Botswana has a moderately well-developed financial sector that comprises a variety of products and services, and adheres to global standards in the transparency of banking supervision.
The ‘Finance and Business Services’ sector made up 15.4 percent of Botswana’s real Gross Domestic Product (GDP) in 2019 against 13.8 percent in 2010, while the ‘Banks and Insurance’ subsector contributed 5.1 percent. Botswana’s financial system remained relatively resilient in 2020, despite the negative environment created by the Covid-19 pandemic. During the year both Moody’s Investors Service and Standard & Poor’s continued to award Botswana the best credit rating in Africa.
The Bank of Botswana (BoB), which is the country’s central bank, is responsible for the regulation and supervision of commercial banks, statutory banks, bureaux de change and deposit-taking microfinance institutions. The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) is an independent regulatory agency for non-bank financial institutions (NBFIs). Established in April 2008, its principal objective is to regulate and supervise NBFIs so as to foster their safety and soundness, bringing fairness, efficiency and orderliness to the sector and the financial system at large, while reducing financial crime.
FINANCIAL SYSTEM RESILIENCE
Notwithstanding the challenges raised by the onset of the Covid-19 pandemic, the vulnerabilities that could have elevated risks to financial system stability were adequately contained, as reported in the BoB’s Financial Stability Report of October 2020. In particular, the sector was assessed to be resilient and characterised by strong capital and liquidity buffers, as well as generalised institutional strength and good business performance.
The enduring stability of the financial system is supported by a sound macroeconomic environment, efficient and robust market infrastructure, prudently managed banks, and effective regulation and supervision. While economic performance is severely constrained by the impact of Covid-19, proactive policy actions continue to provide a stable anchor for the financial sector. Positive developments include the accommodative real monetary conditions, creating additional liquidity channels into the banking system, additional measures instituted by non-bank financial institutions to mitigate the negative consequences of the pandemic, and expansionary fiscal policy support.
Maintaining a stable macroeconomic environment is crucial in times of uncertainty. In this regard, Botswana continues to pursue fiscal and structural reforms aimed at restoring the economy to a higher growth path.
In managing monetary policy, the Bank of Botswana strives to maintain inflation within the objective range of 3-6 percent. In December 2020, headline inflation was 2.2 percent, and has been below the lower end of the BoB objective for more than a year. The low inflation rate is mainly a reflection of reduced domestic fuel prices following a fall in international oil prices, combined with subdued domestic demand and sluggish economic activity.
In the medium-term, inflation is expected to remain within the Bank’s objective range, despite some upward pressure from fuel prices, the increase in VAT and administered prices, and the anticipated increase in domestic demand in response to the implementation of the Economic Recovery and Transformation Plan (ERTP).
Since the advent of the pandemic in the first quarter of 2020, the Bank Rate has been reduced twice in an effort to boost economic activity as the cost of borrowing is lowered. In April 2020, it was reduced from 4.75 to 4.25 percent, and a further reduction to 3.75 percent was effected in October 2020.
BANKING
The banking sector comprises nine commercial banks (five of which dominate the industry, with 84.7 percent of total assets), three statutory banks, including a building society, and 60 bureaux de change. Commercial banks with the longest history in Botswana include Standard Chartered Bank Botswana and Barclays Bank of Botswana (both established in 1950), First National Bank of Botswana (established in 1991) and Stanbic Bank Botswana (1992). The network of bank branches and ATMs is extensive, albeit concentrated in the more populated eastern areas.
The size of the banking sector, relative to GDP, was estimated at some 50 percent at the end of 2019. At the same time, the number of branches had risen to 155, and the total number of ATMs to 542. Most of the new ATMs have enhanced functions, including deposit-taking capabilities, thus making it more convenient to access transactional banking services. At the same time, overall access to banking services stood at 72 percent.
In the main, the capital, asset quality, liquidity and profitability levels of banks met prudential requirements in 2020, indicating a generally sound and stable banking system.
