Botswana’s financial system remains stable, but growing reliance on non-bank financial institutions (NBFIs) as a source of funding is creating a new layer of systemic risk, according to the Bank of Botswana (BoB).
In its latest Financial Stability Report, the central bank said the expanding role of pension funds, insurers and other institutional investors has made them increasingly important providers of liquidity to the banking sector, raising the risk that stress in one part of the financial system could quickly spread elsewhere.
Large and rapid withdrawals of deposits by NBFIs could tighten liquidity across the banking system and push up funding costs, the report said. Such pressures could then feed through to the wider economy by restricting credit growth and increasing borrowing costs for households and businesses.
“The key policy challenge is to ensure that the growing dominance of NBFIs and their role as major liquidity providers do not become channels for amplifying shocks across the financial system,” the central bank said.
Commercial banks depend heavily on wholesale deposits from NBFIs, a funding structure that has proved stable during normal market conditions. However, BoB cautioned that the arrangement could become vulnerable during periods of financial stress if institutional investors adjust portfolios, rebalance assets or increase liquidity holdings.
Large and rapid withdrawals of deposits by NBFIs could tighten liquidity across the banking system and push up funding costs, the report said. Such pressures could then feed through to the wider economy by restricting credit growth and increasing borrowing costs for households and businesses.
The central bank said the risk lies less in the strength of individual institutions than in the interconnected nature of funding relationships across the financial sector.
BoB also signalled a deterioration in broader financial conditions, noting that the country’s financial cycle is moving lower amid tighter liquidity, stricter lending standards and weak economic activity.
“The financial cycle is trending downward, reflecting weakening financial conditions amid tightening liquidity, increasingly stringent credit standards and uncertainty associated with financial pressures and subdued economic activity,” the bank said.
The downturn suggests banks are becoming more cautious and are prioritising balance-sheet strength over loan growth, according to the report.
Liquidity pressures have been intensified by foreign exchange outflows and reduced government spending, factors that have contributed to a sustained squeeze in banking-system liquidity.
The central bank said continued monitoring of funding concentration, system-wide liquidity and links between financial institutions will be critical to preventing isolated strains from developing into broader market disruptions.
