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Kingdom of Swaziland: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
March 2008
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II. Swaziland’s Financial Sector Development and Future Strategies1

A. Introduction

1. Swaziland is undergoing a significant change in its financial sector. In recent years, deposit-taking Savings and Credit Cooperatives (SCCOs) have grown substantially and have increased access to finance for many low income individuals. However, growth of SCCOs is taking place without sufficient regulation and supervision, posing risks to the stability of the financial sector. On the other hand, recent reforms that open up the insurance sector to foreign competition and require insurance and pension funds increase their domestic investment holdings have the potential to deepen Swaziland’s financial sector, increase its efficiency and boost economic growth, but they also pose regulatory challenges and risks of low returns. The banking system is financially sound and a large fully-owned government commercial bank that received a sizable recapitalization in the past faces a challenging task of meeting a dual objective of being both a commercial and a development bank while competing with other banks that are largely private.

2. Swaziland’s shallow financial markets constrain economic growth, resulting in little progress in reducing high rates of poverty and inequality. Experience and research have demonstrated that finance matters for promoting growth, reducing poverty and inequality. However, Swaziland’s financial intermediation through the banking system, low by regional and international standards, has actually declined over time using standard measures of banking system depth (Figure II.1). Real per capita GDP growth has fallen from about 3 percent a year over the 1980–1994 period to about ½ percent a year since mid-1990s, one of the lowest growth rates in the region and well below low income and lower middle income countries. Meanwhile, high inequality is persistent and poverty has risen from 66 percent in 1995 to 69 percent in 2001 and is perhaps higher today because of lower growth and high unemployment.

Figure II.1.Banking Sector Depth and Economic Growth

(in percent)

Sources: International Financial Statistics, World Development Indicators, and staff estimates.

3. Financial development and financial stability are therefore two main challenges confronting Swaziland’s financial sector. This chapter explores the performance of Swaziland’s financial sector using peer group analyses and benchmarking, identifies potential sources of vulnerability and developmental obstacles, reviews ongoing reforms that are to meet the challenges and concludes by discussing steps that could address the major obstacles. 2 Accordingly, the chapter addresses the following four issues:

  • financial structure and soundness;
  • financial sector efficiency and profitability;
  • key constraints to a deeper and healthier financial system; and
  • key elements of a forward looking financial sector strategy.

B. Benchmarking and Peer Group Analyses

4. Peer group analyses is used to assess quantitatively the performance of various aspects of Swaziland’s financial sector. Peer group analysis sets out various benchmarks with which Swaziland’s financial performance can be compared, including its own past history. It is therefore of particular relevance to the objective of the chapter. The analysis is also helpful for assessing financial stability and financial deepening since an annual regular benchmarking exercise of Swaziland’s financial sector against its peer groups can help identify the success of a financial sector strategy and the main constraints in meeting its objectives.

5. That said, Swaziland’s performance is benchmarked against several peer groups which offer different insights. The following factors are used to define peer groups: stage of economic development, economic and financial integration as well as a regional focus. Understandably these groups are not mutually exclusive and commonalities will be discussed. Research has shown that financial structure is strongly shaped by stage of economic development as proxied by per capita income (Demirgüç-Kunt and Levine, 2001):

  • According to World Bank classification, Swaziland is a lower middle income country. Therefore, the lower middle income group forms a natural peer group to compare Swaziland with;
  • The upper middle income and low income groups are two other peer groups, which can be used to determine if Swaziland’s financial sector is underperforming vis-à-vis countries with higher per capita income or overperforming relative to countries with lower per capita income, respectively;
  • Swaziland is also compared with other African countries with which its has close financial, trade and historical links through the Southern African Customs Union (SACU)—consisting of Swaziland, South Africa, Namibia, Lesotho and Botswana—and the Common Monetary Area (CMA)—the SACU countries excluding Botswana. 3 The CMA countries provide a natural peer group since as part of the CMA Swaziland’s currency is pegged to the South African rand and Swaziland’s financial structure is closely integrated with that of South Africa. Moreover, SACU and CMA countries are at different stages of economic development thus allowing for richer benchmarking while controlling for some common factors (a customs union and common currency, respectively); and
  • Sub-Saharan Africa (SSA) is the final peer group as it provides a larger regional focus than the SACU and the CMA, and is a distinct group than low, lower and upper middle income groups that cover disparate continents.

