Botswana Financial Sector Overview 2009/10

B O T S W A N AF i N A N c i A l S E c T O R O V E R V i E W

2 0 0 9 / 1 0

A n A l y s T sK e i t h J e f f e r i s

A b o T a c h e b ar e s e a r c h @ c a p i t a l . b w

BOTSWANA FINANCIAL SECTOR OVERVIEW

1

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW

The informaTion conTained on This page is subjecT To The disclaimer, warning and disclosure sTaTemenTs aT The end of This documenT.

iNdEx

CONTENTS

1. introduction ............................................................................................................................... 3

2. background to the financial sector: the evolution of structure and policy ...............................4

2.1 The development of the banking sector ............................................................................ 4

2.2 The present structure of the financial sector .................................................................... 8

2.3 The regulatory structure of the financial sector ............................................................... 9

2.4 The economic importance of the banking system ........................................................... 12

3. banking sector growth and development ............................................................................... 15

3.1 bank balance sheets: deposits, lending and bobcs ...................................................... 15

3.2 credit growth & the composition of lending .................................................................... 17

3.3 BankingIncomeandProfitability ...................................................................................... 20

3.4 other banks ...................................................................................................................... 22

4. The non-bank financial sector ............................................................................................... 23

4.1 capital market institutions ................................................................................................ 23

4.2 pension & provident funds ............................................................................................... 26

4.3 insurance .......................................................................................................................... 28

4.4 Non-banklenders ............................................................................................................. 29

5. Key issues facing the financial sector ................................................................................... 31

5.1 TheImpactoftheGlobalFinancialandEconomicCrisis .................................................. 31

5.2 bank ownership, and privatisation of state-owned financial institutions ........................ 32

5.3 The cost of banking: charges and interest rate spreads ................................................ 32

5.4 Trends in banking concentration and competition .......................................................... 33

5.5 Competition,ProfitabilityandLicensingPolicy ................................................................. 35

5.6 The future of bobcs ........................................................................................................ 35

5.7 The changing monetary policy framework ...................................................................... 36

5.8 sources of future growth ................................................................................................. 38

5.9 regulatory issues ............................................................................................................. 40

6. conclusions ............................................................................................................................. 41

useful references .................................................................................................................... 41


2

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


TABLE OF FIGURES

figure 1: banking sector & gdp .................................................................................................................... 3

figure 2: commercial banks Timeline ............................................................................................................ 6

Figure3: InstitutionsRegulatedbytheBankofBotswana ........................................................................... 11

figure 4: assets of the financial system (1996) ........................................................................................... 12

figure 5: assets of the financial system (2008) ........................................................................................... 12

figure 6: size of banks relative to the economy ......................................................................................... 13

figure 7: financial depth & gdp per capita (2008) ...................................................................................... 14

figure 8: structure of banking sector balance sheet .................................................................................. 15

figure 9: loan-to-deposit ratio ................................................................................................................... 16

Figure10: StructureofBusinessLending(December2008) .......................................................................... 17

figure 11: maturity of bank lending .............................................................................................................. 18

figure 12: arrears on bank lending (2002-2008) ........................................................................................... 19

figure 13: bank income and costs ................................................................................................................ 20

figure 14: return on assets ........................................................................................................................... 21

Figure15: StructureoftheNon-bankFinancialSector .................................................................................. 23

figure 16: botswana stock exchange dci .................................................................................................... 25

figure 17: bse annual returns (pula and usd, %) ......................................................................................... 25

figure 18: growth of pension fund assets, domestic & offshore, 2002-08 .................................................. 27

Figure19: StructureofPensionFundAssets(December2008) ..................................................................... 27

figure 20: sources of premium income - non-life insurers (2006) ................................................................. 28

Figure21: BankCapitalisationinSub-SaharanAfrica(2007) ......................................................................... 31

figure 22: interest rate spreads (1991-2007) ................................................................................................ 33

Figure23: AssetsbyBank,December2007 .................................................................................................. 34

figure 24: banking sector concentration (1994-2007) .................................................................................. 34

Figure25: DistributionofBankingDeposits–SharesofLargestBanks ........................................................ 34

ABBREVIATIONS

aml/cfT anti-money laundering/countering the financing of Terrorism

bbs botswana building society

bob bank of botswana

BoBCs BankofBotswanaCertificates

bsb botswana savings bank

bse botswana stock exchange

ceda citizen entrepreneurial development agency

ciu collective investment undertaking

dci domestic companies index

DPCF DebtParticipationCapitalFunding

gdp gross domestic product

ifsc international financial services centre

mfdp ministry of finance and development planning

nbfi non-bank financial institution

nbfira non-bank financial institutions regulatory authority

ndb national development bank

PDSF PublicDebtServiceFund

roa return on assets

roe return on equity


3

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


1. iNTROducTiON

TheBotswanaBankingindustryisanincreasinglyimportantsectoroftheeconomy,bothinitsownrightandin terms of the supporting role it plays in the development of other sectors of the economy. The growth of the sectorhasbeengood–overtheperiodfrom1995/96to2007/081itgrewinrealtermsby11.3%ayearonaverage, while overall real economic growth averaged only 5.5% a year over this period (see figure 1). over thatperiodoftime,thebankingsector’sshareofGDPhasdoubled,from4%to8%.

Figure 1: Banking Sector & GDP

Source: Central Statistics Office

The sector also plays a very important role in the botswana stock exchange, where it dominates market capitalisationandhasbeenadrivingforceinthegrowthoftheBSEinrecentyears.Thisinturnreflectsthehighlevelofprofitability,andsustainedprofitsgrowthinthesector.Thebankingsectorcontinuestodominatethefinancialsectormorebroadly,notwithstandingtherapidgrowthofothersegmentsofthefinancialsector,such as pension funds, over the past decade.

As the banking sector has grown in importance, scrutiny of the sector has becomemore intense. In theprocess,concernshavebeenraisedregardingtheactivitiesofthebankingsectoranditswidereconomicrole,withperceivedshortcomingssuchasafocusonlendingtohouseholdsratherthanbusinesses,highlevelsofbankchargesandspreadsbetweendepositandlendingrates,relianceonBankofBotswanaCertificates(BoBCs)forassetsandincome,andreluctancetoextendbankingservicestosomeareasofthecountryandthe population. There are also perceptions of a lack of competition, poor service and a lack of innovation. while someoftheseconcernsarereal,othersaremisplaced,andtherehavebeenimportantpositivedevelopmentsinthebankingsectorinrecentyears,withenhancedcompetition,innovationsinproductandservicedelivery,andgreaterchoicesforcustomers,especiallysavers,bothwithinandoutsideofthebankingsector.

Thecomingyearsthereforeholdconsiderablechallengesforthebankingsector,aswellasforpolicymakerswhodetermineaspectsoftheenvironment inwhichthesectoroperates.Bankswillbe lookingforsourcesof growth and tomaintain the high profit rates that they have become accustomed to,while competitionintensifies,andtechnologicalchangesimpactonthewaythatbankingoperationsarecarriedout.

1 - The national accounts year runs from July to June.


4

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


2. BAckgROuNd TO ThE BANkiNg SEcTOR: ThE EVOluTiON OF STRucTuRE ANd POlicy

2.1 ThE DEVELOpmENT OF ThE BANkING SECTOR

Botswana’sbankingsectorhasgrownandchangedconsiderablyovertheperiodsince1990.Historically,thesectorwasrelativelysmall,anddominatedbyBarclaysandStandardCharteredbanks.Bothofthesebanks’operations inBotswanadateback to the1950s,andwereoriginally runasbranchesof thegroups’SouthAfricansubsidiaries.Inthe1970stheywerebothincorporatedinBotswanaasindependentoperationswithintheoverallinternationalstructuresofBarclaysandStandardCharteredbanks,inlinewiththerequirementsofthe financial institutions act, and came under the supervisory purview of the bank of botswana (bob), which wasestablishedin1975.

Thetwobanksco-existedasacomfortableduopoly,with limitedcompetitionbetweenthem.Thesituationchangedsomewhat in1982,when theBankofCredit andCommerceBotswana (BCCB)wasestablished;however,thisbankremainedrelativelysmall,anddidnotfundamentallychallengethedominanceofthetwomajorexistingbanks.

Theotherfinancialinstitutionsexistingduringthistimewerelargelygovernment-owned.Theseincluded:

• theBotswanaSavingsBank (originally thePostOfficeSavingsBank, thiswasestablished in1911asabranchoftheSouthAfricanPostOfficeSavingsBank,andhasthelongestcontinuousexistenceofanyfinancialinstitutioninBotswana);

• theNationalDevelopmentBank(establishedin1964,initiallywithafocusonlendingtoagriculture);

• theBotswanaDevelopmentCorporation(BDC),establishedin1970,toinvestincommercialandindustrialprojectsthroughtheprovisionofloansandequityfinance;

• the Financial Services Company (FSC), established as a subsidiary of BDC and NDB, mostly offeringpropertyloans;

• theBotswanaBuildingSociety(BBS),originallyestablishedasabranchoftheSouthAfricanUnitedBuildingsociety in 1970, and locally incorporated in 1977, with majority government shareholding.

Unlike many other countries, there has never been a government-owned commercial bank in Botswana.However, the government has been an extensive provider of finance in the economy, through the aboveinstitutionsandalsothroughthePublicDebtServiceFund(PDSF),whichlentdirectlyfromgovernmentfundstostate-owned (parastatal) enterprises, and for many years the pdsf was the largest lending entity in botswana.

During the1980s,Botswanaboastedabankingsector thatwassoundand reasonablywell-run innarrowbanking terms but which was unadventurous and not actively developing financial intermediation in theeconomy.Thecomplacencythatresultedfromthelackofeffectivecompetitionwasreinforcedbyrisinglevelsofliquidityintheeconomy,asmineralrevenuesrosesharplyandthegovernmentbudgetmovedintosurplus.

Thepolicyframeworkdidlittletoencouragecompetitioninthebankingsector.Thelicensingofnewbankswasrestrictive,inthatmarketcapacityissuesweretakenintoaccountandtheexistingbankscouldobjecttothelicensingofnewbanks.Inreturnforthemaintenanceofthismarketpower,theBoBrequiredbanks–oratleastthetwomainbanks–tokeepanationwidenetworkofbranches,includingsomeintheruralareasthatwouldprobablynotbejustifiedonacommercialbasis.


5

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


InterestrateswerecontrolledbytheBoB,andinterestratepolicyaimedtokeepinterestrateslowtoencourageborrowingandinvestment.TherisingexcessliquiditywasabsorbedthroughacalldepositmechanismattheBoBwhichwasopentobanksandotherlargedepositors.

by the late 1980s it was realised that this policy was having a range of negative impacts:

• thepolicyof low interest rateswas leading todisintermediation,as thebankswere turningaway largedepositsonwhichtheycouldnotearnaprofitgivenminimumpublicdepositratesandthecallratesofferedbytheBoB;

• artificiallylowinterestrateswereencouragingborrowingforunproductiveprojects;

• restrictionsonthelicensingofnewbanksreinforcedtheduopolyofBarclaysandStandardChartered,andinhibitedcompetitionandefficiency;

• thedominantroleofGovernmentmeantthatmarketforcesplayedonlyalimitedroleintheallocationofcredit;

• theloosemonetarypolicy–withnegativerealinterestrates–madecontrolofinflationdifficult,especiallygivenrapidfiscalexpansion.

These issues were summarised in a government of botswana/world bank report entitled “financial sector PoliciesforDiversifiedGrowth”,publishedin1989.Thereportnotedthat:

Thecommercialbankingsystem,whilesoundandprofitable,isveryconservative.Withonlythreebanks(andone of these very small) the degree of competitiveness is low. in the tradition of the last century of british commercialbanking,thesebanksemphasizeoverdraftlendinganddonotoffermuchinthewayoflongertermresourcestofundinvestment.Thebankshavenothadtobeparticularlyentrepreneurialtoearngoodprofit...[and]...theircapitalbasesaresmallinrelationtothefinancingneedsofsomemajorclients(p.46).

Thereportprovidedtheimpetusforanextensivesetoffinancialsectorreforms.Theseincluded:

• encouragingtheestablishmentofnewbanks,soastoencouragecompetitionandefficiencyinthebankingsector,throughaliberalisationofbanklicensingpolicy;

• a reduction in the roleofgovernmentasadirect lender toparastatals (notably throughthepublicDebtservice fund), alignment of pdsf interest rates with market rates, and commercialisation of government-ownedfinancialinstitutions;

• promotingthedevelopmentofthecapitalmarket;• changestomonetarypolicyandtheintroductionofapolicyofpositiverealinterestrates;• theintroductionofmarket-basedinterventionsformonetarypolicypurposesandtheabsorptionofexcess

liquidity,throughBankofBotswanaCertificates.


6

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Source: Econsult

Also consistentwith the above policy reforms, but implemented slightly earlier, was the ending of formalcontrolsonbankinterestrates2.

Thesereformsencouragedtheestablishmentofnewbanks(seetimelineinFigure2).ThefirstwasZimbankBotswana,licensedin1990.ThiswasshortlyfollowedbytheestablishmentofFNBBotswana,thelicensingofwhichcoincidedwiththeproblemsfacedbyBCCBasaresultofthecollapseofitsparentcompany,andBCCBwastakenoverbyFNBandusedasbasisforestablishmentofthenewBotswanaoperation.Theearly1990salsosawtheestablishmentofANZ-GrindlaysandUnionBank(asubsidiaryofStandardBankofSouthAfrica).With fournewbanksandoneclosure, thenumberofcommercialbanks inBotswanadoubled inashortperiodoftime.Eventhoughseveralofthenewbankswerequitesmall-thenewlicensingpolicydidnotrequireanationwidepresenceandruralbranches–thebankingenvironmentchangeddramatically,withmorecompetition,andpressureonthedominantpositionofthelong-establishedbanks.

Figure 2: Commercial Banks Timeline

2 - Some controls were reintroduced in March 2009; see section 5.3 below for further information.


