Botswana’s financial sector remains under strain, navigating a complex mix of tight liquidity conditions, rising interest rates and shifting policy interventions. While recent developments suggest some stabilisation, underlying vulnerabilities persist, particularly around credit conditions, bank profitability and the risk of crowding out private sector activity.
According to Dr Keith Jefferis of Econsult, in his latest fourth-quarter review, liquidity pressures in the banking system have “eased slightly in recent months”, largely due to higher interest rates reversing earlier deposit outflows. This trend is consistent with Bank of Botswana (BoB) research, which has highlighted the sensitivity of deposit mobilisation to interest rate adjustments in a constrained liquidity environment.
Despite liquidity challenges, credit growth has remained relatively resilient, expanding by 7.1% year-on-year to October, a stronger outcome than the same period last year. However, both Econsult and BoB indicators point to a tightening of credit conditions toward the end of the period, particularly in the third quarter of 2025.
Dr Jefferis pointed out that, “this may reflect a rise in non-performing loans (NPLs), as arrears on bank credit have begun to rise and in the third quarter of 2025 reached the highest level since early 2023.”
BoB financial stability assessments have similarly warned that elevated interest rates, while necessary for macroeconomic stability, are beginning to test borrower repayment capacity, especially in interest-sensitive sectors.
Rising interest rates have had mixed effects on bank profitability. On the one hand, banks have faced a decline in net interest income, which fell 16% between July and October 2025 compared to the previous year. This reflects higher deposit funding costs and the BoB’s decision to restrict banks from fully passing these costs on to borrowers’ part of a broader effort to avoid excessive tightening of financial conditions.
Looking ahead, a key risk to the financial sector is the government’s reported plan to raise up to P5 billion from banks and pension funds to finance the budget deficit, following weaker-than-expected bond and Treasury bill issuance. If implemented, Dr Jefferis said, “it will require both the consent of BoB and an Act of Parliament, this will further drain liquidity from the financial sector and could lead to crowding out of private sector lending.”
On the other hand, this pressure has been more than offset by a sharp increase in non-interest income, driven by changes to foreign exchange dealing margins introduced by the BoB in July. As Dr Jefferis observes, these changes resulted in a 62% year-on-year surge in non-interest income over the July–October period, effectively providing banks with a windfall gain. BoB research has acknowledged that these margin adjustments were designed to stabilise the foreign exchange market, though they have also significantly reshaped banks’ income structures.
Looking ahead, a key risk to the financial sector is the government’s reported plan to raise up to P5 billion from banks and pension funds to finance the budget deficit, following weaker-than-expected bond and Treasury bill issuance. If implemented, Dr Jefferis said, “it will require both the consent of BoB and an Act of Parliament, this will further drain liquidity from the financial sector and could lead to crowding out of private sector lending.”
Econsult cautions that such borrowing may lead to crowding out of private sector lending, a concern echoed in BoB research on domestic financing constraints. With banks already operating under tighter liquidity and rising credit risk, increased government absorption of available funds could limit credit extension to productive sectors, undermining private-sector-led growth.
Botswana’s financial sector is therefore at a delicate juncture. While higher interest rates have helped stabilise deposits and support macroeconomic objectives, they are also contributing to rising credit stress and shifting bank income dynamics. At the same time, fiscal financing pressures risk exacerbating liquidity constraints.
The challenge for policymakers will be to balance financial stability, fiscal financing needs and private sector credit growth. As both BoB research and independent analysis suggest, maintaining this balance will be critical to ensuring that the financial sector continues to support economic recovery rather than becoming a transmission channel for further stress.
