Assets Management in Botswana Wealth Creation or Wealth Dissipation?

ASSETS MANAGEMENT IN BOTSWANA
Wealth Creation or Wealth Dissipation?
FIRST DRAFT
Botswana Institute for Development Policy Analysis

(BIDPA)
November 14, 2008

Assets Management In Botswana Page II
INSIDE TITLE PAGE
Assets Management In Botswana Page III

TABLE OF CONTENTS
Executive Summary
Chapter 1.0 Introduction to Study

1.1 Preamble …………………….….…………………………………………………..…… 9
1.2 Approach & Report Structure …………..….………………………………… 10
Chapter 2.0 Profile of the Financial Sector

2.1 Introduction ……………………… ……………………………………………………. 12
2.2 Financial Institutions ……… …………..………………………………………… 12
2.3 The Financial Environment ………… ………………………………………… 13
2.4 Instruments for Asset Mgmt & Growth of Assets.…………………. 17
2.5 Summary Profile of Financial Sector ……………………………………. 20
Chapter 3.0 Assets Management in Botswana

3.1 Assets & Asset Managing Companies……...……………………………… 21
3.2 Asset Allocations & Portfolio Profiles…………………………………….. 24
3.3 Existing Asset Management Capacities……….…………………………… 30
3.4 Stock Exchange and Bank of Botswana Certificates …….………. 32
3.5 The Informal and Micro Credit Sectors……………………………..…….34
Chapter 4.0 Comparative Assessment of the Financial Sector

4.1 Framework for Regional and International Comparison ...….. 36
4.2 Stock Market………………………………………………..………………………….. 37
4.3 The Banking Sector ……………………………………………………………….. 41
4.4 Summary & Conclusions…………………………………………………………….47
Chapter 5.0 Prospects and Strategies for Sector Expansion

5.1 Barriers to Sector Development …………………………………………….. 48
5.2 Strategies for Expansion …..………………………….……………………….. 50
5.3 Cross Sectoral Issues………………………………………………………………… 52
5.4 Conclusions & Way Forward……………………………………………………..53
Appendices
Bibliography
Assets Management In Botswana Page IV

LIST OF FIGURES
Graph 2.1 Commercial Bank Deposits by Type 19
Figure 3.1a Trend in BPOPF Assets 2002-2007 22
Figure 3.1b Growth of Asset Managers in Botswana 22
Table 3.2a On/Offshore Asset Distribution of BPOPF 24
Table 3.2b AGB Asset Allocations 25
Table 3.2c BIFM Asset Allocations 26
Table 3.2d Coronation Fund Asset Allocations 26
Table 3.2e Fleming Asset Allocations 27
Table 3.2f Investec Asset Allocations 28
Table 3.2g Stanbic Investment Asset Allocations 28
Table 4.1 Equity Indicators on Market Size 38
Table 4.2 Equity Market Size Index (2004) 39
Table 4.3 Equity Market Stability Indicators 40
Table 4.4 Banking Sector Size Indicators 42
Table 4.5 Banking Sector Efficiency Indicators 44
Table 4.6 Banking Sector Stability Indicators 46
Assets Management In Botswana Page V

Executive Summary
This paper addresses issues in Botswana’s financial sector from three perspectives. First it reports on
the state of Botswana’s financial environment and the regulatory standards across the banking and
securities sectors. Second, it discusses assets, their management and allocations and also raises issues
relating to the capacity for proper management. Thirdly, it gives a comparative assessment between
Botswana in a regional and global context. In this regard, the paper identifies a few emerging
regulatory risks, some cross-sectoral issues and mentions some barriers to sector development.
Although Botswana’s macroeconomic policies and regulatory framework are broadly satisfactory,
there are a few underlying issues that are creating challenges for FDI attraction and sectoral
expansion. Because of the 70/30 ratio allowed by asset managers to invest offshore, there is
vulnerability to the financial stability in those investing countries, especially when the business
objectives and incentives for cooperation with regulators are different from institutions operating
primarily in the domestic market. Other weaknesses are identified.
Several factors help explain the shortcomings of asset managers in Botswana. In some instances,
some asset managing institutions are often subsidiaries (or branches) of a major international group.
Hence it is more profitable for ‘experts’ to visit local offices for consultation. This limits skill transfer
and puts local managers at a disadvantage. Another factor is that in government’s struggle to balance
the objectives aimed at diversification of the BPOPF portfolios, it has created a virtual ‘Pass though’
system whereby investing onshore is not encouraged or conducive.
The writers identify some barriers of expansion within the asset management environment in this
report and propose some expansion strategies consistent with international best practises and takes
into consideration some flexibility in customising product development and innovation. This is
particularly important with the establishment of the Diamond Trading Center last year, and in the
context of wealth creation for all Botswana.
Assets Management In Botswana Page VI

ACRONYMS, ABBREVIATIONS & DEFINITIONS
AAB African Alliance Botswana
ABC African Banking Corporation
AGAM Allan Gray Asset Managers
AGOA African Growth and Opportunity Act
BIFM Botswana Insurance Fund managers
BoB Bank of Botswana
BoBCs Bank of Botswana Certificates
BFS Botswana Financial Statistics
BIHL Botswana Insurance Holdings Limited
BSB Botswana Savings Bank
BSE Botswana Stock Exchange
CIU Collective Investment Undertaking
CFM Coronation Fund managers
CSO Central Statistics Office
DoC Department of Cooperatives
FAM Fleming Asset Management
FDI Foreign Direct Investments
GDP Gross Domestic Product
GoB Government of Botswana
IAM Imara Asset management
IMF International Monetary Fund
INV Investec Asset Management
LDC Less-Developed Countries
LFS Labour Force Survey
MDGs Millennium Development Goal
MFA Multi-Fibre Agreement
MTI Ministry of Trade & Industry
NDP National Development Plan
P Pula
SACCOs Savings and Credit Cooperatives
SIM Stanbic Investment Management
Assets Management In Botswana Page VII

Assets Management In Botswana Page VIII
CHAPTER 1. INTRODUCTION TO STUDY
1.1 Preamble
Over the past two decades, Africa has been getting its “economic house” in
order. Fiscal management has improved in terms of healthier current account
surpluses, lower budget deficits and improved creditworthiness. A plethora of
other indicators testify to positive trends in economic productivity. GDP
growth, for example, has been robust virtually throughout the continent.
Consequent to solid economic performance and a stable macroeconomic
environment, investors and entrepreneurs have rediscovered Africa and
identified several regions within the continent as the loci of new growth
opportunities. Collectively, these processes now underpin an entirely new
image for Africa: the development paradigm is being shifted from poverty
alleviation to economic growth; external relationships being transformed from
aid-based linkages to trade-based associations.
The new wave of entrepreneurial and trading interests in the continent will
translate to significant volumes of capital for investments. And Botswana
should be properly situated to benefit from such mobile capital. Success at
competing in the global marketplace will in large part be predicated on such
issues as good governance, a well-trained labour force, robust infrastructure
and a cost-effective, sustainable supply of energy, among others.
Consequently, over the next decade, Botswana’s success in making significant
inroads along these key development axes will lead to significant expansion of
sectors and sub-sectors for investment, and to a considerable upsurge in capital
requirement. Part of this capital requirement will be externally sourced,
undoubtedly. But a significant proportion of the required capital should be
locally generated; and related transactions should be expressed within the
local financial sector. This will bolster aggregate demand for capital and
compel movement toward expanding and diversifying sources of investment
capital.
The financial services sector is assuming increasing importance especially in

view of current policy disposition to utilise the sector as a tool for economic
diversification away from mineral and agricultural exports. Because of the
linkages and spillages between the financial services sector and the rest of the
economy, there is a school of thought recommending that the Government of
Botswana (GoB), particularly the Bank of Botswana (BoB), should develop policy
strategies aimed at consolidating current developments and opening up new
channels for expansion. This study is situated along that axis of thought. It is
aimed at detailed analysis of the institutional framework, policy mechanisms
and wide range of actors that comprise Botswana’s financial sector, specifically
the asset management sector. It has four main objectives:
Assets Management In Botswana Page 9

 First, to delineate areas of strengths and weaknesses in the Botswana financial
sector including global competitiveness, regional comparative advantages as
well as levels of liquidity, transparency and manageable risks;
 Second, to identify structural and operational barriers and obstacles to the
expansion of the asset management within financial sector;
 to delineate directions for likely expansion of the sectors in terms of designing
new or reshaping existing tools and mechanisms for generating local investment
capital and/or attracting international capital, and, in either case, clearly
identifying and assigning regulatory and oversight roles;
 Third, to propose strategies for expanding and broadening the asset
management domain including analysis of the role of government vis-à-vis the
private sector;
 Fourth, to identify potential areas for further studies.
1.2 Approach and Report Structure
Approach and Methodology

To achieve the above objectives, the approach utilised is to construct an
overview of existing financial activities; document current assets management
activities; and analyze various benchmarks in the financial services sector. For
full appreciation of the policy context, the report also describes the micro and
macro economic environments that nurture financial activities. In addition, it
also includes a review of policy instruments currently utilized to contain and
control markets’ liquidity. As an introduction to the general study and body of
issues under discussion, a defining profile of the development context is found
in appendix 1 and description of basic concepts relating to asset management
in appendix 2
The research methodology adopted comprises of a review of secondary data
sourced from government archives and current economic publications and
assessment of financial indicators utilised to compare Botswana to the southern
Africa region and to situate her in a global context. Findings are also based on
analysis of primary data generated from in-depth key informant interviews and
snap surveys of selected relevant players. Research findings will be useful to
the government, development partners, and the non-government and private
sectors. As commissioning agency, BIDPA and its associates will enhance their
mandate for progressive institutionalizing of the policy analyses process.
Structure of the Report

The study will be presented in five chapters. The introductory chapter broadly
defines the relevance of the study for Botswana. It sketches out the specific
objectives and methodology used.
Chapter 2 provides a general overview of the Botswana financial sector
including current profiles and growth trends.
Chapter 3 details the analysis of the local asset management sector. It also
assesses the overall institutional capacity for asset management in the

financial markets. The instruments used to control liquidity are identified and
their efficacies determined. The chapter also summarises key features of the
financial sector, extracts barriers to and define paths for further development
of the sub sectors under review.
Chapter 4 focuses on Botswana’s relative posture comparing it with regional
and global economies through review of performance indicators, ratings and
rankings.
Consequently, Chapter 5 articulates a clear vision of the policy and regulatory
actions required to enable movement along the prescribed trajectory. It
addresses the premise that financial markets do not operate in an economic or
social vacuum: instead they are intricately linked to other sectors within a
national economy. The chapter concludes by examining cross sectoral issues
such as strategies for developing local entrepreneurship and nurturing greater
local participation in financial markets.

