaten the viability and liquidity of the RF subsector. Accordingly, RFs maintained a funding position above the prudential level, signifying a strong solvency position.”
The long-term insurance (LTI) subsector remained solvent, with the demand for LTI products withstanding the effects of the macroeconomic environment. The claims experienced in LTIs has since normalised from the levels observed in the immediate aftermath of COVID-19. LTI assets were observed to slow marginally, in line with the contraction in stock markets during the third quarter of 2023.
Collective investment schemes (CIS) remained stable, with no significant redemptions observed despite the macroeconomic environment. CIS remained a significant source of liquidity in the Namibian economy, with N$48.5 billion (56.6 percent) of funds under CIS management held domestically.
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