## Credit Developments and Macro-Financial Risks in Namibia (SIPEA2025/093)

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### A. Introduction
- Namibia’s total banking assets amounted to 91 percent of GDP as of end-2024.
- The non-bank financial sector is twice the size of the banking sector and is mainly comprised of a fully funded government pension (GIPF) and other pension funds, insurance funds, and collective investment schemes.
- Commercial banks rely on wholesale funding from non-bank financial institutions, representing 15 percent of GDP at end-2024.
- Two salient features over the past two decades:
  - Trends: Bank credit to the non-financial private sector stabilized at approximately 50 to 60 percent of GDP since 2005; the ratio began to decline during the COVID-19 pandemic, resulting in a negative credit gap (before the pandemic the gap was positive).
  - Composition: Approximately half of bank credit to the private sector has consistently gone to mortgages; a growing proportion of credit has been allocated to the public sector.

### B. Credit Developments: Trends and Composition
- Domestic credit dynamics:
  - Pre-COVID-19 (2009–2019) domestic credit (percent of GDP) rose and approached the regional average; the ratio peaked in 2020 and then dipped after the pandemic.
  - Since 2014, the share of credit to the public sector in total domestic credit increased steadily to finance the budget deficit.
  - Fiscal balance shifted from a surplus of 6.2 percent of GDP in 2007 to a deficit of 4.7 percent of GDP in 2014.
  - Claims on the public sector (in percent of GDP) rose further with the onset of the COVID-19 pandemic, coinciding with the widening fiscal deficit.
- Private sector credit gap (private sector credit per capita) across five methodologies (HP, Hamilton, CF, GR, MA):
  - A rise in the early 2010s, peak around 2015, followed by decline.
  - Four methods entered negative territory at the onset of the COVID-19 pandemic.
  - All methodologies indicated Namibia’s credit gap was negative as of mid-2024.
- Sectoral allocation of private sector credit (past two decades):
  - Households have consistently accounted for more than half of private sector credit.
  - Mortgages dominate household credit; within mortgages, on average 77 percent of credit is for residential purposes.
  - Lending to commercial and services sectors constituted approximately 30 percent of private sector credit.
  - Credit to tradable sectors (mining and quarrying, agriculture, fishing) accounts for less than 20 percent of private sector credit.
- International comparison of mortgage share:
  - Namibia’s share of mortgage lending in total bank lending has consistently exceeded 50 percent.
  - Namibia reached a much higher mortgage share compared with 18 advanced economy comparators when they were at a similar credit-to-GDP level (50-60 percent).
  - A JST-style alternative series (coverage from 2013) also shows Namibia’s mortgage shares remained above 50 percent during 2013-2023.
- Housing market dynamics and drivers:
  - Real housing prices rose rapidly since early 2000s, peaked in 2017, and declined thereafter.
  - Real wage growth slowed since 2013 and turned negative in 2018.
  - Supply constraints (shortage of serviced land) and urbanization contributed to earlier price increases; an uptick in land delivery from 2017 exerted downward pressure on housing prices.
  - Correlation between three-year growth in mortgage (percent of GDP) and three-year real housing price growth: 0.41 for full sample; 0.26 in post-2017 sample.
- Macro-financial linkages and household vulnerability:
  - Mortgage accounts for half of banks’ credit to the private sector, making housing key to banking stability.
  - Household mortgage loans have contributed about half of non-performing loans (NPLs).
  - NPLs increased significantly since 2017; many market participants may have not experienced any nominal appreciation in their properties since 2017.
  - Household leverage defined as household mortgage debt to value of residential real estate has risen; declining real wages and rising interest payments since 2022 may increase household debt service burdens.
  - Most mortgages are at variable rates, increasing vulnerability to interest rate and income shocks.
- Loan-to-Value (LTV) policy:
  - March 2017 BoN LTV rules required at least 20 percent down payment for a second mortgage property (bank financed up to 80 percent); down payments increased progressively for third and subsequent properties.
  - In 2023, LTV ratios were revised to stimulate credit growth, eliminating downpayments on purchase of both first and second residential properties.
- Access to credit for businesses:
  - World Bank Enterprise Survey 2024: 203 out of 307 firms surveyed (66 percent) view access to finance as an obstacle (from “minor” to “very severe”); access to finance is the top obstacle.
  - Only 110 firms (36 percent) reported having a line of credit or loan from a financial institution.
  - High collateral requirements are the most important demand-side constraint.
  - Supply-side constraints to investigate include cost of funding, regulatory and capital requirements, administrative and hedging expenses, and borrower credit risk assessment.
  - Regression analysis indicates a positive correlation between having a line of credit and experiencing sales growth.

