The Financial Stability Council (FSC), convened on November 2, 2023, to scrutinize the prevailing conditions within the financial sector, alongside associated developments and vulnerabilities.
In the realm of financial stability, a pivotal state is achieved when financial markets and institutions, encompassing banks, non-bank lenders, insurance companies, pension funds, payments infrastructure and platforms, and their affiliated entities, effectively furnish a wide array of financial services. This entails deposit-taking, loan provision, insurance, wealth and fund management, advisory services, custody, as well as payments and settlement infrastructures that facilitate a broad spectrum of economic activities and inclusivity.
In Botswana, the FSC was officially launched in February 2019 and comprises senior officials of the Ministry of Finance and Economic Development (MFED), the Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), and the Financial Intelligence Agency (FIA).
In its latest evaluation, the FSC said that the domestic financial system persists as resilient, robust, secure, sound, and unencumbered in its mission to deliver and advance the gamut of financial services that support the economy. This mission is underpinned by a comprehensive framework of policies and regulations.
The Council’s scrutiny revealed that the primary risks to financial stability are largely intertwined with global and regional developments. These encompass the deployment of high interest rates as a means to combat inflation, which in turn poses challenges to debt servicing and sustainability for governments, businesses, and households. There is also the looming threat to the viability of banks with business models premised on maintaining low and stable interest rates. Additionally, economic and trade disruptions stemming from geopolitical tensions and economic fragmentation warrant careful consideration. Nevertheless, the global financial system has remained stable and resilient against shocks, thanks to the efficacious regulatory reforms initiated post the 2008/09 global financial crisis and the continuous enhancement of supervisory frameworks.
Within the domestic landscape, the financial system’s resilience and efficacy in offering financial services to the economy is upheld by robust capital and liquidity buffers, sustained profitability, ongoing innovation and adaptability, and a regulatory framework that fosters an enabling environment. The macroeconomic context also fosters financial stability, supported by positive economic growth, sound government fiscal management, moderate inflation, and correspondingly manageable interest rates. This environment is buttressed by dependable and effective macroeconomic policies. Consequently, financial sector vulnerabilities are generally under control, with risks effectively mitigated. Notably, stress tests conducted on banks to gauge their potential susceptibility to various shocks have validated their strong solvency and resilience.
The Council also took note of the potential contagion risk that emanates from the deep interconnections between various elements of the financial system, such as commercial banks, non-bank financial institutions (NBFIs), the non-financial sector (comprising government, corporates, and households), and the external sector. Nevertheless, this risk is mitigated by diligent supervision and the robust liquidity and capital positions upheld by the financial system as a whole. Regarding credit risk, it was observed that commercial bank lending remains moderate, closely aligned with the pace of gross domestic product (GDP) growth. The ratio of non-performing loans to total loans, standing at below four percent, underscores the relatively modest credit risk. Consequently, credit developments pose minimal threats to financial stability. In this context, credit extension continues to serve as a positive catalyst for economic activity and the enhancement of overall welfare.