The banking sector 

The Eswatini banking sector has remained sound, stable, and resilient to shocks including Russia's Invasion of Ukraine due to substantial capital and liquidity buffers, backed by Central Bank of Eswatini (CBE) monetary and macroprudential policies. The sector’s total assets increased from E21.9 billion (US$ 1.5 billion) in 2020 to E27.1 billion (US$ 1.89 billion) in 2021 (23.8% year-on-year increase) but in 2022, the banking sector's assets declined by 3.7% to E26.1 billion (US$ 1.64 billion), primarily due to a decrease in deposits. There was a potential regain in the banking sector's assets in June 2023 as they increased by 0.6% to E26.3 billion (US$ 1.42 billion). 

Domestic credit to the private sector as a percentage of GDP in Eswatini has been made mostly by the banks since 2015. Domestic credit declined sharply to 20.6% from June 2020 to June 2021 due to the pandemic, which negatively affected the banking sector. In the financial year June 2021/June 2022, banks met minimal capital requirements, but somewhat lower than the previous year and the domestic credit improved due to reduced lockdown restrictions.

The banking sector's earnings and profitability improved in June 2021, as lockdown restrictions loosened. Since then there has been an increase in the ROA and ROE until June 2023 where ROA and ROE increased to 2.6% and 17.3% from 2.1% and 15.1% in 2022, respectively. In 2021, the ratio of loans and advances to total deposits decreased from 70.2% in June 2020 to 61.3% in June 2021, indicating a strain on credit due to the COVID-19 pandemic. Nonetheless, the ratio of loans and advances to total deposits increased to 69.9% and 79.8% in 2022 and 2023 respectively. The share of liquid assets to total assets and liquid assets to total deposits decreased in 2022 and 2023, despite a decrease in deposits, banks managed to expand lending and improved their resilience to liquidity shocks by accumulating sufficient liquidity buffers. Tier 1 capital adequacy ratio and total capital adequacy ratio further deteriorated in 2021, as banks paid dividends and increased risk-weighted assets, leading to a year-on-year fall in capital levels. In 2022 and 2023 the average industry tier 1 capital adequacy ratio and total capital adequacy ratio improved accordingly. In 2022 and 2023 the NPLs increased because of the revocation of COVID-19 Relief Measures in December 2021, inflationary pressures on households and businesses, past-due credit relief loans, and interest rate increases over the year.

The capital market and assets under management  

In 2022, there were 7 listed companies on the ESE Main Board. According to the ESE annual report (2022), there was no delisting and no new listing in that period.  The market capitalization surged by 1.44% year on year, from E4.302 billion (US$ 300.8 million) in December 2021 to E4.364 billion (US$ 274.3 million) in December 2022, owing to a share price increase by Nedbank Eswatini Limited. (NB. USD amounts did not increase due to changes in exchange rates). The market capitalization value for the fourth Q4-2022 rose from E4.348 billion (US$ 273.3 million) at the end of the third quarter to E4.364 billion (US$ 274.3 million) at the end of the fourth quarter, representing a 0.37% rise due to a single share price movement in all trades.  

In June 2023, the total value of assets managed for clients and investors reached E33.8 billion (US$ 1.819 billion), up 6.7% from E31.7 billion (US$ 1.99 billion) in June 2022. Collective Investment Schemes (CIS) assets remained at E8.1 billion (US$ 436 million) in June 2023, unchanged from June 2022. Investment advisors (IA) saw a 9.1% increase in assets, reaching E25.6 billion (1.378 billion) in June 2023 from E23.5 billion (US$ 1.47 billion) in June 2022. Capital markets have seen an increase in asset worth from Q1-2022. This could be attributed to improved worldwide market circumstances following the outbreak. (NB. USD amounts did not increase due to changes in exchange rates).

In June 2023, African Alliance, Stanlib, and Old Mutual remained the top three fund managers, accounting for 99.1% of total assets under management, while other CIS assets totaled E0.07 billion (US$ 3.77 million), or less than 1% of total CIS assets. The CIS investment portfolio complies with the provisions of Section 71(2) of the Securities Act of 2010. Hence they allocated 63.2% of total investment as of June 2023, which is E5.2 billion (US$ 279.8 million) in total CIS assets invested in Eswatini. Indicating an increased trust in local market investments.