Chapter 2 Profile of the Financial Sector
2.1 Introduction
Botswana’s financial sector can be broadly divided into two: financial
institutions and the environment in which they operate. The institutions can
be further subdivided into a banking sub-sector which is regulated and
supervised by the Bank of Botswana, and a non-banking sub-sector regulated by
the newly formed Non-Bank Financial Institutions Regulatory Authority (NBFIRA)
under the ambit of the Ministry of Finance and Development Planning. Similarly
the environment, in which these financial institutions operate, can also be sub-
divided into economic policies and the regulatory framework which governs
them.
2.2 Financial Institutions
The Banking Sub Sector

This sub sector comprises of licensed (commercial, merchant and offshore) and
statutory banks. There are seven commercial banks. Three of these, Barclays,
Standard Chartered and First National, are listed on the Botswana Stock
Exchange. The others, Stanbic Bank, Bank Gaborone, Bank of Baroda, and the
newest registered bank, Capital Bank are unlisted.
There is also one merchant bank, the African Banking Corporation, whose
parent company African Banking Corporation Holdings is listed on the BSE.
The offshore banking institutions that operate in Botswana are registered with
the International Financial Services Centers (IFSCs) and include Kingdom Bank,
Enterprise Banking Group (Holdings) and ABCH Holdings (listed).
The statutory banks include the National Development Bank, Botswana Building
Society, Botswana Savings Bank, and the Bank of Botswana which operates as
the central bank and also as the “government banker”.
The Non-Banking Sub Sector

The Non-Bank Financial Institutions (NBFI) sub sector includes the Botswana
Stock Exchange and such stock broking firms as Stockbrokers Botswana, Capital
Securities and Motswedi Securities. These are all registered under the BSE Act.
Non-banking institutions also include the collective investment undertakings
(CIUs) established under the CIU Act and supervised by the Bank of Botswana.
Asset management companies, including African Alliance, Allan Gray, Botswana

Insurance Fund Management(listed under Botswana Insurance Holdings
Limited), Coronation, Fleming, Imara (listed under Imara Holdings limited),
Investec, Legae Investors and Stanbic Investment, are currently unregulated as

are micro lenders such as Letshego which is also listed on the stock exchange,
Penrich and Peo, among others. Pension Fund companies are registered and
regulated under the Pension and Provident Funds Act.
Insurance companies in Botswana include Botswana Life, Regent Life Botswana,

Regent Insurance Botswana, General insurance Botswana, Eagle Insurance,
Botswana Insurance Company, Mutual and Federal Insurance Company,
Metropolitan Botswana, First Life Assurance, Hollard Insurance Company, Sesiro
Insurance Company, Prefsure(Botswana) Limited and Letshego Guard Insurance.
There are 46 Bureau de Change entities in Botswana. Most of them have

branches countrywide. These are entities licensed under Bank of Botswana Act
to carry out the business of buying and selling foreign exchange.
Statutory development finance institutions include the Botswana Development

Corporation (government owned and established in 1970 to be the country’s
main agency for commercial and industrial development) and the Citizen
Entrepreneurial Development Agency (provides financial assistance, business
trainings and mentoring services for sustainable citizen-owned enterprises).
2.3 Financial Environment

2.3.1 Monetary & Fiscal Policies
This section provides an overview of monetary and fiscal policies as well as
principal sources and targets of government revenues and expenditures.
Monetary Policy Objectives and Instruments

The primary objective of monetary policy is price stability. Such stability
provides investors with a predictable macro-economic environment and creates
the confidence required for long term investments. In Botswana, moderate
inter-bank lending rates, Bank of Botswana certificates and a controlled money
supply are among the tools utilized to achieve price stability.
- The inflation objective is to achieve a sustainable, low and predictable level of

inflation which contributes towards economic growth and development. A low and
predictable inflation rate positively affects savings and investment decisions and
has other socio-economic benefits as well. At the beginning of 2008, the BoB
introduced a medium-term inflation objective of 3–6 percent. Short-term inflation
is largely determined by price increases in South Africa and anticipated increases
to administered prices.
- The bank rate, is the rate of interest charged by the Bank of Botswana on loans to
commercial banks, is a tool aimed at avoidance of a credit crunch wherein even
well-managed solid banks may not have access to funding. In such a scenario,
lending would be stifled and credit would contract. If sufficiently severe, credit
contractions could cause major economic recessions. Consequently, the bank rate
is used mainly to avoid dislocations in the credit market. Currently, that rate is
15.5%. The last adjustment being an increase of 50 basis point on June 2008.

- Bank of Botswana Certificates (BoBCs) is a tool for controlling liquidity in the
financial system, influencing short-term interest rates and generally tightening
credit conditions. Leading up to March 2006, BoBCs were openly traded: available
for direct purchase by banks and other financial entities. Subsequently, BoBCs
trading is now restricted to banks only. Prospective individual and institutional
consumers are now compelled to channel offers for BoBCs through commercial
banks. The restriction has created a windfall for the banks: BoBCs are now
packaged and resold to institutional clients at a spread. Demand has been stable
and trading pattern has remained unchanged.
- Money supply is a tool whose efficacy is based on the assumption that there is
some stable relationship over time between changes in the money supply and
total spending on goods and services and prices. Money supply is therefore
directed towards controlling the rate of expansion in the total money supply as an
intermediate objective with the ultimate goal of protecting the value of the
currency. To achieve the intermediate objective, the central bank uses various
operational instruments such as open market operations, variable minimum cash
reserve requirements and changes in the conditions of discount window facilities
to influence the amount of liquidity in the banking sector (supply of money) and
the level of short-term interest rates (demand for money). 1
Fiscal Objectives and Instruments

Fiscal policy refers to government policy with the objective to influence the
direction of the economy through changes in government taxes, or through
government spending.A sustainable fiscal configuration emanates from success
at establishing parity between recurrent expenditure and recurrent revenue
growth. Indeed, government expenditure is a key fiscal instrument that can
either make or break an economy. Accordingly, the budget sustainability ratio,
defined as the ratio of non-investment recurrent expenditure to non-mineral
domestic revenues, should be less than unity, and not greater than unity for
any extended period of time (MFDP 2003). In Botswana, a number of ratios
have been adopted to ensure greater fiscal discipline. The midterm review of
NDP 9 adopted the following fiscal targets:
- total public expenditure level set at 40 percent of GDP;
- composition of government expenditure: 30 percent targeted for development-
related expenditures, the remainder for recurrent expenditures.2
1
This hypothesis has proven controversial in recent years. In 2000, South Africa
underwent major liberalization of its financial markets, with large increase in the volume
of transactions in money and capital markets, and extensive opening-up of the country for
international participation in trade and in the inward and the outward movement of capital
across international borders. In the process, large increases in the money supply occurred
seemingly unrelated to total spending on real goods and services. Differently out, the
additional money supply remained in financial circulation and was reflected in a large
decline in the income velocity of money circulation. More money became available for
every unit of goods and services produced, yet increases in the money supply did not lead
to increases in rate of inflation. On the contrary, inflation in South Africa remained on a
steady downward path. **Check reference.
2
Questions remain with regard to the underlying rationale: it is not clear, for example,
how the 40 and 30 percent ratios for public and development expenditures were
established; or whether fiscal guidelines are best aimed at annual budgets versus rolling

Proportion of development expenditure as percentage of total expenditure has
been on the increase since the beginning of the NDP 9 plan period, from 19.85
percent in 2004/05 to 23.6 percent in 2005/06; and from 25.6 percent in
2006/07 to 26.8 percent in 2007/08. The investment nature of this category of
expenditure signals a continued developmental role for the state in the
medium term. Furthermore, it is in line with the fiscal rule of setting levels of
development expenditure at 30 percent of total public expenditure.
Mineral revenues are currently the single largest contributor to government

coffers accounting for almost half of total revenues in the mid 2000s. However,
the 2007 budget estimates the contribution of this revenue category at 40
percent, a significant decline from 47 and 48 percent registered in 2006 and
2005 respectively.
Revenues from customs and excise (C&E) duties accounted for 18 and 17
percent of government revenues for the first two years of NDP 9 plan period,
subsequently increasing to 22 percent in 2006 and 27 percent in 2007. The
increase from C&E duty may be a reflection of the new SACU revenue sharing
formula as per the revised agreement of 2001. Although currently the second
largest source of revenues, in the years ahead, it is likely that the SACU
common external tariff will continue to decline under the terms of the WTO as
well as with the prospective expansion of SACU to cover the whole of the SADC
region.
Non-mineral income tax and VAT averaged 13 and 9 percent of total revenues
respectively. These make up the third and fourth largest source of public
revenue. While still quite modest, these categories have the potential to
increase dramatically with the growth of the economy. Currently, Botswana’s
tax rates ranks as one of the lowest in the world: payroll tax rates ranges from
0 percent for annual income level below P30 000 to 25 percent for income
levels in excess of P120 000.
2.3.2 Regulation of the Financial Sector

Since regulations for the banking and non-banking financial institutions are
different, their enforcement falls within the purview of 2 different institutions.
Regulation of Banking Institutions

The Bank of Botswana Act provides for the establishment of the Bank of
Botswana (BOB) as central bank and government banker. As prescribed in the
Act, the following activities fall within the ambit of the BoB:
- Administration of exchange controls and foreign exchange management;
- Determination of rates for discount, rediscount, loans and advances including
ceilings for different classes of transactions and maturities;
medium term (3 to 5 years) plans; or whether the tool is best applied to rate of growth or
actual levels of expenditure.

- Reserve requirements in the form of primary reserves including marginal primary
reserves against deposits and similar liabilities;
- Regulation of interest and credit with respect to any class of deposits or
advances;
- Issuance and management of government securities or government guaranteed
securities;
- Determination of maximum amounts of foreign currency holdings or indebtedness
which may be incurred in foreign currency by a financial institution;
- Clearing of facilities in conjunction with other financial institutions.
Regulation of Non-Banking Institutions

There are many legal mechanisms that are applied to regulating the non-bank
financial sector. They include:
- The Companies Act: provides the basic requirements for incorporation of any
company including financial institutions.
- The Insurance Industry Act: provides the requirements for registration,

incorporation, regulation and dissolution of an Insurer in the form of a limited
liability company, and an Insurance Agent in the form of an individual or limited
liability company. The act also provides the industry regulations as well as the
prohibitions and limitations on transactions.
- The Pension and Provident Fund Act: provides for the registration, incorporation,
regulation and dissolution of pension and provident funds as well as for matters
incidental to or connected therewith.
- The Collective Investment Undertakings Act: provides for the registration,

incorporation, regulation and dissolution of CIUs. Examples of such include trust
funds and investment companies established mainly for investment in and out of
the financial sector.
- The Botswana Stock Exchange Act: governs all the activities between the
Exchange and its members, the proceedings of the main Committee and its
composition; the relationship between the Minister and the Exchange together
with the relations between the Registrar.
- In December 2006, Parliament approved the Non-Bank Financial Institutions

Regulatory Authority (NBFIRA) Bill which will place the supervision of all non-bank
financial institutions under one regulatory authority. The establishment of the
authority is in response to the growth of non-banks, which now dominate the
financial sector. The NBFIRA will have powers to license, regulate and inspect, as
well as initiate legal action on behalf of the claimants who have suffered losses
and its powers will extend to the supervision of smaller operations such as brokers
and money lenders.
2.4 Instruments for Asset Management and Growth of Assets

Botswana’s financial sector consists of the following assets: Bank of Botswana
Certificates, shares & stocks, reserves, bonds, commercial paper, cash, bank
deposits and funds.
Bank of Botswana Certificates

The inception of Bank of Botswana Certificates in 1991 was originally to
manage excess liquidity in the domestic financial system and to influence
short-term interest rates. Since inception Bank of Botswana Certificates were
held by commercial banks, other financial institutions including stocking
broking firms and Investec and the private sector. In 2006, the certificates
were only restricted to commercial banks and other financial institutions.
Other BOB Certificates were launched in 2004 and again in 2006, including 3-
month BoB Certificates with rate ranging from 12.2 to 12.74 percent. In
addition, one-year BoB Certificates were reintroduced in March 2006 to
accommodate an unmet demand for such securities.
The total outstanding balance of the Bank of Botswana Certificates (BoBCs),

excluding interests, increased by 48% from P5.15 billion in 2001 to P7.66 billion
in 2002. It increased at a decreasing rate between 2003 and 2007, from P8.74
billion to P16.60 billion. Current balance as of end of July 2008 is P17.72 billion.3
Shares / Company Stocks

Company shares and stocks are listed and traded at the Botswana Stock
Exchange. Share prices are monitored through a variety of indices; the most
widely watched being the Domestic Companies Index (DCI). The DCI tracks
movements in share prices on the BSE using a weighted average of all domestic
companies listed on the exchange. There are 19 listed companies on the main
board, 4 foreign companies and 8 venture capital companies. The BSE plays
host to the most eminent companies doing business in Botswana. These
companies represent a wide spectrum of industries and commerce, from
banking and financial services to wholesaling and retailing, tourism and
information technology. Recently, most new listings have been in the mining
sector, a reflection of both high prevailing prices for minerals and the
attractive investment climate for mining operations in Botswana.
The total number of listed companies increased from 15 in 1999 to 16 in 2001.

