The race for deposits amongst local commercial banks is set to intensify, as the central bank warns that tighter liquidity in the market will push lenders to raise interest rates in order to attract funds.
With government spending slowing and less money circulating through the economy, the fight for cash is entering a new phase.
In its latest Banking Supervision Report, the Bank of Botswana noted deepening pressures facing commercial banks as government, the traditional generator of liquidity, continues to face income pressures due to dampened mineral sales.
The report noted that the amount of money available for different economic agents whether for loans, consumption or saving, was declining with conditions having worsened in the last lap of 2024 where low diamond sales led to more sluggish spending by government and ultimately less money available in the financial system.
“Inherent liquidity risk for commercial banks was high, with an increasing trend over the next 12 months,” the report released this week said. “Banks have been facing persistent liquidity challenges since the last quarter of 2024. “Given the general decline in liquidity, deposit interest rates for banks are expected to rise owing to intensity of competition for deposits, amongst banks”.
Given the diamond downturn, government has also been restraining its spending, which has led to smaller deposits in banks, and slower roll out of projects, tenders, and purchase orders This lower spending in the private sector has worsened liquidity conditions in the market.
The central bank now expects these developments to make the cost of attracting deposits high through increased interest rates between banks.
“Given increased competition for deposits, banks generally offered higher interest rates on deposits, which benefited customers and ensured stable funding for banks,” the report stated. . The current liquidity strain reflects what the International Monetary Fund (IMF) calls “a broader fiscal-monetary feedback loop”. When diamond revenues fall, government spending slows, reducing the circulation of pula in the banking system. Such fiscal tightening can constrict credit growth, raise short-term rates, and amplify competition for deposits, especially in small, mineral-dependent economies like Botswana.
In response to these pressures, the central bank last year moved to inject relief into the market by slashing the Primary Reserve Requirement (PRR), which is the proportion of customer deposits that banks must hold at the central bank without earning interest.
The move allowed banks to have access to an additional P1.8 billion for lending activities. Whilst the measure provided temporary breathing room, the 2024 report suggests underlying liquidity challenges persisted, especially as government cash flows remained constrained.
Despite this downturn, the banking sector has remained resilient. The report shows that total assets of commercial banks rose by 7.7 percent to P144 billion by December 2024, driven by growth in loans and advances which rose from P81.8 billion in December 2023 to P87.1 billion.
Customer deposits, the backbone of bank funding, increased modestly by three percent to P107.3 billion as well, accounting for about 75% of total liabilities.
