World Bank Admits High Banking Charges

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By Frederick Philander WINDHOEK The deputy governor of the Bank of Namibia yesterday told a Parliamentary Standing Committee that the institution has a duty to intervene and investigate excessive bank charges by local financial institutions. Bank of Namibia Deputy Governor, Paul Hartmann, was one of the financial stakeholders who testified in front of the Standing Committee of which Hage Geingob is the chairperson. “The Bank of Namibia is entrusted to administer, amongst others, the Banking Institutions Act, 1998, and the Payment System Management Act, 2003. These two pieces of legislation would allow the Bank to potentially regulate bank charges in Namibia. But, before we look into this particular concern, it is necessary to give a neutral view on this subject matter,” Hartmann said. He went on to say that the IMF/World Bank earlier this year carried out a Financial Sector Assessment Programme in Namibia. The mission inter alia said: “There are concerns that banks in Namibia are charging excessively high fees. It is true that given the sharp decline in interest rate spreads on lending, banks are trying to shift their income base toward fee income. It is also true that banks are very profitable and face low competition in some segments of the market. This could explain the high charges. At the same time, the cost of doing business is high in Namibia not least because of the lack of economies of scale. These factors also explain high charges. To assess the concern that fees are excessively high, a thorough analysis of banks’ fees structure would be particularly useful” – quoted from a document. According to Hartmann, the FSAP report also recommended considerable enhancement of competition in the banking sector by admitting new entrants into the market segment, for instance by allowing NamPost Savings Bank to enter the banking scene and to support the creation of credit unions. “Moreover, the Bank of Namibia is currently considering amendments to the Banking Institutions Act, 1998, to allow branches of foreign banking institutions to be licensed and set up in Namibia. It is hoped that such branches may instil sufficient competition in the banking sector, should there be an interest in establishing bank branches in Namibia,” he said. The Bank of Namibia is on record as having admitted that the bank charges are high, confusing and multiple and that they are arbitrarily determined. “The question arises whether the Bank should intervene by prescribing bank charges or to curb them. To answer this question, we need to look at the different roles that the Bank fulfils. Its primary responsibility, in accordance with the Bank of Namibia Act, 1997, is to promote and maintain a sound monetary, credit and financial system in Namibia and to sustain the liquidity, solvency and functioning of that system; and to promote and maintain internal and external monetary stability and an efficient payments mechanism,” he told the Standing Committee. According to Hartmann, the Bank of Namibia has the responsibility to administer the Banking Institutions Act, 1998, whereby it licenses and supervises banking institutions, and ensures that these institutions are solvent and liquid and have sufficient and quality capital to support their operations by enforcing specific prudential requirements. “Should the Bank, in its supervisory capacity, start prescribing bank charges, it could lead to lower returns which in turn could erode the capital base of the banking sector. As such, the Bank sees the regulation of bank charges as a conflict of interests to its primary objective of safeguarding financial stability in the country, at least from a macro and prudential perspective,” Hartmann asserted. It is the Bank’s view that the reference to “cost-effective operation of all or any part of the National Payment System or payment system arrangements” should be construed to mean that the fees that banks charge their customers for payment system-related services, i.e. EFT, cheques, cards, large value transactions, should be such that they lead to an efficient and cost-effective use of these services. “Overcharging customers for these services will dissuade them from using these services and will cause an under-recovery of capital invested in setting up the payment system infrastructure. Given this background, the Bank of Namibia does play a role in monitoring and, if necessary, regulating the fees charged by system participants (i.e. banking institutions) and payment system service providers (i.e. NamClear and SmartSwitch),” said Hartmann. The Bank of Namibia, for example, charges all participants certain fees for the settlement for services rendered. Similarly, NamClear charges participants fees for EFT, clearing and cheque processing services. “It is required from the Bank to establish what “margins” banking institutions add to these charges when billing their customers. If these margins are excessive, then the Bank has to use its powers under Section 2 of the Payment System Management Act, 2003, to direct banks to remedy the situation. The Bank maintains that, if there are reasonable grounds to prove that banking institutions engage in “restrictive business practices” or “abuse of dominant position” the Competition Commission should investigate these practices. Therefore, the Bank of Namibia strongly advises that the Commission should be established to start fulfilling its objectives. “While the Bank should not regulate bank charges in its capacity as supervisor and overseer of the banking system, it should do so as overseer of the national payment system so as to safeguard the integrity and confidence in that system,” Hartmann concluded.