CENTRAL BANKING IN NAMIBIA
1. Historical Background
2. Functions of the Bank of Namibia
3. The Influence of the Bank on the Namibian Economy
1. HISTORICAL BACKGROUND
(a) The South African Reserve Bank
THE DEVELOPMENT OF THE CENTRAL BANKING in Namibia has to be viewed in the context of the colonial relationship with South Africa. Although legislation for the establishment of a central bank in South Africa was not enacted until August 1920, the need for a bank of issue with special privileges had been strongly canvassed in certain circles in the Cape as far back as 1890. Indeed, it would appear than an agitation for a "national bank" was actually begun by the Afrikaner Bond, an important political organisation at the time in the Cape Colony, as early as 1879.
Then in 1891 its Annual Congress, the Afrikaner Bond resolved unanimously that the establishment of a national bank was not only desirable, but also imperative. Thus evolved the process that led to the establishment of the South African Reserve Bank (SARB) in 1920.
The annexation of the then South West Africa after the First World War, resulted in the incorporation of Namibia into the South African monetary system. Major South African banking institutions were extended to Namibia, mainly to finance commerce and trade. As Namibia was treated as an integral part of South Africa, the country did not have its own central bank. The SARB maintained a branch in Windhoek since 1961, but its role was restricted to performing the following functions:
Distribution of currency (notes and coins) issued by SARB
Administration of exchange control
Provision of clearing facilities to commercial banks
Banker to commercial banks
The SARB branch in Windhoek was just that, a branch, without any authority to formulate monetary policy appropriate for Namibia.
(b) Establishment of the Bank of Namibia
In Namibia, even before independence in 1990, one of the institutional needs which attracted most attention from the government-to-be was that of a central bank. Consultations between the dominant liberation movement SWAPO, the IMF, the World Bank and the Swedish International Development Agency (SIDA) started as early as 1988 in preparation for setting up a central bank once the country became independent. SIDA provided support to investigate the need and mode for the establishment of such a seminar with other central banks on their experiences of developing bank activities in the shadow of South Africa. A central question was whether Namibia would need and be able to introduce its own currency.
After gaining political independence in 1990, Namibia established its own central bank, (BON). The establishment of the Bank has its legal foundation in the constitution of the Republic of Namibia. Article 128(1) of the Constitution states that:
"There shall be established by Act of Parliament a central bank in the Republic of Namibia which shall serve as the state's principal instrument to control the money supply, the currency and the institution of finance and to perform all other functions ordinarily performed by a central bank."
Soon after the BON Act was passed by Parliament, the Bank of Namibia was founded on 16 July 1990 by the Bank of Namibia Act, Act 15 of 1997. It provided the legal framework for the BON to provide the fundamental central banking services, viz. to
promote and maintain a sound monetary, credit and financial system and sustain the liquidity, solvency and functioning of that system;
promote and maintain internal and external monetary stability and an efficient payments mechanism;
foster monetary, credit and financial conditions conducive to the orderly, balanced and sustained economic development of Namibia;
serve as the Government's banker, financial adviser and fiscal agent, and assist in the attainment of national economic goals.
2. FUNCTIONS OF THE BANK OF NAMIBIA
The Bank of Namibia, is responsible for a number of functions, which lie outside the domain of other banks and financial institutions in the economy. The functions, which BON has performed since its inception, can be grouped broadly into two, viz. the service rendering functions and the policy-making functions. The former includes the issuance of a legal tender currency and acting as banker and financial adviser to the government, and the latter the promotion of monetary stability and a sound financial structure and the maintenance of external resources in order to safeguard the external value of the currency.
The functions of the bank in terms of the Act of 1997 are as follows:
(a) The Issue of Notes and Coins
In terms of the BON Act of 1990, the Bank has the sole right to issue bank notes and coins in Namibia. In pursuance of this, the national currency, the Namibian Dollar, was issued in September 1993. Denominations of the currency are as follows:
Notes: N$10, N$20, N$50, N$100 and N$200.
Coins: 5c, 10c, 20c, 50c, N$1 and N$5.
(b) Banker to Commercial Banks
The commercial banks hold accounts at the BON for inter-bank clearing and settlement claims. Settlement of the day to day inter-bank balances is achieved by debiting or crediting the accounts of the individual banks at the BON.
(c) Banker and Adviser to the Government
The Bank administers the financial accounts of the central government, It also acts as adviser on monetary and financial policies, and handles the periodic issue of Treasury bills and government bonds.
As financial adviser to the government, the Bank seeks to ensure some co-ordination between government's financial policy and the main national objectives of growth within the framework of monetary stability. The regular monthly meeting between the bank and the ministry of finance is one of such outlets for regular consultations and dialogue on such issues as monetary-fiscal alignment.
(d) Custodian of Foreign Reserves
The Bank has responsibility for maintaining external reserves in order to safeguard the international value of the currency. It maintains accounts with other central banks and financial institutions in the major financial centres abroad.
(e) Supervision of Banks and Building Societies
The Bank is charged with the responsibility of promoting a sound financial structure. To this end the bank supervision department of BON ensures that commercial banks operate within the provision of the prudential regulations of the Bank. The officials of the banking supervision department of BON ensure control of the banks and building societies through regular on-site examination and off-site surveillance. Such examinations are designed not only to uncover and check malpractice but also to provide guidance to banks and offer an early warning signal as prevention against bank failures. The Bank also has powers to prescribe the proportion of the liabilities that commercial banks must hold in the form of liquid assets.
(f) Monetary Policy
Currently the Bank of Namibia does not engage in any active discretionary monetary policy because of its membership of the Common Monetary Area (CMA). Other members of this structure include South Africa, Lesotho and Swaziland. When banks are temporarily short of liquidity, they can obtain such liquidity from the BON through the use of the overnight lending system. The rate at which such accommodation is made is the bank rate, which is modelled after the South African repo rate. The Bank also imposes reserve requirement on commercial banks and building societies.
Currently the minimum requirement is determined by applying a unified ration of 1% on the average daily amount of a banking institution's total liability to the public on a monthly basis.
3. THE INFLUENCE OF THE BANK ON THE NAMIBIAN ECONOMY
The Bank of Namibia affects economic activities by influencing the flow of credit and money from the banking system to the private sector. Its monetary stance at any time is by and large a reaction to the prevailing economic conditions. Monetary policy is restrictive when inflationary forces are present and expansionary when there is no clear danger of inflation. The government also influences economic activities through the budget.
The channel through which the BON influences economic activities is the bank reserves. Irrespective of which monetary policy instrument the bank uses the immediate impact falls on commercial bank reserves, which ultimately affects the cost of money and availability of credit. A change in e.g. reserve requirements alters the amount of required and excess reserves in the banking system. Deposit money banks in turn respond to changes in the availability of funds of the banks by altering their lending and investment policies. The lending and investment activities of the banks in turn influence conditions in the credit market. Therefore, the impact of the Bank's policy on bank reserves not only exerts a powerful influence on the flow or bank credit and money but also in liquidity and the availability of credit in general.
However, as pointed out earlier, Namibia's membership of the CMA as well as the increasing role that the South African Reserve Bank plays as the dominant central bank in the monetary area also influence activities in Namibia. Given this stark realty, the effectiveness of monetary policy could be enhanced by a Common Monetary Area harmonisation of monetary policies within the greater.