Botswana’s banking industry has been named among sectors that pose risks to the country’s financial sector but is nevertheless described as “broadly stable, sound, and resilient”.
According to a recently released report by the International Monetary Fund (IMF) titled “Botswana Financial System Stability Assessment,” the “main risks relate to banks’ high concentration of lumpy short-term deposits from retirement funds and insurance companies, volatility in diamond prices, geo-political developments, and the tightening of global financial conditions.”
It says the financial system appears resilient to a wide range of shocks relating to these risks, although pockets of vulnerabilities exist. “Under a severe risk scenario, two banks fell below the prescribed capital ratio,” says the report. “The elevated level of banking sector liquidity allows most banks to withstand liquidity shocks.”
Household sector
“Credit risk forms the largest risk in Botswana’s banking system. Risk-weighted assets (RWAs) of credit risk account for 89 percent of total risk-weighted assets. The largest part of total assets comprises loans (83 percent). Loans are concentrated in the household sector (41 percent of commercial bank assets), followed by the non-financial corporate (real) sector.
“Bank loans to households are largely personal loans (70 percent), mainly in the form of unsecured consumer credit, for which a large share of lenders collect repayments through direct salary deduction, contributing to generally low level of non-performing household loans. Mortgages comprise 23 percent of household loans.”
The report notes how banks in Botswana are vulnerable to liquidity and funding risks due to concentrated funding profiles – short-term deposits of corporations and NBFIs (Non-Bank Financial Institutions). It says total deposits of NBFIs in the banking sector account for 23 percent of deposits and comprises sizeable deposits from a few. The report reveals that the largest banks hold close to 68 percent of total household and corporate call and savings deposits, leaving smaller banks to rely largely on price-sensitive fixed-deposits or access interbank funding from larger banks.
Maturity mismatches
“Banks may face financial exposures to interest rate risks in the banking book (IRRBB) due to interest rate and maturity mismatches,” it notes. “Over 65 percent of bank assets are floating rate, while approximately 35 percent of liabilities are fixed rate and are subject to administered rates that typically lag policy rate changes.”
The report warns that “contagion risk from banks to non-bank financial institutions could be material”. “The challenging risk environment underscores the need to address the existing gaps in the financial stability framework and the supervisory regime that could impede the Bank of Botswana’s (BoB) operational independence in supervisory matters.”
The IMF report recommends a risk-based and forward-looking banking supervision approach with more skilled staff who can identify emerging risks in the more complex banking sector. “Specific regulations for material risks should be issued and Pillar 2 supervisory assessments developed for more risk-sensitive capital requirements,” it says. “Data gaps should be addressed to enable the implementation of stress tests on a globally consolidated basis, perform more granular analyses of household and corporate sector vulnerabilities, and activate macro-prudential tools.
Calibration of capital buffers
“To enhance the system’s resilience, strengthening decision-making and refining the strategy for the calibration of capital buffers and borrower-based macro prudential tools should be considered.” The report says two banks would face a mild capital shortfall under an adverse risk scenario while most banks are expected to meet the prescribed liquidity ratios under a baseline scenario. “However, some show vulnerabilities when subjected to an adverse scenario,” it says.
Regarding banking regulation and supervision of banks, the report says in addition to the need for the supervisory framework to be more risk-based and forward-looking, it should be implemented on a consolidated basis. “The operational independence of BoB supervision should be strengthened, the framework for the oversight of banks’ corporate governance should include concentration risk and transactions with related parties, and tools for reviewing and assessing banks’ internal capital adequacy assessment and Pillar II risks should be incorporated into the supervisory review and evaluation process (SREP),” it says.
Concentrated exposures
Three banks would face challenges in meeting their minimum capital requirements by 2025 (aggregate recapitalisation needs reach to 0.4 percent of GDP). The report warns: “Risks could arise due to a homogenous structure of concentrated exposures to household loans. “Assuming 20 percent of household performing loans transit into non-performing loans, some banks would encounter a significant capital shortfall, resulting in the aggregated Capital Adequacy Ratio (CAR) falling below minimum capital requirements. “Nevertheless, the majority of the banks possess robust total capital buffers and would remain unaffected by severe shocks to household loans.”