Banks maintained good quality assets in 2020, with a decline in credit default rates. The ratio of non-performing loans (NPLs) to total credit was 4.3 percent in December 2020, compared with 4.9 percent in December 2019. Nevertheless, there continues to be some risk to asset quality associated with the high proportion of relatively more expensive unsecured lending (at 71.5 percent of household credit in December 2020) in commercial bank credit.
Proactive responses to Covid-19 include a loan guarantee scheme to support access to bank credit for struggling businesses, as well as bank loan repayment holidays for adversely affected borrowers.
In general, the level and rate of increase of credit continued to be supportive of economic activity. Notably, the credit to GDP ratio increased, indicating the steadily growing importance of credit in supporting economic activity, albeit remaining comparatively low by global standards. Moreover, this modest credit growth, which is commensurate with the rate of increase in GDP as measured by the credit-to-GDP gap, signifies that there is room for sustained economic expansion.
The Botswana Financial Inclusion Roadmap and Strategy that runs from 2015 to 2021 lays out national priorities for the enhancement of financial inclusion in the country. The Strategy is being implemented under five priority areas, namely: Improvement of Payments Eco-System; Facilitation of Low Cost, Accessible Savings Products; Development of Accessible Risk Mitigation Products; Improvement of the Credit Market and Consumer Empowerment and Protection.
The aim is to reduce the percentage of the financially excluded population to 12 percent by 2021. Results from the Botswana Finscope Consumer Survey 2020 will determine the current level of access to financial services in the adult population.
Government is developing legislation that will promote access to credit and provide for regulation of the credit reporting system and the credit bureau operation in Botswana. Additional legislation will provide for the creation of security interests in movable property and harmonisation of all secured transactions, allowing individuals with movable property, such as motor vehicles, tractors, farm produce, and intellectual property rights, to use these as collateral to secure loans from financial institutions. Furthermore, the Botswana Savings Bank has championed the facilitation of low cost, accessible savings products in Botswana for the lower income segment of the population who are currently excluded.
The financial sector is at the forefront of digitisation in Botswana’s economy, with banks continuing to roll out digital products and services. By late 2020, the number of transactions conducted through electronic funds transfer (EFT) had increased by 7 percent compared with the previous year, while the number of point-of-sale or swiping transactions increased by 13 percent. At the same time, the use of cheques dropped by 33 percent. The National Payments System Vision and Strategy (NPSS) 2020– 2024 is designed to promote the use of digital payment platforms, thereby accelerating financial inclusion and supporting the growth of the digital economy.
NON-BANK FINANCIAL INSTITUTIONS
Non-Bank Financial Institutions (NBFIs), which include retirement/pension funds, insurance, the capital market, mutual funds and micro-lenders, have grown significantly in recent years, and cross-linkages with commercial banks have increased. At 54 percent market share of overall financial sector assets by December 2019, NBFIs continue to dominate the financial system, underscoring their importance in financial intermediation. The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) Act has brought the supervision of all NBFIs and services under one regulatory authority.
The NBFI sector has recorded an increase of 2.3 percent in active entities, from 747 in 2018 to 764 in 2019. This was primarily due to the number of non-bank lenders, which grew by 10 percent, from 342 in 2018 to 376 in 2019. Retirement funds also registered one new player, ending the year at 86. Over the same period, there was a decline in the number of entities in capital markets, decreasing by 3.6 percent from 84 to 81, and insurance, falling by 6.4 percent from 236 to 221.
The insurance industry comprises life insurers, general insurers (accident, engineering, property, guarantee, liability, transportation and miscellaneous insurance services), reinsurers and medical insurance funds. The industry is dominated by the life segment, followed by the non-life segment, and lastly the personal accident and health segment which has a much smaller share.
By the end of March 2020, the insurance industry consisted of a total of 221 insurance entities, of which 193 were insurance intermediaries licensed to carry out intermediary services. In addition, there were 2 978 representatives. Life insurance continues to dominate in respect of the share of assets and gross written premiums underwritten during the year ending 31 December 2019, at 86 percent and 72 percent, respectively.
The contribution of the insurance sector to GDP is high by regional standards, but was unchanged at 3.5 percent in 2018 and 2019, as overall gross written premiums remained steady at P5.4 billion. In addition, the total asset base of the insurance sector (reinsurers and insurers) increased slightly, from P19 billion in 2018 to P19.4 billion in the year under review.
