BSD Annual Report (18.09.2017)

BANKING SUPERVISION
ANNUAL REPORT 2016
BANK OF BOTSWANA
Bank of Botswana: Banking Supervision Annual Report 2016
1
MISSION STATEMENT
The principal objective of the Bank of Botswana (Bank) is to promote and maintain monetary
stability, an efficient payments mechanism, liquidity, solvency and proper functioning of a
soundly based monetary, credit and financial system in Botswana.
In view of the foregoing, the Bank’s mission is to promote and maintain a safe, stable, sound,
efficient and competitive banking system. In its supervisory role, the Bank is guided by the Bank
of Botswana Act (CAP. 55:01), Banking Act (CAP. 46:04) (Banking Act), Banking Regulations 1995,
Bureaux de Change Regulations 2004 and relevant directives, policies and guidelines issued
under the Banking Act, which govern the establishment and conduct of financial institutions over
which the Bank has supervisory authority.
Accordingly, the Bank seeks to promote market integrity, competition, fair trading practices and a
high standard of governance through consultation and open communication with market players.
Furthermore, the Bank is committed to upholding a high standard of professional conduct, in line
with international regulatory and accounting standards for effective banking supervision.
In order to achieve these goals, the Bank
(a) sets transparent criteria, guidelines and other requirements for market entry, as set out in
the Licensing Policy;
(b) establishes and updates, on a regular basis, prudential policies and standards;
(c) monitors solvency, liquidity, large exposures, insider loans, provisioning and risk
management strategies, as well as the adequacy of management and governance
structures for the sound operation of banks;
(d) establishes effective systems for off-site surveillance and on-site examinations, including
reporting, accounting, auditing and disclosure standards;
(e) ensures timely supervisory action and compliance with the banking and other related laws
governing the operations of banks in Botswana; and
(f) monitors and investigates unlicensed illegal deposit taking activities and practices.

2
BANKING SUPERVISION
ANNUAL REPORT 2016
BANK OF BOTSWANA
CONTENTS
BANK OF BOTSWANA: BANKING SUPERVISION

4
CONTENTS
MISSION STATEMENT Inside cover page
LIST OF ACRONYMS vi
FOREWORD vii
INTRODUCTION viii
CHAPTER 1: BOTSWANA’S FINANCIAL SYSTEM AND SELECTED INDICATORS 1

CHAPTER 2: PERFORMANCE OF THE BANKING INDUSTRY 11
CHAPTER 3: LICENSING AND CONSUMER PROTECTION ISSUES 47
CHAPTER 4: OTHER SUPERVISORY ACTIVITIES 56
CHAPTER 5: SUMMARY OF KEY ISSUES ARISING FROM ON-SITE EXAMINATIONS AND PRUDENTIAL
MEETINGS 59
APPENDICES 62
Appendix 1: The Regulatory Architecture of the Financial System and the Banking Supervision Department
Organisational Structure 64
Appendix 2: Bank Branch Distribution Network by District as at December 31, 2016 66
Appendix 3: Approaches to Regulation and Supervision of Banks in Botswana 67
Appendix 4: Supervised Financial Institutions as at December 31, 2016 73
Appendix 5: List of Guidelines Issued and Other Statutory Amendments 76
Appendix 6: Definitions of Banking Supervision Terms 77
Appendix 7: Aggregate Financial Statement of Licensed Banks: 2012 - 2016 86
Appendix 8: Charts and Tables of Key Prudential and Other Financial Soundness Indicators 96

5
v
LIST OF ACRONYMS
AML/CFT Anti-Money Laundering and Combating the IDs Identity Documents

Financing of Terrorism IFRS International Financial Reporting
ATA Average Total Assets Standards
ATMs Automated Teller Machines IMF International Monetary Fund
BancABC African Banking Corporation of Botswana IT Information Technology
Limited JWC Joint Working Committee
BAGL Barclays Africa Group Limited KYC Know-Your-Customer
Banking Act Banking Act (CAP. 46:04) LHS Left Hand Scale
Bank Gaborone Bank Gaborone Limited MAP Making Access Possible
Bank SBI Bank SBI Botswana Limited MER Mutual Evaluation Report
BNPS Botswana National Payments System MFED Ministry of Finance and Economic
Barclays Barclays Bank of Botswana Limited Development
Baroda Bank of Baroda (Botswana) Limited ML/TF Money Laundering and Terrorist
BBS Botswana Building Society Financing
BCBS Basel Committee on Banking Supervision MLRO Money Laundering Reporting Officer
BIA Basic Indicator Approach MoU Memorandum of Understanding
BIS Bank for International Settlements NDB National Development Bank
BOBA Bank of Botswana Act (CAP. 55:01) NIM Net Interest Margin
BoBCs Bank of Botswana Certificates NPLs Non-Performing Loans
BOI Bank of India (Botswana) Limited ORS Off-site Rating System
BSB Botswana Savings Bank OSS Off-site Surveillance System
BSE Botswana Stock Exchange PoS Point of Sale
CAMELS Capital Adequacy, Asset Quality, RAS Risk Assessment System
Management, Earnings, Liquidity and RBA Risk-Based Approach
Sensitivity to Market Risk RBS Risk-Based Supervision
Capital Bank Capital Bank Limited RCAP Regulatory Consistency Assessment
CA Competition Authority Programme
CBRs Correspondent Banking Relationships RHS Right Hand Scale
CET1 Common Equity Tier 1 ROAA Return on Average Total Assets
CDS Credit Default Swap ROE Return on Equity
CIH Capricorn Investment Holdings RSA Rate Sensitive Assets
CIRTs Computer Incident Response Teams RSL Rate Sensitive Liabilities
CIUs Collective Investment Undertakings RWA Risk-Weighted Assets
CRB Credit Reference Bureau SMM Standardised Measurement Method
EPS Electronic Payment Services Stanchart Standard Chartered Bank Botswana
EPSPs Electronic Payment Services Providers Limited
ESAAMLG Eastern and Southern African Anti-Money SWIFT Society for Worldwide Interbank
Laundering Group Financial Telecommunication
FATF Financial Action Task Force TSA The Standardised Approach
FIA Financial Intelligence Agency UNHCR United Nations High Commissioner
FNBB First National Bank of Botswana Limited for Refugees
FRPGA Financial Ratio and Peer Group Analysis USD United States Dollar
GDP Gross Domestic Product VAT Value Added Tax
HHI Herfindahl-Hirschman Index ZAR South African Rand

vi
6
FOREWORD
This Annual Report provides information on banking regulation and supervision, including the structure and performance of
the banking sector in 2016.
In 2016, the world economy was characterised by modest economic growth, low commodity prices, persistent excess
capacity in some major economies and uncertain prospects. In the case of Botswana, the economy faced challenges,
resulting in the closure of some mining companies. The debilitating drought situation experienced in 2015, continued in
the early part of 2016. Real Gross Domestic Product (GDP) grew by 4.3 percent in the 12 months to December 2016,
compared to a contraction of 1.7 percent in the prior year, mainly underpinned by growth in non-mining output.
There were no new banks licensed in 2016. Asset quality in the banking sector weakened, with the Non-Performing Loans
(NPLs) to Total Loans and Advances ratio rising from 3.9 percent in 2015 to 4.9 percent in 2016, due to challenges in some
sectors of the economy. However, in comparative terms, the majority of the financial soundness indicators improved during
the year; an indication that the banking sector was safe and sound in 2016.
The downward trend in profitability in 2015 was reversed in 2016, with the banking sector recording significant growth in
profitability. As a result, banks augmented their capital levels, strengthening the resilience of the banking sector to solvency
risks.
The Bank implemented the Directive on the Revised International Convergence of Capital Measurement and Capital
Standards for Botswana (Basel II) effective January 1, 2016. This followed a successful parallel run with the old capital
framework (Basel I) in 2015. The transition to the new capital framework was smooth, with all banks that are on the new
standard being compliant.
The Bank participated in supervisory college meetings for some of the banks operating in Botswana. The meetings are
structures or mechanisms for collaboration, coordination and information sharing among the authorities responsible for the
supervision of internationally active banking groups.
During the year under review, the banks were largely compliant with all regulatory prudential requirements, with any acts of
non-compliance being subjected to the normal remedial processes. The annual consultative arrangements between the
Bank and supervised entities continued in 2016, where issues of mutual interest were discussed.
Moses D Pelaelo
GOVERNOR

vii
7
INTRODUCTION
The Bank continued to regulate and supervise commercial banks, bureaux de change and a deposit-taking microfinance
institution, in accordance with the requirements of the Banking Act and the Bureaux de Change Regulations. There were
no new banks licensed in 2016 and, therefore, the number of licensed commercial and statutory banks remained at 10
and three, respectively. Banks continued to restructure their operations, which led to an increase in branch networks and
Automated Teller Machines (ATMs). In addition, banks embraced technology and innovation and, therefore, enhanced their
service delivery through the introduction of new banking products and services.
Regulatory and supervisory activities were guided by a focus on ensuring good governance and appropriate risk-taking by
regulated institutions. These included, inter-alia, on-site examinations and off-site monitoring of banks through the use of a
Risk-Based Supervision (RBS) approach and Off-site Surveillance System (OSS).
The Bank continued to adopt best practices from the ongoing global regulatory reforms. Consequently, the Bank issued
the Revised Directive on the International Convergence on Capital Measurement and Capital Standards for Botswana and
related Guidelines for the banking industry, which came into effect on January 1, 2016. Basel II aims at further strengthening
the resilience of banks to shocks through improving the quality, consistency and quantity of capital. The banking sector
transitioned smoothly to the new capital requirements, with all banks on the new standard complying with the revised
prudential minimum capital requirements.
Efforts to strengthen safeguards against threats of money laundering and terrorist financing (ML/TF) continued to be a
key priority area for the Bank. In June 2016, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)
conducted a mutual evaluation assessment of Botswana’s anti-money laundering and countering the financing of terrorism
(AML/CFT) framework. The recommendations of the draft Mutual Evaluation Report (MER) were discussed at the ESAAMLG
meeting held in April 2017. Drawing in part from the recommendations of the draft MER, the Banking Act and Banking AML/
CFT Regulations are being reviewed to ensure compliance with the Financial Action Task Force (FATF) Recommendations.
As was the case in the prior year, five banks dominated the banking sector, accounting for 90 percent of total banking
assets. There was a dilution of competitiveness, as measured by the Herfindahl-Hirschman Index (HHI), during the year.
However, the banking sector remained moderately competitive. The pressure on banks to innovate, develop and improve
their products and services, in order to maintain high profitability levels, is expected to enhance competitiveness.
The country’s financial depth and development indicators improved marginally, with the ratios of Private Sector Credit and
Banking Credit to GDP increasing from 31.6 percent and 32.4 percent in 2015, to 31.8 percent and 32.6 percent in 2016,
respectively. However, the M2 to GDP ratio decreased from 45.7 percent in 2015 to 42.8 percent in 2016.
The banking sector’s total assets increased by 5.3 percent from P76.6 billion in December 2015 to P80.6 billion. Loans and
advances grew by 6.2 percent to P51.3 billion in December 2016, compared to growth of 7.1 percent in 2015.

viii
8
INTRODUCTION (CONTINUED)
The Liquid Assets to Total Assets Ratio rose from 15.4 percent (2015) to 16.7 percent (2016), following an increase in
liquid assets. Similarly, the ratio of NPLs to Total Loans and Advances increased from 3.9 percent in December 2015 to
4.9 percent in December 2016. The household sector accounted for 59 percent of total NPLs. The ratio of aggregate Large
Exposures to Unimpaired Capital was much lower than the 800 percent maximum prudential limit set for banks in Botswana,
implying satisfactory management of credit concentration risk.
In 2016, total customer deposits grew by 4.2 percent to P62.4 billion. Customer deposits constituted the largest proportion
of liabilities at 77.4 percent and, as expected, the primary source of funding for the banking assets. Interbank balances
and credit from institutions increased by 20.4 percent from P3.3 billion in 2015 to P4 billion in 2016, as banks accessed
alternative sources of funding for asset growth. As a result, the Financial Intermediation Ratio (the ratio of Loans and Advances
to Deposits) increased from 80.6 percent to 82.2 percent.
The banking sector was adequately capitalised and met the new regulatory capital requirements, with all banks reporting
Capital Adequacy and Common Equity Tier 1 Capital Ratios in excess of the minimum prudential requirements of
15 percent and 4.5 percent, respectively. The banking industry’s capital adequacy ratio was 19.6 percent in December
2016 (December 2015: 20.1 percent).
The banking sector’s profitability improved in 2016, with income after-tax increasing by 29.3 percent from P1.1 billion in
2015 to P1.4 billion in December 2016. As a result, Return on Average Total Assets (ROAA) and Return on Equity (ROE)
also increased from 1.5 percent and 13.3 percent to 1.8 percent and 14.4 percent, respectively. Overall, the banking sector
complied with the minimum prudential and statutory thresholds as expected.
The Report is organised as follows: Chapter 1 highlights the structure of the financial sector, with particular emphasis on
banks, while Chapter 2 assesses the financial performance of the banking sector in 2016; Chapter 3 reports on licensing and
consumer protection issues; Chapter 4 highlights the recent global standards and guidelines issued by the Basel Committee
on Banking Supervision based at the Bank for International Settlements (BIS); and Chapter 5 provides a summary of key
issues arising from the on-site and off-site examination processes. Appendices are provided at the end of the Report.

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CHAPTER 1
BOTSWANA FINANCIAL SYSTEM AND SELECTED INDICATORS

10
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CHAPTER 1:
BOTSWANA FINANCIAL SYSTEM AND SELECTED INDICATORS
STRUCTURE OF THE FINANCIAL SECTOR

(COMMERCIAL BANKS, STATUTORY BANKS AND NON-BANK FINANCIAL ENTITIES)
1.1 The Bank regulates and supervises commercial banks, bureaux de change and a deposit-taking microfinance
institution, as shown in Diagram 1.1 (Appendix 1). There were 10 licensed commercial banks and three statutory
banks as at December 31, 2016. During the year, four new bureaux de change were licensed, while three had their
licences revoked. As a result, the total number of licensed bureaux de change increased from 58 in 2015 to 59 in
2016.
BANKING SECTOR: BRANCH NETWORK AND OTHER DELIVERY CHANNELS
1.2 Table 1.1 shows the number of bank branches and ATMs (2014 to 2016). Banks continued to restructure their
operations, resulting in the closure of some branches and the opening of new ones during the year. Some banks
increased their delivery channels by installing additional ATMs. Consequently, the total number of commercial bank
branches increased from 114 in 2015 to 115 in 2016, while the total number of ATMs increased from 415 to 440 in
the same period. Statutory banks’ branches increased from 15 in 2015 to 18 in 2016.
1.3 Regarding the geographical distribution of branch network, the South East District which includes the capital city,
Gaborone, had the highest concentration of branches at 52, as at December 31, 2016, followed by the Central
District at 26 (Appendix 2).

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CHAPTER 1:
BOTSWANA FINANCIAL SYSTEM AND SELECTED INDICATORS (CONTINUED)
Table 1.1: Banks, Branches and Other Delivery Channels: 2014 - 2016
BRANCHES AND SUB-BRANCHES ATMs

2014 2015 2016 2014 2015 2016
Barclays 41 38 36 116 117 118
Stanchart 19 19 21 68 68 68
FNBB 22 22 23 172 173 188
Commercial Banks
Stanbic 11 11 11 26 29 30
BancABC 8 8 8 10 10 15
Baroda 3 3 3 6 6 6
Bank Gaborone 7 7 7 18 8 9
Capital 4 4 4 4 4 6
BOI 1 1 1 - - -
Bank SBI 1 1 1 - - -
KBAL 1 - - - - -
Total (Commercial Banks) 118 114 115 420 415 440
BSB 2 2 5 - - 3
Statutory
Banks
BBS 9 9 9 12 12 12
NDB 4 4 4 - - -
Total (Statutory Banks) 15 15 18 12 12 15
Aggregate 133 129 133 432 427 455

1.4 Access to banking services, as measured by the ratio of Bank Accounts to Adult1 Population, improved from
75.9 percent in 2015 to 76.5 percent in 2016. Notwithstanding the fact that an individual can have multiple accounts,
the ratio of Bank Accounts to Adult Population provides a rough indicator of access to banking services. The
aggregate number of bank accounts grew by 3 percent from 1.13 million in 2015 to 1.17 million in 2016, while the
number of accounts held by the adult population grew by 2.7 percent from 1.49 million to 1.53 million.
BANKING SECTOR EMPLOYMENT TRENDS: 2015 - 2016
1.5 Table 1.2 shows the employment levels in the banking sector for 2015 and 2016. Employment levels increased by
0.5 percent from 5 030 in 2015 to 5 055 in 2016. The increase in employment levels was due to branch expansion.
However, five banks recorded declines in their employment levels during the year under review due to branch
rationalisation and automation.
1
Adult refers to persons aged 15 years and above. The population projection figures were adopted from Botswana Statistics Projections 2011 - 2026 Report; medium
scenario projections were used.

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CHAPTER 1:
Table 1.2: Employment Levels for Licensed Domestic Banks: 2015 - 2016
2015 2016
CITIZENS EXPATRIATES TOTAL CITIZENS EXPATRIATES TOTAL
Barclays 1 185 11 1 196 1 147 10 1 157
Stanchart 811 4 815 752 10 762
FNBB 1 218 4 1 222 1 275 3 1 278
Commercial Banks
Stanbic 570 5 575 590 6 596

BancABC 260 8 268 237 6 243
Baroda 32 12 44 35 12 47
Bank Gaborone 246 7 253 291 4 295
Capital 87 8 95 113 8 121
BOI 7 4 11 7 4 11
Bank SBI 12 4 16 19 3 22
Total (Commercial Banks) 4 428 67 4 495 4 466 66 4 532
BSB 156 - 156 149 - 149
Statutory
Banks
BBS 200 2 202 200 2 202

NDB 177 - 177 172 - 172
Total (Statutory Banks) 533 2 535 521 2 523
Aggregate 4 961 69 5 030 4 987 68 5 055
NEW BANKING PRODUCTS AND SERVICES
1.6 Banks continued to innovate and introduce new products and services, including Credit Default Swaps (CDS)2 for
institutional investors. CDS is an agreement where the buyer of the CDS makes a series of payments (the CDS “fee”
or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults. Various savings accounts, such as
target savings and offshore accounts, were also introduced.
1.7 To further enhance the existing service delivery channels, some banks upgraded the intelligent ATMs, among
others, improving functionality with respect to cash and cheque deposits, withdrawal of foreign currency (e.g., South
African rand (ZAR)), bill payments, and cardless services. Point of Sale (PoS) functionalities were also upgraded to
permit acceptance of Union Pay International cards3, as well as allowing local merchants and customers to pay in
any currency of their choice, where feasible. Furthermore, PoS machines were enhanced to allow payment using
earned cash-back points. In addition, the online banking platforms for small and medium enterprises were extended
to include services such as payments to other bank accounts held in Botswana, bulk file payments for multiple
beneficiaries and segregation of duties in the platform, according to an individual client’s needs.
2
Only one bank offered CDS in 2016.
3
Union Pay International cards are China domestic card prints and operate in a similar way to VISA and MasterCard in terms of regulations and operations relating to
ATMs and Point of Sale Machines.

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BOX 1: INTRODUCTION OF ELECTRONIC PAYMENT SERVICES (EPS) REGULATIONS
As part of the reform and modernisation of the Botswana National Payments System (BNPS),
the Bank has committed to implementing a strategic framework and legal environment to ensure
provision of safe and secure electronic payment services. The legal basis for this framework is
derived from Section 4 (1) (a) of the Bank of Botswana Act (CAP. 55:01), which requires the Bank,
first and foremost, to promote and maintain monetary stability, an efficient payments mechanism
and the liquidity, solvency and proper functioning of a soundly based monetary, credit and
financial system in Botswana. This is expected to support the use of a wide variety of technology
based payment services/systems and ensure that the rights and obligations of stakeholders
are recognised, protected and enforceable. Respective services and infrastructure components
not only require a properly structured legal and regulatory framework, but one that functions
effectively, at all relevant levels. To this extent, the Bank, following extensive consultations with
key stakeholders, is developing Electronic Payment Services (EPS) Regulations to address
lack of specific guidelines with respect to electronic money and payment services. The EPS
Regulations are part of the Bank’s broader strategy to create an enabling regulatory environment
for convenient, efficient and safe retail payments and funds transfer mechanisms.
The purpose of the EPS Regulations is to allow for the licensing and oversight of Electronic
Payment Services Providers (EPSPs). EPSPs are, generally, organisations authorised by the Bank
to provide electronic payment services to facilitate money transmission in a properly structured
environment which conforms to best international standards by requiring comprehensive
identification of the benefactor and beneficiary of the funds. Electronic payments are typically
equated with transactions originated from a mobile phone or card, usually linked to an account,
or prepaid card.
The EPS Regulations are expected to open up the electronic payments system business to
non-bank players which, in turn, should reduce costs, stimulate competition and financial
inclusion. The regulations are intended to streamline and strengthen licensing procedures,
improve governance arrangements and oversight, engender consumer protection and tighten
anti-money laundering procedures. The introduction of electronic payments products and
services in the Botswana payments environment, including person to person payments, has
made it imperative to recognise EPS as a means of driving the national financial inclusion agenda.
This does not only extend the outreach of payment services, it also transforms the traditionally
bank-dominated payments services landscape.
EPSPs operating in Botswana shall be subjected to all provisions of these Regulations. The
Regulations create a licensing regime for providers of electronic payment services that are not
licensed financial institutions or banks.
The Regulations do not apply to services based on specific payment instruments that can be
used in a limited way, such as instruments allowing the holder to acquire goods and services
only from the issuer or within a limited network of service providers under direct commercial
agreement with the issuer; payment transactions carried out between payment service providers,
their agents or branches for their own account; and technical support services for the provision
of payments services.
The framework for EPS is premised on principles of transaction safety and efficiency, transparency
and consumer protection and conforms to international best practice.

