Country Financial Sector Profilesback

Financial Sector Overview

Economic Context

Botswana is classified as an upper-middle income country with a GDP per capita of USD 8,258.6 in 2018. It has recorded positive economic performance in recent years thanks to strong democratic institutions as well as efficient and prudent economic management of national resources, particularly revenue from diamonds, of which it was the world's second largest producer in 2018, after Russia. The average economic GDP growth rate was 4.2% between 2012 and 2018, well above that of sub-Saharan Africa (3.2%). Botswana's main engine of growth remains the mining and processing of diamonds for export (about 90% of exports in 2018 according to the central bank), although the mining sector's contribution to GDP plummeted from 47% in 1986 to about 20% in 2017. Despite efforts to diversify the economy, the economic base remains narrow and growth, mostly financed by diamond revenue, has not been sufficiently inclusive. The agricultural and manufacturing sectors, accounting for just over 2% and 5% of GDP respectively, remain relatively underdeveloped. Botswana also enjoys a favourable business environment despite its decline in the World Bank's Doing Business rankings. Out of 190 countries, Botswana was ranked 86th in 2018 compared to 52nd in 2010. A National Development Plan (NDP 11), covering the period from April 2017 to March 2023, has been prepared to guide the medium-term economic development of the country. This multi-year programme, which falls under the implementation of Vision 2036 (launched in September 2016 and defining a roadmap for the next 20 years), seeks to promote inclusive growth for sustainable employment and poverty eradication.

Financial Sector Overview

In 2018, the sector comprised 10 commercial banks, 3 statutory banks, 57 foreign exchange bureaux and a deposit-taking microfinance institution (Women's Finance House), all under central bank regulation and supervision. All commercial banks are predominantly foreign-owned and include subsidiaries of pan-African groups. The non-banking sector, representing 55% of the total assets of the financial system, is composed of 9 life insurance companies, 12 non-life insurance companies, 3 reinsurance companies, 87 pension funds and 216 micro-lenders. The regulatory authority for the non-bank financial sector is the NBFIRA (Non-Bank Financial Institution Regulatory Authority). Three mobile phone companies operate under 3G and 4G/LTE licenses and offer mobile money services.

The Central Bank supervises the various banks through a system of monthly and quarterly statements, risk-based supervision, on-site monitoring, as well as consultative meetings with banks and their external auditors. The authorities plan to step up their AML/CFT (anti-money laundering/combating the financing of terrorism) efforts and to improve implementation of the Know Your Customer (KYC) protocol.

Banking Sector

Banking Market Structure: Five banks held 89.5% of total assets in 2017, a level slightly below the 90% reached in 2016. The bank penetration rate within the population aged 15 and above increased from 76.5% in 2016 to 84.4% in 2017, and the number of bank accounts rose from 1.17 million in 2016 to 1.32 million in 2017, representing an increase of 12%. Banking sector assets are dominated by the share of commercial (private) banks, which reached 83 468 million Botswana Pula (BWP) in 2017, or USD 7 billion compared to USD 3 607 million (USD 300.6 million) for statutory (public) banks. Despite their erratic trends, commercial bank assets have stayed above 45% of GDP and 55% of non-mining GDP (NM GDP) between 2010 and 2017.

Credit Structure and Bank Deposits: Loans and advances from commercial banks grew steadily from BWP 22,122.1 million (USD 1.8 billion) in 2010 to BWP 54,181.1 million (USD 4.5 billion) in 2017, representing an average annual growth of 13.65%. However, they have declined since 2016 to 36.7% of NM GDP in 2017. This decline is partly due to the slowdown in NM growth and an increase in non-performing loans. On average, 80% of these consist of medium- and long-term loans. Domestic credit provided to the private sector by commercial banks amounted to 31.3% of GDP in 2017. Loans and advances are mainly allocated to households, which received on average 63% of all loans and advances. Bank deposits gradually increased in nominal value from BWP 40,422.1 million (USD 3.4 billion) in 2010 to BWP 63,581.2 million (USD 5.3 billion) in 2017, representing an increase of 57% over the period. They are dominated by sight deposits, which represent 73% on average (27% for time deposits). Private companies hold the majority of deposits (62.7% on average) while households hold just under a quarter of them (21.6%).

Lending and Deposit Interest Rates: Between 2010 and 2017, average lending rates gradually declined, reflecting the fall in the official market rate, due to the implementation of an accommodative policy aimed at supporting stronger output growth. Average lending rates also fell steadily over the same period.

