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"Boosting the financial sector, boosts economic development"

The financial sector facilitates economic activity
Both theory and empirical studies support the existence of a mutually reinforcing relationship between economic growth and financial sector development in the context of a conducive environment. Researchers at the BANK OF BOTSWANA propose ways in which the sector’s contribution can be enhanced

Botswana has long recognised the importance of financial sector development in pursuit of deep financial markets, sustainable and inclusive economic growth. Against this background, the evolution of the financial sector in Botswana has been guided by deliberate policy formulation, advancement in financial technology, evolving user needs in the economy, as well as adoption of international standards and best practice.

Nevertheless, international experience shows that Botswana lags behind in several respects, including financial institutions and market depths, financial access and size relative to the economy. The country has also not kept pace with peers in financial innovation and, as such, there is a dearth of financial derivatives that are important in risk management as well as in harnessing financial technology to reap maximum benefits. In order for the country to realise the full benefits of financial sector development, appropriate financial sector policies should be formulated and implemented, focusing on promotion of a conducive operating environment, sound regulatory and supervisory frameworks, fostering the development of financial markets and broadening financial inclusion.

In this context, while the positive correlation between financial sector development and economic activity is evident, financial services in Botswana, although growing, remain relatively low relative to overall output, and in comparison to other countries.

At least five areas can be highlighted as representing opportunities for addressing existing needs, inclusive growth and innovative expansion of the financial sector. These include increasing the size of mortgages in the balance sheet of banks and relative to GDP; enhancing productivity of resources flowing into the agriculture sector; expansion of support for the small and medium scale enterprises; effective packaging and harnessing of resources for long-term project funding; and accelerated integration of technology in the provision of financial services.

In addition, resource mobilisation that encompasses stable and sustainable resources flowing to the Government and a variety of foreign capital flows provide opportunities for deepening and growing the money and capital markets. As well as being beneficial to economic activity directly, such an environment augurs well for expansion of the financial sector, as well as ease of conducting business and effectiveness of macroeconomic policies. Moreover, development of government and corporate securities markets that involves foreign participation and includes a robust derivatives market would widen participation, enhance domestic liquidity and efficient price discovery, while providing a platform for diversified financial services and increased choice of risk management instruments in both the credit and equity markets. This would also enhance the skills base and expertise in financial management in the country, and promote effective integration in regional and global financial markets activities.

The scope for growth in the areas highlighted above is crucially linked to structural and enabling transformation with respect to legislation and regulation, institutional support, adequate and purposeful infrastructure and availability of relevant skills. Therefore, ongoing review of relevant legislation to modernise, close gaps and foster enabling provisions, as well as implementation of ideas reflected in the 2012 – 2016 Financial Sector Development Strategy (FSDS) need to be sustained. At the same time, there is need to maintain a disciplined approach to policy formulation and governance, as well as entrench high regulatory standards in order to retain integrity and wide patronage of the financial sector.

Amongst measures to reinforce financial sector stability, the Bank of Botswana, in consultation with MFED, are at an advanced stage of establishing a Financial Stability Council that would promote information exchange, cooperation and coordination in all areas relevant to financial system stability, including bank crisis resolution, while the establishment of a deposit insurance scheme also remains a priority. These would help to lay down clear guidelines on financial sector crises detection, prevention and resolution and restore consumer and investor confidence in the domestic financial sector.

Fostering healthy competition, cost effective access and introduction of innovative financial products and services through harnessing of fintech is considered to be a necessary agent for financial sector development. To this end, there is need to ensure that a supportive licensing, regulatory and business environment is in place to accelerate the penetration of mobile, agency and internet banking, including through the promulgation of electronic payment services regulations. Such an environment would promote market participation by both suppliers and consumers of financial products. A key lesson from other experiences is that countries, such as Kenya, Rwanda, India and Malaysia, have allowed non-bank institutions in the telecommunications and retail sectors to offer financial products and services, thereby creating competition and making it possible to improve access for the underserved and unbanked communities. In this regard, Botswana’s high mobile phone connectivity provides an opportunity for a more inclusive financial sector that offers low-cost financial services to the unbanked and underserved, within an appropriate regulatory framework.

