January 2007 Issue 19 CNEPRU POLI Y BRIEF ISSN: 1680-659X Published and distributed free of charge by The Namibian Economic Policy Research Unit (NEPRU) P.O. Box 40710, Cnr Louis Raymond & Grant Webster Streets Windhoek, Namibia Phone: +264-61-277500 Fax +264-61-277501 Email: nepru@nepru.org.na Web Site: http://www.nepru.org.na T This series aims at providing lessons from recent economic research applied to Namibia relevant for policy making Comparing Retail Banking Charges in Namibia, South Africa and Botswana his policy brief compared retail banking charges in Namibia with those levied by their commercial banking head offices in South Africa and their counterparts in Botswana. It argues that the effective retail banking charges incurred by individuals differ based on their usage. To address the high banking charges sentiment in Namibia retail banking customers should shop around for cheaper services among existing financial institutions based on their needs. For this to succeed the lack of comparability among publicly available information on bank charges and possibly high switching costs between financial institutions need to be addressed. This will require the revamping of the Namibia Consumer Lobby to collect disparate information, compare and present it in a manner that will allow retail banking customers in Namibia to exercise their right of choice and an effective Competition Commission to guard against anti-competitive practices in the banking industry. Intro The four commercial banks in Namibia are First National Bank, Standard Bank, Bank Windhoek, and NedBank. The negative sentiment generated by public claims that they were charging high fees led to an investigation into options to address the issue by the Namibian National Assembly s Parliamentary Standing Committee on Economics, Natural Resources and Public Administration in 2006 (Weidlich, 2006). Why banks charge Commercial banks play an important intermediation role in an economy. The deposit and credit facilities that they offer to households, businesses and public agencies allow these entities to save, invest and stabilize the economy, which are important for economic growth. Despite this important economic function, commercial banks are private businesses, whose main objective is to maximise profits for their shareholders. The retail banking divisions earn income from the interest rate spread, which is defined as the difference between the interest rate that they pay to depositors and the interest rate they charge borrowers. In addition, banks can earn income by directly charging for various wholesale banking services. With the nature of banking changing in Namibia, as in other parts of the world, commercial banks increasingly rely on fees and commissions form their wholesale banking divisions as a source of revenue (Allen & Santomero, 1999 and Boer & Sherbourne, 2003). The justification of retail banking charges is that they are needed to cover the costs of providing retail services to their clients. These costs consist of not only the direct cost of providing services, but also the risks faced by banks in the lending process. The latter arises due to difficulty in obtaining information on borrowers creditworthiness in an environment with limited credit information systems. From this perspective, high retail banking charges arise if the costs and risks faced by banks are high. High banking costs also persist if there are low levels of competition in the banking industry due to less pressure to innovate (Adongo and Stork, 2005). In addition, the relatively low population size and density in Namibia makes it difficult for banks to benefit from economies of scale and implies that a higher per capita cost of bank service provision exists than in other more densely populated countries. Finally, the strong link between Namibian banks and those of South Africa may also result in the utilization of pricing models that do not conform to the general business environment in Namibia, also resulting in higher charges.
Are bank charges in Namibia high? Whether or not retail bank charges in Namibia are conclusively high can only be answered by analysing the cost structures of retail banking and making a relative comparison with other countries. Although, an analysis of cost structures is not part of this policy brief, an attempt is made to compare retail banking charges of Namibian commercial banks to their head offices in South Africa and their counterparts in Botswana. To assess whether retail bank charges are high in Namibia relative to South Africa and Botswana, this brief makes use of two accounts, Savings and Current accounts. The comparison is done by making the following assumptions: That the consumer of bank services transacts on a pay-as-you-transact basis; That the consumer spends N$1000.00 for each transaction (or the Pula equivalent of the stated amount for the case of Botswana). Tables 1 and 2 below give a concise overview of the different retail banking services with their respective costs for commercial banks in the three countries with local operations in Namibia at the end of 2006. 