Report recommends new growth avenues for banks

Brian Benza
Staff Writer | Tuesday June 17, 2008 00:00

The report says in recent years, lending to the household sector has been the traditional driver of banking growth in Botswana, but due to rising rates of arrears and concerns about over-borrowing, banks must consider other areas of potential growth.

Capital Securities identifies these as the low-income/unbanked market, new opportunities offered by technology challenges and the underserved business sector.

'Banks need to find ways of providing part of mining finance needs, if they are to be involved with important local business opportunities,' the report says.

One notable feature of the Botswana banking sector is that it does not lend any significant amounts to the two largest sectors of the economy - Mining and Government.

There has been little or no need for funding from banks in the mining sector, especially in diamond production which has been highly profitable, with capital investment financed from cash flows or by shareholders.

The report says by contrast, the largest mining company in the copper-nickel sector, BCL, has been unprofitable and has generally relied on government for funding.

However, with bigger mining projects coming on stream, banks will need to be on the lookout for financing opportunities in the mining sector.

'Some of the new mines will have financial needs far in excess of the capacity of the local banking system (and the smaller, junior mining projects may need predominantly risk/equity capital rather than bank loans,' says the report.

'Nevertheless, mining and mining-related projects are likely to be among the main drivers of the Botswana economy in future.

'Mining finance is, however, quite specialised, with distinctive risk profiles and lead times, and may require new skills in the banking system.

'The fact that Botswana banks are part of larger international groups provides possible sources of additional financing and expertise in these areas.'

Banks also need to examine other areas of potential growth such as financial inclusion for the previously unbanked market and to maximise use of technology in banking.

According to data from a Finscope survey carried out in 2004, 57 percent of the Botswana population is unbanked, reflecting concerns that the banking system only services a relatively small proportion of the population.

Capital Securities says improving access to banking can be a significant driver of growth for the banks in the future, although the conventional branch banking model is unlikely to be a suitable vehicle for extending access to banking, given the different characteristics of the unbanked.

'Hence other options may need to be considered,' says the report, 'including partnerships with other entities that have a distribution network (such as BotswanaPost and retail stores)', or taking advantage of new technology.

'In Botswana, access is particularly a problem in the less densely populated areas, and providing banking services through alternative distribution mechanisms may be one way of addressing this.'

Yet another avenue through which banks can find potential sources of future growth is mobile or cellphone banking.

Mobile banking platforms provide ways of reaching large numbers of customers on a low unit cost basis, and can provide a range of services, including bill payment, account transfers, person-to-person (p2p) transfers, government transfers (such as social welfare payments and pensions), cash withdrawals (via merchants or ATMs), and e-money (cash loaded onto smartcards or cellphone sim cards).

'Considerable success has been achieved in the Philippines, where Globe  Telecom's  G-Cash service, established in 2000, now provides mobile banking to 1.3 million customers.

'Safaricom's M-Pesa money transfer service in Kenya has been a runaway success since its launch in 2007. With the agreement of banking regulators in both countries, both G-Cash and M-Pesa are provided by cellphone companies, and not banks.

With Botswana having a high cellphone penetration, the report says banks need to take advantage of this as it has considerable potential.

From the seven operating banks in Botswana, only FNBB has a fully-fledged cellphone banking system in place.

'The high take-up of cellphones in Botswana suggests that the population is ready to adopt new technology, a point that is reinforced by (a) finding from  the FinScope survey that 75 percent of respondents were prepared to learn how to use new technology.

'FNB established a cellphone banking operation in late 2006, although this is targeted (at least initially) at existing customers rather than the unbanked.

Smartcards also offer considerable potential for payment services, especially for social welfare payments such as old-age pensions and virtual bank accounts,' says the report.