Financial Strength of the Banking Sector: The Basel II framework has been adopted and the implementation of Pillar 3 has been effective since 1 January 2016. The second implementation phase of Basel II began in September 2018. The banking sector is adequately capitalised and the capital adequacy ratio (15%) and basic Tier I (4.5%) solvency ratio remained compliant with the statutory minimum. However, asset quality has been deteriorating gradually since 2013 due to non-performing loans. Although they have remained above the statutory maximum (2.5%), they have gradually increased over the years, rising from 2.6% in 2012 to 5.3% of total gross lending in 2017. The increase in non-performing loans follows difficulties encountered by some companies in the mining, manufacturing and parapublic sectors, that led to job losses and the loss of household repayment capacity. At least 50% of non-performing loans are owed by households. However, banks remained profitable, despite the downward trend in yields. The liquidity ratio (liquid assets/total deposits) also remained compliant with the statutory minimum (10%) between 2010 and 2017.

Financial Inclusion

Several measures are being implemented by the authorities to develop financial inclusion. The roadmap (2015-2021) for financial inclusion in Botswana establishes the development of the payments ecosystem as a key priority in strengthening financial inclusion. According to data from the World Bank's Global Findex, the proportion of adults with an account is 51%, a rate well above the sub-Saharan average (42.6% in 2017). This performance partly stems from the dynamism of the mobile money segment, with 24.4% of adults having an account in 2017 compared to 20.8% in 2018, representing an increase of 17.3%. However, overall financial inclusion has made little progress compared to 2014, when 52% of adults had an account. This poor performance could be explained in part by a combination of obstacles to access and use of financial services. One of the major obstacles is reportedly low income levels that impede access to formal financial services, as well as limited knowledge of financial products and a poor understanding of how they work. Difficulties with documentation for opening accounts and limited access to branches and distribution networks are also some of the obstacles. According to FinMark Trust (2015), only 54% of the population lives in geographical areas that have bank branches, and about 30% of the population lives in areas with no formal institutions (banks, post offices or mobile money agencies). The limited need for insurance products is explained by the existence of community structures whose contributions, in kind or in cash, would be substantial, particularly in case of death. High costs, particularly for insurance products, are also a barrier to inclusion. The low caps imposed on mobile account balances (BWP 4,000) and on daily mobile payments, as well as high transaction costs, discourage payments through mobile money. The gradual increase of this ceiling, greater supervision of mobile accounts and the possibility of interoperability between mobile networks, bank accounts and other payment mechanisms could reduce costs for low-income households.

Microfinance Sector

The microfinance sector is characterized by the predominance of lending activities. In 2017, it had 324 non-bank lenders, comprising 214 microlenders, 29 finance companies, 5 leasing companies and 76 pawnbrokers. There is only one deposit-taking microfinance institution operating in the sector. Furthermore, there are 52 savings and credit cooperatives with total assets estimated at BWP 0.5 billion in 2016). The latter would not be subject to any prudential regulations. In accordance with the NBFIRA law, supervision of the sector is entrusted to the Non-Bank Financial Institutions Regulatory Authority whose power extends to the granting or withdrawal of licenses to micro-lenders. Licences are issued to pawnbrokers, finance or leasing companies to enable them to carry out their activities, pending the enactment of relevant legislation.

SME Financing

SMEs face a multitude of problems resulting in a high bankruptcy rate. About 70% of SMEs in Botswana fail within the first 18 months of operation, with an overall failure rate of about 80%. Difficulties encountered by SMEs include the lack of a favourable regulatory environment, lack of financing, prohibitive costs to procure and effectively use appropriate technology and limited managerial skills. For the financing of SMEs, the authorities have put in place targeted measures through several agencies and initiatives, including, the Local Enterprise Authority (LEA), the Citizen Entrepreneurial Development Agency (CEDA) and the Botswana Textile and Small Business Owners' Association (BOTSBOA). The Citizen Entrepreneurial Development Agency (CEDA), for example, offers a comprehensive approach to the development and promotion of viable businesses owned by nationals through financial assistance in the form of loans at subsidized interest rates, additional business training and mentoring services to strengthen the sustainability of these businesses. A venture capital fund was recently set up to facilitate the financing of projects that can be owned by both local and foreign interests.

Digital Finance

The number of ATMs gradually increased from 391‰ in 2010 to 497‰ in 2017. Botswana has major financial market infrastructures (FMIs) such as the Botswana Interbank Settlement System (BISS), the Botswana Automated Clearing House (BACH) and the Central Securities Depository (CSD). A supervisory inspection of the BISS was conducted in October 2017 and preliminary findings revealed that the system is largely compliant with international standards for financial market infrastructure. In January 2019, the government adopted a law on the regulation of electronic payment services. The online payment system is operational and evolving. Mobile money services are offered by 3 operators. According to the Regulatory Authority, 40% of mobile telephone services are used for communication and 15% for bill payment. The sending and receiving of remittances respectively account for 40% and 5% of mobile phone usage. The number of mobile financial transactions increased from 1.75 million in 2013 to 2.52 million in 2014 for a total value of BWP 498 million (USD 41.3 million).

