Abstract
1. Lesotho is making significant efforts to increase financial inclusion but substantial challenges remain. The rapid growth of mobile money is an important recent success. Active accounts have increased by about four and half times since 2015, improving access for previously excluded parts of the populations, such as the rural poor. By 2021, adults with access to more than one formal financial product increased by 40 percent from 2011. The Central Bank of Lesotho (CBL) recently issued pricing directives to alleviate financial transactions costs. However, Lesotho continues to underperform on key dimensions of financial development and inclusion relative to peers.2 Only about 10 percent of households who borrow do so from a financial institution, much lower than in lower-middle income countries (LMICs), while fewer MSMEs have access to credit in Lesotho than in neighbor SACU member states.
Improving Financial Inclusion1
A. Progress and Challenges
1. Lesotho is making significant efforts to increase financial inclusion but substantial challenges remain. The rapid growth of mobile money is an important recent success. Active accounts have increased by about four and half times since 2015, improving access for previously excluded parts of the populations, such as the rural poor. By 2021, adults with access to more than one formal financial product increased by 40 percent from 2011. The Central Bank of Lesotho (CBL) recently issued pricing directives to alleviate financial transactions costs. However, Lesotho continues to underperform on key dimensions of financial development and inclusion relative to peers.2 Only about 10 percent of households who borrow do so from a financial institution, much lower than in lower-middle income countries (LMICs), while fewer MSMEs have access to credit in Lesotho than in neighbor SACU member states.
2. The well-capitalized, highly liquid, and largely foreign-owned banking sector’s contribution to private sector credit remains limited. The banking sector dominates credit provision with limited competition as suggested by the sector’s concentrated asset holdings, high profitability and overhead costs, and large spreads between lending and deposit rates (see Figure 1). While the supply of funds to banks—measured by deposits to GDP—is comparable to Lesotho’s peers at 30 percent, only about half goes to the private sector as credit. Banks prefer to invest heavily in South Africa, likely reflecting home bias within the parent banks of the three foreign bank subsidiaries, deeper financial markets and better investment opportunities in South Africa, and a lack of bankable projects in Lesotho. Only about a third of domestic credit goes to businesses, much lower than in peers.
Benchmarking Financial Development and Access
(Relative to expected median)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
Benchmarking Financial Development and Access
(Relative to expected median)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
Benchmarking Financial Development and Access
(Relative to expected median)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
3. Access to finance for MSMEs is typically a bigger constraint in Lesotho compared to the rest of SACU. Lenders report that MSMEs often lack adequate financial statements to assess risk and business plans to evaluate prospects. Lenders’ ability to use collateral is also limited by the current legal framework. MSMEs borrowers also often face difficulty getting the necessary documentation, such as business registration, licenses, and tax clearance due to the complexity of the processes, and some instead take out more expensive consumer loans. A weak credit infrastructure and information gaps limit access to financial services particularly for rural and non-salaried households.
Businesses Reporting Access to Finance as Major Constraint
(Percent)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
Businesses Reporting Access to Finance as Major Constraint
(Percent)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
Businesses Reporting Access to Finance as Major Constraint
(Percent)
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
4. Despite substantial demand, access to financial services remains limited for most households. Lenders prefer to lend to salaried workers, mainly civil servants, using deduction at source from paychecks to manage risk. For example, data from the most recent household budget survey suggest about half of all mortgage loans are to civil servants, who account for only 4 percent of the labor force. Meanwhile, Findex 2017 data suggest the rest of the population has limited access to financial services and use informal methods to meet their needs. They instead tend to rely on family and friends to borrow, and only a minority who save do so through a financial institution. However, lack of documentation, distance to provider, and high costs are particularly important reasons for not being able to open a bank account in Lesotho. Furthermore, agriculture is an important source of income for the majority of Basotho and is subject to high variability due to periodic droughts. Smallholder agricultural insurance has only recently started to be introduced to help mitigate this volatility with surveys suggesting high demand for access.
5. Microfinance institutions (MFIs) and financial cooperatives likely have a limited impact on financial inclusion, while raising consumer protection concerns. The small MFI sector, with only about 5 percent of the assets of the banking sector, lends almost entirely to households, often once again to salaried workers—who are already able to borrow from banks, further raising their indebtedness. Financial cooperatives are growing rapidly, outpacing the supervisory capacity of the central bank. Some of the largest, such as Boliba, remain in regulatory limbo, highlighting critical governance concerns within the sector. Progress on the Financial Cooperatives Bill, which would improve the Ministry of Small Business Development, Cooperatives and Marketing’s (MSBDCM) powers to supervise the sector, has stalled. Absent improvements in governance, the sector risks undermining consumer trust and financial inclusion.
6. Mobile money usage has grown rapidly—helping to expand the reach of digital financial services—but less than half of the mobile money accounts are actively used. Lesotho has made greater progress for all groups compared to other LMICs, including for the poor, less educated and rural individuals. Usage has increased rapidly, with mobile money accounts more than doubling since 2017. 2.2 million mobile money accounts were registered as of year-end 2020, of which 882,000 were 30-days active (40 percent) and 920,000 were 90-days active (42 percent). Active accounts equate to around two-thirds of the adult population of 1.4 million. Therefore, while mobile phone penetration appears high, this reflects the use of multiple SIM cards. Two-thirds of Basotho do not use the internet regularly, because weak competition leads to a high cost to use communication services and low internet usage by both businesses and individuals. Although there are five mobile money issuers, Vodacom dominates the sector with an 87 percent market share. Despite rising interest, digital lending is in its infancy partly due to the lengthy licensing process for Fintech companies.
