The Bank of Botswana has said banking sector’s profitability improved in 2016, with income after-tax increasing by 29.3 percent from P1.1 billion in 2015 to P1.4 billion in December 2016.
As a result, Return on Average Total Assets (ROAA) and Return on Equity (ROE) also increased from 1.5 percent and 13.3 percent to 1.8 percent and 14.4 percent, respectively. Overall, the banking sector complied with the minimum prudential and statutory thresholds as expected. According to the Banking Supervision Annual Report 2016 released this week, the banking sector’s total assets increased by 5.3 percent from P76.6 billion in December 2015 to P80.6 billion. Loans and advances grew by 6.2 percent to P51.3 billion in December 2016, compared to growth of 7.1 percent in 2015.
“The Liquid Assets to Total Assets Ratio rose from 15.4 percent (2015) to 16.7 percent (2016), following an increase in liquid assets. Similarly, the ratio of NPLs to Total Loans and Advances increased from 3.9 percent in December 2015 to 4.9 percent in December 2016. The household sector accounted for 59 percent of total NPLs. The ratio of aggregate Large Exposures to Unimpaired Capital was much lower than the 800 percent maximum prudential limit set for banks in Botswana, implying satisfactory management of credit concentration risk,” reads the report.
In 2016, total customer deposits grew by 4.2 percent to P62.4 billion, the report further states. It recognizes that customer deposits constituted the largest proportion of liabilities at 77.4 percent and, as expected, the primary source of funding for the banking assets. “Interbank balances and credit from institutions increased by 20.4 percent from P3.3 billion in 2015 to P4 billion in 2016, as banks accessed alternative sources of funding for asset growth. As a result, the Financial Intermediation Ratio (the ratio of Loans and Advances to Deposits) increased from 80.6 percent to 82.2 percent.”
The Banking Supervision report notes that the banking sector was adequately capitalised and met the new regulatory capital requirements, with all banks reporting Capital Adequacy and Common Equity Tier 1 Capital Ratios in excess of the minimum prudential requirements of 15 percent and 4.5 percent, respectively. The banking industry’s capital adequacy ratio was 19.6 percent in December 2016 (December 2015: 20.1 percent).
Access to banking services, as measured by the ratio of Bank Accounts to Adult1 Population, improved from 75.9 percent in 2015 to 76.5 percent in 2016. Notwithstanding the fact that an individual can have multiple accounts, the ratio of Bank Accounts to Adult Population provides a rough indicator of access to banking services. The aggregate number of bank accounts grew by 3 percent from 1.13 million in 2015 to 1.17 million in 2016, while the number of accounts held by the adult population grew by 2.7 percent from 1.49 million to 1.53 million.
The Banking Supervision Annual report states that the employment levels in the banking sector for 2015 and 2016 increased by 0.5 percent from 5 030 in 2015 to 5 055 in 2016. The increase in employment levels was due to branch expansion. However, it further records that five banks recorded declines in their employment levels during the year under review due to branch rationalisation and automation.
The report indicates that Banks continued to innovate and introduce new products and services, including Credit Default Swaps (CDS)2 for institutional investors. CDS is an agreement where the buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults. Various savings accounts, such as target savings and offshore accounts, were also introduced.
To further enhance the existing service delivery channels, some banks upgraded the intelligent ATMs, among others, improving functionality with respect to cash and cheque deposits, withdrawal of foreign currency (e.g., South African rand (ZAR)), bill payments, and cardless services. Point of Sale (PoS) functionalities were also upgraded to permit acceptance of Union Pay International cards3, as well as allowing local merchants and customers to pay in any currency of their choice, where feasible.
Furthermore, PoS machines were enhanced to allow payment using earned cash-back points. In addition, the online banking platforms for small and medium enterprises were extended to include services such as payments to other bank accounts held in Botswana, bulk file payments for multiple beneficiaries and segregation of duties in the platform, according to an individual client’s needs.
