## 1. Bank Loans by Type of Borrowers ## Source details **Canonical URL:** [1. Bank Loans by Type of Borrowers](https://www.imf.org/-/media/files/publications/cr/2018/cr1859.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1859.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1859.pdf.json) --- ### Overview and purpose - Provides background for Lesotho’s 2017 Article IV consultation macrofinancial analysis. - Focuses on two potential consequences of a severe SACU revenue shock for the financial system: - A decline in reserves that may threaten the sustainability of the hard currency peg with the South African rand. - The impact of a forced fiscal consolidation on household income and the quality of credit to households, affecting both bank and nonbank lenders. - Notes limited data prevent full quantification, but allows analysis of macrofinancial linkages, resilience, and buffers. ### Key characteristics of the financial sector - Banks are the largest component of Lesotho’s financial sector; three foreign-owned banks and one public bank hold 50 percent of the system’s total assets. - Insurance companies represent nearly a fifth of total assets (this includes assets on behalf of group pension products offered by insurance companies). - Public pension fund and private collective investment schemes are significant components. - Bank lending composition: - Uncollateralized personal loans: 50 percent of the lending portfolio. - Mortgages: 17 percent of the lending portfolio. - Loans to business enterprises: one third of loans. - Households often borrow from multiple lenders (money lenders, financial cooperatives). - Credit bureau (created in 2014) now covers most formal financial institutions. ### Financial intermediation and market metrics - Loan-deposit ratio is low, averaging less than 60 percent over the past six years. - Loan-deposit ratios inversely correlated with interest rate spread between loans and deposits. - Banks hold an unusually large share of liquid foreign assets placed at banks in South Africa. - Deposit composition: low share of rand-denominated bank deposits (about 2 percent). - Central Bank of Lesotho (CBL) fixed exchange rate regime since 1980 under the Common Monetary Area; maloti pegged at par with the rand. ### Reserves, coverage ratios, and liquidity buffers - International reserves coverage of the monetary base averaged 650 percent over the first ten months of 2017. - Coverage of M1 plus (transferable and callable deposits) remained above 100 percent; specifically 132 percent in September 2017. - Adding banks’ net foreign assets (NFA) to central bank gross reserves increases average coverage of “M1 plus” to 186 percent. - Coverage of broad money by the system’s foreign reserve assets: 137 percent in September 2017. - Trend: coverage of M1 is strong but recently declining; warns the declining trend is not sustainable over the medium term. ### Liquidity requirements and domestic instruments - Current requirements: - Cash reserve requirement (CRR): 3-percent against total deposit liabilities and balances due to foreign and local banks. - Minimum liquid asset requirement (LAR): 25 percent. - Qualifying liquid assets include cash, deposits with the central bank, short-term treasury bills, and balances due from other banks in Lesotho (claims on other banks are not netted out in practice). - Treasury bills used for sterilization are capped at 700 million maloti; auctions are nearly always oversubscribed by participating banks. - Longer-term government bonds have experienced mixed auction results, indicating limited appetite for illiquid long-term assets. - Proposed adjustments: - Amend the LAR to restrict use of intra-bank claims to a net basis only (a revised LAR from 2016 changed the definition to net balances but is currently not applied due to technical problems). - Once LAR amended, changes in the required ratio would give the CBL limited room to influence banks’ supply and demand for foreign exchange. - Raise the ceiling on the issuance of treasury bills for sterilization purposes: current ceiling 700 million maloti; recommendation to raise by at least 300 million maloti to provide more domestic instruments and induce banks to sell NFA. ### Credit risks from household lending - Lending concentrated toward private resident households exposes banks to household financial health. - Civil servants frequently have loans secured by deduction of debt service at source; their disposable incomes are net of taxes, social contributions, debt and insurance payments. - Credit bureau emergence has led some rejected borrowers to turn to money lenders that rely on source deduction; formal lenders have similarly increased deduction-at-source practices for weaker households. - Banking sector heatmap indicates: - System is solid with no signs of overheating. - Credit-to-GDP ratio steady relative to trend; NPLs stable at low levels; profitability high but declining. - System shows poor capacity to foster financial development and inclusion; credit-to-GDP ratio has been decreasing somewhat. - Exposure to sovereign risk is limited: - Government domestic securities represent 5.6 percent of banks’ assets and about 2.4 percent