7

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Afterthisrapidexpansion,aperiodofconsolidationfollowed:ANZ-GrindlayswastakenoverbyUnionBank,whichwas subsequently renamedStanbicBank,whileZimbankwas takenoverbyFNBB, andhence thenumberofbanksfell tofour.Subsequentlythreemorebankswereestablished,theBankofBaroda(2000),BankGaborone(2006)andCapitalBank(2008).

TheBotswanaCo-operativeBank(BCB)wasestablishedin1974tocaterfortheneedsoftheco-operativemovement;thebankwasformedoutoftheBechuanalandCo-operativeDevelopmentTrust,foundedin1962.Over the years, theBCBsuffered froma rangeofproblems–mistakenpolicies, inadequatemanagementand poor performance of its loan portfolio. After several bank examinations, audits and policy reviews,GovernmentdecidedthattheBCBcouldnotbesaved,andthebankwasplacedintoliquidationinAugust1995.Thegovernment,whichhadgiventheBotswanaCooperativeBankloansfromthePublicDebtServicefund (pdsf), was the only creditor.

InvestecBankwas licensedasamerchantbank inSeptember1998,andwastakenoverbyStanbicBankin april 2004. african banking corporation (abc) evolved from a credit institution, ulc, and was granted a merchantbankinglicenceinDecember2001.ABCplanstoobtainacommercialbankinglicenceandtorollout retail operations in 2009.

Botswana’sbankingsectorisnowrelativelyliberalised.Inprincipletherearenodirectcontrolsoverinterestrates,creditallocationorproductpricing.Inpractice,however,theBoBimposesrestraintsonthelevelofbankchargesandspreadsbetweendepositandlendingrates.Thebanklicensingregimeaimstoencouragetheestablishmentofnewbanks,althoughaswillbediscussedbelow,itmaybearguedthatitisnowsomewhatoutdated.

Thebankingsectorhasalsobeenaffectedbychangesinthebroaderpolicyenvironment.Theliberalisationofexchangecontrolsthroughthe1990s,whilenotspecificallyfocusedonthebankingsector,hadanimportantimpactonbanks,e.g.throughpermittingthemtoopenforeigncurrencyaccountsandofferforeigncurrencyloans.Thesubsequentabolitionofexchangecontrols in1999permitted residents toopenbankaccountsoutside of the country (which had previously been prohibited) andmore generally, to hold a full range ofoffshorefinancialassets,therebyexposingthelocalbankstomorecompetition.

Thebanksarealsostronglyaffectedbythemacroeconomicenvironmentandthemonetarypolicyframework.an important characteristic of the macroeconomic environment is a surplus of savings over investment, leading toexcessliquidity,whiletheBoB’smonetarypolicyaimstokeepinterestratespositiveinrealterms,whichisnot always easy in an environment of excess liquidity.

Themonetary policy framework includes an eclecticmix of both activemonetary policy and amanagedexchangeratethroughthePulabasketmechanism.Inrecentyearsmonetarypolicyhasfocusedondealingwiththehighlevelsofliquidityinthebankingsystem,andonimplementingmonetarypolicythroughindirectinstruments.TheBoBdealswithboththroughtheissueofshort-termpaper(BankofBotswanaCertificates).bobcs are issued through weekly auctions and have maturities ranging from 14 days to 12 months. The bob alsooperatesarepo/reversereposystemformanagingshort-termliquidityfluctuations.TheBoBCsystemisthemainchannelfortransmittinginterestratesignalsfromthecentralbanktothemarket;althoughthereisalsoaBankRatechargedbytheBoBonloanstothebanks,thepersistenceofexcessliquiditymeansthatthereislittlesuchborrowingandhencetheBankRatehaslittlepracticalimpact,althoughitisimportantforsignalling purposes.

Untilearly2006,BoBCswereavailablefordirectpurchasebybothbanksandotherentities,suchasmajorcorporatesandotherfinancialinstitutions,andcouldbeheldindirectly(throughbanksandstockbrokers)byanyfirmorindividual.SinceMarch2006,however,BoBCshavebeenrestrictedtobanksonly,andthishashadamajorimpactontheinflowofdepositfundstothebanks,whichwillbediscussedfurtherbelow.


8

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


2.2 ThE pRESENT STRUCTURE OF ThE FINANCIAL SECTOR

Botswana’sfinancialsectorcanbedividedbroadlyintotwosegments:thebankingsector(largelyregulatedandsupervisedbytheBankofBotswana),andthenon-bankfinancialsector (largelyregulatedbythenewnon-bank financial institutions regulatory authority (nbfira).

Withinthebanking3 sector , there are:

• sevencommercialbanks,ofwhichthree(BarclaysBankofBotswana,StandardCharteredBankBotswana&FirstNationalBankBotswana)arelistedontheBSE,whiletheotherfour(StanbicBank,BankGaborone,BankofBarodaandCapitalBank)areunlisted;

• onemerchantbank(AfricanBankingCorporation),whoseparentcompany(AfricanBankingCorporationHoldings)islistedontheBSE;

• oneoffshorebank,KingdomBankAfricaLtd (KBAL),andoneoffshorebankholdingcompany (ABCH),whichareregisteredintheIFSC;

• onestatutorydeposit-takinginstitution(BSB)andonebuildingsociety(BBS).

The non-bank financial institutions (nbfi) sector includes:

• theBotswanaStockExchangeandstockbrokingfirms(registeredintermsoftheBSEAct);

• Insurers:short-term(casualty)insuranceandlong-term(lifeinsurance)(registeredintermsoftheInsuranceIndustryAct,andsupervisedbyNBFIRA));

• Pensionfunds(registeredintermsofthePensionandProvidentFundsAct,andsupervised/regulatedbyNBFIRA);

• Assetmanagers(previouslyunregulated,butnowregulatedbyNBFIRA);

• Creditinstitutions(non-banklenders),whichinclude“term”lenderssuchasLetshego(listedontheBSE),penrich, blue, peo etc., which make medium-term loans against the security of payroll deductions, and short-term“cashloan”lenders(previouslyunregulated,butnowregulatedbyNBFIRA);

• Microfinanceinstitutions(e.g.WomensFinanceHouse)(grantedexemptionsfromtheBankingActbyBoB);

• Collective InvestmentUndertakings (CIUs) (established under theCIUAct and regulated by theBoB -regulationtobemovedtoNBFIRAinduecourse);

• threestatutorydevelopmentfinanceinstitutions(NDB4, bdc & citizen entrepreneurial development agency (CEDA));

• statutoryfunds(e.g.MotorVehicleAccidentFund,NationalPetroleumFund);

• thePublicDebtServiceFund(PDSF)5.

3 - Defined as deposit-taking institutions, in line with Banking Act

4 - Although called a bank and supervised by the BoB, NDB is not a deposit-taking institution.

5 - The majority of PDSF loans were transferred to a new special purpose vehicle, Debt Participation Capital Funding Ltd (DPCF), and securitised, in 2004. However, a few loans remained with PDSF, although the fund is no longer active.


9

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


2.3 ThE REGULATORy STRUCTURE OF ThE FINANCIAL SECTOR

Banks are regulated by the BoB in terms of the Banking Act (Cap. 46:04)6 and the associated banking regulations7.BoBissuesbankinglicencesandundertakesprudentialsupervision.

TheminimumcapitalrequirementtoestablishabankisP5million.Inpractice,however,muchmorethanthisislikelytoberequiredinviewofongoingcapitaladequacyrequirements.Thestatutorycapitaladequacyratiostipulates that unimpaired capital must equal at least 8% of risk-weighted assets, while the bob imposes a “safeandprudent”capitaladequacyratioof15%forallbanksinBotswana.Itisalsorequiredthatcorecapitalconstitutes at least 50 percent of total capital.

Considerationofapplicationsforbankinglicencesfocuseson:

(a) thetechnicalknowledge,integrity,experience,financialconditionandhistoryoftheapplicant;(b) theadequacyofitscapital;(c) thecharacterofitsbusiness,andtheexperienceandqualificationsofitsmanagement;(d) theconvenienceandneedsofthecommunityandmarkettobeserved;(e) theabilityandwillingnessoftheapplicanttocomplywithanyconditionstheBoBmayimposepursuant

to the banking act.

The bob does not concern itself with market issues in considering licence applications (other than reviewing the viability of theprospectivebank’sbusinessplan), and is in general supportiveof newbanks from theperspective of enhancing competition.

Decisionsonapplicationsforbanking licencesaremade independentlybytheBoardoftheBoB,althoughthereisprovisionintheBankingActfordissatisfiedapplicantstoappealtotheMinisterofFinance.

Prudential supervision followsconventionalpractice,and isessentially riskbased.Supervisory regulationsandpracticesevolveinlinewithinternationalnorms,andarecurrentlybeingreviewedwithaviewtoupdatingthemtocomplywithBaselIIprinciples.WhileBotswanaisnotobligatedtocomplywithBaselII,thefactthatmostofBotswana’sbanksaresubsidiariesofmajorregionalor internationalbankinggroups,whichwillbeimplementingBaselIIintheirhomejurisdictions,meansthatinpracticeitwillbenecessary.

besides capital adequacy requirements, there are also regulatory requirements relating to:

• reserveassetholdings;

• minimumliquidassetholdings;

• concentrationoflending;

• foreigncurrencyexposure;

• significantchangesofshareholding;

• appointmentsofBoardmembersandChiefExecutiveOfficer.

6 - Available at http://www.bankofbotswana.bw/files/attachments/an2077465886.html

7 - Available at http://www.bankofbotswana.bw/files/attachments/an31681338.html


10

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


The system of prudential supervision has two main functions: (i) protection of depositors and (ii) systemic stability. It is lessconcernedwithconsumerprotection, althoughBoBpermission is required toopenandclosebranches,andtheBoBhastakenupissuessuchasbankcharges.Amorerecentthirdpillarofbankingregulationrelatestoanti-moneylaunderingandcounteringthefinancingofterrorism(AML/CFT).

Thereisnosystemofstatutorydepositinsurance,althoughtheoptionofintroducingsuchasystemhasbeenconsideredinthepastandmaybereconsideredinthefuture.

TheBoBisarespectedsupervisor,andhasinthepastshowngoodjudgementinassessingbankinglicenceapplications.Ithasalsobalancedfirmregulationwithflexibilityinallowingbankstopursuetheircommercialinterestsinthecontextofasoundandstablefinancialsector.Botswanahasneverhadabankingcrisis,andwherebankshavefacedproblemsthesehavebeendealtwithwithoutthreateningtheintegrityofthebankingsystem.Pastbankingproblemshaveincluded:

• theBCCIcrisis(1991):whentheBankofCreditandCommerceInternationalwasclosedbytheBankofEngland,itsBotswanasubsidiary(BankofCreditandCommerceBotswana)wastakenovertemporarilyby theBoB, andwas eventually sold as a going concern to the newly-licensed FirstNational Bank ofBotswana;

• ZimbankBotswana(1993):thissubsidiaryofaZimbabweanbankwasunprofitable,andwithanerodingcapitalbase,andtheBoBco-ordinatedatakeoverbyFNBinordertopre-emptthecollapseofthebank.

• BotswanaCo-operativeBank(1995):originallyestablishedtoservetheco-operativesectoroftheeconomy,itobtainedacommercialbankinglicencebutneveroperatedprofitablyandwaseventuallyclosedbytheBoB;

• KingdomBank Africa Limited (2005): the offshore bank’s capital basewas eroded due to unprofitableoperations, and the bankwas taken under temporary BoBmanagementwhile it was restructured andrecapitalised.Thiswasachievedsuccessfully,andthebankwasreturnedtoitsmanagementandownerswithin three months.


11

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Statutory banksdonotrequirebankinglicencesandareultimatelyunderthecontroloftheMinisterofFinanceandDevelopmentPlanning.However, theBankingActgives theBoBpowers tosupervisesuchbanks,aswell asbuildingsocietiesestablishedunder theBuildingSocietiesAct.Hence theBoBcarriesout regularexaminations of the botswana savings bank, the national development bank and the botswana building society.

The International Financial Services Centre (IFSC). The bob plays an important role in administering the IFSCregulations.AllIFSCcompanieshavetoreceiveeitherabankinglicence,aCIUlicenceoranexemptioncertificatefromtheBoB,oraninsurancelicencefromtheMFDP.Thefirsttwocategories(banksandCIUs)aresubjecttoongoingBoBsupervision.TherequirementsforanIFSC(offshore)bankinglicenseareslightlylessdemandingthanforadomesticbankinglicence.Asoffshorebanksarerestrictedtonon-pulabusiness,thereisnorisktothedomesticfinancialsystem;themainriskisreputationalrisk.

Besidesbanks,theBoBalsoregulatesCollectiveInvestmentUndertakings(mutualfunds)intermsoftheCIUAct.Somesmalldeposit-takingmicrofinanceinstitutionshavereceivedbankinglicenceexemptionsfromtheBoB,onthebasisthat theyhavecommunitybenefitsandaretoosmall tohaveanyeffectonthefinancialsystem. more generally, however, unlicensed deposit-taking operations (such as pyramid schemes) are dealt withfirmlyundertheprovisionsoftheBankingAct.

Figure 3: Institutions Regulated by the Bank of Botswana

Source: Econsult

until early 2008, the ministry of finance and development planning housed the registrars of insurance, pension FundsandtheStockExchange,undertherelevantlegislation.Manyothertypesoffinancialinstitutionswerethenunregulated.Theseincludedtheso-called“cashlenders”,whousetheirownfundsandhencearenotinvolvedindeposittaking,andassetmanagers,forwhichtherewasnospecificlegislation.

However,anewNon-BankFinancialInstitutionRegulatoryAuthority(NBFIRA)wasestablishedinApril2008,whichprovidesanewregulatoryandinstitutionalframeworkforallnon-bankfinancialinstitutions,includingpreviouslyunregulatedones(theNBFIsectorisdescribedinmoredetailbelow).

