Botswana: Financial Sector Assessment Program-Detailed Assessment of Observance—Basel Core Principles for Effective Banking Supervision

BOTSWANA IMFCountryReportNo.24/62 March2024 FINANCIALSECTORASSESSMENTPROGRAM DETAILEDASSESSMENTOFOBSERVANCE—BASELCOREPRINCIPLESFOREFFECTIVEBANKINGSUPERVISION ThispaperonBotswanawaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonJanuary18,2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.org InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund January18,2024 BOTSWANA DETAILEDASSESSMENTOFOBSERVANCE BASELCOREPRINCIPLESFOREFFECTIVEBANKINGSUPERVISION PreparedBy MonetaryandCapitalMarketsDepartment,IMF,andFinance,CompetitivenessandInnovationGlobalPractice,WorldBank ThisreportwaspreparedinthecontextofajointIMF-WorldBankFinancialSectorAssessmentProgram(FSAP)missioninBotswanafrom October12–November2,2022,ledbyThorJonasson,IMFandHarishNatarajan,WorldBank,andoverseenbytheMonetaryandCapitalMarketsDepartment,IMF,andtheFinance,CompetitivenessandInnovationGlobalPractice,WorldBank.FurtherinformationontheFSAPprogramcanbefoundathttp://www.imf.org/external/np/fsap/fssa.aspx,andwww.worldbank.org/fsap. BOTSWANA CONTENTS GLOSSARY3 INTRODUCTION8INSTITUTIONALANDMARKETSTRUCTURE—OVERVIEW8PRECONDITIONSFOREFFECTIVEBANKINGSUPERVISION12DETAILEDASSESSMENT15 A.SummaryofMainFindings16 B.SupervisoryPowers,ResponsibilitiesandFunctions25 C.PrudentialRegulationsandRequirements88 SUMMARYCOMPLIANCEWITHTHEBASELCOREPRINCIPLES224RECOMMENDEDACTIONSANDAUTHORITIES’COMMENTS233 A.RecommendedActions233 B.Authorities’ResponsetotheAssessment238 TABLE 1.Botswana:StructureofFinancialSystem10 BOTSWANA Glossary AC AdditionalCriterion ALCOAML/CFTBAOABCBSBCPsBIABoBBoBAABoBActBSDBWPC AssetLiabilityManagementCommitteeAnti-MoneyLaundering/CombatingTheFinancingofTerrorismBotswanaAccountancyOversightAuthorityBaselCommitteeonBankingSupervisionBaselCorePrinciplesforEffectivebankingSupervisionBasicIndicatorApproachBankofBotswanaBankofBotswanaAmendmentAct,2022BankofBotswanaAct,1995BankingSupervisionDepartmentPula(CurrencyofBotswana)Complaint CAMEL Capitaladequacy,Assetquality,Marketsensitivity,Earnings,Liquidity CCA CompetitionandConsumerAgency CDD Customerduediligence CEOCET1CFPCIActCPCROD-SIBD-SIFIsEaRECERTPEUFATFFIAFSAPFSCGDPICAAPIFRSIRRBB ChiefExecutiveOfficer(Principalofficer)CommonEquityTier1ContingencyfundingplanCreditInformationAct,2021CoreprincipleChiefRiskOfficerDomesticSystemicallyImportantBankDomesticSystemicallyImportantFinancialInstitutionsEarningsatriskEssentialCriterionEconomicRecoveryandTransformationPlanEuropeanUnionFinancialActionTaskForceFinancialIntelligenceAgencyFinancialStabilityAssessmentProgramFinancialStabilityCouncilGrossDomesticProductInternalCapitalAdequacyAssessmentProcessInternationalFinancialReportingStandardsInterestrateriskinthebankingbook 3 BOTSWANA ISAInternationalStandardonAuditing ISFIndustrySupportFacility ITInformationtechnology LARLiquidassetsratio LCLargelycompliant LELargeexposures MOFMinistryofFinance MISManagementinformationsystems MNCMateriallynon-compliant MoUsMemorandumofUnderstandings NBFIRANon-BankFinancialInstitutionsRegulatoryAuthorityNCNon-compliant NPLNon-performingloan OTCOver-the-counter RWARisk-weightedassets SREPSupervisoryReviewandEvaluationProcess USDUSDollar VaRValueatrisk ZARSouthAfricanRand 4 EXECUTIVESUMMARY BOTSWANA Despitesignificantprogressimprovingsupervisoryframeworkssincethelastassessmentin2007,supervisorypowersremainunderdeveloped.ThecurrentBankingActwasadoptedin1995andhasseveraldeficienciessuchasanabsenceofprovisionsforconsolidatedsupervision,majoracquisitions,andchangesinsignificantshareholding.Thereisneedforamorefrequentandcomprehensivereviewoftheregulatoryframeworktoensuretheyremainrelevanttochangingindustryandregulatorypractice.TheregulatoryframeworkneedstobeupdatedtoaligncloserwithrecentBaselnorms,guidance,andprinciples,particularlyintheriskmanagementareasspecifiedbelow.Supervisiontoolsandmethodologiesandguidancetosupervisorsneedtobeaugmentedasspecifiedbelowtomakesupervisionmoreforward-lookingandeffective.TheplannedrevisionoftheBankingActshouldaimtoaddressgapsandhelpstrengthenpowersandsupportmoreintrusivesupervision. Legislativechangesforsafeguardingoperationalindependenceareneeded.LegislativemeasurestoremovecertainministerialpowersinrelationtosupervisorymattersisneededtoachievetheindependenceoftheBoBinmattersofsupervision.Forexample,theBankingActprovidesforseveralcircumstanceswhereMinisterialapprovalisrequiredwhichmayinterferewiththeBoB’soperationalindependence.OtherprovisionsoftheBankingActallowtheMinistertooverruleBoB’sdecision,inthecaseofappealsforbankinglicenserejections.Finally,Government/MinistriesrepresentativesaresittingattheBoBBoardwhichisanotherfeatureoftheinstitutionalsettingthatneedstobeamended. WhiletheBoB’sBankingSupervisionDepartment(BSD)hasexperiencedandhighlycom