Member of Parliament for Gaborone Bonnington South, Ndaba Gaolathe has called for further and thorough review of the Banking act, recommending that the capital adequacy of setting up a bank be reconsidered.
Gaolathe was responding to the Banking Act Amendment bill tabled by Finance Minister, Kenneth Matambo in Parliament last week. According to Gaolathe who is also the leader of minority in parliament, Botswana’s banking regulations are stringent and hinder the sector from flourishing to its full potential.
Gaolathe argued that currently the requirements for setting up a commercial bank were restrictive especially for citizens. “The Banking act that we have now is too stringent and restrictive in terms of applying for a banking license and it is even more difficult for home grown indigenous banks to surface,” he said. The AP lawmaker explained that since Botswana is a developing economy, government should put in place relaxed regulations that promote financial inclusion and encourage mass participation of indigenous citizens in the lucrative sectors like the Banking industry.
Gaolathe said community savings and credit schemes popularly known as “Motshelo” have to be nurtured and given the opportunity to flourish into home grown banks that can develop into serious multinational banking corporations. “With the current act, the requirements and regulations are too steep for such evolution, this now leaves the Banking sector only to foreign investors who may decide anytime to take their wealth elsewhere,” he said.
Furthermore, Gaolathe highlighted that in the current Banking act, entities applying for a banking license were required to have a branch roll out strategy in place. Gaolathe said this requirement was an impediment as it overlooked the fact that some banking entities could still operate at profitable means and contribute significantly to the financial services sector while serving its customers as a single branch. The Gaborone Bonnington South Legislator also added that in reviewing the Banking Act there was need to add a clause that advocates for a balance in the shareholding structure of banking entities.
Minister of Finance & Economic Planning, Kenneth Matambo acceded to Gaolathe’s views, saying citizen owned banks were essential components for modern economies, not only in terms of turnover, but also as primary financiers. He observed that establishment of the indigenous banking sector would require adjustment of capital adequacy ratio as well as further amendments to the current banking act.
“We would need to remove stringent bottlenecks that hinder locals from investing in bank ownership during this in-depth review of the banking act so as to loosen up regulations and permit citizen participation,” he said. Matambo also underscored that the shareholding structure acceptable to Bank of Botswana was too broad and needed to be trimmed down to certain specifications so as to be more relevant to those willing to apply for banking licences. It was also noted that the dominance of foreigners in the banking sector shareholding was too risky and makes the sector prone to money laundering threats.
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Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”