Bank of Botswana

Listed commercial

banks

Standard Chartered Bank

Barclays Bank

First National

Bank

Unlisted commercial

banks

Stanbic Bank

Bank Gaborone

Bank of Baroda

Capital Bank

Statutory Banks

National Development

Bank

Botswana Building Society

Botswana Savings

Bank

Offshore banks (IFSC)

Kingdom Bank

ABCH (listed)

ABC Botswana

CIUs


12

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


2.4 ThE ECONOmIC ImpORTANCE OF ThE BANkING SySTEm

Financial intermediariescanbeclassified into fourmaingroupsdependingprimarilyon thenatureof theirbalancesheets,viz:banks,statutoryfinancialinstitutions,pensionfundsandnon-banklenders8. it is estimated thatbankscontrolalmosthalfoftotalfinancialsectorassets,whilepensionfundscontrolanother43%.Formuchof thepastdecade,pensionfundshavebeen largerthanthebankswhenmeasuredbytotalassets,althoughtheinflowoffundsintothebanksfollowingchangestotheBoBCregulationsinearly2006(discussedbelow)haveenabledthebankscollectivelytoovertakepensionfundsintermsofsizeofbalancesheets.

Whilethepensionfundsarealmostasimportantasthebanksasadestinationforsavings,theyareofcoursemuch more important as a destination for household savings. banks and pension funds are of similar sizes in termsoftheirdomesticinvestments;whilepensionfundsinvestedP13.8bnindomesticassetsinDecember2007,banklendingtotalledP13.7bn.

Thestructureofthefinancialsectorhaschangedconsiderablyoverthepastdecade(seeFigures4and5).Theshareofthebanksintotalassetshasnotchangedagreatdeal,althoughithasgrownslightly;themoststrikingchangeshavebeenthegrowthofthepensionfunds,andtherelativedeclineintheimportanceofgovernment-owned financial institutions, andof direct lendingby government. In 1996, theGovernment’sPublicDebtServiceFund(whichusedtomakeloanstoparastatals)wasbyfarthelargestfinancialinstitutioninBotswana,withabalancesheetexceedingthatofanyoftheindividualbanks,andaccountedfor29%oftotalfinancialsectorassets.By2008,thecombinedassetsofthePDSFandDPCF10amountedtoonly2%oftotalfinancialsectorassets.Overthesameperiod,theshareofassetsheldbythepensionfundsrosefrom11%to31%,whichwasmainlydrivenbytheestablishmentofanewpensionschemeforgovernmentemployees9.

Figure 4: Assets of the Financial System (1996) Figure 5: Assets of the Financial System (2008)

Source: Bank of Botswana; Econsult

8 - Short-term insurers are excluded as they are not strictly financial intermediaries.

9 - DPCF is a special purpose vehicle established to securitise and sell notes based on PDSF loans

10 - The Botswana Public Officers Pension Fund (BPOPF) is a funded, defined contribution scheme, managed by private sector asset managers, and replaced the previous unfunded, defined benefit scheme.


13

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Althoughtherelativepositionofthebankingsectorinthebroaderfinancialsectorhasnotchangedmuchoverthepastdecade,bankshaveneverthelessbeengrowing rapidly, supportedby the liberalisationmeasuresundertakenduringthe1990s.Overthedecadefrom1997to2007,thetotalassetsofthebankingsystemgrewatanaverageannualrateof21%,while(nominal)GDPgrewonaverageby14%ayearoverthesameperiod.Relativetothesizeoftheeconomy,therefore,thesizeofthebankingsector–measuredforinstancebytheratioofbankingassetstoGDP–hasbeenrisingsteadily(seeFigure6).

Figure 6: Size of Banks Relative to the Economy

Source: BoB; CSO; Econsult

Bankbalancesheetsexpandedconsiderablyin2006,asaresultofthechangedrulesregardingtheholdingofBoBCsandtheirrestrictiontobanksalone.ThiscausedamajorinflowoffundsfromentitieswhichhadheldBoBCs intheirownright (whetherdirectly,as inthecaseofDebswanaandsomeparastatals,or indirectlythroughbanksandstockbrokingfirms),butwhichwerenolongerabletodoso.Thetotalassetsofthebankingsector grew fromP17.76bn inDecember 2005 toP27.19bn in June2006, an increaseof 53% inonly sixmonths.


14

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Notwithstandingthisrapidgrowth,thebankingsectorremainsrelativelysmallbythestandardsofcountrieswith similar income levels.Measuring the size of the banking sector by the ratio of broadmoney supply(comprisingcashandbankdeposits)toGDPshowsthatthisratio–sometimestermedfinancialdepth–tendstorisewithGDP.However,financialdepthinBotswanaisrelativelysmallforacountryofitsincomelevel;acountrywithBotswana’sGDPpercapita levelofaroundUS$7500wouldbeexpected tohaveafinancialdepthratioofaround60%,comparedtoBotswana’s43%attheendof2008.BothSouthAfricaandMauritiushavesimilarpercapitaincomelevels,buthavefinancialdepthmeasuresof83%and169%respectively.Onthismeasureatleast,thissuggeststhatthereisconsiderablegrowthpotentialleftforthebankingsystem.Itisinterestingtonote,however,thatmanyofthecountriesthattendtohavelowlevelsoffinancialdepthrelativetoGDPare,likeBotswana,resource-basedeconomies,suchasAngolaandGabon.

Figure 7: Financial Depth & GDP per capita (2008)

Source: IMF


15

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


3. SEcTORAl gROWTh ANd dEVElOPmENT

3.1 BANk BALANCE ShEETS: DEpOSITS, LENDING AND BOBCS

Asnotedabove,theBotswanafinancialsystemhaslongbeencharacterisedbyexcessliquidity,dueinparttothestructuralsurplusofsavings(overinvestment).Thishashadamajorimpactonthestructureofbanks’balancesheets;inparticular,lending–to-depositratiostendtobesomewhatlow,andassetsotherthanloansand advancesmake up a considerable portion of the balance sheet. Furthermore, policies relating to theabsorptionofexcessliquidityhaveanimportantimpactonbankoperationsandprofits.

Overthedecadeto2005,loans&advancesmadeupapproximately50%ofbankingsectorassets,withtheother50%comprisingBoBCs(21%),balancesduefromforeignbanks11 (15%) and other assets (14%) (see figure 8).However, the inflowof funds in2006followingthechanges inBoBCregulationshashadamajor impact,however;besidescausingbalancesheetstogrowrapidly,theshareofBoBCsintotalassetsrose(to45%atthe end of 2007) and that of loans fell (to 37%). in 2008, the share of bobcs fell and that of loans rose slightly.

Figure 8: Structure of Banking Sector Balance Sheet

Source: BoB

11 - Comprising mostly deposits with parent banks offsetting FCA liabilities


16

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Source: BoB; Econsult

One interesting recentchange in thestructureofdepositshasbeena sharp increase in theproportionofforeigncurrencydeposits.Bytheendof2008,foreigncurrencyaccounts(FCAs)totalledP10.2billion,or27%of all deposits. nearly 90% of fcas were us-dollar denominated, and it is likely that the change is related to the agreement between theGovernment andDebswana that the company can pay its tax and relatedobligationsinUSdollarsratherthanpula.

loan-to-deposit ratios rose steadily over the decade to 2005, and averaged around 61% over this period (see Figure9).Thisisseeninsomequartersasarelativelylowfigure,andthebankshavebeencriticisedfornotlendingsufficientlyandnotproperlycarryingouttheirintermediationfunction;however,italsoreflectsalackofviablelendingopportunities.Theupwardtrendintheloan-to-depositratiooverthedecadeto2005doesreflectconcertedeffortsbybankstoexpandtheirlending,although–aswillbediscussedbelow–thishasbeenmuchmoretoindividuals/householdsthantobusinesses.Morerecently,thesubstantialinflowoffundsintothebankingsystemin2006hascausedtheratiotofall,astheadditionaldepositswere– intheshorttermatleast–investeddirectlyinBoBCsratherthanbeingusedtoexpandlending;bytheendof2008theloan-to-deposit ratio was only 45%.

Figure 9: Loan-to-Deposit Ratio


17

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


3.2 CREDIT GROwTh & ThE COmpOSITION OF LENDING

Bank credit hasbeengrowing rapidly in recent years, after a sluggishperiod in the early-to-mid-1990s. Innominaltermscreditgrewby18%ayearbetween1997and2007,androsefrom8%toanestimated15%ofgdp over this period.

The composition of credit has changed significantly over time. Back in 1993, 55%of creditwas to privatebusinessesand39%wastohouseholds;by2008,however,theproportionsweremoreorlessreversed,with57%ofcredittohouseholdsand43%toprivatebusiness.Hencerecentcreditgrowthhasbeendrivenmuchmorebythegrowthoflendingtohouseholdsthanbylendingtobusinesses.

Bank Lending to households

Asnoted,theproportionoftotalbanklendinggoingtohouseholdshasbeenrising.However,whilebanklendingtohouseholdsishighbythestandardsoflowincomecountries, it isnotunusualbythestandardsofmiddleandupperincomecountries–forinstanceitisclosetothevaluesforSouthAfricaandNamibia.Furthermore,household lending is not particularly high relative to gdp, which suggests there is still scope for further growth.

Inothercountrieslendingtohouseholdstendstobedominatedbylendingformortgages.InBotswana,however,mortgages account for a relatively small share of household borrowing (21% at the end of 2008),which isdominatedbygeneralunsecuredborrowing;fromaneconomicpointofview,therefore,themajorityofhouseholdborrowingisforconsumptionpurposesratherthanforinvestment.

Bank Lending to Businesses

Itisstrikingthatthestructureofbanklendingtobusinessesdoesnotreflectthestructureoftheeconomy(seeFigure10).Perhapsmostnotably,mining isunder-represented, accounting foronly11%ofbank lending tobusinesses,comparedtoits43%shareofGDP12.Bycontrast,34%ofbanklendingtobusinessesisaccountedforbylendingtothebusinessservicesandfinance,incontrasttothosesectors’10%shareofGDP.RelativetosharesofGDP,banklendingtobusinessesisalsodisproportionatelylargetothemanufacturingandtradesectors.

Figure 10: Structure of Business Lending (December 2008)

Source: BoB

12 - Share of 2007/08 GDP at current prices.


18

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Credit to the public sector

In contrast tomany other countries, there is virtually no lending by banks to government. This is due tothe budget surpluses experienced by government in most years, and the resulting government balancesaccumulatedattheBoB,asaresultofwhichtherehasbeennoneedforgovernmenttoborrowfromthebanks.

Despitefiscalsurpluses,theGovernmenthasissuedTreasuryBillsandBondsforthepurposesofdevelopingthecapitalmarket.Thebanksholdaround16%oftheseinstrumentsdirectly,andanother82%off-balancesheetonbehalfofclients.OwnaccountT-BillsandBondsmakeupaverysmallproportion(lessthan1%)ofcommercialbankassets,andareequivalenttoaround2%ofbanklending.Currently,thebankingsectorholdsBoBCstothevalueofapproximatelyP18bn.

Overthenextfiveyearsitislikelythatmoregovernmentbondswillbeissuedforthepurposesoffinancingthebudget.Thedownturnintheglobaleconomyandingovernmentrevenuesfromthediamondsectorislikelytoleadtoprolongedfiscaldeficits.ThedeficitwillbefinancedlargelybydrawingdownpartofGovernment’sreservesthathavebeenbuiltupovertheyears,andbyborrowingbothdomesticallyandinternationally13.

Lendingtoparastatalshasbeenimportantatsometimesinthepast,butisnowinsignificant(0.8%oftotallendingin2008),duetoacombinationofdirectborrowingfromgovernmentfundsbysomeparastatalsandtheaccumulationoflargecashbalancesbyothers14.

maturity of Lending

Therehasalsobeenconcernthatthebanksfocusonshort-termlendingonly,withareluctancetoprovidelongertermloans.Whiletheremayhavebeensometruthinthisinthepast,therehasbeensomeimprovementinrecentyears,andtheaveragematurityofbanklendinghasrisenfrom2.2yearsin1998to5.4yearsin2008.

Figure 11: Maturity of Bank Lending


13 - Budget Speech 2009-2010 – MFDP

14 - In principle, government lending to parastatals was brought to an end in the late-1990s when lending from the PDSF was terminated. However, several parastatals have subsequently managed to negotiate loans from government, although the criteria for granting such loans is unclear.


19

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW



Quality of Lending (Bad debts/arrears)

Generally the levelofnon-performing loans (NPLs) inBotswana is low.However,baddebt&arrears levelshavebeenrisinginrecentyears,withtotalarrearsandspecificprovisionsupfrom2.6%oflendinginearly2002to5.2%inDecember2008 (seeFigure12).Mostof the increase isdueto risingarrearsonpersonal(household) borrowing, which have generally been far higher than arrears on business lending. However,arrearsonbusinesslendingexperienceoccasionalspikes,suchasthatattheendof2007duetotheextensivelossesincurredbythecollapseoftransportcompanyLobtrans.

Figure 12: Arrears on Bank Lending (2002-2008)


20

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


3.3 BANkING INCOmE AND pROFITABILITy

Thebulkofbankincomecomprisesnetinterestincome,accountingforaconsistent65%ofthetotal,withlittletrendvariation.Theremaining35%comprisesfeeincomeofvariouskinds.Despiteconcernsaboutthelevelsofbankcharges(discussedfurtherbelow),thereisnoevidencethattheshareofincomederivedfromcharges(broadlydefined)isrising.

Whatismorestrikingisthesuccessthatthebankshavehadinbringingtheircostsdown,relativetoincome.The sector’s cost-to-income ratio fell from 65% in themid-1990s to around 45% since 2000, which hasresultedinincreasedprofitability.

Figure 13: Bank Income and Costs



21

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW



Returnonassets(RoA)rosesteadilyoveralongperiod,andmorethandoubledbetween1995and2005(NetProfitBeforeTaxrosefrom1.7%ofassetsin1995to5.3%in2005,whileNetProfitAfterTaxrosefrom1.2%to4.5%)(seeFigure14).Fallingrelativecostshavebeenassociatedwithanintensiveprogrammeofautomationandmoreefficientuseoflabour.