It further increased to 18 in 2004 and remained stagnant through to 2007.
Market capitalization as a percentage of GDP decreased from 29.04 in 2002 to
23.18 in 2005. This trend was then followed by an increase to 49.90 in 2007.
(See Table 3.1)
Reserve Portfolios
3
Botswana Financial Statistics, Bank of Botswana

The national reserves are currently held in two portfolios namely the Liquidity
Portfolio and the Pula Fund. The portfolios are managed separately in order to
enable simultaneous meeting of different objectives. The Liquidity Portfolio is
treated as a buffer against short-term trade and capital account fluctuations
and as a cushion to finance unforeseen developments in the external payments
situation. The Pula Fund is a long term fund for future generations. Its primary
objective is to ensure that Botswana’s national savings are deployed to
optimize contributions to sustained economic development.
Official foreign exchange reserves increased from P34.6 billion in December 2005
to P48.8 billion in December 2006; an increase of 26.75 percent, representing 30
months of imports of goods and services, (BOB Annual Report, 2006). Following a
slight decrease in September, 2005, foreign exchange reserves increased by P1
009 million (3.0 percent) in October to P34 544 million from P33 535 million. The
increase was the result of net revaluation gains of P981.9 million, domestic
foreign exchange inflow of P110.2 million and interest and dividends income of
P94.2 million. These were offset by net market losses of P173.4 million.
Bonds
The current bond market consists of 9 bonds issued by the government of
Botswana and 25 bonds issued by parastatal and financial institutions. The
development of the bond market started in 1997 with the issue of a P50 million
bond issued by Botswana Development Corporation. In 2003 the government
issued three bonds with original maturity periods of two years (P750 million),
five years (P850 million) and 12 years (P900 million). These were introduced to
add to the range of financial instruments available to meet the needs of
longer-term investors.
The market capitalisation of bonds has been increasing since 2001 recording
P250m in the same year. Market capitalisation increased by 20% in 2002 but
recorded only 17% increase in 2003. In 2004, there was an increase in the
number of listed bonds as well as listings of Debt Participation Capital Fund
(PDCF). Market capitalisation recorded a percentage increase of 87% in 2005.
Despite the increase, market capitalisation recorded a decline of 7.3% in 2007.
Commercial Paper
Commercial paper is a money-market security issued by large banks and
corporations. It is generally used to purchase inventory or to make working
capital rather than finance long-term investments.It is commonly bought by
money funds (the issuing amounts are often too high for individual investors),
and is generally regarded as a very safe investment. As a relatively low-risk
investment, commercial paper returns are not large.The only commercial paper
ever issued in the Stock Exchange by Botswana Telecommunications
Corporation in 2000 was redeemed in 2004.
Cash / Bank Deposits

Bank deposits comprises of deposits from households, resident and non-resident
businesses, parastatals, central and local government.
Total private sector deposits at commercial banks increased from P11 216.63
billion in December 2004 to P13 073 billion in December 2005, a 14.2% year
over year growth. In the same period, commercial banks’ capital and reserves
increased by 4.8 percent to P1 462 million in 2005 compared to 3.7 percent
growth in 2004. In 2006, overall total deposits increased by 74.6 percent, from
P13.2 billion to P23.1 billion, the bulk of which was in fixed deposits of up to 6
months maturity. The main reason for the rapid growth was due to the new
policy restricting holdings of BoBCs to banks only. The BoBCs previously held by
non-banks were converted into deposits at the commercial banks, (BOB Annual
Report, 2006).
Graph 2.1 Commercial Bank Deposits by Type

Trend of Bank Deposits
90 000.0
80 000.0
70 000.0
Pula , billions
60 000.0
50 000.0 Current
40 000.0 Savings
30 000.0
20 000.0
10 000.0
0.0
95 97 99 01 03 05 07
19 19 19 20 20 20 20
Year
Source: Bank of Botswana Financial Statistics, 2008
Graph 2.1 above shows the trend of commercial bank deposits for both current
accounts and savings accounts in absolute values. Both the accounts show an
increasing trend from 2004 even though the current account was way ahead of
the savings account.
The Fund Markets

The funds sector of Botswana comprises statutory fund (Motor Vehicle Accident
Fund) public debt service fund, pension funds and the mutual funds. Pension
funds have grown rapidly over the past ten years. One major development that
has impacted the sector was the introduction of a defined contribution pension
scheme for public officers. More than 70 percent of the pension funds in 2005
were accounted for by the Botswana Public Officer’s Fund. The percentage of
pension funds invested offshore increased from 45 percent in 2002 to 64.8
percent in 2006.

During 2006, pension fund assets grew from P22.3 billion at the end of 2005 to
P29 billion. Of this total, about 81 percent comprised assets of the Botswana
Public Officers Fund (BPOPF) .The strongest growth of 45.7 percent was in
holding of equities, the domestic component of which rose by 78.1 percent,
while the offshore investment increased by 30.9 percent and amounted to 64.8
percent of the total investment by the BPOPF (BOB Annual Report, 2006).
2.5 Summary Profile of Financial Sector

This chapter described the structure and composition of the financial sector in
terms of institutions, regulations (including policy) and asset management
instruments.
The financial sector of Botswana can be divided into 2 segments, the banking
sector which is largely regulated and supervised by the Bank of Botswana and
the non-bank financial sector which is regulated by the newly formed Non-Bank
Financial Institutions Regulatory Authority (NBFIRA). The establishment of the
authority is in response to the growth of non-banks institutions which now
dominate the financial institution.
The instruments for asset management in Botswana consist of the following
assets: BoBCs, shares and stocks, reserves, bonds, commercial paper, bank
deposits and funds.

Chapter 3 Assets Management in Botswana
3.1. Assets and Asset Managing Companies
Asset management in Botswana has expanded from a small base to reach a

market value in excess of P32.60 billion as of April 30, 2008 4. In light of such
rapid growth, it is important to detail and analyse the asset management
framework vis-à-vis the set of objectives, principles and structures that guide
an integrated financial sector product line that comprises of public and private
equity, private and public debts and alternative assets which allows investors
to reduce risks and enhance returns.
Chapter 3 reviews patterns and trends in assets management and analyses

some of the strategies used to shape asset allocation. It reviews initiatives
open to financial institutions toward provision of more efficient services better
tailored to respective needs, circumstances, and assesses and analyses risks in
the Botswana financial system. The single largest and most important asset
within the pension fund industry is the Botswana Public Officers Pensions Fund
(BPOPF). It will therefore be examined in some detail and used as case for
reviewing levels of diversity in assets management and allocation. The chapter
also reviews existing asset managers and summarizes their capacities. Main
features and challenges of the stock exchange, bond markets, and
miscellaneous informal and other assets are also discussed. Along this line of
reasoning, some proposals are also earmarked for further In-depth analysis and
study.
The Botswana Public Officers Pensions Fund

Since inception in 2001, the BPOPF has enjoyed remarkable growth with a
cumulative return of 116 percent over the seven year period. The combined
active, deferred and pensioners’ portfolio totalled P28 billion as of March 2008,
compared to P26.075 billion in March 2007 and P19.91 billion in March, 2006.
The data reveal high growth of assets between 2001 and 2008. BPOPF assets
account for 80 percent of total fund assets under management. The remaining
20 percent of assets, equivalent to over P6 billion in funds, is competed for by
all ten asset managers (including those that may/may not be involved in
management of BPOPF.) Figure 4.1 illustrates the growth in BPOPF assets from
2002 through 2007.
The original managers of the BPOPF were African Alliance (AA), BIFM, Fleming
and IAM. The number was increased from four to six following the floating of a
public tender in early 2007. AA was removed and Alan Grey, Coronation and
Stanbic Investments brought on as managers. According to the BPOPF, the
4
Bank of Botswana, Pension Fund Assets.

moves were in line with the Fund’s policy of ‘diversifying and minimizing
manager concentration risk’.
Figure 3.1a: Trend in BPOPF Assets, 2002-2007.
G r o w t h O f B P O P F A s s e ts 2 0 0 2 - 2 0 0 7
30
25
20
Value in P
Billion
15
10
5
0
2002 2003 2004 2005 2006 2007
Y e a r / P e r io d
(Source: BPOPF Trustee Reports 2001 – 2006)
Compared to the strong growth of assets over the past six years, the increase in
numbers of asset managers has been marginal. In year 2001, there were only
six registered managers of assets. Currently, in 2008, that number stands at
ten; an increase of four over seven years. While assets growth has been
steadily sustained over the last eight years, number of asset managers has been
flat since the entry of 4 new actors in 2003.
Figure 3.1b: Growth of Asset Managers in Botswana

No of Managers
12
10
8
6
4
2
0
2001 2002 2003 2004 2005 2006 2007
Years
(Source: BPOPF Trustee Reports 2001 – 2007)

Asset Managing Companies
In a proper operating environment, the professional experts are responsible
for, but not limited to:
a. Establishing investment policies

b. Designing objectives and guidelines.
c. Develop asset allocation strategies
d. Measuring and evaluating investments
e. Purchase, sell or hold specific securities that meet the fund’s objectives.
f. Custodian to collect dividends, interest payments, and conduct accounting
of all assets owned, purchased, sold, moved in and out of the funds
Whilst it is the author’s belief that although some of the limitations of some
asset managers may not hamper all investment decisions, it is essential to be
reminded that the amount of assets under management by these managing
firms are quite substantial. If the investing team is not qualified, some of the
above mentioned functions should be outsourced to qualified professionals.
There are ten registered managing companies 5 some of which are best
described as ‘one-man’ outfits. The current service providers are as follows:
 African Alliance Botswana
 Allan Gray Asset Managers
 Botswana Insurance Fund Management
 Coronation Fund Managers
 Fleming Asset Management
 Imara Asset Management
 Investec Asset Management
 Legae Investors
 Metropolitan Asset Management
 Stanbic Investment Management
3.2 Asset Allocations & Portfolio Profiles

5
A brief profile of these companies is listed in Appendix 3

This section analyzes the patterns and trends in the management of specifically
the BPOPF assets and some of the strategies used to shape asset allocation.
Due to the general illiquidity of capital markets, Botswana regulations allow up
to 70% of investing assets to be invested offshore. For each managing company,
we shall review trends of data provided for the past 4 quarters and analyze:
 Offshore and Onshore portfolio balance
 Asset Allocation – Dividing investments into different classes of assets
 Risk Tolerance – Ability to handle declines in the value of a portfolio.
 Return on Investments – Generally, an income an investment provides in
a year.
Table 3.2a Onshore Vs Offshore asset distribution of BPOPF managers

