Financial Sector Overview

Namibia has a relatively large and well-established financial sector, which is regulated by the Bank of Namibia and the Namibia Financial Institutions Supervisory Authority (NAMFISA). The sector includes banks and non-bank financial institutions (NBFIs) as major players, and over the years it has sustained a sound position, and it has been adequately capitalized and profitable. It is noteworthy that these institutions are mostly private owned and benefit from the close links with South Africa due to both proximity and membership of the Common Monetary Area (CMA). Importantly, the performance of the financial sector is strongly influenced by NBFIs, consisting of insurance companies, pension funds, medical aid funds, friendly societies, micro-lenders and capital markets.

The financial sector has experienced major reforms under the Namibian Financial Sector Strategy (NFSS) for the strategy period 2011-2021, which was geared towards achieving Vision 2030.[1] This strategy was introduced by the government in 2012 on the back of identified weaknesses in the financial sector, including limited competition, a less developed capital market, shallow financial markets, poor regulation, limited financial safety nets, low access to financial services, and the dominance of foreign ownership, limited skills, and the lack of consumer activism. Overall, the strategy was aimed at developing a financial system that is more dynamic, resilient and competitive, to foster growth of the economy. With this strategy in place, the financial sector has made significant progress and it is in no doubt that the sector is one of the best in Southern Africa.

Banking Sector

Namibia gained independence in 1990 and that brought significant changes to the banking sector. The regulatory and supervisory environment of the banking system changed, with the newly established Bank of Namibia taking over from the South African Reserve Bank. Since then, the Bank of Namibia has been both the regulator and supervisor of the banking sector, primarily in terms of the Banking Institutions Act, 1998 (Act No. 2 of 1998, as amended). The country’s new status also led to the restructuring of the banking sector, with banks forming new amalgamations as well as changing ownership and their names. In 2022 the Namibian banking system still comprised seven fully fledged commercial banks, four of which are Domestic Systemically Important Banks (DSIBS), with the remaining three classed as second tier banks.

The list of authorized institutions still completed by one international banking institution and one representative office. Equally important is the growth in the number of bank branches, from 72 in 1992 to 167 in 2018, though this dropped to 137 branches in 2021. The decline in the number of bank branches was due to rationalization as a result of operational inefficiencies (Bank of Namibia, 1992; 2021). In 2022, banks began a digitization strategy that includes lowering the bank's points of presence. During the year, the number of branches declined from 135 to 134, while the number of agencies decreased from 85 to 82 points. The banking sector has been impressive in recent years, as banks have continued to show robust growth in capital adequacy and liquidity, as well as positive though relatively muted profits. Another positive factor is the growth in total assets, which grew from NAD 148 billion (USD 10 billion) in 2021 to NAD 164.4 billion (USD 11.11 billion) in 2022. This growth is reflected in the value of domestic credit extended to the private sector, which rose from 65.6% of GDP in 2015 to 72.78% in 2020, though it declined to 69.4% of GDP in 2021.

The asset and liability structure of the banking system 

Between 2019 and 2021, there was no significant variation in the asset and liability structure of the Namibian banking sector. In 2022 the asset structure maintained its composition from the prior year with net loans and advances accounting for more the half of total assets. Net loans and advances decreased as a proportion of total assets from 68.5% to 64.4%, whereas cash and balances with banks’ asset share increased from 11.4% held during the 2021 to 16.1% in 2022. Notably, a decrease was reported under short term negotiable securities from 12.8% in 2021 to 12.5% in 2022.

Regarding the liability structure, the main source of funding for the banking sector was non-bank funding comprising demand deposits, saving deposits, negotiable certificates of deposit, fixed and notice deposits, and foreign deposits. Non-bank funding’s share of total funding increased marginally from 76.7% in 2020 to 77.2% in 2021. This growth was driven by the rise in demand deposits from NAD 56.3 billion (USD 3.4 billion) to NAD 61.2 billion (USD 4.1 billion), which accounted for a large share (53.7%) of the non-bank funding (Bank of Namibia, 2021). However, the Non-bank funding decreased to 73% in 2022, while capital and reserves remained the same as in 2021 at 12%.

