Chart of the Week

Private sector credit extension (PSCE) measures the total credit extended by financial institutions to households and businesses, and serves as a valuable indicator of economic activity. Robust growth in PSCE typically reflects a healthy, expanding economy – suggesting that businesses are borrowing to invest in growth and that household affordability is improving with access to mortgages, vehicle finance, and other forms of credit.PSCE growth has softened notably over ‘23 and ‘24, before declining by 3.2% year-to-date as of 31 May ‘25. Credit growth has been largely driven by the business sector, while household borrowing remains subdued, indicating continued pressure on consumers. The slowdown in credit extension reflects a mix of factors, including weaker demand due to affordability constraints, but also clear supply-side limitations within the banking sector.At the same time, banks have markedly increased their participation in government debt markets, reallocating capital away from private credit. While constrained affordability has dampened demand for credit, strong capital inflows into the banking sector over recent years have left institutions seeking suitable investment opportunities. In the current interest rate environment, however, there is little incentive to increase lending to the private sector.Namibia’s generic 10-year government bond currently yields 11.02% – a risk-free return that exceeds the current prime lending rate of 10.5%. From a risk-adjusted perspective, government debt offers banks significantly more attractive returns than private lending. For example, earning 11.5% on a 20-year home loan carries far greater risk compared to government bonds yielding nearly the same, but with far less uncertainty.On 1 July, the Bank of Namibia issued a directive instructing commercial banks to reduce the margin between the repo and prime rates by 25 basis points, effectively lowering the prime rate to 10.25%. While this offers some relief to existing borrowers and improves affordability metrics slightly, it may further disincentivise banks from extending private credit, as the yield gap between PSCE and government securities widens. This dynamic risks further exacerbating the crowding out of the private sector in domestic capital markets.

Chart of the Week

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Republikein 2025-08-29

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Chart of the Week

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Republikein 2025-08-29

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