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The Ministry of Finance is the financial sector policymaker. Lesotho’s regulatory system hinges on the Central Bank of Lesotho (CBL), which is responsible for regulating banks and non-banking financial institutions (NBFIs), including credit-only and deposit-taking microfinance institutions (MFIs), financial leasing institutions, insurers, money lenders, money transfer operators, the credit bureau and others. NBFIs are supervised and regulated within the Non-Banks Supervision Division (NBSD), which is also charged with implementing projects aimed at building financial infrastructure, fostering financial inclusion and improving access to finance.

The primary instrument of regulatory legislation is the Financial Institutions Act (FIA) of 2012, which establishes the CBL as the regulator of banks and a wide range of NBFIs. The Payments Systems Act (2014) enabled the CBL to exercise oversight of the payment systems and provide modernised methods of payment, covering interbank payment systems, clearing houses and securities settlement systems, as well as collateral and netting arrangements.

Since its launch in 2006, the Lesotho Wire (LSW) has been the backbone of the payment and settlement system in the country. In 2016, this system continued to process and settle significant interbank transactions – a total of 23 917 transactions valued at approximately M34.26 billion compared with 27 683 transactions to the tune of M28.06 billion processed and settled in 2015. While this represents a decline in terms of transaction volumes, at the same time transaction values have grown by 22 percent.

Three of Lesotho’s commercial banks – Standard Lesotho Bank, Nedbank and First National Bank – are foreign-owned, being subsidiaries of South African banks and serving the formal sector, mainly medium and large corporate enterprises and salaried employees in urban and peri-urban areas. Most bank credit to households takes the form of personal loans related to salaries, but mortgage finance is also growing. The local, state-owned Lesotho PostBank is more development-focused and concentrates its activities in rural areas.

Commercial banks are concentrated in the capital city of Maseru, and while the distribution of ATMs is improving, they are mainly found in urban centres and the Lesotho lowlands. Despite the small size of the banking industry, the number of branches has increased significantly, from 44 in 2013 to 76 in 2016. Furthermore, the number of ATMs has risen to 194, while the number of Point of Sale (POS) terminals now stands at 1 339.

Economic and financial cooperation in the region is vital, and Lesotho is actively involved in the activities of various regional and international organisations. This includes, among others, the Common Monetary Area (CMA), along with Namibia, Swaziland and South Africa, and also the Southern African Customs Union (SACU), Southern African Development Community (SADC), International Monetary Fund (IMF) and World Bank.

Bilateral and multilateral monetary agreements exist between Lesotho and South Africa. Lesotho’s national currency, the Loti, is fixed at par with the South African Rand, which is also legal tender in Lesotho. Benefits arising from the CMA arrangement include macroeconomic stability and the elimination of exchange rate risk between Lesotho and South Africa. However, it also poses some challenges for Lesotho, particularly with regard to synchronising fiscal and monetary policies.

The Central Bank expects financial and insurance activities to register an average growth rate of 6.5 percent over the 2016-2018 period, as it reaps the rewards of ongoing financial sector reforms geared towards improving access to credit and financial inclusion.

FINANCIAL INCLUSION

According to the FinMark Trust report ‘Making Access Possible’, financial inclusion in Lesotho is relatively high, largely due to the coverage and operation of the informal sector which is used by 62.4 percent of the adult population. The most common financial service providers include non-bank credit institutions, registered money lenders, NGOs, Savings and Credit Cooperatives (SACCOs), Village Savings and Loan Associations, Rural Savings and Credit Groups, and unregistered money lenders (Machonisas). This high level of inclusion is also driven by very high usage of insurance, primarily funeral insurance (formal as well as informal), which covers 62 percent of adults, with a further 23 percent having another form of formal financial service.

As a result, Lesotho’s financial exclusion was just 19.1 percent of adult Basotho at the end of 2016. This figure compares favourably with 27 percent for South Africa, 31 percent in Namibia, and 33 percent for Botswana. However, the report also shows that Lesotho ranks the lowest amongst  SACU member state on access to banking services at 38 percent.

Financial inclusion and literacy are known to be catalysts for financial education and stability in both developed and developing countries. The objective of enhancing financial inclusion is to reduce vulnerability and increase income in the wider economy, thereby enhancing poverty reduction, employment and growth. Lack of access to credit and savings, and poor payment mechanisms from formal service providers, have been identified as some of the main challenges in Lesotho’s financial sector.

World Bank FIRST initiative

In an effort to achieve greater national financial inclusion, the CBL has received technical assistance from the World Bank FIRST initiative in addressing issues related to MFIs, SACCOs, mobile financial services, and partial credit guarantee programmes. According to the World Bank, Lesotho lacks adequate regulatory and supervisory frameworks for MFIs. Similarly, SACCOs are highly fragmented and inadequately managed and supervised because the CBL has limited supervisory capacity and no legal foundation for oversight. The legal requirements for banks that use agents are much stricter and more inconsistent than are regulations for mobile network operators that provide mobile money services.

Consumer protection is an area of particular concern, especially because Lesotho lacks the appropriate legal framework. In addition, the country’s partial credit guarantee programmes, which are intended to serve small and medium enterprises, have not had sufficient impact because of deficiencies in the programmes’ design, lack of institutional capacity to implement the schemes, and ineffective governance.

