BoB mulls retail bonds from P15bn note programme

BoB governor, Moses Pelaelo
BoB governor, Moses Pelaelo

Batswana could soon join citizens in a handful of other African countries with access to state-backed retail bonds, the blue chip investments that offer top notch returns with the risk-free status that comes from being backed by government.

Retail bonds are an ‘IOU’ in which an investor agrees to loan money to an individual, company or government in exchange for a predetermined interest rate. Typically, government would hold auctions through the Bank of Botswana (BoB) giving Batswana a chance to bid for the bonds and secure their funds in a new investment class featuring an attractive interest rate. In Africa, South Africa and Kenya have the most successful government-backed retail bond markets.

This week, in response to BusinessWeek enquiries, central bank executives said proposals had been made that the retail bond programme kick off from within government’s existing P15 billion note issuance programme. Under the programme, dating back to February 2011, the BoB auctions bonds and six-month treasury bills exclusively to commercial banks.  The latest developments, if successful, would open the door of the auctions to Batswana.  At present, government has issued out P10.2 billion of the note issuance programme, via quarterly auctions.

While the funds raised at the auctions are generally used to develop and support the local capital market, government also directs them to budgetary support as part of its domestic borrowings. “The Bank of Botswana is indeed considering the introduction of retail bonds as a component of the existing P15 billion bond programme, administered by the Bank on behalf of government, and currently offered at wholesale level,” the BoB said in an emailed response. “In addition to contributing to enhancing the benefits of the programme, the retail bonds would support financial inclusion through access to secure, low-denomination savings product offering an attractive return.  “Moreover, in providing alternative options for retail savers, it would also encourage commercial banks to offer more attractive savings products.”

The retail bonds would be boon to Batswana looking at investing lump sums, such as entrepreneurs, pensioners and ordinary citizens. At present, the main savings avenue, is via deposits with local banks, where real interest rates are at rock bottom levels. 

The central bank said careful planning and preparation was needed for the retail bonds, including the development of effective marketing and distribution networks in order to “optimise the opportunities of the programme and to gain traction and success over the long term”. 

“Among others, the bonds must be secure while also easily accessible to the general public; thus the opportunities to use information technology options, including the internet or mobile phones, as well as retail partners to support effective marketing and distribution.

“In addition, appropriate ranges for thresholds need to be carefully determined to achieve the access objective and retain the character and features of a retail product,” the central bank said.

The BoB said because retail bonds must be readily accessible to retail customers including small businesses, there was need to focus on relatively small denominations that would accommodate those on relatively low incomes. Such denominations would reach those currently disadvantaged in terms of access to quality savings products which offer attractive returns, the Bank said.

“The necessary consultations with the government would need to be undertaken in this regard. “Effective savings mobilisation at the retail level is essential for financial inclusion.

“In developing the project, close attention will be paid to the experience of introducing retail bonds in other countries, notably in South Africa and Kenya where the issue of such bonds has been highly successful, in terms of both promoting financial inclusion and providing a valuable alternative source of finance for government,” the Bank said. BusinessWeek in informed that talks with government and other stakeholders are ongoing.

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