The Macroprudential Oversight Committee (MOC) of the Bank of Namibia is at an advanced stage of implementing the countercyclical capital buffer (CCyB) as an additional macroprudential tool to strengthen the banking sector’s resilience.
BoN Deputy Governor Leonie Dunn said the CCyB is a macroprudential policy instrument that serves as a measure of protection for the banking sector against the build-up of systemic risks associated with periods of excessive aggregate credit growth.
Raising the countercyclical capital buffer requires banks to add capital at times when credit is growing rapidly so that the buffer can be reduced if the financial cycle turns down or the economic and financial environment becomes substantially worse.
“During the meeting, the MOC approved the CCyB framework that aims to provide a comprehensive understanding of the Bank’s CCyB operations, thereby promoting transparency of the policy tool,” she said.
Dunn noted that the preparations and consultations to introduce the CCyB as a macroprudential policy tool are underway.
“This buffer instrument is generally built during good economic times and used during economic downturns,” she said.
This comes as last year the International Monetary Fund (IMF) recommended the Bank to implement countercyclical capital requirements as a means to bolster the nation’s economic stability.
In a recent exclusive interview with The Brief, IMF Senior Economist Mehmet Cangul noted that countercyclical capital requirements are a financial tool that the Bank of Namibia could adopt to regulate the capital maintenance of commercial banks. He also discussed the implications of these adjustments for the general public. Cangul noted that tightening capital requirements during an economic boom could potentially hurt consumption. “However, given the current downward trend in consumption, loosening these requirements might serve as a stimulus for increased spending,” he said.
Meanwhile, despite moderate economic conditions, the banking sector remained sound and resilient. “The banking sector’s total assets grew by 2.8% to N$177.9 billion during the first quarter of 2024 on the back of growing cash and balances with banks. The liquidity ratio stood at 18.1% during the period under review, compared to 17.3% observed during the preceding quarter. This was mainly ascribed to diamond sales and increased government expenditure at the end of the FY2023/2024 fiscal year,” Dunn said.
In terms of profitability, both the return on equity and return on asset ratios declined slightly by 2.0% and 17.0%, respectively, mainly due to a slowdown in other operating income. Similarly, both the Tier 1 and total risk-weighted capital ratios declined by 14.8% and 16.7%, respectively, during the review period.
“Notwithstanding the slight declines in the profitability and capital ratios of the banking industry, the levels remained prudent for banks to meet the Bank’s prudential regulatory requirements. Asset quality, as measured by the NPL ratio, deteriorated to 6.1% at the end of the first quarter of 2024 from 5.9% during the last quarter of 2023,” said Dunn.
Despite the increase in the NPL ratio, she noted that the banks have sufficient provisions and adequate capital to absorb potential credit losses.
The Bank further imposed the necessary supervisory interventions to contain the credit risk and will continue to monitor the developments in furtherance of stability.
