The state of access to financial services in Namibia

From the finance-growth nexus it is clear that finance is important for growth. It follows therefore that access to financial services is important. A savings account provided to individuals will enable accumulation of funds in a secure place over time, access to credit enables them to borrow funds and strengthen their productive assets, access to mechanisms that facilitate transactions such as electronic transfers of regular remittances can reduce risks for households, while access to insurance can also minimise the negative impacts of shocks on future income (Ellis, Lemma & Rud, 2010). Further, access to credit is

important for firms to finance their working capital and investment (CAF, 2011). As such, access to financial services is a key factor in economic development and social welfare (CAF, 2011). It is for these reasons that improving access to financial services has become an important policy objective, especially in the developing world (Ghalib & Hailu, 2008).

In Namibia, access to financial services has remained limited, especially for previously disadvantaged low-income people and SMEs, as mentioned earlier. The high cost of services mentioned earlier, coupled with the limited outreach of commercial banks, as illustrated under Section 2.4.4, has left certain areas (especially the rural areas) of the country unserved. Figure 2.17 depicts the latest survey results on access to banking services in Namibia.

Figure 2.17: Access to financial services: Banked and unbanked population Source: FinMark Trust (2011)

The above figure shows that while 62 per cent of the Namibian economically active population is banked, approximately 35 per cent47 _{is not served by banks. This is however a}

reduction from 51 per cent registered in the previous FinScope Survey of 2007. While this is clearly an improvement in the banked population between 2007 and 2011, it is important to note that access to finance in Namibia does not necessarily represent credit usage, but mainly deposits (FinMark Trust, 2011). For instance, the results indicate that 64 per cent of

the population has access to a formal savings account and the survey attributes this to significant outreach efforts by the Namibian postal service, NAMPOST, through the introduction of its smart card48 _{during that period.}

The survey found only 13 per cent of the population having had access to a formal loan, while informal sources (including family and friends and informal institutions) were found to be the main source of borrowing for 19 per cent of Namibians. The remaining 68 per cent did not have access to any form of borrowing whatsoever (FinMark Trust, 2011). A similar situation is revealed with regard to insurance products and services, in that 64 per cent of Namibians were found not to have used any insurance product or services before, hence non-coverage of their risk. This is not an ideal situation, as access to savings and credit as well as non-credit services is important for an effective financial inclusion process.

The survey further found the unserved to be mainly those residing in the rural areas, typically the low-income people and the poor. Figure 2.18 shows that 76 per cent of the urban population in Namibia is banked, compared to 51 per cent of the rural population. In terms of the unbanked population, 45 per cent49 _{of the rural population is unbanked, compared to 33}

per cent in the urban area.

Figure 2.18: Access to financial services: Urban and rural banked and unbanked Source: FinMark Trust (2011)

48 _{This is a savings card introduced by Nampost in 2010/2011, through which even pensioners have been receiving their}

monthly pensions.

The above shows the disparity levels at which the Namibian banking sector serves the different income groups and different parts of the country, i.e. those in urban areas get served better (receive better coverage) than the low-income people of the rural areas.

Namibian small businesses have also remained insufficiently served, despite their identified importance to the economy.50 _{A 2012 study of registered SMEs, commissioned by Business}

Finance Solutions and carried out by the IPPR to assess the market demand for private equity and venture capital among SMEs in Namibia, found business owners having perceived access to finance as a serious constraint to grow their companies and that the cost of finance is particularly high. It further revealed that only approximately 36 per cent of respondents had used bank loans as starting capital while approximately 76 per cent had used own savings and the remainder used borrowings from family and friends (BFS, 2012). The 2014 IMF Financial Access Survey also uncovered a similar situation, namely that in Namibia both outstanding commercial bank loans to SMEs and outstanding SME deposits with commercial banks amount to only approximately 1 per cent of GDP (IMF, 2014). This is a persistent situation considering that in 2010 the annual symposium of the BoN, which focused on SME development, reported the share of formal and informal businesses that had not been able to access finance from the financial sector during 2008/9 to have been very high at above 50 per cent (see Figure 2.19).

The symposium also revealed at the time that the informal businesses who managed to access finance sourced it mainly from friends and relatives, as is evident from Figure 2.19. In fact, the symposium concluded that a lack of access to finance was the key constraint that had hampered the development of the Namibian SME sector. Other key challenges highlighted were access to land and the cost of utilities.

50 _{The importance of the SME sector to an economy is a generally accepted notion, as it has been proven empirically. In}

Namibia, the contribution of SMEs to the GDP is estimated at between 10 and 20 per cent. Although there is no official estimate of the contribution of SMEs to the GDP in Namibia, various reports have made references in that range.

Figure 2.19: Formal and informal businesses accessing finance during 2008/9 (per cent)

Source: Adapted from BoN (2010b)

The low access to financial services by Namibians has been ascribed to a lack of collateral and limited effective demand for financial services due to low incomes as a result of high poverty (28.7 per cent) and unemployment (27.4 per cent) (AfDB, 2014; FinMark Trust, 2011). Moreover, the collateral requirements by banks for lending has limited the participation of previously disadvantaged people and SMEs in the system, given the lack of assets to pledge to the banks for loans. Furthermore, the country’s land tenure system, in terms of which all communal land belongs to government, has not made it easy for inhabitants who hold leaseholds, as trading of land is not allowed and therefore land or properties built on it cannot be pledged as security.51 _{These challenges have caused high}

expectations by the Namibian public for the recently established SME Bank to play a meaningful role in financing SMEs. This however remains to be seen once the bank has fully operated in that space. The researcher is of the view that the outcome might not fully align to expectations in the end, given that this bank, which is considered a specialised SME Bank, is licensed as a full commercial bank, just like all other existing commercial banks, and its focus is not entirely on the SME sector. Given this status, and the competition it presents, the bank might find itself operating based on the same principles as conventional

51 _{The 2012 annual symposium of the BoN, which focused on the theme of unlocking the economic potential of communal land,}

commercial banks without necessarily granting special treatment to SMEs. There is also a possibility of the bank being lured into financing more large-scale businesses rather than small businesses and avoiding financing a large number of SMEs that are generally viewed as inherently risky. This situation is not ideal, as it constrains the capacity of the SME sector to make a meaningful contribution to the economy. As Klapper, Laeven and Rajan (2006) posit, countries that provide a supporting, enabling environment, including easier access to finance, are the ones that experience entry and growth of small firms. SMEs have the potential to contribute to the GDP and growth and significantly expand the well-being among Namibia’s low-income communities.

Further, in the context of Namibia’s insufficient economic growth (averaging below 5 per cent) and prevailing high unemployment (Republic of Namibia, 2012), SMEs become particularly important as a source of employment and a strategic avenue to increase domestic economic activity and enhance economic growth. There is therefore a need for Namibia to engage deliberate efforts geared towards the support of its SME sector with the aim of overcoming the barriers to finance for entrepreneurs.