Banking sector soundness 

For the period 2016-2021, measures of profitability from the financial soundness indicators of the Namibian banking sector generally showed a declining trend, but recovered in 2021. Return on assets declined from 2.3% in 2016 to 1.3% in 2020, though it rebounded to 1.7% in 2021. Similarly, return on equity was on a continuous decline, from 24.1% in 2016 to 10.9% in 2020, but this rose to 13.9% in 2021. In 2021, the profitability of the banking sector improved, because of the decline in the provision overlays. Following the increase in earnings, the ROA increased from 1.7% in 2021 to 1.9% in 2022 while the ROE rose from 13.9% in 2021 to 15.7% in 2022 as capital and reserves increased year over year. Regarding the liquidity indicators, it is clear that the banking sector maintained a favourable liquidity position, pointing to its ability to meet short-term obligations. The liquid asset ratio fell from 15.7% in 2021 to 15.6% in 2022, while the liquidity ratio fell from 18.3% in 2021 to 17.8% in 2022. With a surplus of N$11.1 billion, the liquidity ratio was above the regulation minimum of 11.0%. The loan-to-asset ratio fell from 69.2% to 65.1%. This reflects the liquidity of the asset base, which was lower than the international norm of 75.0%. Meanwhile, the loan-to-deposit ratio fell from 90.4% in 2021 to 83.7% in 2022.

Capital adequacy of the banks remained satisfactory, as all indicators were above their minimum regulatory requirements. Banks classified by the Bank of Namibia as domestic systemically important banks (DSIBs)[2] whose capital adequacy indicators are gauged based on Basel III standards were assessed to be capital adequate. This is clear from the capital adequacy indicators between 2016 and 2021 – such as Tier 1 leverage, Common equity tier 1, and Total eligible capital ratio (They all surpassed the minimum regulatory requirements of 9%, 6%, and 11.5%, respectively). All DSIBs as per Basel III Capital Accord, increased their Common Equity Tier 1 capital from N$14.5 billion in 2021 to N$16.0 billion in 2022. Both the total eligible capital ratio and the Common Equity Tier 1 capital ratio are higher than the minimum regulatory standards for DSIBs of 10.8% and 7.0%, respectively. In 2022, the Common Equity Tier 1 capital ratio was 14.7%, while Tier 1 leverage was 9.6%, compared to 13.7% and 9.6% in 2021, respectively. Finally, the Tier 1 leverage ratio remained stable and considerably over the statutory minimum of 6.0%, indicating a larger capital cushion to withstand financial shocks. The NPL ratio fell from 6.4% in 2021 to 5.6% in 2022. The NPL ratio of 5.6% was lower than the crisis trigger ratio of 6.0%, indicating that asset quality was good in 2022.

Composition of income and cost in the banking sector 

The income composition of the Namibian banking sector consists mainly of net interest and operating incomes, with net interest income serving as the largest source of income. This pattern has remained consistent, with net interest income increasing from NAD 5.4 billion (USD 408.2 million) in 2018 to NAD 5.9 billion in 2019 (USD 408.3 million). While it declined to NAD 5.5 billion (USD 334.1 million) in 2020, it saw a rebound to NAD 5.9 billion (USD 399.2 million) in 2021. Overall, total income follows a similar trend, with the rise in 2021 due mainly to an improvement in both net interest income and operating income. In addition, the total cost of the banking sector is largely driven by operating expenses, which continued to dominate and increased from NAD 5.47 billion (USD 413.5 million) in 2018 to NAD 6.27 billion (USD 424.2 million) in 2021.

Non-Bank Financial Institutions

Namibia has a vibrant non-bank financial sector, which consists of an array of institutions (NBFIs) such as short-term and long-term insurance companies; pension funds; medical aid funds; capital markets entities including investment managers, the Namibian Stock Exchange, stockbroker firms, linked investment service providers, unit trust management companies, unlisted investment managers, and special purpose vehicles; friendly societies; and micro-lenders. These NBFIs are regulated and supervised by the Namibia Financial Institutions Supervisory Authority (NAMFISA) under the NAMFISA Act (Act No. 3 of 2001). As the Authority faithfully executed on its duty, the Non-Bank Financial Industry (NBFI) remained financially sound and stable, posing no risk to the financial system in 2021. As of December 2021, the number of regulated NBFIs was 590, lower than the 622 recorded in 2020. Micro lenders have been the major players in the sector since 2018, whereby out of 633 NBFIs, there were 365 micro lenders. In 2021 there were 360 micro-lenders out of the total 590 NBFIs.