In order to address these challenges and create a strong regulatory framework for the sector, the spotlight has been on the following five components:

  • Strengthening legal, regulatory and supervisory frameworks for MFIs and financial cooperatives
  • Strengthening supervision of other non-bank financial institutions
  • Developing an environment that is conducive to mobile money and agency banking
  • Developing the framework for financial consumer protection and improving financial capability and education
  • Revamping the Government’s partial credit guarantee schemes to improve access of small and medium enterprises to financing

Current developments

With lack of access to financing being one of the most limiting constraints faced by the private sector, Government committed in the 2017/18 budget speech to implement the Financial Inclusion Strategy. This seeks to: increase access to financial products and services in the rural areas by bringing access points closer; deepen the usage of financial products across a wide spectrum of instruments; and increase the take-up and effective use of mobile money and digital finance products and services, especially where such products and services are more affordable.

The CBL, with the assistance of the World Bank under the FIRST Initiative, has been reviewing the Deposit Taking and Credit Only MFIs Regulations with the aim of creating an appropriate legal and regulatory framework.

In the coming months, Government plans to set up a committee to develop proposals on lending to start-ups and small businesses. This committee will also review the two government partial risk guarantee schemes which have to date fallen short of expectations.

FINANCIAL INITIATIVES & LEGISLATION

The Central Bank of Lesotho is undertaking a variety of activities to realise the targets set in its 2015-2019 Strategic Plan. Some of these strategic objectives include:

  • Adapting to changing stakeholder needs
  • Using technology effectively
  • Engendering a culture of innovation and modernisation
  • Delivering services effectively and efficiently

The Financial Leasing Regulations were enacted into law in 2013. However, no players have yet entered the industry. The CBL is pursuing the development of the leasing market by undertaking market research and reviewing the legal framework with a view to identifying and reducing barriers to entry.

The Bank is also implementing a Financial Education and Literacy programme, working in collaboration with major stakeholders in the financial sector. This involves activities such as the Annual Money Month Event which promotes knowledge and understanding among Basotho on financial matters.

In September 2017 the CBL launched its new website, which has an enhanced look and feel and makes it easier for clients to access information as well as providing additional opportunities for interaction and communication between the bank and its strategic stakeholders.

Mobile money and cross-border transfers

In 2016, Shoprite Lesotho in collaboration with Standard Lesotho Bank launched the Shoprite Domestic Money Transfer Service in Lesotho. This was after witnessing the successful launch of Shoprite cross-border Money Transfer Service for inbound remittances in the previous year, and its significant uptake by Basotho working and residing in South Africa.

In addition, the transaction volumes and values of mobile money in Lesotho have grown significantly over the years since the service was launched in 2012. In 2016, these systems collectively processed a total of 29.69 million transactions worth about M4.21 billion compared with 16.76 million transactions valued at approximately M1.95 billion in 2015. This represents growth of approximately 77.0 percent in transaction volumes and 116 percent in transaction values.

Accessing credit

The CBL’s credit bureau project has seen the promulgation of the Data Protection Act (2011) and the Credit Reporting Act (2012), with the Credit Reporting Regulations of 2014 laying the foundation for the establishment of the credit bureau, which commenced operations in August 2014. During 2016 the focus was directed at improving data coverage in the Bureau and building supervisory and regulatory frameworks within the Central Bank.

The SADC Credit Information Sharing (CIS) project, initiated and supported by FinMark Trust, also began in 2014. This saw a partnership between the Ministry of Finance as the policy maker and project custodian on the ground, the CBL, the credit bureau and the credit providers themselves, who have been working together to improve the credit information sharing environment in the country.

The ease of ‘Getting Credit’ in Lesotho has improved tremendously in the World Bank’s ‘Doing Business’ rankings, rising from 152nd place in 2016 to 82nd in 2017 and 77th in 2018, thanks to the establishment of the country’s first credit bureau and its subsequent expansion in coverage.

MONETARY POLICY

Under the CMA arrangement, the CBL is involved in maintaining the peg between the Loti and the Rand. The Monetary Policy Committee (MPC) meets to consider global and domestic economic conditions, global financial market conditions, net international reserves (NIR) developments and outlook in order to determine the NIR target floor (the level of NIR below which the parity of the Loti and the Rand would be compromised) and the CBL Rate.

The introduction of the CBL Rate in December 2015 was the first pillar of the three-pillar monetary policy framework improvement project. The rate, which was introduced at 6.25 percent, is meant to serve as a reference and anchor for domestic interest rates, ensuring that the cost of borrowing is aligned with domestic developments and thus helping the bank to maintain price stability.

The second pillar of the project, which entailed development of an active liquidity management model, was completed in 2016. The model uses the autonomous components of the Bank’s balance sheet that influence the liquidity of the banking sector. In-sample tests and dry runs of the model were conducted, and its performance was satisfactory. The model data requirements were finalised and the full roll-out of active liquidity management began in 2017.

Monetary and financial indicators

Improvements in the inflation outlook during 2016 were in line with the downwards adjustments of South Africa’s inflation outlook, particularly food inflation. The year-on-year consumer inflation rate was registered at 5.4 percent in October 2017. This compares favourably with the 5.6 percent recorded in September 2017 and, according to the CBL, follows the observed trend across the southern African region

At the meeting of the Central Bank’s Monetary Policy Committee on 29 November 2017 it was decided to increase the NIR target floor from US $700 million to US $745 million and maintain the CBL rate at 6.75 percent per annum.

Interest rates in Lesotho follow the same trend as those in South Africa. The prime lending rate has remained stable and was set at 7 percent in mid-2017, in line with that of South Africa, dropping to 6.75 percent in November 2017. The commercial bank prime lending rate averaged 11.7 percent from June to December 2016, while the deposit rate has remained unchanged at 3.5 percent. The large margin between the lending and the deposit rates implies low lending by commercial banks, despite high demand for start-up and working capital. By the end of 2016 the 91 day Treasury Bill rate had increased to 6.58 percent.

