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Struggling manufacturing sector failing to pay banks

Publishing Date : 11 November, 2019


Manufacturing industry, often regarded as the ‘black sheep’ of this country’s economy for its stunted growth and meager contribution to the nation’s GDP, is a big culprit to the impairment of the local banking sector as it fails to pay loans.

According to Bank of Botswana’s Banking Supervision Annual Report 2018, manufacturing and trade continued to dominate the private business Non Performing Loans (NPLs) in 2018, accounting for 29.5 percent of the private business NPLs. The culprits were not small players as the Bank of Botswana report said, the increase in NPLs was mainly due to the default by a few large corporate clients of some banks.

Manufacturing accounts for 4 percent of the nation's GDP and is contributing to upward trend in NPLs. There have been plans for many years to improve the growth of the manufacturing industry in this country. The latest report suggest that manufacturing businesses either cannot fulfill debt obligations or collapse before paying borrowings, leaving banks with impaired loans. 

When making a report on sectoral distribution of private business Non-performing Loans and Advances for years (between 2014 and 2018), the central bank said the NPLs in the manufacturing subsector has been growing for years. In 2014 NPLs were at 9 percent, 2015 at 8.5 percent, 2016 up with 10.6 percent. In 2017 the NPLs increased three times from 2016 with 30.9 percent, while during the year under review they were still up albeit falling by 1.4 percent.

Following the manufacturing subsector-in industries which fail to pay loans are; the restaurants and bars with 17.2 percent, then business services with 10.3 percent and in third place, is the construction subsector with 10 percent. The private businesses entities accounted for 51 percent, household which is predominantly unsecured loans accounted to 47 percent, while public sector 2 percent of total NPLs in 2018.

“In an environment of faster annual growth in credit during the year, the banking asset quality, as measured by non-performing loans, deteriorated marginally,” said Bank of Botswana Governor Moses Pelaelo. At the end of this year’s first quarter, FNBB released its year ended December 2018 and revealed that it has difficulty collecting interest and principal on their credits with a reflection of the non-performing loans (NPL) to gross advances ratio increasing from 6.6 percent to 7.6 percent year-on-year, with the NPL exposure increasing to P1.26 billion.

“This significant growth in NPLs is largely due to the deterioration of certain high-value FNB business segment exposures, and the relegations that have been experienced in the FNB Retail and WesBank segments,” explained FNBB directors in the financial report. While gross loans and advances grew by 7.7 percent from P54.2 billion in 2017 to P58.3 billion in 2018, a faster increase than 5.6 percent in 2017, the asset quality of the banking sector deteriorated as evidenced by the small increase in the ratio of non-performing loans (NPLs) to gross loans and advances from 5.3 percent in December 2017 to 5.5 percent in 2018.

According to Banking Supervision Annual Report 2018 ratio of non-performing loans (NPLs) to gross loans and advances ranged between 1.3 percent and 10.4 percent for the banking sector. The need to develop a diversified and robust manufacturing sector is a key agenda in government efforts to identify potential growth areas beyond the exploitation of its mineral wealth, which has been central to its transformation into a middle-income country, but which at the same time makes it susceptible to the vagaries of a fickle global economic order.



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