Overthepastthreeyears,however, thetrendhasbeenreversed.RoAhasfallensignificantly, to3.9%and3.0%beforeandaftertax,respectively,in2008.

Similartrendshavebeenapparentwithregardtothebanks’returnonequity,whichrosefrom27%(aftertax)in1996to55%in2006,althoughit fell to45%in2008. It isclearthatprofitsroseformanyyearsdespiteincreased competition in the banking sector. The reduced profitability over the last two yearsmay be anindicationthatcompetitionisfinallyhavingtheexpectedresults.

Figure 14: Return on Assets


22

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


3.4 OThER BANkS

Theabovediscussionrelatesprimarilytocommercialbanks.Inaddition,thereisonemerchantbank(AfricanBankingCorporation,ABC),oneoffshorebank (KingdomBankAfricaLtd),onebuildingsociety (BotswanaBuildingSociety),andonestatutorybank(BotswanaSavingsBank).

ABCbeganlifeasafinanceandleasingcompany,ulc(Botswana)(Pty)Ltdin1990.ItwaseventuallyintegratedintotheZimbabwe-basedAfricanBankingCorporationin2001,andobtainedamerchant/investmentbankinglicencein2002.ABCiscurrentlyintendingtoapplyforafullcommercialbankinglicenceandrolloutafullrangeofretailproductsandservices.KingdomBankAfricaLtd(KBAL)isanoffshoreinvestmentbankregisteredintheInternationalFinancialServicesCentre(IFSC).AsanIFSC-registeredoffshorebank,itcanprovideservicesonlyfornon-residentclientsincurrenciesotherthanpula.KBALhasbeeninoperationsince2003.KBALhasasubsidiary,KingdomFinance,engagedindebtfactoringandtradefinancingintheBotswanamarket.

TheBotswanaSavingsBank(BSB)wasestablishedbyActofParliamentin1992,assuccessortothelong-establishedPostOfficeSavingsBank. Itderives itsdeposit-takingauthority from theActandhencedoesnotrequireabankinglicence;BSBistheonlystatutorydeposit-takingbankinBotswana.Nevertheless,BSBis requiredtocarryout itsbusinessaccording tosoundcommercialprinciplesand inaccordancewith theBankingActof1995.Thebank’saimistocultivateastrongsavingshabitamongBatswanaandtopromotethecultureofself-development.BSBplaysanessentialroleofmobilizingsavingsandprovidingbankingservicesthroughoutthecountry.ThisserviceisconsolidatedbyabilateralAgreementbetweentheBankasprovidedforbySection3of theBSBActof1992and theBotswanaPostalServices,where theservice isprimarilydelivered.

TheBotswanaBuildingSociety(BBS)wasestablishedin1976.Duringitsfirsttenyearsofoperation,BBSwasrestrictedbylawtolendonlyagainstthesecurityofimmovableurbanproperty.TheActwasamendedinApril1986topermitlendinginruralareas.Upuntil1986,BBSrestricteditslendingonlytoresidentialproperties,butsincethattimeithasalsoventuredintocommercialpropertylending.BBSisestablishedundertheBuildingSocietiesAct, fromwhich itderives itsdeposit-takingauthority. It isownedbymembers,whohavevotingpowerinrelationtothenumberofsharestheyhold.Governmentisthelargestshareholder,andthereforehaseffective control of the institution.


23

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


4. ThE NON-BANk FiNANciAl SEcTORTheremainderofthefinancialsectorcomprisesthenon-bankfinancialsector,whichfallsundertheregulatorypurviewoftheNon-BankFinancialInstitutionsRegulatoryAuthority(NBFIRA),andwhichcanbedividedintothe following segments (see figure 15):

• Capitalmarketinstitutions

• Pension&ProvidentFunds

• Insurance(short-andlong-term)

• CIUs

• Non-banklenders

• Other

Thesesegmentsarediscussedbelow.

Figure 15: Structure of the Non-bank Financial Sector

Source: Econsult

4.1 CApITAL mARkET INSTITUTIONS

TheBotswanaStock Exchange (BSE)was formally established in 1995with the passing of theBSEAct.Between 1989 and 1995 the market operated informally as the Botswana Share Market, having beenestablishedwithfivelistedcompanies.Thenumberof listedcompanieshasgrownsteadilyovertheyears,helpedbytheintroductionofaventurecapitalboardandaforeignboardcomprisingsecondary(dual)listingsofcompanieslistedinotherjurisdictions.TheBSEhasfourstockbrokingmembers;atpresenttheBSEhasmutualownership,butthereareplanstode-mutualise.

Non-Bank Financial Institutions Regulatory

Authority (NBIFIRA)

Capital Markets

Botswana Stock

Exchange

Stockbrokers

Central Securities Depository

Pensions

Pension/ provident

funds

Pension fund administrator

Pension fund

trustees

Insurance

Short-term insurers

Long-term (life) insurers

Insurance brokers & agents

Non-bank lenders

Microlenders

Finance/ leasing

companies

CIUs

CIU fund

CIU managers &

trustees

Other

Asset managers

Investment advisors

Custodians


24

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


as at april 2009, the following companies were listed:

Table 1: BSE Listed Equities

Company Sector market Cap (p mn, April 2009)

Domestic – Main Board

african banking corporation holdings (abch) financial services 220 barclays botswana financial services 4516 botswana insurance holdings ltd (bihl) financial services 1953 ChobeHoldings Tourism 197 Engen Fueldistribution 639 first national bank of botswana (fnbb) financial services 4871 funeral services group (fsg) personal services 150 Furnmart Distribution-Retail/wholesale 637 g4s security 163 letshego financial services 1797 olympia services 16 primetime property 216 rdc properties property 113 rpc data iT services 12 Sechaba Brewing 1849 Sefalana Distribution-Retail/wholesale 447 Sefcash Distribution-Retail/wholesale 280 standard chartered botswana financial services 5128 Turnstar property 521

Domestic – Venture Board

imara financial services 255 Foreign–MainBoard anglo american mining/resources 209442 blue financial services 799 iamgold mining/resources 23051 investec financial services 9034

Foreign – Venture Board

a-cap resources mining/resources 147 african copper mining/resources 44 african diamonds mining/resources 210 aviva mining/resources 83 cic energy mining/resources 752 diamonex mining/resources 58 discovery metals mining/resources 284

The Domestic Board is dominated by financial institutions (mainly banks), which account for 80% of totalcapitalisation. The foreign board comprises mainly mining & resources companies. The largest is anglo-american Corporation; althoughAnglo does not have any direct operations in Botswana, it is listed as a result of itsshareholdinginDeBeers,andindirectlyinDebswana.Otherdual-listedminingcompaniesallhaveprospectingor mining operations in botswana, and for all except iamgold, botswana is their main location of activity.


25

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Figure 16: Botswana Stock Exchange DCI

Source: BSE

BSEperformanceover the years hasgenerally beengood. In local currency terms, annual returnson thedomestic board averaged 24% a year (excluding dividends) from 1990 to 2008, while returns in us dollar terms averaged 16% a year. dual listed mining companies also showed strong growth in the period to 2007. However, incommonwithstockmarketsaround theworld, theBSEhadabadyear in2008,although thiswasthefirstfullyearofnegativeperformanceinlocalcurrencytermssincethemarketwasestablished.InUSDtermsthemarketfellby33%in2008,amajordeclinebutsmallerthanmostotheremergingmarkets;forinstance,theMSCIEmergingMarketsIndexfellby54%during2008.

Figure 17: BSE annual returns (Pula and USD, %)

Source: BSE; Econsult

The bse remains relatively small, with market capitalisation estimated at 35% of gdp at the end of 2008, and illiquid.

There isalsoanembryonicbondmarket. Like theequitymarket, it is small (bondmarketcapitalisation isequivalenttosome7%ofGDP),buthasbeengrowingsteadilyinrecentyears.Thedevelopment(orpotentialdevelopment)ofthebondmarketwasconstrainedformanyyearsbythelackofgovernmentpaper–giventhemanyyearsofbudgetsurplusesandlargeaccumulatedsavingsbalances,thegovernmenthadnoneedtoborrowfromthemarketsandhencetherewerenogovernmentbondsinissue.However,thegovernmentrecognised that it had a role to play in capital market development, and 2003-4 issued a range of government and quasi-government bonds. These bonds provided the basis for a risk-free yield curve, which in turnpromptedtheissuanceofarangeofcorporatebonds.Theseincludedbondsissuedbythebankstoenhancetheircapital structures (Tier IIcapital),andothers issuedbyfinancialparastatals (asasourceof funds forcreditactivities),non-financialparastatalsandmajorcorporates.Bytheendof2008,atotalof36bondsfrom14issuerswerelistedontheBSE,andaswelltherewereanumberofunlistedbondsinissue.Adistinctivefeatureofthemarketisthatnon-government(corporateandparastatal)bondsoutnumbergovernmentbondsintermsofnumberandvalue(althoughnotinliquidity),whichishighlyunusual.


26

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Althoughthebondmarkethasgrownintermsofnumberofbondsinissue,itfacesanumberofproblems.Liquidity is lowforgovernmentbondsandalmostnon-existent fornon-governmentbonds.Asa result theyield curve is insensitive to changing market conditions, and price formation is mainly dependent upon primaryauctions.Governmentbondsare issued throughprimarydealers (commercialbanks), anddespitetheirresponsibilityformarket-making,thereislittlesecondarymarketactivity.Lowliquidityalsoreflectsthe“buyandhold”strategyofinstitutionalinvestors,whoarethemainbondholders;thisinturnreflectsthelowlevelofgovernmentbondissuance,resultinginaseriousimbalancebetweensupplyanddemand,andthefearbybondholdersthatiftheytrademoreactivelytheywillbeunabletore-establishtheirpositions.Therearealsofewforeigninvestorsinthebondmarket;inothermarketsasubstantialforeignpresenceisamajorcontributortoliquidity.Forthebondmarkettobecomemoreactiveandliquid,asubstantialincreaseinthelevelofgovernmentbondissuanceisrequired.In2008,thegovernmentannouncedaP5billionbondissuanceprogramme,withregular(six-monthly)auctions,whichwouldapproximatelydoublethevalueofgovernmentbondsinissue.Giventhelikelihoodofbudgetdeficitsinthecomingyearsastheglobalfinancialandeconomiccrisisreducesmineralrevenues,itispossiblethatevenlargerbondissueswillberequired,whichwouldhavethepositiveeffectofboostingthebondmarket.

TheBSEisundertakinganumberofdevelopmentinitiativestoboostthecapitalmarket.AnewSecuritiesBillisbeingdrafted,whichwouldmodernisethelegalandregulatorystructureforthemarket.ACentralSecuritiesDepository (CSD) has been introduced,whichwill help improve settlement processes, and anAutomatedTradingSystem(ATS)isbeingplanned.BoththeCSDandATScanhandlebondsaswellasequities.TheBSEalso has a bond market development programme.

4.2 pENSION & pROVIDENT FUNDS

PensionfundsaregovernedbythePensionandProvidentFundsAct(Cap27:03),anduntilMarch2008wereregulated by the Registrar of Pension Funds at theMinistry of Finance and Development Planning. Theynow fall under the nbfira, and new legislation is planned. The most recent report of the registrar, giving detailsofpensionfundoperations,onlycoverstheperiodtotheendof2006.AsatDecember2006,therewere123registeredpensionfunds;fiveofthesewereumbrellafundswhichadministerpensionsforafurther118funds.ThepensionfundsectorisdominatedbytheBotswanaPublicOfficersPensionfund(BPOPF),afunded,definedcontributionschemeforpublicofficers.Attheendof2006,theBPOPFaccountedfor76%ofallpensionfundmembers,and70%oftotalpensionfundassets.OthersignificantfundsincludethoseofDebswana,thebanksandmajorparastatals.Around40%oftheformalsectorlabourforcearemembersofpensionfunds,althoughmembershipismuchhigherinthepublicsectorthanintheprivatesector.

The establishment of theBPOPF transformed the pension fund sector, aswell as the assetmanagementindustry.Thereareatpresentnospecificregulationsfortheassetmanagementsector,althoughitfallsunderthe general purview of the nbfira. almost all pension funds contract out their investment management to domestic asset management companies (although two of them contract directly with offshore managers for theoffshoreportionof their funds).Themajorassetmanagers, rankedapproximatelyby themagnitudeofassetsundermanagement,are:BotswanaInvestmentFundManagement(BIFM);InvestecAssetManagement;FlemingAssetManagement;StanbicInvestmentManagement(SIMS);CoronationFundManagers;AllanGray;AfricanAlliance;Metropolitan;andLegaeInvestors.

BIFM isassubsidiaryofBotswana InsuranceHoldingsLtd (BIHL),which is listedon theBSEand is54%ownedbySanlamofSouthAfrica.Flemingismajorityownedbylocalinvestors.Investec,SIMS,Coronation,AllanGray,AfricanAllianceandMetropolitanaresubsidiariesofSouthAfricanassetmanagementcompanies,whileLegaeislocallyowned.ThefirstsixmanageportionsoftheBPOPFportfolio,whichisbyfarthemostimportant client among pension funds. besides pension funds, asset managers also handle the assets of long-terminsurancecompanies.MostpensionfundsarenowDefinedContributionfunds,havingconvertedfrom(orreplaced)DefinedBenefitfundsoverthepastdecade.

Pension funds have experienced a rapid growth of assets under management (AUM), from P9 billion inDecember2002toP34billioninDecember2007,drivenbythefundingoftheBPOPFandgoodinvestmentreturnsduringthebullmarket–bothdomesticallyandoffshore-overthisperiod.AUMfellin2008,asbothdomesticandoffshoreequitymarketsdeclined,andwereP28billionasatDecember.