C. Financial Sector and Soundness

Overview

6. The financial sector is small, but includes numerous informal financial entities. The financial sector consists of the Central Bank of Swaziland (CBS), four commercial banks, one building society, two unit trusts, two development finance institutions, 56 SCCOs, a stock exchange, over 200 pension funds (private and public), six life and insurance companies, and over 100 micro finance institutions (MFIs). In terms of GDP, as of end-2006, total assets of the financial sector—consisting of banks, SCCOs, pension funds and life and insurance companies—is estimated at 105 percent of GDP as compared with 160 percent of GDP for Namibia at end-2004 and 118 percent of GDP for Botswana at end-2006. 4 In US Dollar terms, the estimated size of Swaziland’s financial sector at end-2006 stood at about US$3 billion as compared with $US 10.7 billion for Namibia at end-2004 and US$12 billion for Botswana at end-2006.

The banking system

7. The depth of the Swazi banking system is at the lowest end of the spectrum among its peer groups based on three widely-used measures of financial depth (Figure II.2). Ratios of M2, M3 and bank deposits to GDP are well below all income groups, the SSA average as well as other members of the SACU. 5 However, Swaziland’s banking sector, as measured by the ratio of private sector credit to GDP—another widely used measure of financial depth—is deeper, exceeding levels recorded by the SSA and low income countries. This overperformance is a recent phenomenon. Between 1998 and 2004, Swaziland’s credit-GDP ratio was below both the SSA and low income countries while it has been trending down consistently till 2001. Swaziland’s eventual catch-up and overtaking of these groups since 2004 occurred as a result of the combination of low interest rates and strong prospects for Swaziland’s textile and sugar industries.

Figure II.2.Indicators of Banking System Depth: Swaziland and Various Peer Groups

(In percent)

Source: International Financial Statistics and World Development Indicators. For Swaziland, M3 includes SCCOs.

8. However, Swaziland’s financial depth, as measured by the ratio of M1 to M2, is comparable to upper middle income countries and South Africa and better than Namibia and Lesotho among SACU countries (Figure II.3;Table II.1). A low ratio of M1 to M2 reflect, among other things, less reliance on cash for transactions, higher reliance on term deposits, a low inflation environment and confidence in the banking system. Therefore, financial development is generally associated with a decline in the ratio. There has been a steady decline in the ratio across all income categories. At end-2006, Swaziland’s ratio is less than half the SSA level while the SSA continues to have the highest ratio in the world. Swaziland’s ratio declined from 37 percent in 1980 to 31 percent in 2006 against a much larger decline of 10 percent to 59 percent for the SSA. However, Swaziland’s ratio has been rising recently reflecting in part disintermediation from the banking system by SCCOs, which tend to have lower charges and fees than commercial banks and may offer higher interest rates.

Figure II.3.Indicators of Banking System Depth: Swaziland and Other SACU Countries

(In percent)

Source: International Financial Statistics, World Development Indicators and staff estimates. For Swaziland, M3 includes SCCOs.

Table II.1.Indicators of Financial Depth by Income Group and SACU, 2006
Bank deposits-

GDP ratio 1
Private sector

credit-GDP ratio1
M2-GDP ratioM3-GDP ratio2Ratio of M1 to M2Memo:

Gross National

Income per

capita US$
Swaziland21.722.523.025.031.32,430
Botswana33.219.632.540.821.05,900
Namibia25.058.447.952.260.83,230
Lesotho30.78.930.535.176.61,030
South Africa57.470.761.465.829.75,390
Other peer groups
Low income countries24.420.956.161.753.7650
Sub-Saharan Africa26.619.841.846.259.1842
Lower middle income countries48.643.8114.5123.339.92,037
Upper middle income countries55.852.344.948.435.15,913
Sources: Beck, Demirgüç-Kunt and Levine, (2007 updated), “A New Database on Financial Development and Structure” World Bank; World Development Indicators; International Financial Statistics; and Fund staff estimates.

Deposit money banks.

Currency plus demand and interest bearing liabilities of deposit money banks and nonbank financial intermediaries.

Sources: Beck, Demirgüç-Kunt and Levine, (2007 updated), “A New Database on Financial Development and Structure” World Bank; World Development Indicators; International Financial Statistics; and Fund staff estimates.

