SMMEs struggle for capital as banks stash M3bn in SA

KANANELO BOLOETSE

MASERU – Foreign-owned commercial banks have stashed staggering M3 billion in liquid assets in South Africa, keeping the money out of the reach of Basotho who desperately need credit, Public Eye has learnt. The banks which hold large sums of money in South Africa are: First National Bank (FNB) Lesotho, Nedbank Lesotho and Standard Lesotho Bank. The assets held abroad by Lesotho banks increased by 59.9 percent from 2.4 billion in 2019 to M3.9 billion in 2020. Lesotho’s banking sector is largely foreign-owned and the three major banks mentioned above are subsidiaries of South African banks with headquarters in Johannesburg, Gauteng.

The fourth bank, Lesotho PostBank, is the only domestic bank, fully owned by the government. FNB Lesotho, Nedbank Lesotho and Standard Lesotho Bank together accounted for 91 percent of the banking sector assets as of 2020. Their share of the assets they have kept in banks outside Lesotho is larger than their cash deposits with the Central Bank of Lesotho (CBL) and treasury bills put together.

These findings have emerged in several reports by the International Monetary Fund (IMF) on Lesotho published between March 2018 and June 2022. A close scrutiny of the reports by Public Eye indicates that while the foreign-owned banks are taking money from Lesotho and stashing it in South Africa, there is substantial demand for financial services locally. Basotho have limited access to financial services, according to the IMF, and use informal methods to meet their needs. They tend to rely on family and friends to borrow.

Their start-ups are underfunded and are, as a result of lack of access to finance, stagnant or even failing. Most small business owners finance start-ups using their own savings. This has caused the government of Lesotho to go to the World Bank with a cap in hand to borrow money to finance Micro, Small and Medium Enterprises (MSMEs) and entrepreneurs. On June 28 this year, the World Bank Group announced that its board of directors approved a US$45 million (about M2.8 billion) loan for the government to increase access to business support services and financial products targeted at MSMEs and entrepreneurs, especially women and youth.

It said Lesotho is facing economic challenges which include a crowding out of the private sector by a large public sector, a lack of diversification, a largely informal small and medium enterprise (SME) sector, and limited support for SMEs and entrepreneurs. Vodacom Lesotho (VCL), the Lesotho telecommunications giant, has also lent a helping hand to provide financial assistance to the local entrepreneurs. The VCL Foundation, in association with the Global Entrepreneurship Network (GEN), earlier this month launched the World Entrepreneurship Cup (EWC) at an event held at VCL headquarters in Maseru.

The programme offers the opportunity to participate on a global stage for a share of US$1 million in global prizes, access to international mentors and investors plus M1 million in local prizes and local incubation. Speaking at the event, Vodacom’s Executive Director of Corporate Affairs, Tšepo Ntaopane, said the company was challenged by the unemployment rate in the country and said that most entrepreneurs were not eligible to get loans from banks to boost their businesses.

Ntaopane also pointed out that it was vital to invest in local entrepreneurship since this will boost the country’s economy. Two Basotho businesswomen, ’Malebohang Sekoati and Rethabile Seitlheko, told Public Eye last month that they founded and registered their bakery business, the Bakers Home, more than two years ago but their challenge is start-up capital. “We sell home-baked goods. We would like to grow our business and sell in large quantities but the challenge is capital,” Sekoati and Seitlheko said.

“We would like to start a micro bakery that would operate daily, serving the community with baked foods such as croissants, cookies, cakes, muffins, scones and bread. We need to purchase bakery equipment as we are currently using our own kitchen equipment to bake,” they added. Lesotho was warned by the IMF in 2018 that banks lend very little to the local private sector but hold an unusually large share of liquid foreign assets in South Africa.

The IMF published the selected issues paper on Lesotho in March 2018 which was highly critical of the banks’ meagre lending to Basotho. “Banks in Lesotho hold an unusually large share of liquid foreign assets (liquid assets are assets that can easily be converted into cash within a short time) placed at banks in South Africa,” read the 2018 report. The IMF released another report in June this year again criticising the banks’ contribution to the local private sector credit.