27

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Figure 18: Growth of Pension Fund Assets, Domestic & Offshore, 2002-08

Source: Bank of Botswana

Pensionfundsareentitledtoholdupto70%oftheirassetsoffshore.Thisreflectsthelackofabsorptivecapacityindomesticfinancialmarkets;concernsthatrequiringtoomuchtobeheld locallycouldcauseassetpricebubbles;andadesiretosecurethegreatestreturnsforpensionfundmembersbyallowingassetmanagersasmuchfreedomaspossibletoinvestinarangeofassets.WithveryhighsavingsratesinBotswana,highlevelsofliquidityinthebankingsystem,andextensiveinvestmentbypensionfundsinthedomesticequityandbondmarkets,therehavebeenrelativelyfewconcernsaboutsavingsbeinginvestedoffshore.Theshareofassetsheldoffshorehasbeengraduallyrising,from45%attheendof2002to60%attheendof2008.Offshoreinvestmentsareattractivebothbecauseofthemuchgreaterrangeofassetsavailablecomparedtodomesticmarkets-andhencediversificationbenefits-aswellasexchangerategains.

Giventherelativelyyoungageofmostpensionfundmembers,assetmanagershaveinvestedpredominantlyinequities,whichaccountfornearly70%oftotalassets.Theremainderissplitbetweenbonds(20%),cash/near cash (10%) and property (1%). The high proportion of domestic cash investments (mostly in bobc-linked accounts)reflectsthelackofotherdomesticinvestmentopportunities.

Oneofthemajorproblemsfacinglocalassetmanagersrelatestolifeinsurersandannuityproviders.Obtainingmatchingassetsforannuityliabilitiesrequiresdomesticgovernmentbond-typeassets;anyotherassetsincureither credit risk (for non-government issuers), currency risk (for non-pula assets), or duration risk (for shorter-termassets).Giventheshortageofgovernmentbondsinissue,assetmanagershavetotakeonmoreriskthanisdesirable,andfaceatrickytaskinbalancingthevariousrisks.

Figure 19: Structure of Pension Fund Assets (December 2008)

Source: Bank of Botswana


28

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


4.3 INSURANCE

The insurance industry is regulated by the Insurance Industry Act, and is defined as comprising insurers,reinsurers,brokers,agents,insurancesurveyors,riskmanagers,lossadjustersandclaimssettlementagents.However,detailedregulationandmonitoringisonlycarriedoutoninsurancecompanies,brokersandagencies.RegulationandsupervisionoftheindustryistheresponsibilityoftheRegistrarofInsurance;asofApril2008,this function was transferred from the mfdp to the nbfira.

OneofthemainrequirementsoftheInsuranceIndustryActisthatcompaniesarenotpermittedtoofferbothlong-term(life)andshort-term(non-life)insurance;hencethemaindistinctionintheindustryisbetweenthesetwo types of insurance companies. as at the end of 2006 (the date of the most recent report from the registrar of insurance), there were 13 registered insurance companies, of which 5 were long term and 8 were short term. Therewerealso32insurancebrokers(whichcantransactbusinessonbehalfofanyinsurancecompany),114corporateinsuranceagenciesand616individualagents(agentsrepresentspecificinsurers).

Table 2: Insurance companies operating in Botswana as at December 2006

Long-term (Life) Short-term (Non-life)

botswana life insurance ltd (blil) hollard insurance company of botswana

metropolitan life of botswana botswana eagle insurance

regent life botswana botswana insurance co. ltd (bic)

firstlife assurance mutual and federal insurance co of botswana

botswana insurance fund management (bifm) prefsure

regent insurance

export credit insurance & guarantee co. (BECI–BotswanaExportCreditInsurance)

sesiro insurance

Source: Registrar of Insurance (MFDP)

Ofthe13insurersasatDecember2006,11aremajorityforeignowned.BLILandBIFMaresubsidiariesofbotswana insurance holdings ltd (bihl), which is listed on the bse. although bifm is primarily an asset manager,itoffersinsurance-basedproductsthatenablethepoolingofinvestors’funds.BECIisownedbytheBotswanaDevelopmentCorporationandSesiroisacaptiveinsurerforDebswana.

GrosspremiumincomefortheinsuranceindustrywasP1742millionin2006;ofthis,P1213million(70%)wasforlifeinsurancepremiumsandP529millionfornon-lifepremiums.Short-terminsuranceisdominatedbymotorinsurance,accountingfor43%ofnon-lifegrosspremiumincome,whilstfirepremiumsaccountedfor25.3%.

Figure 20: Sources of Premium Income - Non-life Insurers (2006)


One of themajor costs facing Botswana insurers is reinsurance; given the small size of themarket, it isessential to lay off risks elsewhere. for short-term insurers, reinsurance premiums represented 34% of gross


29

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


premiumincome,whileforlifeinsurersitwasonly7%.ReinsurersdonotfallwithinBotswana’sjurisdictionandeffortstohavethemestablishofficesherehavenotbornefruit.Sincemostoftheinsurersaresubsidiariesofforeignownedcompanies,theyusereinsurerschosenbytheirholdingcompany.

Table 3: Insurers Income and Expenses (P mn, 2008)

Non-life Life Total

premiums 529.2 1 212.9 1742.1

claims 329.0 291.0 620.0

reinsurance premiums 182.2 79.0 261.2

management expenses 71.3 116.8 188.1


TheMotorVehicleAccidentFund(MVAF)isastatutoryfundprovidingthirdpartymotorvehicleaccidentcover.Itwasestablishedin1987,andisfundedbyalevyonfuelsales.Althoughitiseffectivelyashort-terminsurer,ithasaccumulatedsubstantialassets,whichamountedtosomeP2billionattheendof2007.Asastatutoryfundwithitsownlegislation,theMVAFisnotcoveredbytheinsuranceindustrylegislation.

4.4 NON-BANk LENDERS

Thenon-banklendingsectorisdividedintostatutoryfinancialinstitutionsandprivatecreditinstitutions.Thestatutory institutions include the national development bank (ndb), the botswana development corporation (BDC), and the Citizen Entrepreneurial Development Agency (CEDA), each established under dedicatedlegislation.Theprivatecredit institutionsare lenders that fund theiractivitiesoutofequity fundsor loans;becausetheyarenotdeposit-takingentities,theyarenotsubjecttotheBankingAct.

Statutory financial institutions

NDBwasestablished for thepurposeofpromoting theeconomicdevelopmentofBotswana in termsof theNationalDevelopmentBankAct,1963,andoffersprojectfinance loanstoBatswanaorBotswanaregisteredcompanies.Itisagovernment-ownedestablishmentoperatingunderthedirectcontroloftheBoardofDirectors,appointedbytheMinisterofFinanceandDevelopmentPlanning.NDBprovidesfinancialservicestobusinessesand entrepreneurs in the agriculture, commerce, tourism, manufacturing and real estate sectors. it has recently introducedarangeofretailproductssuchasmortgagesandunsecuredpersonalloans,thusmovingbeyonditstraditionalfocusonbusinesslending.NDBiscurrentlybeingconsideredforprivatisation.

BDCistheprincipaldevelopmentfinanceinstitutioninBotswana,andwasestablishedin1970asthemainagencyforthefinancingofcommercialandindustrialdevelopment.Itcanprovideequityparticipation,loanfinancing,guarantees,and theprovisionof factoriesorofficespaceorcommercial land.LikeNDB, it isagovernment-ownedestablishmentoperatingunderthedirectcontrolofaBoardappointedbytheMinisteroffinance and development planning. bdc can assist local, joint venture or foreign-owned companies. it has madeover100investmentsinsubsidiary,associateandaffiliatecompanies.

CEDAwasestablishedin2001,followingthewindingupoftheFinancialAssistancePolicy(FAP).CEDAwasformedtoprovidesubsidisedcredittoSMMEsalongwithtrainingandmentoringservices.Itisrestrictedtofully citizen-ownedenterprises.Thereareno restrictionson the typesofbusinesses thatmaybeassisted(it therefore contrastswith FAPwhichprovidednon-repayable grants butwas restricted tomanufacturingenterprisingandselectedagriculturalandserviceactivities).CEDAalsohasaVentureCapitalFundwhichprovidesassistancetolargerbusinesses,andwhichcanalsoassistjointventuresbetweencitizensandforeigninvestors.ItalsohasaCreditGuaranteeFundthatprovidespartialguaranteesforcommercialbankloanstoSMMEs, and a dedicatedYoung Farmers Fund,whichwas established to provide easy access to capitalbyyoungpeopletoengageinsustainableprimaryagriculturalprojects.UnlikeNDBandBDC,whichaimtooperateasprimarilycommercialentities,CEDAisheavilydependentuponcontinuedgovernmentsubsidies.Ithasahighlevelofnon-performingloansandthis,combinedwithinterestsubsidiesandthecostsoftrainingandmentoringservices,meansthatitdoesnotyethaveaviablebusinessmodel.Itisalsosubjecttoahighlevel of political intervention in its lending criteria and decisions.


30

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Credit institutions

ThereareanumberofformalcreditinstitutionsinBotswanathatprimarilyengageinconsumerlendingagainstthesecurityofpayrolldeductions(sometimesdescribedas“termlenders”).ThelargestoftheseisLetshego(Microprovident botswana ltd). The company commenced trading in 1998 and was listed on the botswana stock Exchangein2002.Letshego’sclientsareemployeesofthecentralandlocalgovernments,parastatalsorquasigovernmentandsomeprivatecompanies.Thebusinessmodelhasprovedhighlysuccessful,andLetshegonowhassubsidiariesoperatinginanumberofAfricancountries,includingSwaziland,Tanzania,ZambiaandUganda,withplanstorolloutintomanymore.AsecondtermlenderBlueFinancialServices,operatesinanumberofcountries inSub-SaharanAfricaand is listedontheJSE inSouthAfrica.Othertermlenders includePenrichEmployeeBenefits,whichoperatesincollaborationwithvarioustradeunionsandprovidesloanstoemployeesandmembers;itsassociatedcompanyPeoMicro;andFirstFunding.Theselatterentitiesarenotstrictlyspeakingindependent credit institutions, although they may operate independently. penrich and peo micro are part of CapricornInvestmentHoldings,whichalsoownsBankGaborone,andtheirloanshavenowbeenincorporatedintothebank’soperations,whileasimilarrelationshipexistsbetweenFirstFundingandFNBB.

There are also a large number of small “cash lenders”. Some of them aremembers of theMicrolendersassociation of botswana (mab), which is self regulated. This was founded in 1998 to promote the interests ofsmall-scalelendersandtomakesurethattherewasatleastsomecontrolovertheirbusinesspractices.RulesgoverningmembersoftheAssociation includethattheymusttradefromproperbusiness,andmustnotchargemorethan30percentinterestpermonth.Also,theymustalluseCompuscan,acentraldatabaseofloansthatoperatesoutofSouthAfrica.They’remeanttocheckallpotentialborrowerswithCompuscantomakesurethattheydon’talreadyhaveanoutstandingloanfromanotherlender.FinallytheymustalladheretotheAssociation’sCodeofConduct,whichshouldbedisplayedopenlyintheirpremises.

NBFIRA is in theprocessofdrawinguprulesandregulationsofbusinessoperation formicrolenders.Thiswill cover interest rates charged, capital requirements, formation of a national loans registry, auditors and accountants,leviesandfeespayable,andaimstomakealevelplayingfieldformicrolendersandbanks.TherulesarebeingbenchmarkedonthosefromSouthAfricaandNamibia.Estimatesarethatthereareabout125microlendersregisteredwithMicroLendersAssociationofBotswanaandabout75nonmembers.

Therelativesizes(assets)ofarangeoffinancialinstitutions,includingcommercialbanks,otherbanks,non-banklendersandpensionfundsareshowninTable4.

Table 4: Financial Institutions - Assets, December 2007

Name Type Assets (p mn)

BankGaborone Commercialbank 268.2 Barclays Commercialbank 10,703.8 Baroda Commercialbank 447.8 FNBB Commercialbank 10,161.3 StandardChartered Commercialbank 7,838.2 Stanbic Commercialbank 6,081.1 ABC Merchantbank 1,373.5 bbs building society 1,539.5 BSB Statutorybank 459.9 NDB Developmentfinanceinstitution 919.3 BDC Developmentfinanceinstitution 1,866.7 CEDA Developmentfinanceinstitution 828.6 letshego credit institution 811.9 MVAF Statutoryinsurer 2,012.5 life insurers (all) insurance companies 4 350.0 pension funds (all) pension funds 28,325.8

Notes: only includes institutions where quantitative data are available; CEDA data are for March 2008; figure for life insurers is an

estimate – the most recent published figure is for December 2006 . Source: Bank of Botswana, CEDA, Company reports


31

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


5. kEy iSSuES FAciNg ThE FiNANciAl SEcTORThereareanumberofkeyissuesfacingthefinancialsectorgoingforward,whichwediscussinmoredetailbelow.Theseincludeissuesofbankownership(includingthoserelatedtolocalandforeignownership,andprivatisation);bankchargesandprofitability;competitionandefficiency;potentialsourcesoffuturegrowth;changesinthemonetarypolicyframework;andpotentialchangesintheregulatoryregime.Wealsodiscusstheimpactofthe2007-8creditcrunchandtheglobalfinancialandeconomiccrisisontheBotswanabankingsector.

5.1 ThE ImpACT OF ThE GLOBAL FINANCIAL AND ECONOmIC CRISIS

Incommonwithbanksinmostdevelopingcountries,the“creditcrunch”andsubsequentglobalfinancialandeconomiccrisishadlittledirect impactontheBotswanabankingsystem.Therewereanumberofreasonsfor this, including thestructureof thebanks’balancesheets,bankprofitability,and the levelof regulatoryoversight.

ThebasicstructureoftheBotswanabanks’balancesheetwassound:asdiscussedearlier,theloan-to-depositratio is less than 50%, and there is relatively little use of wholesale markets or offshore funding sources. hence the banks have not been vulnerable to outflowsof funds –while depositsmaymove to other banks, thedepositbaseofthebankingsystemasawholeisrelativelystable.Hencethegrantingofloanshasnotbeenconstrained due to lack of funds.

