Financial Sector Overview

Lesotho’s financial sector is small, highly concentrated, and regulated by the Central Bank of Lesotho (CBL). The sector is dominated by the banking sector comprising four banks with three subsidiaries of South African banks and one local bank; insurance companies (general and life insurance); non-bank financial institutions such as microfinance institutions (MFIs-132); asset managers (2); insurance brokers (49); foreign exchange bureaus also operating as money transfer institutions (MTIs-2); credit bureaus (1); stockbrokers (6); mobile money issuers (5); pension funds (7); and pension fund administrators (4). Among these players, the banking sector accounted for 68.4% of its total assets by the close of December 2022 (Central Bank of Lesotho, 2022). This sub-sector is dominated by subsidiaries of foreign banks from South Africa following the liquidation of most of the government-owned banks in the 1990s. The foreign banks account for 90% of the total assets of the banking sector. Another uniquely defining feature of the financial sector in Lesotho is its proneness to competition from banks in South Africa. This is attributed to the free flow of funds between these two countries owing to their membership in the Common Monetary Area (CMA), which allows the Rand to serve as a legal tender in Lesotho. Additionally, Lesotho consists of financial markets that are primarily made up of money markets and securities markets, with the latter being the larger of the two.

Banking Sector

In 2022, Lesotho’s banking sector comprised three foreign-owned banks and a government-owned bank. The three South African banks dominate this sector, which has 50 bank branches in the country, as well as the number of employees in the industry (81.5%). Notably, these foreign banks operated 183 automated teller machines (ATMs) and 1,881 point of sale (POS) devices in the country (Central Bank of Lesotho, 2020a). There has been an increase in banking sector assets since 2016 from M 13.2 billion (US$ 897.3 million) to M 21.6 billion (US$ 1.44 billion) in 2021. However, banking sector assets declined by 8.4% to M19.8 billion (US$ 1.26 billion) in 2022 (Central Bank of Lesotho, 2022). The decline was due to the sector’s vulnerability to threats posed by Covid-19 and its residual effects on nonperforming loans (NPLs), as well as high and persistent inflation and policy rates.

The credit provided by banks to the private sector as a percentage of GDP consistently rose from 18% in 2016 to 22.2% in 2021, mainly attributed to the massive reforms in the financial institutions’ regulatory framework during the period. However, credit provided by banks to the private sector declined in 2022 due to a decrease in banking assets.

Banking Sector Soundness

Between 2016 and 2021, the banking sector's soundness based on the profitability measure of return on asset (ROA) generally showed a decreasing trend except in 2018, where it increased to 3.4%, up from 2.4% in 2017. Return on equity (ROE) followed a similar trend. It decreased during the period 2016–2017, increased in 2018, and consistently declined from 2018 to 2021. The ratio of net interest margin to gross income, which shows the proportion of banks’ income from their core business, improved from 2016 to 2018, but was reduced subsequently until 2020 and slightly increased in 2021. On the other hand, the trend of the ratio of noninterest expenses to gross income was mostly subdued; however, it improved in 2020 and 2021 during economic challenges. Despite banks being profitable over the years, their performance in 2020 and 2021, based on most of the indicators, deteriorated chiefly because of the challenges posed by the COVID-19 pandemic and geopolitical tensions.

Broadly, there is a satisfactory improvement in the liquidity position of banks, as all the indicators showed an increasing trend, especially between 2019 and 2021, though there was a decrease in customer deposits to total loans. The liquidity indicators point to the resilience of banks to withstand shocks to their balance sheets.  Again, the ratios of regulatory capital to risk-weighted assets and regulatory tier 1 capital (core capital) to risk-weighted assets improved consistently from 2018 to 2020, with a slight decrease in 2021, above the minimum regulatory requirements of 8% and 4%, respectively. This is evidence of a well-capitalized banking sector. Regarding asset quality, non-performing loans (NPLs) increased from 3.7% in 2016 to 4.4% in 2017 and thereafter decreased consistently until 2020, when they rose again to 4.2%, up from 3.3% in 2019 due to the effects of COVID-19, and marginally decreased to 4.1% in 2021.

Financial Inclusion

The advancement of technology has supported the proliferation of a wide range of services and products in the digital financial space in Lesotho. The growth in digital financial services is reflected in the higher number of account ownership between 2011 and 2022. There was a significant increase from 18.5% in 2011 to 63.63% in 2022, which was largely attributed to the implementation of financial inclusion recommendations highlighted in the 2013 Financial Sector Development Strategy of Lesotho. This growth in financial inclusion is evident across gender and age groups. However, males and older adults owned more accounts relative to females and young adults in 2022, respectively.

Arguably, the level of financial inclusion in Lesotho is low (63.63%) in 2022 when compared to South Africa (85.38%), Namibia (71.35%), Kenya (79.2%) in 2021, and Eswatini (66.18%) in 2022, but higher than Botswana (58.76%) in 2022. This underscores the need for more enhanced measures to deepen financial inclusion in Lesotho. Despite an increase in the usage of Internet banking and mobile money services in Lesotho, digital finance is low (58.58%) when compared with its peer countries, South Africa (80.8%), and Kenya (77.56%) (World Bank, 2022). Nevertheless, Lesotho’s digital finance usage is slightly above that of the sub-Saharan Africa average of 49.52%, suggesting the need to accelerate digital finance in most countries in the sub-region, including Lesotho.