### C. Banking Resilience
- System-wide condition:
  - Overall, Namibia’s banking system has remained resilient despite slower credit growth since 2020: banks remained liquid, profitable, and well-capitalized.
  - Asset quality deteriorated during the pandemic; household mortgages have been primary contributors to NPLs.
  - NPLs peaked at 6.8 percent in March 2021 (breaching Namibia’s supervisory threshold), and moderated to 5.6 percent in December 2024.
  - Moderation in NPLs partly reflects nominal credit growth surpassing NPL growth; NPLs are sufficiently provisioned to cover expected losses during the review period.
- Bank-sovereign nexus and public sector exposure:
  - Domestic credit to the public sector more than doubled over the past decade, reflecting increased government financing needs.
  - Banks’ exposure to the public sector (excluding the central bank) is above the African average; comparable to South Africa and higher than Botswana and Mauritius.
  - Relative to selected upper middle- and high-income Euro-area countries, Namibia’s exposure is lower than Albania, Romania, Hungary, and Poland but significantly higher than Denmark and the Netherlands (exposures as low as 0.4 percent).
  - Non-bank financial institutions held domestic debt amounting to 20 percent of GDP as of end-December 2024.
  - Total domestic debt at end-December 2024 was 51 percent of GDP: Depository corporations held 14 percent of GDP and NBFIs held 20 percent of GDP.

### D. Policy Recommendations
- Enhance macroprudential toolkit at the Bank of Namibia (BoN):
  - Implement the countercyclical capital buffer (CCyB) framework in the last quarter of 2025 to allow capital accumulation during credit booms and release during downturns.
  - Given Namibia’s small open economy status and structural vulnerabilities, consider a positive-neutral CCyB to enhance banking resilience.
- Rationale for a stronger macroprudential stance:
  - Namibia’s vulnerabilities to external and commodity price shocks and a fixed exchange rate underscore the need for a resilient financial system.

### Structural vulnerabilities and capital buffers (Section 2)
- Structural vulnerabilities:
  - Banks exhibit reliance on wholesale NBFI financing and significant exposures to the sovereign, creating structural vulnerabilities that require releasable capital to sustain credit growth in the face of negative shocks.
- Recommendations on capital buffers:
  - BoN should consider implementing targeted measures, such as a systemic risk buffer for sovereign exposures that surpass a certain threshold.
  - BoN should conduct further analysis of the structure of exposures in both banking and trading books to ensure appropriate risk weights.
- Observations on capital usage and credit demand:
  - There must be demand for credit that would otherwise go unmet due to banks' capital requirements, and banks need to view lending as profitable based on their assessment of risks.
  - Historical policy note: The Capital Conservation Buffer (CCoB) was relaxed for a two-year period in response to the COVID-19 Pandemic in April 2020; the relaxation was later extended. Slow credit growth during the period suggests banks’ lack of willingness to use the temporarily relaxed capital requirement to supply credit.

### Housing sector credit and borrower-based measures (Section 2)
- Findings and recommendations:
  - Finding: There is a large share of credit to the housing sector and existing vulnerabilities.
  - Recommendation: BoN should reverse the elimination of downpayments on first and secondary residential properties to maintain minimum lending standards and prevent future NPLs.
  - Recommendation: In addition to stock-based measures, BoN should consider collecting data on flow measures such as debt-to-income (DTI) ratios and debt service-to-income (DSTI) for new property buyers.
  - Rationale: Collecting DTI and DSTI data would be valuable for analysis and formulation of targeted borrower-based macroprudential measures.

### Credit to private business and policy priorities (Section 2)
- Context and recommendations:
  - Credit to non-financial corporations remains relatively limited.
  - Authorities are promoting access to financing while safeguarding financial stability as Namibia seeks to diversify its economy and foster private sector-led growth.
  - Recommendation: Develop solutions that support sound lending to non-financial corporations to expand credit availability.
  - Recommendation: Conduct further studies to identify constraints hindering businesses in accessing credit; such analysis is critical for designing and implementing effective policies.
  - Rationale: Understanding constraints would also help clarify the key drivers of Namibia’s credit cycles, which will become increasingly important as the economy diversifies and transitions to being more driven by the private sector, leading to a stronger interconnection between credit and business cycles.