Asalsodiscussedearlier, thebankshavebeenextremelyprofitable,andevenwithasmallrise inthe levelofnon-performingloans,thegeneralassetqualityhasremainedgoodandtherehavebeenminimallosses;hencebankshavenothadtousetheircapitalandreservestofinancelosses,unlikebanksinmajordevelopedeconomies.

Finally,theBankofBotswanahasmaintainedaneffectiverisk-basedregulatoryandsupervisorysystemthathaspreventedthebanksfromtakingonexcessiverisks.BotswanahasbeenimplementingtheBaselIrulesregarding capital requirements, and in fact the general level of capital requirements in relation to risk-weighted assetshasbeeninexcessoftheinternationallyagreedminimum.AsFigure21shows,theBotswanabankingsystemisoneofthebettercapitalisedbankingsystemsinAfrica.

Figure 21: Bank Capitalisation in Sub-Saharan Africa (2007)

Source: IMF


32

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Although therehasbeennodirect impactof theglobalcrisison theBotswanafinancial system, thereareindirectimpacts.First,Botswanabanksaresubsidiariesofinternationalbankinggroupsthathavegenerallytightened credit criteria and reduced their risk appetite in response to the crisis; hence there has been areductioninnewcreditapproval in late2008andearly2009.Theseexternalpressuresarebeingdrivenbyaseconddynamic,which is the impactof theglobaleconomicslowdownon theBotswanaeconomy.Forinstance,thebankshadbeguntoextendcredittominingcompaniesandrelatedactivitiessuchasdiamondcutting,butthesehavebeenamongstthesectorsworstaffectedbytheglobalcrisis,andtherehavebeensomeloanlossesinthesesectors.Thismaybefurthercompoundedbycutbacksingovernmentspendinginresponsetofiscalpressures,whichwillimpactonbusinessesthataredependentupongovernment-financedactivities (such as private educational institutions).

5.2 BANk OwNERShIp, AND pRIVATISATION OF STATE-OwNED FINANCIAL INSTITUTIONS

Allsevencommercialbanksareeitherwhollyormajorityforeignowned15.Thishashadsomeadvantages;mostofthebanksarepartoflarge,wellcapitalisedinternationalbankinggroups,andthishasprovidedstability,aswell as access to capital, resources and management expertise (this is one reason why botswana has no system ofdepositinsurance).Therehavealsobeengainswithregardtoaccesstotechnologyandimprovedefficiency.

At thesametime, thedominant roleof foreignownership in thebankingsectorhasexposedthebanks tocriticismthattheyareinsensitivetolocalconditions.Ithasoftenbeensaidthatwhilethebanksarehappytodobusinesswithinthenarrowconfinesofmediumandlargescalebusinesses,andwealthierindividuals,theydonotmakeenoughefforttobroadenaccesstobanking(toSMMEsandlow-incomeindividuals),andthattheyapplylendingconditionsthataretoostrict.Variouslocalgroupshaveconsideredmakingapplicationsforabankinglicence,althoughnonehavesuccessfullycompletedtheprocess,withconcernsarisingaboutaccess to the necessary technical and management expertise. nevertheless, the predominance of foreign ownershipinthebankingsectorwillremainatopicalissue,andtherewillcontinuetobeconcern.

Theonlylocalfinancialor“quasi-banking”institutionsarestate-owned.Inprinciplesomeofthesearetobeprivatised,includingBSBandNDB,alongwiththegovernment’smajorityshareholdinginBBS.Howthisistobedoneisnotyetresolved;considerationwasgiventomergingNDBandBSBbeforeprivatisation,butthelack of synergies and high prospective merger costs seems to have put paid to the idea. nevertheless, there issomepotentialforastate-ownedfinancialinstitutiontobecomeafully-fledgedlocally-ownedbankthroughprivatisationandrestructuring,althoughtheywouldstillhavetogothroughtheprocessofobtainingabankinglicence.ThePublicEnterprisesEvaluationandPrivatisationAgency(PEEPA)hascommissionedaconsultancystudytomakerecommendationsontheprivatisationofNDB,whichmaybethefirststate-ownedfinancialinstitutiontobeprivatised.ItisalsounderstoodthattheGovernmenthasagreedtoasproposalforBBStobedemutualisedandapplyforabankinglicence.

5.3 ThE COST OF BANkING: ChARGES AND INTEREST RATE SpREADS

InrecentyearstherehavebeenconsistentcomplaintsaboutthelevelofbankchargesinBotswana,buttowhatextent is this justified?Available researchonbankcharges in theregionsuggests that there issometruth in this16.Basedonasurveyin2000,theBankofBotswanaconcludedthatbankchargesinBotswanaarehigherthaninSouthAfricaandMauritius,whileacomparativestudybyBIDPAconcludedthatbankinginBotswanaismoreexpensivethaninSouthAfrica.TheCentralBankofLesothofoundthatBotswanabankswerethemostexpensiveinSACU,asdidastudybyGenesisAnalyticsforFinMarkTrust.Whileeachofthefourstudiescanbecriticisedtosomeextentongroundsofmethodology,theconsensusoftheirconclusions– thatbanking inBotswana is expensive - is striking.Unfortunately there arenomore recentdataon thecomparativecostofbanking.

15 - Three have a portion of local shareholding through being quoted on the BSE, and two are joint ventures with minority local partners.

16 - Central Bank of Lesotho (2003) Comparative Analysis of the Cost of Banking Services in the SACU Region (CBL Research Department paper); Genesis Analytics (2005) Measuring Access to Transaction Services in the Southern African Customs Union – an Index Approach (Paper prepared for FinMark Trust); BIDPA (2003) “Cost of Banking in Botswana”, BIDPA Briefing, January 2003


33

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Thisresultshouldbequalified,however,asBotswanaalsohasthehighestlevelofaverage(percapita)incomesintheSADCregion,andhenceitistobeexpectedthatbankchargeswouldbehigher.Nevertheless,concernaboutthelevelofbankchargesislikelytopersist,especiallywhencombinedwiththecontinuedhighprofitsmentionedearlier.Andwhile it isunlikely thatstatutorypricecontrolsonbankchargeswillbe introduced,“moralsuasion”isappliedtothebanksbyboththeBankofBotswanaandtheGovernmenttorestrainthegrowthofbankcharges.

Arelated issueconcerns interest ratespreads (lendingminusdeposit rates),whicharealsoconsideredbysometobeexcessive.Spreadshavebeenwideningovertheyears,althoughtheyarenotparticularlyhighbyglobalstandards(seeFigure22).Thewideningofspreadsmayreflectinsufficientcompetitivepressures,butcouldalsoreflectthechangingstructureoflending,suchastherisingproportionofunsecuredhouseholddebtintotallending,whichtendstoattracthigherinterestratesthansecureddebt.Duetoconcernsabouthighandrisinginterestratespreads,theBankofBotswanahasrecentlyreintroducedcontrolsoninterestrates;asofMarch2009,amaximumspreadof4%ispermittedbetweentheBankRateandabenchmark(91day)depositrate. at the end of 2008, the relevant spread was around 6.5%.

Figure 22: Interest Rate Spreads (1991-2007)


5.4 TRENDS IN BANkING CONCENTRATION AND COmpETITION

Thereformand liberalisationmeasuresadoptedover thepast twodecadeshavehadapositive impactonbankingcompetition.Asdiscussedabove,severalnewbankshavebeenestablished,and–notwithstandingtheconsolidationthatfollowedtheearlierroundofnewentryinthe1990s–theindustryhasbecomemorecompetitive.FNBBhasgrown toasize that iscomparablewith thatofBarclaysandStandardChartered,andwhereasStanbicwasinitiallycontenttobeanicheplayer,ithasrecentlybeentakingonthethreelargerbanksmoredirectly.Over thepastyear,FNBBandStanbichavebeenparticularlysuccessful inattractingnew deposits as a result of the changed regulations regarding the holding of bobcs. The net result is that the dominanceof the industryby the twooldestbanks,BarclaysandStandardChartered,hasgraduallybeenwhittledaway.For instance,whilethesetwobanksaccountedforwellover95%oftotalbankingassets inthelate1980s,bytheendof2007theyaccountedforonlyaround50%ofbankingsectorassets,loansanddeposits.WhileBarclaysremainsBotswana’slargestbank,FNBBhasovertakenStandardCharteredasthesecondlargestbankonallthreemeasures.


34

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Figure 23: Assets by Bank, December 2007

Source: Company reports; Econsult

Competition is a complex phenomenon which cannot be directly measured. However, the degree ofconcentration in an industry – the extent to which it is dominated by a small number of large firms – isoftenusedasaproxy.ConcentrationmeasuresforBotswanashowthatthelevelofconcentrationhasbeendeclining, as FNBBandStanbic have grown relative toBarclays andStandardChartered (see Figure 24).Figure25showshowmarketshareshavebecomemoreequallydistributedovertime.Thesedevelopmentsaresupportiveofrisingcompetitionamongstthebanks.Nevertheless,despitenewentrantstothebankingsector,concentrationremainshigh,althoughperhapsnotexcessivelysobyregionalstandards17.

Figure 24: Banking Sector Concentration (1994-2007), Figure 25: Distribution of Banking Deposits – Shares of Largest Banks

Source: Company reports; Econsult

Competitionislikelytoincreasefurther,giventhatABCisintendingtoconverttoacommercialbankandrolloutaretailnetwork.Thereisalsolikelytobeatleastonespecialiseddiamond-financingbankestablishedtosupportthegrowthanddiversificationofthediamondsector.

Morequalitative indicatorsalsosuggest that thedegreeofcompetitionhasbeen risingover thepastfifteenyears.Thebankshavebeenactivelyintroducingnewproducts,makinguseoftechnology,withFNBBtypicallythefrontrunnerinthisregard(itwasthefirsttointroduceinternetandcellphonebanking,andtolinkupwithretailstoresforits“mini-ATM”service).Whileinterestratespreadsasrecordedby“headline”ratesremainhigh,therearereportsofverycompetitivemarketsforcertainproductsthatenablelargercustomerstonegotiateratesthataremuchmorefavourablethanadvertisedrates(with,forinstance,loansavailableatwellbelowprimerates).

17 - In 2004, the two largest banks had a market share of 63%, and the next two a share of 32%. By comparison, in Mauritius the largest two banks had a market share of 90%, and in South Africa the top four banks had a market share of 85% (Soylemezoglu, A. Botswana’s Financial Sector: Issues and Prospects, background paper prepared for World Bank/BIDPA Study on Export Diversification in Botswana, 2004).


35

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


5.5 COmpETITION, pROFITABILITy AND LICENSING pOLICy

Asdiscussedabove,theprofitabilityofBotswanabanksisextremelyhigh,despiteevidencethatthebankingsectorhasbecomemorecompetitive(itis“contestable”intheterminologyoftheeconomicsofcompetition).Indeed, this is one of the perennially controversial issues regarding the banking system, especially givenconcernsrelatingtothelevelofbankchargesandaccessissues.BanksinBotswanaareextremelyprofitable,even by African standards where returns on assets and equity are high by world standards. Lending inBotswanaisnotparticularlyrisky,sohighreturnscannotbeexplainedbyrisk.

Partoftheexplanationforhighprofitsisthattechnologicaladvanceshaveenabledbankstobringunitcostsdown–withmostofthebankstakingadvantageofbeingpartoflargeinternationalgroupsandhencehavingaccesstosuchdevelopments–whilecompetitionhasnotbroughtpricesdowncommensurately.

Persistentlyhighprofitsareindicativeofmarketfailure.Neverthelessthereissomeevidencethatcompetitionishavingitsdesiredeffect,andthattheentryofnewbanksandincreasedcompetitioninthebankingsectorisbeginningtobringprofitsdown,aswouldbeexpected.

Thefactthatthelicensingregulationspermitnewentrants,subjecttomodestcapitalrequirementsandprudentialconditions,shouldprovideanimportantcheckonprofits.Thesmallsizeofthemarket,however,mayposealimitonnewentry,inthattheBotswanabankingmarketmaynotbebigenoughtoaccommodateverymanyfull-servicecommercialbanks.Potentialcompetition,however,may increasinglycome fromdifferent typesofbanks,notnecessarilyofferingafullrangeofcommercialbankingservices.Technologicaldevelopments(suchascellphonebankingande-money)alsohaveimplicationsforthetraditionalbankingmodel,andenablesomebankingandmoneytransmissionservicestobeconductedbyotherentities.Whetheralternativestotraditionalbankswillenterthemarketdependson,amongstotherthings,banklicensingpolicy.Asaresult,theremaybeargumentsformakingthebanklicensingregulationsmoreflexible,inordertoaccommodatetheentryofnewtypesofbankingservicesintothemarket.

5.6 ThE FUTURE OF BOBCS

TheroleofBoBCsinthebankingsectorhasbeenimportantandcontroversial.Their fundamentalpurposehasbeentoabsorbexcessliquidityinthefinancialsector.Indoingso,theyhaveprovidedthebankswithanalternativeasset,andhavemeantthatbankshavenothadtopursueundulyriskyorpotentiallylowreturn(onarisk-adjustedbasis)lendingopportunities.BecauseBoBCinterestrateshavebeenrelativelyhigh,earningsonBoBCshavebeenanimportantcontributortobankprofits.

BoBCsalsoprovideabenchmarkinterestrate,byinfluencingdepositinterestratesaswellastheopportunitycostof loanable funds.Hencetheyhavebeenan importantmechanismfor implementingmonetarypolicy,bothbyenablingtheBoBtotransmitinterestratepolicypreferencestothemarket,andbyrestrainingcreditgrowthandhenceaggregatedemandgrowthandinflationarypressures.