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CHAPTER 1:
BANKING SECTOR MARKET SHARE AND COMPETITION
MARKET SHARE
1.8 Chart 1.1 shows the banking sector market share of total assets, total deposits and total loans and advances. The
banking sector was dominated by commercial banks, given the size of their total assets, total deposits and total
loans and advances, relative to the statutory banks. The market share of statutory banks, in terms of total assets,
decreased slightly from 7.3 percent in December 2015 to 6.9 percent in 2016. In terms of loans and advances,
statutory banks’ share increased from 8.1 percent in 2015 to 8.5 percent in 2016.
Chart 1.1: Banking Sector Market Share of Total Assets, Total Deposits and Total Loans and Advances*
100
90
80
70
60
Percent
50
40
30
20
10
0
2014 2015 2016 2014 2015 2016 2014 2015 2016
Total Assets Total Deposits Total Loans and Advances
Commercial Banks Statutory Banks

*Figures revised to exclude one statutory bank (2014 - 2016)
1.9 The top five banks continued to dominate the banking sector and accounted for 90 percent of total assets, total
deposits and total loans and advances in 2016 as in 2015.

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CHAPTER 1:
Chart 1.2: Market Share of Total Assets, Total Deposits and Total Loans and Advances of Commercial Banks
100
90
80
70
60
Percent
50
40
30
20
10
0
2014 2015 2016 2014 2015 2016 2014 2015 2016
Total Assets Total Deposits Total Loans and Advances
Small Banks Large Banks
THE HERFINDAHL-HIRSCHMAN INDEX (HHI) OF COMPETITIVENESS
1.10 The Bank uses the HHI4, a widely used measure of market concentration, to assess the degree of competition in
the Botswana banking industry. The degree of competition during the year deteriorated slightly, as shown by the
marginal increase in the HHI from 0.1774 in December 2015 to 0.1784 as at December 31, 2016 (Chart 1.3). By this
measure, the banking sector in Botswana is highly concentrated. However, the modest differences in market shares
for the top five banks suggest wider dispersion and competition at that level.
4
The HHI (calculated as the sum of squares of market shares of all banks) threshold levels determining the level of concentration in an industry are as follows: below
0.01 suggests a highly competitive market; below 0.1 indicates an unconcentrated market; between 0.1 and 0.18 indicates a highly concentrated market; with a
monopolist market condition, the HHI=1; with an industry of 100 equal size firms, the HHI=0.01.

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CHAPTER 1:
Chart 1.3: Herfindahl-Hirschman Index (HHI)
0.190
0.186
0.182
0.178
0.174
0.170
2012 2013 2014 2015 2016
Year ending December
NET INTEREST MARGIN AS AN INDICATOR OF COMPETITION IN THE MARKET
1.11 The industry net interest margin (NIM) increased from 4.7 percent in 2015 to 5.4 percent in 2016, indicating a
reduction in competition in the market, and thus reversing the downward trend observed over the past four years
(Chart 1.4). In addition to competitive forces, the NIM can be driven by different factors, such as operating costs, loan
quality and the macroeconomic environment, including inflation and interest rates. In this case, the indicator of weak
competition in the market could be attributed to the fall in the average cost of deposits compared to 2015, where
banks had to compete aggressively for deposits in response to tightening of liquidity in the market.
Chart 1.4: Banking Sector Trend of Net Interest Margin (NIM): 2012 - 2016
10
6
Percent
0
2012 2013 2014 2015 2016

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CHAPTER 1:
1.12 Hence, the two measures of competition (HHI and NIM) increased, indicating further room for improvement, in
general terms, in the level of competition in the banking sector.
FINANCIAL DEEPENING AND DEVELOPMENT
1.13 Chart 1.5 shows several ratios, commonly used as measures of financial deepening and development. Financial
deepening refers to the extent of access to financial services, which enables economic agents’ meaningful
participation in economic activities.
Chart 1.5: Financial Sector Deepening Indicators
30 60
25 50
20 40
Percent
Percent
15 30
10 20
5 10
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Year ending December Year ending December
Cash to M2 M2 to GDP
Household Debt to GDP Banking Assets to GDP
Household Deposits to GDP Banking Credit to GDP
Mortgage Loans to GDP Banking Deposit to GDP
Private Sector Credit to GDP
*Private Sector Credit to GDP figures revised in accordance with the World Bank definition of Private Sector Credit
1.14 Financial depth and development, as approximated by the ratio of Private Sector Credit to GDP5, decreased slightly
from 31.6 percent in 2015 to 29.5 percent in 2016. However, Private Sector Credit, as a proportion of Non-mining
GDP, was higher at 39 percent in 2016. When benchmarked against the global average ratio of Private Sector Credit
to GDP of 51.2 percent (as reported by the World Bank’s 2015/2016 Global Financial Development Report), the
Botswana banking system is relatively shallow.
5
The Private Sector Credit to GDP ratio, as defined by the World Bank, excludes credit issued to government, government agencies and public enterprises.

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CHAPTER 1:
1.15 The ratio of Banking Assets to GDP, a measure of financial sector size, decreased to 47.5 percent in 2016
(2015: 51.4 percent) (Chart 1.5). Similarly, the ratio of Banking Assets to Non-mining GDP decreased marginally from
63.8 percent in 2015 to 62.8 percent in 2016 (Chart 1.6). Over the two years to December 2015, the annual growth
rate of banking assets exceeded that of total GDP because of contraction in mining. However, in 2016, banking
assets growth rate (5.3 percent) trailed total GDP growth rate (13.8 percent). Banking Credit, as a proportion of total
GDP, decreased slightly from 32.4 percent in 2015 to 30.2 percent in 2016 (Chart 1.5).
Chart 1.6: Financial Sector Size and Depth Indicators
180 80
130 60
Pula billion
Percent
80 40
30 20
-20 0
2012 2013 2014 2015 2016
Total GDP (LHS) Non-Mining GDP (LHS)

Banking Assets (LHS) Banking Assets to Non-Mining GDP (RHS)
Banking Credit to Non-Mining GDP (RHS) Private Sector Credit to Non-Mining GDP (RHS)
1.16 On the other hand, M2 to GDP decreased from 45.7 percent in 2015 to 42.8 percent in 2016. This means that,
relatively, the extent to which private agents store value decreased slightly. Liquidity preference, as measured by the
Cash6 to M27 ratio, increased from 21 percent in 2015 to 23.3 percent in 2016.
1.17 Household debt as a proportion of total GDP, decreased from 19.2 percent in 2015 to 18.2 percent in 2016. The
Mortgage Loans to GDP Ratio also decreased from 5.5 percent in 2015 to 5.2 percent in 2016. When statutory
banks are included, the Mortgage Loans to GDP Ratio decreased from 8.1 percent in 2015 to 7.5 percent in 2016.
The Household Deposits to Total GDP Ratio declined from 8.9 percent in 2015 to 8.7 percent during the year under
review. In broad terms, nominal GDP increased at a faster pace than the financial variables during the year, thus
negating financial depth on a comparative basis.
6
Coins and notes in circulation and other money equivalents that are easily convertible into cash.
7
M2 (P72.7 billion) comprises all liabilities of financial corporations included in a country’s definition of broad money. In the case of Botswana, M2 comprises currency
outside depository corporations, transferable deposits (demand deposits) and other deposits included in broad money (time and fixed deposits).

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CHAPTER 1:
1.18 The Pension Fund Assets to Total GDP ratio decreased from 50.6 percent in 2015 to 44.3 percent in 2016. In light
of the fact that as at December 31, 2016, the aggregate household savings in the banking sector and pension funds
was P90.3 billion, compared to household borrowings of P35.7 billion, the household sector was a net saver8 in the
economy. Meanwhile, the bulk of payments are done through electronic means, with the value of electronic funds
transfer transactions relative to economic activity, increasing from 9.4 percent in 2015 to 10.7 percent in 2016.
1.19 Overall, compared to developed economies, where banking services account for very high proportions of total
income generated in the economy (with ratios in excess of 100 percent), the banking sector in Botswana remained
relatively small, vis-à-vis the size of the economy. Thus, there is considerable scope for the banking sector to expand,
albeit in the context of proper prudential oversight and maintenance of financial stability.
8
Data used was from pension funds, commercial and statutory banks. Due to data limitations, the analysis does not include other financial institutions such as micro
lenders.

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CHAPTER 2
PERFORMANCE OF THE BANKING INDUSTRY

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CHAPTER 2:
PERFORMANCE OF THE BANKING INDUSTRY
COMMERCIAL BANKS
IMPLEMENTATION OF THE NEW CAPITAL MEASUREMENTS STANDARDS
2.1 In an effort to enhance and strengthen the resilience of the banking sector to economic and financial shocks, the
Bank implemented the Basel II Capital framework which came into effect on January 1, 2016. In order to facilitate
an orderly transition to the new capital regime, the Bank adopted a gradual approach to Basel II implementation,
commencing with Pillar 1 (Simple Approaches) and Pillar 3 disclosure requirements. The implementation of Pillar 2
and the Advanced Approaches has been deferred to a later stage.
2.2 All the regulated and supervised banks, except one statutory bank, have adopted the Basel II standards and the
transition to the new capital regime has had no adverse effects on the key financial soundness indicators.
2.3 The main features of the revised regulatory capital framework include:
(i) explicit computation of regulatory capital for market and operational risks, as well as a wider range of exposure
categories and risk-weights. This is intended to enhance the risk sensitivity of a bank’s capital. This is unlike
Basel I, where only credit risk was considered in the computation of the regulatory capital of a bank; and
(ii) the gradual phasing-out of non-qualifying capital instruments over a period of five years (beginning
January 1, 2016) in order to minimise shocks.
2.4 Overall, the minimum prudential Capital Adequacy Ratio (CAR) of 15 percent (Table 2.1 below) has been maintained.
Table 2.1: Capital Adequacy Requirements (All numbers in percent)
Tier 1 Capital
Common Equity Additional Tier 1 (CET 1 Capital + Tier 2 Total
Tier 1 (CET 1) Capital Capital Additional Tier 1 Capital) Capital Capital
Minimum 4.5 3 7.5 7.5 15
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
2.5 The banking sector’s total assets increased by 5.3 percent in 2016 (December 2015: 12.7 percent) from
P76.6 billion in December 2015 to P80.6 billion; mainly reflecting a 6.2 percent increase in gross loans and advances
to P51.3 billion in December 2016. Net loans and advances constituted a larger proportion of total banking sector
assets (62 percent), followed by investment and trading securities (14 percent).
2.6 Charts 2.1 and 2.2 show the composition of assets and liabilities for 2015 and 2016, respectively. The proportions of
both assets and liabilities for 2015 and 2016 have largely remained unchanged, with minimal variations between the
two periods. From the two charts, it is evident that the major source of funding for commercial bank assets continues
to be customer deposits. Subsequent paragraphs explain in some detail the funding structure and structure of loans
and advances.

12
CHAPTER 2:
PERFORMANCE OF THE BANKING INDUSTRY (CONTINUED)
Chart 2.1: Commercial Banks: Composition of Assets: 2015 - 2016 (Percent)
December 31, 2016
Cash and balances with the Central Bank 8

Investment and trading securities 14
Placements with other banks and credit institutions 13
Net loans and advances 62
Other assets 3
December 31, 2015
Cash and balances with the Central Bank 6

Investment and trading securities 16
Placements with other banks and credit institutions 14
Net loans and advances 61
Other assets 3

13
CHAPTER 2:
Chart 2.2: Commercial Banks: Composition of Liabilities: 2015 - 2016 (Percent)
December 31, 2016
Due to other banks and credit institutions 5

Customer deposits 77
Shareholders’ funds 12
Other liabilities 3
Debt securities and other borrowing 3
December 31, 2015
Due to other banks and credit institutions 4

Customer deposits 78
Shareholders’ funds 11
Other liabilities 3
Debt securities and other borrowing 4

14
CHAPTER 2:
2.7 Charts 2.3 and 2.4 show the level of total assets, total deposits and total loans and advances, as well as their growth
rates, for the period 2012 - 2016.
Chart 2.3: Commercial Banks: Total Assets, Total Loans and Advances and Total Deposits: 2012 - 2016
90
80
70
60
Pula billion
50
40
30
20
10
0
2012 2013 2014 2015 2016
Total Assets Total Loans and Advances Total Deposits
Chart 2.4: Commercial Banks: Annual Growth Rates of Total Assets, Total Loans and Advances and Total
Deposits: 2012 - 2016
30
20
Percent
10
-10
2012 2013 2014 2015 2016
Total Assets Total Loans and Advances Total Deposits

15
CHAPTER 2:
COMPARATIVE CHANGE IN THE RISKINESS OF ON-BALANCE SHEET ASSETS
2.8 Table 2.2 shows the comparative movements in the riskiness of banks’ total on-balance sheet assets for the period
ending December 2015 and 2016, following the implementation of Basel II in 2016. It is clear that there has been
a downward shift in the risk profile of assets held by banks under the 20 percent, 50 percent, 100
percent and 150 percent risk-weights in 2016. In contrast, on-balance sheet assets risk-weighted zero percent
increased marginally from 21.3 percent to 21.6 percent. Assets risk-weighted 35 percent, 75 percent and 250
percent accounted for 8 percent, 31.3 percent and 0.03 percent of total on-balance sheet assets, respectively.
2.9 Overall, 75 percent of the on-balance sheet asset items were below the 100 percent risk-weight category under
Basel II, compared to 50.3 percent under Basel I (December 2015). This reflects the higher risk-sensitivity of the
Basel II framework.
Table 2.2: Comparative Change in the Riskiness of Banks’ Portfolios of On-Balance Sheet Assets
DECEMBER 2015 DECEMBER 2016

RISK-WEIGHTS ON-BALANCE PERCENTAGE TO ON-BALANCE PERCENTAGE TO
(PERCENT) SHEET ASSETS TOTAL ON-BALANCE SHEET ASSETS TOTAL ON-BALANCE
(P’MILLION) SHEET ASSETS (P’MILLION) SHEET ASSETS
0 16 336 21.3 17 452 21.6
20 13 007 17.0 8 639 10.7
35** - - 6 358 7.9
50 9 201 12.0 3 685 4.6
75* - - 25 220 31.3
100 36 678 47.9 18 725 23.2
150 1 382 1.8 539 0.7
250* - - 22 0.03
Total 76 605 100 80 640 100
* Retail portfolio which was risk-weighted 100 percent under Basel I

** Qualifying owner-occupied residential mortgage (or rented for residential purposes)

16
CHAPTER 2:
COMMERCIAL BANKS: RISK ASSESSMENT
INTRODUCTION
2.10 The prescribed methodologies for the computation of the minimum capital adequacy requirements for banks in
Botswana are the Standardised Approach (SA) for Credit Risk and Standardised Measurement Method (SMM) for
Market Risk; as well as a choice between the Basic Indicator Approach (BIA) and the Standardised Approach (TSA)
to Operational Risk.
2.11 Charts 2.5 shows the aggregate Risk-Weighted Assets (RWA) of the banking sector as at December 31, 2016,
calculated under Pillar 1 of Basel II. In addition to credit RWA used in the computation of risk capital under Basel I,
Basel II introduced capital charges for operational risk and market risk, which increased individual bank’s RWA. The
credit RWA constituted the bulk of the banking sector’s total RWA at 89 percent, followed by operational RWA at
10 percent and market RWA at 1 percent.
Chart 2.5: Composition of Risk-Weighted Assets (Percent)
Credit RWA (Simple Approach) 89

Market RWA 1
Operational RWA (BIA) 10
2.12 Six banks made notable capital savings resulting from reduced credit RWA. These were banks with predominantly
retail loan books. The capital savings derived from these reduced risk-weights were offset by increases in
risk-weights of certain asset categories that migrated to higher risk-weights, as well as additional RWA (emanating
from operational and market risk capital charges).
CREDIT RISK

REGULATORY CAPITAL REQUIREMENTS ON CREDIT RISK
2.13 Credit risk regulatory capital requirements (as measured by credit RWA) increased from P45.9 billion to
P46.5 billion in December 2016. This increase resulted from the migration of some risk exposures (under Basel I) to
different risk-weight categories (under Basel II). In particular, qualifying retail and residential mortgage exposures were
risk-weighted at lower values of 75 percent and 35 percent, respectively, compared to 100 percent and 50 percent
(under Basel I), respectively. The two exposure categories (combined) constituted 39.1 percent of the industry
aggregate loan book.

17
CHAPTER 2:
ASSET QUALITY: LEVELS AND TRENDS
2.14 Gross loans and advances grew by 6.2 percent, from P48.3 billion in 2015 to P51.3 billion in December 2016. The
relatively slower rate of credit growth than in the prior year at 7.1 percent, was a result of the adoption of a more
stringent approach to lending. This was in light of moderate economic growth, restructuring of balance sheets by
banks, and reduced marginal capacity for additional borrowing by public sector employees, in particular, as salary
increments had been modest; this has meant limited headroom for increased borrowing from banks.
2.15 The Financial Intermediation Ratio (the ratio of Loans and Advances to Deposits) increased from 80.6 percent in
December 2015 to 82.2 percent in December 2016, and thus was outside the upper end of the recommended
prudential range of 50 - 80 percent for the Botswana banking sector (Chart 2.6). This indicates that banks in
Botswana are expanding their sources of funding beyond deposit liabilities.
Chart 2.6: Commercial Banks: Loans and Advances to Deposits Ratio (Financial Intermediation)
100
80
60
Percent
40
20
2012 2013 2014 2015 2016
2.16 The banking sector’s asset quality deteriorated somewhat, as the NPLs to Total Loans and Advances Ratio increased
from 3.9 percent in December 2015 to 4.9 percent in December 2016. The growth in NPLs followed job losses and
the closure of some mines e.g., BCL and Tati Nickel.
2.17 Total past due loans (i.e., loans tainted by arrears) increased significantly by 32.7 percent to P3.6 billion in December
2016 (December 2015: P2.7 billion), while NPLs (i.e., impaired loans) increased by 32.8 percent to P2.5 billion.
The household sector (predominantly comprising unsecured loans) accounted for 59 percent of total NPLs in 2016
(December 2015: 52 percent).

18
CHAPTER 2:
2.18 The ratio of NPLs to Total Loans and Advances varied substantially among individual banks, ranging from 0.8 percent
to 8.5 percent. The banking sector’s specific provisions increased from P1 billion in 2015 to P1.3 billion in 2016,
providing a 51 percent cover of NPLs as at December 2016. Furthermore, the ratio of NPLs (net of specific provisions)
to Unimpaired Capital increased to 12.2 percent as at December 31, 2016 (December 2015: 9 percent). However,
the credit risk mitigation measures that banks have in place are expected to absorb any residual credit risk. Chart 2.7
shows trends in commercial bank asset quality indicators for the period 2012 - 2016.
Chart 2.7: Commercial Banks: Asset Quality Indicators: 2012 - 2016
20
2800
2400 16
2000
12
Pula million
Percent
1600
1200 8
800
4
400
0 0
2012 2013 2014 2015 2016
Specific Provisions (LHS) Non-Performing Loans (LHS)

Past Due Loans to Total Loans and Advances (RHS) Net NPLs to Unimpaired Capital (RHS)
NPLs to Total Loans and Advances (RHS)
CREDIT CONCENTRATION RISK
SECTORAL DISTRIBUTION OF COMMERCIAL BANK LOANS AND ADVANCES
2.19 Chart 2.8 compares the sectoral distribution of loans and advances between 2015 and 2016. Household loans
and advances increased by 7.6 percent to P30.8 billion and accounted for the largest share of loans and advances
(60.1 percent) provided by the banking sector. Private sector enterprises’ loans and advances also increased
(4.7 percent) to P19.2 billion and accounted for 38 percent of total loans and advances. The increase was driven
mainly by more credit facilities granted to the manufacturing, commercial real estate, tourism and hotels, and
agriculture sectors (Chart 2.10).

19
CHAPTER 2:
Chart 2.8: Sectoral Distribution of Loans and Advances: 2015 - 2016 (Percent)
December 31, 2016

Total Loans and Advances P51.3 billion
Private Sector Enterprises 38
Public Sector Enterprises 2
Household Sector 60
December 31, 2015

Total Loans and Advances P48.3 billion
Household Sector 59
LARGE EXPOSURES
2.20 The commercial banks’ Large Exposures9 to Unimpaired Capital Ratio increased to 195 percent (2015: 194 percent)
(Chart 2.9). This ratio differed considerably among individual banks, ranging from 65.5 percent to 484.1 percent. The
large exposures increased from P18.2 billion in 2015 to P20 billion in 2016, while unimpaired capital increased to
P10.2 billion in 2016 (2015: P9.4 billion). The Large Exposures to Total Loans and Advances Ratio was 38.9 percent
(2015: 37.7 percent). All banks maintained Large Exposures to Unimpaired Capital Ratios within the recommended
800 percent prudential limit.
9
These are loans and advances of 10 percent and above of a bank’s unimpaired capital.

20
CHAPTER 2:
Chart 2.9: Commercial Banks: Large Exposures to Unimpaired Capital Ratio: 2012 - 2016
300
250
200
Percent
150
100
50
0
2012 2013 2014 2015 2016
THE STRUCTURE OF PRIVATE SECTOR ENTERPRISES LOANS AND ADVANCES
2.21 Commercial banks maintained a diversified exposure to different sectors of the economy (Chart 2.10). During 2016,
loans and advances to six sectors, namely, agriculture, forestry and fishing, manufacturing, construction, commercial
real estate, and tourism and hotels, grew by different rates ranging from 0.7 percent to 6.1 percent. In contrast, loans
and advances to the trade, restaurants and bars sectors fell by 8.2 percent, while to the mining and quarrying sector,
the decline was 3.4 percent.