“The well-capitalized, highly liquid, and largely foreign-owned banking sector’s contribution to the private sector credit remains limited,” read the report. The IMF said while the supply of funds to banks – measured by deposits to Gross Domestic Product (GDP) – is comparable to Lesotho’s peers at 30 percent, only about half goes to the private sector as credit. “Banks prefer to invest heavily in South Africa, likely reflecting home bias within the parent banks of the three foreign bank subsidiaries, deeper financial markets and better investment opportunities in South Africa and a lack of bankable projects in Lesotho,” it said.

It added that “only about a third of domestic credit goes to businesses, much lower than in peers.” Asked to comment on these remarks, the Central Bank of Lesotho (CBL)’s public relations manager, Ephraim Moremoholo, said before publishing its reports, the IMF holds bilateral discussions with the members and releases all its documents in consultation with members. In fact, Moremoholo said, the IMF gets information about Lesotho’s banking sector from the CBL as it is the one mandated to license, regulate and supervise banks and monitor developments in the financial sector to ensure safety and soundness.

He referred Public Eye to the CBL’s 2020 supervision annual report (latest available) which indicates that the banks’ assets held abroad increased by 59.9 percent from M2.4 billion in 2019 to M3.9 billion in 2020. In April this year, central bank issued a directive on loans to deposit ratio in an effort to improve access to credit. It requested banks to extend at least 70 percent of their deposits to credit. “This limit is expected to be fully attained by 31 December 2023,” it said.

But the Bankers Association of Lesotho (BAL) disagrees that banks prefer investing heavily in South Africa. “This is not the case. What should be taken into account is the fact that there are currently limited investment instruments in the country for banks to invest excess liquidity in,” BAL chairperson, Delekazi Mokebe, said in written responses to emailed questions by the paper. “This is seen in the bi-weekly CBL treasury bills and quarterly bonds auctions where there is always oversubscription, indicating that banks compete for limited investments instruments with all other participants in the market, thereby driving banks to seek alternative investments elsewhere, not because it is a preference to invest in South Africa,” Mokebe added.

Mokebe is the chief executive officer of FNB Lesotho. She further indicated that recent numbers from the CBL confirm that banks invest 56 percent (M4.5 billion) in Lesotho, made of balances with all local banks, the central bank, and government of Lesotho securities (bonds and treasury bills), “whilst only 44 percent (M3.6 billion) is placed with banks in South Africa and in the region”. “It should be noted that South Africa is Lesotho’s biggest trading partner, therefore, it follows that part of balances with banks in South Africa are held to facilitate and settle payments and transfers by Lesotho businesses and individuals,” she said.

She also said the banks will endeavour to comply with the central bank’s directive on loans to deposit ratio “in a responsible manner that protects the depositors’ monies and shareholders’ capital”. “If looked at in simplest terms, where total bank loans are divided by total bank deposits, this ratio (currently) averages 51 percent across all the banks. It should, however, be noted that if this is further dissected and some critical considerations are made to this calculation to arrive at a more informative ratio, this number is certainly higher,” she said.

She added: “It is important to have a holistic view of the country’s structural challenges that impact lending by banks and to appreciate that it is and continues to be a collective effort by all stakeholders, including the banks, to facilitate responsible credit extension to support the country’s economic growth.”

The structural challenges, according to the bankers’ association, include inadequate private sector business opportunities, low depth of support to stimulate integrated local economic activity and opportunities that are backed up by intentional regulations and frameworks that support local businesses while also enhancing the showcasing of Lesotho as an attractive domestic and international investment destination.

They also include limited functioning of the judiciary and delayed payments of suppliers by the government which make up about 42 percent of the country’s Gross Domestic Product (GDP). “It is only when all stakeholders collectively solve these challenges that meaningful growth in credit extension to drive local economic activity and growth can be realised and sustained over the long term,” Mokebe said.

“When the IMF report is read holistically, it describes the country’s structural challenges that need to be resolved collectively, through partnering with government, regulators, business enablement and support services, and the business community.

“Through different innovations, offerings, initiatives and strategic collaborations the banking industry has proven over the years its commitment to Lesotho’s growth and its prosperity,” she concluded. Lesotho’s banking sector is small and comprises only four commercial banks offering traditional personal and corporate banking services through branches around the country.

The total assets of the four banks were about USD1.2 billion as of December 2018, representing 48 percent of the country’s GDP as of that date. The largest foreign bank, Standard Lesotho Bank, held about 53 percent of the total banking sector assets, 56 percent of total loans to customers and 54 percent of total deposits as of December 2018.