of GDP. - Stress testing outcomes: - A severe shock that raises NPLs by 180 percent would still leave all banks comfortably capitalized (CBL exercise using end-2016 data). - Reverse stress-testing: 30 percent of the system’s performing loan portfolio would have to become non-performing to breach the system’s minimum capital adequacy ratio of 8 percent. - In a severe fiscal shock (expenditure cuts, salary freezes, retrenchment, increasing arrears) banks should be able to withstand the first-round impact. ### Payroll data and household financial vulnerability - In 2016 more than 20 percent of civil servants took home less than 50 percent of their pay, the remainder being deducted at source for debt and insurance payments. - This indicates significant financial vulnerability of households; while banks may have significant buffers to face external and fiscal shocks, households do not. - Second-round effects of shocks affecting households could reverberate intensely through the financial system, the real sector, and public finances. - Authorities have started to address the problem by implementing the legally required minimum for the take-home pay of 30 percent of salaries. - Since October 2017, the information system of the company that administers the debt-service deduction at source (CEDAS) has been linked to the payroll database, allowing CEDAS to reject requests from lenders for deduction at source once the 70-percent threshold has been reached. ### Mortgage market and potential amplification of household vulnerability - Mortgage lending has picked up in recent years, following improvements of the land registry system. - Between 2009 and now, the share of mortgage loans in total lending has increased from six to seventeen percent of the total loan portfolio. - There is some anecdotal evidence of booming construction and rising house prices, although a house price index does not exist at this stage. - A sudden retrenchment of house prices would accelerate and aggravate any financial shock hitting households and banks’ loan portfolio. ### Transmission of a disorderly fiscal adjustment and systemic risks - Households’ financial fragility and income exposure to the public sector could lead to harmful dynamics in the case of a disorderly fiscal adjustment. - First-round effects of the shock could be easily absorbed by banks, but households have little buffers; their financial predicament would reverberate across the whole economy, including the real sector. - The private business sector is dependent not only on household spending, but also on government contracts; a financial crunch would be exacerbated by public sector payment arrears. - Consequences could include: sharply curtailed investment and private sector spending; erosion of banks’ profitability; declines in tax revenue; and further fiscal spending or payments cuts. - Prolonged dynamics could exhaust the financial system’s buffers, forcing a bank bailout that would drive up public debt and activate a negative bank-sovereign feedback loop. - To minimize potential spillovers, it is important to phase in an orderly fiscal adjustment as soon as possible; establishing confidence in the effectiveness of the proposed fiscal adjustment path would stabilize the financial sector and could open up sources of external financing consistent with a more gradual and well-structured consolidation plan. - Macroprudential tools, such as the gradual phasing in of debt-service-to-income ceilings on consumer lending, are recommended to contain the risk of credit overheating and to enhance household resilience to income shocks. ### Mobile banking and broader financial inclusion - Since its introduction in July 2013, the use of mobile financial services has exploded, and 60 percent of Lesotho’s total population are now registered mobile money users. - The industry is dominated by two companies (EcoCash and M-Pesa); nearly all banks surveyed plan to offer mobile banking services. - The CBL supervises mobile payments operators, and a new set of regulations has been enacted in March 2017. - Mobile money usage indicators shown in the source include Customer Deposits, Domestic Transfers, Mobile Money Usage (value in millions of maloti), and Mobile Money Trust Account Balances (in million maloti). - The last comprehensive World Bank financial inclusion data for Lesotho is from 2011; in 2011 Lesotho had 18 percent of the population over 15 years old owning an account at a formal financial institution. - Nonbank financial institutions with potential to widen access: - Financial cooperatives (SACCOs): structural problems exist, reporting gaps are being addressed with a new reporting template and a Cooperative Data System scheduled for early 2018; policy work includes encouraging mergers and creating a single financial cooperatives league; a draft law for financial cooperatives has been prepared in the MoSBCM. - Boliba Savings and Credit: the largest financial cooperative with more than 65,000 members has not completed its licensing process and is currently supervised neither by the CBL nor by the MoSBCM; governance appears inappropriate for its scale; recapitalized a few years ago; an eventual bailout could pose