Deposit money banks.

Currency plus demand and interest bearing liabilities of deposit money banks and nonbank financial intermediaries.

9. The banking system is largely foreign owned. Three banks, the Standard Bank, the First National Bank and the Nedbank are subsidiaries of South African banks. The largest bank is the Standard Bank while the government-owned Swazibank is the third largest commercial bank. All commercial banks have branch networks around the country offering both personal and corporate banking services. The Swaziland Building Society is a deposit-taking financial institution which offers mortgage loans, accounting for about 80 percent of its loan portfolio, and savings and investment accounts; loans are secured and are mostly residential. All five financial institutions are regulated and supervised by the CBS.

Table II.2.Swaziland’s Banks: Ownership Structure and Size(in percent)
OwnershipSize
GovernmentForeignPublicAsset-GDP ratio
Standard Bank Swaziland Ltd25651012.2
First National Bank Swaziland Ltd.1006.2
Swazibank1005.7
Nedbank Swaziland Ltd2367105.4
Swaziland Building Society1003.2
Source: CBS Annual Report 2006/07 and Banks’ Annual Reports.
Source: CBS Annual Report 2006/07 and Banks’ Annual Reports.

10. The Swazi banking system is sound, well capitalized with low nonperforming loans though higher than the rest of the SACU countries. Many banks have low nonperforming loans, except for one bank. The central bank is actively working with the bank to improve compliance. Loans of the banking system are skewed towards sugar-related industries (70 percent of all loans). However, the exposure requirements on large and sectoral-clients are met by all banks. In addition, the three largely South African-owned banks, which have the most exposure to sugar-related industries, conduct regular risk assessments and hedge their risks through their parent companies.

Figure II.4.Ratio of Nonperforming Loans to Total Loans in SACU Countries in 2006

(in percent)

Source: IMF staff reports.

Table II.3.Swaziland: Banking System Prudential Indicators(in percent)
Dec-2003Dec-2004Dec-2005Dec-2006Mar-2007Jun-2007
(in percent)
Performance Ratios:
Basle capital ratio (Tier 1)14141519.518.622.5
Basle capital ratio (Tier 2)20161726.121.022.5
Asset Quality:
Loans to deposit ratio 175738385.591.587.9
Earning assets to total assets90879264.569.266.7
Nonperforming loans to total loans 12323.63.93.6
Reserve for losses to total loans9879.68.59.2
Liquidity Ratios:
Liquid assets to total deposits19181720.417.919.8
Available reserves to total deposits1819209.99.711.7
Liquid assets to total assets14141314.512.713.6
Profitability Ratios:
Net income to average total assets4335.91.52.5
(return on assets)
Net income to average total equity29202052.013.426.0
(return on equity)
Total expenses to total income60646870.673.373.9
Source: Central Bank of Swaziland.

Excluding the Swazibank, which is owned by the government and offers both development finance and commercial banking services since its recapitalization and reliance by the government in 2001.

Source: Central Bank of Swaziland.

Excluding the Swazibank, which is owned by the government and offers both development finance and commercial banking services since its recapitalization and reliance by the government in 2001.

11. Access to finance is limited. According to the World Bank (2007), only 35 percent of the Swazi adult population has access to an account with a financial intermediary. In general access to credit and its availability go hand in hand. However, this does not appear to be the case in Swaziland as it has a higher access than Namibia, but lower ratio of private sector credit to GDP. Similarly, Swaziland has a lower access than Botswana, but higher ratio of credit to GDP. Differences in type of restrictions that limit credit availability, access or both may explain some of these differences.

Figure II.5.Access to Credit

(in percent)

Sources: Word Bank (2007), International Financial Statistics, World Development Indicators, and staff estimates.

The nonbank financial sector: savings and credit cooperatives

12. The credit cooperative sector in Swaziland was established with a focus on agricultural cooperative concept and is governed by the Cooperative Societies Act (2003) and the Cooperative Societies Regulations (2005) promulgated in 2006. These acts empower Commissioner of the Department of Cooperatives of the Ministry of Agriculture and Cooperatives (MoAC) to regulate and supervise the cooperative sector, including SCCOs. The main responsibility of the Department is to promote and implement the Government Policy on the formation of cooperatives and their development through guidance on the Cooperative Act in line with the National Development Strategy for Swaziland to empower its citizens. Responsibility for regulating, monitoring and supervising credit cooperatives rests with the Cooperatives Department, which could be in conflict with its responsibility to promote and develop cooperatives.