June 30, 2008 March 31, 2008 December 31, Sept 30, 2007
2007
ON OFF ON OFF ON OFF ON OFF
ALLAN 43.91 56.09 40.63 59.37 46.53 53.47 48.00 52.00
GREY
B.I.F.M. 37.40 62.60 38.325 61.675 36.335 63.665 40.50 59.50
C.F.M. 37.10 62.90 30.99 69.01 30.73 69.27 N/A N/A
F.A.M. 36.73 63.27 39.775 60.225 40.73 59.27 38.04 61.96
INVESTEC 39.163 60.837 39.97 60.03 40.62 59.38 39.575 60.425
STANBIC 37.665 62.335 46.81 53.19 44.15 55.85 65.91 34.09
Original data from Alexander Forbes’ Asset Manager Watch September 2007 through July
2008
Alan Gray Botswana

Table 3.2a shows the distribution of assets being managed in Botswana
(onshore) and overseas (offshore). Over the past four quarters, Allan Gray
Botswana has increased the assets it manages within Botswana from 43.91% to
48.00% (approximately P116 million); conversely, assets managed overseas are
reduced by equivalent amount. This may be attributed to global market trends
and with all things considered, Botswana’s investing environment has not been
affected to the depth major markets have been with the housing debacle in the
US and UK.
Table 3.2b shows asset allocations of investments on and off shores, as a
percentage of total investment, for the past four quarters. The larger
allocation to bond markets reflects a preference for the stability of interest
payments that bonds provide. The decreasing percentage allocated to equity
can be attributed to the reduced returns of global equities over the period.
Cash allocations have increased as the average return of money market funds
(CDs and treasuries) is stable in the short-term. Assets under the management
of Allan Gray in Botswana are managed externally by its offshore offices.

Table 3.2b: AGB Asset Allocations from September 30th, 2007 thru June 30th, 2008
Quarter DOMESTIC INVESTMENTS FOREIGN INVESTMENTS

Ending
Equity Bonds Cash Prop Priv Alt Equity Bonds Cash Prop Priv Alt
Eq. Eq
June 30, 50.13 21.36 28.51 0.00 0.00 0.00 47.41 0.00 0.00 0.00 0.00 52.59
2008
March 31, 59.233 22.18 18.57 0.00 0.00 0.00 47.53 0.00 0.00 0.00 0.00 52.47
2008
December 61.93 22.37 15.70 0.00 0.00 0.00 49.37 0.00 0.00 0.00 0.00 50.63
31, 2007
September 67.80 24.60 7.60 0.00 0.00 0.00 49.50 0.00 0.00 0.00 0.00 50.50
30, 2007
(Source: Alexander Forbes’ Asset Manager Watch September 2007 thru July 2008)
As market conditions change, so does the risk tolerance of a portfolio. AGB’s

current domestic portfolio (June 30th, 2008) can be termed as very conservative
compared to the allocations three quarters earlier. Market conditions have
dictated conservation of capital by reducing the equity allocation and
increasing cash or money-market investments. For offshore assets, risk
tolerance has been kept relatively constant, as indicated by a marginal change
of 2 percentage reduction in equity to ‘Alternate’, which is fund specific and
proprietary information.
Botswana Insurance Fund Managers

Over the past 4 quarters, BIFM has marginally reduced its investments in the
local market and placed into offshore market. See Table 3.2a. Its portfolio
allocation is the most diversified of all asset managers, in terms of asset
classes. The company is a long-standing player in the local private equity
market, effecting ground-breaking investments in Botswana enterprises. Over
the past 4 quarters, an increased investment in bonds is a cautious approach
for regular income and a reduction of the volatility of the equity market.
Currently, the company is poised to undertake a P2 billion construction project
of the Botswana Financial Center (BFC) and has secured tenancies that would
insure long-term steady cash flow. The portfolio allocation is balanced and
well-positioned to meet unexpected dips in various market performances.
Table 3.2c: BIFM Asset Allocations from September 30th, 2007 thru June 30th,
2008

Ending
Equit Bonds Cash Prop Priv Alt Equity Bonds Cash Prop Pri. Alt
y Equ. Eq
June 30, 54.195 24.18 19.74 1.44 0.000.445 74.705 11.20 1.095 0.00 1.165 11.835
2008
March 55.625 22.00 9.78 7.47 3.235 1.88 74.095 9.285 1.59 0.00 1.625 13.405
31, 2008
Dec.31, 64.23 9.73 8.053 12.1 3.056 2.786 76.167 7.50 0.063 0.00 3.71 12.563
2007 7
Sept. 30, 64.67 9.005 14.31 8.91 3.10 0.00 76.625 7.56 0.075 0.00 3.125 12.62
2007 5
Source: Alexander Forbes’ Asset Manager Watch, Quarterly reports Sept 2007 thru June
2008
Coronation Fund Managers

Unlike the previously mentioned asset managers, who have decreased assets
being managed onshore (hence an increased offshore allocation), Coronation
Fund Managers has increased domestic investments allocation by almost 25%
(See Table 3.2a).
In analyzing the domestic and foreign allocations, this asset manager has more
than half of its domestic investment held in cash and money market
instruments. As this percentage gradually increases, its foreign investing
exposure in equity has been reduced over 10% the past three quarters. The
company has also diversified slightly into more asset classes. See table below.
All international (offshore) assets are managed by the London office.
Table 3.2d: Coronation Fund Asset Allocations from December 31st, 2007 thru June 30th,
2008
DOMESTIC INVESTMENTS FOREIGN INVESTMENTS

Quarter Equity Bonds Cash Prop Priv Alt Equi. Bonds Cash Prop Pri. Alt
Ending Equ. Eq
June 30, 21.665 24.405 53.93 0.00 0.00 0.00 81.73 3.62 0.00 0.00 0.00 14.65
2008
March 31, 22.585 24.465 52.95 0.00 0.00 0.00 83.49 0.00 3.94 0.00 0.00 12.57
2008
December 26.545 16.995 56.46 0.00 0.00 0.00 92.59 0.00 7.41 0.00 0.00 0.00
31, 2007
September N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
30, 2007
Source: Alexander Forbes’ Asset Manager Watch, Quarterly reports Sept 2007 thru
June 2008
Over the past three quarters, against the backdrop of relatively favorable
market conditions, investment in the domestic bond market has increased 40%,

from about 17% to 24.5%. This is a good strategy for capital preservation during
an environment of uncertainty, although, during rising interest rates, the value
of bonds generally declines. Overall, this asset managers’ portfolio is well
diversified.
Fleming Asset Management

Fleming Asset Management has kept its on and offshore allocations constant
over the past four quarters. The minimal percentage change in allocation has
been against the trend of other asset managers. Could this be attributed to
buying opportunities? See Table 3.2a
Table 3.2e: Fleming Asset Allocations from September 30th, 2007 thru June 30th, 2008

Ending
Equity Bonds Cash Prop Priv Alt Equity Bonds Cash Prop Pri. Alt
Equ. Eq
June 30, 70.375 15.27 8.585 5.77 0.00 0.00 51.705 18.99 15.775 0.00 0.00 13.525
2008
March 31, 61.57 15.755 8.895 0.00 0.00 13.785 44.38 15.12 28.57 0.00 0.00 11.935
2008
December 77.4 10.915 6.495 5.19 0.00 0.00 61.57 15.755 8.895 0.00 0.00 13.785
31, 2007
September 79.59 8.35 8.55 3.51 0.00 0.00 57.365 17.475 10.935 0.00 0.00 14.215
30, 2007
Source: Alexander Forbes’ Asset Manager Watch, Quarterly reports Sept 2007 thru June
2008
Unlike African Alliance and Allan Gray Asset Managers, but like BIFM, this
company invests in properties. The quarter ending September 2007 saw FLEM
investing almost 80 percent of its portfolio in equities (See Table 3.1h).
Although over time, equities have a proven record of high returns (and
considered to protect against inflation); it is quite risky to put such a high
percentage of investment in one asset class. However, the percentage of
investment has been reduced by 10% over the past 4 quarters. The foreign
investment in equity has also been reduced over the period.
This asset manager’s portfolio is appropriately spread across asset classes for
diversification.
Investec Asset Management

Despite the changes in market dynamics, Investec’s ratio of onshore and
offshore allocation has been constant over the past four quarters. See Table
3.2a.
The company’s current domestic asset allocation is approximately 68 percent in
equities (all asset classes) and 32 percent in bonds and cash. See Table 3.2f.

Although the company is presently investigating the possibility of starting a
fund for further diversification, it needs to act sooner than later for capital
preservation. Investment decisions are made and supported by Investec’s South
Africa office.
Table 3.2f: Investec Asset Allocations from September 30th, 2007 thru June 30th,
2008
Ending
Equity Bonds Cash Prop Priv Alt Equity Bonds Cash Prop Pri. Alt
Equ. Eq
June 30, 67.74 25.13 7.13 0.00 0.00
0.00 68.45 27.95 0.77 0.00 0.00
2.90
2008
March 31, 66.78 14.96 18.26 0.00 0.00 0.00 67.35 28.96 2.91 0.00 0.00 0.78
2008
December 73.56 20.25 6.19 0.00 0.00 0.00 66.31 31.04 1.87 0.00 0.00 0.78
31, 2007
September 71.35 13.60 15.00 0.05 0.00 0.00 71.20 28.20 0.60 0.00 0.00 0.00
30, 2007
Source: Alexander Forbes’ Asset Manager Watch, Quarterly reports Sept 2007 thru June 2008
Stanbic Investment Management

Table 3.2a shows how Stanbic Investment Management had reduced its
exposure to onshore investments by almost 50 percent.
On October 16th 2007, SIM launched its first equity fund, Stanbic Equity Fund,
for retail and institutional clients. The fund is set to maintain a minimum 70
percent exposure to foreign equities while a minimum of 30 percent of the
fund's value will be committed to local stocks and preference shares. This
strategy is reflective of SIM’s total asset allocations; 75 percent on equities, 10
percent on bonds and 15 percent as cash.
Table 3.2g: Stanbic Asset Allocations from September 30th, 2007 thru June 30th,
2008
DOMESTIC INVESTMENTS FOREIGN INVESTMENTS
Quarter Equity Bonds Cash Prop Priv Alt Equity Bonds Cash Prop Pri. Alt
Ending Equ. Eq
June 30, 58.44 28.12 13.44 0.00 0.00 0.00 76.655 21.95 1.395 0.00 0.00 0.00
2008
March 31, 66.05 25.25 8.70 0.00 0.00 0.00 71.745 27.255 1.00 0.00 0.00 0.00
2008
December 70.145 20.895 8.96 0.00 0.00 0.00 64.65 30.74 4.61 0.00 0.00 0.00
31, 2007
September 76.77 9.07 14.16 0.00 0.00 0.00 66.54 33.01 0.45 0.00 0.00 0.00
30, 2007
Source: Alexander Forbes’ Asset Manager Watch, Quarterly reports Sept 2007 thru June 2008
3.3 Existing Asset Management Capacities