21
CHAPTER 2:
Chart 2.10: Sectoral Distribution of Private Sector Enterprise Loans: 2015 - 2016 (Percent)
December 31, 2016
Agriculture, Forestry and Fishing 8

Mining and Quarrying 2
Manufacturing 23
Construction 6
Commercial Real Estate 27
Electricity 1
Telecommunications 1
Tourism & Hotels 4
Transport 4
Trade, Restaurants and Bars 24
December 31, 2015
Agriculture, Forestry and Fishing 7

Mining and Quarrying 5
Manufacturing 17
Construction 6
Commercial Real Estate 25
Electricity 1
Telecommunications 1
Tourism & Hotels 2
Transport 4
Trade, Restaurants and Bars 32
LOANS TO DIRECTORS AND RELATED PARTIES
2.22 As at December 2016, total loans and advances extended to related parties constituted 1.8 percent of banks’
unimpaired capital, thus posing minimal credit risk in the banking sector.
FOREIGN CURRENCY DENOMINATED LOANS AND LIABILITIES
2.23 The ratio of Foreign Currency Denominated Loans to Total Loans and Advances and Foreign Currency Denominated
Liabilities to Total Assets were 7.5 percent and 10.5 percent, respectively. This indicated that adverse movements
in foreign exchange rates had a relatively modest impact on the earnings and capital of the banking sector. The ratio
of Foreign Currency Loans to Total Foreign Currency Deposits was 36.5 percent in 2016. The ratio ranged between
2.4 percent and 111 percent, implying that banks’ foreign currency lending was not solely funded by foreign currency
deposits.

22
CHAPTER 2:
THE COMPOSITION OF HOUSEHOLD LOANS AND ADVANCES
2.24 The composition of loans and advances to households was almost unchanged in 2016, compared to 2015
(Chart 2.11). Total credit to the household sector increased from P28.7 billion in December 2015 to P30.8 billion in
2016. The growth was driven by a 9.1 percent increase in personal loans, which constituted the largest proportion
of household loans at 63 percent. Mortgage loans increased by 6.3 percent to P8.8 billion, although its share, as
a proportion of total retail lending, was almost unchanged at 28 percent (December 2015: 29 percent). The motor
vehicle and credit card segments had shares of 6 percent and 3 percent, respectively.
Chart 2.11: The Distribution of Household Loans and Advances (Percent)
December 31, 2016
Personal Loans 63
Mortgage 28
Motor Vehicle 6
Credit Card 3
December 31, 2015
Personal Loans 62
Mortgage 29
Motor Vehicle 6
Credit Card 3
2.25 In general, the banking sector’s inherent credit risk was considered high. However, measures in place, including
collateral and stringent loan approval processes for unsecured loans, have adequately mitigated the risk, resulting in
a moderate residual risk.

23
CHAPTER 2:
MARKET RISK
REGULATORY CAPITAL REQUIREMENTS ON MARKET RISK
2.26 The total market RWA was P456.5 million (constituting 1 percent of total RWA), while the total regulatory capital
requirement for market risk was P68.1 million. This was indicative of the industry’s low exposure to market risk.
The majority of the market risk regulatory capital requirement relates to interest rate exposures, which amounted to
P41.9 million or 61.5 percent of the total regulatory capital requirement for market risk in December 2016. The capital
charge for exposure to foreign exchange risk was 38.5 percent of the total market risk regulatory capital requirement
(Chart 2.12).
Chart 2.12: Composition of Market Risk Regulatory Capital Requirement (Percent)
Interest Rate Risk 61.5

Foreign Exchange Risk 38.5
FOREIGN EXCHANGE RISK EXPOSURE
2.27 All banks complied with the Foreign Currency Exposure Directive No. BoBA 1/99, by maintaining Foreign Exchange
Currency Exposure to Unimpaired Capital Ratios within the required 15 percent, 5 percent and 30 percent limits10 for
major, minor and overall currency exposures, respectively. This indicates that the banking sector had relatively low
net exposure to foreign exchange risk.
INTEREST RATE RISK EXPOSURE
2.28 The banking sector gap between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) was positive in each
time band, except for the “6 to 12 months” time band, which recorded a negative gap of P189 million (Table 2.3).
This negative gap shows that a decline in interest rates will result in liabilities repricing at a lower rate, thus, increasing
the banks’ earnings. Similarly, on rate sensitive assets, a decline in interest rates would lower the sector’s earnings,
while an increase in interest rates will positively impact earnings and profitability and, by extension, economic capital.
10
The 15 percent and 5 percent limits are for individual major (ZAR, USD, UK, Euro) and minor currency exposures, respectively.

24
CHAPTER 2:
Table 2.3: Interest Rate Risk Exposure
TOTAL VARIABLE RATE TOTAL VARIABLE RATE VARIABLE GAP

ASSETS (P’MILLION) LIABILITIES (P’MILLION) (P’MILLION)
Up to 1 month 51 609 30 842 20 767
1 - 3 months 2 708 1 392 1 316
Over 3 - 6 months 384 13 371
Over 6 - 12 months 832 1 021 (189)
Over 12 months - 3 years 1 472 2 1 470
Over 3 - 5 years 1 543 457 1 086
Over 5 - 10 years 2 324 307 2 017
More than 10 years 2 105 46 2 059
Total 62 977 34 080 28 897
2.29 Overall, market risk in the banking sector was considered low and the direction of risk is expected to be stable over
the next 12 months.
OPERATIONAL RISK
REGULATORY CAPITAL REQUIREMENTS ON OPERATIONAL RISK
2.30 The risk-weighted assets for operational risk was P5.3 billion, constituting 10.1 percent of the total RWAs in
December 2016. On the other hand, the total regulatory capital requirement for operational risk was P787 million
as at December 31, 2016. All banks computed their operational risk capital requirements using the Basic Indicator
Approach (BIA), except one bank, which used both the BIA and the Standardised Approach for Operational Risk
(TSA), since it was conducting a TSA trial-run.
OPERATIONAL RISK EXPOSURE
2.31 A review of banks’ internal controls by the external auditors highlighted incidences of internal control deficiencies,
which included outstanding items in the suspense accounts (indicating delays in reconciliations), credit card
impairment model with no access rights, incorrect interest rates on staff loans, missing customer loan files, as well as
lack of withholding tax on payments made to VISA. On IT-related matters, on-site examinations revealed that some
banks had neither conducted penetration tests that ensure security of the IT infrastructure nor had their core banking
systems replicated in Botswana, to enable timely intervention.
2.32 In the circumstances, the banking sector composite operational risk was considered moderate, in light of satisfactory
risk management measures in place to mitigate the risk.

25
CHAPTER 2:
LIQUIDITY AND FUNDING RISK
2.33 The banking sector’s Liquid Assets to Total Deposit Ratio increased from 19.7 percent in 2015 to 21.6 percent in
2016, which was significantly above the 10 percent minimum prudential requirement. Similarly, the Liquid Assets
to Total Assets Ratio increased from 15.4 percent in 2015, to 16.7 percent in 2016, following an increase in liquid
assets (Chart 2.13). Overall, the total liquid assets held in the banking sector increased to P13.5 billion as at
December 31, 2016 (December 2015: P11.8 billion).
Chart 2.13: Commercial Banks: Liquidity Ratios: 2012 - 2016
25
20
15
Percent
10
0
2012 2013 2014 2015 2016
Statutory Minimum Requirement for Liquid Assets to Deposits Ratio

Liquid Assets to Total Assets Ratio
Liquid Assets to Deposits Ratio
Liquid Assets to Short-Term Liabilities Ratio
2.34 The banks’ aggregate cash and balances with the Bank increased by 38.2 percent from P4.6 billion in 2015 to
P6.3 billion in 2016. Commercial banks’ placements with other banks and credit institutions increased by 3.9 percent
from P10.5 billion in 2015 to P11 billion in 2016. Chart 2.14 shows Bank of Botswana Certificates (BoBCs) holdings
by banks for the period 2012 - 2016. There was a slight decrease in BoBCs holdings to P7.9 billion during 2016
(December 2015: P8.2 billion).
2.35 Overall, the liquidity indicators show an improved liquidity condition in 2016.

26
CHAPTER 2:
Chart 2.14: Commercial Banks: Market Value of Outstanding BoBCs Holdings
10
8
Pula billion
0
2012 2013 2014 2015 2016
LIABILITIES AND FUNDING STRUCTURE
2.36 The main sources of funding (total deposits and shareholders’ funds) increased marginally in 2016. Total customer
deposits increased (4.2 percent) from P60 billion in 2015 to P62.4 billion in 2016, and constituted the largest
proportion of liabilities at 77.4 percent and, as expected, were the primary source of funding for asset growth and
other aspects of the banks’ operations. Interbank balances and credit from institutions increased by 20.4 percent
from P3.3 billion in 2015 to P4 billion in 2016, as banks accessed alternative sources of funding for asset growth.
Debt securities decreased by 16.5 percent from P3.2 billion in 2015 to P2.6 billion, which weakened balance sheet
funding.
2.37 The relative share of deposits by maturity changed significantly between 2015 and 2016. The share of long-term
deposits (time and savings) decreased from 52 percent in 2015 to 46 percent in 2016, while that of short-term
deposits (call and current) increased from 48 percent to 54 percent (Chart 2.15). This exacerbates the problem of
funding long-term assets with short-term liabilities.

27
CHAPTER 2:
Chart 2.15: Commercial Banks: Deposits Type by Maturity (Percent)
December 31, 2016
Long-term Deposits 46
Short-term Deposits 54
December 31, 2015
Long-term Deposits 52
Short-term Deposits 48
2.38 Chart 2.16 shows the value of Pula denominated deposits by type, for the period 2012 to 2016. As at December
31, 2016, time deposits (fixed and notice) amounted to P23.2 billion (December 2015: P22.4 billion), and accounted
for the largest proportion of total deposits at 38.2 percent. In contrast, savings deposits constituted the smallest
proportion of total deposits (7.3 percent).
Chart 2.16: Commercial Banks: Share of Value of Pula Denominated Deposits by Type: 2012 - 2016
25
20
Pula billion
15
10
0
2012 2013 2014 2015 2016
Current Call Savings Time

28
CHAPTER 2:
2.39 Foreign currency deposits amounted to P8.7 billion as at December 31, 2016 (December 2015: P9 billion). Chart
2.17 shows that the proportion of Foreign Currency Deposits to Total Deposits decreased marginally from 15 percent
in December 2015 to 14 percent in December 2016. The United States dollar (USD) and South African rand (ZAR)
dominated foreign currency deposits, mainly due to the relative importance of these two currencies in the country’s
trade transactions. However, most of the deposits (85.6 percent) were Pula denominated.
Chart 2.17: Commercial Banks: Share of Foreign Currency and Pula Denominated Deposits to Total Deposits
(Percent)
December 31, 2016
Foreign Currency Deposit Accounts 14

Pula Deposit Accounts 86
December 31, 2015
Foreign Currency Deposit Accounts 15

Pula Deposit Accounts 85
2.40 The bulk of deposits were mainly held by private sector enterprises (64 percent) in December 2016. The share of
deposits for the household sector decreased slightly from 24 percent in December 2015 to 22 percent in December
2016, while the public sector deposits increased marginally to 14 percent (December 2015: 13 percent). Chart 2.18
shows the sectoral distribution of deposits in 2015 and 2016.

29
CHAPTER 2:
Chart 2.18: Commercial Banks: Sectoral Distribution of Deposits: 2015 - 2016 (Percent)
December 31, 2016
Total Deposits P62.4 billion

Household Sector 22
December 31, 2015

Total Deposits P60 billion
Household Sector 24
2.41 Other sources of funding (share capital, balances due to other banks, debt securities and other borrowings)
comprised 12.1 percent, 4.9 percent and 3.3 percent of total funding, respectively, in 2016. Table 2.4 shows the
sources of funding for the banking sector from 2012 to 2016.

30
CHAPTER 2:
Table 2.4: Main Sources of Funding (Pula Million)
CATEGORY 2012 2013 2014 2015 2016

Deposits 47 219 48 589 51 492 59 940 62 438
Growth Rate (Percent) 9.4 2.9 6.0 16.4 4.2
Share of Total Funding 81.5 81.0 75.7 78.2 77.4
Other Liabilities 2 925 1 207 3 109 1 999 1 817
Growth Rate (Percent) 60.1 (58.9) 157.8 (35.5) (9)
Share Capital 5 548 6 479 7 724 8 195 9 748
Growth Rate (Percent) 18.1 16.8 19.2 6.1 19
Due to other Banks 1 320 1 394 3 581 3 308 3 984
Growth Rate (Percent) 33.3 5.6 157.0 (7.6) 20.4
Debt Securities and Other Borrowings 942 2 292 2 088 3 163 2 642
Growth Rate (Percent) 3.7 143.5 (8.9) 51.5 (16.5)
Total Funding 57 954 59 962 67 994 76 605 80 640
Note: Parenthesis denotes negative figures
CAPITAL ADEQUACY (SOLVENCY): LEVELS, QUALITY AND TRENDS
2.42 The banking sector was adequately capitalised and complied with the new regulatory capital requirements, with all
banks on the new standard reporting Capital Adequacy and Common Equity Tier 1 Capital ratios in excess of
the 15 percent and 4.5 percent prudential minimum requirements, respectively. Nevertheless, commercial banks’
Capital Adequacy Ratios declined marginally from 20.1 percent in December 2015 to 19.6 percent in December
2016. This was partly a result of the 12.1 percent growth in RWAs to P52.3 billion in December 2016 (December
2015: P46.7 billion). Chart 2.19 shows the capital adequacy ratios over a five-year period (2012 - 2016).

31
CHAPTER 2:
Chart 2.19: Commercial Banks: Capital Ratios: 2012 - 2016
40 80
30 60
Percent
Percent
20 40
10 20
0 0
2012 2013 2014 2015 2016
Tier 1 Capital to RWA (LHS) Unimpaired Capital to ATA (LHS)

Tier 2 Capital to Unimpaired Capital (LHS) Minimum Prudential Limit (LHS)
Unimpaired Capital to RWA (LHS) Core Capital to Unimpaired Capital (RHS)
2.43 The banking industry’s unimpaired capital increased by 9.2 percent from P9.4 billion in 2015 to P10.2 billion in
2016, due to an increase in retained earnings of 4.1 percent (2015: 11.5 percent) and Tier 2 capital instruments
(5.8 percent). Four banks voluntarily injected additional Tier 2 capital amounting to P240 million. In addition, increases
in banks’ capital levels can also be attributed to increases in RWA, as banks grew their loan books. All banks, with
the exception of two banks, which paid out dividends, recorded increases in their unimpaired capital.
2.44 Total qualifying Tier 1 capital accounted for 67.8 percent of total unimpaired capital. The movement from Basel I
to Basel II shows notable increments in the commercial banks’ unimpaired capital, mainly for the reasons given at
paragraph 2.43.
2.45 Total Tier 2 capital was P3.3 billion (December 2015: P2.8 billion), comprising mainly subordinated term debt
(55.2 percent), unpublished current year’s profits (31.6 percent) and general loan reserves (13.2 percent). Qualifying
subordinated term debt constituted 90.3 percent of total subordinated term debt.

32
CHAPTER 2:
COMPOSITION OF THE STATEMENT OF COMPREHENSIVE INCOME (COMMERCIAL BANKS’ INCOME

STATEMENT)
2.46 The total income for commercial banks (net-interest and non-interest income), increased by 18.2 percent
(1.6 percent in 2015) from P5.3 billion in 2015 to P6.3 billion in 2016. Net-interest income increased by
26.7 percent from P3 billion in 2015 to P3.8 billion in 2016 partly reflecting a 31.9 percent decline in interest
expenses. Non-interest income increased by 7.1 percent from P2.3 billion in 2015 to P2.5 billion in 2016. The share
of Non-Interest Income to Total Income declined to 39.2 percent in 2016 (2015: 43.2 percent), while the ratio of Net
Interest Income to Total Income increased from 56.8 percent in 2015 to 60.8 percent in 2016.
2.47 Operating expenses have been on a five-year upward trend for several reasons, including increasing staff costs,
rental costs as banks expanded branch networks and due to a rise in specific impairments.
2.48 The Cost to Income Ratio declined from 60.6 percent in 2015 to 57 percent in 2016, and thus was within the 55 - 60
preferred range. The decline was attributable to faster growth in income than expenses, implying relatively satisfactory
non-interest expense management. Chart 2.20 shows the trends and composition of income and expenses for
commercial banks for the period 2012 - 2016.
Chart 2.20: Commercial Banks: Composition of Income and Expenses: 2012 - 2016
5
Pula billion
0
2012 2013 2014 2015 2016
Net Interest Income Non-Interest Income Total Income Operating Expenses
LEVELS, SOURCES AND TRENDS OF PROFITABILITY
2.49 Most banks reported net profit for the period ended December 31, 2016. The banking sector net income after-tax
improved and increased by 29.3 percent from P1.1 billion to P1.4 billion in December 2016. Chart 2.21 shows
commercial banks’ pre- and after-tax profit growth rates over a five-year period.

33
CHAPTER 2:
Chart 2.21: Commercial Banks: Growth Rates of Pre- and After-Tax Profits: 2012 - 2016
30
20
10
Percent
-10
-20
-30
2012 2013 2014 2015 2016
Pre-Tax Income After-Tax Income
PROFITABILITY AND OPERATING EFFICIENCY INDICATORS
PROFITABILITY INDICATORS
2.50 Key profitability indicators improved in December 2016. The Return on Equity (ROE) ratio increased from
13.3 percent in 2015 to 14.4 percent in 2016. Likewise, the Return on Average Assets (ROAA) Ratio increased
from 1.5 percent in 2015 to 1.8 percent in 2016 (Chart 2.22). The higher ratios were mainly due to an increase in
commercial banks’ profitability, arising out of an improvement in net interest income and non-interest revenue.

34
CHAPTER 2:
Chart 2.22: Commercial Banks: Profitability Indicators for Commercial Banks, 2012 - 2016
35 7
30 6
25 5
20 4
Percent
Percent
15 3
10 2
5 1
0 0
2012 2013 2014 2015 2016
Return on Equity (ROE) (LHS) Return on Average Total Assets (ROAA) (RHS)
2.51 The Net Interest Income to Average Total Assets (ATA) Ratio increased from 4.2 percent in 2015 to 4.9 percent
in 2016 (Table 2.5). The Non-Interest Income to Total Income Ratio declined from 42.7 percent to 39.2 percent,
signaling reduced reliance by banks on non-interest income to augment profits. Table 2.5 provides data on key
financial performance indicators for the banking sector, from 2012 - 2016.
Table 2.5: Financial Performance Ratios (Percent)
FINANCIAL PERFORMANCE RATIOS 2012 2013 2014 2015 2016

Income on Investments and Securities to Total Income 8.3 11.3 4.5 4.3 3.0
Non-Interest Income to Total Income 35.1 36.4 39.6 43.2 39.2
Net Interest Income to Total Income 64.9 63.6 60.4 56.8 60.8
Return on Equity 31.9 27.4 19.1 13.3 14.4
Return on Average Total Assets 3.2 3.0 2.3 1.5 1.8
Net Interest Income to Average Total Assets 6.0 6.0 5.1 4.2 4.9
Interest Income to Average Earnings Assets 11.9 11.8 8.8 7.9 7.4
Non-Interest Income to Average Total Assets 3.2 3.4 3.4 3.2 3.1
Interest Expense to Average Total Assets 2.7 2.7 2.6 2.9 1.8
Earnings Retention 92.8 69.9 70.1 37.6 80.0
Interest Income on Loans to Average Total Assets 7.5 7.7 6.9 6.3 6.0
Non-Interest Expense to Average Total Assets 4.3 4.6 4.3 4.5 4.6
Gross Interest Income to Average Total Assets 8.7 8.7 7.7 7.1 6.7

35
CHAPTER 2:
OPERATING EFFICIENCY INDICATORS
2.52 Table 2.6 shows the trend in commercial banks’ efficiency measures for the period 2012 - 2016. Net Income per
Employee increased to P310 500 in 2016 (2015: P233 900), while Net Income to Employee Costs increased from
81.5 percent to 91.2 percent in 2016.
2.53 The core earning capability of commercial banks improved in 2016, as indicated by the increase in the net
spread from 4 percent in 2015 to 4.8 percent in 2016. Net Interest Margin also increased to 5.4 percent in
2016 (2015: 4.7 percent). On the other hand, the Average Cost of Deposits Ratio declined from 3.1 percent in
2015 to 1.7 percent in 2016, while the Return on Loans and Advances Ratio decreased to 9.5 percent in 2016
(2015: 9.7 percent).
Table 2.6: Commercial Banks: Other Efficiency Measures: 2012 - 2016
2012 2013 2014 2015 2016

Average Cost of Deposits (Percent) 3.0 3.0 2.9 3.1 1.7
Return on Loans and Advances (Percent) 13.3 12.4 10.4 9.7 9.5
Net Interest Margin (Percent) 8.2 8.2 5.8 4.7 5.4
Net Spread (Percent) 8.6 7.9 6.2 4.0 4.8
Cost to Income (Percent) 46.7 48.6 51.2 60.6 57.0
Net Income to Employee Costs (Percent) 156.4 142.2 107.9 81.5 91.2
Net Income per Employee (P’000) 404.9 390.4 317.6 233.9 310.5
Staff Cost per Employee (P’000) 258.8 274.5 294.4 289.9 340.5
Asset per Employee (P’000) 13 238 13 190 14 610 16 460 17 793
A SUMMARY OF THE ASSESSMENT OF THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS

USING THE OFF-SITE SURVEILLANCE SYSTEM
2.54 The Bank’s Off-site Surveillance System (OSS)11 and the annual risk assessment review showed that, as at the end
of 2016, commercial banks were sound and stable. The solvency of banks, as measured by the Capital Adequacy
Ratios had an average rating of 1.3. On the other hand, the asset quality was unsatisfactory, as it was partially
adequate with scores ranging between 3 and 3.5. This was attributed to the high NPLs. The liquidity position of
banks was satisfactory and had an average score of 2.5.
2.55 Commercial banks’ sensitivity to market risk had an average rating of 2, with scores ranging between 1.5 and
2.5. Consequently, the management12 was rated 3.5, which was the highest ranking assigned to the CAMELS
components. Table 2.7 below provides a summary of OSS ratings for the eight banks included in this framework.
11
This is a quarterly monitoring tool that rates performance of banks with respect to capital adequacy, asset quality, management, earnings, liquidity and sensitivity to
market risk (CAMELS); it rates and ranks banks using an assessment of key financial soundness indicators. The ratings range from strong (1) to weak (4.5).
12
Management is responsible for the activities and condition of the bank, which gives rise to the ratings assigned to each of the CAMELS components. Therefore,
management of a bank is rated after all the other components and, as a general rule, it cannot be assigned a rating better than that of any of the components.

