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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