A survey of over half of the firms that are active in the asset management
sector reveals relatively young companies, staff with an attendant lack of
experience, offshore bias, and generally low investment capacity locally. 6 7
Of the ten registered asset investment firms, three are either completely
dormant or have very low and restricted levels of activity. The remaining seven
active firms are constituted as local (small) branches of larger firms generally
head-quartered in South Africa. Four out of five firms self-describe themselves
as “large private organizations”. Majority were incorporated less than five
years ago with the exception of one which evolved from a long-established
insurance entity with over 30 years of operations and a second that was
established some 11 years ago.
Two asset management firms are registered under the Collective Investment
Undertaking. One of the two has 100 percent foreign ownership. Similarly,
most of the firms surveyed operate under a joint offshore/onshore investment
platform sustained with an array of financial vehicles ranging from a low of 200
million (Imara) to a high of 15 billion Pula (BIFM) under direct control of the
local company. Total investment portfolio for the other three companies
surveyed range between 2.1 and 4.2 billion Pula.
Overall, funds are broken-down into a 60/40 offshore/onshore component with
a matching 60/40 distribution into equities versus bonds and cash. This
distribution may likely change with the inception of the Botswana
Infrastructure Fund, if this fund is able to effectively and deeply penetrate the
sector. The offshore/ onshore investments split falls within the curve of the
government recommended 70/30 ratio which does little to retaining optimum
levels of capital in Botswana.
Do asset management firms in Botswana have the capacity to pursue

opportunities for expansion? The largest of these has 25 professional staff. The
next biggest has 13. Smaller outfits have current staff complements of 4 and 5
respectively. The smallest of these operates with a lone professional.
With regard to organizational efficiencies, the lowest ratio of professional to

non-professional staff is 13 to 30; whilst the highest ratio was found to be 25
professional staff to 7 sales/support personnel. At least three quarters of the
staff in all surveyed firms have a post graduate degree and/or a Chartered
Financial Analyst (CFA) designation.
Managers in asset management firms see staff competence and up-to-date

training as an ongoing process in a changing environment and recognize the
need for consolidated efforts in that regard. But there is little evidence of
concrete efforts in this regard. Indeed, most managers were somewhat
6
The authors of this report would like to thank Allan Gray, BIFM, Imara, Investec, and
Stanbic Investments for their open participation in the survey.
7
A sample of the questionnaire is included in the appendices.

satisfied with the existing experience and training of professional staff. Where
concerns were expressed or weaknesses identified, they were pointed at lack
of broader, more international perspective with a concomitant overly narrow
Botswana focus; lack of exposure. All establishments claim to provide further
training and certification of staff including CFA and Diploma courses. They also
generally make good use of Euromoney training to provide practical skills and
training in finance and banking. In some establishment, staffs were reported
to have opted not to avail themselves of such training opportunities.
Staff turnover is low. Of all the establishments, only one professional staff has
been lost over the last 5 years, this in response to an alternative offer “that
could not be refused”. Low numbers of active firms and a stable institutional
environment accounts for this. The very low levels of staff turnover may
explain the paucity of training and other employment perquisites offered by
the various organizations as there is seemingly little need to compete for good
staff. Managers are satisfied with the status quo; they see the stable
environment as being positive for the industry. They report that the factors
that current constrain expansion of the sector derive from more structural
factors including the narrow client base which poses a serious barrier to
portfolio diversification, especially in the areas of fixed incomes and alternate
investments.
3.4 Stock Exchange & Bank of Botswana Certificates
The Botswana Stock Exchange

The Botswana Stock Exchange is Botswana’s national stock exchange assigned
with the responsibility to operate and regulate the equities and fixed income
securities market. Formally established in 1989, the BSE continues to be pivotal
and cornerstone to Botswana’s financial system.
Total number of securities listed increased from 5 in 1989 to 18 in September,
2007. The value of equities trades rose by approximately 105 percent over the
same period. This factor juxtaposed against growing market capitalization have
led to increases in market depth and liquidity, two critical elements --along
with integrity-- of a successful market (Chapter 4).
The structure of the market has changed significantly over the years with a
relatively strong diversification of sectors to include Wholesaling and Retailing,
Financial Services and Banking, Petroleum, Medical Emergency Services,
Property, Security services, Mining and Informational Technology. In 2001, the
BSE launched a Venture Capital Board dedicated to start-up companies. The
following are the current product offerings of the BSE:
 Equities (found in the Domestic, Foreign and Venture Boards)
 Commercial Paper
 Corporate Bonds

 Quasi-Government Bonds
The capacity of the BSE to sustain Botswana’s performance in global capital

markets is confirmed by its being ranked the seventh largest gainer worldwide
for 2006. Having said that, this performance is certainly NOT an indicator of
effectiveness at facilitating access to the country’s equity and debt markets.
Access has been limited by:
 Liquidity – Availability of companies’ shares (securities) is limited.
 Numbers of companies to invest in are few.
 Listed companies are narrowly diverse.
 Lack of a benchmark for long-term debt.

These factors limit investors’ choices and hence risks.
Bank of Botswana Certificates

BoBCs were intended as a mechanism for mediating capital flows in the private
sector (See Chapter 2.4: Instruments for Asset Management). Participants
compete --through commercial banks-- for certificates auctioned weekly under
the existing competitive price auction format. Although the issuance of the 14-
day, 91-day and 1 year BoBCs serve to enhance liquidity in the shorter end of
the domestic money market, BoBCs have increasingly been viewed by non-
banking institutions (including asset managers and parastatals) as an
alternative long term investment vehicle: holders generally ‘roll over’
certificates by re-investing as and when they matured. A second objective of
the introduction of the BoBCs was to propel movement toward market-based
determination of interest rates, with the ultimate goal of contributing to the
development of money and capital markets. Unlike those countries
experiencing cumulative budget deficits and significant government debt,
Botswana has not had the need to issue treasury bills so that those markets
remain underdeveloped.
Given the prominent role of commercial banks in mediating liquidity through
BoBCs, it is critical that we mention the effects and functions in the context of
policy and implementation:
Effect of BoBCs on commercial banks lending – Current rates on BoBCs have

risen recently and currently at 13.12 %. BoB has since the beginning of 2008,
increased the bank rate by 100 bps. That in turn has forced the banks to keep
their commercial interest rates high (currently averaged at 15.5%). This
increase in domestic interest rate is in line with BoB’s mandate to reduce
inflation by sustaining a high interest rate. Commercial banks’ lending have
therefore been increased and credit conditions have generally been tightened.
Extent and effect of foreign investments in BoBCs – The risk-free, 12 – 13

percent interest on offer has not attracted a lot of foreign capital flow mainly

because of the exchange-rate risk. **Check – foreign entities are NOT allowed
to buy BoBCs** Despite the relative stability of the pula, some foreign investors
lost significantly when the currency was devalued twice in the past two years.
Alternatives for government participation in capital markets – Despite recurring

government budget surpluses, GoB should provide longer term investment
instruments, where the private sector would be encouraged to invest with a
long term vision. When such instruments are in place, only then would BoBCs
fulfill the context of their existence.
3.5 The Informal and Micro Credit Sectors
The informal and micro-credit sector plays a key role in resource mobilization
and allocation. Informal finance is defined to include financial transactions
that take place outside of the officially regulated/monitored financial sector.
Micro-credit and informal funding windows provide a wide range of services and
activities which are ‘demand driven’ and generated in response to market
needs typically in remote rural, urban & semi-urban areas and villages.
Features of the sector include:
 easy to enter;
 financed mainly from personal and family resources;
 low starting capital;
 is relatively high cost being aimed at the ‘unbanked’.
The Micro Lenders Association of Botswana was founded in 1998 to promote the
interests of small-scale lenders and provide some degree of control over
lending practices. Some of its adopted rules are:
 establishments must trade from a proper business establishment;
 establishments are forbidden from charging more than 30% interest
monthly;
 establishments must adhere to the Association’s code of conduct which
should be prominently displayed in offices;
 establishments must use a central database of loans (Compuscan) to
register all borrowers and guard against multiple borrowings.
In Botswana, the informal financial sector continues to grow due to the

inability or unwillingness of formal banks to adopt a configuration better able
to lend small and medium scale businesses (such as creating bank branches).
Indeed, the liberalization of financial sectors in various developing countries
geared to facilitating public mass access to formal financial sectors has not
been generally met with a parallel shrinking of the informal sector as would be
expected if informal finance was a result of repressive policies in the formal
sector.

The informal sector comprises various many including friends/relatives, money
lenders, landlords, savings & credit co-operatives societies (SACCOs), pawn
shops and microfinance institutions. Some of the better-established channels
and their modus operandi are profiled below.
 Friends/Relatives: lenders use personal knowledge of borrowers for

effective assessment of risk and debt repayment. But if such transactions
are characterized by the lack of formal legal mechanisms, why do borrowers
choose to repay debts? Theorists have focused on two mechanisms that
seem to serve to as repayment incentives:
o The "self-enforcing contract": borrowers repay because they fear losing
access to future loans if they ever default; this is the explanation most
often provided by borrowers when asked why they repay loans;
o The creation of social sanctions to punish defaulters: defaulters are
penalized broadly by the community as a whole, in addition to being denied
access to future loans. It is clear that social sanctions play an important
role in sustaining some informal credit markets
 Moneylenders: these shops provide credit only. Money lending
is unique in the sense that it is the only source from which some borrowers
are assured a high probability of having loan requests met. This makes
borrowing from moneylenders acceptable to borrowers without other
options, such as those that require loans to meet social and economic
exigencies. They are often not attractive for those seeking working capital
and fixed investment loans. The market niche served by money lenders
comprises low income earners who don’t have any other source for short-
term working capital. While interest rates are unattractive, the possibility
of repayment through small daily or weekly amounts is a main attraction.
Even though loan amounts are small, regularly receipt ensures a smoothing
of expenditures for many especially traders and farmers who have to make
immediate payments to their suppliers to ensure regular supplies.
 Landlords: Informal finance is important to landlords in poor
communities, especially those with a lot of poor women.
 Savings & Credit Co-operatives Societies (SACCOS):
Currently, the BoB’s newly formed legislative body NBFIRA is the regulatory
body mandated to oversee this sub-sector of the lending industry.
Summary of Asset Management Profile
In 2007, the value of funds assets stood at P33.8 billion from P0.5 billion in
2001 over 80 percent of which comprised BPOPF assets. During the same
period, the number of asset managers increased from 6 to 10. Consequently,

average value of assets per manager increased fifty fold, from P83 million to
P3.38 billion! What are the implications of such a drastic increase? It is from
this perspective and a synthesis of key features, that several conclusions are
drawn:
Limited Management Expertise – This is exemplified by the fact that most

investment decisions are typically NOT made by the local Botswana offices.
With two exceptions, asset management firms have a rather thin staff presence
on the ground in Botswana. Absorption capacities are, nonetheless, quite
significant. Establishments operate generally as branches of larger offices
based in South Africa as opposed to “stand-alone” companies. Therefore,
organizational personnel are able to be redeployed to Botswana at short
notice, and as needed. Within Botswana, there is widespread recognition for
continuous training for good adaptation to a changing environment, and asset
managers are engaged in on-going efforts to provide training for professional
staff.
Key strengths cited by some of the relevant actors lies in the areas of
performance, brand name, individual experience and current equities positions
held. The Allan Gray Company suggests that its strengths lies in its performance
record which is a function of a time horizon and expresses confidence in its
name brand. The BIFM Company is well positioned for the short and long terms;
Imara boasts of competencies in equities management, Investec markets itself
as a global player giving value for money, while Stanbic Investments are
effective in the areas of investment management capabilities with solid market
credibility. This multivariate assessment of relative strengths could translate
into the creation of market niches that play to individual firm strengths, thus
lay the ground for a limited amount of diversification.
Limited Domestic Opportunities – Botswana’s asset-managing companies are