*Source: IMF Selected Issues Paper SIP/2025/093, "Credit Developments and Macro-Financial Risks in Namibia," prepared by Yumeng Gu and Lilian Muchimba (completed May 28, 2025; published July 2025).*

### Section 1

### Credit Developments and Macro-Financial Risks in Namibia

### A. Introduction
- Namibia’s total banking assets amounted to 91 percent of GDP as of end-2024.  
- The non-bank financial sector is twice the size of the banking sector and is mainly comprised of a fully funded government pension (GIPF) and other pension funds, insurance funds, and collective investment schemes.  
- Commercial banks rely on wholesale funding from non-bank financial institutions, representing 15 percent of GDP at end-2024.  
- Two salient features over the past two decades:
  - Trends: Bank credit to the non-financial private sector stabilized at approximately 50 to 60 percent of GDP since 2005; the ratio began to decline during the COVID-19 pandemic, resulting in a negative credit gap (before the pandemic the gap was positive).
  - Composition: Approximately half of bank credit to the private sector has consistently gone to mortgages; a growing proportion of credit has been allocated to the public sector.

### B. Credit Developments: Trends and Composition
- Pre-COVID-19 (2009–2019) domestic credit (percent of GDP) rose and approached the regional average; the ratio peaked in 2020 and then dipped after the pandemic.  
- Since 2014, the share of credit to the public sector in total domestic credit increased steadily to finance the budget deficit.
  - Fiscal balance shifted from a surplus of 6.2 percent of GDP in 2007 to a deficit of 4.7 percent of GDP in 2014.
- Claims on the public sector (in percent of GDP) rose further with the onset of the COVID-19 pandemic, coinciding with the widening fiscal deficit.
- The private sector credit gap (based on private sector credit per capita) across five methodologies (HP, Hamilton, CF, GR, MA) shows:
  - A rise in the early 2010s, peak around 2015, followed by decline.
  - Four methods entered negative territory at the onset of the COVID-19 pandemic.
  - All methodologies indicated Namibia’s credit gap was negative as of mid-2024.
- Sectoral allocation of private sector credit (past two decades):
  - Households have consistently accounted for more than half of private sector credit.
  - Mortgages dominate household credit; within mortgages, on average 77 percent of credit is for residential purposes.
  - Lending to commercial and services sectors constituted approximately 30 percent of private sector credit.
  - Credit to tradable sectors (mining and quarrying, agriculture, fishing) accounts for less than 20 percent of private sector credit.
- International comparison of mortgage share:
  - Namibia’s share of mortgage lending in total bank lending has consistently exceeded 50 percent.
  - Namibia reached a much higher mortgage share compared with 18 advanced economy comparators when they were at a similar credit-to-GDP level (50-60 percent).
  - A JST-style alternative series (coverage from 2013) also shows Namibia’s mortgage shares remained above 50 percent during 2013-2023.
- Housing market dynamics and drivers:
  - Real housing prices rose rapidly since early 2000s, peaked in 2017, and declined thereafter.
  - Real wage growth slowed since 2013 and turned negative in 2018.
  - Supply constraints (shortage of serviced land) and urbanization contributed to earlier price increases; an uptick in land delivery from 2017 exerted downward pressure on housing prices.
  - Correlation between three-year growth in mortgage (percent of GDP) and three-year real housing price growth: 0.41 for full sample; 0.26 in post-2017 sample.
- Macro-financial linkages and household vulnerability:
  - Mortgage accounts for half of banks’ credit to the private sector, making housing key to banking stability.
  - Household mortgage loans have contributed about half of non-performing loans (NPLs).
  - NPLs increased significantly since 2017; many market participants may have not experienced any nominal appreciation in their properties since 2017.
  - Household leverage defined as household mortgage debt to value of residential real estate has risen; declining real wages and rising interest payments since 2022 may increase household debt service burdens.
  - Most mortgages are at variable rates, increasing vulnerability to interest rate and income shocks.
- Loan-to-Value (LTV) policy:
  - March 2017 BoN LTV rules required at least 20 percent down payment for a second mortgage property (bank financed up to 80 percent); down payments increased progressively for third and subsequent properties.
  - In 2023, LTV ratios were revised to stimulate credit growth, eliminating downpayments on purchase of both first and second residential properties.
- Access to credit for businesses:
  - World Bank Enterprise Survey 2024: 203 out of 307 firms surveyed (66 percent) view access to finance as an obstacle (from “minor” to “very severe”); access to finance is the top obstacle.
  - Only 110 firms (36 percent) reported having a line of credit or loan from a financial institution.
  - High collateral requirements are the most important demand-side constraint. Supply-side constraints to investigate include cost of funding, regulatory and capital requirements, administrative and hedging expenses, and borrower credit risk assessment.
  - Regression analysis indicates a positive correlation between having a line of credit and experiencing sales growth.

