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A mixed bag

Progress made but problems remain in financial system

The latest Financial Stability Report, released in May, has identified numerous shortcomings that continue to undermine the integrity of Botswana’s financial system.

According to the damning report, chief amongst these failings is strategic anti-money laundering, deficiencies in combating terrorism (AML/CFT), governance, and misappropriation of funds in the non-bank financial sector.

It also warns the country’s European Union blacklisting poses additional risks, especially relating to the need for enhanced due diligence in establishing correspondent banking relationships and investing in offshore markets.

It is also feared the lingering presence of Covid-19 could elevate the risk of financial instability.

There was, however, some light amid the gloom.

It was noted progress is being made to rectify these problems, with Botswana obtaining positive re-ratings on some of the previously adversely rated Financial Action Task Force (FATF) recommendations.

“As such, the likelihood of elevated risk to financial stability due to ongoing strategic AML/CFT deficiencies is expected to recede going forward,” states the report.

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Additionally, despite the highlighted failings, the country’s financial system was described as ‘resilient’, characterized by strong capital and liquidity buffers, as well as moderate profitability.

Meanwhile, Botswana’s household credit is reported to have grown by 6.3 percent in the 12-month to March, a drop from the 15.1 percent growth recorded in March 2020.

Credit to households continued to dominate total commercial bank credit, at P43.3 billion or 66 percent in March and was mostly concentrated in unsecured lending at 71.8 percent.

The proportion of unsecured loans to total credit is said to be higher than the 24.4 percent and 35.4 percent reported in South Africa and Mauritius, respectively.

Indeed, the Bank of Botswana warns that a significant share of unsecured loans has the potential to cause financial distress for households, given the expense and short-term nature of such credit.

Household debt as a proportion of household income was 37.5 percent in the fourth quarter of 2020, a decrease from 44.7 percent in the same period in 2019.

But the ratio is relatively low when compared to 78.7 percent and 72.7 percent for Namibia and South Africa, respectively.

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In this respect, domestic household borrowing is reportedly in line with trends in personal incomes, implying a relatively strong debt-servicing capacity.

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