quite unevenly structured, with varying strengths and constraints and different
perceptions as to where its best opportunities and prospects lie. It was the
general consensus of the asset managers that participated in the survey that
there is a need for more investing opportunities.
Government Regulations – For most asset managers, these areas of concern are
almost as important as investments capacity. They include limited investment
alternatives in terms of long term debt instruments, poor infrastructure, lack
of market depth and so forth. The government-mandated 70/30 split of assets
management in Botswana is generous compared to that in neighboring
countries. For South Africa, this ratio is 15/85; for Namibia, 15/85; for
Zimbabwe 0/100 and for Mauritius 15/85 (confirm-Mauritius Financial Mgmt
Svcs;). The creation of alternate investment vehicles could be utilized to keep
more capital within Botswana. Government regulation is generally uneven. In
some areas, more stringent controls are required while in others the market
could be allowed to take its course as in, for example, the restrictive laws with

regard to taxation policy within the sector. And there is little public
sensitization to stimulate demand.
Overall, asset management firms are optimistic and look to positioning

themselves strategically to exploit new opportunities to diversify and expand
respective portfolios. It is the author’s hope to extend the study to identify
viable alternative investment vehicles and also identify areas for more/less
regulations that would foster increased domestic investing opportunities.
Evaluation of the internal factors limiting portfolio diversification of onshore

funds exposes some structural and operational constraints: both depth of
market penetration as well as scope of coverage have been limited and there
has been failure to take up new opportunities for expansion of the sector –
infrastructure opportunities like building toll roads and bridges, power plants,
new dams. These are some undertakings that in most developed and developing
countries are funded by municipalities or private sector. Some of the barriers
preventing the financial sector development are detailed in Chapter 5.
For non-BPOPF assets being managed by AAB, AGAM, BIFM, FAM, IAM and SIM,
over 54% of assets are being managed offshore. For BPOPF funds being
managed by BIFM, FAM and IAM, over 64% of assets are being managed
offshore.
Summary of Stock Exchange & Bank of Botswana Certificates
The Botswana Stock Exchange is an ‘order’ driven market whereby orders are
matched with the book of limit orders already posted. Although there are few
advantages to this system, it is worth noting two main disadvantages:
 Transparency risk – Orders are placed at ‘current market prices’
with no limit orders option (buy or sell at a specified price)
 Inability to execute large trades in a timely manner
Despite the increased number of listed securities, increased market

capitalization and a relatively well performing bourse, the BSE is still being
challenged by certain issues:
 Liquidity
 Information inefficiency and inaccuracy
 Lack of diversity of shares
The implementation of the Central Depository System earlier this year should
help in the dissemination of trading information for investors.
The Bank of Botswana uses BoBCs in open market operations with three main
objects:
 To reduce excess liquidity

 Propel movement towards market-based determination of interest
rates
 Contribute towards price stability.
Summary of Informal & Micro Credit Sectors
Botswana’s informal and micro credit sectors continue to grow mainly due to:
 The inability of formal banks to cost-effectively service
transactions in rural, semi-urban and villages.
 Easy to participate in, especially with loans under P10,000
 Low starting capitals
 Relatively lower costs to the ‘unbanked’
Chapter 4 Comparative Assessment of the Financial Sector

4.1 Framework for Regional and International Comparisons
One of the outcomes of the globalization is increased exchange of goods and
services through international trade, and increased integration of financial and
capital markets. In the absence of a general equilibrium framework, evaluating
the robustness of financial environments and determining the conditions
associated with economic success is a complex process. This chapter assesses
the performance of the domestic financial sector and compares it to a group of
selected countries. It sets out a framework for comparison and then relates
Botswana’s financial performance to other countries in the areas of banking,
and stocks stock exchange. Due to time and resource constraints the same
analysis is not conducted for other segments of the financial market such as
asset management firms and the bond market. However, if resources become
available they will be included at a later stage. The variables applied to
comparing financial performance of the bank and bond market are market size,
market efficiency and market stability.
Countries for comparison are selected based on their level of financial

development and economic development. The comparison includes 2 sets of
countries. The first set of countries is a few SADC countries that have economic
structures and growth that are similar to Botswana. For example, the rate of
inflation in South Africa is strongly linked to real rates in Botswana (although
subsidy of some of the goods and services included in the inflation index has
translated to a notion that cost-of-living is lower in Botswana). Similarity to the
structure of Botswana’s productive sector was also considered with preference
given to those producers and exporters of primary products with a relatively
small industrial base such as Mauritius and Namibia. The second set of
countries is newly industrialised economies selected mainly for their high rates
of growth that have experienced successful financial sector reforms. These are
the challenges that now face Botswana. The Japanese economy, for example,
is a good case of an economy that successfully transitioned from post-war
decline to a modern industrial power.
The comparison is carried out to see in order to analysis where Botswana is

relatively to neighbouring countries and the newly industrialised countries. The
countries selected for the comparison are Japan, South Korea, Malaysia,
Mauritius, Namibia, Singapore and South Africa. Of which Namibia, Mauritius
and South African are SADC countries with similar economic structure to
Botswana while the rest of the countries are newly industrialised countries.
4.2 Stock Market

This section provides a comparison of Botswana’s stock exchange to those of
the selected countries indicated above. The comparison will mainly focus on
market size and stability. This section will not look at the efficiency of the
stock exchange as data for efficiency indicators of the stock market was not
available for the developing countries in the group.
4.2.1 Stock Market Size and Growth
The ratio of market capitalization to GDP is used to facilitate benchmarking of

various level of financial development; it allows comparison across countries at
different stages of development. Market capitalization is the total stock market
value of all publicly traded companies; GDP is the total value of all goods and
services produced by an economy. Thus, the ratio of the value of all stock
listed on the stock exchange to GDP. It also gives a summary of the
development of a market and an approximation of the relative size of the stock
market.
A study conducted by the World Bank found market capitalization was on

average 38 percent for developing countries and 110 percent for high-income
economies. The market capitalization to GDP ratio, as indicated in Table 4.1,
was above the developed countries rate, of 110 percent, for South Korea,
Malaysia, Singapore and South Africa for the displayed years. Mauritius,
Botswana and Namibia had the lowest market capitalization to GDP and it was
only that the average percentage ratio obtained in all the years of the study
except in 2007 in the case of Botswana. Despite the low level in this ratio,
Botswana and Mauritius have registered the highest growth rate in this ratio in
the recorded 9 years. The percentage increase in the market capitalization
ratio between 1999 and 2001 was 167 130 52 and 30 for Botswana, Mauritius
South Africa and South Korea respectively. The rest of the countries registered
negative growth rates in the given period.
Rapid increase in capitalization of stock markets is not synonymous with

market diversity and sophistication. Even the most advanced markets on the
continent are quite immature from a global perspective. In most cases, trading
occurs in only a few stocks; which therefore account for a considerable
proportion of total market capitalization and renders it vulnerable. This applies
to smaller markets as well as to the Johannesburg Stock Exchange, the most
developed market in the continent.
Market liquidity reflects the ability to buy and sell stocks easily. It
complements market capitalization by assessing whether market size is
matched by trading volume. Liquidity is represented by the turnover ratio
which measures trading relative to the size of the stock market. Liquid equity
markets make investment less risky and more attractive because investors are
both able to easily acquire assets and to sell them off quickly where urgent

access to savings or changes to portfolios are required. Also, companies are
able to enjoy sustained access to the capital raised through the issuing of
equity. By facilitating longer-term and potentially more profitable investments,
liquidity in markets can improve the allocation of capital and enhance
prospects for long-term economic growth. Because making investment becomes
a less risky and more profitable proposition, high stock market liquidity leads
to higher level of investment: more investors will enter because they can
leave.
The data provided in Table 3.1 indicates that Botswana, Namibia and Mauritius
have the lowest turnover ratio and the stock traded ratio. In terms of Growth
rate Botswana and Namibia have scored the highest percentage increase in the
turnover ratio between 1999 and 2007. While Japan and Mauritius had the
highest growth rate in the stock traded ratio. Although Botswana performance
is not comparable to the other countries, its growth rates or percentage
increase in indicators is higher than most of the countries and this to some
extend shows some form of development.
Table 4.1: Equity Indications on Market Size
Country Indicator 1999 2001 2001 2002 2003 2004 2005 2006 2007
Listed domestic companies,
Botswana total 15 16 16 18 19 18 18 18 18
Market capitalization (% of
GDP) 18.71 15.83 21.03 29.04 25.74 25.93 23.18 35.86 49.97
Stocks traded (% of GDP) 0.67 0.77 1.08 0.93 1.05 0.51 0.43 0.66 0.93
Stocks traded, turnover ratio (%) 0.71 4.78 5.60 5.04 4.36 2.30 1.81 2.27 2.20
Japan total 2470 2561 2471 3058 3116 3220 3279 3362 3844
GDP) 104.08 67.64 54.98 54.26 71.90 79.86 104.12 108.19 101.75
Korea, Rep. total 1178 1308 1409 1518 1563 1573 1620 1694 1767
GDP) 88.83 33.54 45.66 45.64 54.20 62.99 90.75 94.03 115.86
Malaysia total 757 795 809 865 897 962 1020 1027 1036
GDP) 183.76 129.47 136.37 130.17 161.91 152.31 132.13 150.79 180.21
Mauritius total 41 40 40 40 40 41 42 41 90
GDP) 38.56 29.79 23.42 29.19 37.26 39.23 41.61 56.70 89.04
Namibia Listed domestic companies, 14 13 13 13 13 13 13 9 9

total
GDP) 20.42 9.12 4.68 5.47 6.88 7.83 6.66 8.25 10.41
Singapore total 355 418 386 434 551 625 685 461 472
GDP) 240.17 164.83 137.05 115.45 246.19 253.77 264.37 202.34 219.09
South Listed domestic companies,
Africa total 668 616 542 450 426 403 388 401 422
GDP) 197.08 154.24 117.95 166.51 160.66 210.46 233.58 280.41 300.29
Source: World Bank Development indicators
Another important variable worth mentioning that can also be used to measure
the size of the stock exchange is the number of registered companies. Namibia
and Botswana have the lowest registered companies on their stock exchange.
Between 1999 and 2003 the Botswana stock exchange had an increase of 3
companies while in the same period the companies on the Japanese, South
Korea and Malaysian stock exchange increased by 1374, 589 and 275 companies
respectively. South Africa and Namibia, on the other hand, experienced a
decline on the number of registered companies.
The World Bank provides an overall index to measure the market size of stock
exchange of various countries. This index is a composite indicator created on
the basis of market capitalization to GDP; stock traded to GDP and the
turnover ratio. This index is provided in Table 3.2 below.
Table 4.2: Equity Market Size Index (2004)
Equity
Market Size
Index
Namibia 4.37
Botswana 4.65
Mauritius 4.84
Malaysia 7.94
Japan 8.21
Singapore 8.66
Korea, Rep 9.27
South Africa 9.35
The table indicates that Botswana has the second lowest market size index
indicating that the Botswana Stock Exchange is relatively small and

underdeveloped compared those of the other country. South Africa and Japan
had the highest index. It should be noted that the index extends from 0 to 10
with higher valves indicating better positions.
4.2.2 Stock market Stability indicators
This study uses three indicators to access the stability of the stock market
namely; skewness of market returns, volatility of market returns and price
ratio earnings. Data for these indicators are provided in Table 4.3.
Table 4.3: Equity Market Stability Indicators
Equity markets Stability Indicators Years

