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Bank of Botswana (BoB)’s Director of the Department of Research and Financial Stability Dr Tshokologo Kganetsano says the financial sector is a key element in the potential success of the current industrialization policy.
Briefing the Francistown business community and other stakeholders at the Thapama Hotel this week observed that there is scope for financial sector growth as Botswana is still lagging behind its peers in the upper-middle income countries category.
Deliberating on the subject of Financial Sector Development, Inclusive and Sustainable Economic Growth described the financial sector as “a set of institutions and markets, which include banks, insurance companies, investment funds, stock exchanges and development finance institutions”.
However, the financial sector can only develop provided there is supportive environment hinged on sound macroeconomic and financial stability, strong governance and institutions which adhere to the principles of transparency accountability, rule of law and legal framework that guarantees and efficiently enforces property rights.
Other preconditions for the development of the financial services sector include a robust, efficient and innovative regulatory framework.
According to Dr Kganetsano, Botswana’s financial sector still remains relative to the size of the economy and challenges all stakeholders to spur the sector’s growth.
In its 2017 annual report, BoB acknowledges that financial development is initially advantageous as it promotes productive deployment of financial resources and risk sharing, and alleviates the constraints from information asymmetry.
However, a highly developed and globally integrated financial system entails increased economic and financial vulnerabilities, while also amplifying boom-bust cycles by promoting greater risk taking and leverage.
This is a greater challenge and with a potentially increased adverse impact in a poorly regulated and supervised financial system. The 2007/8 global financial crisis illustrates financial development and financial stability trade-offs, where the combination of a lightly regulated and integrated financial system contributed to the financial crisis and the significant adverse impact on macroeconomic outcomes and, in general, economic performance.
The rapid development of the financial sector worldwide promotes greater inter-connectedness between financial institutions and the real economy, and creates potential for accelerated, widespread and intense contagion; thus costly disruption to the financial sector and to economic performance. All these point to the importance of having a stable well-functioning financial system, hence the increased vigilance of central banks in respect of financial stability.
As part of the strategy to safeguard financial stability, Bank of Botswana says there are concerted international efforts towards a system-wide macroprudential approach to regulation and supervision of the financial sector that also incorporates elements of micro-prudential (an institution-based system) regulation.
It is recognized that the soundness of an individual financial institution or segments of the financial sector is not enough to ensure financial system stability. Therefore, macroprudential policies derived from a broad-based monitoring framework help to limit systemic risks that could otherwise disrupt the provision of financial services and adversely affect the real economy.
Macroprudential policy seeks to address three key areas: increase the resilience of the financial system to aggregate shocks; contain the build-up of systemic vulnerabilities over time; and control structural vulnerabilities within the financial system.
It is notable that macroprudentail policy, as part of a broad macroeconomic policy framework, takes account of other policies that have a bearing on financial stability. Overall, macroprudential policy aims to reduce the frequency and severity of financial crisis. Countries use a wide range of indicators and models to assess systemic risk.
A key element for enhancing and maintaining financial stability is the confidence of economic agents in the financial system. This can be promoted by an effective regulatory and supervisory framework that promotes competition among financial institutions and transparency to enable consumers to make informed financial decisions that include ability to switch, at minimum cost, to better financial service options when they become available. One factor that can entrench confidence in the financial system is a legal framework that recognizes and effectively enforces property rights, contracts and protects consumer rights.
On the evolution of the financial sector in Botswana, BoB observes that from 1976 to 1991, the financial system was characterized by financial repression, whereby interest rates were not market determined and government involvement in the provision of key financial services was prominent and entry into the banking sector was highly regulated and restricted.
Since then, the development of the financial sector in Botswana beyond the 1990s was influenced by deliberate policy, economic developments and advancing information technology. However, the financial sector is relatively small and undiversified compared to that of other upper-middle income countries. In particular, financial intermediation levels, credit and other monetary variables are comparatively low relative to nominal Gross Domestic Product (GDP).