The commencement of the NBFIRA Act, 2016, raised a need to review industry-specific Acts or to have some promulgated by Parliament. As a result, the Insurance Industry Act, 2015 and its supporting Regulations commenced with effect from 17 May 2019, and the Insurance Industry Act of 1987 was repealed.
Pension funds are the single largest subsector of the non-bank financial sector. The huge increase in pension funds industry assets has been supported by growth in membership as well as investment returns. The establishment of the Botswana Public Officers’ Pension Fund (BPOPF) in 2001 provided impetus for the sector’s growth. Reflecting the increase in member contributions and fair value gains, assets held by pension funds have increased from some P34.6 billion at the end of 2010 to P93.1 billion by December 2019, with total membership having risen to 264 591. By September 2020 the asset value had risen to P99.6 billion.
Currently the country’s largest pension fund by asset value, the BPOPF had 164 163 members as at 31 March 2020 compared with 162 051 in the previous year, with total assets valued at P67.1 billion against P66.5 billion in 2019. By September 2020, the fund’s assets were worth some P73 billion, of which P3 billion is being invested in public infrastructure during the 2021-2022 period in order to diversify its holdings and contribute to national development.
The ratio of pension fund assets to GDP increased from 41.5 percent in 2018 to 47.2 percent in 2019, reflecting growth of 17.9 percent. Between December 2018 and December 2019, investment in domestic equities increased by 2.5 percent to P16.9 billion, while holdings of offshore equities increased by 17.3 percent to P42.9 billion due to rising prices and favourable exchange rates. Meanwhile, the value of domestic bonds held by pension funds increased by 6.6 percent to P9 billion, while offshore bonds rose by 4.1 percent to P6.1 billion.
The proportion of assets invested offshore by pension funds increased from 57.4 percent in December 2018 to 59.8 percent in December 2019. Current rules require pension funds to invest a minimum of 30 percent locally and up to 70 percent offshore. The share of pension fund assets invested locally has averaged around 40 percent and above in recent years.
By September 2020, domestic pension funds held P99.6 billion in assets, their highest level to date, with 36.4 percent of these invested in Botswana and the balance offshore.
BOTSWANA STOCK EXCHANGE
The Botswana Stock Exchange (BSE) is pivotal to the country’s financial system. It has allowed dual listing with other stock exchanges since 1997, and in 2001 launched a Venture Capital Board (VCB) that serves as a vehicle for newer businesses to raise start-up capital. The BSE’s launch of the Automated Trading System in 2012 saw a rise in the value of shares traded daily.
The Botswana Bond Market Association was registered in 2013, formulating a bond market convention for Botswana and Botswana Bond Indices. The Securities Act of 2015 consolidates and amends the laws relating to the regulation and supervision of the securities industry and its institutions in Botswana, prohibiting insider trading and other forms of market abuse.
In a process that began with the formulation of the BSE Transition Act in 2015, the BSE registered as a public company – Botswana Stock Exchange Limited – in August 2018. Government is the major shareholder, with 81.3 percent, while Imara Capital holds 5.7 percent, Motswedi Securities 4.3 percent and African Alliance 2.8 percent.
As a company, BSE now falls under the Companies Act. Its board comprises two non-independent directors and seven that are independent. This new development will enable the bourse to attract capital from some of the more sophisticated investors who are sceptical about conflicts of interest in non-demutualised stock exchanges.
In 2019, the BSE celebrated 30 years in operation. The year also saw the exchange enter into a Memorandum of Understanding with the Zimbabwe Stock Exchange (ZSE) to promote dual listings. In 2020, the first ever stock market data display screen was installed in the Gaborone CBD, and the revamped BSE website and new mobile application were launched.
The oversight of the BSE as a self-regulatory organisation (SRO) commenced in March 2020, with a Directive to issuers of unlisted bonds requiring them to register the bonds with the Central Securities Depository of Botswana (CSDB). This was meant to dematerialise the securities and to promote automated trading and digital record keeping. Companies operating under the auspices of the Botswana International Financial Services Centre (IFSC) were re-assigned to sector-specific departments in order to avoid supervisory arbitrage and risks that arise from grey area supervisory responsibilities.