Insurance Sector

As at 31 March 2018, Botswana's insurance sector consisted of 22 insurance companies (8 life, 11 non-life and 3 non-life reinsurance companies). It also comprises 9 medical aid funds, 267 intermediaries (including 57 brokers and 210 corporate agents) and 2,470 individual representatives. The insurance sector penetration rate is 3% and total gross premiums reached BWP 5.1 billion (USD 424.4 million) in 2017. Total liabilities accounted for 84% of total assets, while shareholders' equity represented 15.9% of total assets held in 2017, compared to 17.9% in 2016. The insurance sector is dominated by life insurance accounting for about 69% of gross written premiums, ahead of non-life insurance (28.5%) and reinsurance (2.5%). Life insurance and annuity contracts account for 99.9% of gross life insurance premiums (the remainder being split between long term and permanent health insurance). Non-life insurance is dominated by the motor branch, which accounts for 34% of gross written premiums in this branch, followed by real estate (33%). The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) established in 2006 supervises and regulates the sector. There is currently no legislation on medical assistance, with the exception of exemptions issued to authorize the activity of medical assistance, pending promulgation of the relevant regulatory framework. The creation of NBFIRA has led to a significant improvement in insurance sector supervision, notably through the transition to risk-based regulation, far beyond regulation focused solely on compliance. The minimum capital required is BWP 2 million (USD 166,534) for insurance companies (insurers/reinsurers) and BWP 30,000 (USD 2,499) for brokers. Company agents are reportedly not bound by any statutory minimum capital requirements.

Capital Markets

As of 31 March 2018, the capital market consisted of 2 infrastructure organizations (the Central Securities Depository and the Stock Exchange), 5 accredited international financial services centres (IFSCs) and 57 investment institutions for collective investment schemes, in addition to asset managers, asset management firms, brokers and investment advisors. The consolidated balance sheet of the IFSCs shows a growth in assets, which recorded an 11% increase, financed by a combination of liabilities and equity, which increased by 18% and 6% respectively. Assets amounted to BWP 10,460 million (USD 869.4 million) in 2017 (compared to BWP 9,406 million or USD 782.6 million in 2016), while liabilities and shareholders' equity amounted to BWP 4,785 million and BWP 5,675 million respectively. Stock market assets increased significantly and steadily to about BWP 64 billion (USD 5.3 billion) in 2016, compared to BWP 31 billion (USD 2.5 billion) in 2012. Initial public offerings (IPOs) between 2010 and 2017 raised USD 211 million. Total assets managed by investment institutions reached BWP 52.5 billion (USD 4.4 billion) in 2017, of which 14% were held by collective investment schemes and 86% by non-collective investment schemes.

Social Security

Botswana has a combination of universal and targeted social protection programmes. These non-contributory schemes, which are conditional on Botswana citizenship, are fully supported by the government, which provides transfers in cash or cash equivalents amounting to 4% - 4.5% of GDP. As of 31 March 2018, there were 86 authorized pension funds and the total number of pension fund members was 259,301. Pension funds maintain a healthy financial position, with income exceeding expenses. The sector contributes significantly to Botswana's economy, with total pension fund assets reaching 45% of GDP in 2017. Assets held by these funds as of 31 December 2017 were worth BWP 82 billion (USD 6.8 billion), compared to BWP 75.1 billion (USD 6.3 billion) in 2016, i.e., a growth rate of 9.2%.











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At a Glance

At a Glance Source
Population in thousands (2019): 2,303.69
GDP per capita (current US$) 2017 - World Average 10,721.61: 7961.33
Account (%) age 15+) - (2014 vs 2017): 52% | 51%
Agriculture Orientation Index - Credit (Agriculture, Forestry and Fisheries share of GDP) (2015 vs 2016): 0.98 | 1.11
Financial Inclusion Strategies: • Financial Inclusion Roadmap and Strategy 2015-2021• SADC Financial Inclusion Strategy 2016-2021
Domestic credit provided by financial sector (% of GDP) 2017: 17.05
Made or received digital payments in the past year (% age 15+) (2014 vs 2017): 42% | 42%
Remittances % of GDP for 2018: 0.0017
Mortgage Interest Rate / Mortgage Term (years): 7.5% | 10

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