Coen Welsh | Aug 9, 2017 | 0
Development Bank limits participation in equities
The Development Bank of Namibia(DBN) says it has made a conscious decision to limit its participation in the equities market to 10% of the bank’s total investment portfolio.
Acting CEO, Martin Inkumbi said although the bank invests in equities of a strategic nature besides the loans it gives to SMEs and other corporate clients, a decision was taken by the bank’s management to limit its exposure in the equities market for strategic reasons. In line with the policy, 93% of the bank’s total investments are currently in loans and 7% in equity.
Inkumbi said the decision was taken due to the “small” nature of the bank’s balance sheet which stands at around N$2 billion, and also with one eye on the possible changes to the way the bank is capitalised.
He said: “Our strategy is that: Of our total investment, 90% should be in loans then 10% can be equity. There are reasons for splitting it that way at the moment. More so because of the balance sheet of the bank. With equity you are in there for a long term; there is no cash flow coming into the bank for some time. They [equities] also have a very high risk in the sense that you never know whether that business will succeed or not. We are also at a stage were we are positioning ourselves as a bank to be able to raise money on the market in the near future when the treasury says, well we have capitalised you enough, now run on your own.”
Inkumbi pointed out that in the event that funding from the treasury stops and the bank has to raise money on the market or borrow money from institutional investors, it was imperative for the bank to have a balance sheet that is attractive. “They [investors] look at your balance sheet and say: are you having performing assets, are you having investments that are bringing you returns that are predictable and so on?”
He stressed that it is easy to convince investors if the majority of the bank’s investments are in debt because debt has to be repaid according to certain schedules and there is also security to cover the debt.
“So an investor who’s putting money in the bank that has got a balance sheet that is sound and attractive knows that they can get their money back, and also by what time and therefore they can charge a reasonable return on their investment.”
He said having a balance sheet that does not look attractive will result in demand for high returns from investors which will make the bank’s loans unattractive.
Inkumbi said the decision to take up equity in businesses was taken for various reasons. “One is obviously there are certain businesses at a stage where they need equity rather than debt. For example, if the business has got too much debt, it cannot afford debt, but if you put in money in the form of equity then that money doesn’t need to be paid immediately.
“We also take up equity investments primarily in businesses that we see as very strategic for the economic development of the country like Ohorongo. Any business that is involved in value addition, we consider that very strategic.”
Inkumbi said he was happy with the bank’s flagship investment in the Ohorongo Cement factory.
He said: “We do believe that making cement available is very important for our construction industry and for our infrastructure. It’s hopefully an industry that can also have a transfer of technology and skills. So we feel that it is an ideal strategic industry.”
Although the bank has taken the decision to invest in strategic businesses, Inkumbi emphasised that the DBN does not want to be shareholders in a business for a long time. “We do not want to be shareholders forever. We have an exit strategy that after ten years we can give back the shares either to the owners of the business or to any other group.”
The bank also said it has set a maximum shareholding ceiling of 26% in any company as long as it gives it an opportunity to have a representation on the board. “It is not our objective to be the majority owner of the business. We don’t want to run a business, we are bankers. The management and operations of a business should be driven by the owners of the business,” Inkumbi said.