THE PRIME SUSPECT BEHIND EXPENSIVE LOANS

While the Bank of Botswana has kept prime lending rates stable, an economist says the government’s own borrowing from commercial banks at rates as high as 13.7 percent is increasingly becoming the real benchmark for pricing loans in the economy , writes Gilbert Manenye.

The government’s growing appetite for debt is quietly reshaping the price of borrowing across Botswana’s economy, while undermining the Bank of Botswana’s efforts to keep borrowing costs low even after instructing commercial banks not to raise prime lending rates.

As government struggled to raise enough capital from the bond market, it turned to emergency bank funding priced as high as 13.7 percent from Standard Chartered Bank. According to observations by an economist, banks increasingly began treating those state-backed returns as the benchmark for lending, adding to tight credit conditions. The result has been higher loan pricing for households and businesses despite the central bank’s attempts to shield borrowers from tighter monetary conditions.

At its October 2025 meeting, the Bank of Botswana’s Monetary Policy Committee, when the central bank raised the policy rate by 160 basis points from 1.9 percent to 3.5 percent, commercial banks were told not to raise their prime lending rates in response, despite it being liberalized. The central bank maintained this stance even at its April 2026 meeting when it increased the rate by 200 basis points to 5.5 percent, partly because it wants to bring the rate closer to market rates, which have been going up owing to the government deficit which led to tight cash in the financial system.

While the central bank is attempting to keep borrowing costs low for businesses and households, the Ministry of Finance is simultaneously pushing those costs upward through borrowing both on the bond market and the banking space.

“These rates inevitably affect the banking sector, as government rates provide the risk-free benchmark against which all other rates are calibrated,” economist Dr. Keith Jefferis noted. Government debt is widely regarded as the safest form of borrowing in the country because the state is considered the least likely borrower to default.

Economists argue that once the government begins paying interest rates as high as 13.7 percent, it becomes difficult for businesses or households to expect cheaper financing. Banks naturally begin using those government-backed returns as the reference point for pricing credit across the economy.

In effect, lenders are increasingly asking why they should lend to riskier businesses or consumers at lower rates when government borrowing offers near risk-free returns at 13.7 percent.

As a result, higher government borrowing costs are feeding directly into the broader credit market. Jefferis says bank lending rates have now risen to levels not seen in more than a decade.

“At these rates, borrowing is becoming unaffordable, especially for investment by individuals (mortgages) or firms,” he warned.

According to the December 2025 Business Expectations Survey, firms expect lending rates in Botswana to rise more sharply in 2026 than in South Africa.

While Jefferis warned that borrowing costs are becoming increasingly unaffordable, the survey also found that companies still expect borrowing volumes to increase, largely because of growing liquidity and working-capital pressures rather than expansion plans or new investment.

Most firms indicated they would continue seeking financing domestically and from South Africa.

The survey noted that increased borrowing demand is likely to reflect operational survival needs rather than confidence-driven investment activity.

Pressure on households is also being amplified by widening lending margins.

Although the Bank of Botswana instructed banks not to increase prime lending rates, margins applied to loans have continued creeping upward.

Bankers say loan pricing depends on several factors, including funding costs and credit risk premiums. With both now elevated, effective lending costs have remained high despite stable prime rates.

In practical terms, loans are still becoming more expensive for households and businesses.

Last week, the Bank of Botswana said its Business Compliance and Regulatory Department had begun inspections at all commercial banks to assess how interest rates are being applied and to determine effective lending rates across different categories of borrowing.

“We are having conversations meant to have an impact so that banks are transmitting what the monetary policy posture is. We had written to them. We have two departments that deal with commercial banks directly,” Governor Lesego Moseki said.

A growing debate within the banking sector centres on whether higher lending margins should apply only to new loans or also to existing loan books.

Some banks have increased margins only on new lending, arguing that market conditions and credit risks have deteriorated sharply compared to previous years.

However, reports indicate that some lenders have also adjusted margins on existing loans, which triggered an inspection by the central bank.

Bankers say such changes are only permissible where loan agreements contain clauses allowing margins to be revised in response to changing market or credit conditions.

Moseki warned that the central bank could act against institutions that fail to comply with guidelines.

“If there’s a need where banks are not abiding by guidelines, we can impose penalties,” he said.

However, he noted that the Bank’s current approach is focused more on persuasion than enforcement.

As credit conditions worsen, borrowing activity has already begun slowing.

Annual bank credit growth fell from 7.1 percent in October 2025 to 2.5 percent by January 2026.

“Both households and businesses continue to experience notable declines, consistent with the rising cost of living, weaker business confidence and higher interest rates,” Jefferis noted.

Over the three months to January, he said, “bank credit actually contracted, with annualised growth of minus 4.4 percent.”

“This presumably reflects a combination of reduced demand for credit from firms and households, due to high interest rates and uncertainty over future economic conditions, as well as restricted credit supply from the banks,” he added.

Household credit growth dropped from 4.4 percent to 1.5 percent over the same period, largely due to weaker mortgage lending. Business credit growth slowed from 10.5 percent to 4.4 percent.

Loan arrears are also rising.

By December 2025, total arrears across the banking sector had reached 5.8 percent of all bank credit, up from 4.8 percent a year earlier.

“This upward trend was particularly pronounced in the household sector, where arrears jumped from 4.3 percent to 5.5 percent year-on-year, likely reflecting the impact of rising interest rates,” Jefferis said.

The timing is particularly significant because it coincides with the government’s own economic recovery strategy.

The Botswana Economic Transformation Programme (BETP), which the Ministry of Finance expects to drive projected growth of 3.1 percent in 2026, is heavily dependent on private sector investment.

Roughly 60 percent of projects under the programme are expected to be private sector-led.

As the Business Expectations Survey observed, “investments and funding requirements associated with the Botswana Economic Transformation Programme may also engender an increased appetite for borrowing.”

However, Jefferis warned that elevated government borrowing is undermining those ambitions.

He cautioned that sectors such as real estate and construction are likely to suffer from “the limited availability and high cost of bank credit, driven by continued high government borrowing.”