36
CHAPTER 2:
Table 2.7: Banking Sector OSS Results as at December 31, 2016
CAPITAL ASSET MANAGEMENT EARNINGS LIQUIDITY SENSITIVITY TO OVERALL

ADEQUACY QUALITY MARKET RISK SCORE
BANKING SECTOR AVERAGE
Meaning of the Colour Codes
RATING STRONG ADEQUATE PARTIALLY ADEQUATE WEAK
Category Band 1 Band 2 Band 3 Band 4

Sub B1-Upper B1-Lower B2-Upper B2-Lower B3-Upper B3-Lower B4-Upper B4-Lower
CAMELS
Category
Score 1.0 1.5 2 2.5 3 3.5 4 4.5
Risk Assessment
Summary Risk Rating Low Medium Medium High High

37
CHAPTER 2:
STATUTORY BANKS
STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
2.56 The financial position of two statutory banks was unchanged at P6 billion at the end of both 2015 and 201613. Total
assets and deposits of the statutory banks were lower than those of all banks in general and small banks in particular.
LIQUID ASSETS AND LIQUIDITY RISK
2.57 Statutory banks’ liquid assets fell by 33.9 percent from P1.5 billion in 2015 to P1 billion in 2016 and these comprised
mainly of placements with domestic banks. Placements with other banks declined by 35.2 percent to P1 billion
(2015: P1.6 billion). As a result, the Liquid Assets to Total Deposits Ratio declined from 45 percent in 2015 to
28.4 percent in 2016. However, the ratio still remained within the prudential minimum limit of 10 percent. Likewise,
the Liquid Assets to Total Assets and Liquid Assets to Advances Ratios, declined to 16.6 percent and 20.8 percent,
respectively (December 2015: 24.9 percent and 35.1 percent, respectively).
LOANS AND ADVANCES, CREDIT RISK AND ASSET QUALITY
2.58 Lending by the statutory banks increased by 11.5 percent in 2016 to P4.8 billion (2015: P4.3 billion). NPLs declined
by 18 percent to P215 million in 2016, compared to P262 million in 2015. As a result, the ratio of NPLs to Total
Loans and Advances decreased from 6.1 percent in 2015 to 5 percent in 2016. However, past due and specific
provisions increased in 2016 to P450 million and P28 million, respectively (December 2015: P369 million and
P22 million, respectively). To mitigate the credit risk, the two banks had some of their loans and advances secured
by qualifying real estate or guaranteed by Government.
2.59 During the period under review, the regulatory capital requirements of the statutory banks, in terms of credit risk-
weighted assets, declined from P2.9 billion in 2015 to P2.4 billion in 2016. The decline resulted from the migration
of some risk exposures under Basel I to lower risk-weighted categories under Basel II. These credit risk-weighted
assets constituted 84.9 percent of the total risk-weighted assets.
COMPOSITION OF LIABILITIES AND FUNDING STRUCTURE OF STATUTORY BANKS
2.60 The assets of statutory banks were funded by customer deposits (58.4 percent), shareholders’ funds (21.8 percent)
and borrowings from international lending agencies (16.5 percent). Deposits increased by 5 percent to P3.5 billion
(2015: P3.3 billion). The Loans to Deposits Ratio increased to 136.6 percent in 2016 (2015: 128.1 percent). This
relatively high ratio reflects the fact that statutory banks rely more on capital and other funding sources, and not on
customer deposits.
CAPITAL ADEQUACY (SOLVENCY): LEVELS, QUALITY AND TRENDS
2.61 Statutory banks were adequately capitalised and met the new regulatory capital requirements. Capital Adequacy and
Common Tier 1 Capital ratios were in excess of the 15 percent and 4.5 percent minimum prudential requirements,
respectively. The Unimpaired Capital to Risk-Weighted Assets Ratio was virtually unchanged at 45.1 percent
(December 2015: 45 percent), due to the marginal decline in risk-weighted assets, while capital remained the same.
Core Capital to Total Capital Ratio remained above 50 percent, at 94.8 percent in 2016, an improvement from
92.8 percent in 2015. One statutory bank was the main contributor to the increase in the ratios.
13
The analysis of statutory banks excludes one statutory bank because it was given a waiver not to report under the Basel II Reporting structure until further notice.

38
CHAPTER 2:
STATEMENT OF COMPREHENSIVE INCOME
2.62 The aggregate net income of the statutory banks fell by 31.7 percent to P65 billion in 2016. The primary driver for the
decrease in net income was loan impairments (trading losses), which doubled to P18 million from P9 million in 2015.
As a result, ROAA and ROE ratios declined in 2016 to 1.1 percent and 5 percent, respectively (2015: 1.8 percent
and 7.6 percent, respectively). However, interest income increased by 1.5 percent to P482 million in 2016 (2015:
P475 million). The Interest Income to ATA Ratio declined to 8 percent in 2016, from 8.7 percent in 2015. Table 2.8
shows key performance indicators for statutory banks during 2012 - 2016.
Table 2.8: Statutory Banks: Financial Performance Indicators: 2012 - 2016
INDICATOR 2012 2013 2014 2015 2016

Net Income (P’ million) 81 68 60 96 65
Net Income Growth Rate (Percent) (5.9) (15.4) (12.8) 60.3 (31.7)
Interest Income (P’ million) 310 352 370 475 482
Net Interest Income (P’ million) 175 192 197 242 251
Non-Interest Expense (P’ million) 132 151 174 189 214
Total Assets (P’ million) 3 894 4 333 4 834 6 031 5 982
Average Total Assets (P’ million) 4 087 4 114 4 584 5 432 6 006
Average Earning Assets (P’ million) 1 722 1 443 1 636 1 890 2 120
Unimpaired Capital (P’ million) 1 634 1 062 1 205 1 325 1 297
Risk-Weighted Assets (P’ million) 3 167 2 171 2 700 2 943 2 878
Interest Income to ATA (Percent) 7.6 8.6 8.1 8.7 8.0
Interest Income to Average Earnings (Percent) 18.0 24.4 22.6 25.1 22.7
Cost to Income (Percent) 62.5 65.7 74.7 64.3 72.1
ROAA (Percent) 2.0 1.7 1.3 1.8 1.1
ROE (Percent) 5.7 2.8 3.6 7.6 5.0
Notes: 1. Parenthesis denotes negative figures

2. All figures in the table exclude one statutory bank
2.63 Chart 2.23 depicts the trend in the Cost to Income Ratio over the five-year period (2012 - 2016) for statutory
banks. The Cost to Income Ratio increased sharply to 72.1 percent in 2016 (2015: 64.3 percent), reflecting the
decline in income and increasing costs, partly because of expenses on infrastructure and systems associated with
the preparation for conversion to a commercial orientation. The relatively lower Cost to Income Ratio in 2015 was
attributable to a faster growth in income compared to expenses.

39
CHAPTER 2:
Chart 2.23: Statutory Banks: Cost to Income Ratio: 2012 - 2016
80
70
60
50
Percent
40
30
20
10
0
2012 2013 2014 2015 2016

OPERATIONAL RISK
REGULATORY CAPITAL REQUIREMENTS IN RESPECT OF OPERATIONAL RISK
2.64 As at December 31, 2016, the risk-weighted assets for operational risk was P434.9 million, constituting 15.1 percent
of the total risk-weighted assets of statutory banks. The total regulatory capital requirement for operational risk was
P64.9 million. The two statutory banks computed their operational risk capital requirements using the BIA, which is
an operational risk measurement technique proposed under Basel II.
2.65 The on-site examination of one statutory bank conducted in 2016 revealed that, in general, the bank complied with
the statutory and prudential requirements on capital adequacy, earnings and profitability, as well as liquidity. However,
deficiencies in the control environment, cash management and security measures were noted. Furthermore, the
bank’s core banking system did not interface with other business units’ IT systems. These deficiencies were judged
to pose high operational risk.
OVERVIEW OF PILLAR 3 DISCLOSURE REQUIREMENTS
2.66 The implementation of Pillar 3 under Basel II commenced on January 1, 2016. As a result, all banks were required to
have in place Board approved Disclosure Policies by June 30, 2016, prior to publishing the disclosures. Furthermore,
a Circular on Pillar 3 Market Disclosure was issued to banks in March 2016, to augment and provide clarification on
the implementation of Pillar 3 Disclosure Requirements.
2.67 The Bank has since determined that further guidance is required for banks to fully comply with the Disclosure
Requirements. As a result, the Bank will organise training in 2017 to assist banks accordingly. However, it is expected
that the country’s disclosure requirements will provide banks’ customers and other relevant stakeholders with
information on the level, structure and quality of banks’ capital.

40
BOX 2: CYBER-CRIME PREVALENCE IN THE BANKING SECTOR
INTRODUCTION
The dependence of banks on Information Technology (IT) continues to increase as a result of

rapid innovation around information and communications technologies as well as improvements
in the quality, performance and efficiency in delivery of services. However, this evolution has
unintended consequences, including vulnerability to cyber-crime risk. According to Roux
(2015)14, “Cyber risk is a growing risk, which has serious implications for prudential supervision,
consumer protection and financial stability”.
While there is no globally accepted definition of cyber-crime, it is associated with any criminal
activity emanating from the use of electronic data and its transmission. Given the extensive
interlinkages and interdependency of financial systems, cyber-attacks can be perpetrated on
banks, customers, linked financial institutions and service providers. Broadly, this involves
criminal and other malicious cyber-attacks/crimes carried out by perpetrators seeking financial
gains or even competitors seeking to steal intellectual property or trade secrets. Insider threat
from disgruntled or careless employees can be another avenue for cyber-attacks. Financial
Technology (FinTech) innovations and digital channels and/or services may also act as vehicles
of cyber-crime.
The Global Economic Crime Survey of 201615 indicated that incidences of cyber-crime were the
second highest reported form of economic crime, globally. The financial sector is particularly
targeted because of the unique and critical economic function it performs, the nature and value
of its assets, as well as the significance of potential financial gains.
POTENTIAL IMPACT OF CYBER-CRIMES
Cyber-crime has the potential to undermine proper functioning of financial systems. If the world’s
financial systems fail to put in place cyber risk mitigation measures, the consequences could be
far-reaching with adverse implications, including:
i. loss or corruption of confidential and sensitive data;
ii. financial loss; either direct loss of revenue or indirectly through litigation and other legal
costs, fines, reputational damage; and
iii. loss of business due to weakened confidence, material loss of shareholder value, and
business disruptions due to compromised IT systems. For banks, this could result in
depositors being unable to access their funds on demand, creating mass panic and bank
runs, thus threatening the existence of financial institutions and systems.
14
Adopted from an Address by Cyril Roux, Deputy Governor (Financial Regulation) of the Central Bank of Ireland, to the Society of Actuaries in Ireland Risk Management
Conference “Cybersecurity and cyber risk”, Dublin, September 30, 2015.
15
Global Economic Crime Survey 2016; Adjusting the lens on economic crime: Preparation brings opportunity back into focus by PricewaterhouseCoopers

41
THE WAY FORWARD
The management and mitigation of cyber risk is a major challenge and requires significant
financial, human and other resources. However, given the various consequences of cyber-crime,
efforts must be made to tackle it, including:
i. enhanced risk awareness by the Board and Executive Management;
ii. strengthening of Board oversight over cyber security risks. In addition, there should be an
on-going dialogue about emerging trends and vulnerabilities;
iii. adequate investment in cyber security infrastructure systems and procedures. The
resources allocated to cyber security should be commensurate with the nature and
complexity of an institution’s business activities and its strategic direction;
iv. there is need to engage cyber risk specialists that can develop timely and customised
solutions on the institution’s operating systems, business needs and organisational
culture; and
v. sectoral and regulatory collaboration and information sharing on cyber-crime risks and
threats.
Furthermore, it is crucial for the financial sector to work more closely with the telecommunications
firms, internet service providers and other vendors in tackling cyber-crime.
The Bank is updating regulatory and supervisory frameworks aimed at addressing the cyber
security threats. Banks are equally expected to clearly outline key areas of vulnerability. In the
meantime, the Bank has urged banks to proceed as follows:
i. develop cyber-crime risk policy to strengthen the Board’s oversight role of this type of risk;
ii. establish Computer Incident Response Teams (CIRTs) to monitor, detect, analyse and
investigate cyber threats and cyber incidents;
iii. ensure that appropriate reporting channels are made available to facilitate the reporting
of incidents related to cyber-crime to the Bank, other licensed banks and relevant law
enforcement authorities in a timely manner;
iv. each bank to have a system in place for recording, production and provision of statistical
data on cyber-crime and other related criminal activities to the Bank and relevant law
enforcement authorities; and
v. domestic financial institutions to establish mechanisms to facilitate collaboration and work

more closely with each other, the telecommunications industry, internet service providers
and other vendors, so as to increase awareness of cyber-crime.

42
CONCLUSION
In view of the serious threats posed by cyber-crime, the Bank will continue to closely monitor
developments in this area, and regularly engage the banking sector, as necessary.
REFERENCES
1. Address by Cyril Roux, Deputy Governor (Financial Regulation) of the Central Bank of
Ireland, to the Society of Actuaries in Ireland Risk Management Conference “Cybersecurity
and cyber risk”, Dublin, September 30, 2015.
2. Global Economic Crime Survey 2016; “Adjusting the lens on economic crime: Preparation
brings opportunity back into focus” by PricewaterhouseCoopers.
3. “Guidance on Cyber Resilience for Financial Market Infrastructures”, June 2016, Bank for
International Settlements.
4. “Cyber Risk - Nature of Risk” by Financial Stability Institute, January 2017.

43
CHAPTER 2:
NON-BANK FINANCIAL INSTITUTIONS
BUREAUX DE CHANGE ACTIVITIES
MARKET ENTRY AND EXIT
2.68 In 2016, the Bank licensed four bureaux de change and revoked three licences. The licence revocations were mainly
due to failure to comply with the Bank of Botswana (Bureaux de Change) Regulations, 2004 (Regulations). Overall,
there were 59 bureaux de change in operation as at December 31, 2016.
ON-SITE EXAMINATIONS OF BUREAUX DE CHANGE
2.69 The Bank conducted 13 on-site examinations during the year to check compliance with the Regulations. The on-site
examinations revealed that only one bureau de change complied fully with the provisions of the Regulations, and that
others violated various provisions of the Regulations. As a result, one bureau de change was cautioned and 11 were
fined a total of P29 120 (VAT inclusive) for non-compliance.
2.70 Maintenance of minimum balance was a requirement that was not complied with by the largest number of the
bureaux de change (Table 2.10).
Table 2.10: Violations of the Provisions of the Bank of Botswana (Bureaux de Change) Regulations
REGULATION DETAILS OF THE PROVISIONS OF THE REGULATIONS NUMBER OF

VIOLATED BUREAUX DE
CHANGE
3(d) Failure to appoint a Principal Officer 1
5(2)(a) Failure to operate from premises approved by the Bank 1
5(2)(b) Change of premises without prior written approval by the Bank 1
5(2)(c) Maintenance of minimum cash balance 5
5(2)(e) Effecting change in the composition of shareholders or principal officers without the 3
approval of the Bank
6(f)(i) Failure to display operating hours of business 2
6(f)(ii) Failure to display the buying and selling rate of the Pula against other currencies 1
6(f)(iii) Failure to display commission charges in a conspicuous place on the licensed 1
premises
12(2)(a) Failure to take reasonable measures to obtain information about the true identity of a 4
person on whose behalf a transaction is conducted
12(2)(d)(i) Failure to identify and capture customer addresses 3
12(2)(d)(vi) Failure to continuously train employees on anti-money laundering measures 3
13(1) Transactions, per person per day, of cash amount exceeding P10 000 2
16 Failure to submit a monthly consolidated purchase and sales return 1
17 Maintaining a financial year not ending 31st of March 1
18 Failure to keep and maintain proper books of accounts 1
18(5) Failure to submit auditor’s report (audited accounts) 3

44
CHAPTER 2:
OFF-SITE SURVEILLANCE OF BUREAUX DE CHANGE
2.71 The value of sales and purchases of foreign currency at bureaux de change maintained an upward trend, as they
both increased from 12.4 percent and 11.4 percent, respectively, in 2015, to 14.9 percent and 16.7 percent,
respectively, in 2016. The United States dollar (USD) and South African rand (ZAR) dominated the bureaux de
change foreign exchange transactions by value, during 2016 (Chart 2.24).
Chart 2.24: Bureaux de Change: Shares of Sales and Purchases of Foreign Currency in 2016 (by Value)
60
50
40
Pula million
30
20
10
0
USD GBP ZAR EURO OTHER
Purchases Sales

Chart 2.25: Bureaux de Change: Shares of Sales and Purchases of Foreign Currency in 2015 (by Value)
60
50
40
Pula million
30
20
10
0
USD GBP ZAR EURO OTHER
Purchases Sales

45
CHAPTER 2:
Chart 2.26: Bureaux de Change: Shares of Sales and Purchases of Foreign Currency: 2012 - 2016 (by Value)
1000
900
800
700
Pula million
600
500
400
300
200
100
0
2012 2013 2014 2015 2016
Purchases Sales

46
CHAPTER 3
LICENSING AND CONSUMER PROTECTION ISSUES

47
CHAPTER 3:
LICENSING AND CONSUMER PROTECTION ISSUES
MARKET ENTRY ENQUIRIES AND LICENSING OF NEW BANKS
3.1 Seven banking licence enquiries were made in 2016. However, none of the promoters formally submitted an
application for a banking licence.
FINANCIAL INCLUSION INITIATIVES
3.2 Financial inclusion initiatives refer to a deliberate effort by authorities and financial services providers to devise and
design ways and means that enable sections of the society that would otherwise be excluded from accessing
financial services, to have cost-effective access to financial products and services. Crucially, one of the key tenets
for economic development is access to finance by the low-income and non-salaried cohorts, as well as other
disadvantaged segments of the society, such as women. It is also recognised that financial inclusion is also necessary
to broaden coverage of transmission of macroeconomic policies and efficient provision of social services. According
to the FinScope Survey of 2014, approximately 68 percent of adults in Botswana had access to formal financial
services, with 8 percent depending on the informal financial services. Hence, 24 percent of the population had no
access to either formal or informal financial services.
3.3 In recognition of the critical role of financial inclusion to socio-economic development, Botswana devised a six-year
financial inclusion strategy, effective 2014, called Making Access Possible (MAP). MAP represents a partnership
between Government and cooperating multilateral institutions that are tasked with the promotion of financial inclusion
globally. Furthermore, the critical importance of financial inclusion in bolstering socio-economic development had
been underscored in the Botswana Financial Sector Development Strategy of 2012 - 2016. The Strategy highlighted
the need for broad-based access to financial services, also took cognisance of the fact that the more informed and
knowledgeable consumers are, the better their financial decision making.
3.4 The national strategy to bolster financial inclusion covers the demand-side, supply-side and assessment of the
regulatory environment. The supply-side assessment covers payments, savings, credit and insurance, and, therefore,
provides an understanding of financial inclusion in a broader context. On the other hand, the demand side entails the
assessment of access, usage, perceptions and attitudes of the identified target groups.
3.5 Domestic banks continue to introduce financial inclusion products and services, in order to serve the unbanked or
underbanked sections of the society. For the year under review, financial inclusion products in the market included
low threshold transactional accounts, group savings schemes (Motshelo accounts), mobile funds transfer services
and savings accounts for minors.
3.6 In most cases, these products and services were either offered without charges, charged a minimal fee or required
low amounts for activation at account opening stage. As in all cases relating to the review of the proposed new
products, and in line with the MAP strategy, the Bank assessed fees associated with financial inclusion products
and, where the fees were considered onerous, the Bank instructed the concerned banks to reduce such fees to
reasonable levels.

48
CHAPTER 3:
LICENSING AND CONSUMER PROTECTION ISSUES (CONTINUED)
POLICY ON COMMERCIAL BANK CHARGES AND SELECTED AVERAGE CHARGES
3.7 Following the expiry of the two-year moratorium on the upward adjustment of bank charges effective January 2016,
most banks, except one bank, sought regulatory approval to adjust tariff structures in 2016, in accordance with
Clause 15 of the Disclosure of Bank Charges Notice.
3.8 The proposed charges varied across banks in terms of magnitude and category, and were ascribed to higher
banking costs, including increased systems support expenses, cost of labour and enhancements of product quality.
The proposed fee increases were benchmarked against charges levied by peer banks on comparable products and
services in the industry. Where banks were found to be offering the highest charge/fee in the market, the proposed
fee increases were rejected by the Bank. In general, banks were encouraged to consider fee increases which were
in line with the level of inflation.
3.9 Banks continued to be largely compliant with the minimum public disclosure requirements on bank charges
by publishing, on a monthly basis, interest rates payable on deposits, on their websites, as well as in at least
two newspapers widely circulating in Botswana (Table 3.1). This arrangement is meant to enhance information
dissemination, transparency and promotion of public awareness on the cost of banking services in Botswana.
Bank customers are expected to use the information to negotiate for better rates and/or lower cost of their banking
activities.
Table 3.1: Commercial Banks: Banking Sector Deposit Rates for December 2016
DEPOSIT PRODUCT DEPOSIT RATES (ANNUAL PERCENT)

Lowest Highest
Ordinary Savings 0.20 4.25
Call 0.03 2.96
91 days 2.00 2.75
6 months 2.00 3.25
12 months 2.10 4.25
24 months 2.50 4.70
3.10 Table 3.2 below provides selected banking industry average charges applied during 2016. The structure is based
on four broad categories of frequently applied charges, namely, accessibility facilitation, investment/intermediation,
trade facilitation and payments and clearing charges. The selected banking industry average charges indicate that
the cost of financial services has increased.