Once the implementation of the Namibian Financial Sector Strategy (NFSS) was under way, the sector experienced rapid growth in total assets, from NAD 155.6 billion (USD 19 billion) in 2012 to NAD 186 billion (USD 19.3 billion) in 2013. This growth trajectory continued in the subsequent years, despite the persistent effects of COVID-19 and inflation. The NBFI sector's assets increased by 13.9% in 2021 to NAD 370.6 billion (USD 22.51 billion). With this asset size, NBFIs clearly dominate the financial sector and contribute significantly to the Namibian economy. The growth in total assets can mainly be ascribed to the excellent performance of the pension industry, which has accounted for the largest share in the last few years. The long-term insurance, retirement fund, and collective investment scheme (CIS) subsectors expanded by 8.1%, 16.9%, and 4.9%, respectively, accounting for more than 90.0% of the NBFI sector's total assets. Long-term insurers' assets increased as a result of favourable market returns as well as received premiums exceeding claims paid. The increase in CIS assets was mostly due to new business and strong financial market returns, whereas the increase in retirement fund assets was primarily due to positive financial market returns following COVID-19.

Digital Finance and Financial Inclusion  

Namibia has prioritized digital transformation, and this includes the financial sector as a central player. There has been excellent progress in the digital finance environment as banks and non-bank financial institutions continue to leverage on technology to upgrade their services to customers and also to stimulate financial inclusion. Digital finance services include internet banking, mobile banking, automated teller machines (ATMs) and payment services (including e-money service). Digital transactions through electronic fund transfers (EFT), bank cards, and e-money products have grown significantly over recent years.

The growing use of digital financial services in Namibia has been matched with a high level of financial inclusion. As the percentage of Namibians aged 15 years and above with a bank or mobile money account increased from 58.8% in 2014 to 80.63% in 2017. Although there is a decline in Namibians aged 15+ with a bank or mobile money account in 2021. In 2021, the proportion of financially included females (62.42%) was lower than males (69.17%). Namibia’s level of financial inclusion (71.35%) in 2021, compared less favourably with neighbouring countries, such as South Africa (85.37%) and Kenya (79.19%), which is one of the leading digitalized economies in Africa.

Banking Regulation and Supervision

To ensure prudent and effective regulation and supervision of the banking system, the Bank of Namibia has relied on the Banking Institutions Act, 1998 (Act No. 2 of 1998, as amended) as the key legislative guideline of the banking sector. This legislation is in line with international standards and practices, such as International Financial Reporting Standards (IFRS), Basel II and III standards, IMF and World Bank technical reviews, among others. Major primary legislation changes between 2018 and 2021 included amendments to the Banking Institutions Act to respond to the current regulatory environment; and the enactment of Deposit Guarantee Act to protect depositors in the event of bank failure. For secondary legislation changes, the Bank of Namibia issued several determinations which sought to: improve capital requirements for the DSIBs (BID-5A); adjust the limits on total exposures to single borrowers of banks from 30% to 25% (BID-4); strengthen the liquidity risk management system of banks (BID-6); and bring relief to banking institutions from the destructive effects of the Covid-19 pandemic by introducing additional credit, liquidity, and capital measures (BID-33).

Good progress has also been made in implementing the provisions of the Banking Institutions Act. For instance, in the area of illegal banking business, the Bank of Namibia has made consistent efforts to assess the operations of suspected illegal financial schemes, in line with section 55A of the Act. Those found guilty have been prevented from operating in Namibia and ordered to either refund all money obtained from the public or face the law, as a way of seizing assets, which would be used to repay participants in the illegal schemes. As an additional measure, the Bank of Namibia has run media awareness campaigns to educate the public about the risk of getting involved in illegal financial schemes. With regard to information and cyber risk, the Bank has intensified its implementation drive by issuing specific legislative frameworks, such as the determination on information security (BID-30).

