The Bank of Botswana (BoB) has begun consulting banks as well as its partners in the Financial Stability Council on establishing a Deposit Protection Fund (DPF), which would insulate customers’ funds in the event of a bank default.
By July, deposits with commercial banks amounted to P74.4 billion, with individuals accounting for about 20% of these or P15.2 billion.
While stress tests done in June by the Financial Stability Council show local bank resilience in the event of a run on deposits, a DPF would provide more security in the local financial sector.
The Council, made up of the BoB, Non-Bank Financial Institutions Regulatory Authority and the Financial Intelligence Agency, has already concluded consultations on the macro-prudential policy framework for the DPF.
In addition, the central bank has also adopted a concept paper on the DPF’s establishment. “Consultation will involve consideration of a DPF for the country, to guarantee access to deposits up to a specified threshold, in the event of bank failure,” the Council’s inaugural report on financial sector stability, reads.
“The macro-prudential policy framework outlines the possible and situational policy responses to developments that could include prescriptions with respect to loan-to-value, debt-to-income, and debt service ratios, amongst others, as measures or tools to foster safe and sound lending practices.”
The framework suggests the DPF would not simply be a financial bulwark for deposits, but would be introduced
The link between reckless lending and deposits was brought into sharp focus locally in 2014, when the local banking sector suffered one of its worst liquidity crises.
The crunch was caused primarily by years of unsustainably high credit growth set against stagnant deposit growth.
Several banks fell below the statutory liquid asset ratios, incurring penalties from the BoB, which was later forced to inject P2.3 billion into the banking system to shore up liquidity.
According to the liquidity stress tests conducted by the Council in June, in the case of a run on deposits, large banks showed they could survive for 17 days under severe stress conditions and small banks 11, indicating sound resilience.
“The purpose of the liquidity stress is to test the ability of banks to meet near-term payment obligations when faced with the loss of funding and counterparty cash drains,” reads the Council’s report.
Very few banks have failed in the country’s history with the list including the Bank of Credit and Commerce Botswana, Botswana Cooperative Bank and Kingdom Bank Africa.