In order to

encourage participation of fintech companies in the domestic financial sector, appropriate licensing and regulatory practices through the so-called ‘regulatory sand boxes’ (experimental regulatory approaches) could be adopted. This would accelerate the pace of adoption of technology in the delivery of innovative financial products and services.

Beneficial contribution of the financial sector to economic activity also hinges upon efficiency in the payment and settlement systems and this is increasingly in digital and electronic form; hence, the need for supportive infrastructure, connectivity and interoperability, as well as enabling regulatory and administrative processes that also help mitigate fraudulent and inappropriate use. Prospective developments include the enactment of EPS regulations to enable expansion of participation in the payment system to non-bank financial institutions and establishment of a single CSD that is linked to the real time gross settlement (RTGS) system to ensure timely and safe payments delivery. Supportive infrastructure also relates to management of customer data. Countries such as India and Malaysia, have adopted the use of technology-based collection and management of bio-data to facilitate access to services. Such an approach also lowers significantly the burden and cost of adherence to KYC/AML protocols. Thus, purposeful and appropriate configuration and centralisation of bio-data and other personal identification information to fit various service access needs and records management is necessary to help ease the conduct of diverse facets of economic activity.

The Treasury Mobile Direct project of Kenya, through the M-Akiba infrastructure bond on the M-Pesa platform, offers a benchmarking opportunity for Botswana to consider broadening household participation in the capital and bond markets. Furthermore, financial literacy and dissemination of relevant information through public education campaigns provide an effective avenue for increasing private sector participation in the capital and bond markets. Thus, it is imperative to intensify public awareness campaigns, by both operators and regulators.

This is also important in mitigating exposure of the public to fraudulent operations that can undermine the public’s confidence in the banking system, thus work against the financial inclusion agenda and potential beneficial role of the financial sector in economic activity.

For Botswana, financial sector development, particularly efficiency and diversity of products, could be constrained by the small national market. Considering this, regional economic and financial integration offers a possible strategy to unlock the efficiency of scale and returns from diverse products, thereby expanding the possible financing options and vehicles for savings in the country. Accordingly, small countries with a nascent local securities market can benefit from listing and trading instruments on a regional stock market. Botswana has, therefore, ratified the SADC Protocol on Finance and Investment aimed at the promotion of cooperation in regional capital and financial markets. This review highlighted gaps in infrastructure development financing that can be reduced through exploring a number of sources of funds, including commercial bank loans; undertaking upstream reforms; resolving market failures; drawing upon public and concessional facilities; and accessing the capital market. In this regard, Botswana’s capital markets, including the issuance and trading in bonds and shares need to be improved with respect to number and scope of issuers, liquidity and public participation beyond banks and institutional investors, while development of the corporate securities market provides an opportunity to unlock substantial long-term finance that could complement commercial bank lending. With the amount of outstanding government bonds and T-bills currently at P10.2 billion out of the P15 billion Government Bond Programme, there is scope for more and regular issuance that could further stimulate the bond market.

It is also noted that resources for public sector financing of infrastructure development can be mobilised through the use of the PPP initiative. For this mode of financing to be unlocked and succeed, enactment of a specific PPP legislation and adoption of an appropriate

regulatory framework is paramount, hence the need for expeditious finalisation of relevant laws.

Given that the latest financial sector development strategy was adopted in 2012 and has run its course, going forward, there is a void in as far as formal policy to guide financial sector development is concerned. As such, a comprehensive review of the financial sector with a view to formulating an FSDS that can be formally adopted by government and incorporated into NDP 11, at the time of the mid-term review, and subsequent NDPs, is recommended. Such a strategy would clearly define an envisioned state of a developed financial sector and set out the goals and objectives to be achieved to that end.

In addition, the strategy would identify key performance indicators and measureable targets to facilitate monitoring and designate authorities that can be held accountable for ensuring the FSDS is effectively and timely implemented.

(Bank of Botswana, abridged text from research contained in the 2017 Annual Report)




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