Financial Sector Overview

Botswana’s financial sector includes banks and large non-bank financial institutions (NBFIs). The structure of the financial sector shows that the NBFIs hold the largest share of the financial sector, being led by the pension funds (43%), followed by the banking sector (42%). Financial institutions have appropriate capital and liquidity and demonstrate moderate profitability however, the repatriation of pension fund assets creates liquidity issues in local financial markets due to limited investment options.

The banking sector focuses on using domestic deposits to provide credit, while the nonbank financial sector encompasses retirement funds and insurance companies. Hence Botswana’s domestic credit to the private sector (% of GDP) is done by the banks in the financial sector (World Bank data). The financial system's total assets, including those of banks and NBFIs, grew by 12.7%, reaching P320 billion (USD 23.65 billion) in December 2023, up from P284 billion (USD 22.04 billion) in December 2022. This increase was driven by growth in NBFI financial assets, primarily pension funds, which benefitted from improved global financial market performance. By December 2023, NBFIs held the largest percentage share of financial system assets at 57%, while the banking sector held 43%. The financial system's overall size was about 121.4% of GDP in December 2023, an increase from 112.8% in December 2022, highlighting the financial sector's significant economic impact.

Banking Sector

Botswana's banking system comprises the Central Bank of Botswana (Bank of Botswana) and nine commercial banks and two statutory banks. As of April 1, 2023, commercial banks gained the autonomy to set their own Prime Lending Rates (PLRs) to foster competition within the banking sector, enhance the depth of the industry, and improve the transmission of monetary policy. Additionally, commercial banks are required to report their PLRs to the central bank, which then publishes the average PLR for market transparency. In December 2023, following a similar adjustment in the Monetary Policy Rate (MoPR), commercial banks reduced their PLRs by 25 basis points to 6.51%.

The banking sector maintains robust credit intermediation, evidenced by an intermediation ratio of 77.9% in January 2024, compared to 81.7% in January 2023. This ratio, which reflects the relationship between loans and deposits and indicates how effectively excess funds are being allocated to those in need, remains within the 50% to 80% range. Such a level of credit intermediation continues to foster sustained economic growth.

Asset and the liability structure

The financial position of commercial banks improved significantly, with total assets rising by 14.2%, from P117 billion (USD 9.08 billion) in December 2022 to P133.6 billion (USD 9.88 billion) in December 2023. This growth was driven by substantial increases in Bank of Botswana Certificates (BoBCs) and loans and advances, which surged by 57.7% and 11.8%, respectively, from P3.2 billion (USD 248.32 million) and P73.2 billion (USD 5.68 billion) in December 2022 to P5.1 billion (USD 376.89 million) and P81.8 billion (USD 6.045 billion) in December 2023. Balances at the Bank of Botswana include banks’ cash.

Deposits are the primary funding source for banks, totaling P110.3 billion (USD 8.15 billion) in December 2023, up from P96.1 billion (USD 7.46 billion) the previous year. These included customer and government deposits of P104.1 billion (USD 7.69 billion) and bank deposits (balances due to other banks) of P6.2 billion (USD 458.2 million). The industry's average intermediation ratio remained within the recommended prudential range of 50-80%, standing at 80% in December 2023, up from 78.6% in December 2022. Non-Financial Corporations (NFCs) and Non-Bank Financial Institutions (NBFIs) were the main contributors to bank deposits.

Banking sector Soundness

The banking sector was found to be profitable, well-capitalized, liquid, and compliant with statutory and prudential standards. In 2023, commercial banks achieved an after-tax profit of P3.1 billion (USD 229.09 million), marking a 15.2% increase from P2.7 billion in 2022 (USD 209.52 million). This rise in profitability was driven by a 17.3% increase in total income, which grew from P8.4 billion (USD 651.84 million) in 2022 to P9.8 billion (USD 724.22 million) in 2023. However, asset quality declined as non-performing loans (NPLs) rose by 9.3%, from P2.7 billion (209.52 million) in December 2022 to P3 billion (USD 221.7 million) in December 2023. Despite this, the ratio of NPLs to gross loans and advances slightly decreased from 3.8% to 3.7% over the same period.