FINANCIAL POSITION OF BANKS
According to the Banking Supervision Annual report, the banking sector’s total assets increased by 5.3 percent in 2016 (December 2015: 12.7 percent) from P76.6 billion in December 2015 to P80.6 billion; mainly reflecting a 6.2 percent increase in gross loans and advances to P51.3 billion in December 2016. Net loans and advances constituted a larger proportion of total banking sector assets (62 percent), followed by investment and trading securities (14 percent).
It states that the proportions of both assets and liabilities for 2015 and 2016 have largely remained unchanged, with minimal variations between the two periods. The report further buttresses that it is evident that the major source of funding for commercial bank assets continues to be customer deposits. In an effort to enhance and strengthen the resilience of the banking sector to economic and financial shocks, the Bank of Botswana says it implemented the Basel II Capital framework which came into effect on January 1, 2016.
“In order to facilitate an orderly transition to the new capital regime, the Bank adopted a gradual approach to Basel II implementation, commencing with Pillar 1 (Simple Approaches) and Pillar 3 disclosure requirements. The implementation of Pillar 2 and the Advanced Approaches has been deferred to a later stage.” According to the report, the commercial banks’ Large Exposures to Unimpaired Capital Ratio increased to 195 percent (2015: 194 percent). This ratio differed considerably among individual banks, ranging from 65.5 percent to 484.1 percent.
“The large exposures increased from P18.2 billion in 2015 to P20 billion in 2016, while unimpaired capital increased to P10.2 billion in 2016 (2015: P9.4 billion). The Large Exposures to Total Loans and Advances Ratio was 38.9 percent (2015: 37.7 percent). All banks maintained Large Exposures to Unimpaired Capital Ratios within the recommended 800 percent prudential limit.” The Banking Supervision Annual report states that the banking sector’s Liquid Assets to Total Deposit Ratio increased from 19.7 percent in 2015 to 21.6 percent in 2016, which was significantly above the 10 percent minimum prudential requirement.
“Similarly, the Liquid Assets to Total Assets Ratio increased from 15.4 percent in 2015, to 16.7 percent in 2016, following an increase in liquid assets. Overall, the total liquid assets held in the banking sector increased to P13.5 billion as at December 31, 2016 (December 2015: P11.8 billion),” it states. The banks’ aggregate cash and balances with the Bank increased by 38.2 percent from P4.6 billion in 2015 to P6.3 billion in 2016. Commercial banks’ placements with other banks and credit institutions increased by 3.9 percent from P10.5 billion in 2015 to P11 billion in 2016.
Chart 2.14 shows Bank of Botswana Certificates (BoBCs) holdings by banks for the period 2012 – 2016. There was a slight decrease in BoBCs holdings to P7.9 billion during 2016 (December 2015: P8.2 billion). The Report says overall, the liquidity indicators show an improved liquidity condition in 2016.
“The banking industry’s unimpaired capital increased by 9.2 percent from P9.4 billion in 2015 to P10.2 billion in 2016, due to an increase in retained earnings of 4.1 percent (2015: 11.5 percent) and Tier 2 capital instruments (5.8 percent). Four banks voluntarily injected additional Tier 2 capital amounting to P240 million. In addition, increases in banks’ capital levels can also be attributed to increases in RWA, as banks grew their loan books. All banks, with the exception of two banks, which paid out dividends, recorded increases in their unimpaired capital,” reads the report.
The report further shares that the country’s financial depth and development indicators improved marginally, with the ratios of Private Sector Credit and Banking Credit to GDP increasing from 31.6 percent and 32.4 percent in 2015, to 31.8 percent and 32.6 percent in 2016, respectively. However, the M2 to GDP ratio decreased from 45.7 percent in 2015 to 42.8 percent in 2016.
“As was the case in the prior year, five banks dominated the banking sector, accounting for 90 percent of total banking assets. There was a dilution of competitiveness, as measured by the Herfindahl-Hirschman Index (HHI), during the year. However, the banking sector remained moderately competitive. The pressure on banks to innovate, develop and improve their products and services, in order to maintain high profitability levels, is expected to enhance competitiveness.”
The Banking Supervision report suggests that there is still room for more players in the banking sector.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.