The bond market 

As of December 31, 2022, twenty-seven (27) corporate bonds had begun trading, one (1) had reopened, and twenty (20) bonds had matured in 2022. Bonds Trading activity in the secondary market was modest, with no trades recorded during the year, since most fixed-income investors held them until maturity. The value of corporate bonds at year-end was E1.705 billion (U$S 107.2 million). Corporate bonds listed on the ESE rose by 24.87% year on year, from E1.366 billion (US$ 95.5 million) in December 2021 to E1.705 billion (US$ 107.2 million) in December 2022.

The government bond market in 2022 was small, with sixteen (16) bonds reopening trading and four (4) bonds maturing. The value of government bonds as of December 31, 2022, was E5.926 billion (US$ 372.5 million). Year on year, government bond trading on the ESE increased by 5.12%, from E5.637 billion (US$ 394.16 million) in December 2021 to E5.926 billion (US$ 372.5 million) in December 2022. (NB. USD amounts did not increase due to changes in exchange rates).

Digital finance, financial inclusion, and remittances 

The Government of Eswatini developed a National Finance Inclusion Strategy (NFIS) 2017-2022 aimed at removing the bottlenecks to inclusion through a demand-side approach that meets the needs of the people, deepens the financial sector, ensures financial stability, and serves as a cross-cutting framework by complementing existing programs. In terms of account ownership and financial inclusion, in 2022, 66% of the Eswatini population aged 15+ owned an account. This has improved compared to the 2011 data. In 2011, most females had accounts and were financially included, while in 2022, more males owned accounts than females in Eswatini. The young population compared to the older ones, has fewer accounts. As compared to its CMA peers, account ownership and digital or mobile-money-service usage are higher in Eswatini than in Lesotho in 2022 but lower than in South Africa and Namibia in 2021. In terms of gender disparities, more women use digital services than men in Eswatini and South Africa.

MSMEs finance, financial inclusion, and remittances 

Access to finance, business development support, and a conducive business environment are currently part of the government’s proposed changes to Eswatini’s MSME policy. There is no recent data on the financing of Eswatini MSMEs, however, according to ECA online stories (2023), an inclusive financing model for MSMEs was established with technical assistance from the Economic Commission for Africa (ECA) to address a critical limitation for Micro, Small, and Medium Enterprises (MSMEs): access to finance. That was launched in September 2021 to increase access to funding, promoting MSMEs' growth, and resolving challenges in the MSME financing ecosystem. 

According to the CBE financial stability reports (2021 and 2022), the MSMEs sector assets recorded E29.1 billion (US$ 2.03 billion) at the end of June 2021 but then declined by 5.7% in June 2022 to E27.5 billion (US$ 1.73 billion). In terms of MSME debt, the amount of E13.0 billion (US$ 816.8 million) was recorded at the end of June 2022 and E28.5 billion (US$ 1.53 billion) at the end of June 2023. The sector's debt levels grew faster than its earnings in 2023 indicating that it is unable to produce enough profits to cover interest payments. This may result in financial distress and debt defaults that may harm the financial system, and affect lenders and investors. Since lenders may find the sector risky, leading to high borrowing costs and limited credit availability. This could further strain MSMEs' financial status, limiting their ability to expand and grow.

Contractual savings institutions, and insurance and pension funds 

Insurance

The insurance sector in Eswatini consists of 1 composite insurer, 6 long-term insurers, and 4 short-term insurers. The insurance industry's assets reached E6.6 billion (US$ 414.8 million) at the end of June 2022, up from E6.3 billion in June 2021 (US$ 440 million). The growth in overall industry assets was led by 15.6% growth in the short-term sector and 6.3% growth in the long-term insurance sector. Even though the insurance sector’s assets have been rising, the industry's overall assets decreased slightly from E6.5 billion (US$ 408.5 million) in June 2022 to E6.1 billion (US$ 328.36 million) in 2023 as a result of a considerable reduction in investment assets and cash, impacting both long and short-term insurers. (NB. USD amounts did not increase due to changes in exchange rates)