49
CHAPTER 3:
Table 3.2: Selected Commercial Banks Average Charges: 2015 - 2016 (Pula)
SERVICE CHARGE CATEGORY (PULA) 2015* 2016 GROWTH RATE

(PERCENT)
Accessibility Facilitation
ATM Charges
(i) Cash withdrawal (Own Bank) 1.93 2.09 8.09
(ii) Lost ATM Card replacement 59.79 60.99 2.00
Internet Banking Charges
(i) Monthly fees 172.69 174.27 0.91
(ii) Transfers (third party within Bank) 2.93 3.12 6.34
Investment/Intermediation
(i) Personal loan - Arrangement Fee (Min) 387.09 391.20 1.06
(ii) Vehicle/Asset Finance - Arrangement Fee (Min) 593.76 633.82 6.75
Trade Facilitation
(i) Purchase of foreign notes (Min) 21.64 21.86 1.01
(ii) International SWIFT transfer (Max) 342.50 344.36 0.54
(iii) Advising commission on Letters of Credit 214.54 216.84 1.07
Payment and Clearing Charges
(i) Bank cheque (Standard 100 pages) 58.65 59.39 1.25
(ii) Unpaid cheque due to lack of funds 194.16 197.80 1.87
E-Banking/Mobile-Banking
(i) Utility bill payment 3.07 3.10 0.88
(ii) Payment to third party accounts 2.56 2.62 2.27
(iii) Buy Pre-paid airtime 0.21 0.22 1.89
(iv) Cash Send/E-wallet/Instant Money 9.43 9.43 0.00
*Figures vary from the figures reported in the previous year because the fees for the newly licensed banks have been included.
CONSUMER COMPLAINTS MANAGEMENT
3.11 During the year under review, the Bank received and processed 18 consumer complaints, of which 15 were
successfully resolved, while three were still being investigated, as at December 31, 2016. The complaints mainly
related to disputed mortgage loan arrears and balances, unauthorised ATM withdrawals and internet transactions,
unsatisfactory service and disputed listing on Credit Reference Bureau Collection Africa (CRB). It was observed
that there was lack of consumer education, particularly on the procedures to be followed in lodging complaints
(Table 3.3).

50
CHAPTER 3:
Table 3.3: Consumer Complaints (2016)
NATURE OF COMPLAINT RECEIVED COMPLAINTS TOTAL TOTAL TOTAL

OUTSTANDING NUMBER NUMBER OUTSTANDING
AS AT RECEIVED RESOLVED AS AT
JANUARY 1, IN 2016 DECEMBER 31,
2016 2016
Unauthorised Transactions 3 4 6 1
CRB Disputed Listings - 2 2 -
Disputed Mortgage Loan Arrears and Balances - 4 4 -
Unsatisfactory Service - 4 3 1
Other 3 4 6 1
Total 6 18 21 3

ABANDONED FUNDS
3.12 In accordance with Section 39 of the Banking Act, the Bank continued to administer abandoned funds from
commercial banks. Table 3.4 below, shows that the balance of abandoned funds increased to P6.9 million as at
December 2016 (December 2015: P5.5 million).
Table 3.4: Total Abandoned Funds from Commercial Banks (Pula)
2015 2016
PULA PULA
Balance Brought forward 5 052 907 5 515 681
Funds Received 2 335 297 2 321 882
Claims Paid Out (510 316) (372 291)
Transfer to Guardian’s Funds (1 362 207) (547 055)
Balance at Year-end 5 515 681 6 918 217
Note: Parenthesis denotes negative figures

51
CHAPTER 3:
CORPORATE GOVERNANCE
3.13 Commercial banks appointed senior management officials who were considered “fit and proper”, as per the
requirements of the Banking Act, relevant guidelines and international best practice. During 2016, the Bank received
19 applications for appointments to banks’ Boards and 34 to senior management positions, all of which were
approved. Out of the total appointments, eight Botswana citizens were appointed to Boards and 15 to senior
management positions. This represented a 7 percent decline on the number of citizen appointments reported in
2015.
ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM
3.14 The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) conducted an on-site assessment of
Botswana’s compliance with the Financial Action Task Force (FATF) recommendations on Anti-Money Laundering
and Combating the Financing of Terrorism (AML/CFT) from June 13 - 24, 2016. The draft MER has since been
submitted to the Bank, Financial Intelligence Agency (FIA) and Ministry of Finance and Economic Development
(MFED), and the findings thereof were discussed at the ESAAMLG meeting held in April 2017 in Arusha, Tanzania.
3.15 The Bank continued to ensure that the legal framework for the regulation and supervision of banks remained relevant
and current. Ideally, the legal framework pertaining to banking regulation has to reflect local and international supervisory
developments, and comply with best practice, including compliance with the FATF Recommendations. The Bank will
continue to review and amend the Banking Act and Banking AML/CFT Regulations, to ensure compliance with the
FATF Recommendations.

52
BOX 3: THE DE-RISKING PHENOMENON FROM A BANKING PERSPECTIVE
INTRODUCTION
De-risking from a banking industry perspective refers to the process whereby a bank reduces
or terminates relationships with other banks or other financial institutions to reduce the level of
counter-party risks and/or multiple banking relationship risks. This often occurs when the bank
views another client in the relationship as non-compliant with some regulatory and supervisory
requirements/standards. Recently, de-risking has occurred in the form of either restriction or
outright termination of Correspondent Banking Relationships (CBRs). The CBRs are meant to
facilitate cross-border payments and settlement and, therefore, international trade.
COMMONEST DRIVERS OF DE-RISKING
Given the importance of banks in the economy, supervisory authorities are increasingly
demanding that they should be more prudent when they establish inter-jurisdictional banking
relationships. The compliance requirements which banks should meet have resulted in the re-
assessment of CBRs by international banks. In most cases, a bank terminates a relationship
with its counterparty when it realises that the other party does not comply with best international
practices. The most common instances of non-compliance are failure to conduct Know-Your-
Customer (KYC) and non-disclosure of either source, purpose or intended beneficiary of money
transfer services.
International banks state that they de-risk in order to comply with the anti-money laundering and
combating the financing of terrorism (AML/CFT) requirements/standards. However, the Financial
Action Task-Force (FATF), the inter-governmental body that develops and promotes policies
to safeguard the global financial system against money laundering, financing of terrorism (ML/
FT) and proliferation of weapons of mass destruction, recommends that banks should adopt
a risk-based approach and only de-risk on a case-by-case basis and terminate relationships
where ML/FT risk could not be mitigated. In other words, de-risking is not meant to be a risk
management tool.
THE EFFECTS OF DE-RISKING
De-risking undermines payment and settlement systems, thus constraining international trade in
the process. As most of the de-risking is imposed on banking clients from developing countries,
this inhibits financial inclusion in those countries. This is because in order to comply with the
stringent requirements set by their CBR counterparts, local banks require their local clients to
meet certain stringent conditions, prior to accessing banking services. Other effects include
constraining remittances.
According to the World Bank Survey (WB Survey) of 2015, approximately 75 percent of the
international banks covered in the survey had reduced their CBRs. In the Southern African
region, Angola, Mauritius and South Africa had been the most affected, as their international
banking networks declined by 37 percent, 16 percent and 10 percent, respectively, between
2013 and 2015. The end result is that these reductions led to contraction in access to financial
services by some banking clients in these countries. One of the shortcomings of de-risking is the
lack of a binding obligation on international banks to advance reasons for terminating banking
relationships.

53
This has resulted in the international banks taking unilateral decisions based on inconsistent or
unwarranted grounds for de-risking.
There have been instances in which some customers who are barred from accessing the banking
system for money transfer service, end up shifting to alternative service providers that do not
comply with best standards for AML/CFT compliance. Paradoxically, therefore, rather than
mitigating ML/TF activities altogether, de-risking merely shifts them from one service provider to
the other.
DE-RISKING IN THE BANKING ENVIRONMENT IN BOTSWANA
De-risking in Botswana has been very minimal as the banking environment is dominated by
subsidiaries of foreign banks, with wide global networks. Also, all banks are subjected to an
acceptable level of AML/CFT compliance regime. For example, the Bank requires every bank
to institute a comprehensive AML programme, which entails having an AML related training
programme for bank employees and the appointment of a Money Laundering Reporting Officer.
Compliance with best international standards is assessed from time to time and, where necessary,
remedial action is enforced.
Notwithstanding the foregoing, some local banks have experienced CBR termination. The
following reasons were advanced:
i. group-wide termination of correspondent banking services for euro payments to

53 countries, including in Africa, Caribbean and Channel Islands;
ii. avoiding reputational risk as the local banks had bureaux de change and money remitters
as their clients; and
iii. risks associated with the African clientele.
CONCLUSION
It is clear from the reasons advanced by international banks that the decision to de-risk is based
on a blanket policy and not a risk-centric assessment of the likelihood of risk that each relationship
could present. Also, it is apparent that the decision to restrict or terminate respondent banks’
customers are often unilaterally initiated by the international banks, without taking cognisance of
the AML/CFT measures deployed by such banks.
Given the adverse impact that de-risking could have on the banking system and, consequently,
the domestic economy, the Bank of Botswana shall continue to require all the banks and other
entities falling under its purview to strictly comply with the best standards as prescribed by the
FATF.
In general, de-risking needs to be addressed urgently as it has the potential to negatively affect
development efforts in lower income countries.

54
REFERENCES
Financial Market Integrity: World Bank Survey, 2015
Tracey Durner and Liat Shetret (2015). “Understanding Bank De-Risking and Its Effects on
Financial Inclusion”.
Third Public and Private Sector Dialogue (2016): Eastern and Southern African Anti-Money
Laundering Group, 2016.

55
CHAPTER 4
OTHER SUPERVISORY ACTIVITIES

56
CHAPTER 4:
OTHER SUPERVISORY ACTIVITIES
RECENT GLOBAL STANDARDS AND GUIDELINES ISSUED BY THE BASEL COMMITTEE ON BANKING
SUPERVISION AT THE BANK FOR INTERNATIONAL SETTLEMENTS
4.1 The Basel Committee on Banking Supervision (BCBS) continued to issue and revise guidelines and standards that
will, over the next few years, materially impact on the regulation and supervision of banks and banking groups. The
following guidelines/standards and reports were issued in 2016:
a. Revised Framework for Market Risk Capital Requirements - January 2016;

b. Guideline on Sound Management of Risk Related to Money Laundering and Financing of Terrorism - February
2016;
c. Guidelines on Anti-Money Laundering and Countering Financing of Terrorism with a “General Guide to Account
Opening” - February 2016;
d. Standard on the Interest Rate Risk in the Banking Book - April 2016;
e. Report on Regulatory Consistency Assessment Programme (RCAP) - Analysis of Risk-Weighted Assets for
Credit Risk in the Banking Book - April 2016;
f. Tenth Report on the Adoption of the Basel Regulatory Framework - April 2016;
g. Guidance on the Application of the Core Principles for Effective Banking Supervision to the Regulation and
Supervision of Institutions Relevant to Financial Inclusion - September 2016;
h. Final Standard on Total Loss Absorbing Capacity for Global Systemically Important Banks - October 2016; and
i. Eleventh Progress Report on the Adoption of the Basel Regulatory Framework - October 2016.
4.2 In addition, the BCBS had issued, for consultation, the following Standards as at December 2016:
a. Revisions to the Annex on Correspondent Banking;

b. Standardised Measurement Approach for Operational Risk;
c. Reducing Variation in Credit Risk-Weighted Assets - Constraints on the Use of the Internal Models Approaches;
d. Revisions to the Basel III Leverage Ratio Framework; and
e. Prudential Treatment of Problem Assets - Definitions of Non-Performing Exposures and Forbearance.
PARTICIPATION IN INTERNATIONAL AND DOMESTIC REGULATORY AND SUPERVISORY FORUMS
PARTICIPATION IN SUPERVISORY COLLEGES
4.3 During 2016, the Bank attended supervisory colleges16 meetings organised by the parent banks of the banking
groups, which have subsidiaries in Botswana. These included the following: Capricorn Investment Holdings Group
(CIH) in Windhoek, Namibia; two Supervisory College meetings for Barclays Africa Group Limited (BAGL) in Pretoria,
South Africa; Supervisory College Meeting for Bank of Baroda Limited and Bank of India Limited in Mumbai, India,
and Supervisory College for Standard Chartered Bank Limited in Kampala, Uganda.
4.4 Supervisory Colleges were held in compliance with Principle 13 of the Basel Core Principles for Effective Banking
Supervision (Core Principles). The Principle mandates home supervisors to establish bank-specific supervisory college
meetings for banking groups, and also requires host supervisors to be included in the colleges. The objective of the
supervisory colleges was to discuss key supervisory issues and engage with senior management officials of banks,
with a view to enhancing supervision of the respective international banking groups. The subject matters discussed
included, among others, group financial performance, capital and liquidity management, business conduct and risk
management programmes, and oversight by the Boards of these banks.
16
Supervisory Colleges are working groups of supervisors formed to enhance the consolidated supervision of banking groups.

57
CHAPTER 4:
OTHER SUPERVISORY ACTIVITIES (CONTINUED)
OTHER SUPERVISORY MATTERS
4.5 Following the signing of the Memorandum of Understanding (MoU) between the Bank and the Competition Authority
(CA), the two authorities constituted a Joint Working Committee (JWC), the objectives of which are to:
(i) manage and facilitate meetings, cooperation and consultation in respect of matters dealt with by each party in
terms of the MoU;
(ii) propose, when necessary, any amendment of, or supplementation to the MoU;
(iii) advise senior management of the Bank and CA on issues affecting the efficient and effective cooperation and
implementation of the MoU and solutions thereto; and
(iv) address any matter connected to or incidental to the MoU.
4.6 The Bank received a request from commercial banks seeking authorisation to use the United Nations High
Commissioner for Refugees (UNHCR) issued Identity Documents (IDs) for on-boarding of refugee bank customers.
The Bank, in consultation with FIA, allowed the banks to accept such a document, as a form of identity when
refugees do business with the banks. However, banks were advised to continuously conduct the normal customer
due diligence.
CROSS BORDER SUPERVISION
JOINT EXAMINATIONS
4.7 The Bank, FIA and the home supervisor of one bank conducted a joint AML/CFT on-site examination of the bank in
April 2016. The examination was undertaken in line with Principle 12 of the Core Principles. The examination revealed
that the bank required enhanced focus on, and commitment to, strengthening its controls in relation to the combating
of money laundering and the financing of terrorism in various areas. However, the progress update submitted by
one bank, regarding the findings of the examination, showed that most of the supervisory concerns were being
addressed.
MEMORANDA OF UNDERSTANDING
4.8 During 2016, the Bank finalised and signed MoUs with the SARB and the Reserve Bank of Zimbabwe, on April 10,
2016 and April 24, 2016, respectively. The MoU between the Bank and FIA was submitted to FIA for counter-signing
on December 19, 2016. The main purpose of the MoUs is to determine parameters within which mutual assistance,
cooperation and exchange of supervisory information would be handled between the Bank and other supervisory
authorities. The MoUs signed with external supervisors are consistent with Principle 13 of the Core Principles, which
requires home and host supervisors of cross-border banking groups to share information and cooperate for the
effective supervision of the group and group entities, and for the efficient and effective handling of crisis situations.

58
CHAPTER 5
SUMMARY OF KEY ISSUES ARISING FROM ON-SITE EXAMINATIONS
AND PRUDENTIAL MEETINGS

59
CHAPTER 5:
SUMMARY OF KEY ISSUES ARISING FROM ON-SITE EXAMINATIONS AND PRUDENTIAL MEETINGS
COMMERCIAL BANKS’ EXAMINATIONS
5.1 The Bank carried out full-scope on-site examinations of one commercial bank and one statutory bank, and limited
scope (AML/CFT) on-site examinations of two commercial banks. The full-scope on-site examination of two banks
included a review of capital adequacy; asset quality; management and effectiveness of Board oversight; earnings and
profitability; liquidity; and sensitivity to market risk (CAMELS). The review also included the assessment of operational
risk, legal and compliance risk. The full-scope on-site examination of one bank, was a joint on-site examination with
the bank’s home supervisor. The joint AML/CFT on-site examinations were carried out in collaboration with FIA and
the bank’s home supervisor. All the four banks examined were ordered to implement corrective actions to remedy all
areas of weakness.
5.2 The full-scope examination of the commercial bank revealed that its financial condition and performance were sound.
However, some issues of supervisory concern were brought to the attention of the Board, namely, unsatisfactory
management of credit risk, in light of the concentration in unsecured retail scheme loans; violations of the bank’s
Credit Policy, evident in collateral management and inability of the bank to periodically review credit facilities.
5.3 The bank’s liquidity position had improved. However, deposit concentration risk was an issue of concern and the
bank was reliant on volatile wholesale deposits to fund its lending activities.
5.4 The bank’s operational risk was considered high, on account of significant manual interventions in the IT systems and
poor record management. Furthermore, the bank did not have robust policies and processes for the monitoring and
detection of unusual or suspicious transactions.
5.5 The quality of the statutory bank’s risk management systems and controls on strategic risk was found to have
material shortcomings partly because: Board members did not evaluate each other, resulting in failure to establish
the performance and effectiveness of individual Board members; and the bank did not have a succession plan to
identify and develop staff in order to timely fill key positions, when they become vacant.
5.6 It was established that there was need to improve the quality of credit risk management processes, given the lack of
a robust loan classification methodology; and inadequate computation of the general impairments.
5.7 With respect to the limited scope on-site examinations, the management of AML/CFT processes and procedures
was considered inadequate at both banks. The banks did not regularly review their existing customers against
sanction lists to ensure that the information was up-to-date.
5.8 In addition, the banks did not conduct ML/TF risk assessments on their customers, geographic areas, products and
services, transactions and/or delivery channels. Consequently, it was determined that these banks did not have a
thorough understanding of ML/TF to determine the level of their overall inherent risk and type of mitigation strategies
to be applied.

60
CHAPTER 5:
SUMMARY OF KEY ISSUES ARISING FROM ON-SITE EXAMINATIONS AND PRUDENTIAL MEETINGS (CONTINUED)
CONSUMER COMPLIANCE ON-SITE EXAMINATIONS
5.9 The Bank conducted full scope consumer compliance on-site examinations of two banks during the year under
review. The examinations revealed that the two banks had comprehensive policies and procedures in place.
Furthermore, the banks complied satisfactorily with most consumer issues, except for the violations shown in Table
5.1.
Table 5.1: Violations of Consumer Compliance Standards
VIOLATION DESCRIPTION
Section 39(1) of the Banking Act One bank did not have a standard policy on abandoned funds, which details
(CAP. 46:04) how such funds are to be transferred to the Bank, as mandated by Section
39(1) of the Banking Act (CAP. 46:04).
Disclosure of Bank Charges Notice Both banks did not compute and disclose the Annual Percentage Rate (APR)
(Government Notice No. 41 of 2001) for all credit facilities.
Disclosure Framework for Deposit and One bank used the Simple Interest Rate method to calculate the interest
Lending Interest Rates, Regulatory payable on longer-dated deposits, instead of the Compounding Interest
Guideline No. RG 01/09/2009 Rate method cited in the customers’ certificates, resulting in shortfalls in the
interest amounts payable to customers.
Government Notice No. 111 of 2011, The early settlement clause in one bank’s loan application forms required
on the Prescription of Notice Period and customers to give at least 90 days’ notice, contrary to the 45 days prescribed
Early Settlement Penalties for Term Loans by the Notice.
and Similar Credit Facilities (Notice).
CONSULTATIVE AND PRUDENTIAL MEETINGS
5.10 Prudential bilateral and statutory trilateral meetings were held in 2016, during which banks reviewed their business
strategies for the previous year(s) and presented plans for the period ahead, as well as financial year-end results.
Furthermore, statutory bilateral meetings were held with external auditors to discuss audit strategies for the respective
banks. The biannual Banking Committee meetings were held as planned. These meetings serve as a consultative
forum and advisory body on broad parameters of monetary and financial sector policies of the Bank.
VIOLATIONS OF THE BANKING ACT
5.11 Two banks violated various sections of the Banking Act during 2016. These included the submission of incorrect and
misleading data. Consequently, a monetary penalty fee was levied on such banks.