In December 2023, commercial banks' average Capital Adequacy Ratio (CAR) and Liquid Asset Ratio (LAR) were 19.7% and 20.1%, respectively, exceeding the prudential and statutory thresholds of 12.5% and 10%. This indicates that the banking industry was well-capitalized and maintained adequate liquidity throughout 2023. Average daily market liquidity increased from P11 billion (USD 819.43 million) in January 2024 to P11.9 billion (USD 867.51 million) in February 2024, driven by high government spending. Banks sustained adequate liquidity positions, with a LAR of 17.6% in February 2024, as reported in the Financial Stability Report.

The Bank of Botswana performed a stress test to evaluate the domestic banking sector's resilience to moderate and adverse macroeconomic shocks. Credit shock tests show that commercial banks are mostly resilient, except under severe conditions that could significantly breach prudential capital requirements. In a moderate scenario, where an additional 10% of performing loans become non-performing, capital adequacy levels drop to 10.9%, below the 12.5% requirement. In a severe scenario, with 20% of loans turning non-performing, capital adequacy falls to 1.3%. This leads to a decline in asset quality, with the NPL ratio increasing from 3.7% to 13.2% in the moderate scenario and to 22.8% in the severe scenario (Bank of Botswana Financial Stability Report, 2024).

In the liquidity risk assessment, banks demonstrate the ability to withstand a moderate stress scenario involving a liability run, enduring drawdowns for 17 days. Under severe stress conditions, banks can manage drawdowns for 6 days. The findings indicate a significant reliance on wholesale deposits, accounting for 26% to 67% of total customer deposits across different banks. Consequently, it is essential for banks to diversify their portfolios further to reduce liquidity risks. However, these scenarios do not account for the Bank's liquidity support provided through the Credit Facility, as well as help from associated corporations or parent institutions. As a result, the financial stability report indicates that the stress test findings should not be construed as an indicator that banks will default in such circumstances.

Banking Sector Regulation

In 2023, the Bank monitored banks’ performance through off-site and on-site examinations to ensure compliance with prudential and market infrastructure standards. The Bank also held bilateral and trilateral meetings on risk-based AML/CFT measures with banks and their external auditors. Overall, the adequacy and effectiveness of these measures were satisfactory. However, some institutions had issues of supervisory concern, prompting the Bank to direct corrective actions and, where necessary, impose monetary penalties. Additionally, the Bank promoted an efficient payment system by upgrading processes and mitigating risks in payments, clearing, and settlement operations. The bank regulated and oversaw payment systems and providers under the National Clearance and Settlement Systems Act and the Electronic Payments Services Regulations 2019.

Financial Inclusion and Digital Finance

As of March 31, 2024, the Bank licensed 25 initiatives to improve digitalization and financial inclusion in Botswana, as part of the country's economic transition and policy reforms. According to the Bank of Botswana Financial Stability Report, the Ministry of Finance (MoF) is developing the new National Financial Inclusion Strategy and Roadmap for 2024–2030, in partnership with the SADC Support Consortium, which includes FinMark Trust, GFA Consulting Group, and Southern Africa Trust. This strategy aligns with the SADC Strategy on Financial Inclusion and MSMEs' access to finance and is based on the 2015–2021 National Financial Inclusion Strategy and Roadmap. The project, part of the Support for Improving the Business Environment initiative, will launch in the first quarter of the 2024/25 financial year. Additionally, MoF and the SADC Support Consortium have begun the 2024 FinScope Consumer Survey and the 2024 MSMEs Survey, both set for completion in the first quarter of the 2024/25 financial year.

However, the global Findex data shows that in 2022, 59% of Botswana's population aged 15+ had accounts. This has increased from 51% in 2017. In 2022, there was a greater gender gap in Botswana’s financial inclusion, where most males had accounts, and made or received digital payments. As compared to its neighbouring countries (SACU member states), Botswana’s account ownership and digital payments in 2022 were lower than all the SACU member states but greater than Sub-Saharan Africa by 9 and 2 percentage points respectively.