some moderate fiscal risk but no systemic risk is identified for the financial system. - Microfinance Institutions (MFIs): regulated separately and reporting to the CBL; regulation allows for deposit-taking MFIs but currently only credit-only MFIs operate; industry is in an infant stage with potential to foster financial inclusion. - For 2018, the Postbank plans to introduce a mobile banking application that includes savings products and nano loans for customers in rural areas. ### Conclusions and policy recommendations - Baseline scenario findings: - The financial system is well endowed with ample foreign-exchange and capital buffers, sufficient to prevent a confidence crisis or systemic spillovers to the rest of the economy. - CBL stress-testing exercises subjected the banking system to significant hypothetical credit and liquidity shocks. - In the baseline scenario used for Lesotho’s 2017 Article IV consultation, the current shock to the SACU revenues recedes in 2020–22. - Under these assumptions, gross international reserves of the CBL would gradually decrease from 3.6 months of imports (2017/18) to 1.9 months of imports (2021/22). - Over the same period, the overall fiscal balance would improve from -6.5 to 0.3 percent of GDP. - Extended shock scenario risks: - If the fall in SACU revenues is permanent, medium-term sustainability of the exchange rate peg is questioned. - A foreign currency run would occur well before international reserves have fallen to zero, leading to severe repercussions: contraction of bank credit, default by households and private sector business, collapse of fiscal revenues, bank failures, and further spillovers and spillbacks. - Policy prescriptions: - Proactive fiscal consolidation must be the principal policy instrument to prevent dire consequences of an extended shock. - An orderly adjustment, initiated in time, is necessary to maintain confidence and mitigate negative impacts on domestic demand, household income, and economic growth. - Fiscal measures should be complemented by monetary policy instruments that strengthen domestic liquidity control. - Macroprudential measures, such as debt-service-to-income ceilings for consumer lending, could be used to enhance household resilience to income shocks. *Prepared by Tobias Roy. January 31, 2018. Kingdom of Lesotho — Macrofinancial Linkages in Lesotho. KINGDOM OF LESOTHO — INTERNATIONAL MONETARY FUND* ### 1. Bank Loans by Type of Borrowers ____________________________________________________ 2 ### 1. Bank Loans by Type of Borrowers ### Overview and purpose - Provides background for Lesotho’s 2017 Article IV consultation macrofinancial analysis. - Focuses on two potential consequences of a severe SACU revenue shock for the financial system: - A decline in reserves that may threaten the sustainability of the hard currency peg with the South African rand. - The impact of a forced fiscal consolidation on household income and the quality of credit to households, affecting both bank and nonbank lenders. - Notes limited data prevent full quantification, but allows analysis of macrofinancial linkages, resilience, and buffers. ### Key characteristics of the financial sector - Banks are the largest component of Lesotho’s financial sector; three foreign-owned banks and one public bank hold 50 percent of the system’s total assets. - Insurance companies represent nearly a fifth of total assets (this includes assets on behalf of group pension products offered by insurance companies). - Public pension fund and private collective investment schemes are significant components. - Bank lending composition: - Uncollateralized personal loans: 50 percent of the lending portfolio. - Mortgages: 17 percent of the lending portfolio. - Loans to business enterprises: one third of loans. - Households often borrow from multiple lenders (money lenders, financial cooperatives). - Credit bureau (created in 2014) now covers most formal financial institutions. ### Financial intermediation and market metrics - Loan-deposit ratio is low, averaging less than 60 percent over the past six years (comparison with small middle-income countries noted). - Loan-deposit ratios inversely correlated with interest rate spread between loans and deposits. - Banks hold an unusually large share of liquid foreign assets placed at banks in South Africa. - Deposit composition: low share of rand-denominated bank deposits (about 2 percent). - Central Bank of Lesotho (CBL) fixed exchange rate regime since 1980 under the Common Monetary Area; maloti pegged at par with the rand. ### Reserves, coverage ratios, and liquidity buffers - International reserves coverage of the monetary base averaged 650 percent over the first ten months of 2017. - Coverage of M1 plus (transferable and callable deposits) remained above 100 percent; specifically 132 percent in September 2017. - Adding banks’ net foreign assets (NFA) to central bank gross reserves increases average coverage of “M1 plus” to 186 percent. - Coverage of broad money by the system’s foreign reserve assets: 137 percent in September 2017. - Trend: coverage of M1 is strong but recently declining; warns the declining trend is not sustainable over the medium term. ### Liquidity