7. The increasing use of mobile money for domestic remittances has led to a decline in informal services for cross-border remittances. As the growth of mobile money has formalized the majority of domestic transfers, the share of informal remittances (e.g., cash carried across the border) has been declining. FinMark Trust estimates the proportion of informal remittances declined from 54 percent in 2016 to 30 percent in 2018. The decline is due to various partnerships between MNOs, MTOs, retailers (e.g., Shoprite) and exchange bureau that have expanded the availability and reduced the cost of formal remittances.
B. Policies to Increase Financial Inclusion
8. Mobile money and other digital financial services are a promising avenue for increasing financial inclusion for households. The CBL is revising the National Payments Act and improving the regulatory framework, which will also increase consumer protection, and is planning upgrades to improve interoperability across service providers. These efforts may need to be complemented by monitoring whether anti-competitive practices may also be hindering interoperability, as suggested by conversations with market participants. Reducing the cost of meeting documentation requirements for individuals, which is currently a major hurdle, while maintaining adequate protections will also be key. Utilizing the national ID for consumer verification, which the authorities are piloting, could substantially reduce costs. The authorities should consider whether there is scope to take a risk-based and tiered approach to banking agent licensing, which has proven essential to expanding financial services in other countries.
9. Fostering digital financial services will broaden financial access and inclusion. Measures include: (i) submit the National Payments Systems Bill to Parliament and implement associated regulations; (ii) implement the Government Payment Gateway; (iii) implement the National Switch-and the associated common data standards and protocols; (iv) implement the National Identification Act; (v) update the Data Protection Act in line with international good practices, and revise and resubmit the draft Computer Crime and Cybersecurity Bill; (vi) adopt simplified customer due diligence requirements; (vii) harmonize Financial Agency requirements; and (viii) adopt Financial Consumer Protection regulations.
10. International coordination is necessary to lower the cost of cross-border remittances. Greater integration of regional payment systems and expanding the usage of existing facilities such as SIRESS to low-value payments, could help further lower costs. Coordinating with South African and regional authorities to identify areas to streamline regulations could foster use of formal services and increase the number of providers.
11. Continued efforts to increase consumer protection and literacy will be necessary to boost inclusion and sustain trust in the financial system. The CBL should continue its efforts to enhance financial literacy and consumer protection. Passage of the Financial Consumer Protection Bill and ensuring that the newly-created Consumer Protection Unit is adequately capacitated are key first steps. It will be important to speed passing the Financial Cooperatives Bill to ensure adequate coverage for customers of financial cooperatives.
12. The CBL should continue to be vigilant on over indebtedness. The CBL should continue its efforts to expand the coverage of the credit bureau and could also consider integrating information from Treasury’s payroll system, which is used by lenders for deduction at source from paychecks, to enhance the monitoring of overindebted individuals. Carefully monitoring lending practices, and issuing warnings and imposing penalties, will also be important.
13. Efforts to increase financial inclusion for MSMEs should focus on creating an enabling environment for lending, complemented with pro-growth and sustainable regulatory and fiscal policies. Improving the credit infrastructure, enhancing the partial credit guarantee scheme, and supporting the development of capital markets will help overcome barriers. In particular, completing the collateral property register, broadening the coverage and scope of the Credit Reporting Act, and implementing the Insolvency Act by developing regulations with detailed provisions for practitioners will facilitate the use of collateral. Including businesses in the credit bureau can help with credit assessments. Creating credit scores for individuals could also facilitate lending to MSMEs, by allowing information on the entrepreneur to serve as a proxy for their business. The required documentation for business loans could be reviewed with a view to facilitating access, while ensuring that risks are appropriately managed. However, the benefits from improving the lending environment will be limited without concurrent efforts to create a pro-growth and stable business environment while eliminating government payment arrears.
14. Additional interventions should focus on reducing risk and increasing the bankability of projects, while leaving project selection to the private sector. Providing training on business development and preparing financial statements could enhance the bankability of MSMEs. The two existing partial credit guarantee schemes, maintained by LNDC and the MSBDCM, should be reviewed to eliminate overlaps in coverage, and their design should follow international best practices, such as ensuring that the private sector plays the lead role in project selection.
The Banking Sector in Lesotho
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
The Banking Sector in Lesotho
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
The Banking Sector in Lesotho
Citation: IMF Staff Country Reports 2022, 162; 10.5089/9798400212918.002.A002
Prepared by Haiyan Shi and Ashique Habib.
The World Bank’s Finstats 2019 tool, used to benchmark Lesotho’s performance, attempts to isolate the impact of policy on different dimensions of financial development and inclusion, by using regression analysis to control for structural variables (e.g., population density, per capita income) which may also affect outcomes. The model controls for the level of economic development, population size and density, demographics, the global financial cycle, and special characteristics such as geography and resource endowment, and estimates the expected distribution of outcomes. The underlying data, from various sources, extends up to 2017. The most recent years are used for the analysis.