61
APPENDICES

62
APPENDICES
Appendix 1: The Regulatory Architecture of the Financial System and the Banking Supervision Department
Organisation Structure 64
Appendix 2: Bank Branch Distribution Network by District as at December 31, 2016 66
Appendix 3: Approaches to Regulation and Supervision of Banks in Botswana 67
Appendix 4: Supervised Financial Institutions as at December 31, 2016 73
Commercial and Statutory Banks 73
Bureaux de Change 74
Microfinance Institutions 75
Appendix 5: List of Guidelines Issued and Other Statutory Amendments 76
Appendix 6: Definitions of Banking Supervision Terms 77
Prudential Ratios 78
Risk-Weights Applied on Various Asset Exposures for Purposes
of Capital Adequacy Measurement 81
Capital Elements 83
Appendix 7: Aggregate Financial Statement of Licensed Banks: 2012 - 2016 86
Table 1: Aggregate Statement of Financial Position of Licensed Commercial Banks 86
Table 2: Aggregate Statement of Comprehensive Income of Licensed Commercial Banks 87
Table 3: Aggregate Statement of Financial Position of Statutory Banks 88
Table 4: Aggregate Statement of Comprehensive Income of Statutory Banks 89
Table 5: Aggregate Capital Structure of Commercial Banks 90
Table 6: Aggregate Capital Structure of Statutory Banks 93
Appendix 8: Charts and Tables of Key Prudential and Other Financial Soundness Indicators 96

63
APPENDIX 1
DIAGRAM 1.1: THE REGULATORY ARCHITECTURE OF THE DOMESTIC FINANCIAL SYSTEM
BANK OF BOTSWANA
NON-BANK FINANCIAL
INSTITUTIONS REGULATORY
AUTHORITY
STATUTORY BANKS (3) COMMERCIAL BANKS (10)

• FUND MANAGERS
• PENSION FUNDS
• INSURANCE COMPANIES, BROKERS
AND AGENCIES
BUREAUX DE CHANGE (59) • STOCKBROKERS
• COLLECTIVE INVESTMENT
UNDERTAKINGS
• BOTSWANA STOCK EXCHANGE
• MICRO-LENDERS
MICRO-FINANCE INSTITUTION (1)

64
APPENDIX 1
DIAGRAM 1.2: BANKING SUPERVISION DEPARTMENT ORGANISATIONAL STRUCTURE
DIRECTOR
DEPUTY DIRECTOR DEPUTY DIRECTOR DEPUTY DIRECTOR

REGULATORY POLICY AND PRUDENTIAL SUPERVISION BUSINESS CONDUCT AND
LICENSING DIVISION DIVISION BUREAUX DE CHANGE
SUPERVISION DIVISION
PBE (2) PBE (2) PBE (1)

SBE (6) SBE (6) SBE (3)
BE (7) BE (9) BE (5)
Key: PBE: Principal Bank Examiner

SBE: Senior Bank Examiner
BE: Bank Examiner

65
66
Barclays (1)
Barclays (3) FNBB (1) Barclays (9)
3
Stanchart (1) BBS (1) Stanchart (6)
APPENDIX 2
FNBB (1) FNBB (5)

Stanbic (1) Stanbic (2)
BancABC (1) 10 BancABC (2) North-East (16)
Bank Gaborone (1) BSB (2) Barclays (4)
BBS (1) BBS (1) Stanchart (2)
NDB (1) NDB (1) FNBB (1)
Stanbic (1)
Baroda (1)
28 BancABC (1)
Bank Gaborone (1)
Barclays (1) Capital (1)
FNBB (1) BSB (1)
Bank Gaborone (1) BBS (2)
3 NDB (1)
Barclays (2)
Stanbic (2)
FNBB (2)
Stanchart (2)
Bank Gaborone (1)
9
Barclays (1) Kgatleng (3)
1 Barclays (1)
Stanchart (1) South-East (53)
7 FNBB (1) Barclays (11)
Stanchart (8)
Barclays (3) FNBB (9)
Stanchart (1) Stanbic (5)
FNBB (2) Baroda (2)
BBS (1) BancABC (4)
Bank Gaborone (3)
Capital (3)
BOI (1)
Bank SBI (1)
BSB (2)
BANK BRANCH DISTRIBUTION NETWORK BY DISTRICT AS AT DECEMBER 31, 2016
BBS (3)
NDB (1)

APPENDIX 3
APPROACHES TO REGULATION AND SUPERVISION OF BANKS IN BOTSWANA
1. INTRODUCTION
1.1 This Appendix outlines the basic elements of the framework, standards and processes for banking supervision in
Botswana. The Bank is committed to the development of a sound, stable and competitive banking system, which
promotes savings mobilisation while responding, in a prudent and sustainable manner, to the credit requirements of
the economy. The Bank also seeks to adhere to best international practice, as enshrined in the Core Principles.
2. LEGAL FRAMEWORK
2.1 In general, it is considered that, to be effective, a regulatory framework must have sufficient authority established
by law, a high degree of independence or operational autonomy and adequate human and financial resources.
In Botswana, the primary legislation covering the supervision and regulation of licensed financial institutions is the
Banking Act. Important elements of the Banking Act are: explicit provisions for licensing and authorisation processes,
which give the Bank powers to regulate market entry; power to establish minimum prudential supervisory standards
and policies with respect to capital adequacy, liquidity, restrictions on large exposures, loans to insiders and quality of
management; rules governing accounting, auditing and disclosure of information; and guidelines for the management
and/or restructuring of banks in distress.
2.2 The banking law also covers matters of governance, market discipline within the banking system, and prudential
supervision of the banking system. It is recognised that, primarily, the responsibility for banking soundness lies
with owners (shareholders) and managers, who have a commercial incentive to operate banks prudently. Market
discipline, which is underpinned by minimum disclosure requirements, provides an incentive for good internal
governance and imposes sanctions for failures, particularly for institutions listed on the Botswana Stock Exchange
(BSE). Prudential supervision is essential to provide external incentives for management and owners of banks to
rectify inadequacies in governance and impose the appropriate level of control where market behaviour could lead
to imprudent conduct, which could have adverse systemic repercussions. Thus, the continuing safety, soundness
and stability of the banking system and the extent to which it is effective in facilitating financial intermediation between
savers and borrowers, as well as operating the payment system, is a reflection of efficiency in all these three areas.
3. AUTHORITY FOR LICENSING BANKS
3.1 A central feature of banking supervision is establishing criteria for licensing of banks. Banking is a regulated industry
because banks take deposits from the public, and play a critical role in the country’s payments system. As a result,
there are regulatory barriers to entry that importantly influence the structure of the banking sector in terms of the
number, size and ownership of banks in the country. These market entry requirements must be carefully balanced
with the public policy objective of a competitive and efficient banking system.
3.2 The responsibility for licensing banks is exclusively conferred on the Bank by Section 3 of the Banking Act. This
section covers licensing of commercial banks, merchant/investment banks, credit institutions and discount houses.

67
APPENDIX 3
4. LICENSING POLICY AND PROCEDURES FOR ESTABLISHING A BANK
4.1 The licensing requirements and procedures for establishing a bank in Botswana are set out in Sections 6(1) and 8 of
the Banking Act, and detailed in Banking Regulations 3, 4 and 5.
4.2 In order to be licensed as a bank in Botswana, an applicant must satisfy the following requirements:
a. The company must be locally incorporated in Botswana (branch banking is not permitted);
b. The proposed banking establishment must have the prescribed initial minimum capital (currently P5 million) and
the owners must demonstrate willingness and ability to provide additional financial support as and when required.
In case of applicants that are majority owned by holding companies or a part of a financial conglomerate, the
parent entity should demonstrate capacity to be a source of financial strength to the applicant;
c. The applicant must have adequate managerial capacity, which includes the appointment of “fit and proper”
persons, as well as sound risk management and other governance structures;
d. In the case of foreign banks, the parent bank must be subject to adequate home supervision, and documentary
evidence of consent by the parent supervisor to operate in Botswana must be provided;
e. The proposed ownership and organisational structure must be acceptable to the Bank, and the structure
must be such that it does not deter effective supervision, or, where necessary and appropriate, consolidated
supervision; and
f. The promoter must submit a business plan and five-year financial projections showing the establishment of a
branch network, products to be provided, and demonstrate the ability to enhance effective competition, and
effectively provide products and services to meet legitimate public financial needs in a prudent and safe manner.
5. CORE PRUDENTIAL REQUIREMENTS
5.1 Among the most significant prudential regulations on banks are capital adequacy requirements, statutory primary
reserve requirements, liquid asset requirements, large exposure limits, restrictions on insider loans and asset quality
requirements. Each of these is described briefly below.
CAPITAL ADEQUACY REQUIREMENTS
5.2 A bank must maintain a minimum capital adequacy (solvency) ratio of at least 8 percent, calculated as the ratio
of Unimpaired Capital to Total Risk-Weighted Assets. The 8 percent is regarded as the statutory floor. Banks in
Botswana are required to maintain a capital adequacy ratio at or above 15 percent, which, in the context of the
current macroeconomic and financial environment, is regarded as a safe and prudent level. The key issue is that a
bank must maintain sufficient capital and other financial resources at a level that is considered to be commensurate
with the nature and scale of its operations and the risks associated with them. The availability and adequacy of high
quality capital determines the degree of resilience of a bank to withstand shocks to its financial position.
RESERVE REQUIREMENTS
5.3 Section 40 of the Bank of Botswana Act (CAP. 55:01) empowers the Bank of Botswana to require financial institutions
to hold primary reserves, including marginal primary reserves, in the form of cash holdings or deposits with the Bank
or both, against such deposits and similar liabilities as may be specified by the Bank.

68
APPENDIX 3
LIQUID ASSETS REQUIREMENTS
5.4 Section 16(2) of the Banking Act stipulates that every bank must maintain in Botswana, on a daily basis, specified
eligible liquid assets as a percentage of its deposit liabilities, currently equal to 10 percent and 3 percent for
commercial banks and credit institutions, respectively.
5.5 In general, a licensed financial institution should establish appropriate and prudent policies for the management of
liquidity risk. It should ensure, to the satisfaction of the Bank, that adequate internal risk management systems exist
to monitor and control maturity mismatches between its assets and liabilities; that the bank has the capacity to meet
maturing obligations and/or fund expansion of its statement of financial position in a sound and effective manner; that
the level, trend and quality of bank funding sources, including cash flow from earning assets, are supportive of the
bank’s growth strategy.
ASSET QUALITY
ASSET CONCENTRATIONS (LARGE EXPOSURES)
5.6 Section 17 of the Banking Act, read together with Regulation 9, restricts a bank from granting facilities that are in
excess of 10 percent of a bank’s unimpaired capital to a single customer or group of related customers without
the specific approval of a bank’s entire board of directors. Further, a bank is required to seek prior approval of
the Bank before granting loans and other credit facilities to a single entity or group of related companies which, in
aggregate, are in excess of 30 percent of a bank’s unimpaired capital. This is an asset quality ratio intended to avoid
vulnerabilities arising from excessive concentration of credit risk, or, put more positively, to encourage diversification
of the loans and advances portfolio of a bank.
INSIDER LENDING
5.7 Section 17 of the Banking Act, read together with Banking Regulation 9, also restricts banks from granting credit
facilities to directors and their related interests in excess of the higher of P50 000 or 1 percent of a bank’s core
capital without the approval of the bank’s entire board of directors. In addition, no bank may grant facilities, direct or
indirect, to a member of its board of directors in excess of 25 percent of its unimpaired capital. This provision seeks
to avoid possibilities of insider abuse, self-dealing or over-reliance on related party business. Any lending in violation
of this requirement is deemed to be a withdrawal of capital and, therefore, deducted from the unimpaired capital in
computing the capital adequacy ratio of a bank.
NON-PERFORMING LOANS AND PROVISIONS
5.8 Section 14 of the Banking Act deals with certain items, which should be provided for; that is, reserves to be made to
take into account potential losses when determining a bank’s capital adequacy. It establishes the legal framework for
the Bank to assess adequacy of the provisions for non-performing assets. Accordingly, the Bank has statutory power
to assess, in consultation with the bank’s independent statutory auditors, the level of impairments in a bank’s loans
and advances portfolio and the amount of charges to the bank’s profit and loss as an expense for non-performing
assets.

69
APPENDIX 3
6. MAIN SUPERVISORY APPROACHES
ON-SITE EXAMINATIONS
6.1 The Bank conducts regular on-site examinations of banks pursuant to Section 24(1) of the Banking Act. The Bank
may also conduct an examination of a bank if so petitioned by one fifth of the total number of depositors as provided
for under Section 24(3) of the Banking Act.
6.2 A full scope prudential on-site examination is one that is sufficient in scope to assess an institution’s Capital Adequacy
(C), Asset Quality (A), Management and Effectiveness of Board Oversight (M), Earnings and Profitability (E), Liquidity
(L) and Sensitivity to Market Risk (S) components (referred to as CAMELS) and the risk management systems
and make a conclusion about its safety and soundness. Full scope on-site examinations should be conducted
at least every 18 months. A limited scope examination is an on-site examination which does not cover all the
CAMELS components, but rather focuses on a specific product, area, or risk, e.g., consumer loans, treasury or
operational risk. An ad hoc on-site examination is usually a limited scope examination designed to test a specific
area of supervisory concern; e.g., compliance with laws and regulations, liquidity, capital adequacy, etc. A full scope
business conduct supervision examination focuses on the entire business conduct of an institution and how it relates
to customers (consumer protection).
6.3 The objectives of on-site examinations are to: assess and evaluate the overall condition and financial soundness of
a bank, compliance with applicable laws and regulations, the quality and effectiveness of governance structures,
including the internal control environment, as well as to check the accuracy of statutory reports submitted to the
Bank.
6.4 During an on-site examination, examiners have direct access to the books and records of the financial institution
being examined. This enables examiners to make a fair and realistic assessment of the condition of the institution in
various risk areas.
6.5 The evaluation of the financial soundness of the institution is achieved by assessing CAMELS, and the Risk
Assessment Systems (RAS) rating. CAMELS and RAS ratings are awarded on a scale of 1 to 5. A rating of 1 indicates
strong performance and strong risk management practices, while a rating of 5 represents weak performance and
inadequate risk management practices. Consistent with the Risk-Based Supervision (RBS) methodology applied by
the Bank, CAMELS ratings are used as a guide to determine, inter alia, the frequency of on-site examinations and
intensity of supervisory programmes for each bank. A CAMELS rating of 1 (sound/strong bank) requires a bank to be
examined within 24 months; a CAMELS rating of 2 within 18 months; a CAMELS rating of 3 within 12 months; and
CAMELS ratings of 4 and 5, represent poor risk management and/or unsound banking operation, thus requiring a
bank to be examined within 6 months.
6.6 In order to ascertain the soundness and prudence of a bank’s practices and procedures, an assessment is made
of its inherent risks, and the adequacy of its risk management systems and controls. The practices and procedures
adopted would reveal the extent to which the financial institution is employing adequate measures to protect
depositors’ funds, shareholders’ interests, deployment of resources and effective measurement and control of risks
that are inherent in any banking operation.

70
APPENDIX 3
6.7 The internal control systems are also assessed to determine their effectiveness and the role of the internal audit
function. Effective running of operations depends on the adequacy of records maintained and the adoption and
implementation of issues that may adversely affect the performance of a bank for which they are responsible.
6.8 To enhance the traditional supervisory process, the Bank adopted the RBS framework in 2014. This framework places
strong emphasis on understanding and assessing the adequacy of each financial institution’s risk management
systems. It also stresses the process of risk identification, measurement, monitoring, control and reporting on an
on-going basis. As a result, the use of RBS assists supervisors to identify banks in which risks are greatest, identify
within a bank those areas or activities in which risks are high and apply supervisory resources to assessing and
measuring those risks. Therefore, it enables the supervisor to prioritise efforts and focus on significant risks by
channelling available resources to banks where the risk profile warrants greater attention. The major output of RBS is
a bank’s supervisory plan which outlines the planned supervisory activities for a bank over a given period of time. The
supervisory plan is established every year with results obtained from OSS, CAMELS and RAS assigned to a bank
during the previous on-site examinations.
BILATERAL AND TRILATERAL MEETINGS
6.9 Bilateral meetings are held once a year with each supervised bank. Prudential meetings with the institution’s
management are meant to discuss its financial performance, risk profile, strategies, the market in which it operates,
and/or any other issues of supervisory concern. These meetings provide a forum for exchange of views on matters
affecting the supervised banks and serve to improve communication and information flow between the Bank and the
supervised banks. Bilateral meetings are also held once a year with auditing firms engaged by supervised banks. The
meetings are arranged to discuss supervisory issues that might need attention of both the external auditor and the
supervisor. It is at such meetings that the Bank also takes the opportunity to discuss with auditors their expectations
regarding the scope of statutory audits and other general issues of a prudential nature.
6.10 In addition to the separate bilateral meetings with both external auditors and the respective supervised banks, the
Bank, pursuant to Section 22(8) of the Banking Act, arranges tripartite meetings with each financial institution and
its external auditors. These trilateral meetings are convened to discuss matters relevant to the Bank’s supervisory
responsibilities that may have arisen in the course of a statutory audit of a bank’s business, its accounting and
internal control systems, and its draft audited annual statement of financial position and statement of comprehensive
income. The forum is also used to share information on the critical risk areas and/or any new developments in
accounting and regulatory standards. Trilateral meetings have an added advantage of fostering effective collaboration
and communication between the Bank (as the regulatory authority) and external auditors of banks, in the application
of accounting standards and ensuring effective disclosure in financial statements and related reports of material risks
in a bank’s statement of financial position.

71
APPENDIX 3
OFF-SITE MONITORING AND SURVEILLANCE
6.11 Off-site surveillance involves off-site monitoring of the supervised institution regarding its performance and
condition, together with an assessment of progress made regarding implementation of various directives and/or
recommendations from the supervisor. All banks are required to submit statutory returns as prescribed under Section
20 of the Banking Act. The foreign exchange statutory return, which shows the bank’s net foreign exchange position,
is submitted every week to the Bank. The monthly and quarterly statutory returns should be submitted on the 10th
day of the month following the reporting month. Instructions on how to complete the returns are contained in the
statutory returns availed to each bank upon being granted a licence.
6.12 The Banking Supervision Department analyses financial data from banks continuously to determine their financial
condition, soundness and viability. The specific objectives of the analysis are to determine the levels, trends and
sources of banks’ profits; compare each bank’s performance for the period with that of prior periods, and against that
of other banks; note changes in the banks’ capital accounts and the causes thereof (monthly, quarterly and annual
performance review); and determine whether the banks have complied with the Banking Act, Banking Regulations,
Directives, Circulars and Guidelines pertaining to prudential requirements.
6.13 The outcome of the off-site analysis is used for preparing early warning reports, which also serve as an input to
the on-site examination work, including planning, scope of on-site examination work and resourcing of the on-
site examination teams. Furthermore, this regular off-site monitoring, surveillance and analysis serves an important
function of risk profiling of banks, continuous engagement with bank management and, as may be necessary, any
targeted supervisory interventions.
6.14 To enhance the off-site monitoring process, in 2015 the Bank adopted the use of an OSS quarterly monitoring tool.
The OSS is a hybrid of the Off-site Rating System (ORS) and the Financial Ratio and Peer Group Analysis (FRPGA)
monitoring tools that are used by regulators worldwide. The OSS rates and ranks banks based on an assessment of
32 financial soundness indicators or ratios. It is the adaptation of the traditional CAMELS ratings system that weighs
the components relative to their current industry importance to financial soundness. The OSS scoring places banks
within four broad categories of strong, adequate, partially adequate and weak, with a rating scale of 1 to 4.5, where 1
is strong and 4.5 is weak. This rating methodology was developed based on the Botswana banking sector data and,
therefore, factored in the country-and-sector-specific variables affecting local banking business. It is expected that
this system will bring a wealth of benefits in terms of tracking financial soundness and, accordingly, trigger appropriate
supervisory reactions to systemic and idiosyncratic conditions.
7. ACCOUNTING, AUDITING AND DISCLOSURE STANDARDS
7.1 Section 22 of the Banking Act requires banks to annually appoint independent external auditors acceptable to the
Bank. Statutory audits are conducted annually, usually at financial year-end, except when a bank intends to capitalise
half-year interim profits, it must call for an audit of the accounts. Change of external auditors or the financial year-end
requires prior approval of the Bank.

72
APPENDIX 4
SUPERVISED FINANCIAL INSTITUTIONS AS AT DECEMBER 31, 2016
INSTITUTION TOTAL ASSETS POSTAL ADDRESS BUSINESS AUDITORS

(P’ MILLION) LOCATIONS
Commercial Banks
African Banking Corporation of 8 386 Private Bag 00303 8 KPMG
Botswana Limited Gaborone
Bank of Baroda (Botswana) 1 617 P O Box 216 ADD 3 KPMG
Limited Gaborone
Bank of India (Botswana) 200 Private Bag 00111 1 Grant Thornton
Limited Gaborone
Bank Gaborone Limited 4 354 Private Bag 00325 7 Pricewaterhouse-
Gaborone Coopers
Barclays Bank of Botswana 15 410 P O Box 478 36 Pricewaterhouse-
Limited Gaborone Coopers
Capital Bank Limited 1 619 P O Box 5548 4 KPMG
Gaborone
Bank SBI Botswana Limited 454 P O Box 505243 1 Grant Thornton
Gaborone
First National Bank of 22 516 P O Box 1552 23 Deloitte
Stanbic Bank Botswana 12 220 Private Bag 00168 11 KPMG
Limited Gaborone
Standard Chartered Bank 13 862 P O Box 496 21 KPMG
Statutory Banks
Botswana Savings Bank 2 217 P O Box 1150 5 KPMG
Gaborone
National Development Bank 1 654 P O Box 225 4 Pricewaterhouse-
Gaborone Coopers
Building Society
Botswana Building Society 3 765 P O Box 40029 9 KPMG
Gaborone

73
APPENDIX 4
BUREAUX DE CHANGE AS AT DECEMBER 31, 2016
NAME POSTAL ADDRESS BUSINESS LOCATION

4Corners Bureau de Change P O Box 848, Ghanzi 1
Aldaph Bureau de Change P O Box 404845, Gaborone 2
American Express Bureau de Change P O Box 45140, Gaborone 2
Andy and Esi Bureau de Change P O Box 504125, Gaborone 1
Apijoe Bureau de Change P O Box 458, Mogoditshane 2
Ban Mo Bureau de Change P O Box 99, Sherwood 1
Bellagio Bureau de Change Private Bag BR 321, Gaborone 1
Beni Fame Bureau de Change P O Box 2143 AAD, Gaborone 4
Berry-Pee Bureau de Change P O Box 20051, Gaborone 1
Boitekanelo Bureau de Change P O Box 2768, Gaborone 1
BT Bureau de Change P O Box 601369, Gaborone 2
Cape to Cairo Bureau de Change P O Box 799, Kasane 2
City Exchange Bureau de Change Private Bag F199, Francistown 1
Crystal Diamond Bureau de Change P O Box 20554, Gaborone 1
CSS Bureau de Change P O Box 45168, Gaborone 3
Dollar Wave Bureau de Change P O Box 10784, Palapye 1
Eagle Sight Bureau de Change P O Box 10654, Palapye 1
Earthmark Bureau de Change P O Box 242, Digawana 1
Exim Bureau de Change P O Box 1020, Gaborone 1
Fanz Bureau de Change P O Box 617, Lobatse 1
Fundex Bureau de Change P O Box 401547, Gaborone 3
Galaxy Bureau de Change P O Box 501055, Gaborone 1
Garona Bureau de Change P O Box 408, Gaborone 5
Genesis Bureau de Change Private Bag BR 225, Gaborone 1
Gorogang Bureau de Change P O Box 46785, Gaborone 1
Hi-Rated Bureau de Change P O Box 3299, Gaborone 1
*Investors View Bureau de Change P O Box 2381, Francistown 1
Kaycy Bureau de Change P O Box 1693, Lobatse 2
Kwanokeng Bureau de Change P O Box 10, Sherwood 2
Limpopo Bureau de Change P O Box 8, Sherwood 2
Macheng Bureau de Change P O Box 60474, Gaborone 1
Madikwe Bureau de Change P O Box 268, Sikwane 1
Maeto Bureau de Change P O Box 22, Mahalapye 1
Mochudi Bureau de Change P O Box 202147, Gaborone 2
Monty Cristo Bureau de Change Private Bag 00254, Gaborone 1

74
APPENDIX 4
BUREAUX DE CHANGE AS AT DECEMBER 31, 2016
NAME POSTAL ADDRESS BUSINESS LOCATION

Okavari Bureau de Change P O Box 44, Karakubis 1
Open Door Bureau de Change P O Box 839, Maun 6
Ozair Bureau de Change P O Box 4862, Gaborone 2
Proxy Bureau de Change P O Box 404108, Gaborone 3
Regash Bureau de Change P O Box 45144, Gaborone 1
Rennies Bureau de Change P O Box 2482, Gaborone 1
River Ride Bureau de Change P O Box 301106, Francistown 4
Rose of Sharon Bureau de Change P O Box 404338, Gaborone 1
Royalty Bureau de Change Private Bag BO 259, Gaborone 2
Sherwood Ranch Bureau de Change P O Box 1, Sherwood 1
Simple Forex Bureau de Change P O Box 81384, Gaborone 1
SMH Bureau de Change P O Box AD 148 ADD, Gaborone 3
Sunny Bureau de Change P O Box 370, Maun 2
Tlhokomelo Bureau de Change P O Box 2033, Molepolole 1
Thari Bureau de Change P O Box 40074, Gaborone 2
The Silver Bureau de Change P O Box 1894, Ramotswa 1
Trans Frontier Bureau de Change P O Box 183, Pitsane 2
Travellers’ Bureau de Change P O Box 20909, Maun 2
Travellers’ Choice Bureau de Change P O Box 26725, Gaborone 2
TRL Money Link Bureau de Change Private Bag F333, Francistown 1
Tshilong Bureau de Change P O Box 40418, Gaborone 1
Toluca Bureau de Change P O Box 402026, Gaborone 1
UAE Xchange Bureau de Change P O Box AD 749 ADD, Gaborone 4
Unity Bureau de Change P O Box 1586, Francistown 1
*Universal Bureau de Change P O Box 2444, Gaborone 1
West Bureau de Change P O Box 40854, Gaborone 1
Total 59 104
* Ceased operations on December 31, 2016
MICROFINANCE INSTITUTION
INSTITUTION POSTAL ADDRESS BUSINESS LOCATIONS AUDITORS

Women’s Finance House Private Bag 124, Gaborone 1 Sharma & Associates

75
APPENDIX 5
LIST OF GUIDELINES ISSUED AND OTHER STATUTORY AMENDMENTS
The Circular on the Implementation of Pillar 3 Disclosure Requirements was issued to all banks in March 2016, to provide
clarification on the implementation of Pillar 3 market disclosure.