requirements and domestic instruments - Current requirements: - Cash reserve requirement (CRR): 3-percent against total deposit liabilities and balances due to foreign and local banks. - Minimum liquid asset requirement (LAR): 25 percent. - Qualifying liquid assets include cash, deposits with the central bank, short-term treasury bills, and balances due from other banks in Lesotho (claims on other banks are not netted out in practice). - Treasury bills used for sterilization are capped at 700 million maloti; auctions are nearly always oversubscribed by participating banks. - Longer-term government bonds have experienced mixed auction results, indicating limited appetite for illiquid long-term assets. - Proposed adjustments (policy recommendations detailed below) aim to strengthen liquidity control and provide domestic instruments to absorb liquidity. ### Credit risks from household lending - Lending concentrated toward private resident households exposes banks to household financial health. - Civil servants frequently have loans secured by deduction of debt service at source; their disposable incomes are net of taxes, social contributions, debt and insurance payments. - Credit bureau emergence has led some rejected borrowers to turn to money lenders that rely on source deduction; formal lenders have similarly increased deduction-at-source practices for weaker households. - Banking sector heatmap indicates: - System is solid with no signs of overheating. - Credit-to-GDP ratio steady relative to trend; NPLs stable at low levels; profitability high but declining. - System shows poor capacity to foster financial development and inclusion; credit-to-GDP ratio has been decreasing somewhat. - Exposure to sovereign risk is limited: - Government domestic securities represent 5.6 percent of banks’ assets and about 2.4 percent of GDP. - Stress testing outcomes: - A severe shock that raises NPLs by 180 percent would still leave all banks comfortably capitalized (CBL exercise using end-2016 data). - Reverse stress-testing: 30 percent of the system’s performing loan portfolio would have to become non-performing to breach the system’s minimum capital adequacy ratio of 8 percent. - In a severe fiscal shock (expenditure cuts, salary freezes, retrenchment, increasing arrears) banks should be able to withstand the first-round impact. ### Policy recommendations and operational measures - Amend the LAR to restrict use of intra-bank claims to a net basis only (a revised LAR from 2016 changed the definition to net balances but is currently not applied due to technical problems). - Once LAR amended, changes in the required ratio would give the CBL limited room to influence banks’ supply and demand for foreign exchange. - Raise the ceiling on the issuance of treasury bills for sterilization purposes: - Current ceiling: 700 million maloti. - Recommendation: raise by at least 300 million maloti to provide more domestic instruments and induce banks to sell NFA. - Consider policy measures to stabilize reserves coverage ratios through timely fiscal adjustment to avoid sharp and disorderly fiscal contraction that could have severe financial system implications. *Prepared by Tobias Roy. January 31, 2018. Kingdom of Lesotho — Macrofinancial Linkages in Lesotho.* ### 16. Payroll data indicate that in ### 16. Payroll data indicate that in ### Household financial vulnerability and payroll deductions - In 2016 more than 20 percent of civil servants took home less than 50 percent of their pay, the remainder being deducted at source for debt and insurance payments. - This indicates significant financial vulnerability of households; while banks may have significant buffers to face external and fiscal shocks, households do not. - Second-round effects of shocks affecting households could reverberate intensely through the financial system, the real sector, and public finances. - Authorities have started to address the problem by implementing the legally required minimum for the take-home pay of 30 percent of salaries. - Since October 2017, the information system of the company that administers the debt-service deduction at source (CEDAS) has been linked to the payroll database, allowing CEDAS to reject requests from lenders for deduction at source once the 70-percent threshold has been reached. ### Mortgage market and potential amplification of household vulnerability - Mortgage lending has picked up in recent years, following improvements of the land registry system. - Between 2009 and now, the share of mortgage loans in total lending has increased from six to seventeen percent of the total loan portfolio. - There is some anecdotal evidence of booming construction and rising house prices, although a house price index does not exist at this stage. - A sudden retrenchment of house prices would accelerate and aggravate any financial shock hitting households and banks’ loan portfolio. ### Transmission of a disorderly fiscal adjustment and systemic risks - Households’ financial fragility and income exposure to the public sector could lead to harmful dynamics in the case of a disorderly fiscal adjustment. - First-round effects of the shock could be easily absorbed by