Insurance Sector

The insurance industry in Namibia is divided into short-term and long-term insurance. The industry consists of players such as short-term insurers, long-term insurers, reinsurers, and intermediaries (insurance agents and brokers). For short-term insurance, the number of participants have been increasing since 2017 from 1,472 participants to 2,210 participants in 2021. The number of participants in the long-term insurance sector rose from 5,015 to 8,634 in the same period. The overall assets of the long-term insurance industry increased by 8.1% to N$66.7 billion as of 31 December 2021, owing mostly to an increase in investments due to favourable financial market performance. The short-term insurance sector equally grew its assets from NAD 6.2 billion (USD 465.8 million) in 2017 to NAD 6.8 billion (USD 470.6 million) in 2019, but declined slightly to NAD 6.1 billion (USD 370.6 million) in 2020. As of December 31, 2021, the total assets of the short-term insurance had increased by 10.8% to N$7.2 billion. This growth in total assets was mostly due to ongoing recovery and excellent financial market performance in both the long-term and short-term insurance sectors over the years.

The Pension Industry

Namibia’s pension industry is well established, made up of both contributory (including the Government Institutions Pension Fund and private funds) and non-contributory pension schemes. The asset composition of the industry is held in diverse investments, with equity investment forming the largest component (45% in 2021). Equity investments as the major asset class in the pension industry remained unchanged in the 2018-2021 period. The investments of this asset class are geographically spread as most of the assets are invested outside Namibia. Specifically, in 2021, equities as a proportion of total assets, 17.7% were invested in Africa (including CMA), 33.1% internationally and 49.3% in Namibia. The pension industry is, however, exposed to market risk arising from volatility in the market value of equities and international equity markets. This is because the industry has been holding most of its assets in equities over the years. 

The Asset Management Sub-Sector

In Namibia, the asset management sub-sector are well noted for their role in managing funds on behalf of collective investment schemes, pension funds, insurance companies, medical aid funds, and other wholesale investors. Total assets under management have grown from NAD 164.3 billion (USD 12.3 billion) in 2017 to NAD 207.8 billion (USD 12.6 billion) in 2021. These assets have been held in different types of investments, with those held in listed equities accounting for 39.7% of the total as of December 31, 2021. Money market instruments accounted for 24.8% of the total, while listed debt accounted for 27.8%. Fixed-income (debt and money market) instruments accounted for 52.6% of total assets.

In 2021, 52.8% of these assets under management were invested in Namibia, with the remaining 47.2% invested outside Namibia, with 32.7% invested in the CMA (mostly in South African securities), 1% in Africa (excluding the CMA), and 13.5% in offshore markets. In terms of source of funds, total assets under management in 2021 were sourced from pension funds (51.4%), collective investment (unit trust) schemes (27.1%) and long-term insurance companies (14.7%).  In 2021, the Pension funds and Collective Investment Schemes accounted for the majority of assets under management (51.4% and 27.1%, respectively).

The Capital Market

By the end of 2021, the capital markets in Namibia was made up of the Namibian Stock Exchange, 31 investment managers, 4 stockbrokers, 4 linked investment service providers, 19-unit trust management companies, 29 unlisted investment managers, and 21 special purpose vehicles. The performance of the Namibian Stock Exchange (NSX) has been subdued in recent years, with its overall market capitalization decreasing continuously from NAD 2.08 trillion (USD 156.3 billion) in 2017 to NAD 1.74 trillion (USD 105.7 billion) in 2020. However, in comparison to 2020, overall market capitalization of companies listed on the NSX increased by 24.7%, reaching NAD 2.17 trillion (USD 111.17 billion) as of 31 December 2021. Local market capitalization increased by 38.6% from the end of 2020 to the end of 2021, owing mostly to the listing of Mobile Telecommunications Limited.

The SME Finance

The Namibian government continues to prioritize the small and medium enterprises (SMEs) sector because of its role in contributing to economic growth and development. In particular, the sector has been hugely important in providing employment and income to 160,000 Namibians.^[3] The Bank of Namibia has stressed that SME development continues to be hampered by limited access to finance. This is supported by available data from the SME Finance Forum, which suggests that the size of the Micro Small Medium Enterprise (MSMEs) finance gap^[4] in Namibia is USD 1.79 billion, relative to the much smaller volume of finance currently available, which is estimated at USD 139. 6 million. Moreover, it can be observed that the severity of financial constraints existing in the sector varies significantly between microenterprises and SMEs. It can be observed that microenterprises are more fully (30%) and partially (12%) constraint in receiving credit than SMEs. This is ascribed to limited source of external funding for the microenterprises.