Financial inclusion in Namibia : summary note

FINANCIAL INCLUSION IN NAMIBIA: SUMMARY NOTE OCTOBER 2016 1  Acronyms ATM Automated Teller Machine CPSS Committee on Payment and Settlement Systems DBN Development Bank of Namibia ES Enterprise Survey FAS Financial Access Survey FLI Financial Literacy Initiative ICR ROSC Insolvency and Creditor/Debtor Regimes Report on Observance of Standards & Codes MFI Microfinance Institution MSME Micro, Small, and Medium Enterprise NBFI Non-Bank Financial Institution NEEC Namibia First National Enterprise/Establishment Census NPL Non Performing Loans RSP Remittance Service Providers SOEs State-Owned Enterprises TA Technical Assistance WBES World Bank Enterprise Survey 2  Executive Summary This note summarizes recent World Bank work on financial inclusion in Namibia. This includes: (i) a stocktaking exercise on financial inclusion in Southern Africa carried out in 2015; (ii) the 2014 Namibia Insolvency and Creditor/Debtor Regimes Report on Observance of Standards & Codes (ICR ROSC); (iii) the 2014-2015 Namibia World Bank Enterprise Survey (WBES); and (iv) the 2014 Review of the Market for Remittances in Namibia on the Basis of the CPSS-World Bank General Principles for International Remittances Services. The goal is to provide a snapshot of financial inclusion (for individuals and enterprises) in Namibia as well as to identify main issues and related policy recommendations. Namibia has the second largest financial system in Southern Africa (SA). The financial system is relatively well-developed compared to regional peers and is dominated by non-bank financial institutions (NBFIs). Pension funds and insurance companies are the largest component among NBFI. Reportedly, the banking sector is sound, profitable and adequately capitalized. The main four commercial banks hold more than 95 percent of assets and deposits with three of them being mainly South African owned. Financial inclusion for individuals has increased remarkably in recent years and Namibia stands out for the high percentage of banked individuals. Importantly, the increase in the banked population has largely emerged from low-income earners who tend to live in rural areas. The Financial Literacy Initiative (FLI, et al 2013) found that 60 percent of Namibians had bank accounts, which is slightly higher than the level observed in South Africa and the East Asia and the Pacific (EAP) Region. Similarly, Global Findex 2014 finds a relatively high percentage of individuals with accounts at financial institutions (58 percent vs. 69 percent in South Africa and 51 percent in LAC). Notwithstanding these notable improvements on financial inclusion at the household/individual level, some issues remain. Given the large size of the country and the small population size, there is low coverage of bank branches/ATMs in rural areas. Enhancing the use of more innovative delivery channels like mobile banking could enhance financial inclusion in rural areas. In addition, increased financial inclusion has been driven by transactional and savings products with relatively low usage of credit and insurance. Other reported issues are high prices of some financial products (e.g. insurance and micro- lending), limited availability of some financial data that restricts the ability of consumers to compare prices/costs, lack of consumer awareness of lower cost products (e.g. Basic Bank Account) and MFIs mainly targeting salaried individuals. The latter would be limiting MFIs potential contributions to enhance financial inclusion for microenterprises and lower income individuals. At the enterprise level, access to finance is perceived as a key obstacle by businesses with no visible improvement in recent years. Firms (irrespective of size/age) rate cost and access to finance as the top 1 constraint for their growth. Informal firms and MSMEs have lower access to credit. In particular, access to working capital financing in Namibia is low compared with other countries. Lack of collateral is identified as a key obstacle to improve access to financing for MSMEs and informal enterprises. Other reported obstacles are the lack of credit history and financial statements, enterprises low level of skills/training/expertise (e.g. to prepare business plans), informality (lack of business registration), MFIs targeting salaried individuals mostly, and lack of financial products tailored for micro-enterprises. 3  Recommendations to Enhance Financial Inclusion Financial sector interventions/efforts in Namibia should seek to enhance employment and reduce inequality. The country suffers from chronic high unemployment, HIV/AIDS, and a distribution of income that is among the World’s most unequal—only a minority of the population lives in conditions expected in a middle income country. The unemployment rate (broad) is 27 percent and the labor force participation rate (60 percent) falls below the averages for Sub-Saharan Africa, middle-income countries and low-income countries. Economic growth has not generated jobs as the structure of economic production and trade is tied closely to metals, minerals, and other natural resources. Efforts to enhance financial inclusion should focus on increasing financial inclusion at the enterprise level (particularly MSMEs and informal enterprises) given links to growth/employment and relevant improvements at individual level. Reform priorities to