Standard Lesotho Bank Maseru Branch, Kingsway © Standard Lesotho Bank

The position of Lesotho’s external sector improved during the third quarter of 2017, with the current account deficit narrowing to 3.1 percent of GDP from a revised 7.9 percent of GDP in the second quarter. The current account’s performance was influenced by rising exports during the quarter. However, a slowdown in primary and secondary income offset the smaller current account deficit, thereby slightly reducing the official reserves from 4.4 months of import cover realised in June, to
4.3 months in September 2017.

Money supply increased by 8.5 percent in September 2017, compared with an increase of 0.7 percent realised in June 2017. The rise in money supply was due to a 13.3 percent surge in domestic claims, coupled with a 4.2 percent increase in net foreign assets. Credit to the private sector grew by 3.8 percent during the third quarter of 2017, up from the 1.3 percent recorded in the second quarter. This follows an improvement in credit extended to households that offset a fall in credit to business enterprises.

By mid-2017, total private sector credit by commercial banks in Lesotho was approximately M5.6 billion, which is about 23.7 percent of GDP. The equivalent in Botswana is 32.3 percent of GDP, while Swaziland is about 21.6 percent of GDP. However, M5.6 billion is not enough to drive private sector growth, and there are viable businesses with strong growth potential which are unable to borrow from banks any further because they are highly leveraged.

BANKING SECTOR

The industry’s total assets amounted to M13.2 billion in December 2016, with the sector largely dominated by foreign subsidiaries, which accounted for 97 percent of assets. Four-fifth of total banking sector assets are concentrated in the top two banks. The first half of 2016 saw the industry’s total assets increasing due to growth in financial intermediation, while total assets dropped in the second half of the year due to a decline in balances with South African banks and investment securities.

According to the CBL in its 2016 Annual Report, the banking industry remained profitable during the year, with banks utilising their resources efficiently to generate income. Return of Equity (ROE) increased significantly, by 20.67 percentage points to 61.5 percent. The increase in the ratio was as a result of a rise in net income across the industry. However, Return of Assets (ROA) remained relatively unchanged. The ratio of net interest margin to gross income was 58.0 percent in 2016 – a marginal decrease compared with 2015. The ratio of non-interest expense to gross income rose from 52.2 percent in 2015 to 54.7 percent 2016. This shows that administration expenses relative to income increased during the year, although this was offset by growth in gross income.

The liquidity ratio of commercial banks stood at 72.4 percent in 2016 compared with 82.6 percent in 2015, predominantly caused by a 32.6 percent decline in balances due from banks in South Africa and a 4.8 percent drop in
total deposits.

In respect of asset quality, Non-Performing Loans (NPLs) management improved during 2016, as the ratio of NPLs to total gross loans declined by 0.3 percentage points to 3.6 percent and the ratio of large exposures to capital decreased by 26.4 percentage points to 124.5 percent. The ratio of liquid assets to short-term liabilities dropped from 63.5 percent in 2015 to 52.4 percent in 2016, while the ratio of liquid assets to total assets declined by 9.0 percentage points from to 31.4 percent recorded in 2015.

The customer deposit to total (non-interbank) loans ratio is a measure of liquidity that compares the stable deposit base with gross loans, excluding interbank activity. In 2016, the ratio was 149.4 percent, reflecting a drop of 13.9 percentage points from the ratio observed in 2015. This was due to a decline in customer deposits during the year.

The banks’ exposure to foreign risk, measured by the net open position in foreign exchange to capital, increased in 2016 to 42.0 percent against 18.6 percent in 2015 as a result of an increase in assets denominated in foreign currencies.

Commercial banks

Standard Lesotho Bank is proud to have been in the country for 24 years and still continuing to be the leading financial service provider for many individuals, organisations and the Government of Lesotho. The bank’s relationship with the Government is founded on a strong heritage that has been largely underpinned by mutual trust and cooperation, with the common goal of providing value for Basotho. Standard Lesotho Bank was born of the merger of Standard Bank and Lesotho Bank (1999) back in 2006, and Standard Bank Group is the majority shareholder, with the Government of Lesotho and Lesotho Unit Trust owning the remaining shares.

Standard Lesotho Bank remains committed to driving Lesotho’s economic growth and has mapped a clear strategic focus that puts its clients at the centre of everything it does. Due to the ever changing environment and to demonstrate its commitment to clients, the bank took a transformational journey by upgrading its core banking system in 2017 with the aim of unlocking a great deal of value while moving into the future in order to bring relevant solutions to its clients. It is driven by the vision of being ‘The Preferred and Leading Financial Services Provider in Lesotho’ and has also developed a very clear mission and value proposition to help achieve this vision, supported by the following five strategic pillars:

• Client centricity

• Enabling technology

• Operational excellence

• High performance culture

• Brand elevation

Standard Lesotho Bank prides itself on being not just a bank but a financial partner that continues to change the game of banking to Lesotho’s advantage. It continuously engages clients with the aim of understanding their needs and hearing their voice. With the feedback received, the bank has heeded the clarion call from Basotho to refocus its efforts and add more impetus on developing entrepreneurship, which is widely regarded as a golden key for unlocking the way towards the economic emancipation of every Mosotho. The bank has thus opened another chapter to take entrepreneurship to the next level. Understanding the economy and appreciating the fact that Lesotho’s growth trajectory largely depends on the pioneering spirit of its own entrepreneurs, the bank has not only partnered with Basotho to make entrepreneurship real, but has also carved out a roadmap that is set to take local businesses to greater heights.

His Majesty King Letsie III with the winner of the Nedbank Mohokare Golf Classic 2017, Ms. Motselisi Ramakoae, the first lady winner ever. With her are previous years’ winners.

