The International Monetary Fund (IMF) has called upon Botswana to revise its banking laws as well as bolster its insurance legislation, highlighting significant deficiencies that demand urgent attention.
The IMF’s latest report highlights concerns regarding the country’s underdeveloped supervision infrastructure and said the planned revision of the Banking Act should focus on addressing gaps and bolstering regulatory powers to support more intrusive supervision.
The Brettonwood Institution also lamented the impact of the recently enacted Retirement Act of 2022 on the liquidity of retirement funds. Mandating the transition of investments to onshore significant assets while granting members increased access to accumulated savings, the Act is expected to significantly affect retirement funds’ liquidity. This, according to the IMF, underscores the need for robust liquidity management strategies.
The Washington-based institution identified several deficiencies such as an absence of provisions for consolidated supervision, major acquisitions, and changes in significant shareholding.
For example, the IMF identified Clause 18(2) of the new Act which requires deposit-taking institutions to have a written notice to the central bank of its intention to do so, specifying a date, being not less than 30 calendar days after the date of service of the notice.
The IMF advises Botswana to eliminate the clause saying giving a failing bank notice of impending license revocation is a recipe for asset stripping, document destruction and other insider abuse that could greatly increase the resolution cost.
IMF also states that the new Act does not have a clause that “would enable BoB to revoke a bank’s license before capital reaches zero; Prompt Corrective Action calls for license revocation when a bank is severely undercapitalized, but still has positive capital.”
The report says the new Act permits BoB to “establish a resolution fund, financed through levies on banks, for the purpose of facilitating bank resolutions”.
But IMF does not approve of this arguing that “A paid-in resolution fund is not recommended in jurisdictions where the DISB fund has not reached its target funding level, as it would impose additional levies on the banking sector.”
IMF says the new banking Act permits BoB to “appoint an official administrator to conduct resolution functions and apply resolution actions and measures.”
But IMF warns that “The authorities must be judicious and very careful in taking this action because Article 64(4)(a) and (b) require posting of the notice of such action on the doors of all the bank’s offices and publishing it in the Gazette, at least two newspapers of general circulation in Botswana and on the Central Bank’s website.” It says such publication of notices risks deposit runs on the intervened bank and quite possibly contagion to other banks in the system, which will likely have an adverse impact on financial stability and public confidence.
It says a clause giving shareholders back voting rights, dividends and other capital distribution should not be permitted unless they have contributed all the funds necessary to recapitalize the bank.
“If government support has been used, shareholders should have no rights except to file a claim with the liquidator,” the IMF says. It says clause or Article 73 references provisions of the Companies Act regarding the winding up of a bank and is inappropriate.
“The Banking Act should supersede all other legislation in relation to bank intervention and resolution, including the Companies Act and Insolvency Act. Nevertheless, the latter instruments may be supplementary to the Banking Act to ensure there are no gaps in the legal framework, provided that there are sound provisions on resolving conflicts among these laws,” the report says.
The IMF noted that expanding lump-sum withdrawal options for pension scheme members, both pre-retirement and at retirement could compromise their ability to build long-term retirement savings.
“Already now, payments upon retirement account for only around 80 percent of all payouts, of these around 40 percent are paid as a lump sum. The other 20 percent is paid out for other reasons, with payments upon dismissals or resignations being the most important type in this category,” it said.
The report adds that the differences in the membership in terms of age and salary of members, and also the cyclicality of the employer’s industry will determine how individual retirement funds are affected by the new act.
Smaller funds, especially those catering to a single employer or operating within a single economic sector, are particularly susceptible and expected to feel the brunt of the new act. This vulnerability is heightened in sectors prone to pronounced cyclicality. Funds serving the lower-income segment, those with a high proportion of deferred to active members, and those where benefits match or surpass contributions are also likely to be significantly impacted.
“These numbers differ considerably between retirement funds, depending inter alia on the age and salary of members and the cyclicality of the employer’s industry. Especially for smaller funds—and those where benefits already exceed contributions—a robust liquidity risk management will be critical,” the report elaborated.
For all these entities, robust liquidity risk management will be critical, and the IMF emphasised that the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) should increase the intensity of supervision for those and require liquidity buffers to be held where necessary.
Moreover, the Act brings further changes which might significantly impact Botswana’s financial system, and therefore require a comprehensive impact assessment.
The IMF notes that on the investment front, the act gradually lowers the cap on foreign assets, prompting concerns regarding the domestic capital markets’ ability to absorb repatriated investments. Additionally, the repercussions of the new legislation are expected to extend to other financial sectors. For instance, in the life insurance industry, there may be implications for the annuity business if pension funds transfer reduced accrued pension interest to annuity providers upon retirement.
The Act, which came into effect on October 14, 2022, repealed and replaced the previous Retirement Funds Act (2014). Its key amendments include expanding and reinforcing the Authority’s regulatory oversight powers, enhancing governance within pension funds to promote professionalism, strengthening regulation and supervision of pension fund administration, and modifying the criteria for early withdrawals of accrued pension benefits by members, contingent upon meeting qualifying conditions.
