Botswana: Financial Sector Profile

For the past forty years, Botswana has been amongst the world’s fastest growing economies. Diamond-led growth, combined with sound macroeconomic policies and good governance has moved Botswana from being one of the poorest countries in the world to the upper-middle-income range (GDP per capita stood at USD 6064 in 2009), with the highest sovereign debt ratings in Africa.

Although non-mineral growth has picked up in recent years, income from diamonds is still the largest contributor to government revenue and the sector continues to account for a significant share of total exports.

Real GDP growth averaged over 5 percent between 2002 and 2008. However, Botswana experienced its worst recession in over 40 years in 2009 as real GDP contracted by 3.7 percent in the wake of the global financial crisis and the collapse of world demand for diamonds. Several years of prudent macroeconomic management facilitated the timely easing of fiscal and monetary policies which helped cushion the impacts of the crisis; with the non-mining sector actually experiencing 6.2 percent growth in 2009. The economy rebounded in 2010 with real GDP growth reaching 8.4 percent in 2010 and projected at 6 percent in 2011 and 6.6 percent in 2012.

The economy is likely to experience some realignment in the next few years, with reduced government spending likely to lead to slower growth in the non-mining sector as recovery of the diamond sector accelerates. While authorities have actively pursued reforms to facilitate private sector access to credit, many domestic entities, and especially micro and small and medium enterprises, still face significant difficulties accessing working capital.
    
Botswana has a small but thriving financial sector that has experienced significant growth in the past decade – primarily a reflection of the substantial accumulation of national resources and the associated high degree of liquidity. An array of financial institutions populates the country’s financial system, with pension funds and commercial banks being the two most important segments by asset size. The government is actively supporting further growth and development of the financial sector, having identified it as a key area of activity to promote economic growth and diversification efforts.

The global financial crisis' impact on the banking sector was, for the most part, indirect and banks remain fundamentally sound, though there has been a recent increase in non-performing loans in the household sector. The Banking sector of the country is not extensively exposed to the mining sector (largely financed by foreign parent companies and via retail earnings). It is however significantly exposed to households, who account for approximately 59 percent of bank lending to the private sector representing about 23 percent of total bank assets.

In recent years the government and Central Bank have undertaken significant steps to modernize the country’s payment system infrastructure. These efforts included the establishment of a code-line clearing system for the exchange of cheques and electronic funds as well as a Real Time Gross Settlement (RTGS) system, including SWIFT connection. The Stock Exchange implemented a Central Securities Depository in 2007.

The Botswana Stock Exchange (BSE), a member of the African Stock Exchanges Association (ASEA), has been growing in recent years. Stock market capitalization increased from 60.8 percent of GDP in 2008 to 87.6 percent in 2009, while the stock turnover ratio stayed largely constant at about 1.9 percent.

As of April 2011, Moody’s listed Botswana’s sovereign rating at A2 for both local and foreign currency, while Standard & Poor’s gave the country a rating of A for local currency and A- for foreign currency.  The government regularly issues both bills and bonds, and has been making significant strides towards expanding the range of long-term finance solutions available to local investors and establishing a government yield curve. Though a large share of the domestic bond market is controlled by commercial banks, pension funds are increasingly becoming important fixed income investors. While there are a few nonfinancial corporate issuers on the corporate debt market, issuance activity of private sector borrowers is largely dominated by financial institutions, most of which are international institutions operating in the country.

Derivatives market activity in Botswana is mainly concentrated in over-the-counter foreign exchange forwards and hard currency swaps, mostly in USD (though these can be crossed against any hard currency). Both forwards and swaps markets are liquid and provide tenors of up to 6 and 3 months respectively.

The Non-Bank Financial Institutions Regulatory Authority (NBFIRA), established in 2008, is responsible for the oversight of all non-banking financial services entities in the country. The NBFIRA has steadily been increasing its activities and, as of September 2009, has assumed full responsibility for supervising non-bank financial institutions. A gap in the current regulatory framework does however remain in the case of micro-lenders.

The insurance sector is relatively well developed and supervised. By last count approximately, 14 insurance companies operated in Botswana, with total assets equivalent to 16 percent of GDP and insurance premiums amounting to 3.4 percent of GDP. The pension fund system is relatively large: 115 pensions funds operate in Botswana, with total assets amounting to 60 percent of GDP. Over the past 20 years, the legal framework for the pension systems has provided a good basis for the development of the sector. Combined, the assets of pension and insurance companies account for 49.5 percent of GDP. Revisions to the Insurance and Pension Fund acts, and their accompanying regulations, are presently in their industry consultation phase, and are expected to be implemented shortly.

Financial Sector Development Indicators
  2007 2008 2009 Average Africa 2009
Liquid Liabilities /GDP 0,402 0,484 0,582 0,412
Deposit Money Bank Assets / GDP 0,198 0,195 0,193 0,32
Other Financial Institutions Assets / GDP n.a. n.a. n.a. 0,288
Private Credit By Deposit Money Banks and Other Financial Institutions / GDP 0,193 0,192 0,192 0,272
Bank Credit / Bank Deposits 0,484 0,465 0,444 0,728
Net Interest Margin 0,052 0,057 0,062 0,069
Bank Concentration 0,777 0,741 0,703 0,841
Stock Market Capitalization / GDP 0,419 0,608 0,876 0,947
Remittance Inflows / GDP 0,01 0,009 0,009 0,237
Mobile Cellular Subscriptions (Per 100 People) 60,862 77,34 - 40,33
Private Credit Bureau Coverage (% Of Adults) 58,3 52,9 51,9 4,539
Public Credit Registry Coverge (% Of Adults) 0 0 0 2,575
Number of commercial bank branches per 100,000 adults 7,705 8,636 8,793 6
Depositors with commercial banks per 1000 adults 381,742 428,799 506,335 311
Borrowers from commercial banks per 1000 adults 181,125 219,491 243,381 87