Overview of the Botswana Banking Sector

1. Overview of the Botswana Banking Sector Keith Jefferis Econsult Botswana (www.econsult.co.bw)

2. Structure of Presentation Structure and Regulation of Banking Sector Sector growth Structure of assets and lending Competition and profitability Current issues

3. Financial Institutions Classified by Regulator

4. Financial Institutions Regulated by BoB

5. Regulatory Structure BoB Licensing of Banks (Banking Act & Regulations) Ongoing Supervision and Regulation Statutory banks (shared with MFDP) CIUs & IFSC MFDP Insurance firms & brokers, BSE and stockbroking firms, pension funds, statutory banks, DFIs New regulator (NBFIRA) Entities regulated by MFDP Currently unregulated entities CIUs MFDP to focus on policy

6. Regulatory Structure BoB Well-established and well-regarded regulator Licensing process non-political � determined by BoB Board (with appeal to Minister) Banks defined in terms of deposit-taking activity Banking system sound, profitable and well-capitalised Banking �crises� dealt with capably BCCI, Zimbank, BCB, Kingdom Swift action in (few) cases of illegal banking activity Focus on prudential regulation, depositor protection, systemic stability & capital adequacy rather than consumer protection

7. Banking System - 1989 �The commercial banking system, while sound and profitable, is very conservative. With only three banks (and one of these very small) the degree of competitiveness is low. In the tradition of the last century of British commercial banking, these banks emphasize overdraft lending and do not offer much in the way of longer term resources to fund investment. The banks have not had to be particularly entrepreneurial to earn good profit . . . [and] . . . their capital bases are small in relation to the financing needs of some major clients�. World Bank/GoB �Financial Sector Policies for Diversified Growth(p.46)�.

8. Banking Sector Growth - 1 Banking sector has grown faster than economy as a whole Banking VA avg. 9.7%/yr growth 1993-2006 GDP avg. 6.9%/yr growth Up from around 4% of non-mining GDP to 6.5%

9. Banking Sector Growth - 2 Key banking aggregates (assets, credit) have increased steadily as a share of GDP Sharp jump in banking assets in 2006

10. Banking Sector Growth - 3 No. of banks increased rapidly after 1990 Followed by a period of consolidation and subsequent renewed growth

11. Banking Sector Growth - 4 Steady increase in capitalisation of banking sector Up from 1.1% of GDP in 1988 to 2.7% in 2006

12. Structure of Financial Sector Assets, 1996 & 2006

13. Financial Depth & Per Capita Income (2005) Comparative int�l data shows positive relationship between relative size of banking sector (M2 = deposits) and real income Botswana banking sector is relatively small given GDP level Half of �expected� level

14. Structure of Banking Sector Balance Sheet Excess liquidity a dominant factor Loans are the largest asset class But, assets other than loans important on balance sheet Sharp jump in BoBCs in 2006

15. Loan to deposit ratio Banks sometimes criticised for not lending out enough of their deposits; Loan-to-deposit ratio fluctuates around 60%; Upward trend over decade to 2005 Sharp drop in 2006 due to BoBC-related inflows

16. Structure of Bank Lending 2006

17. Maturity of Bank Lending Banks criticised for lending short-term Steady increase in avg. maturity of lending Avg. maturity doubled over past decade

18. Bank Income and Costs Net interest income makes up bulk of bank income No evidence of rising income share from fees & charges despite concerns Striking decline in (non-interest) cost to income ratio Evidence of greater efficiency? Result is risinig profits

19. Return on Assets RoA has been rising steadily More than doubling over the decade Similar trends in RoE Rising profitability despite increased competition RoA and RoE very high by international standards

20. Interest Rate Spreads Lending rates have been rising over time (partly driven by monetary policy) Deposit rates have declined Rising spread between deposit & lending rates Again, contrary to expectations

21. Banking Sector Concentration Concentration is one measure of degree of competition Depends on size and number of banks Has been declining steadily, indicating increased competition

22. Issues Facing the Banking Sector Ownership and Privatisation Dominant foreign ownership will remain an issue Pressure for citizen-owned bank(s) to continue Privatisation of Govt FIs in next 5 years Competition, Profitability and Licensing Policy Trend of increased competition will continue Licensing policy needs reform to accommodate new types of banking operations Profits likely to remain high although rate of profitability may decline

23. Issues Facing the Banking Sector Cost of Banking Evidence that banking in Botswana is expensive by regional standards, although not unduly so Will remain an issue especially while profits remain high Competition will result in pricing pressure � both new competitors and technologies Future of BoBCs Excess liquidity likely to persist Some absorption mechanism essential (BoBCs, T-Bills)

24. Issues Facing the Banking Sector Sources of Future Growth Un/under-banked Over 50% of adults unbanked Only 50% of population live in proximity to bank branches Govt pressure to extend banking coverage Will require products and pricing geared to low/irregular incomes and alternatives to branches

25. Issues Facing the Banking Sector Technology Cell-phone banking � high cellphone penetration offers opportunities Non-branch distribution (ATMs, retail agents) e-money Under-served sectors of economy lending doesn�t reflect structure of economy opportunities in, e.g., new mining ventures may require product innovation and changed attitudes to risk

26. Conclusions Banking sector transformed since 1989 Rapid growth in number of banks, assets and capital base Steady increase in extent and maturity of lending Broader range of products and services Rising profitability despite intensified competition, unlikely to be sustained Contentious issues of cost of banking, lack of population coverage, high profits Challenges/opportunities of new technologies and forms of banking