Country 2001 2002 2003 2004
Botswana Equity Return Skewness 1.5 1.6 1.6 1.7
Equity Return Volatility (%) 19.9 12.3 11.7 7.6
Price to Earnings Ratio 12.3 9.8 9.1 13.9
Stability Index 5.29
Japan Equity Return Skewness 0.0 0.0 0.0 -0.1
Korea Equity Return Skewness 0.1 0.1 0.0 0.0
Malaysia Equity Return Skewness 0.7 0.7 0.8 0.8
Price to Earnings Ratio 16.7 15.7 16.0 16
Mauritius Equity Return Skewness -0.5 -0.4 -0.3 -0.3
Namibia Equity Return Skewness -0.2 -0.3 -0.2 -0.2
Singapore Equity Return Skewness 0.0 0.1 0.1 0.1
South Africa Equity Return Skewness -1.0 -0.9 -0.8 -0.8
Price to Earnings Ratio .. .. .. ..
Source: Financial Sector Development Indicators
Stability indicators are based on total market returns and capture systematic
risk associated with participating in a particular stock exchange. A stock
market with a more negatively skewed distribution is likely to deliver large
negative returns and hence prone to greater instability. The price to earning ratio,
calculated by taking the share price and dividing it by the company’s earning

per share, gives an idea of what the market is willing to pay for the company’s
earnings. The higher the price earning ratio the more the market is willing to
pay for the company’s earnings. A low Price to earnings ratio normally
indicates a vote of no confidence by the market and hence signals greater
instability. The price return volatility, on the other hand, is the standard
deviation of volatility. The stability index is a composite indicator calculated
by the world ban based on the Skewness and volatility of market returns. It
ranges from one to ten with higher values indicating greater stability.
In the group of countries being compared, Botswana has the highest positive
equity return skew-ness indicator, while it had one of lowest equity return
volatility between 2001 and 2004. This indicates that Botswana’s stock
exchange is relatively more stable than some of the newly industrialized
countries. The Equity Market Stability Index was highest for Mauritius and
Namibia with an index of 6.13 and 5.87 respectively. Additionally, Botswana
has the third lowest stability index. From this index it can be concluded that
Botswana’s stock market is not really stable in comparison to other developing
countries with similar economies, like Namibia and Mauritius.
4.3 The Banking Sector
A number of indicators are used to assess the size, stability and efficiency of
the banking sector of Botswana relative to other countries. Amongst these are
capital to assets, liquid reserves to bank assets and nonperforming to gross
loans ratios. This section shall compare Botswana’s banking sector to those of
the selected countries.
4.3.1 Bank Sector Size
The simplest and most conventional indicator used in order to assess bank
sector performance, is the money/GDP ratio, which measures the degree of
monetization in the economy. The ratio M2/GDP is normally used to determine
the size depth and development of a country’s banking and financial sector. It
is often taken as an adequate measure of the size of the financial sector depth
and it is used in most cases because of the lack of data on other financial
assets. However, this measure does not consider the full extent of financial
intermediation. In order to capture aspects of intermediation the comparison
in the banking sector size will private credit to GDP, private credit to total
domestic credit and private credit to total funding. The private credit to total
domestic credit measure captures the fraction of total domestic credit in the
economy channeled by financial intermediaries other than the central bank and
public enterprises. While the private credit to total funding ratio measures how
much of the private credit is funded by total financial system deposits in the
system, foreign liabilities, money market instruments and bonds.
Table 4.4: Banking Sector Size Indicators

2001 2002 2003 2004 2005 2006 2007
Botswana Money and quasi money (M2) as % of GDP 25 26 26 27 26 31 39
Private Credit to GDP 9 17 11 19
Private Credit to Total Domestic Credit 100 100 100 100
Private Credit to Total Funding 53 68 64 69
Banking Size Index 5
Japan Money and quasi money (M2) as % of GDP 225 208 210 208 208 205 202
Korea Money and quasi money (M2) as % of GDP 71 72 74 71 69 68 66
Malaysia Money and quasi money (M2) as % of GDP 137 135 131 120 119 118 120
Banking Stability Index 8
Mauritius Money and quasi money (M2) as % of GDP 80 82 89 97 99 100 101
Namibia Money and quasi money (M2) as % of GDP 40 36 39 40 42 45 50
Private Credit to GDP .. .. .. ..
Singapore Money and quasi money (M2) as % of GDP 115 114 116 109 107 111 115
South
Africa Money and quasi money (M2) as % of GDP 53 52 53 54 56 60 64
Source: Financial Sector Development Indicators and World Development
Indicators
For all the countries in which the comparison is made, Botswana has had the
lowest m2 to GDP ratio indicating that Botswana banking sector less developed
and smaller compared to those of the other countries for all the years (Table
4.4). Another country that also had a low m2 to GDP ratio was South Africa.
In terms of the intermediation function of banks Botswana also had the lowest
private credit to GDP ratio between 2001 and 2004. Botswana was comparable
to Korea and Singapore in the private credit to total domestic credit measure
but lagged behind in the private credit to total funding ratio for all years

presented in Table 4.4. The Banking size index, created on the basis of seven
indicators of which the indicators in Table 4.4 are inclusive, by the World Bank
indicates that in terms of banking size Botswana’s banking sector is rated the
lowest in all the seven countries. Note that the size indicator extends from 0 to
10 with higher valves indicating better positions. Even Namibia and Mauritius
which are also developing countries with comparable economy situations like
Botswana rated higher than Botswana. This shows that Botswana’s banking size
is not comparable regionally.
South Africa had the highest banking size indicator and indeed the South
African banking sector is of world class standard as evidenced in user-friendly
operations and an effective regulatory and supervisory environment. It was the
first to offer international operability of ATM cards through SA switch. It was
among the first of the developing countries to introduce credit cards (in 1950),
and among the first countries in the world to use satellite communications for
branch operation.
Botswana’s highly market orientated and non-interventionist financial
regulatory environment is adjudged one of the most progressive in the
continent but yet it is still not able to lead to the development a sophisticated
bank sector. Unlike South Africa where the banking sector has achieved deep
penetration at all levels of society, the banking sector in Botswana still operate
within a relatively small elite market and there has been limited success at
extending services to new markets in the past. In recent years, however, bank
account start-ups have increased and risen faster than the population growth,
implying that an increasing proportion of the population is able to access
banking services.
4.3.2 Banking Efficiency
The traditional measures used for efficiency as the ratio of overhead costs was
not used as data for the various countries was not readily available. Instead
other variables suggested and obtained from the financial Sector Development
Indicators are obtained and used in order to have a more comprehensive
picture of the overall performance of the banking sector, such as the
profitability and structure of the banking system and competitiveness.
Efficiency can also be measured by the use the lending and deposit spread,
measured as the percentage difference between the lending rate and the
deposit rate. Efficiency can also be measured by aspect of competitiveness and
profitability in the market. Competition is seen as a source of discipline in the
market, or in any social organization for that matter. Producers who are
earning profits for the time being can rarely afford to rest on their laurels. A
single new entrant producing a better, cheaper product can turn those profits
to losses very quickly. As long as entry into the market is open, competition
(actual or potential) ensures that entrepreneurs stay on their toes by

constantly increasing efficiency and finding new, better ways to produce. The
more profits a bank is then it is able to invest these profits back into the
business in order to make it more efficient.
Table 4.5: Banking Sector Efficiency Indicators

Banking sector efficiency indicators
2001 2002 2003 2004 2005 2006 2007
Botswana Banking Competitiveness Index 4 5 5 7
Banking Profitability Index 9 10 10 10
Interest rate spread (lending rate minus
deposit rate) 6 6 6 6 6 8 ..
Return on Assets (adjusted) 1 2 2 2
Banking Efficiency Index 7
Japan Banking Competitiveness Index 7 7 7 7
deposit rate) 2 2 2 2 1 1 ..
Return on Assets (adjusted) -1 -1 -1 -1
Korea Banking Competitiveness Index 5 5 5 5
deposit rate) 2 2 2 2 2 1 ..
Return on Assets (adjusted) -1 -1 -1 -1
Malaysia Banking Competitiveness Index 6 7 7 6
deposit rate) 4 3 3 3 3 3 ..
Mauritius Banking Competitiveness Index 3 3 3 3
deposit rate) 11 11 11 13 14 12 ..
Namibia Banking Competitiveness Index 4 6 6 6
deposit rate) 8 6 6 5 4 5 ..
Singapore Banking Competitiveness Index 4 4 3 3
deposit rate) 4 4 5 5 5 5 ..
South
Africa Banking Competitiveness Index 6 6 6 6
deposit rate) 4 5 5 5 5 4 ..
Indicators

Between 2001 and 2007, Botswana had lending deposit spread lower than
Mauritius, comparable to Namibia and but higher than all the newly
industrialized countries in the sample. Botswana has the highest profitability
index which is a good sign as higher profits are associated with a more efficient
banking system. Another measure for profitability is the return on assets
(adjusted), which is a ratio of returns generated from assets financed by the
banks. Even this indicator shows that Botswana has the most profitable banking
system. The competitive index reveals that Japan is the most competitive
country between the periods 2001 and 2004. In 2004 Botswana scored the same
rate in the competition index as Japan. This could have been a result of the
introduction of new banks into the banking arena. Malaysia and Singapore had
the lowest average competitive index for the period between 2001 and 2004.
Botswana had the highest efficiency index amongst all the 8 countries in 2004.
Banks are more important in developing countries like Botswana as it a major
source of funding for new investment where security markets are weak.
Botswana high efficiency bank sector index could be a result of high profits.
Calculations of this index assume that high profits can be easily translated to a
more efficient operating environment.
4.3.3 Banking Stability
In order to obtain a complete picture when comparing the stability of the

banking sector, the Financial Sector Development indicators recommend that
the following aspects; capital adequacy index, asset quality of both the lender
and borrowers and liquidity. Unfortunately data on the quality of borrowers
was unavailable. Capital adequacy index determines the capacity of the bank
in terms of meeting the time liabilities and other risk such as credit risk,
operational risk, etc. A bank's capital is the cushion for potential losses, which
protect the bank's depositors or other lenders. Banking regulations normally
define and monitor capital adequacy ratios to protect depositors, thereby
maintaining confidence in the banking system. Therefore the higher this index
or the requirement the more stable a banking system is likely to be. Non
performing loans and real credit growth measure the asset quality of the
lender. Non performing loans are loans that are in default or close to being in
default and hence reduce the asset quality of the lender and hence decrease
stability.
Table 4.6: Banking Sector Stability Indicators
Banking sector stability indicators
2001 2002 2003 2004 2005 2006 2007
Botswana Banking Capital Adequacy Index 10 8 8 8
Banking Liquidity Index 5 5 4 5
Capital Adequacy Requirement 28 20 22 21
Bank liquid reserves to bank
assets ratio (%) 6 7 7 7 6 9 9