13. SCCOs are the more prosperous cooperatives in Swaziland. Fifty five SCCOs were active in Swaziland as of end-2006 with 39,592 members (4 percent of the population):6

  • Each member is a depositor and can take out a loan only after establishing a history of regular depositing-making to the SCCO, which may take up to two years. SCCOs are formed by workers with a common goal. Examples are the police, army, prison services, hotel service providers, town councils, and teachers;
  • At any point in time some cooperatives may can inactive. For example, as of end-2006, there were 10 inactive SCCOs and 49 inactive farmers/multipurpose cooperatives;
  • SCCOs tend to charge higher interest rates than commercial banks, but have much lower overhead costs, charges and fees and provide credit to individuals who may find it difficult to get access to credit from banks; and
  • Some 41 SCCOs are members of Swaziland Association of Savings and Credit Cooperatives (SASCCO), an Apex organization formed under section 40 of the Act, which educates the management of each SCCO and provides training and auditing standards based on best practices as advocated by the World Council of Credit Unions.

14. SCCOs have grown significantly without sufficient regulation and supervision. Their lending and deposit operations have increased from less then ½ percent of GDP each in 2002 to 1½ and 2 percent of GDP, respectively by end-2006. The deposit and lending operations of SCCOs have grown much faster than Swaziland’s four commercial banks. Deposits of SCCOs have grown from 3 percent of commercial banks’ deposits in 2002 to 10 percent in 2006. Credit extended by SCCOs grew by 116 percent a year since 2002 as compared with 25 percent by banks. SCCOs are required to submit annual audited accounts to MoAC, but MoAC does not seem to scrutinize these accounts systematically. Moreover, some audits do not follow internationally accepted accounting standards. Computers are not used extensively for book keeping though some SCCOs have acquired them recently (e.g., the teachers’ SCCO). Monetary accounts currently compiled by the CBS do not include SCCOs.

Figure II.6.Swaziland: Lending by Banks and SCCOs

15. SCCOs are highly concentrated in terms of total value of deposits and lending and some face financial difficulties. Prosperous cooperative societies are the SCCOs, which are run more effectively by members who have regular incomes. The top three SCCOs account for almost 50 percent of deposits or lending of all SCCOs. At end-2006, the deposits of SCCOs that may face financial difficulties accounted for almost 1 percent of GDP, equivalent to 4 percent of commercial banks’ deposits; their membership is about 2 percent of the population. Currently, no prudential indicators exist for SCCOs.

The nonbank financial sector: pension funds and insurance funds

16. Pension funds dominate Swaziland’s financial sector. There are over 200 pension funds, but the largest funds are Public Service Pension Fund (PSPF) for civil servants and the Provident Fund for the private sector employees. The PSPF alone accounts for almost 55 percent of the financial sector. At end March-2007, its assets stood at E7.4 billion (59 percent of GDP), equivalent to US$1 billion, which exceeds the combined assets of the four commercial banks. The rate of return on the fund’s assets for the financial year ending on March 31, 2007 was 30 percent against 42 percent the previous year with a 10-year historical return of 25 percent. The investment objective of the Fund is to earn at least 5 percent real return on its assets. Under CMA rules, investment managers may invest up to 15 percent of the Fund’s assets offshore (i.e., outside the CMA); investments in unlisted shares and unlisted debt instruments may only be made in Swaziland at the discretion of the Board. Between 70 to 85 percent of the assets have to be placed in South Africa, primarily in equities. At its inception in 1991, the Fund was gross underfunded. However, the net actuarial liabilities of the Fund has fallen over time, in large part due to superior investment performance, from E3.2 billion in 2004/05 to E1.4 billion in 2005/06 and to E343 million in 2006/07.

