Consumer crippled by debt

Banks stable, but NPLs monitored

30 April 2021 | Economics

Current economic conditions played a rather large role in the ability of clients to service their debt, more so with lay-offs and retrenchments experienced. – Bank of Namibia

Jo-Maré Duddy – Out of every N$100 disposable income in 2020, consumers on average could call only N$10.90 their own as they owed N$89.10 in debt to commercial banks and non-banking institutions.

The Bank of Namibia (BoN) yesterday released its Financial Stability Report, which showed average annual disposable income last year amounted to N$75 725 – N$1 310 or 1.7% less than in 2019.

Adjusted credit to disposable income in 2020 was 89.1% compared to 83.8% the previous year – by far the highest in the latest BoN figures dating back to 2016, which is based on revised data of the Namibia Statistics Agency (NSA).

Household indebtedness grew by 4.5% last year.

“The contraction in disposable income of 1.7% in 2020 outweighed the growth in disposable income of 0.5% in 2019,” the BoN said. The central bank attributed the drop in disposable income to rising unemployment and a decline in the compensation of employees due to the ongoing recession, which was exacerbated by the impact of the Covid-19 pandemic.


“At face value, a higher ratio of household debt to disposable income does not bode well for the stability of the financial system; however, it largely depends on the type of debt,” the BoN said.

About 69% of household debt last year was in the form of mortgage lending, while overdrafts, instalment and leasing, as well as other loans and advances collectively contributed 30.8% of household debt.

“This means that the majority of household debt is collateralised thus putting the banks in a favourable position to recover a significant amount, if not all, of the debt in the case of default,” the BoN said, adding: “In this context, an increase in household indebtedness does not pose a significant risk to financial stability.”

However, the BoN cautioned that a growth in unsecured lending “would not be a positive development for financial stability because it can have a significant negative impact should it materialise”.


The asset quality of commercial banks deteriorated last year and a “persistent increase” in non-performing loans (NPLs) was witnessed, the BoN said.

The banking sector’s NPL ratio rose above the new trigger ratio of 6.0% for times of crisis and reached 6.4% in 2020, a “significant escalation” from 4.8% of 2019, the central bank said.

It attributed the spike to “unfavourable economic conditions, cash flow constraints experienced by both households and businesses and the downside risk emanating from the Covid-19 pandemic, which caused business to either scale down operations or close”.

Mortgage NPLs increased by 24.2% year-on-year (y/y), while overdraft NPLs jumped by 59.7%. NPLs in the category for personal loans, as well as other loans and advances skyrocketed by 76% and 60.8% respectively.

According to the BoN, mortgage loans contributed significantly to the growth in the NPL ratio during the period under review. “However, this is expected given that mortgage loans make up 52.3% of the total loan book of banks,” it added.

“Current economic conditions played a rather large role in the ability of clients to service their debt, more so with lay-offs and retrenchments experienced,” the BoN said.


In line with the deterioration in asset quality, the write-offs in relation to profits increased last year. In 2019, commercial banks had to write off 2.47% of their profits. Last year, the figure was 11.09%.

“The increase in the write-off to profits ratio reflects the recessionary economic conditions triggered by Covid-19 and is expected to improve once the economy recovers during the course of 2021 and 2022,” the BoN said.

The banking sector’s after-tax profits fell by 33.4% or some N$900 million y/y to N$1.8 billion in 2020.

Despite the challenges, the banking sector last year continued to be financially stable, sound, profitable and well capitalised while maintaining liquidity levels well above the prudential requirement, the BoN said.

“The banking institutions displayed a healthy aggregate balance sheet growth, profitability and satisfactory liquidity levels given the impact of the Covid-19 pandemic.”


Equally, Namibia’s financial system remained sound, profitable and resilient, the central bank said.

Going forward, risks to the Namibian financial system require continuous monitoring, the BoN said.

“Specifically, the significant increase in the NPL ratio in the banking sector will be monitored closely. The deterioration in banking sector asset quality has surpassed the crisis time supervisory intervention trigger point; as such it poses a risk to financial stability and needs to be monitored.

“Proactive regulation and supervision can therefore mitigate potential systemic risks. Risks to financial stability in Namibia will be monitored accordingly under the advisory guidance of the Financial System Stability Committee and direction of the Macroprudential Oversight Committee,” the BoN said.