76
APPENDIX 6
DEFINITIONS OF BANKING SUPERVISION TERMS
ASSET CONCENTRATION
Measures aggregate exposure to one borrower, an affiliated group of borrowers, or borrowers with a common controlling
interest, common management, cross-guarantees or financial interdependency which cannot be substituted in the short-
term. This exposure is usually expressed as a percentage of the bank’s unimpaired capital and its various thresholds are
subjected to prudential regulatory requirements. In terms of Section 17 of the Banking Act, an exposure in excess of 10
percent of the bank’s unimpaired capital is deemed an asset concentration requiring prior approval of the Board of Directors
of the lending financial institution. Exposures in excess of 30 percent of the bank’s unimpaired capital require the Bank’s
approval.
ASSET QUALITY
A relative measure of the performance of the bank’s loan portfolio based on the appraisal of the asset, in terms of the degree
of risk and the likelihood of recovery, adherence to the terms of contracts and orderly liquidation of the account. A good
quality asset means the loan, advance or investment is producing cash flows as was expected and/or agreed upon. A non-
performing asset or loan is a loan where payment of interest and principal are past due by 90 days or more.
LOAN CLASSIFICATIONS
(i) “Pass” Assets - Assets under the “Pass” category are those that are found to have no material or significant
performance problems, or technical and/or legal documentation deficiencies.
(ii) “Special Mention” Assets - Advances in this category are currently performing well, but are potentially weak.
These advances constitute an undue and unwarranted credit risk, but not to the point of justifying a classification
of sub-standard. The credit risk may be relatively minor, yet it may constitute an unwarranted risk in the light of the
circumstances surrounding a specific advance. Special mention rating is not a classification, and should not be used
as a compromise between a “Pass” and “Sub-standard”.
(iii) “Sub-standard” Assets - A sub-standard asset is inadequately protected by the current sound worth and paying
capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness or
weaknesses that jeopardise the liquidation of the debt. These assets (loans, investments or other credit facilities) are
characterised by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.
(iv) “Doubtful” Assets - An asset classified doubtful has all the weaknesses inherent in one classified sub-standard,
with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high,
but because of certain important and reasonably specific pending factors that may work to the advantage and
strengthening of the asset, its classification as an estimated loss is deferred until its more exact status can be
determined.
(v) “Loss” Assets - Assets classified as losses are considered uncollectible and of such little value that their continuance
as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or
salvage value, but rather it is neither practical nor desirable to defer writing off this potentially worthless asset even
though partial recovery may be effected in the future.

77
APPENDIX 6
CORE CAPITAL
An aggregate of share capital, share premium, general revenue reserve and retained earnings, also called Tier 1 capital.
It represents the most stable and permanent form of capital for supporting a bank’s operations. (See Appendix 7 (5) for
computations)
TOTAL RISK-WEIGHTED ASSETS
An aggregate of the total value of assets after adjusting for the risk inherent in each asset for both on-balance sheet and
off-balance sheet items. A list of assets and the corresponding risk conversion factors used in risk-weighting are presented
at Appendix 6 (Table 1(a) and 1(b)).
UNIMPAIRED CAPITAL

Unimpaired in relation to the capital of a bank means the absence of any legal or technical covenant, term, restriction or
encumbrance, which would otherwise render such capital not to be freely available for distribution to depositors and/or other
creditors in the event of the liquidation or dissolution of the bank, and the absence of any condition or arrangement which
would, in the opinion of the central bank, diminish the value of the whole or any portion of the capital of the bank. An outline
of capital elements used to compute unimpaired capital is presented at Appendix 6.
PRUDENTIAL RATIOS
RETURN ON EQUITY (ROE)
The ratio measures the after-tax profit against shareholders’ funds. The ratio, however, tends to favour highly leveraged
banks in that the ratio tends to be higher for low capitalised banks than for large capitalised banks. It is of major interest to
the shareholders of the bank, and less so for banking supervisory authorities.
RETURN ON AVERAGE TOTAL ASSETS (ROAA)
The ratio measures after-tax profits as a percentage of average total assets. This ratio is widely used by both banking
supervisors and market analysts since banking assets are the base from which earnings are primarily derived. The ratio
measures the earnings capacity of the assets of the financial institution. It measures profit earned against the amount
invested in assets and is the key to profitability measurement as it shows how efficiently a financial institution’s assets are
employed. It is also used to measure the effectiveness of management’s decisions with respect to resource utilisation. The
higher the ratio, the more efficient the management is in its asset allocation decisions.

78
APPENDIX 6
DIVIDEND PAY-OUT
The ratio measures the proportion of the after-tax income that is paid out to shareholders. This ratio is of greater interest to
investors and for prudential supervision. Emphasis is on the adequacy of capital with reference to the quality of capital funds
in relation to the statement of financial position risk profile, i.e., the core and unimpaired capital to risk-weighted assets ratio.
The rationale is that owners of banks must have sufficient own funds in a bank, though it is recognised that unnecessarily
high capital levels could result in economic inefficiencies, if not employed productively. However, for commercial and other
strategic reasons, most banks will retain some or a portion of their income to build greater capacity by way of a larger capital
base, in order to take advantage of lending and/or investment opportunities in large projects, or to support organic growth
of the bank.
RISK-BASED CAPITAL
On January 1, 2016, the Bank implemented Basel II. This new framework augments the risk sensitivity of Basel I. In terms of
the Basel II framework, in addition to credit risk, a separate and explicit computation of the regulatory capital for market risk
and operational risk is introduced. Therefore, the minimum amount of regulatory capital (the ratio of Unimpaired Capital to
Risk-Weighted Assets) is derived from the summation of capital charges for credit risk, operational risk and market risk. The
move to this method of capital adequacy measurement has alerted banks to the type of assets they hold and the associated
risk profiles. The intention is to strengthen the resilience of banks. In the process, some existing capital instruments held by
banks and fixed revaluation reserves were disqualified as part of Tier II Capital. Also excluded are any elements that are likely
to impair a bank’s capital, such as investment in unconsolidated subsidiaries and associated companies, and connected
lending of a capital nature. The use of risk-weighted assets is intended to take into account the risk inherent in the different
types of assets. If two banks with exactly the same size of assets and capital base are to be compared, their unadjusted
capital ratio will be the same. However, if the inherent risk of the statement of financial position is taken into consideration,
the bank with less risky assets will enjoy a higher capital adequacy ratio and is better able, therefore, to expand its business
by lending to large borrowers, if opportunities arise. A good capital base implies that adequate funds are available to absorb
risks inherent in the types of assets held by a bank, its foreign exchange dealing operations and all other risks associated
with the business.
NET SPREAD (PERCENT)
This ratio covers only those assets and liabilities that have an interest rate attached to them. Thus, it excludes the impact
of non-interest-bearing demand deposits, capital and non-remunerated reserve requirements on net interest earned and
thus on bank profits. This is helpful in that it isolates the effect of interest rates on bank profits and thereby enables a better
understanding of the sources of bank profitability and, consequently, of the vulnerability of bank earnings.
NET INTEREST MARGIN (PERCENT)
This ratio identifies the core earnings capability of the bank - its interest differential income as a percentage of average total
earning assets.

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APPENDIX 6
OTHER OPERATING INCOME TO TOTAL ASSETS (PERCENT)
The ratio shows the dependence on “non-traditional” income. Growth in this ratio can indicate diversification into fee-based
financial services or a reaching for speculative profits to make up for deficiencies in the bank’s core interest differential
income.
NET OPERATING (OR INTERMEDIATION) MARGIN (PERCENT)
The intermediation margin can be defined as the differential between the cost of funds and the yield on earning assets
plus related fee income. The differential quantifies the cost extracted by the banking system for intermediating between the
providers and the users of funds.
NET INCOME PER STAFF
The ratio measures the average income generated by each staff member. Note that this ratio will be significantly different for
a wholesale (investment) bank with relatively few, but highly paid staff compared to a retail bank with a large branch network
and many less highly paid clerical staff.
NET INCOME TO STAFF EXPENSE
Measures the return on investment in staffing costs. This ratio is probably a better measure than net income per staff since it
enables institutions of a different type to be compared to some degree. It looks at the effect of staffing decisions, regardless
of whether these are low cost, low expertise clerical staff, or high cost, high qualified professionals.
COST TO INCOME
The ratio measures the non-interest expenses as a percentage of net interest income plus non-interest income (total
operating income). It shows how well the non-interest expenses are managed by the institution relative to the level of total
operating income.
AVERAGE COST OF DEPOSITS
The ratio measures interest paid on deposits as a percentage of total average deposits. Institutions with a large customer
base of operating transaction accounts (demand deposits) relative to interest earning savings accounts tend to report low
average cost of deposits. In turn, banks that tend to rely on wholesale deposits (call and other highly volatile money) for
funding will have relatively high average cost of deposits. Similarly, banks that start to engage in aggressive marketing for
deposits, either due to liquidity concerns and/or to fund expansion of their lending business, will exhibit a high average cost
of deposits.

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APPENDIX 6
RISK-WEIGHTS APPLIED ON VARIOUS ASSET EXPOSURES FOR PURPOSES OF CAPITAL ADEQUACY

MEASUREMENT
Table 1 (a): Summary of Risk-Weights under the SA for Credit Risk
CREDIT RATE
CLAIMS ON EXPOSURE AAA TO A+ TO BBB+ BBB+ BELOW UNRATED RISK-
AA- A- TO TO B- B-/BB WEIGHT/CCF
BBB- PERCENTAGE
Government of Botswana and Bank of 0
Botswana
Cash 0
Cash items in the process of collection 20
Sovereigns and Central Banks 0 20 50 100 150 100
BIS, IMF 0
Domestic PSEs 20
PSEs 20 50 100 100 150 100
Domestic Banks 20
Foreign Banks 20 50 100 100 150 100
Security Firms 20 50 100 100 150 100
Eligible Retail 75
Other Retail 100
Mortgages17 35
Corporates/Insurance Companies 20 50 100 100 150 100 100
MDBs 20 50 50 100 150 50 0/100
Commercial Real Estate 100 100 100 100 100 100 100
Other Assets 18
100
Past Due Items 100(20);
100(20);
150(20)
Other Non-Qualifying Residential Property 75
Significant investments in equity and regulatory 250
capital instruments issued by unconsolidated
financial institutions
Mortgage Servicing Rights 250
DTAs 250
Investments in commercial entities 1 250
Non-payment/delivery on non-DvP and non- 1 250
PvP transactions
Venture capital and private equity investment 150
17
Owner occupied or rented by the borrower to a third party, but used for residential purposes.
18
Excludes cash items in the process of collection

81
APPENDIX 6
Table 1 (b): Credit Conversion Factors: Off-Balance Sheet Items
MATURITY/COMMITMENT CREDIT
CONVERSION
FACTOR (CCF)
PERCENTAGE
Commitments:
• Original maturity up to 1 year 20
• Original maturity over 1 year 50
• Unconditionally cancellable commitments without notice 0
Direct credit substitutes:
• Acceptances and endorsements
• Guarantees on behalf of customers
• Letter of credit issued by the bank with no title to underlying shipment;
• Letter of credit confirmed by the bank and Standby letters of credit serving as financial guarantee 100
Repo style transactions:
• Sales and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank. 100
Lending of banks securities or posting of securities as collateral:
• Repurchase/reverse repurchase agreements and securities/borrowing transactions. 100
Forward asset purchases:
• Commitment to purchase at a specified future date on prearranged terms, a loan, security or other asset from 100
another party, including written put options on specified assets with the character or a credit enhancement.
Placements of forward deposits:
• An agreement between a bank and another party where the bank will place a deposit at an agreed rate of 100
interest at a predetermined future date.
Partly paid shares and securities:
• Amounts owing on the uncalled portion of partly paid shares and securities held by a bank representing 100
commitments with certain draw down conditions by the issuer at a future date.
Certain transaction-related contingent items:
• Performance bonds, warranties and indemnities
• Bid or tender bonds
• Advance payment guarantees
• Customs and excise bonds
• Standby letter of credit related to particular contracts and non-financial transactions. 50
Note issuance facilities and revolving underwriting securities:
• An arrangement whereby a borrower may draw down funds up to a prescribed limit over a predetermined period 50
by making repeated note issues to the market. If the issue is unable to be placed in the market, the unplaced
amount is to be taken up or funds made available by a bank being committed as an underwriter of the facility.
Short-term self-liquidating trade LCs/Trade related contingent items with an original maturity below 6 months:
• These are contingent liabilities arising from trade-related obligations, secured against an underlying shipment of 20
goods for both issuing and confirming bank.

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APPENDIX 6
CAPITAL ELEMENTS
ITEM
1. Common shares
2. Share premium resulting from the issue of common shares
3. Retained earnings
Retained earnings brought forward from the previous financial year
Add: Interim profits (audited by external auditor)
Less: dividend declared
Less: Dividend paid in the current financial year
4. Accumulated other Comprehensive income and other disclosed reserves:
a. Statutory Credit Risk Reserve
b. Capital Buffer
c. Statutory Reserves
d. Other (specify)
5. Common shares issued by consolidated subsidiaries of the bank and held by third parties (Minority interest)
6. Regulatory adjustments applied in the calculation of CET1 Capital
7. Common Equity Tier 1 Capital Lines (1+2+3+4+5-6)
Additional Tier 1 Capital

8. Instruments issued by the bank that meet the criteria for inclusion in Additional Tier 1 Capital as per paragraph 4.9 of the Capital
Directive
9. Stock surplus (Share premium) resulting from the issue of Additional Tier 1 capital instruments meeting all relevant criteria for
inclusion
10. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Additional
Tier 1 capital and are not included in CET 1 subject to terms and conditions in 3.5
11. Regulatory adjustments applied in the calculation of Additional Tier 1 Capital
12. Additional Tier 1 Capital Lines (8+9+10-11)
13. Total Tier 1 Capital Lines (7+12)
Tier 2 Capital
14. Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tier 1 capital)
15. Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital
16. Unpublished Current Year’s Profits
17. Tier 2 capital instruments (subject to gradual phase-out treatment)
18. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Tier 2
capital and are not included in Tier 1 capital (minority interests)
19. General provisions/general loan-loss reserves eligible for inclusion in Tier 2, limited to a maximum of 1.25 percentage points of
credit risk-weighted assets calculated under the standardised approach
20. Regulatory adjustments applied in the calculation of Tier 2 Capital
21. Total Tier 2 Capital Lines (14+15+16+17+18+19-20)
22. Total Unimpaired Capital Lines (13+21)

83
APPENDIX 6
Table 3 (b): Regulatory Adjustments Applied In the Calculation of Capital
A. Full deductions
LINE ITEM
22 Goodwill and other intangible assets
23 Advances of a capital nature granted to connected persons
24 Deferred tax assets (DTA) that rely on future profitability to be realised
25 Investments in own shares, whether directly or indirectly
26 Unrealised revaluation losses on investments in securities
27 Defined benefit pension fund assets
28 Reciprocal holdings in the capital of banking, financial and insurance entities
29 Cash flow hedge reserve
30 Gain on sale related to securitisation transactions
31 Regulatory adjustments applied to CET1 Capital due to insufficient Additional Tier 1 and Tier 2 Capital
32 Full Deductions applied to the calculation of CET1 Capital Line (22+23+24+25+26+27+28+29+30+31)
B. Threshold deductions (Recognition capped at 10 percent of the bank’s common equity (after the application of all regulatory
adjustments set out under paragraph 4.6 of the Base II Guidelines)
LINE ITEM
33 Significant investments in the common shares of unconsolidated financial institutions, where a bank or its
subsidiary owns more than 10% common shares of the issuing entity (banks, insurance and other financial
entities) - instead of full deduction, only deduct the excess above the 10% threshold, the remaining balance
below thresholds shall be treated as other assets (para 3.16 - 3.18 Basel II Guidelines)
34 Deferred tax assets that arise from temporary differences
35 Mortgage servicing rights
36 Aggregate non-significant investments by the bank or its subsidiary in the equity of other banks and financial
institutions, where the aggregate investment is equal to or greater than 10 percent of the capital of the institution
in which the investment is made - instead of full deduction, only deduct the excess above the 10% threshold,
the remaining amount below the 10% threshold shall be treated as other assets
37 Threshold deductions applied to the calculation of CET 1 Capital Line (33+34+35+36)
38 Total regulatory adjustments applied to the calculation of CET 1 Capital Line (32+37)
Regulatory adjustments applied in the calculation of Additional Tier 1 Capital
A. FULL DEDUCTIONS
39 Direct investments in own Additional Tier 1 capital, net of any short positions, if the short positions involve no
counterparty risk
40 Indirect investments in own Additional Tier 1 capital (e.g., through holdings of index securities in which the bank
itself is a constituent), net of any short positions
41 Any own Additional Tier 1 capital which the bank could be contractually obliged to purchase
42 Reciprocal cross holdings and the capital of banking, financial and insurance entities that are outside the scope
of regulatory consolidation
43 Significant investments in the common shares of unconsolidated financial institutions, where a bank or its
subsidiary owns more than 10% common shares of the issuing entity (banks, insurance and other financial
entities)
44 Full deductions applied to the calculation of Additional Tier 1 Capital Line (39+40+41+42+43)

84
APPENDIX 6
Table 3 (b): Regulatory Adjustments Applied In the Calculation of Capital
LINE ITEM
B. Threshold deductions: Recognition capped at 10 percent of the bank’s common equity (after the application of all
regulatory adjustments set out under paragraph 4.10 of the Basel II Guidelines)
45 Aggregate non-significant investments by the bank or its subsidiary in the equity of other banks
and financial institutions, where the aggregate investment is equal to or greater than 10 percent
of the capital of the institution in which the investment is made - instead of full deduction, only
deduct the excess above the 10% threshold, the remaining amount below the 10% threshold
shall be treated as other assets.
46 Total threshold deductions applied to the calculation of Additional Tier 1 Capital
47 Total regulatory adjustments applied to the calculation of Additional Tier1 Capital Line (44+46).
Regulatory adjustments applied in the calculation of Tier 2 Capital
A. Full deductions
48 Direct investments in own Tier 2 capital, net of any short positions, if the short positions involve
no counterparty risk
49 Indirect investments in own Tier 2 Capital (e.g., through holdings of index securities in which the
bank itself is a constituent), net of any short positions
50 Any own Tier 2 capital which the group could be contractually obliged to purchase
51 Reciprocal cross holdings and the capital of banking, financial and insurance entities that are
outside the scope of regulatory consolidation
52 Significant investments in the common shares of unconsolidated financial institutions, where
a bank or its subsidiary owns more than 10% common shares of the issuing entity (banks,
insurance and other financial entities).
53 Full deductions applied to the calculation of Tier 2 Capital Line (48+49+50+51+52)
B. Threshold deductions: Recognition capped at 10 percent of the bank’s common equity (after the application of all
regulatory adjustments set out under paragraph 4.15)
54 Aggregate non-significant investments by the bank or its subsidiary in the equity of other banks
and financial institutions, where the aggregate investment is equal to or greater than 10 percent
of the capital of the institution in which the investment is made - instead of full deduction, only
deduct the excess above the 10% threshold, the remaining amount below the 10% threshold
shall be treated as other assets.
55 Total threshold deductions applied to the calculation of Tier 2 Capital
56 Total regulatory adjustments applied to the calculation of Tier 2 Capital Line (53+55)
Important note
1. The amount of the three items (33, 34, 35) not deducted (threshold amounts) in the calculation of CET1 will be treated as
other assets and risk-weighted at 250 percent.
2. Line 36: The amount above the 10 percent threshold shall be deducted from CET1, and the amount at below threshold
shall be risk-weighted as appropriate as per Schedule M-SRWA.