ThebankshavebeensubjecttoextensivecriticisminthecontextofBoBCs,notablythattheyinvestinBoBCsratherthanseekingoutlendingopportunitiesortakingrisks,andthattheyaretooreliantfortheirprofitsonincomefromBoBCs.Muchofthecriticismismisplaced, inthatbanksaresimplyrespondingtothepricesand incentives thathavebeen intentionallyoffered through theBoB’smonetarypolicy,whichhashad theobjectivesofkeeping interest rateshighand, throughabsorbingexcess liquidity, restrainingcreditgrowth.Lending opportunities that provide the bankswith a better return than BoBCs can secure funds, but the“hurdle”rateofreturnthatsuchopportunitiesneedtopassishighasaresultoftherisk-freerateonBoBCs.Tothatextent,thebankshavebeenfortunatebeneficiariesofmonetarypolicyanditsimplementation,especiallysincethechangesintroducedinMarch2006whichrestrictedBoBCstobanksonly,andstrengthenedtheirposition vis a vis the holders of liquidity.

a related issue is the question of how this situation is likely to persist. excess liquidity is not something that is likely to disappear in a hurry, although changes in savings rates, the growth of lending opportunities and relative preferences for pula and foreign currency assets may have an effect over time. nevertheless, the combinationof relativelyhigh real interest rates (reflecting tightmonetarypolicy tobringdown inflation),apeggedexchange rateandcapitalmobility (noexchangecontrols)will tend toattract capital inflows from


36

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


abroadwhichwillcontributetoexcessliquidity.Whileexcessliquiditypersists,sometypeofmechanismforabsorbingitwillberequired,althoughitmaynotnecessarilybeBoBCs–similarresultscouldbeachievedthroughtheissueofTreasuryBills(ormorebonds)bygovernment.Fortheforeseeablefuture,somekindoflow-riskinvestmentinstrumentusedtoabsorbexcessliquidityislikelytoremainavailabletothebanks,andinterestratesonsuchaninstrumentarelikelytoremainhighuntilinflationmovestoastructurallylowerlevel.

5.7 ThE ChANGING mONETARy pOLICy FRAmEwORk

TheBankofBotswana’s 2008MonetaryPolicyStatement (MPS) introduced somepotentially far-reachingchanges to the monetary policy framework, although it will take some time to see how much difference the changes make in practice.

The key features of the old monetary policy framework included:

• a short-term (annual) inflation objective, and a medium-term inflation objective, based on expectedinflationratesofmajortradingpartners;theattainmentoftheinflationobjectivewouldthereforeresultinthemaintenanceof internationalcompetitiveness (bymatching international inflation); thiswaschangedslightly in recent years following the introduction of the crawling exchange rate peg, which allows the Botswanainflationtargettobeslightlyhigherthaninternationalinflation;

• themainmonetarypolicyinstrumentwasshort-terminterestrates(BankRate/BOBCrate);

• theintermediatetargetwastherateofgrowthofbankcredit;

• monetarypolicychangesweredeterminedonthebasisoftheactualrateofinflationvisavistheobjective,and the rate of credit growth vis a vis the intermediate target, as well as the growth rate of government spending and an assessment of real economic activity.

The changes introduced in the 2008 mps include:

• droppingtheannualinflationobjective,andhenceforthfocusingonlyonthemediumtermobjective;

• droppingtheintermediatecreditgrowthtarget;

• monetarypolicychangeswillbedeterminedonthebasisofthedeviationbetweenforecastmedium-terminflation and themedium-termobjective, i.e. policywill be adjusted in order tobring themedium-terminflationforecastinlinewiththeinflationobjective;

• therewillbelessfocusonmeetingshort-termobjectivesforinflationandcreditgrowth.

Theoverall impactof thesechangesshouldbepositive.Theprevious focusonshort-termobjectiveswasproblematic,inthatmonetarypolicychangesworkwithafairlylonglag(typically12-24months)andhenceanychangesmade in responsetocurrent inflation (in relation to theannual target)wouldnothavehadaneffect within the desired time frame. so moving towards a medium term target makes sense in terms of the timelagsinvolvedintheimpactofmonetarypolicy.Therehavealsobeenconcernsovertheusefulnessofcredit growth as an intermediate target, its responsiveness to changes in monetary policy and its links to inflation-i.e.whetheritactuallyfunctionedasanintermediatetargetasintended.Thenewframeworkshouldenableamoremeasuredmonetarypolicyresponsetochangesininflation,andisalsomoreinkeepingwithinternational practice.


37

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Forthechangesinmonetarypolicytobeeffective,however,thereareseveralkeyrequirements:

• thedivergencebetweenthemedium-terminflationforecastandthemedium-terminflationobjective–setinthesamewayasinthepast-willbeacrucialdeterminantofpolicy;hencethequalityoftheinflationforecast becomes crucial, and this in turndependson thequality of theBank’smedium-term inflationforecastingmodel;

• whileshort-terminflationmodellingandforecastingisquiteeasy,beingprimarilymomentumdriven,medium-termforecastingismuchmoredifficult;itdependsuponbothhighqualitymodelling(i.e.amodelwhichcanbeshowntoperformwellinforecastingonthebasisofhistoricaldata)andtheabilitytoaccuratelyforecastarangeofrealactivityvariables(e.g.therateoffutureeconomicgrowth,thelevelofcapacityutilisationintheeconomy,productivitygrowth,governmentspending,andrealandnominaleconomicshocks);italsodependsonthequalityofthestatisticaldataonwhichthemodelisestimated;

• themodelshouldalsobecapableofproducingarangeofforecastsunderdifferentscenarios,withdifferentprobabilitiesattached;

• thecredibilityofmonetarypolicyactionswouldbeenhancedifBoBpublishesitsinflationforecasts,andindue course details of the model itself.

Thechangesrepresentapartialmovetowardstheadoptionofinflationtargeting.Inparticular,theadoptionofamediumterminflationtarget/objective,andtheuseofamodelandmedium-termforecaststodeterminepolicychanges,areacommonfeatureofinflationtargetingregimes.

however, there are key differences which mean that the new monetary policy framework is some way from being a fully-fledged inflation targeting (FFIT) regime.One of themost crucial aspects of FFIT is that theinflationtargetmustdominateallothermacroeconomicpolicyobjectives, includingexchangerateorfiscalpolicyobjectives.Botswanaofcoursemaintainsapeggedexchangerate,determinedbygovernment,andBoBdoesnothavecontroloverthis importantcomponentofmonetarypolicyanddeterminantof inflation.FFITcountriesallhavefloatingexchangerates.Inaddition,fiscalpolicyisnotmanagedsoastominimiseitsinflationaryimpact.Furthermore,thereisnoclearmandateforBoBtopursuepricestabilityaboveallotherobjectives(whetherastatutoryobjectiveorastatementofgovernmentpolicy),andBoBcannotatpresentbeheldfullyaccountableforachievingthetarget.

Inflation targeting has generally been quite successful in achieving low inflation across a wide range ofcountries,althoughthecurrentenvironmentofcost-driven increases inglobal inflationwillprovide inflationtargetingregimeswithaseveretest.However,ithasgenerallybeenadoptedbymediumorlargeeconomies,andthereislimitedexperienceofitsuseinsmallopeneconomiessuchasBotswanawhereinflationisprimarilyimportedandhencedeterminedbyexternalfactors.

The2008monetarypolicychangesinBotswanacanbeseenasa“halfwayhouse”towardstheadoptionoffullinflationtargeting.Whetheritworksdependscruciallyontheperformanceoftheinflationforecastingmodeland itsmodellingof themonetarytransmissionmechanism,whichwillbecomeapparentoverthenext2-3years. however, the adoption of ffiT would depend on much more than this, as it would require reform of the bank of botswana act, and an explicit commitment to the framework from government. it would also require a movetowardsmuchgreaterexchangerateflexibility,witheitheramarket-determinedfloatingexchangerate,orattheveryleastanacceptancethatintheeventofconflictbetweenexchangerateandinflationobjectives,thelatterwouldtakeprecedence.Amoreflexibleexchangeratepolicywouldinturnrequireanewmechanismforbuildingupforeignexchangereservesandsavingmineralrevenues,andwouldalsoruntheriskthattheexchangeratewouldappreciate,leadingtocompetitivenessproblemsofthekindthatemergedpriortothedevaluationsof2004and2005.Furthermovementalongtheroutetoinflationtargetingwouldthereforehavemajorimplicationsfortheeconomicandmonetaryenvironmentwithinwhichthebanksoperate.


38

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


5.8 SOURCES OF FUTURE GROwTh

Oneofthekeyissuesfacingthebankingsectoris,afteryearsofrelativelyfastgrowth,whataresourcesofpotentialfuturegrowth?Oneofthemainsourcesofrecentgrowth–lendingtothehouseholdsector-maybesaturated(albeitperhapstemporarily),givenrisingarrearsratesandconcernaboutover-borrowingandthelevelsofhouseholddebtburdens,evenifbyinternationalstandardshouseholddebtratiosmaynotbehigh.Three areas of potential growthmay be considered: the low income/unbankedmarket; newopportunitiesresultingfromtechnologicalchange;andunder-servedbusinesssectors.

a. potential of low-income/underbanked market

“Accesstobanking”isatopicalissueinBotswana,asinmanyothercountries,reflectingconcernsthatthebankingsystemonlyservicesa relativelysmallproportionof thepopulation.Dataonaccess tobanking isavailablefromtheBotswanaFinScopesurvey,carriedoutin2004,andshowthat18:

• 43%ofthepopulationwere“banked”,inthattheycurrentlyusedatleastonebankingproduct,and57%were“unbanked”;

• therearemajordifferencesbetweenthecharacteristicsofthebankedandtheunbanked;

• thereisrelativelyhigherusageofbankingamongsturbanresidents,headsofhouseholds,well-educatedpeopleandthosewithhigherincomes;forinstance,57%oftheurbanpopulationisbanked,asare81%ofthoseinfull-timeemployment;

• malesaremarginallymorelikelytousebanksthanfemales;

• usageofbankingisrelativelylowamongsttheruralpopulation,theunwaged,theyoungandtheelderly,andthosewithlesseducation;forinstance,only37%oftheruralpopulationarebanked.

Whiletheresultonaccesstobankingindicatethatmorethanhalfofthepopulationdonotmakeuseofbanks,itisusefultoplacetheresultincomparativeperspective.FinScopesurveysinSouthAfricaandNamibiagiveslightlyhigherlevelsofaccesstobanking,at47%and51%respectively.Elsewhereinsub-SaharanAfrica,bankingpenetrationismuchlower,especiallyinlowincomecountries:theproportionofthepopulationwithaformalbankaccountisestimatedat2%inAngola,10%inKenya,1%inMadagascar,5%inTanzania,6%inUganda,and17%inZimbabwe19.

InBotswanaaselsewherethereispressuretoextendbankingtoagreaterproportionofthepopulation.However,this isnot justasocialandpolitical issue,as internationalevidenceshowsthatgreaterfinancialdepth,andenhancedaccesstofinance,improveseconomicgrowthpotentialandcancontributetopovertyalleviation.

SouthAfricahasbeenoneofthemostactivecountriesintheregionintermsofimprovingaccesstobanking,anda“FinancialAccessCharter”hasbeenagreedbetweenthegovernmentandvariousfinancialinstitutions,withcommitmentstovariouspoliciesandtargets.OneofthefirstinitiativesundertheCharterwastointroducethe“Mzanzi”account,alowcoststandardisedproductavailableacrossthebankingsector,aimedatfirst-timecustomers.SimilarinitiativesmayberelevantinBotswanaandothercountriesoftheregion.

Theconventionalbranchbankingmodelisunlikelytobeasuitablevehicleforextendingaccesstobanking,giventhedifferentcharacteristicsoftheunbanked;thecostsofbranchbankingaretoohigh(bothintermsofinfrastructureandpersonnel),andtheresultingcost-coveringfeelevelswouldmakebankingunaffordableto low incomegroups.Henceotheroptionsmayneed tobeconsidered, includingpartnershipswithotherentitiesthathaveadistributionnetwork(suchasthePostOfficeorretailstores),ortakingadvantageofnewtechnology.InBotswana,accessisparticularlyaprobleminthelessdenselypopulatedareas,andprovidingbankingservicesthroughalternativedistributionmechanismsmaybeonewayofaddressingthis.

18 - FinScope 2004 was a representative nationwide survey of financial usage and related issues, co-ordinated by FinMark Trust (www.finmark.org.za), and funded by a consortium of Botswana financial institutions. An updated FinScope survey was being undertaken in early 2009, with the results expected in the second half of the year.

19 - Source: IMF Regional Economic Outlook, Sub-Saharan Africa, May 2006, p.69. It should be noted, however, that in many countries the quality of data on usage of financial services is poor.


39

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


b. Technology (e.g. cellphone banking)

Mobileor cellphonebanking is seenasone importantway toextend the reachofbanking in low incomecountries.Mobilebankingplatformsprovidewayofreachinglargenumbersofcustomersonalowunitcostbasis,andcanprovidearangeofservices,includingbillpayment,accounttransfers,person-to-person(p2p)transfers, government transfers (such as social welfare payments, pensions etc.), cash withdrawals (via merchants or aTms), and e-money (cash loaded onto smartcards or cellphone sim cards). under conventional licensinglegislationsuchfacilitieshavetobeofferedbybanksonly(becauseofrestrictionsondeposittaking),incollaborationwithmobilecompaniesandmerchants.Changesinlicensingregulations,orexemptions,mayenablemobilebankingtobeprovidedbynon-bankproviders.

Considerable success has been achieved in the Philippines, where Globe Telecom’s G-Cash service,established in 2004, now provides mobile banking services offering money remittance, donations, loansettlement,disbursementofsalariesorcommissions,andpaymentofbills,productsandservices.Safaricom’sM-PesamoneytransferserviceinKenyahasbeenarunawaysuccesssinceitslaunchin2007.BothG-CashandM-Pesaareprovidedbycellphonecompaniesandnotbanks,withtheagreementofbankingregulatorsinbothcountries.ThereareseveralcellphonebankingservicesavailableinSouthAfrica,includingWIZZITandMTNBankingwhichprimarily target theunbanked,while thefourmainbanksalsooffercellphonebankingchannels for their existing customers.

