Botswana’s banking sector is set for a difficult year ahead with a leading international research firm warning that a toxic mix of sluggish economic growth and worsening government finances could severely constrain lending and weaken the sector’s ability to support economic recovery.
According to a new report by BMI (Business Monitor International), banks will remain stable but will face mounting pressures throughout 2026 as the fallout from the prolonged diamond sector downturn, tighter monetary policy, soaring inflation, rising borrowing costs reverberate across the economy.
“While financial stability will remain intact, supported by strong capitalisation and loan quality, the sector’s ability to support economic recovery will be limited,” BMI said.
The warning comes as Botswana continues to grapple with the effects of a prolonged downturn in the diamond industry, the country’s economic lifeblood. BMI forecasts economic growth of just 1.5 percent in 2026 following a contraction of 0.7 percent in 2025.
The report points to subdued global demand for diamonds, persistent pricing pressures and uncertainty surrounding De Beers’ long-term role in Botswana’s mining sector as key factors suppressing economic activity.
With household incomes expected to remain under pressure, demand for consumer loans is likely to weaken. At the same time, businesses facing economic uncertainty may postpone investment decisions, reducing demand for commercial credit, says BMI.
“Weak macroeconomic growth, tightening monetary policy and rising macro-fiscal risks will constrain balance sheet expansion, liquidity and profitability,” BMI noted.
The firm also warns that For ordinary citizens, the consequences could be far-reaching.
With household incomes expected to remain under pressure, demand for consumer loans is likely to weaken. At the same time, businesses facing economic uncertainty may postpone investment decisions, reducing demand for commercial credit, says BMI.
BMI expects banks to become increasingly cautious, favouring lower-risk lending while tightening credit standards.
The report also highlights the impact of the Bank of Botswana’s recent decision to raise its benchmark interest rate by 200 basis points to 5.5 percent in April 2026, a move aimed at containing inflationary pressures. Inflation is projected to average 9.7 percent this year, well above the central bank’s target range of 3 to 6 percent, largely due to higher global energy prices linked to geopolitical tensions in the Middle East.
BMI believes another interest rate increase could follow before the end of the year.
“Higher lending rates will suppress credit demand and reduce affordability, particularly among households,” the report states.
The higher-rate environment is expected to create a difficult balancing act for banks. While increased rates may boost interest income, they will also raise funding costs as banks compete for deposits in an already tight liquidity environment.
As a result, BMI forecasts client loan growth of only 4.2 percent by the end of 2026, significantly below the historical average of 7 percent recorded over the past decade.
Concerns are also emerging over loan quality.
Although non-performing loans remain relatively low, the report notes that the NPL ratio jumped sharply to 3.8 percent in January 2026 before easing slightly to 3.4 percent in February, signalling growing financial stress among borrowers.
Liquidity remains another major concern.
Despite efforts to narrow the budget deficit, Botswana’s public finances remain under strain due to declining mining revenues and weaker receipts from the Southern African Customs Union.
BMI warns that structural weaknesses, including heavy reliance on short-term funding and concentrated deposits, continue to leave parts of the banking sector vulnerable.
The introduction of Basel III liquidity regulations is expected to further tighten conditions by requiring banks to hold more liquid assets, potentially limiting their ability to extend new credit.
Perhaps most concerning is the growing threat posed by government borrowing.
Despite efforts to narrow the budget deficit, Botswana’s public finances remain under strain due to declining mining revenues and weaker receipts from the Southern African Customs Union.
BMI warns that the government is likely to remain a major borrower in domestic financial markets as financing needs increase.
“This raises the risk of crowding out private sector credit, as banks allocate a larger share of their balance sheets to government securities,” the report cautions.
With government securities already accounting for roughly one-fifth of banking assets, further increases could leave less funding available for households and businesses, undermining economic recovery efforts. The report suggests that while Botswana’s banking sector is unlikely to face a stability crisis, its ability to fuel growth, support businesses and provide affordable credit to consumers will come under increasing pressure in 2026.