Non Bank Financial Institutions (NBFIs) Sector

Botswana’s NBFI sector is regulated and supervised by the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), known as the authority.  In 2023, the number of licensed NBFIs rose by 3%, from 799 in 2022 to 823, and the number of insurance entities declined by 3.2%, from 250 in 2022 to 242 (NB: insurances include medical aid funds). During the same period, retirement fund entities climbed from 87 to 88, while the capital market business had an increase from 115 to 116 entities. The loan activities industry saw an 8.6% increase from 347 in 2022 to 377 in 2023.

The sector's assets grew from P153 billion (USD 13.02 billion) in 2021 to P161 billion in 2022 (USD 12.5 billion). The sector's asset-to-GDP ratio was 81% in 2022, up from 82% in 2021, meaning that real GDP increased faster than NBFI total assets. The retirement funds business rose by 6.5%, from around P110 billion (USD 9.36 billion) in 2021 to P117 billion in 2022 (USD 9.08 billion), accounting for the majority of the increase in overall sector assets. This sub-sector continued to dominate the NBFI's total assets, accounting for 72.9% in 2022.

The NBFI sector's capital reserves saw a slight surge of less than 1%, rising from P8.8 billion (USD 748.9 million) in 2021 to P8.9 billion (USD 690.64 million) in 2022. Total industry liabilities grew by 5.7%, from P23 billion (USD 1.92 billion) in 2021 to P24.4 billion (USD 1.89 billion) in 2022. This growth was mostly determined by the capital market industries and their liabilities and related party payables. However, the insurance industry held the majority of NBFI liabilities, totaling P18.8 billion (USD 1.46 billion) in 2022, up from P18.2 billion (USD 1.55 billion) in 2021.

SME Financing

Botswana's National Development offers SME loans, which are primarily intended to aid SMEs that provide short-term services. The lending product has three categories: Order finance is used to fund short-term orders, contracts, or tenders; project finance is used to participate in medium to long-term tenders; and bridging finance is used to finance short-term acquisitions while giving an income guarantee. The SME Loan offers financing for loans of up to P4 million (USD 296, 000). Nonetheless, access to credit for MSMEs in Botswana is still difficult due to issues on both the demand and supply sides (World Bank, 2023). Demand challenges include high informality, low financial literacy, poor financial management and reporting, and a preference for cash transactions, which hinder digitization efforts. Banks are reluctant to finance MSMEs on the supply side, and non-bank competitors face limited resources and competition from subsidized digital financial institutions. Additional supply issues involve a lack of skills, innovative products, credit infrastructure flaws, and weak enforcement of creditor rights. This technical note focuses on supply-side challenges and measures to improve MSME access to credit.

Insurance and Medical Funds Sector

The insurance industry is recovering from the unique challenges posed by the COVID-19 pandemic. Performance varied across insurance and medical aid entities; some recovered, others struggled, and a few ceased operations. The number of licensed insurance entities decreased from 250 in the previous year to 242 in 2023, comprising 26 insurers, 211 intermediaries, and five medical funds. The number of individual representatives selling insurance rose by 18%, from 2,927 to 3,463, likely due to efforts to recover lost business and implement growth strategies. These representatives are not licensed by NBFIRA, placing the compliance responsibility on NBFI. Medical aid fund principal members increased by 7.7%, from 145,711 in 2021 to 156,861 in 2022, with total membership (including dependents) rising by 6.8%, from 336,943 in 2021 to 359,938 in 2022.

Life insurers dominate Botswana's insurance industry, holding the largest share of assets at P20 billion (USD 1.48 billion) in December 2023, while general insurers hold about P2 billion (USD 147.8 million). The industry is interconnected with various market players and households, indicating a diversified portfolio and potential contagion risk. Nearly 48% of industry assets are in local collective investment units (CIUs), including money market funds (MMFs) and non-money market funds (NMMFs). Life insurers are more exposed to local CIUs at 55% compared to general insurers and reinsurers. Local NMMFs, holding 91% of life insurance assets, pose a low risk of asset-liability mismatch due to their long-term investments. General insurers are equally exposed to Botswana residents, commercial banks, statutory banks, and the Savings and Credit Cooperative Society (31% each). Additionally, 41% of reinsurance companies' assets are held by residents. Despite these risks, NBFIRA's current risk-based supervision and regulatory approach effectively mitigates them.