Short-term insurance's capital-to-asset ratio increased to 56.9% in June 2023 from 53.7% in June 2022, indicating an improved resilience in the short-term insurance sector. While long-term insurance’s capital-to-assets ratio decreased from 19.2% in June 2022 to 14.2% in June 2023, indicating an increased risk in their capacity to absorb shocks including market downturns, unforeseen liabilities, and economic uncertainty (Central Bank of Eswatini, 2023). This raises insolvency and financial distress risks for long-term insurance, since they may struggle to meet their obligations to policyholders.

Pension funds

The pension industry is a crucial component of Eswatini's financial system, ranking among the most important sectors. In 2021, the pension sector had 31.5% of the financial system's assets and grew to E42.6 billion (US$ 2.98 billion), representing a 15.8% increase from 2020. These assets accounted for almost 95.8% of the country's GDP in 2021. In 2022, the pension sector had an anticipated present value of liabilities of E37.9 billion (US$ 2.38 billion) and a fair value of assets of E30.4 billion (US$ 1.91 billion), resulting in an 80.2% funding deficit of E7.5 billion (US$ 471.4 million). (NB. USD amounts did not increase due to changes in exchange rates)

In terms of domestic investments in the pension sector, as of June 2022, 48.1% of total pension assets were invested domestically, with 40.9% in debt securities, 24.2% in equity, 12.5% in collective investment schemes, 10.2% in property investment, and 8.6% in other investments (including cash and insurance policies).

The pension sector foreign assets as of June 2022, accounted for 51.9% of total pension assets, a 1.1% decline from June 2021 and totaling E21.0 billion (US$ 1.3 billion). The foreign investment portfolio consists of 81.9% shares (mostly through the JSE), 13.3% bank deposits, and 2.9% collective investment schemes. Foreign investments have steadily increased from the first quarter of 2020 but experienced a significant fall from December 2021 to June 2022. Foreign investment allocation is mostly focused on equity investments and deposits in foreign banks.

Challenges and opportunities for the financial sector 

Like many African countries, Eswatini’s financial sector is dominated by the banks. However, the primary challenge facing the banking system is the low banks’ asset quality, high levels of non-performing loans (NPLs), and concentration risks. The high NPLs threaten banks’ profitability and capitalization. Deepening the country’s financial sector is also inhibited by low financial inclusion relative to the SADC and other middle-income countries.  Limited awareness of bank products and terms is also among the key bottlenecks facing the banking sector. The low financial inclusion also inhibits the growth of the equity markets. The Eswatini stock market is also illiquid with limited access and activity.  The relatively high public debt also constrains the banking sector and crowds out the private sector and also inhibiting the performance of the equity market.

The Central Bank has declining reserves and its ability to continue to manage the cash flow may be threatened. In March 2020, the Central Bank reduced statutory liquidity and reserve requirements for the banking sector to improve its liquidity as a form of relief during the COVID-19 pandemic. Despite the healthy liquidity and reserves of the banking sector, the reserves of the Central Bank could be at risk, especially with the falling of liquid assets in 2022 and 2023. The Central Bank relies on interest from Government reserves, and the declining balance may come at a cost to the rest of the financial sector. Recent legislative proposals are also an opportunity for policymakers to critically overhaul the oversight framework (for instance, amending the FSRA Act and introducing the Financial Stability Act) of the overall financial sector including the large non-banking sector.  These legal footprints will support effective and efficient macro-prudential management. The rising digital finance also provides an opportunity for regulators to deepen inclusion and develop the overall financial sector.

New strategies must be put into place to help boost the profitability of the MSMEs to avoid high borrowing costs and limited credit availability. This could help with MSMEs’ role in enhancing Eswatini’s economy in terms of job creation. Also, to avoid unfavorable repercussions of investment losses, insurance companies should manage investment risks, diversify their portfolios, and implement strong risk management techniques, especially long-term insurance.