During 2017, the bank opened its doors to the new Enterprise Banking facility, situated at Maseru Mall. Bigger and better, the facility also accommodates an ever increasing number of entrepreneurs, who visit the bank for an array of financial services as well as expert advice from a team of seasoned business bankers who are dependable and reliable.

Enterprise Banking features Enterprise Direct, which provides Business Banking via the telephone or email. Enterprise Banking is all about convenience, and its operating model is premised on the understanding that time is a valuable commodity in the world of entrepreneurship. Instead of spending time at the bank, entrepreneurs are now able to spend more time on their shop floors or closing deals, whilst their day-to-day financial services are handled by banking professionals over the phone or via email.

Housed within Enterprise Banking there is another innovation aptly called the Enterprise Hub, which provides the requisite resources for budding entrepreneurs in order to help them realise their dreams. It is a meeting venue, a research hub and a networking area, fully equipped with workstations that have free internet and WiFi. The Enterprise Hub is there to bridge the gap for start-up businesses and new ventures that do not have office facilities and meeting rooms.

When it comes to changing the game in the lives of unemployed youth, the bank continues to grow the Bacha Entrepreneurship Project, which is undertaken in collaboration with BEDCO and the Lesotho Revenue Authority (LRA). The project targets unemployed graduates with the aim of transforming them into entrepreneurs that can bring value to Lesotho’s economy and employ other youths. Now in its third year of operation, the project has so far established about nine youth companies that have shared around M1.5 million to invest in their new business ventures which are currently in operation.

These are just glimpses of the many game changing initiatives that demonstrate Standard Lesotho Bank’s commitment to the entrepreneurial drive that is needed to grow Lesotho’s economy and improve the welfare of its citizens. The bank is prepared to invest handsomely in developing entrepreneurship going into the future. This commitment is demonstrated in the investment of more than M3 million in charitable courses and life-changing sponsorships that instil the spirit of hope in Lesotho’s people. This is because, as the largest bank in Lesotho and with a footprint encompassing all ten districts, more than a business the bank also sees itself as a local and community bank that understands the challenges of the people. Standard Lesotho Bank fully appreciates the value of its brand as a leading financial services provider and leverages on this to grow and partner with Basotho as they build their own legacies.

Nedbank Lesotho officially marked a rich 20-year history in Lesotho in January 2017. As part of this history, Nedbank Lesotho has been a pioneer in the market with some of these ‘firsts’:

• First bank to launch Internet Banking in Lesotho

• First and only bank to offer a managed local credit card

• First bank to launch the first low-cost EMV and PCI – certified fully mobile point-of-sale (POS) solutions designed for business (i.e. Nedbank PocketPOS™)

• First and only bank to offer Cash Online solution for corporate clients

• Financed the first mall in Lesotho, namely the Pioneer Mall, as part of  its pioneering retail property developments

• First bank to introduce Sunday opening times through the Pioneer Mall branch

• Corporate sponsor of the first local golf tournament in Lesotho, the annual Nedbank Mohokare Golf Classic

Nedbank continues to strengthen its innovation drive to cater for clients’ specific needs through a variety of banking and financial solutions. It offers a range of personal, SME, business and corporate banking and financial services, including: transactional and current accounts; electronic and mobile banking; private banking; savings and investments; and short-term and long term finance such as overdrafts, personal loans, vehicle finance, home loans and business loans.

The bank’s specialised expertise in business and property finance allows it to be a partner to business and corporate clients and offer specialised financial advice, which results in business growth and success. For corporates, the bank also offers unique solutions in trade finance, money market, foreign exchange trade and sales, and funding. For servicing of SMEs, Nedbank holds the pioneering position of being the first bank to create a full SME unit, which still operates today from Maseru branches and the Northern and Southern regions to meet the unique needs of local enterprises.

In its bid to continue to bring better value banking, Nedbank Lesotho has significantly expanded its offerings and simplified banking for its clients, with innovations that also bring more convenient electronic and self-service banking channels, including the new Nedbank Mobile Banking App, as well as a wide network of ATMs, POS terminals at key retailers, strategically located branches, and unique Sunday banking services at Pioneer Mall for more convenient around-the-clock banking.

The large investment in the bank’s new core banking system has enabled Nedbank to expand its product and services portfolio for the local market, and offer improved value propositions to existing and prospective clients. This has facilitated simplified and transparent pricing with the implementation of real-time billing on transactions, thereby helping to improve clients’ banking and financial management; new bundled products and value adds for entry level, middle income and working professionals, and private banking clients; as well as new mobile banking with value added services, including airtime and electricity purchases.

The bank’s upgraded electronic banking service allows registered clients to transfer funds and make payments, get electronic account statements (e-statements) and do LRA tax payments with convenience and security, anywhere at any time.  This enhancement has been further expanded to corporate and business clients to enable efficient business account management. Nedbank remains the only bank that offers a local credit card for personal, business and corporate clients.

Nedbank Lesotho’s philosophy is to be a ‘green and caring’ bank, using their financial expertise to do good for staff, clients, shareholders, regulators, and for the local communities in which they operate. The various contributions to this aspiration include:

A phantom share scheme (Seshoai) for Nedbank Lesotho staff to create a constructive workplace and empower staff members to become and deliver their best.

Key corporate social investment (CSI) initiatives and sponsorships that include – the Royal Education Development Fund, Queens’ National Trust Fund, Hlokomela Banana ‘Care for Girls’ Project, youth and career days for high school and tertiary students, the annual Menkhoaneng Moshoeshoe Walk, the annual Nedbank Mohokare Golf Classic, support to the Red Cross and Rotary International in Lesotho, and initiatives by other corporate partners. Nedbank has embedded efforts that go towards the development of education, promotion and protection of heritage, the arts, sports development, entrepreneurship, and improved health delivery and social development projects for key beneficiaries and target groups.