17. Since 2007, the authorities are opening up the local market for insurance and pensions and have enacted a number of legislations. Under the Insurance Act (2005) and the Retirement Act (2005), the Registrar of Insurance Companies and Retirement Funds RIRF) has the responsibility for regulating insurance and pension funds. These acts will provide the framework for creating investment instruments that pension and insurance funds could be invested. Until recently, the insurance market was the monopoly of Swaziland Royal Insurance Company (SRIC). Most life insurance policies were written by South African companies operating via brokers or “briefcase agents” in Swaziland, reflecting the lack of competitiveness of the SRIC. With the passage of supporting regulations of the two acts, five new insurance firms, mostly from South Africa, have entered the local market. The size of the insurance market is estimated at E2 billion (16 percent of GDP) at end-2006.

18. Established in September 2006, the RIRF is responsible for licensing and supervising all insurance intermediaries and retirement funds. Few members of the office of the registrar have had any experience in financial system supervision. Technical assistance needs are extensive and MCM has a program in place to assist the authorities.

19. The legislations require a portion of insurance and pension assets be invested in Swaziland, starting with 10 percent in November 2007 and rising to 30 percent in three years. The authorities intend to channel domestic savings into the domestic economy, thus spurring investment and deepening capital markets. Over time, this plan is to be supported by privatization of state assets and listing on the stock exchange. Insurers also have to be incorporated in Swaziland, have a physical presence there, and be partly owned by Swazis.

20. However, at present the opportunities for insurance and retirement funds to invest their assets locally are limited. The economy is not diverse, the demand for funds by businesses is weak apart from sugar-related industries, and the international financial institutions reportedly offer more attractive terms for infrastructure projects than would be available in the open market. Medium- and long- term debt instruments are unavailable, and the government appears unlikely to create a market by issuing such instruments beyond that needed to finance a residual deficit. The Swazi stock market is small and largely illiquid, limiting domestic investment (see below).

21. The domestic investment requirement poses certain risks to the financial sector and real sectors and could complicate the conduct of monetary policy. The requirement could lead to excess liquidity, if funds are repatriated from abroad (primarily from South Africa) and the market is unable to absorb them. The financial performance and solvency of insurers and retirement funds could suffer if high domestic returns are sought with excessive risks. Local incorporation and physical presence requirements could deter some foreign companies from entering the market, limit competition, and increase the operating costs of those that do decide to enter. Each of these risks, if realized, would ultimately have adverse effects on Swazi consumers. Monetary policy also faces challenges. The excess liquidity may get deposited with banks, due to lack of suitable investment vehicles, with the central bank having to mop up the excess liquidity and bear the costs accordingly, which can be large as shown by the experience of other countries with similar requirements (e.g., Botswana).

22. The authorities are mindful of these risks and challenges for monetary policy. They are exercising flexibility in the application of the requirement while precise regulations are being worked out, including investment of these assets in companies that may be dual listed in Swaziland’s Stock Exchange and the Johannesburg Stock Exchange. The central bank is currently taking stock of various options to ensure that liquidity is managed prudently for monetary policy purposes without adverse effects on its balance sheet.

The nonbank financial sector: Swaziland’s stock exchange

23. The stock exchange is small, illiquid and underperforming relative to regional stock markets, holding little prospects as an avenue for the domestic investment requirement. The Swaziland Stock Exchange (SSX) was established in 1990 to provide citizens with the opportunity to invest in the economy. There are only six stocks listed on the SSX of which only one is dual listed with the Johannesburg Stock Exchange. At US$200 million, it has the smallest market capitalization among other SACU countries (South Africa, Namibia, and Botswana) and has been underperforming relative to all. A Security Bill has been in the works since 1993 and is yet to be enacted. Once passed into law, the Bill should promote and facilitate the development of the country’s capital market and will empower the authorities to license, authorize, and regulate all securities markets, participants and activities.

Figure II.7.Stock Markets in SACU Countries

D. Financial Sector Efficiency and Profitability

24. Swaziland’s banks do not appear to be as efficient or cost effective as banks in Namibia and Botswana. High interest margins and overhead costs generally reflect less efficiency. Based on these criteria, Botswana and Namibia do much better than Swaziland though such cross-country comparisons should be treated with care. 7 High bank concentration generally leads to less competition, which allows banks to enjoy their market power by earning high interest margins and operating with high overhead costs. In this regard, Swaziland’s more concentrated banking system than Namibia, the lowest among the SACU countries, may account for its higher overhead costs and higher net interest margin.