1 A further summary illustration is also presented in Figures 1 and 2 below. While Botswana has four major commercial banks, this policy brief included only two banks i.e. First National Bank Botswana and StanBic Bank. The other two banks were omitted because data on the cost structures was undergoing review when this brief was prepared. Therefore, while a comparison with Botswana is important because its economic, demographic and climatic conditions are comparable to those of Namibia it is important to remember that the data on Botswana is limited. Table 1: The cost of various bank transactions in Namibia, South Africa and Botswana in 2006 Evidence NAMIBIA SOUTH AFRICA BOTSWANA TRANSACTION BWHK NEDBANK FNB STANDARD ABSA NEDBANK FNB STANDARD FNB STANBIC Withdrawals Cash Withdrawal (at Branch) 23.00 27.00 24.10 11.00 26.00 17.00 0.00 8.90 ATM Withdrawal (Within Bank) 10.00 10.75 10.50 10.65 11.10 11.85 10.00 12.00 1.78 2.67 ATM Withdrawal (Outside Bank) 12.75 10.45 22.00 17.95 13.90 17.80 15.75 18.70 5.34 1.96 Deposits Cash 16.00 24.50 16.50 16.10 10.50 11.00 12.50 12.00 3.37 Cheque 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Payments & Purchases Card Payments @ POS 2.50 3.90 7.32 3.25 1.75 3.00 0.89 2.67 Debit Orders (internal) 11.50 4.00 3.00 4.75 5.00 3.00 3.00 2.67 Debit Orders (external) 28.75 10.00 17.15 16.19 14.80 10.00 13.00 11.57 Other Charges Statement at Branch 6.30 6.50 6.50 4.80 7.00 3.50 5.34 4.45 Statement at Bank ATM 0.00 2.75 2.00 0.00 1.50 2.75 2.00 1.47 0.98 Stop Payments 40.00 55.00 50.00 35.00 25.00 50.00 30.00 97.90 89.00 Source: Various Banks price brochures and NEPRU calculations Table 2: Average Pay-As-You-Transact bank charges in Namibia, Botswana and South Africa TRANSACTION NAMIBIA SOUTH AFRICA BOTSWANA ATM Withdrawal (Outside Bank) 15.79 16.54 8.90 ATM Withdrawal (Within Bank) 10.38 11.19 2.23 Card Payments @ POS 3.20 3.83 1.78 Cash Deposit 18.28 11.50 3.37 Cash Withdrawal (at Branch) 25.00 19.52 8.90 Check Deposit 0.00 0.00 0.00 Debit Orders (external) 13.99 9.80 11.57 Debit Orders (internal) 6.27 3.94 1.78 Statement at Bank ATM 1.19 2.08 1.23 Statement at Branch 6.43 5.10 4.90 Stop Payments 45.00 35.00 94.95 Source: NEPRU calculations 1 This policy brief was prepared before Capricorn Investment Holdings purchased ABSA s stake in Bank Windhoek
Average Cost of Current Accounts Compared Stop Payments Statement at Branch Statement at Bank ATM Debit Orders (internal) Debit Orders (external) Cheque Deposit Cash Withdrawal (at Branch) Cash Deposit Card Payments @ POS ATM Withdrawal (Within Bank) ATM Withdrawal (Outside Bank) 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 N$ NAMIBIA SOUTH AFRICA BOTSWANA Figure 1: Comparison of the average cost of transactions for a current account Cost of Savings Account Compared Statement at Branch Statement at Bank ATM Debit Orders (internal) Debit Orders (external) Cheque Cash Withdrawal (at Branch) Cash Card Payments @ POS ATM Withdrawal (Within Bank) ATM Withdrawal (Outside Bank) NAMIBIA SOUTH AFRICA BOTSWANA 0.00 5.00 10.00 15.00 20.00 25.00 30.00 N$ Figure 2: Comparison of the average cost of transactions for a savings account Withdrawal Fee Discussion For all three countries, withdrawal transactions made over the counter are charged more than the transactions made using automated teller machine (ATM) networks. In addition, customers are charged more for using other bank s ATM networks than their own banks ATM. The charges on withdrawals at ATMs and at the customers own bank vary across banks. Most other charges from all banks are structured depending on the value of the
withdrawal. The charges are higher for more withdrawals. The relative bank charges of check accounts in Namibia are similar to those of savings accounts. For the classic check accounts presented in Figure 1, all of the withdrawals are charged and largely depend on the value of the withdrawals. On average, Figures 1 and 2 show that Namibian ATM withdrawal charges are slightly lower than those in South Africa and significantly higher than those in Botswana, while over the counter withdrawals are higher than both Botswana and South Africa, for current accounts. However, savings account costs are higher for Namibian ATM and over the counter withdrawal charges except in the case of other bank ATM withdrawals, where costs are slightly higher in South Africa. Cash and Cheque Deposits Charges on cash deposits of savings accounts also vary across banks. Bank Windhoek only charges cash deposits that are over N$2000.00, thus exempting a relatively high value of deposits from charges. Other banks begin charging on deposits as low as N$200.00 as in the case of First National Bank s BOB2000, one of its retail banking products. On the other hand all deposits, irrespective of the value, are charged for Standard Bank s savings accounts. A maximum of 1.6% and 1.5% are charged for all the deposits of PlusPlan and EPlan, respectively. It can be observed from Table 1 that FNB Namibia charges more for cash deposits, then FNB South Africa, while NedBank Namibia charges more than twice as much as NedBank South Africa for cash deposits. On average, Namibia seems to charge the highest fees for cash deposits for both saving and current accounts compared to South Africa and Botswana. Check deposits on the other hand are not charged for all the banks in all the countries of interest. Debit Orders and Point-of-Sales Purchases As can be witnessed from Table 1, debit orders made to accounts in other banks (external) are charged more than debit orders made to accounts within the same bank (internal). On average, Namibia charges significantly higher than South Africa and Botswana for debit orders. In comparison with South Africa, Namibia charges as much as 60% more on internal debit orders and 43% more on external debit orders. In comparison to Botswana, Namibia charges approximately 20% more on external debit orders and 52% more on internal debit orders. With regards to Point-of-Sale (POS) card purchases, Botswana charges the least for this service, followed by Namibia. Bank Statement Requests Most banks covered in this policy brief do not charge for the monthly bank statements. Bank statements only arise upon request by the consumer. These charges vary depending on the channel of request (whether the request is done at the bank or through the ATM), and the length of time the request spans (for Branch requests). ATM statement requests are significantly lower than those made at the bank counter. On average however, Table 2 shows that Namibia charges the highest for branch statement requests while South Africa charges highest for ATM statement requests. Botswana charges the least for branch statement requests while Namibia charges the least for ATM statement requests. Except for cheque deposits, all banks in Namibia charge for all basic transactions, while Botswana s Standard Chartered (not shown) does not charge for all the basic transactions. Addressing Bank Charges in Namibia If consumers were to forfeit their bank accounts it would be difficult to save, transact and vulnerability to theft would be very high. On a macroeconomic level, the reduced effectiveness of the financial intermediation mechanism would reduce investment. This would have negative implications for economic growth. It is important that the issue of retail banking charges is addressed in a way that does not weaken the stability of the financial system. The Bank of Namibia has the mandate to supervise the banking sector in the country. However, it cannot directly control retail banking charges and prefers not to because the costs of this greatly outweigh the benefits. However, it can and has issued directives that require commercial banks to inform customers about the costs attached to various bank services and products in a transparent and simplistic manner (Alweendo, 1998). In fact, the authors of this policy brief experienced that data availability for retail banking charges was higher in Namibia and South Africa than in Botswana. The best way to address the high retail banking charges in Namibia is for customers to shop around for cheaper services among existing financial institutions. For them to do so, they need to be well informed about different fees that commercial banks charge for retail banking services, which are available on each commercial bank s website and in their branches. This will enable them to carefully determine their needs and choose accounts
that best suit these needs. The manner in which customers execute their banking transactions will also determine the levels to which they expose themselves to retail banking charges. For consumers to effectively exercise the option of choice, one key issue that should be addressed is the lack of comparability among publicly available information on bank charges (Boer and Sherbourne, 2003). This will require the revamping of the Namibia Consumer Lobby to collect disparate information, compare and present it in a manner that consumers can understand. Encouragement of competition in the banking industry may also reduce the extent to which banks can charge high retail banking fees because of the threat that customers will leave for banks with lower charges. The effectiveness of this competition mechanism will depend on the level of switching costs in the banking industry (Genesis Analytics, 2003). Also, the pressure to innovate that arises from increased competition should reduce the costs of the current banking model in Namibia over the medium to long-term. These cost savings could be channelled to retail banking clients in the form of reduced fees. The potency of competition as the financial sector evolves will require an effective Competition Commission to guard against anti-competitive practices. Finally, there is a need to formally investigate the overall cost structure of retail banking in Namibia, in order to conclusively determine whether charges currently levied by the retail banking divisions of commercial banks in Namibia are indeed unjustifiably high. Policy Recommendations Continue to ensure that commercial banks comply with BID-13 of the Bank of Namibia Increase consumer rights awareness based on accurate information and through a revamped Namibia Consumer Lobby Protect against anti-competitive practices through an effective Competition Commission References and further reading Adongo, J. and Stork, C. (2005). Competition in Namibia s banking industry. Policy Brief 10. Namibia: NEPRU Allen, F. and Santomero, A.M. (1999). What do financial intermediaries do? Working Paper 99-30-B, Pennslyvania: Wharton School. Alweendo, T.K. (1998) General Determinations on the Disclosure of Bank Charges, Fees and Commissions (BID-13): determinations under the banking institutions act, 1998 (Act no 2 of 1998). Bank of Namibia Boer, M. and Sherbourne, R. (2003). Complex fees ans lack of competition, excess profits? Retail Bank Charges in Namibia. Briefing paper 27. Namibia: Institute of Public Policy Research. Genesis Analytics. (2003) Account for life: A feasibility assessment prepared for FinMark Trust, South Africa: Genesis Analytics. Ketley, R., Davis, B. and Truen, S. (2005). An inter-country survey of the relative cost of bank accounts: A study for FinMark Trust. Version 7.4. South Africa: Genesis Analytics Weidlich, B. (2006) Bank charges justified: Bankers.Namibia: The Namibian. www.namibian.com.na/2006/september/national/064ce9e709.html. Compiled by: Maano Nepembe Revised by: Mumba Mabvuto Technical Editing: Aldenia Chaka