First National Bank of Lesotho (FNBL) has an array of digital banking platforms – FNB Banking App, FNB Online, eWallet and Cellphone banking platforms, as well as cross-border payments which enable real time transacting 24/7 – all adding convenience, time-saving and effectiveness. While increasing FNB Lesotho’s footprint beyond branch banking, the bank’s strategy remains to heighten the use of innovation and technology by being available, visible and locally relevant.

FNB Lesotho is available via branches in Maseru, Mafeteng, Teyateyaneng (TY), Hlotse, Maputsoe, Botha-Bothe and Mokhotlong. It also has ATMs countrywide to support its digital strategy to bring banking solutions closer to communities. FNBL continues to expand the availability of fully functional ATMs throughout Lesotho, along with the new Slimline Mini ATMs which can be placed at retail merchants across the country. Its latest offerings are an ATM with cash deposit-taking technology, and the Cash Deposita: an interactive safe that enables businesses to safely make deposits which automatically reflect in their bank accounts without the need to travel to FNB.

The different FNBL personal bank accounts encompass a broader product offering, from the future-forward account for the toddler to the Private Wealth account for the elite. Beyond the strong Retail Banking offerings, FNBL offers Home Loans, Premier Banking Suite, Business Banking Suite, as well as Corporate and Investment Banking based at Pioneer Mall, Maseru. Vehicle and Asset Finance is another major offering. WesBank, which is well known for financing machinery ranging from farming to office equipment, also has the know-how to finance anything with a serial number, thus enabling businesses to run and operate without hindrances.

The Lesotho PostBank (LPB) was incorporated in 2014, is 100 percent owned by the Lesotho Government and prides itself on being an indigenous bank managed wholly by Basotho. It was founded to provide banking services to under-banked and unbanked Basotho in both rural and urban areas, and remains committed to its mandate of answering the challenge of financial exclusion in the country.

It is licensed by the Central Bank of Lesotho and commenced operations by offering mainly savings products. In 2010, it diversified into lending; in 2012 electronic transacting services were introduced, and by 2014 it had started to be profitable. To date, the PostBank has rolled out 14 branches and 10 ATMs, and utilised both book-based and card modes for transacting.

Since beginning operations, LPB has attracted a substantial diverse client base, and has segmented products to meet those distinct portfolios. Other services include mobile top-up and local and regional money transfers, to mention but a few.

In 2017, LPB took a giant leap in fulfilling its mission to provide modern banking services to its customers at affordable rates by upgrading its core banking system. The upgrade commenced in September 2016 and was launched in May 2017. The upgraded system will enable the bank to offer improved and new products, SMS notifications and security features to give the customer peace of mind and more.

Due to the upgraded system, the bank will introduce other banking platforms such as Europay MasterCard and Visa (EMV), Internet and Mobile Banking as well as Agency Banking. These platforms will enable LPB to provide its existing and potential customers with advanced and diverse banking capabilities.

THE INSURANCE INDUSTRY

The insurance sector in Lesotho is small but growing rapidly. Its penetration is relatively high and substantially above the African average (excluding South Africa). This is mainly because of the popularity of funeral policies, with funeral insurance a major financial inclusion driver. Although the industry is expanding compared with the rest of the economy, its regulatory framework and supervision are still weak and have some gaps.

The insurance industry deals with both long-term and short-term insurance, and is the most-consumed financial service in Lesotho for nearly all target groups, contributing significantly to financial inclusion. Around 62 percent of the adult population has some form of insurance. Usage is significantly higher in urban areas, where formal penetration is 48.1 percent as compared with 31.8 percent in rural areas. In turn, informal-only is much higher in the rural areas (30 percent) than for urban dwellers (11.4 percent).

Total assets of the general insurance business in Lesotho were approaching M500 million by the second quarter of 2017 from just under M400 million in the corresponding quarter of 2016.

The Insurance Act of 2014 provides for the consolidation, administration, supervision, regulation, protection and development of the insurance business in Lesotho. It was developed with the aim of meeting the demands of the economy for risk-management and stimulation of growth in the investment sector. It also tackled the development of the micro-insurance subsector to improve upon the previous Insurance Act (1976) which was marked by excessive rigidities. An applicable regulatory framework was drawn up to promote participation and new entrants, as well as facilitate supervision.

One of the CBL’s areas of focus in 2016 was the reform of insurance sector regulations, and the Bank began a review of the Insurance Act of 2014. A central feature of this review process is to strengthen the governance framework for insurance companies and help to accommodate risk-based supervision. Amendments will be made in the areas of: corporate governance; solvency; risk management; consumer protection; inclusion of annuities as a class of long-term insurance and micro-insurance; and the introduction of a crisis management regime. In order to support the current regulatory regime, seven sets of Insurance Regulations were published in 2016. These include, among others, regulations on solvency, and financial reporting good practice for insurers and intermediaries.

Metropolitan is the leading provider of life insurance and healthcare solutions in Lesotho, and has over 50 years of experience in providing Basotho with affordable and innovative insurance cover and investment solutions. A subsidiary company of MMI Holdings Limited, which is listed on the Johannesburg Stock Exchange and boasts more than a century of life assurance experience, Metropolitan Lesotho represents a consolidation of the previous business operations of Metropolitan Life in the Kingdom of Lesotho.

A keen contributor to the social and economic development of Lesotho, Metropolitan is a socially responsible citizen helping Basotho improve their lives and the lives of future generations. Its client base is as diverse as the colourful people of this beautiful country, and Metropolitan is proud to be the primary provider of life and health insurance to the following sectors: teaching, essential and protection services, the mining industry, the civil service, construction and agriculture.

