Eswatini’s Financial System Faces Stability Concerns- IMF

A recent Financial Sector Stability Review (FSSR) conducted by the International Monetary Fund (IMF) has raised concerns over the stability of the country’s financial system, with non-bank financial institutions (NBFIs) identified as the primary source for financial stability risks and vulnerabilities.

The FSSR was conducted at the request of the Central Bank of Eswatini (CBE), virtually and in-person between April 26 and July 18, 2023. The main mission visited Mbabane, during the period of July 4 to 18, 2023. The mission was led by Ms. Anastassiya Marina of the Monetary and Capital Markets Department (MCM) and included Mr. Phousnith Khay (Statistics Department, STA), and Messrs. David Farelius, Vern McKinley, Ravi Mohan Periyakavil, Rodolfo Wehrhahn (all MCM short-term experts).

The scope of the main mission comprised of financial stability and systemic risk monitoring, and macroprudential frameworks and tools; financial safety net and crisis management; supervision and regulation of deposit-taking financial institutions as well as insurance and retirement funds; and financial sector statistics.

The main mission met with the Minister of Finance, CBE Governor and Deputy Governor, CEO and teams of the Financials Services Regulatory Authority (FSRA) as well as (virtually) with supervisors of the South African Reserve Bank (SARB). The main mission also met with senior executives from public and private sector financial institutions and companies; and liaised with the World Bank prior and post both the scoping and main missions.

The FSSR highlights that NBFIs account for a staggering 78 percent of financial sector assets, equivalent to 116 percent of the GDP. This dominance of non-banks is seen as a double-edged sword, presenting both the bulk of risks and the areas most in need of regulatory oversight improvement.

“Eswatini’s financial system is dominated by non-banks—a source of most financial stability risks and vulnerabilities—whose oversight is in the most need of improvement,” the report notes.

The backdrop of tightening global financial conditions and Eswatini’s economic recovery necessitates close monitoring of household indebtedness and the sovereign-financial sector nexus. Banks, while liquid and well-capitalized, are facing rising non-performing loans (NPLs) that are under-provisioned. In contrast, deposit-taking NBFIs exhibit weaker metrics in terms of NPLs, provisions, and capital adequacy.

The review advises that addressing these emerging vulnerabilities should be a priority, urging the expedited passage of critical financial sector laws and regulations. The authorities are recommended to present these legislative amendments as a single package to facilitate swift action in the next parliamentary session.

Furthermore, the review outlines a series of recommendations for strengthening the financial system, including enhancing coordination between the CBE and FSRA, improving data exchange, and implementing a sequenced technical assistance roadmap to bridge capacity and data gaps. Key areas for improvement include financial stability and systemic risk monitoring, financial safety net and crisis management, regulation and supervision of banks and NBFIs, and the enhancement of financial, external, and government sector statistics.

As Eswatini navigates these challenges, the report underscores the importance of continued capacity building and upskilling of supervisors to address emerging risks such as cyber threats, cryptocurrency, and climate-related risks. The path forward for Eswatini’s financial stability hinges on the successful implementation of these reforms and the vigilant monitoring of its non-bank sector.

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