CellphonebankingmayhaveconsiderablepotentialinBotswana,wherecellphonepenetrationisamongstthehighestinsub-SaharanAfrica,at98per100peoplein2008)20. The high take up of cellphones in botswana suggeststhatthepopulationisreadytoadoptnewtechnology,apointthatisreinforcedbythefindingfromthe finscope survey that 75% of respondents were prepared to learn how to use new technology. fnb establishedacellphonebankingoperationinlate2006,althoughthiswastargeted(atleastinitially)atexistingcustomersratherthantheunbanked.

Smartcardsalsoofferconsiderablepotential forpaymentsservices,especially forsocialwelfarepaymentssuchasold-agepensions,andvirtualbankaccounts.

c. Under-served sectors

OnenotablefeatureoftheBotswanabankingsectoristhathistoricallyithasnotlentanysignificantamountstothetwolargestsectorsofeconomy,miningandgovernment.Governmentitselfhasgenerallyrunbudgetsurplusesand,incontrasttomanyothercountries,hasnothadtoraisefundsfromthebankingsystem,orfromthefinancialsectormoregenerally.Intheminingsector,diamondproductionhasbeenhighlyprofitable,and there has been little or no need for bank funds, with capital investment financed from cash flow orby shareholders. By contrast, in the copper-nickel sector, the largestmining company –BCL – has beenunprofitableandhasgenerallyreliedupongovernmentforfunding.

This situation is changing, with new mining projects being developed. While exploration projects arepredominantlyfundedbyrisk/equitycapitalratherthanbankloans,asprojectsmovetowardstheproductionstagethenbankloansmaybeneeded.Furthermore,mining-relatedprojectssuchasmineralsprocessingmayalsobesuitableforbankfinancing.Unfortunatelytheexperiencesofnewly-establishedminingandprocessingfirmshasnotbeenencouraging,withnewcopperanddiamondminingoperationssufferingasa resultofthe global recession,with losses for both loan and equity financiers. There has been a similar storywithdiamondcuttingoperations.Nevertheless,thelonger-termfutureformininginBotswanaisbright,andtherewillundoubtedlybeopportunitiesforlendingopportunitiestothesector,whetherforestablishedcommercialbanksorspecialisedentitiessuchasdiamondbanks.

ThereisalsochangeinGovernment’sfinancialneeds.Thesharpdeteriorationinpublicfinancesin2009-10islikelytoresultinlargebudgetdeficitsandfurtherborrowingthroughbondissuance,whichwillsupplementearlierbondissuesthatwereundertakenpurelyforcapitalmarketdevelopmentpurposes.

20 - Source: Botswana Telecommunications Authority


40

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


5.9 REGULATORy ISSUES

BotswanahasestablishedaneffectivesystemofbankregulationthroughtheBankofBotswana,whichhascontributed to thestabilityof thebankingsystemover theyears.However, anumberof regulatory issueshaveemergedinrecentyearswhichmayleadtochangesintheregulatorystructureforbanks.Inaddition,theNBFIRAisintroducingnewregulationsforpreviously-unregulatedactivities.Thekeyissuesandpossiblechangesincomingyearsaresummarisedbelow:

Deposit insurance: botswana does not have a system of formal deposit insurance, and there has never beenasituationofbankfailurethatwouldhaveledtoacallonsuchasystem.Furthermore,therehasbeenarequirementthatparentcompanieswouldbacktheirBotswanasubsidiariesintheeventoffinancialdistress.However,theeventsof2008-9andthecollapseofbanksandfinancialinstitutionsthatwerepreviouslythoughttobesound,plustheentryofnew,smallerbanksintotheBotswanamarket,mayleadtoareconsiderationofthisposition.Adepositinsurancesystemwouldneedtobefundedbyaninitialcapitalcontribution(mostlikelyfrombanksandgovernment)andongoingpremiumsfrominsuredbanks,andwouldthereforeleadtoanincreaseinthecostofbanking.Besidestheneedtobringallinstitutionsonboard,agreatdealofpreparatoryworkwouldbeneededtoestablishadepositinsurancesystemsuitedtoBotswana,andhenceitwouldtakesome time to get such a system up and running.

Contingency plans for systemic financial distress: recent events also show the need for contingency plans, preparedinadvance,thatcanbeactivatedintheeventofthedistressorfailureofasystemicallyimportantfinancialinstitution,whichcouldpotentiallythreatenthestabilityoftheentirefinancialsystem.

International regulatory framework:mostcountriesemployarisk-basedsystemofbankingregulationandsupervision,whichentailsidentifyingthemostimportantrisksfacingfinancialinstitutionsandensuringthatadequate measures are in place to deal with such risks. it also entails risk-weighted capital requirements, wherebythelevelofregulatorycapitalthatbanksarerequiredtoprovidedependsonthelevelofriskassociatedwithvariousassetsontheirbalancesheet.Bankingsupervision isgenerallybasedaroundthe“BaselCorePrinciples”,drawnupundertheauspicesoftheBankforInternationalSettlements(BIS).Inrecentyearsanewsetofrules–BaselII-forcapitalrequirementsandriskassessmenthasbeendrawnup,andmostcountriesareintheprocessofimplementing,orpreparingtoimplement,thesenewrules.However,thefinancialcrisishasexposedsomepotentialflawsintheBaselIIsystem,andthesemaynowneedtoberevised.Moregenerally,theacknowledgementthatgapsinthesystemoffinancialregulationcontributedtotheglobalfinancialcrisismeans that new regulations are likely to be introduced covering previously-unregulated activities such asinvestment banks and hedge funds. This could eventually have implications for the structure of financialregulation in botswana.

Non-bank regulation: thenewnon-bankregulatoryauthority,NBFIRA,has initially takenoverpre-existingregulationscoveringthecapitalmarkets(stockexchange,brokersetc.),insuranceandpensionfunds.AmongstNBFIRA’smanytasksarethemodernisationoftheseregulationsandtheintroductionofnewregulationsforpreviously unregulated activities. for instance, a new securities bill is under preparation, which will replace the bse act and deal with capital market regulation. new regulations will cover asset managers, pension fund trustees,andnon-banklenders.Whiletheformofthesenewregulationsisasyetunclear, it is likelythat itwillfollowinternationalbestpracticeandwillbringmorestabilitytotherespectiveindustries,andwillfocusparticularly on consumer protection.


41

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


6. CONCLUSIONS

TheBotswanabankingsectorhasbeengrowinginbothsizeandscopeinrecentyears.Frombeingarelativelyuncompetitiveduopolyinthelate1980s,theentryofnewbankinginstitutionsduringthe1990stransformedthe competitive environment and introduced considerable product and service innovation. By 2007, thebankingsectorcomprised four reasonably largebanks (at leastbyBotswanastandards), and four smallerones(includingonemerchantbank).Inaddition,severalotherfinancialinstitutionsplayanimportantroleinsegmentsofthebankingmarket, includinggovernment-ownedfinancial institutions,non-banklenders,andpension funds, each providing various kinds of competition.

Increasedcompetition in thebankingsectorhasbeenstimulatedbyanumberofchangesover theyears,includingamore liberal licensingregime,broadermacroeconomicpolicychanges (suchastheabolitionofexchange controls) and technological changes. The growth of the economy, and rising income levels, have alsoprovidedmoreopportunitiesforbanks.Thefactthatvalueaddedgeneratedbythebankingsectorhasbeengrowingfasterthantheeconomyasawholeisexactlywhatwouldbeexpectedasboththeeconomyandthefinancialsectorbecomemoredynamicanddiversified.

Notwithstanding increased competition, the banking sector has remained exceptionally profitable, resultswhichmayappeartobeinconsistentwithincreasedcompetition.Oneexplanationmaybethattechnologicaldevelopmentsthatthebankshavebenefitedfromaspartoflargeinternationalbankinggroupshaveenabledthemtobringcostsdown,butcompetitioninwhatremainsarelativelysmallmarkethasnotbeensufficienttobringpricesdowncommensurately.Profitshavealsobeensupportedbytherelativelyhighinterestratesinrecentyears–focusedonbringingdowninflationtointernationallycomparablelevels–whichenhancesthemarginthatbanksearnbetweenlowcostdeposits(especiallynon-interestbearingcurrentaccountdeposits)and interest-earning assets. other changes, especially the change in the bobc regulations in early 2006 that restrictedBoBCholdingstobanksonly,havealsoprovidedthebankswithawindfallprofitsgain.However,thereissomeevidencethatbankingprofitabilityhasbeenreducedin2007and2008ascompetitionintensifies.

TowhatextentwilltheprofitabilityoftheBotswanabankingsystembemaintainedoverthecomingyears?Itislikelythattherewillbearangeofpressurestendingtoreduceprofitability23:

(i) competitionislikelytoincreasefurther;theBankofBotswanareceivesasteadystreamofenquiriesfromboth local and international groups regarding banking licences, and it is likely that new bankswill belicensed–albeitnotinlargenumbers–overtime.Theestablishmentofnewfinancialinstitutionswillbeevenmorelikelyifthelicensingregulationsarerevisedtoaccommodateabroadervarietyoftypesofbanks;

(ii) severalofthegovernment-ownedfinancialinstitutionsarelikelytobeprivatised,andoneormoreofthesecouldformthebasisforanewfinancialservices/bankinggroup;

(iii) while technologicalchangehasprovidedopportunities for banks to improve theirefficiencyandofferinnovativeservices,italsochangesthebankinglandscapeandoffersopportunitiesfornewcompetitorswhomaynotlooklikeconventionalbanks,suchasspecialisedcellphonebankingoperationsande-moneyproviders,especiallyifthelicensingregulationsaremademoreaccommodative;

(iv) finally,interestratesshoulddeclineovertime,andthiswillalsotendtoreducebankprofits.

Banksarealsounderpressuretoextendtheirservicestothe“unbanked”population,comprisingaround55%ofadults.Thereareexpectationsthatbankingwillbecomemoreinclusive,especiallygivenhighprofits,andassistinbringingpoorersegmentsofthepopulationintotheeconomicmainstream.Indoingso,bankswillhavetomoveawayfrombranch-basedbankingandutiliseinnovativeservicedeliverymechanismsthatcanworkefficientlyinareasoflowerincomesand/orlowerpopulationdensities.

Otherpotentialweaknessesof thebankingsector include theveryhighproportionof theirbalancesheetsmadeupofBoBCs,andtheprobablesaturation–atleastintheshortterm–oftheconsumerlendingmarketthathasbeenoneofthefastestgrowingsegmentsofthemarketinrecentyears.But,overtimethereshouldbeconsiderablescopeforgrowth,giventhattheBotswanabankingsectorisstillsmallineconomictermsforan upper-middle income country.

23 - That is, profitability in terms of the Rate of Return on Assets or Return on Equity is likely to be pressurised. Profits in Pula terms are, however, likely to keep on rising as banking balance sheets continue to grow.


42

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


USEFUL REFERENCES

BankofBotswana(various)BankingSupervisionAnnualReport(www.bankofbotswana.bw)

BankofBotswana(2003)AnnualReport–FeatureonCompetition,EfficiencyandProductivityintheBankingSector(www.bankofbotswana.bw)

bank of botswana act (cap: 55:01)

banking act (cap: 46:04) & regulations

non-bank financial institutions regulatory authority act, 2006

salkin, j. et al (1997) aspects of the botswana economy: selected papers, especially chapter 3, “financial SectorDevelopment”(GaboroneandOxford:LentswelaLesediandJamesCurrey)

InternationalMonetaryFund(IMF)(variousyears)BotswanaArticleIVReports(WashingtonDC:IMF)

InternationalMonetaryFund(IMF)(2009)RegionalEconomicoutlookforSub-SaharanAfrica(April)

jefferis, K (2007) enhancing access to banking in botswana (finmark Trust/econsult)


43

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


Notes


44

BO

TSW

AN

A F

INA

NC

IAL

SEC

TOR

OV

ERV

IEW


disclaimer

Producedby: CapitalResources(Pty)Limited

Tel + 267 3188886

fax + 267 3188887

[email protected]

Thisreportisnotandshouldnotbeconstruedasanoffertosellorthesolicitationofanoffertopurchaseorsubscribeforanysecurities.ThisreporthasbeenpreparedbyCapitalResources(Pty)Limited(“Capital”)fordistributiontoitsclientsandotherclientsoftheCapitalGroupfromsourcesitbelievestobereliable.Capitalandothermembersof theCapitalGroupmakenowarranty, guarantee, or representationandacceptsnoliabilityorresponsibilityastoitsaccuracyorcompleteness.AllopinionsarethoseoftheresearchdepartmentofCapitalonly(unlessotherwiseindicated)andaresubjecttochangewithoutnotice.Eachrecipientofthisreportshallbesolelyresponsibleformakingitsownindependentinvestigationofthecompaniesreferredtointhisreport.Thisreportmaynothavebeendistributedtoallrecipientsatthesametime.

Groupcompaniesand/ortheirofficers,affiliates,directorsandemployees, includingpeople involvedinthepreparation or issuance of this report may from time to time (1) have positions in any securities mentioned inthisdocumentor inanyrelatedinvestmentandmayfromtimetotimebuyorsellanysuchsecuritiesorinvestment (2)havean investmentbankingorbroking relationshipwithacompany in this report (3)actasmarket maker or have assumed an underwriting commitment in the securities of companies in this report or in a related investment (4) have acted on the information contained within this report including effecting transactions for their own account.

Thisreportisissuedonlyfortheinformationofandmayonlybedistributedtoprofessionalinvestors.IntheUKitisintendedfordistributiononlytopersonsofakinddescribedinArticle11(3)oftheFinancialServicesAct1986(InvestmentAdvertisement)(Exemptions)Order1996(asamended).ItmaybedistributedintheUnitedStatessolelyto“majorUSinstitutionalinvestors”asdefinedinRule15a-6oftheUSSecuritiesExchangeActof 1934.

Botswana Financial Sector Overview 2009/10

Documents

Transcript of Botswana Financial Sector Overview 2009/10