Metropolitan believes financial literacy and the right advice is key when it comes to making decisions about money, and it strives to service customers with a suite of innovative, appropriate and affordable financial solutions. Whether clients are buying their first home, saving for their child’s education, planning their retirement or needing funeral cover for a loved one, Metropolitan has a financial solution to meet their unique needs. A team of dedicated representatives is committed to guiding clients in understanding each aspect and benefit of their policy, as well as finding the best solution to suit their pocket.

Alliance Insurance Company takes pride in operating in the remarkable country of Lesotho. Alliance opened its doors in 1993, operating out of a small two-roomed rented office, and from these humble beginnings has grown to be the company of note it is today. With branches in all ten districts of Lesotho, as well as other satellite branches in busy areas such as Maputsoe, Kingsway Thola-Tu and Pioneer mall, Alliance can boast about being the most accessible insurance company in Lesotho.

In addition to its accessibility, Alliance has over the years increased the services provided to clients, making it a one-stop-shop for most of its customers’ insurance needs. Alliance is committed to creating and unlocking wealth for its clients, as well as giving them peace of mind in knowing that their hard earned money is in good hands. The company’s extensive range of innovative products is further proof that time has been taken in studying the market to ensure that a variety of needs is
catered for.

Furthermore, Alliance has invested in Lesotho’s infrastructural development, with buildings that have contributed towards making Maseru into an attractive business district with the requisite facilities needed by the private sector, parastatals, NGOs and other institutions. Lately the company has branched out to leave its footprint in other districts as well, opening the Ha Makhakhe Shopping Centre in Mokhotlong, which is the first of its kind in the district. This brings long awaited services to the people of this district that was once considered too remote. Job creation goes hand in hand with this kind of development, and hundreds of Basotho in Mokhotlong have benefited directly, either during the building process or through attaining more permanent jobs when the facility became operational. The next project on Alliance’s agenda is the construction of Mohale’s Hoek Shopping Centre.

The inaugural Alliance Sports Media Awards, the first of its kind in Lesotho, was held at Thaba Bosiu Cultural village on 4 November 2017, with the support of Alliance in collaboration with the Lesotho Sports Reporters’ Association. Alliance is intensely involved in sporting activities, and recognises the importance of acknowledging the men and women who work to deliver sports updates and news. In addition, Alliance believes that sport plays a very important role in bringing people together, and thus has a vital role to play in Lesotho’s future.

Thaba-Bosiu Risk Solutions (Pty) Ltd is one of the leading insurance brokers in Lesotho. The company has 100 percent local shareholding. Established in April 2006, it offers a wide array of insurance products that are tailor-made to meet clients’ needs. Some of the products the company offers include motor vehicle insurance, accident insurance, construction insurance, travel insurance, workmen’s insurance, professional indemnity schemes and goods in transit insurance. The company also offers group funeral schemes, retirement (pension and provident fund) schemes, group schemes (death and disability) as well as students’ medical aid.

In its mission statement, Thaba-Bosiu Risk Solutions (Pty) Ltd says it seeks to provide clients with superb coverage and claims handling through careful and diligent underwriting of risks and the provision of business-friendly solutions. The company’s excellent reputation in the market has not gone unnoticed, and it has over the last 11 years been the recipient of several awards for excellence. The company was awarded first prize in the PMR Awards that seek to reward excellence in the insurance broking sector in Lesotho, for the years 2012, 2013, 2014, 2015 and 2016.

Yet it is Thaba-Bosiu Risk Solutions (Pty) Ltd’s ambitious programme to give back to the community that has set it apart from its peers. Since 2012, the company’s managing director, Matokelo Seturumane, has spearheaded a programme to give back to the community, and two rural schools in Leribe District – Boribeng Primary and Boribeng High School – have been adopted. Every September, the company gives out prizes to outstanding students, with the top student being awarded the coveted ‘white blazer’. It also gives out school shoes and food parcels to vulnerable students.

Seturumane, who grew up in Boribeng about 120 kilometres north of Maseru, says the idea is to motivate the students who come from very poor backgrounds to dream beyond their rural upbringing. For decades, children who were raised in Boribeng had very limited choices – they would either get married in their mid-teens, go to initiation school or make the long trip to work in the gold mines in South Africa. It was very rare for students, particularly girls, to break through these barriers. While much has changed in terms of infrastructure in Boribeng over the decades, the problem of girls getting married at a young age remains. Girls, some as young as 15, are still dropping out of school to get married, to the dismay of educationists and community leaders.

To counter this negative trend, in April 2017 Thaba-Bosiu Risk Solutions (Pty) Ltd launched the ‘She Heroes’ movement, a programme that seeks to discourage young girls from getting married at an early age. Every two weeks, the company’s female staff meets with girls at the school to see how best they can help them. The idea behind the She Heroes movement is to inspire young girls to become tomorrow’s leaders, snub early marriages and pursue non-traditional careers.

As part of its programmes, the company invites successful women in the business sector who are seen as role models to speak to the girls in an effort to persuade them to change tack. It is a programme that is slowly having a profound impact in shaping the thinking of female students who remain vulnerable to social pressures to get married when they are in their teens. Seturumane says their mission is to change society, one child at a time.

It is a battle that Thaba-Bosiu Risk Solutions (Pty) Ltd says it is determined to win. For instance, in early September 2017, the company in partnership with Beautiful Dreams Society (BDS), managed to ‘rescue’ a girl who had been forced into an early marriage. At the time of writing, the girl was at a BDS shelter where she was receiving counselling before being placed back in school.

The company’s phenomenal growth over the last 11 years can be attributed to its strong leadership, dedicated staff and excellent customer service.