enhance financial inclusion at the enterprise level: - Strengthen the collateral framework (e.g. registration of movable collateral) and credit information framework (e.g. to include positive and negative information). (See recommendations to strengthen ICR below). - Promote expansion of MFIs into underserved segments (micro-enterprises and low income individuals), including through the regulation of deposit taking MFIs. - Evaluate/prioritize government initiatives to support the SMEs considering international experience (including the additionality/sustainability of SME credit guarantee schemes and the need for national risk facility fund given private equity funds already present in a small market). - Evaluate the need to: promote alternative financing products to bank financing (factoring/leasing) and enhance current support to business training. Reform priorities to enhance financial inclusion at the individual level: - Promote innovative delivery channels (focus on mobile banking given high access to mobile phones). - Promote micro-insurance. - Enhance financial consumer protection and literacy (including better disclosure). - Enhance transparency and efficiency of remittance market (please see below). Key recommendations to strengthen the ICR are (World Bank 2014a): - Creditor rights: modernize the secured transactions regime. - Risk management and restructuring: regulate the credit information system; incentivize restructuring, modify tax treatment; reform the scheme of arrangement. - Insolvency: modernize the regime for insolvency, including reorganization and cross-border insolvency. - Institutions: increase judicial capacity; enhance communication between authorities; introduce a regime for insolvency professionals. Actions to enhance the efficiency and safety of remittances transactions to and from Namibia include (World Bank 2014b): - Developing common standards of transparency applicable to all Remittance Service Providers (RSP) and ensuring that senders and receivers of remittances are informed of all the relevant elements of transactions. - Clarifying the framework for the protection of consumers of remittance services and explicitly assigning institutional responsibility for protecting the rights of consumers of remittance services. - Fostering the use of electronic channels for the collection and disbursement of remittances and ensuring the interoperability of payment instruments. - Leveraging NamPost for the delivery of remittances. - Consider relaxing currency exchange control requirements for low-value transactions. - Review licensing procedures for RSPs and procedures for the authorization of new products, services, partnerships, agents and similar. - Eliminate few remaining elements that seem to be preventing some players in the market from competing on a level playing field for the delivery of payment and remittance services - Closely monitor (and consider banning) exclusivity agreement clauses by which international money transfer operators can prevent local RSP with whom they are partnering from offering other services along with those of the international MTO. 4  I. Introduction This note summarizes recent World Bank work on financial inclusion in Namibia. This includes: (i) a stocktaking exercise on financial inclusion in Southern Africa carried out in 2015; (ii) the 2014 Namibia Insolvency and Creditor/Debtor Regimes Report on Observance of Standards & Codes (ICR ROSC); (iii) the 2014-2015 World Bank Enterprise Survey (WBES) in the country; and (iv) the 2014 Review of the Market for Remittances in Namibia on the Basis of the CPSS-World Bank General Principles for International Remittances Services. The goal is to provide a snapshot of financial inclusion (for individuals and enterprises) in Namibia as well as to identify main issues and related policy recommendations. The stocktaking exercise on financial inclusion in southern African countries is part of programmatic technical assistance (TA). The TA follows a two-stage approach: a stocktaking exercise and follow up policy advice. The exercise leveraged on existing knowledge and data to provide a comprehensive cross-country view of the main financial inclusion issues in selected Southern African countries (Botswana, Lesotho, Namibia, South Africa and Swaziland). This added a crucial horizontal dimension that was missing in the individual country activities. The exercise included the analysis of existing financial inclusion data, such as Global Findex Database, WBES, FinScope Surveys and IMF’s Financial Access Survey (FAS), to identify the main weaknesses on financial inclusion for individuals and enterprises in Southern African countries. This was complemented by the analysis of relevant analytical work as well as related country and sector strategies. Based on this analysis, the exercise provided an overview of financial inclusion in selected Southern African countries, identified the main financial inclusion weaknesses and knowledge gaps, and offered initial policy recommendations to be deepened in the second stage of the study. This Note presents a summary of the findings of the stocktaking exercise in Namibia. The World Bank reviewed the legal and regulatory frameworks for creditor/debtor rights and corporate insolvency systems in Namibia pursuant to a joint IMF – World Bank initiative to develop Reports on Observance of Standards and Codes (“ROSC