Capital Markets

According to the NBFIRA annual report 2023, Botswana's capital market industry has five segments:

Securities Institutions and Investment Companies (SIIC): This includes asset managers, securities brokers, custodians, transfer secretaries, market makers, investment advisors, and the buying and selling of securities.

Collective Investments Undertakings (CIUs): This involves management companies, investment companies with variable capital (ICVC), trustees, and custodians for CIUs and CIU funds, which include both locally approved funds and offshore funds recognized in Botswana.

Securities Infrastructure Businesses (SIBs): This consists of central securities depository companies of Botswana Limited and the Botswana Stock Exchange Limited.

International Financial Services Center (IFSC) Accredited Entities: These entities are based in Botswana but primarily serve clients outside the country.

Virtual Assets Service Providers (VASPs): These market players are involved in the buying and selling of virtual assets.

The number of licensed entities slightly increased from 115 in 2022 to 116 in 2023. The Botswana Stock Exchange (BSE) Domestic Companies Index (DCI) rose by 15.6% to 8,929.6 in December 2023, reflecting continued recovery from the COVID-19 pandemic. The market capitalization of domestic companies increased by 16.7%, from P41.1 billion (USD 3.19 billion) in 2022 to P48 billion (USD 3.55 billion) in 2023, driven by higher share prices. Significant share price gains were seen in companies like Standard Chartered (84.7%), Chobe (87.7%), and Seedco (29.6%). The Foreign Companies Index surged by 57.7% to 2,464.7 in 2023. Trading activity increased, with 561.5 million shares worth P4.1 billion (USD 303 million) traded in 2023 compared to 514 million shares valued at P1.2 billion in 2022 (USD 93.12 million). The number of listed domestic companies rose from 31 in 2022 to 36 in 2023.

Pension Sector

By the end of March 2023, the retirement funds industry had 88 licensed entities, including 83 retirement funds and five fund administrators. The 83 retirement funds consist of 78 pension funds and five provident funds. Among these are seven umbrella funds, which together account for 367 sub-funds. The pension funds sector continues to make a major contribution to Botswana's economy, with a total assets-to-GDP ratio of 46.9% GDP as of December 2022, down from 61.5% the previous year. Pension fund assets decreased by 1.8% from approximately P120 billion (USD 10.21 billion) in 2021 to P118 billion (USD 9.16 billion) in 2022. This was due to the weaker performance of offshore equities markets.

As of December 2023, pension fund assets significantly rose by 17.9%, from P118 billion (USD 9.16 billion) to P139 billion (USD 10.27 billion), due to increased fair value gains. Investments in primary listed domestic equities grew by 22.6% to P19.4 billion (USD 1.43 billion), while offshore equities rose by 19.5% to P63.7 billion (USD 4.71 billion) due to higher valuations. Domestic bonds held by pension funds increased by 18.5% to P13 billion (USD 960.7 million), and offshore bonds surged by 35.6% to P9.8 billion (0.724.22 million). Local property investments grew from P3.6 billion (USD 279.36 million) to P3.9 billion (USD 288.21 million). The share of pension fund assets invested offshore decreased from 60.5% in December 2022 to 59.4% in December 2023. The ratio of pension fund assets to nominal GDP was 48.8% in the third quarter of 2023, up from 47.1% in the same period in 2022.

Foreign Currency

All foreign currency transactions are converted to Pula at the mid-exchange rate on the transaction date. Foreign currency assets and liabilities are translated to Pula at the mid-year-end rate. Differences from translation are recognized in profit or loss. Gains and losses from disposals reinvested in foreign assets, and unrealized gains/losses on financial instruments, are not distributable and are allocated to the Currency Revaluation Reserve. The Bank’s investment guidelines address market risk, credit risk, and liquidity risk for foreign assets and liabilities.