### C. Banking Resilience
- Overall, Namibia’s banking system has remained resilient despite slower credit growth since 2020:
  - Banks remained liquid, profitable, and well-capitalized.
  - Asset quality deteriorated during the pandemic; household mortgages have been primary contributors to NPLs.
  - NPLs peaked at 6.8 percent in March 2021 (breaching Namibia’s supervisory threshold), and moderated to 5.6 percent in December 2024.
  - Moderation in NPLs partly reflects nominal credit growth surpassing NPL growth; NPLs are sufficiently provisioned to cover expected losses during the review period.
- Bank-sovereign nexus and public sector exposure:
  - Domestic credit to the public sector more than doubled over the past decade, reflecting increased government financing needs.
  - Banks’ exposure to the public sector (excluding the central bank) is above the African average; comparable to South Africa and higher than Botswana and Mauritius.
  - Relative to selected upper middle- and high-income Euro-area countries, Namibia’s exposure is lower than Albania, Romania, Hungary, and Poland but significantly higher than Denmark and the Netherlands (exposures as low as 0.4 percent).
  - Non-bank financial institutions held domestic debt amounting to 20 percent of GDP as of end-December 2024.
  - Total domestic debt at end-December 2024 was 51 percent of GDP: Depository corporations held 14 percent of GDP and NBFIs held 20 percent of GDP.

### D. Policy Recommendations
- Enhance macroprudential toolkit at the Bank of Namibia (BoN):
  - Implement the countercyclical capital buffer (CCyB) framework in the last quarter of 2025 to allow capital accumulation during credit booms and release during downturns.
  - Given Namibia’s small open economy status and structural vulnerabilities, consider a positive-neutral CCyB to enhance banking resilience.
- Rationale for a stronger macroprudential stance:
  - Namibia’s vulnerabilities to external and commodity price shocks and a fixed exchange rate underscore the need for a resilient financial system.

*Source: IMF Selected Issues Paper SIP/2025/093, "Credit Developments and Macro-Financial Risks in Namibia," prepared by Yumeng Gu and Lilian Muchimba (completed May 28, 2025; published July 2025).*

### Section 2

### Section 2

### Structural vulnerabilities and capital buffers
- Banks exhibit reliance on wholesale NBFI financing and significant exposures to the sovereign, creating structural vulnerabilities that require releasable capital to sustain credit growth in the face of negative shocks.
- Recommendation: BoN should consider implementing targeted measures, such as a systemic risk buffer for sovereign exposures that surpass a certain threshold.
- Recommendation: BoN should conduct further analysis of the structure of exposures in both banking and trading books to ensure appropriate risk weights.
- Observation: There must be demand for credit that would otherwise go unmet due to banks' capital requirements, and banks need to view lending as profitable based on their assessment of risks.
- Historical policy note: The Capital Conservation Buffer (CCoB) was relaxed for a two-year period in response to the COVID-19 Pandemic in April 2020; the relaxation was later extended. Slow credit growth during the period suggests banks’ lack of willingness to use the temporarily relaxed capital requirement to supply credit.

### Housing sector credit and borrower-based measures
- Finding: There is a large share of credit to the housing sector and existing vulnerabilities.
- Recommendation: BoN should reverse the elimination of downpayments on first and secondary residential properties to maintain minimum lending standards and prevent future NPLs.
- Recommendation: In addition to stock-based measures, BoN should consider collecting data on flow measures such as debt-to-income (DTI) ratios and debt service-to-income (DSTI) for new property buyers.
- Rationale: Collecting DTI and DSTI data would be valuable for analysis and formulation of targeted borrower-based macroprudential measures.

### Credit to private business and policy priorities
- Context: Credit to non-financial corporations remains relatively limited.
- Policy balance: Authorities are promoting access to financing while safeguarding financial stability as Namibia seeks to diversify its economy and foster private sector-led growth.
- Recommendation: Develop solutions that support sound lending to non-financial corporations to expand credit availability.
- Recommendation: Conduct further studies to identify constraints hindering businesses in accessing credit; such analysis is critical for designing and implementing effective policies.
- Rationale: Understanding constraints would also help clarify the key drivers of Namibia’s credit cycles, which will become increasingly important as the economy diversifies and transitions to being more driven by the private sector, leading to a stronger interconnection between credit and business cycles.

*sipea2025093 - Section 2*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025093.pdf_