Liberty Life Lesotho is a specialist life insurance company that provides group and individual risk insurance solutions and comprehensive health cover, offering an extensive range of products and services to help Basotho build and protect long-term wealth. The company puts the customer’s needs first by creating solutions that are simple, affordable, relevant, flexible, easily accessible and innovative, and has experience in working with and understanding the needs of customers and partners – whether individuals, small businesses, corporates or affinity groups with many members. Liberty Life Lesotho also partners with employers to enhance the lives of their most valuable assets: their employees. They believe that in times of unfortunate events, the last thing customers should worry about is finances.

Liberty Life Lesotho is a subsidiary of Liberty Holdings, founded 60 years ago by Sir Donald Gordon, who watched his father work hard all his life yet reap little financial reward for his efforts. This struggle ignited in him the overwhelming belief that all people should have the opportunity to grow their wealth and leave a proud legacy for their family. This belief is captured in the company’s name and its flame, taken from the Statue of Liberty and imbued with the same meaning of freedom and opportunity. Liberty has a presence in more than 18 African countries, offering asset management, investment, long and short-term insurance and health products to millions of people across the continent. It is also one of the biggest listed long-term insurers on the Johannesburg Stock Exchange by market capitalisation. Liberty is an organisation that understands the value of knowledge and its power to change realities. This is why it has invested over M480 million in supporting various educational initiatives and projects.

Liberty continues to roll up its sleeves and work with Government, the Regulator and other stakeholders to further develop the insurance industry and contribute significantly to the growth of the economy. The company believes that through financial education and guidance, this can be achieved. Through understanding the power of knowledge, Liberty strives to pioneer new ways to guide people towards financial freedom, with a purpose – and passion – to make a difference in people’s lives.

CONTRACTUAL SAVINGS

Lesotho currently has over M10 billion in contractual savings; that is, in collective investment schemes, pension and provident funds, insurance companies, and medical aid schemes. With the introduction of new regulations, a large portion of these funds are expected to be invested in local instruments, with the Central Bank having created demand for securities that needs to be met with the supply of securities. As such, companies from different sectors can issue medium to long-term financial securities to finance their activities.

The pension sector

Lesotho’s pension sector is relatively small and underdeveloped. There is a major divergence between coverage in the public (government/parastatal) sector, where it is very high, and the private sector, where is quite low. However, many companies simply enrol employees in the pension funds of their South African parent company, and the extent to which this takes place is unknown.

The main pension fund in Lesotho is the Public Officers’ Defined Contribution Pension Fund (PODCPF), which was established in 2008 and has its own Act. The PODCPF is a contributory, defined pension fund, covering most government employees, with both employer and employee contributions. At present, there is no legislation in place that deals with the establishment and regulation of private pension funds; the only relevant legislation is the Act establishing the PODCPF and elements of the Income Tax Act.

There is a need to develop an overall policy framework for the pension sector in Lesotho to specify the roles of public (statutory) and private pension schemes. Moreover, pension fund members are vulnerable to fraud and mismanagement because there is no regulation of occupational and private pension funds. The Insurance and Pension Regulation and Supervision Project, which is a World Bank FIRST initiative, has been working to strengthen the legal, regulatory and supervisory frameworks of Lesotho’s private pensions schemes, among others.

Government has, with the assistance of the ILO, proposed the establishment of a national statutory contributory pension scheme as part of broader social security reforms. This is particularly aimed at employees of the many textile and garment firms in Lesotho. In principle, all those in formal employment would be compelled to join the new scheme.

The Ministry of Finance, in collaboration with the World Bank and other stakeholders, has drafted the new Pensions Bill. When it becomes law, the bill will regulate the pensions industry and broaden the mandate of the CBL by making it the regulator of Pension Funds in order to deal with regulatory gaps in the subsector. The envisaged scope of application covers both occupational and non-occupational pension funds. The law is intended to:

  • Ensure protection of the rights and interests of members of pension funds by imposing certain obligations on those who manage pension funds
  • Ensure that pension funds are properly governed in line with modern principles of governance, with particular reference to reporting requirements, risk management and investment of pension monies
  • Provide for the segregation and definition of duties and responsibilities of key players in the pension industry, such as administrators, asset managers and custodians

Pension and insurance reform
Outcomes expected in long term from the World Bank FIRST initiative include: expanding risk coverage and long-term savings provided by insurance products, securing and sustaining a pension system that includes an increase in the coverage of private pensions, and mobilising long-term savings for the productive investment and development of the capital market.

MONEY & CAPITAL MARKETS

Cultivating money and capital markets has been a financial sector priority for more than two decades, with phased development being implemented. The first phase, introduced in 2008, focused on developing money markets (Treasury bills) by increasing the frequency of auctions and the number of tenors. This was followed by the introduction of Government bonds in 2010, with the objective of cultivating domestic sources of financing as a means of reducing the country’s vulnerability to external sources and financing the budget deficit. Traditionally, when the market for Government securities flourishes, it magnifies the ability of the corporate securities market to prosper.

Following the successful implementation of a Treasury securities market, the CBL embarked on yet another important phase in its efforts to develop domestic capital markets – the drive to establish an organised market for trading stocks. This saw the establishment of an Over-the-Counter (OTC) market, which is a market where stocks which are said not to meet the listing requirements of the major exchanges are traded. This provided private enterprises with a platform to make public offerings of their shares to raise capital for their business needs in a more organised and regulated manner.