Table II.4.Banking System Efficiency Profitability 1
Net interest margin (percent of assets)overhead costs (percent of assets)Return on assets (percent)Return on equity (percent)Bank concentration 2(percent)
Swaziland6.27.15.930.381.7
Namibia5.33.71.519.977.5
Botswana3.63.96.162.394.4
Lesotho3.512.02.027.0100
South Africa8.25.21.418.698.5
Sub-Saharan Africa (mean)8.26.12.120.182.1
Sub-Saharan Africa (median)5.95.588.6
Foreign banks in Africa2.826.7
Sources: Honohan and Beck (2007); African Department Regional Outlook (May 2006); IMF staff reports; and Beck, Demirgüç-Kunt Levine (2007 updated).

Latest available data (2005 or 2006) or averages over 2004-06.

Assets of three largest banks as a share of assets of all commercial banks.

Sources: Honohan and Beck (2007); African Department Regional Outlook (May 2006); IMF staff reports; and Beck, Demirgüç-Kunt Levine (2007 updated).

Latest available data (2005 or 2006) or averages over 2004-06.

Assets of three largest banks as a share of assets of all commercial banks.

25. Banks in Swaziland are earning more from noninterest income than interest income. Although commercial banks in Swaziland compete for customers, their noninterest income (with reportedly high bank charges) has become more important over time, rising from 36 percent of their total income in 2001 to over 45 percent in 2006. This trend increase raises some concerns about future prospects for lending as it could result in disintermediation from the banking system, slowing down the deepening of domestic financial markets at least through the banking system. In fact, some disintermediation may have already taken place as SCCOs have grown in size significantly.

26. Despite the high overhead costs, banks are profitable with Swaziland’s banking system enjoying the second highest level of profitability among SACU countries. This is based on either rate of return on equity or on assets. It is not clear why overhead costs are so different across SACU countries since the three foreign banks that operate in Swaziland are also present in Namibia and Botswana and these countries having similar population sizes. Differences in population density and unionization of workers in the banking sector may explain part of the difference, but further work on bank-level analysis may shed more light on the issue.

E. Key Constraints to a Deeper and Healthier Financial System

27. Delays in enacting several financial bills constrain development of a deeper and healthier financial system. While progress has been made regarding the insurance and pension funds, passage of three important financial laws are still pending; the Securities Bill (1993), aimed at developing the security market; the Financial Services and Regulatory Authority Bill (FSRA 2003), aimed at consolidated supervision and regulation of nonbank financial institutions, including SCCOs, insurance and pension funds; and the National Clearing and Settlement Systems Bill (NCSS, 2004) that has allowed smooth operation of the payment system but has no legal basis, which may subject the central bank and commercial banks to potential lawsuits.

28. The existing regulatory and supervisory agency in charge of the SCCOs, MoAC, faces weak capacity and resource constraints:

  • No prudential standards have been established by the regulator;
  • Lack of capacity leads to insufficient monitoring and supervision;
  • Financial institution expertise is sorely lacking at all levels of the cooperative sector. In particular, the inability to manage credit risk will lead to a continued deterioration of the sector;
  • The audited financial statements of credit cooperatives do not meet international audit and accounting standards;
  • The capacity, both in terms of manpower and expertise, within the Cooperatives Department to conduct effective off-site and on-site monitoring is extremely limited;
  • Given the size of the SCCOs, no credit cooperative in Swaziland has adopted a comprehensive banking computer software system to track its deposits and lending operations;
  • The SCCO’s Apex organization (SACCO) also faces capacity constraints in enforcing best practices in risk management among its members; and
  • Delays in implementing the FSRA bill and unclear laws may have prevented the CBS from assisting with the supervision of the SCCOs.

29. Surveys of investment climate show a persistent pattern of weaknesses that constrain decisions to invest and access financial markets. According to the World Bank’s Doing Business 2008, Swaziland is ranked 175 out of 178 countries in the category called protecting investors, which consists of financial disclosure, Directors’ rights, shareholders’ rights and investor protection, all of which are essential factors that add depth to financial markets and can safeguard a healthy financial sector. According to the World Bank’s Enterprise Survey (2006) the top constraint cited by business firms was anticompetitive or informal practices while access to finance was cited as the fourth most binding constraint. The Doing Business 2008 shows that obtaining credit is easy vis-à-vis the rest of the world as Swaziland is ranked 36 out of 178 countries, but the same survey also shows that once credit is granted, protection of investors’ rights is not guaranteed.