85
APPENDIX 7
AGGREGATE FINANCIAL STATEMENTS OF LICENSED BANKS: 2012 - 2016
Table 1: Aggregate Statement of Financial Position of Licensed Commercial Banks: 2012 - 2016 (P’ million) as at
December 31st
TOTAL ASSETS IN LOCAL CURRENCY 2012 2013 2014 2015 2016
1. Cash and balances with the Central Bank 4 933 5 268 5 838 4 584 6 333
1.1. Currency 824 976 1 374 1 544 1 433
a. Foreign Currency 86 159 463 532 363
b. Local Currency 738 816 911 1 013 1 070
1.2. Balances with Central Bank 4 109 4 292 4 419 2 982 4 900
1.3 Other - - 45 58 -
2. Investment and Trading Securities 10 199 8 059 6 482 12 537 11 425
3. Placements with Other Banks and Credit Institutions 7 407 6 410 9 636 10 539 10 951
4. Gross Loans and Advances to Other Customers 34 410 39 499 45 117 48 307 51 325
4.1. Impairments-Specific 617 718 771 1 007 1 270
4.2. Interest in Suspense 257 339 218 340 184
4.3. Impairments Portfolio - - - 132 182
5. Loans and Advances to Other Customers (Net of 33 537 38 442 44 075 46 875 49 690
Specific Provisions)
6. Fixed Assets Net of Depreciation 665 872 910 968 908
7. Other Assets (net) 1 213 911 1 054 1 106 1 333
Total Assets 57 954 59 962 67 994 76 605 80 640
TOTAL LIABILITIES IN LOCAL CURRENCY
1. Amounts Owed to Government Institutions - 6 12 2 12
a. Central Bank Accounts - 6 12 2 12
b. Direct Government Credits (CB or MFED) - - - - -
2. Due to Other Banks and Credit Institutions 1 320 1 394 3 581 3 308 3 984
3. Debt Securities and Other Borrowing 942 2 292 2 088 3 163 2 642
4. Due to Other Customers/Depositors 47 219 48 589 51 491 59 940 62 438
5. Shareholders’ Funds 5 548 6 479 7 724 8 204 9 748
6. Other Liabilities 2 925 1 202 3 097 1 997 1 817
a. Taxes Payable 132 177 133 252 195
b. Dividends Payable 20 - 4 7 -
c. Accrued Expenses - - 1 167 - 7
d. Other 2 774 1 025 1 794 1 715 1 615
Total Liabilities 57 954 59 962 67 994 76 605 80 640

86
APPENDIX 7
Table 2: Aggregate Statement of Comprehensive Income of Licensed Commercial Banks (P’ million) for the period
ended December 31, 2016
2012 2013 2014 2015 2016

1. Interest and similar income 4 784 5 146 4 953 5 129 5 271
2. Interest expense 1 502 1 600 1 670 2 093 1 425
3. Net interest income [1-2] 3 282 3 546 3 284 3 036 3 847
4. Other operating income 1 777 2 028 2 150 2 312 2 477
5. Gross operating income/(loss) [3+4] 5 059 5 575 5 434 5 348 6 323
6. Total Impairments 455 579 760 668 855
a. Impairment of loans and advances - Specific 445 588 545 587 685
b. Impairment of loans and advances - Portfolio 55 45 216 83 172
c. Impairment on other financial assets (46) (53) (1) (2) (2)
7. Operating income/(loss) net of bad and doubtful 4 604 4 995 4 674 4 680 5 469
debts
8. Operating expenses 2 364 2 709 2 782 3 242 3 607
a. Salaries and employee benefits 1 133 1 248 1 370 1 335 1 543
b. Auditing and consulting expenses 6 17 49 49 173
c. Rents paid 129 105 187 195 198
d. Depreciation and amortisation 107 152 135 148 159
e. Other 989 1 186 1 089 1 565 1 533
9. Other provisions and write-offs - - - -
a. Investments - - - -
b. Other balance sheet items - - - -
c. Off-balance sheet items - - - -
10. Net operating income/(loss) [7-8-9] 2 240 2 287 1 893 1 438 1 862
11. Extraordinary Gains/(Losses) - 18 - - -
a. Gains/Losses on revaluation of assets (NET) - 18 - - -
b. Translation Gains/Losses (NET) - - - - -
c. Other Gains/Losses - - - - -
12. Net income/(loss) before tax [10+11] 2 240 2 305 1 893 1 438 1 862
13. Income tax 468 530 415 349 455
14. Net income/(loss) after tax [12-13] 1 772 1 775 1 478 1 088 1 407

87
APPENDIX 7
Table 3: Aggregate Statement of Financial Position for Statutory Banks in Botswana (P’ million) as at December
31st
TOTAL ASSETS IN LOCAL CURRENCY 2012 2013 2014 2015 2016

1. Cash and balances with the Central Bank (20) 19 8 9 23
a. Currency (21) 5 6 8 21
aa. Foreign currency - - - - -
ab. Local currency (21) 15 6 8 21
b. Balances with Central Bank 1 3 2 1 2
c. Other - - - - -
2. Investment and Trading securities - - - - -
3. Placements with other banks and credit institutions 859 856 854 1 580 1 025
4. Gross Loans and Advances to Customers 2 927 3 316 3 823 4 278 4 769
5. Specific Provisions - 25 20 22 28
6. Net Loans and Advances to Customers 2 886 3 273 3 781 4 240 4 722
7. Fixed assets net of depreciation 126 129 121 131 151
8. Other assets (net) 43 57 70 71 62
Total Assets 3 894 4 333 4 834 6 031 5 983
Liabilities in Local Currency
1. Amounts owed to government institutions - - - - -
a. Central Bank accounts - - - - -
b. Direct Government credits (CB** or MFED) - - - - -
c. Other - - - - -
2. Borrowings from Other Banks, Credit Institutions and 468 918 855 1 271 987
International Lending Agencies
3. Due to customers/depositors 1 430 1 740 2 180 3 340 3 493
4. Shareholders’ funds 1 426 1 564 1 664 1 263 1 303
5. Other liabilities 570 111 136 157 200
a. Taxes payable - 1 1 1 1
b. Dividends payable - - - - 4
c. Accrued expenses - - - - -
d. Other 570 110 135 156 195
Total Liabilities 3 894 4 333 4 834 6 031 5 983
* 2012 - 2015 figures revised to exclude one statutory bank

** CB denotes Central Bank

88
APPENDIX 7
Table 4: Aggregate Statement of Comprehensive Income of Statutory Banks (P’ million) for the period ended
December 31st
2012 2013 2014 2015 2016

1. Interest and similar income 310 352 370 475 482
2. Interest expense 135 160 173 233 231
3. Net interest income [1-2] 175 192 197 242 251
4. Other operating income 36 38 35 51 46
5. Gross operating income/(loss) [3+4] 211 230 232 294 297
6. Bad and Doubtful Debts Provisions (2) 11 (1) 9 18
a. Specific loss provision expenses (3) - - - -
b. General loss provision 2 - - - -
c. Releases and Recoveries of bad debts previously - - - - -
written off
7. Operating income/(loss) net of specific loss provisions 213 220 233 284 279
8. Operating expenses 132 151 174 189 214
a. Salaries and employee benefits 70 76 74 94 106
b. Administrative expenses - - - - -
c. Auditing and consulting expenses - - - - -
d. Rents paid - - - - -
e. Depreciation and amortization 7 9 9 13 10
f. Other 55 66 90 81 98
9. Other provisions and write-offs - - - - -
a. Investments - - - - -
b. Other balance sheet items - - - - -
c. Off-balance sheet items - - - - -
10. Net operating income/(loss) [7-8-9] 81 68 60 96 65
11. Extraordinary Gains/(Losses) - - - - -
a. Gains/Losses on revaluation of assets (NET) - - - - -
b. Translation Gains/Losses (NET) - - - - -
c. Other Gains/Losses - - - - -
12. Net income/(loss) [10+11] 81 68 60 96 65
*2012 - 2015 figures revised to exclude one statutory bank

89
APPENDIX 7
Table 5 (a): Aggregate Capital Structure of Commercial Banks in Botswana (Under Basel I) (P’ million) as at
December 31st
TIER 1 2011 2012 2013 2014 2015

1. Stated Capital 712 977 977 1 097 1 381
2. Preference (non-redeemable) non-cumulative shares 255 229 229 229 -
3. General Reserves 70 225 377 67 148
4. Retained Earnings 2 558 3 468 4 112 4 589 5 116
5. Minority Interests - - - - -
6. Less (134) (104) (92) (91) (86)
a. Goodwill and other intangible assets (134) (104) (92) (89) (82)
b. Shareholders equity funded through the capitalisation - - - - -
of unrealised gains arising from property revaluation
c. Current year’s unpublished losses - - - (2) (4)
7. Total Tier 1 Capital (Sum of lines 1-5 less lines 6(a) - (c) 3 461 4 796 5 603 5 891 6 559
TIER 2
8. Current year’s unpublished profits 976 472 634 971 780
9. Fifty percent of fixed asset revaluation reserves 37 32 57 35 34
Unrealised gains on available for sale revaluations 9
10. Unencumbered general provisions not to exceed 1.25 202 345 359 310 332
percent of risk-weighted assets
11. Hybrid (debt/equity) capital instruments eligible for - - - - 8
inclusion
12. Subordinated term debt eligible for inclusion 753 1 088 846 1 036 1 551
13. Minority interest in Tier 2 preference shares 1 - - 100 100
14. Shareholders equity funded through the capitalisation of - - - - -
property revaluation reserves
15. Total Tier 2 Capital (sum of lines 8 - 14) 1 969 1 937 1 896 2 472 2 814
16. Total Capital (sum of lines 7 and 15) 5 430 6 733 7 499 8 363 9 373
Impairments - - - - -
17. Investments in unconsolidated subsidiaries and - - - - -
associated companies
18. Total Impairments of Capital - - - - -
19. Total Unimpaired Capital 5 430 6 733 7 499 8 363 9 373

90
APPENDIX 7
Table 5 (b): The Revised Aggregate Capital Structure of Commercial Banks in Botswana (Basel II) (P’ million) as at
December 31, 2016
COMMON EQUITY TIER 1 (CET1) CAPITAL

1. Common shares 1 165
2. Share premium resulting from the issue of common shares 271
3. Retained Earnings: 5 479
Retained Earnings brought forward from the previous financial year 5 325
Add: Interim profits (audited by external auditor) 506
Less: Dividend declared -
Less: Dividend paid in the current financial year 352
4. Accumulated other Comprehensive income and other disclosed reserves 156
a. Statutory Credit Risk Reserve 25
b. Capital Buffer -
c. Statutory Reserves 2
d. Other (specify) 129
5. Common shares issued by consolidated subsidiaries of the bank and held by third parties (Minority Interest) -
6. Regulatory adjustments applied in the calculation of CET1 Capital 19
123
7. CET1 Capital (Lines (1+2+3+4+5-6)) 6 948
ADDITIONAL TIER 1
8. Instruments issued by the bank that meet the criteria for inclusion in Additional Tier 1 capital as per paragraph 4.9 of -
the Capital Directive
9. Stock surplus (Share premium) resulting from the issue of Additional Tier 1 capital instruments meeting all relevant -
criteria for inclusion
10. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion -
in Additional Tier 1 capital and are not included in CET 1 subject to terms and conditions in 3.5
11. Regulatory adjustments applied in the calculation of Additional Tier 1 Capital -
12. Additional Tier 1 Capital (Lines (9+10+11-12)) -
13. Total Tier 1 Capital (Lines (7+13)) 6 948
TIER 2 CAPITAL
14. Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tier 1 capital); 1 641
15. Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital; -
16. Unpublished Current Year’s Profits 1 041
17. Tier 2 capital instruments (subject to gradual phase-out treatment) 176
18. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion -
in Tier 2 capital and are not included in Tier 1 capital (minority interests)
19. General provisions/general loan-loss reserves eligible for inclusion in Tier 2, limited to a maximum of 1.25 percentage 435
points of credit risk-weighted assets calculated under the standardised approach
20. Regulatory adjustments applied in the calculation of Tier 2 Capital -
21. Total Tier 2 Capital (Lines (15+15+16+17+18+19-20)) 3 293
22. Total Unimpaired Capital (Lines (13+21)) 10 241
19
Comprises of Goodwill and other intangible assets

91
APPENDIX 7
Table 5 (c): Listing of the Key Components of the Capital Structure of Commercial Banks in Botswana (Summary)
(P’ million) as at December 31st
2012 2013 2014 2015 2016

1 Stated Capital* 977 977 1 097 1 381 1 165
2 Share Premium - - - - 271
3 Retained Earnings 3 468 4 112 4 589 5 116 5 479
4 Total Tier 1 Capital 4 796 5 603 5 891 6 560 6 948
5 Subordinated Term Debt 753 1 088 1 036 1 551 1 817
6 Current year’s unpublished profits 472 634 971 780 1 041
7 Total Tier 2 Capital 1 937 1 896 2 472 2 814 3 293
8 Total Unimpaired Capital (sum of Line 4 and 7) 6 733 7 499 8 363 9 374 10 241
* Stated Capital for period 2012 - 2015 included share premium.

92
APPENDIX 7
Table 6 (a): Aggregate Capital Structure of Statutory Banks in Botswana (Basel I) (P’ million) as at December 31st
TIER 1 2011 2012 2013 2014 2015

1. Stated Capital 560 601 712 809 878
2. Preference (non-redeemable) non cumulative shares - - - - -
3. General Reserves 194 197 214 224 228
4. Retained Earnings 89 101 97 121 130
5. Minority Interests - - - - -
6. Less - - - - 7
a. Goodwill and other intangible assets - - - - 7
b. Shareholders equity funded through the - - - - -
capitalisation of unrealised gains arising from
property revaluation
c. Current year’s unpublished losses - - - - -
7. Total Tier 1 Capital (Sum of lines 1 - 5 less lines 6(a) 843 900 1 023 1 153 1 229
and (b)
TIER 2
8. Current year’s unpublished profits 54 32 36 51 90
9. 50 percent of fixed asset revaluation reserves - - - - -
10. Unrealised gains on available for sale revaluations - - - - -
a. Unemcumbered general provisions not to exceed - 3 3 4 5
1.25 percent of risk weighted assets
b. Statutory Credit Risk Reserve - - - - -
11. Subordinated term debt eligible for inclusion 3 - - - -
12. Minority interest in Tier 2 preference shares - - - - -
13. Shareholders equity funded through the capitalisation of - - - - -
property revaluation reserves
14. Total Tier 2 Capital (sum of lines 8 - 13) 57 35 39 55 95
15. Total Capital (sum of lines 7 and 14) 900 935 1 062 1 208 1 324
Impairments
16. Investments in unconsolidated subsidiaries and - - - - -
associated companies
17. Connected Lending of a Capital Nature 15 38 - 4 -
18. Total Impairments of Capital 15 38 - 4 -
19. Total Unimpaired Capital 885 897 1 062 1 208 1 324
*2013 - 2015 figures revised to exclude one statutory bank

93
APPENDIX 7
Table 6 (b): The Revised Aggregate Capital Structure of Statutory Banks in Botswana (Basel II) (P’ million) as at
December 31, 2016
COMMON EQUITY TIER 1 (CET1) CAPITAL 2016

1. Common shares 922
2. Share premium resulting from the issue of common shares -
3. Retained Earnings: 97
Retained Earnings brought forward from the previous financial year 157
Add: Interim profits (audited by external auditor) -
Less: Dividend declared -
Less: Transfer during the year -
Less: Dividend paid in the current financial year 60
4. Accumulated other Comprehensive income and other disclosed reserves 64
a. Statutory Credit Risk Reserve -
b. Capital Buffer -
c. Statutory Reserves -
d. Other (specify) 64
5. Common shares issued by consolidated subsidiaries of the bank and held by third parties (Minority Interest)
6. Regulatory adjustments applied in the calculation of CET1 Capital -
7. CET1 Capital (Lines (1+2+3+4+5-6)) 1 083
ADDITIONAL TIER 1
8. Instruments issued by the bank that meet the criteria for inclusion in Additional Tier 1 capital as per paragraph 4.9 of the -
Capital Directive
9. Stock surplus (Share premium) resulting from the issue of Additional Tier 1 capital instruments meeting all relevant criteria for -
inclusion
10. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in -
Additional Tier 1 capital and are not included in CET 1 subject to terms and conditions in 3.5
11. Regulatory adjustments applied in the calculation of Additional Tier 1 Capital -
12. Additional Tier 1 Capital (Lines (8+9+10-11)) -
13. Total Tier 1 Capital (Lines (7+12)) 1 083
TIER 2 CAPITAL
14. Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tier 1 capital)
15. Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital
16. Unpublished Current Year’s Profits 67
17. Tier 2 capital instruments (subject to gradual phase-out treatment) -
18. Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Tier -
2 capital and are not included in Tier 1 capital (minority interests)
19. General provisions/general loan-loss reserves eligible for inclusion in Tier 2, limited to a maximum of 1.25 percentage points -
of credit risk-weighted assets calculated under the standardised approach
20. Regulatory adjustments applied in the calculation of Tier 2 Capital -
21. Total Tier 2 Capital (Lines (14+15+16+17+18+19-20)) 67
22. Total Unimpaired Capital (Lines (13+21)) 1 150
*Figures excludes one statutory bank

94
APPENDIX 7
Table 6 (c): Listing of the Key Components of the Capital Structure of Statutory Banks in Botswana (Summary)
(P’ million) as at December 31st
2012 2013 2014 2015 2016

1. Stated Capital 601 712 809 878 922
2. Retained Earnings 101 97 224 228 97
3. Total Tier 1 Capital 900 1 023 1 153 1 229 1 083
4. Current year's unpublished profits 32 36 51 90 67
5. Total Tier 2 Capital 35 39 55 95 67
6. Total Unimpaired Capital (sum of line 3 and 5 less 897 1 062 1 205 1 325 1 150
impairments)
*Figures excludes one statutory bank

95
APPENDIX 8
CHARTS AND TABLES OF KEY PRUDENTIAL AND OTHER FINANCIAL SOUNDNESS INDICATORS
Chart 8.1: Average Cost of Deposits Chart 8.2: Return on Loans and Advances
4 14
12
3
10
8
Percent
Percent
2
6
4
1
2
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Chart 8.3: Residential Real Estate Loans to Chart 8.4: Household Loans to Gross Loans
Gross loans
18 80
16
14 60
12
10
Percent
Percent
40
8
6
4 20
2
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

96
APPENDIX 8
CHARTS OF KEY PRUDENTIAL AND OTHER FINANCIAL INDICATORS
Chart 8.5: Non-Performing Loans Growth Chart 8.6: Share of Value of Total Deposits
Rate by Type (including FCAs)
80 80
70
60 60
50
Percent
Percent
40 40
30
20 20
10
0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Current Call Savings Time FCA
Chart 8.7: Growth Rate of Foreign Currency Chart 8.8: Efficiency Ratios
Accounts
50 12
40
9
30
20
Percent
6
Percent
10
0 3
2012 2013 2014 2015 2016
-10
-20 0
-30 2012 2013 2014 2015 2016

Non-Interest Income to Average Total Assets
Non-Interest Expense to Average Total Assets
Gross Interest Income to Average Total Assets

97
NOTES

98
NOTES

99
100

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BANKING SUPERVISION

ANNUAL REPORT 2016

In order to achieve these goals, the Bank

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

MISSION STATEMENT Inside cover page

CHAPTER 1: BOTSWANA’S FINANCIAL SYSTEM AND SELECTED INDICATORS 1

Bank of Botswana: Banking Supervision Annual Report 2016

AML/CFT Anti-Money Laundering and Combating the IDs Identity Documents

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

STRUCTURE OF THE FINANCIAL SECTOR

BANKING SECTOR: BRANCH NETWORK AND OTHER DELIVERY CHANNELS

Bank of Botswana: Banking Supervision Annual Report 2016

BRANCHES AND SUB-BRANCHES ATMs

BANKING SECTOR EMPLOYMENT TRENDS: 2015 - 2016

Bank of Botswana: Banking Supervision Annual Report 2016

Stanbic 570 5 575 590 6 596

BBS 200 2 202 200 2 202

NEW BANKING PRODUCTS AND SERVICES

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

BANKING SECTOR MARKET SHARE AND COMPETITION

Total Assets Total Deposits Total Loans and Advances

Commercial Banks Statutory Banks

Bank of Botswana: Banking Supervision Annual Report 2016

Total Assets Total Deposits Total Loans and Advances

Small Banks Large Banks

THE HERFINDAHL-HIRSCHMAN INDEX (HHI) OF COMPETITIVENESS

Bank of Botswana: Banking Supervision Annual Report 2016

Chart 1.3: Herfindahl-Hirschman Index (HHI)

Year ending December

NET INTEREST MARGIN AS AN INDICATOR OF COMPETITION IN THE MARKET

Year ending December

Bank of Botswana: Banking Supervision Annual Report 2016

FINANCIAL DEEPENING AND DEVELOPMENT

Chart 1.5: Financial Sector Deepening Indicators

Year ending December Year ending December

Bank of Botswana: Banking Supervision Annual Report 2016

Chart 1.6: Financial Sector Size and Depth Indicators

Year ending December

Total GDP (LHS) Non-Mining GDP (LHS)

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

Bank of Botswana: Banking Supervision Annual Report 2016

IMPLEMENTATION OF THE NEW CAPITAL MEASUREMENTS STANDARDS

Table 2.1: Capital Adequacy Requirements (All numbers in percent)

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

Bank of Botswana: Banking Supervision Annual Report 2016

Chart 2.1: Commercial Banks: Composition of Assets: 2015 - 2016 (Percent)

December 31, 2016

Cash and balances with the Central Bank 8

December 31, 2015

Cash and balances with the Central Bank 6

Bank of Botswana: Banking Supervision Annual Report 2016

Chart 2.2: Commercial Banks: Composition of Liabilities: 2015 - 2016 (Percent)