Maseru Securities Market

Launched in January 2016, the Maseru Securities Market (MSM) was set up to further the development of equities and the corporate bonds market while also addressing the illiquidity problem of Government securities. The MSM establishes a central location for Basotho to buy and sell local companies’ stocks and bonds, and for trading in the secondary market, thus providing companies that participate in the stock exchange with alternative sources of capital and the public with diversified investment opportunities. Operating in line with international best practices, the MSM is expected to benefit the economy through facilitating the mobilisation and efficient allocation of capital to finance investment.

The establishment of the securities market is governed by the Central Bank of Lesotho Act of 2000, Section 6 (i) and (j), which mandates the CBL to promote the development of a safe and sound financial system as well as to monitor and regulate the capital market. It is supported by the Capital Markets Regulations (2014), which provides for the orderly, secure, fair and transparent operation of the MSM. The exchange is currently operated by the Central Bank, but preparations are being made to have it stand on its own.

Government’s efforts to develop the capital market have proven quite successful, and in the 2017/18 budget speech, the Minister of Finance proposed that an additional M450 million be raised through bonds.

To make companies realise the value of the securities market, the CBL continues to raise awareness among business decision makers regarding the merits of capital markets as a source of long term capital to finance growth and expand businesses, either by issuing debt or equity securities. The stock market is expected to benefit the economy in a number of ways, including:

  • Provision of Capital – Stock markets facilitate the raising of capital for companies through the issuance of new stock (selling shares) or by borrowing through bonds and other debt instruments. Thus the MSM’s role is to provide much needed financing for investment within the country. It will also provide an alternative avenue to raise funds for investment instead of depending only on borrowing from commercial banks. This will remove the bottleneck to investment which emanates from the fact that the banks are generally risk averse.
  • Increased Savings – Domestic savings are expected to increase as the securities market provides opportunities and profitable options for people to invest in and increase their savings. It provides incentives to defer consumption in favour of investment. If efficient, capital markets also enable savings to be allocated to investment projects with higher returns. As the rate of return to savers increases, savings become more attractive. This encourages the growth of overall savings and investment within the economy.
  • Efficient allocation of capital – Investing in the stock market leads to a more rational allocation of resources. Funds which could have been consumed or kept as idle deposits with banks could be mobilised and redirected to finance business activity in the more productive and profitable sectors of the economy.
  • Provision of liquidity – The MSM provides a ready market for the sale and purchase of securities. This gives assurance to investors that their investment could be converted into cash at any time if needed.
  • Improved corporate governance – Capital market development necessitates the creation of a legal and regulatory framework incorporating increased transparency and information dissemination. These monitoring systems reinforce corporate governance practices, improve transparency and enhance investor confidence. Industry-level data from various studies has shown a positive relationship between market-based governance and improvements in industry efficiency.
  • Economic growth – The MSM aims to accelerate economic growth by providing a boost to domestic savings and increasing the quantity and the quality of investment. In particular, it can encourage economic growth by providing an avenue for new and growing companies to raise capital at a lower cost.

TAXATION

The Lesotho Revenue Authority (LRA) was established in 2003 to enhance the efficiency and effectiveness of revenue collection and to provide an improved tax service to the public. Huge improvements have subsequently taken place in revenue collection as well as in raising voluntary compliance among taxpayers and creating a fair
and equitable environment. Milestones achieved by the LRA in the past decade include the introduction of Value Added Tax (VAT) at 14 percent, which has been instrumental in broadening the tax base, as well as the establishment of the self-assessment system.

The LRA’s Strategic Plan for the 2014-2019 period focuses on the urgent need to provide the funding required to develop the economy while minimising the cost of compliance to the client and the cost of collecting that revenue. The plan builds on the solid foundation established in 2007 when the authority began to emphasise ‘taxpayer-centricity’.

In implementing its strategic plan, the LRA has set out to address medium and long-term issues through specific action programmes. In the medium term, this will see the modernisation of the LRA’s processes and systems. In line with its Customs Modernisation Programme, the authority is redesigning and automating customs procedures through the implementation of the Asycuda customs border control system. Another area is the automation of tax processes through the Oracle Tax system. Long-term objectives include working to ensure that relevant policies and legislation are updated in line with changing times, the development and implementation of an integrated border management strategy, as well as the development of a strategy for new markets and for the informal sector, among others.

The LRA intends introducing an electronic tax-filing system during 2017/18 in order to make the process easier for taxpayers.

Tax rates

As a means of improving Lesotho’s competitiveness in the region, the company tax rate was reduced from 35 to 25 percent in 2006, while the preferential tax rate of 15 percent enjoyed by manufacturing and farming was lowered to 10 percent. To promote textile manufacturing, Government introduced a zero tax rate on proceeds from exports destined outside SACU in 2006/07. This tax exemption was abolished in 2014/15 and replaced with the standard 10 percent rate as it was felt to be inconsistent with Lesotho’s commitment under international and regional agreements.

Over the years, Lesotho’s effective tax rate on personal incomes has remained one of the highest in Sub-Saharan Africa. To reduce the tax burden and encourage tax compliance, the 2014/15 budget reduced both the lower and upper personal income tax rates, from 22 to 20 percent and 35 to 30 percent, respectively. This is applicable for resident individuals, sole traders and employees under the pay-as-you-earn (PAYE) system.

Best practice as regards VAT dictates that a single rate be used to avoid distortions, ensure tax efficiency and reduce administration and compliance costs. As a result, Lesotho’s four VAT rates have been simplified. All items, with the exception of the zero-rated items, electricity and telecommunications, are taxed at the standard rate of 14 percent. At the same time, an additional levy of 4 percent has been added to alcohol and tobacco products to curb abuse of these substances. Technical assistance from the World Bank will support Government in fostering and implementing tobacco and alcohol tax reforms to reduce their affordability and consumption, as well as to control illicit trade on these items.