Non-Bank Financial Institutions (NBFIs)

The NBFIs in Lesotho broadly supplement the banking sector in providing microfinance, foreign exchange and money transfer, financial leasing, and credit bureau services to businesses and households. With these services, the NBFIs have largely extended financial services to the unbanked and the informal sector to drive financial inclusion. This sub-sector is supervised by the non-bank supervision division of the CBL under the financial institutions regulations (2013, 2014, and 2018) and the Credit Reporting 2011 Act. As of December 2022, the Bank had licensed 132 microfinance institutions (MFIs), 2 foreign exchange and money transfer institutions, 1 financial leasing institution, 2 asset management firms, and 1 credit bureau. MFIs continue to dominate the NBFIs in Lesotho, increasing in number from 16 in 2018 to 132 in 2022. During this same period, total MFI assets grew from M 797 million (US$ 60.2 million) in 2018 to M 1.17 billion (US$ 74.19 million) in 2022, mainly due to a combination of factors such as credit extension recovery and relicensing efforts that expanded the number of MFIs.

Capital Markets

The Treasury Securities Market was the first to become active in the capital market, commencing its operation in 2010 with the aim of serving as a source of domestic finance to minimize Lesotho’s vulnerabilities to external sources and finance budget deficits. Following this, the Central Bank established the Maseru Securities Market under the Capital Market Regulations in 2014 to further develop the capital market. The objective of this market was to serve as an open finance channel for listed companies and investment options for the public by way of trading in stocks. In 2016, the Maseru Securities Market was launched, and it registered its first listing, RNB Properties Ltd (RNB), a property development and management company, floated its equity on the platform (CBL Annual Report, 2021).

The government securities market is relatively active with the issuance of Treasury bills and bonds. Notably, the government was successful in issuing a bond valued at M450 million (US$33.8 million) in 2017. In 2018, transactions of government securities valued at M 3.59 billion (US$ 271.4 million) were also settled by Lesotho’s largest payment system (Lesotho Wire), representing transaction growth up from M 2.5 billion (US$ 187.7 million) in 2017 (Central Bank of Lesotho, 2018b). In 2021, Lesotho Wire (LSW) settled financial transactions in real-time and intraday on a continuous and gross basis. LSW's transaction volumes and values climbed by 18% and 0.3%, respectively, over the previous year.

Insurance Sector

Lesotho’s insurance sector contributed about 29.8 percent of total financial system assets and 22.4 percent of GDP, making it the third largest after the banking sector and other non-bank financial institutions, including MFIs in 2022. The insurance market is small and concentrated, consisting of 10 insurance companies, 6 long-term (LT) insurers, 4 short-term (ST) insurers, and 49 insurance brokers as of December 2022. These players operate under the guidelines of the Insurance Act 2014, with the Central Bank of Lesotho as the Commissioner of Insurance. In terms of business, the insurance industry is segmented into two sub-sectors: the short-term sub-sector (general insurance) and the long-term sub-sector (life insurance). These sub-sectors have remained sound and resilient over the years until 2022, though they came under pressure because of the challenges of the COVID-19 pandemic in 2020. In 2022, the LT sector received most of its net written premiums from life insurance (65.7%), followed by endowment (22.1%) and credit life (7.7%). Motor and property insurance products, on the other hand, account for 74.8 percent of total ST insurance net written premiums.

There was growth in total assets in the insurance sector, and this is witnessed in both the long-term and short-term insurance sub-sectors between 2018 and 2022. The total assets for the long-term insurance sector increased from M 5.9 billion (US$ 446 million) in 2018 to M 8.6 billion (US$ 545.34 million) in 2022. During this same period, total assets rose from M 427.64 million (US$ 32.3 million) to M 920.2 million (US$ 58.35 million) in the short-term insurance sector. The increase in assets was driven by increases in the sector's investments. At the end of December 2022, LT Insurance had 50.9 percent of its investment assets in non-money market investment funds and 4.4 percent in money markets. Government securities, non-governmental securities, investment property, and investments in subsidiaries and affiliates accounted for a sizable share of the industry's investment assets. Money market funds accounted for 45.3 percent of ST Insurance's investment assets, while non-money market funds accounted for 16.8 percent. Similarly to LT insurance, the other ST asset classes were government securities, investment real estate, and investments in subsidiaries and affiliates (Central Bank of Lesotho, 2022).

Pension Sector

The passing of the Pension Funds bill into law as the Pension Funds Act 2019 will now oblige pension funds to disclose their financial information before. Prior to this, the sector was unregulated, with the activities of the corporate pension system dominating. Here, pension funds were not licensed, properly supervised, and were not obliged to disclose their financial information. Through the efforts of the Central Bank of Lesotho, this regulatory gap has now been closed following the pension sector reforms leading to the enactment of the Pension Funds Bill. This bill mandates the Central Bank of Lesotho as the regulator and brings more transparency and protection to the beneficiaries of pension funds. Currently, the scope of the funds in the pension sector includes occupational, non-occupational, and umbrella of pension funds. It is expected that the pension sector under regulation will flourish and contribute greatly to economic development in Lesotho. As of December 2022, the central bank of Lesotho licensed 7 pension funds and 4 pension fund administrators.

Asset Management Sector

Lesotho has a monopolistic asset under management (AuM) sub-sector with one licensed asset manager, STANLIB Lesotho (Pty) Ltd, controlling the market, increasing its share of total AuM from 97% in 2016 to 100% in 2020. This sector has witnessed a significant drop in the number of asset managers over time, especially between 2016 and 2017. This was mainly because two asset managers failed to renew their licenses, and the remaining one closed. At the end of 2022, the number of licensed asset managers stood at two, but only one was actively managing all four Collective Investment Schemes (CIS) in the market.