Botswana: Financial Sector Assessment Program-Detailed Assessment of Observance—Basel Core Principles for Effective Banking Supervision

FINANCIAL SECTOR ASSESSMENT PROGRAM DETAILED ASSESSMENT OF OBSERVANCE—BASELCORE PRINCIPLES FOR EFFECTIVE BANKINGSUPERVISION This paperonBotswanawas prepared by a staff team of the International Monetary Fundas background documentation for the periodic consultation with the member country. Itis based on the information available at the time it was completed onJanuary 18, 2024. Copies of this report are available to the public from International Monetary Fund•Publication ServicesPO Box 92780•Washington, D.C. 20090Telephone: (202) 623-7430•Fax: (202) 623-7201E-mail:publications@imf.org Web:http://www.imf.org International Monetary FundWashington, D.C. BOTSWANA DETAILED ASSESSMENT OF OBSERVANCE BASEL CORE PRINCIPLES FOR EFFECTIVE BANKINGSUPERVISION This report was prepared in the context of a jointIMF-World Bank Financial Sector AssessmentProgram (FSAP) mission in Botswana fromOctober 12–November 2, 2022, led by Thor Jonasson,IMF and Harish Natarajan, World Bank, and overseenby the Monetary and Capital Markets Department,IMF, and the Finance, Competitiveness and InnovationGlobal Practice, World Bank. Further information onthe FSAP program can be found athttp://www.imf.org/external/np/fsap/fssa.aspx, andwww.worldbank.org/fsap. Prepared ByMonetary and CapitalMarkets Department, IMF,and Finance,Competitiveness andInnovation Global Practice,World Bank CONTENTS GLOSSARY _______________________________________________________________________________________3 INTRODUCTION _________________________________________________________________________________8 INSTITUTIONAL AND MARKET STRUCTURE—OVERVIEW ____________________________________8 PRECONDITIONS FOR EFFECTIVE BANKING SUPERVISION __________________________________12 DETAILED ASSESSMENT _______________________________________________________________________15 A. Summary of Main Findings ___________________________________________________________________16B. Supervisory Powers, Responsibilities and Functions___________________________________________25C. Prudential Regulations and Requirements ____________________________________________________88 SUMMARY COMPLIANCE WITH THE BASEL CORE PRINCIPLES____________________________224 A. Recommended Actions ______________________________________________________________________233B. Authorities’ Response to the Assessment ____________________________________________________238 TABLE 1. Botswana: Structure of Financial System ______________________________________________________10 Glossary ACAdditional CriterionALCOAsset Liability Management CommitteeAML/CFTAnti-Money Laundering/Combating The Financing of TerrorismBAOABotswana Accountancy Oversight AuthorityBCBSBaselCommittee on Banking SupervisionBCPsBasel Core Principles for Effective banking SupervisionBIABasic Indicator ApproachBoBBank of BotswanaBoBAABank of Botswana Amendment Act, 2022BoB ActBank of Botswana Act, 1995BSDBankingSupervision DepartmentBWPPula (Currency of Botswana)CComplaintCAMELCapital adequacy, Asset quality, Market sensitivity, Earnings, LiquidityCCACompetition and Consumer AgencyCDDCustomer due diligenceCEOChief Executive Officer (Principal officer)CET1Common Equity Tier 1CFPContingency funding planCI ActCredit Information Act, 2021CPCore principleCROChief Risk OfficerD-SIBDomestic Systemically Important BankD-SIFIsDomesticSystemicallyImportantFinancialInstitutionsEaREarnings at riskECEssential CriterionERTPEconomic Recovery and Transformation PlanEUEuropean UnionFATFFinancial Action Task ForceFIAFinancial Intelligence AgencyFSAPFinancial Stability Assessment ProgramFSCFinancial Stability CouncilGDPGross Domestic ProductICAAPInternal Capital Adequacy Assessment ProcessIFRSInternational Financial Reporting StandardsIRRBBInterest rate risk in the banking book ISAInternational Standard on AuditingISFIndustry Support FacilityITInformation technologyLARLiquid assets ratioLCLargely compliantLELarge exposuresMOFMinistry of FinanceMISManagement information systemsMNCMaterially non-compliantMoUsMemorandum of UnderstandingsNBFIRANon-Bank Financial Institutions Regulatory AuthorityNCNon-compliantNPLNon-performing loanOTCOver-the-counterRWARisk-weighted assetsSREPSupervisory Review and Evaluation ProcessUSDUS DollarVaRValue at riskZARSouth African Rand EXECUTIVE SUMMARY Despite significant progress improving supervisory frameworks since the last assessment in2007, supervisory powers remain underdeveloped.The current Banking Act was adopted in 1995and has several deficiencies such as an absence of provisions for consolidated supervision, majoracquisitions, and changes in significant shareholding. There is need for a more frequent andcomprehensive review of the regulatory framework to ensure they remain relevant to changingindustry and regulatory practice. The regulatory framework needs to be updated to align closer withrecent Basel norms, guidance, and principles, particularly in the risk management areas specifiedbelow. Supervision tools an