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Financial Sector Assessment Program (FSAP) Report on Botswana

Background and Economic Context
Botswana's financial system is highly integrated, with commercial banks and non-bank financial institutions (NBFIs) dominating the sector. The economy has shown strong post-pandemic recovery, driven by diamond exports, but inflation remains elevated due to global conditions. Banks maintain robust capital buffers, but face vulnerabilities from concentrated short-term deposits and corporate reliance on retirement funds.

Systemic Risk Assessment

1. Credit Risk: Household loans account for over 40% of bank assets, with high exposure to short-term deposits from corporates and NBFIs. A 20% increase in household non-performing loans (NPLs) could strain capital adequacy.
2. Liquidity Risk: Banks hold ample liquidity, but wholesale deposit concentration creates vulnerabilities under adverse scenarios. Two banks were found to fall below capital requirements in severe stress tests.
3. Market and Macroeconomic Risks: High volatility in diamond prices, geopolitical developments, and tightening global financial conditions pose systemic threats.

Supervisory and Macroprudential Framework

• Supervisory Deficiencies: Limited operational independence for the Bank of Botswana (BoB), outdated regulatory tools, and gaps in risk-based supervision.
• Macroprudential Tools: Legal reforms under the Bank of Botswana Amendment Act (2022) aim to strengthen crisis management and emergency liquidity assistance (ELA).

Policy Recommendations

1. Strengthen Risk-Based Supervision: Implement Basel III liquidity standards, enhance consolidated supervision, and improve staff capacity for forward-looking risk assessments.
2. Deepen Capital Markets: Utilize retirement funds and insurance companies for long-term financing; develop debt and capital markets to reduce reliance on foreign borrowing.
3. Enhance Financial Safety Nets: Establish the Botswana Deposit Insurance Scheme (BDIS), operationalize ELA, and expand the Financial Stability Council’s mandate.
4. Address Data Gaps: Improve stress-testing frameworks, upgrade credit information systems, and enhance granularity in financial data collection.

Authorities' Response
Botswana authorities acknowledged progress in financial stability frameworks but highlighted the need to resolve systemic risks, particularly liquidity concentration and funding vulnerabilities. They committed to implementing FSAP recommendations, including regulatory reforms and crisis management tools.

Key Conclusions
Botswana's financial sector remains broadly resilient, but risks to capital and liquidity necessitate regulatory modernization. Strengthening supervision, deepening markets, and enhancing crisis preparedness are critical for safeguarding financial stability amid global uncertainties.