The impact of the Covid-19 pandemic on the performance of the financial sector in Botswana is currently unknown and expected to be unraveled in the near future. Fears abound that like other sectors of the economy, the likelihood of the financial sector getting out unscathed are very minimal.
Comprising of 10 commercial banks and three statutory banks respectively, the Botswana banking sector is dominated by commercial banks that hold 91 percent of total loans and advances, and 93 percent of assets. According to banking Supervision Annual report 2016, oligopolistic market conditions continue to be prevalent within the five large commercial banks, namely; Bank ABC, Barclays Bank (now Absa), First National Bank, Stanbic Bank and Standard Chartered Bank which account for more than 90 percent of total banking loans, advances assets and deposits.
According to a 2018 Grant Thornton report titled; “Botswana’s Banking, Financial and Insurance (BFSI) industry at inflection point”, the banking financial and insurance industry has experienced continued growth over the last three years, and its contribution to the country’s Gross Domestic product (GDP) stands at 5.1 percent. The size of the banking and insurance industry is currently P4.7 billion in real terms (constant 2006 prices) and P7.9 billion at current prices.
The Grant Thornton report also says that the credit deposit ratio of local commercial banks has improved steadily from 64 percent in 2011 to 86 percent in April 2018, with banks having to move a significant portion of their risk free investments an Bank of Botswana Certificates (BOBCs) into loans and advances to both commercial and household segments of the local economy.
Gross loans and advances experienced a compounded Annual Growth Rate (CAGR) of 9.4 percent from 2012 to 2017. As at December 2017, the figure stood at P54.1 billion, which is 59 percent of GDP versus 46 percent in 2012.
Despite the reflected healthy conditions of the banking and insurance industry sectors, there have been challenges to be grappled with including the decline in commodity prices over the past two years that translated into lower export values and lower mineral revenues.
It is also observed in the report that credit growth in the commercial segment has slowed down significantly in the last three years, with declining commodity prices impacting the segment as well as the overall economy.
“This is in contrast to the previous years when growth grew in double digits (excluding 2013). There is a decline is in credit growth within key sectors of the economy such as mining, manufacturing and agriculture. The mining sector’s credit growth is negative due to low commodity prices – which has resulted in the closure of some big mines such as African copper, Discovery Metals as well as BCL that has been placed in provisional liquidation”, laments Grant Thornton.
According to the report, credit growth declined from 6.2 percent in 2016 to 5.6 percent in 2017. Slower credit growth of the commercial segment is mainly on account of lower debt to parastatals, not the private sector. The decline in credit growth and rates over the years, as well as increased competition has seen the normalization of the banking industry’s profitability.
In yet another report dealing with banking industry performance, a report titled: “Performance Evaluation of Listed Commercial Banks in Botswana: The Camel Model”, released in October 2017, it is posited that the banking sector together with the insurance and business services accounted for 14.7 percent of the GDP in 2015, having risen over the years from six percent some 50 years ago.
The study by C. R. Sathyamoorthi, Mogotsinyana Mapharing, Shabane Ndzinge, Gobona Tobedza and Lillian Wally-Dima evaluated the financial performance of the listed commercial banks in Botswana for the period 2011 – 2015 applying the Camel Model concluded that “the selected banks were highly leveraged and that their liquidity position was sound”, and the results of the study are expected to be helpful to the management of the selected banks in making appropriate managerial decisions.
There is a widespread consensus that financial performance of a business enterprise has to be evaluated on a regular basis hence the study on the three oldest and largest commercial banks. Performance measurement is described as the process of quantifying efficiency and effectiveness while effectiveness is compliance with customer requirements, and efficiency is how the organization’s resources are used to achieve customer satisfaction levels.
The study concluded that all the selected banks were highly leveraged indicating that the banks had adequate capital funds that would comfortably provide coverage against bankruptcy. “It is worth noting that 64 percent of the assets of the selected banks were made of loans, which emphasized the quality when contrasted with returns. However, 82 percent of the loans were generated from deposits, which might be a concern for asset transformation. It is encouraging to note that average expenses during the period of study stood at 2.7 percent of the total deposits indicating efficient control over expenses. The earning ability registered a good return to the shareholders, a rate that was above 15 percent, exhibiting strong earnings ability over the five-year period. The liquidity position of the selected banks during the period of stud was also very sound”, said the study authors.
In yet another illuminating study on an “Analysis of Determinants of Profitability of Commercial Banks in Botswana” by Christain John Mbekomize and Mogotsinyana observed that financial institutions’ sustainable profitability is not only essential for their survival but also for propelling the overall productive capacity of the economy leading to national development. However, on the flip side, “financial institutions’ weak performance can trigger financial tragedy as the world witnessed in 1997 and 2008 financial crisis”.
It is further observed that since 1975 when Botswana established its own financial system, the banking sector has been characterized by rapid growth and high level of profitability compared to other countries in Africa. This has been achieved on account of good credit management policies, high bank fees, lack of effective competition and very low risk market conditions.
According to Dr Keith Jefferis (2009) the contribution of the banking industry to GDP doubled from 4 percent in 1995/6 to 8 percent in 2007/8. The banking industry has also been commended for the role it plays in the Botswana Stock Exchange through its dominancy in market capitalization. The down side of the banking sector in Botswana, however, is that it has remained small with high levels of concentration in relation to the economy size.
According to Bank of Botswana (Bob), the banking sector managed to maintain stability, soundness and solvency despite the global financial crisis of between 2007 and 2012. However, in the past five years since 2011 banks profitability started declining due to subdued global demand for commodities, particularly diamonds which have been the main export of Botswana, low interest rates and sharp decrease in market liquidity.
Moreover, the fall in profitability might have been contributed to by a two-year moratorium on banking fees and charges placed on shoulders of commercial banks in 2014 by the reserve bank. This onerous factor might have strained the banks’ earnings although the intention might have been to revitalize the borrowings by the public.
This study found that during the period in which it was undertaken, a sharp plunge of 50 percent in commercial banks profitability as measured by Return of Equity (ROE) was witnessed although assets were rising.
“Implications of these results to the banks are that they should find means to shield themselves against inflation related risks and try to match their increasing operating expenses with revenue growth. As banks chase corporate customers, they should not lose sight of household customers since excessive exposure to the former may lead to high risk in case of defaults due to macroeconomic factors. Bank liquidity should be brought under control while banks become more vigilant on assessing deserving customers for loans and advances to reduce the likelihood of defaulting. Banks should also intensify pursuit for non-interest income sources which can guarantee constant income to cover some non-interest expenses”, advised the study authors adding that banks should strike a balance between assets, liquidity, and liability management in order to remain competitive and earn higher profits.