30. Restrictions on land ownership limit financial depth as well as efficiency of investment in the real sector. Ownership rights to the Swazi Nation Land, which accounts for 60 percent of the land is severely restricted, thus preventing any individual from using it as a collateral for accessing the financial sector. High poverty, high inequality and a sizable informal sector impose further constraints on financial depth.

31. Low economic growth is a reflection of many factors, but weak growth prospects limits growth of the financial sector and vice versa. Research has shown that higher financial depth is causal to the growth process, at least in a temporal sense, i.e., other things being equal, countries that start with a high initial financial depth have grown faster subsequently. In Swaziland’s case, low growth and low financial depth have coexisted for almost ten years now. Although efficiency in use of funds also matters to the growth process, the lack of investment opportunities outside the textile and sugar sectors has also constrained growth.

F. Conclusion

32. The authorities need to formulate a financial sector strategy that addresses Swaziland’s twin challenges of enhancing financial development and ensuring financial stability. Key elements of a forward looking financial sector strategy could include:

  • Legislation: Pass the three financial sector laws to improve the investment climate and send a signal to potential investors by enforcing the laws;
  • SCCOs: Improve supervision of SCCOs to safeguard their financial viability and allow SCCOs to fulfill their potential in providing financial access to the public at competitive costs. Given the serious limits of financial expertise, considerations should be given to consolidated supervision of all deposit-taking cooperatives to maximize synergy by passing the FRA bill. The monetary survey compiled by the CBS should start including accounts of SCCOs and be extended over time to include other cooperatives;
  • Restrictions on the financial sector: Opt for gradual phasing of the domestic investment requirements for insurance and pension funds; explore Public Private Partnerships as a way of developing viable projects that could be financed by use of the domestic investment requirement; and over time securitization should be an option; expand the availability of long lease arrangements (99 years or more) for the Swazi Nation land and allow these leases to be used as collateral;
  • Insurance and pension funds: Continue building up the regulatory capacity of the Registrar of Insurance Companies and Retirement Funds in areas of legislation, supervisory policy and staff development per action plan agreed with the MCM;
  • Access to finance: Promote competition and disclosure in the financial sector with an eye toward reducing bank charges and SCCO’s informal charges; consider removing restrictions on women’s access to finance;
  • Growth strategy: Swaziland needs a growth strategy that removes binding constraints on its growth; in many cases removal of these constraints also deepens the financial sector;
  • Basel II: Seek technical assistance that enables the staff of the supervision department at the CBS to monitor compliance of the three subsidiaries of South African banks with Basel II, although these banks will continue to prepare their accounts under Basel I as well; and
  • Stock market: This is by far the most developmental and challenging component of a future financial sector strategy as it requires progress in many areas of reform outlined above. In time, development of a secondary bond market should also be considered.

33. The above strategy should be sequenced and prioritized. Reforms that safeguard financial stability should be tackled first, thus limiting any possible systemic effects on the financial sector, followed by reforms that increase the depth of Swaziland’s financial markets. Some reforms, such as the domestic investment requirement, will be more challenging in the short to medium term than others in deepening financial markets and therefore in need of more urgent attention.

    BeckThorstenAsliDemirgüç-Kunt and RossLevine2007“Finance, Inequality and the PoorJournal of Economic Growthvol. 12issue 1 pp. 2749

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    HonohanPatrick and ThorstenBeck2007Making Finance Work for Africa. (World Bank: Washington D.C.)

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Notes
1Prepared by Hamid R. Davoodi.
2Swaziland has not yet benefited from a Financial Sector Assessment Program (FSAP), but has received considerable technical assistance from the IMF Monetary and Capital markets Department (MCM) and others.
3According to World Bank classification, South Africa and Botswana are upper middle income countries while the remaining SACU countries are lower middle income countries.
4Excluding specialized financial institutions (e.g., development banks, agricultural banks) across these countries for which comparable data are not available.
5Estimates of M3 for Swaziland includes SCCOs.
6As of end-2006, there were also 60 active farmers/multipurpose cooperatives with an additional 3,549 members. Activities of these cooperatives include consumer shops, vegetable farming, maize production and milling, tractor hire services and sale of farm inputs.
7For example, Lesotho’s banking system is the most efficient, based on net interest margin, but least efficient based on overhead costs.

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