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
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Financial Institutions Regulated by BoB
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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

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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

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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).

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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

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Banking Sector Growth - 2

• Key banking aggregates (assets, credit) have
  increased steadily as a share of GDP
• Sharp jump in banking assets in 2006

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Banking Sector Growth - 3

• No. of banks increased rapidly after 1990
• Followed by a period of consolidation and
  subsequent renewed growth

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Banking Sector Growth - 4

• Steady increase in capitalisation of banking
  sector
• Up from 1.1 of GDP in 1988 to 2.7 in 2006

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Structure of Financial Sector Assets, 1996 2006
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Financial Depth Per Capita Income (2005)

• Comparative intl 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

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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

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Structure of Bank Lending 2006
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Maturity of Bank Lending

• Banks criticised for lending short-term
• Steady increase in avg. maturity of lending
• Avg. maturity doubled over past decade

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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

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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

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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

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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)

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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

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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 doesnt reflect structure of economy
• opportunities in, e.g., new mining ventures
• may require product innovation and changed
  attitudes to risk

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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