The International Monetary Fund (IMF) this week said Botswana needs to review its banking laws, as the central bank lacks some of the legal powers required for implementing corrective action on banks that flout prudential requirements. IMF further said Bank of Botswana (BOB) has no real powers to take action against banks that conduct business in an unsound or unsafe manner.
According to a report compiled by an IMF team that visited Botswana last year at the request of the BoB, the current legislative framework guiding the bank resolution and financial sector, crisis management is weak and no longer provides an adequate framework for the conduct of the central bank’s responsibilities.
The IMF said; “Once a bank has become acutely distressed, the BoB has insufficient legal powers to resolve the bank effectively. The current powers are largely limited to the ability to issue directives to a bank, to place a bank into temporary management, and to apply to the court for the winding up of a bank or commencement of judicial management. The powers are not sufficiently certain or wide enough in scope to provide an effective legal framework for resolution.”
There are two laws governing the supervision of banks in Botswana, the Bank of Botswana Act (BoBA) and the Banking Act (BA), whose last significant revisions date back to 1996 and 1995 respectively. According to the IMF, revisions to the existing BoBA and BA are also needed to remedy the deficiencies in the emergency liquidity assistance (ELA) capabilities, corrective action framework and bank resolution powers.
On liquidity, the IMF said the capacity of the financial system to adequately allocate liquidity when it is needed, should also be reviewed.
“The effectiveness of the current BoB liquidity providing monetary operations could be reassessed,” the report stated.
Botswana last experienced a liquidity crunch two years ago, which led to the central bank releasing more funds into the system by reducing the primary reserve requirements. However, the IMF believes that while the banking system still has a structural liquidity surplus, it is distributed unevenly, leading to occasional idiosyncratic liquidity shortages. The temporary liquidity shortages in the Botswana banking system have been attributed to the dominance of the volatile corporate sector deposits and to the creation of a single treasury account.
In the 2017 monetary policy statement, the central bank also bemoaned the worsening corporate sector liquidity, referring to it as an enduring challenge for commercial banks. About 73.4% of deposits are from corporates potentially reflecting an imbalance in the market. In 2016 the imbalance appears to worsen, as there was a significant deceleration in the annual growth of household deposits i.e from a growth of 16.8% in December 2015 to a contraction of 3.6% in December 2016. Additionally, annual growth in business deposits decreased significantly from 16.2% in December 2015 to 7.2% in December 2016.
While in Botswana, the IMF team met with Governor, Moses Pelaelo and his Deputy, Andrew Motsomi, as well as with Solomon Sekwakwa, Permanent Secretary of the Ministry of Finance and Economic Development. The team also met with senior staff, officials, and advisors of the BoB, as well as with public officials of the Non-bank Financial Institutions Regulatory Authority and private sector representatives from the banking and insurance sectors.