During the period 1 January to 31 August 2020, the Domestic Company Index (DCI) depreciated by 5.9 percent against a decline of 5.8 percent during the same period in 2019. At the same time, the DCI Total Return Index (DCTRI) depreciated by 2.4 percent compared with a decline of 2.6 percent. The Foreign Company Index (FCI) depreciated by 0.8 percent on a year-to-date basis in 2020, following a decline of 0.4 percent over the same period in 2019.
Trading activity during the period under review was 59 percent lower than the corresponding period in 2019. As at the end of August 2020, the BSE had recorded total equity turnover of P483.3 million from traded volumes of 274.3 million shares, against a turnover of P1 175.4 million and a total volume of 378.2 million shares traded in 2019.
In the eight months to 31 August 2020, the top three traded companies in terms of value were Letshego (P122.7 million), Sechaba (P69.1 million), and FNBB (P59.2 million). Total turnover from these three companies (P251 million) accounted for 52 percent of total equity turnover, with the leading counter (Letshego) accounting for 25 percent of total equity turnover.
The value of bonds traded during the year to August 2020 was P834.19 million against P666.84 million in 2019. On the back of the reopening of Government bonds and corporate issuances, the market capitalisation of listed bonds increased to P19.3 billion during this period.
TAXATION & FISCAL LEGISLATION
A low taxation environment has been in place in Botswana for many years to encourage inward investment and expansion by local business. Changes have been made in tax legislation in recent years to streamline and strengthen the system, increasing the disposable income of individual taxpayers, improving the country’s competitiveness in attracting both direct and portfolio investment and intensifying anti-avoidance provisions. During 2012, the two-tier corporate tax system was abolished and replaced with a unified corporate tax rate of 22 percent and a withholding tax of 7.5 percent.
Sales Tax was replaced with Value Added Tax (VAT) in July 2002. Initially applied at a uniform rate of 12 percent to a wide range of goods and services, VAT increased to 14 percent with effect from 1 April 2021 in order to broaden the domestic revenue base. Even with this increase, Botswana’s VAT rate remains among the lowest in the SADC region.
The Botswana Unified Revenue Service (BURS) is responsible for the assessment and collection of tax revenue, facilitation of legitimate trade and management of borders for the development and security of Botswana. This comprises customs and excise duties, Income Tax, VAT, Capital Transfer Tax and other government levies. In an effort to minimise the burden for taxpayers, BURS has introduced e-services for all tax types, enabling the e-filing of income tax returns.
Changes announced in the 2021/22 budget include an increase in the fuel levy by P1 per litre on 1 April 2021. In addition, the withholding tax rate on dividends is being raised to 10 percent to equalise this rate with that on interest income. This is a final tax, and no further tax is payable on income derived from this source.
In order to alleviate the burden on taxpayers and reflect the impact of inflation over time, the tax threshold for income earners is being raised to P48 000 per annum, starting from the 2021/22 tax year. In a further effort to ease the burden on taxpayers, Government is offering a tax amnesty during the coming tax year, allowing taxpayers with outstanding tax amounts an opportunity to clear the principal amount owed in exchange for a write-off of interest and penalties charged during previous tax periods.
DEVELOPMENT FINANCE
Development Financial Institutions (DFIs) offer specialised services aimed at given economic sectors and areas of economic activity, providing loan facilities for a wide range of agricultural, commercial, service and industrial enterprises, including residential property services.
Originally established as a Post Office Savings Bank in 1911, the present-day Botswana Savings Bank (BSB) came into being through an act of parliament in 1992, when it became an independent financial institution, wholly-owned by Government. In 2009, Government took the decision to merge BSB, Botswana Post and Botswana Couriers. The Bank has been operating under the Transition Act of 2011, with suitable business models currently under scrutiny.
Botswana Post has launched a mobile money solution, PosoMoney, that allows customers to access a wide range of financial products and services, helping the unbanked and under-banked achieve financial inclusion.