banks, but households have little buffers; their financial predicament would reverberate across the whole economy, including the real sector. - The private business sector is dependent not only on household spending, but also on government contracts; a financial crunch would be exacerbated by public sector payment arrears. - Consequences could include: sharply curtailed investment and private sector spending; erosion of banks’ profitability; declines in tax revenue; and further fiscal spending or payments cuts. - Prolonged dynamics could exhaust the financial system’s buffers, forcing a bank bailout that would drive up public debt and activate a negative bank-sovereign feedback loop. - To minimize potential spillovers, it is important to phase in an orderly fiscal adjustment as soon as possible; establishing confidence in the effectiveness of the proposed fiscal adjustment path would stabilize the financial sector and could open up sources of external financing consistent with a more gradual and well-structured consolidation plan. - Macroprudential tools, such as the gradual phasing in of debt-service-to-income ceilings on consumer lending, are recommended to contain the risk of credit overheating and to enhance household resilience to income shocks. ### Mobile banking and broader financial inclusion - Since its introduction in July 2013, the use of mobile financial services has exploded, and 60 percent of Lesotho’s total population are now registered mobile money users. - The industry is dominated by two companies (EcoCash and M-Pesa); nearly all banks surveyed plan to offer mobile banking services. - The CBL supervises mobile payments operators, and a new set of regulations has been enacted in March 2017. - Mobile money usage indicators shown in the source include Customer Deposits, Domestic Transfers, Mobile Money Usage (value in millions of maloti), and Mobile Money Trust Account Balances (in million maloti). - The last comprehensive World Bank financial inclusion data for Lesotho is from 2011; in 2011 Lesotho had 18 percent of the population over 15 years old owning an account at a formal financial institution. - Nonbank financial institutions with potential to widen access: - Financial cooperatives (SACCOs): structural problems exist, reporting gaps are being addressed with a new reporting template and a Cooperative Data System scheduled for early 2018; policy work includes encouraging mergers and creating a single financial cooperatives league; a draft law for financial cooperatives has been prepared in the MoSBCM. - Boliba Savings and Credit: the largest financial cooperative with more than 65,000 members has not completed its licensing process and is currently supervised neither by the CBL nor by the MoSBCM; governance appears inappropriate for its scale; recapitalized a few years ago; an eventual bailout could pose some moderate fiscal risk but no systemic risk is identified for the financial system. - Microfinance Institutions (MFIs): regulated separately and reporting to the CBL; regulation allows for deposit-taking MFIs but currently only credit-only MFIs operate; industry is in an infant stage with potential to foster financial inclusion. - For 2018, the Postbank plans to introduce a mobile banking application that includes savings products and nano loans for customers in rural areas. ### Conclusions and policy recommendations - Baseline scenario findings: - The financial system is well endowed with ample foreign-exchange and capital buffers, sufficient to prevent a confidence crisis or systemic spillovers to the rest of the economy. - CBL stress-testing exercises subjected the banking system to significant hypothetical credit and liquidity shocks. - In the baseline scenario used for Lesotho’s 2017 Article IV consultation, the current shock to the SACU revenues recedes in 2020–22. - Under these assumptions, gross international reserves of the CBL would gradually decrease from 3.6 months of imports (2017/18) to 1.9 months of imports (2021/22). - Over the same period, the overall fiscal balance would improve from -6.5 to 0.3 percent of GDP. - Extended shock scenario risks: - If the fall in SACU revenues is permanent, medium-term sustainability of the exchange rate peg is questioned. - A foreign currency run would occur well before international reserves have fallen to zero, leading to severe repercussions: contraction of bank credit, default by households and private sector business, collapse of fiscal revenues, bank failures, and further spillovers and spillbacks. - Policy prescriptions: - Proactive fiscal consolidation must be the principal policy instrument to prevent dire consequences of an extended shock. - An orderly adjustment, initiated in time, is necessary to maintain confidence and mitigate negative impacts on domestic demand, household income, and economic growth. - Fiscal measures should be complemented by monetary policy instruments that strengthen domestic liquidity control. - Macroprudential measures, such as debt-service-to-income ceilings for consumer lending, could be used to enhance household resilience to income shocks. *KINGDOM OF LESOTHO — INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1859.pdf_