Total assets and liabilities of the BSB increased by 24 percent in the year to December 2019. Over the same period, savings deposits rose by 21.1 percent, from P2.1 billion to P2.6 billion, compared with a contraction of 0.7 percent in the previous year. However, loans and advances decreased by 3.3 percent in 2019.
Established in 1963, the National Development Bank (NDB) is a self-sustaining Government-owned financial institution. The bank offers a variety of financial services to the business community, in particular small, medium and large-scale enterprises, providing long-term loan finance at competitive fixed or linked interest rates, and it has played an important role in managing various Government initiatives on an agency basis. While the bank’s portfolio is diversified across various sectors, including property, commercial, retail and industrial, agriculture continues to account for the bulk of its loans.
Plans to privatise NDB to increase its efficiency and promote citizen economic empowerment foresee the sale of up to 49 percent of its shares, with 44 percent being offered to citizens and non-citizens and 5 percent to employees through an employee share ownership plan. While the National Development Bank Transition Bill was passed in 2013, the privatisation process has been delayed to allow for NDB’s commercialisation.
Between December 2018 and December 2019, the balance sheet of the NDB rose by 12 percent, from P939 million to P1.1 billion, compared with a decline of 18 percent in 2018. This growth was thanks to a capital injection by Government, which resulted in 132.8 percent total liquid assets, while asset building was constrained. Loans and advances and fixed assets dropped by 5.9 percent and 1.6 percent, respectively. On the liability side, capital and reserves increased by 68.2 percent while borrowing (to fund its operations) contracted by 18.9 percent.
The Botswana Development Corporation (BDC) Limited was established in 1970 to be the country’s main financing agency for the development of commercially viable businesses. Products include equity participation, loan financing (short and long term), guarantees and provision of factory space. Its investment portfolio covers agribusiness, industry, property development and management, hotels and tourism, and financial services.
BDC’s total assets grew by 28.1 percent from P2.8 billion to P3.6 billion between December 2018 and December 2019. This performance was largely attributable to a rise of 53.4 percent in loans, advances and leasing, as well as a 31.6 percent increase in investments in related companies. Fixed assets decreased from P181.1 million in 2018 to P163 million in 2019.
The Botswana Building Society (BBS) is tasked with raising funds to provide mortgage finance for both citizens and non-citizens. It has a wide range of savings and investment products in the form of shares and deposit accounts, and its nine branches cover most of Botswana’s major urban and rural centres. The society now boasts a more diversified customer base that includes high net worth clientele, comprising both private individuals and corporate entities.
The demutualisation and privatisation process of the BBS, which included the conversion of the Society into a company registered under the Companies Act, was completed in April 2018. As a result, many Batswana who held different types of deposit accounts with the Society were transformed from depositors into shareholders. The BBS has applied for a licence from the central bank to operate as a fully-fledged commercial bank, which will make it the first indigenous bank in the country.
BBS’s latest financials show a loss of P35.761 in the nine months to December 2019 against a loss of P26.191 for the corresponding period to December 2018. At the same time, total savings and deposits grew by 33 percent, from P2.170 billion to P2.885 billion.
Over the same period, BBS experienced an increase in NPLs from 9 percent to 10 percent, as some of its customers defaulted on their loan repayments due to loss of income and/or loss of jobs, largely associated with mine closures and retrenchments. Despite the loss, other performance indicators show that BBS Limited remains healthy. Furthermore, BBS Limited’s capital base remains strong, as signalled by the capital adequacy ratio, which stood at 24.50 percent as at December 2019.
Total assets and liabilities of the building society increased by 15.5 percent from P4.0 billion in December 2018 to P4.6 billion in December 2019. Mortgages, which make up the bulk of BBS’s loan book (89.3 percent in 2019) increased by 6.7 percent from 3.6 percent in 2018. On the liabilities side, the level of capital and reserves decreased by 11.1 percent from P595 million to P529 million, while public deposits grew by 36.3 percent, reflecting the increase in deposits from corporate customers during the year, which led to the 81.6 percent rise in cash and deposits with the domestic banks.