Bank non performing loans to total
gross loans (%) 4 4 4 3 .. .. ..
Real Credit Growth (adjusted) (%) .. 2 1 1
Japan Banking Capital Adequacy Index 4 3 4 4
assets ratio (%) 2 3 4 5 4 2 2
gross loans (%) 8 7 6 4 3 3 ..
Korea Banking Capital Adequacy Index 4 4 4 4
assets ratio (%) 2 3 3 2 3 3 3
gross loans (%) 3 2 3 2 1 1 1
Malaysia Banking Capital Adequacy Index 5 5 5 5
assets ratio (%) 4 4 4 4 3 4 4
gross loans (%) 18 16 14 12 10 9 8
Mauritius Banking Capital Adequacy Index .. .. .. ..
Capital Adequacy Requirement .. .. .. ..
assets ratio (%) 5 5 2 2 2 2 2
gross loans (%) .. .. .. .. .. .. ..
Namibia Banking Capital Adequacy Index .. .. .. ..
Capital Adequacy Requirement .. .. .. ..
assets ratio (%) 3 2 3 3 3 2 2
gross loans (%) 3 4 4 2 2 3 ..
Real Credit Growth (adjusted) (%) .. .. .. ..
Singapore Banking Capital Adequacy Index 7 6 6 6
assets ratio (%) 3 3 2 2 3 3 2
gross loans (%) 8 8 7 5 4 3 3
South
Africa Banking Capital Adequacy Index 4 4 4 5

assets ratio (%) 3 3 3 3 3 3 3
gross loans (%) 3 3 2 2 2 1 1
Indicators
Botswana had the highest capital adequacy index (Table 4.6). On average
between 2001 and 2004, Botswana had lower non performing loans to total
gross loans ratio than Japan and Malaysia. On the other hand, the real credit
growth was similar to those of other countries between 2001 and 2004. The
liquidity index was highest for Mauritius and Singapore, though figures of the
liquidity index and liquid reserves to bank assets were relatively high for
Botswana indicating that Botswana banks are relatively secure. The Bank
stability index indicates Botswana, with an index of 5.81, has the second
highest stable banks in Table 3.6 after Singapore with an index 6.35
4.5 Summary and Conclusions

Relative to the other countries, Botswana’s financial sector seems to be less
developed, only comparable to the financial markets of Namibia and Mauritius.
However, Botswana banking sector ranked more efficient and stable than most
of the newly industrialized countries in the group. However, Botswana seems to
have the smallest banking sector which is not easily accessible by most of its
population. Relative to the Banking sector, the stock exchange needs more
attention as it is relatively smaller and even unstable compare to the other
countries. Between 2001 and 2004 Botswana’s market capitalization was lower
than the average of that of developing countries calculated by the World Bank.
Chapter 5 Prospects & Strategies for Sector Expansion
5.1 Barriers to Sector Development
Market Structure

Key challenges and constraints to further expansion of the Asset Management
Sector include:
 insufficient activity to create diversified domestic opportunities

 lack of domestic market depth – little or no securitized or derivative
products
 insufficient bonds to create yield curve (BoB has recently issued
added debt in an effort to create a benchmark curve)
 Limited alternatives - some opportunities exist but investments are
constrained
 Relatively new existing local offices with little or no autonomy
Government Regulation
As a regulator, the government has an overall responsibility to institute
political stability, macroeconomic measures and a strong legal framework that
creates an enabling environment. GoB allows up to 70% of assets to be
managed offshore. It is because of the 70/30 ratio of assets allowed for
offshore investing, that has rendered an aversion to risks onshore and a
seemingly complacent attitude for economic innovation. Hence as a
consequence, majority of the investments are mostly limited to equities and
bonds. Some common features of such a landscape are:
 lack of investment opportunities;

 build on Infrastructure, Regulatory and Legal Systems
 vision too short-term (shortage of long-term debt instruments)
 change mindset of public;
 There is a need to relax laws that restrict FDIs – For example tax on
interests, to compete with Mauritius and similar economies.
Data provided by Alexander Forbes Financial Services confirm that although the
legal requirement is that funds can be distributed offshore at a 70/30 ratio,
most managers struggle to be compliant.
Coverage and Penetration

With over 55% of the population living in urban areas and over 80% living in the
eastern region, it is extremely difficult for the major commercial banks to cost-
effectively serve other regions and rural areas. The informal financial sectors,
in their various roles, serve this niche. They continue to play a key role in
resource mobilization and development of small enterprises.
Other Factors

I. Risk averse: Asset Managers in Botswana are becoming more risk-averse
because of the HIV/AIDS pandemic, which adversely affects the saving potential
of economies with consequential effects on investments and economic growth.
In an environment characterized by poor health, illnesses and frequent deaths,
poor savings of workers affects growth in all sectors.
II. High Transaction Costs: The high transaction costs of formal banks are the main
reasons ROSCAs are the most viable savings option for low-income people in
rural Botswana. These transaction costs include transport to the bank,
opportunity costs due to long waiting time.
III. HIV / AIDS Threat: The HIV/AIDS epidemic is threatening to undermine past
economic gains and productivity may diminish due to ill health. It is difficult
for families to build a financial future when expected to contribute to funerals
almost on a monthly basis.
As mentioned in the Development Context (Apendix1) of this paper, the
Department of Health still has curb the health issues of recent years so that the
populous in general, but specifically institutions such as life insurance
companies, can operated in a confident manner where competing for jobs
within a bigger work force would encourage new ideas and hopefully increase
the life expectancy of its worker.
IV. Trade Related Issues: The current economic development strategy for Botswana
emphasizes the advantages of attracting FDI to the country. However, the
phasing out of the Multi-Fibre Agreement (MFA) on textiles and clothing on
December 2004 has had adverse effects on Botswana’s exports attempts.
Despite the WTO’s Generalised System of Preferences (GSP), a tariff reduction
facility offered by industrial countries to designated less-developed countries
(LDCs) on certain export countries, and the African Growth & Opportunity Act
(AGOA), which provides duty-free access to the US market for over 65,000
products from sub-Saharan Africa until 2008. The effects are two-fold:
 Botswana is exposed to competition from larger low-cost producers like
China and India, which can produce and sell at lower prices in the global
market. Botswana cannot attract and compete effectively.
 Most participants in this sector in Botswana (and other African countries)
are Asians who shifted their activities to Africa to jump quotas and
maximize market access opportunities provided by the AGOA initiatives.
(Source?) As Asian merchants relocate to their own countries, they
expose the supply constraints that often characterize production and
exports in Africa.
These and other trade issues should serve Botswana as a wake-up call to
diversify production, upgrade their quality of exports and be more competitive
globally.
VII. Legal Framework: Legal frameworks can play a major role in supporting, or
constraining economic growth and development. As expressed by an asset
manager who participated in this study, ‘the Botswana government needs to
relax some of the constraints on FDIs’.
5.2 Strategies for Expansion

The dilemma that arises from Botswana not running a fiscal deficit as most
other countries/governments is the inability of the government to play the
critical role of issuing essentially ‘risk-free’ medium and long-term debt
instruments, from which the private sector looking to raise capital, can bench-
mark, leverage and structure deals off.
This market should be both deep (offer short, medium and long term
instruments) and liquid (more than a blotter that mops up temporal excesses).
These issues should shape a bond curve whose yields Corporations would issue
debt. Revenues from short term paper can be used to fund projects and pay
interests of the longer-term papers. Projects like power stations, water
pipelines, new dams, improved roads and infrastructures can be initiated to
attract FDIs, create employment and expand the Botswana economy. By almost
any economically relevant meter, more will be invested locally (less offshore)
and pressure would be taken off the BSE whose leading indicators are in danger
of becoming overvalued. Suggestions for a more robust asset managing seector
include:
 med/large companies float more shares and, through that, encourage

regulatory changes
 entice medium-sized companies to raise capital by issuing
shares/bonds;
 set up a more robust retail platform;
 set up more private & government trust funds.
GoB should also consider forming a committee with a ‘policy-shaping’ role that
would define the medium- and long-term strategy for financial services issues
and be capable of assessing progress and implementation. It should be
knowledgeable to provide advice (and oversight) on internal issues (financial
markets) and also external issues (SACU, WTO and other international
linkages).
The Banking Sector

When developing countries such as Botswana gets to a certain level of wealth,
which is not always well-defined, the population should be able to support a
new array of more sophisticated financial services. Gradually, services should
evolve to higher quality products such as mutual funds, credit cards to suit
different categories of customers, secured loans (backed by a variety of
collaterals) and other lending and wealth management services. These and
other fee-based activities may prove to be more profitable than plain vanilla
lending and borrowing. Yet these opportunities come with risks. For this sector
of the economy, some of the high growth potential areas worth investigating
are:
The market for consumer finance: This stands at X% - X% of GDP, compared

with 25% at some European countries.

The real Estate Market: This market in Botswana is growing at a rate of XX%
annually and is projected to touch PXX billion in 2008.
The retail Credit Market: This is currently at PXX billion and is expected to
cross the PXX billion mark by the end of 2008.
The following are suggestions & strategies that would expand services,
markets, and profits within this sector of the economy:
New Banks
As previously mentioned, Botswana’s commercial banks, although profitable
and sound are very conservative in lending and competitiveness is low. Through
a process of liberalizing licensing policy that would foster the establishment of
new banks, competition and efficiency would result. The new banks would
however, be faced with managing their risks within an economy that may not
have the kind of credit-rating systems that may help them evaluate potential
clients and lenders.
A new bank Capital Bank Ltd. was registered in Gaborone last December. Its
effects are yet to be realized.
Strategic Alliances
Some of the commercial banks in Botswana should seriously focus on ‘organic
growth’ in a bid to reach beyond their branches and those who fall-out of the
banks’ credit threshold and at the same time delivers value to their
shareholders and stakeholders. As a consequence, they would be able to
service a larger number of people in an economy of scale that would lower
banking costs. Strategic alliances with micro-lenders would be beneficial to the
banking institutes because of several reasons:
 They tend to know the local needs of the small markets much better.
 Operating costs are generally lower since both entities normally have
infrastructural investments
 The micro-lenders provide instant creditability and access to the
targeted markets
 The new customer base can be leveraged at the same time that cross
selling of other products and services can occur using the same distribution
base for this purpose
Early in 200?, FNBB partnered with Adima Batswana, before it swallowed it to

create the present day First Funding. It has seen its market share increase from
XX% in 200? to XX% currently. The increase has been attributed to the market
share increase of First funding.

Standard Chartered Bank Botswana has made some strategic alliances with Blue
Financial Services, a micro-lending outfit, in its bid to expand and retain its
market share.
Islamic Banking
Islamic Finance is has become one of the most dynamic growth areas in
international finance and an increasingly important form of financial
intermediation. Understanding the importance of Shariah compliance for the
Islamic banking community would encourage religious diversity for Botswana’s
banking institutions. Currently, only FNBB offer that banking service. Although
Muslims cannot pay or receive interests, the basis of operations for banks,
loans given out under the scheme comprises a figure that includes the profit to
be made by the bank. That profit plus the capital amount is then divided by the
number of months it will take to repay.
5.3 Cross Sectoral Issues

The government of Botswana needs to put into place regulations capable of
dealing with the fast-changing and highly integrated financial markets.
 Financial regulations must be able to adapt quickly to new market
developments and practices. It must facilitate the integration of
foreign investments to bring benefits to consumers and
enterprises alike and to enhance the competitiveness of financial
service providers.
 To facilitate necessary information flow for an environment of
increased cross-border and cross-sectoral activities by providing
competent supervisory authorities for monitoring and stability.

5.3.1 Societal Impact

Since the inception of idea for this paper last year, the global economy,
including Botswana’s, to a lesser extent, has weaken considerately. The
regional financial crisis has had severe economic (and social) aftershocks
mainly because of the crisis in Zimbabwe and DRC. Nevertheless, there have
been some encouraging developments
5.3.2 Implications from Local Perspective

i) List strategies that have/can change
 Relaxing foreign exchange controls –
 Allowing private sector and parastatals to own foreign assets


ii) Review impact of changes in AMS
iii) What indicators have/can change and/or will need to be monitored
A) where data exists, do graphs to show extrapolation to future
trends
B) How has it/will it affect the local populous?
iv) Summarize the overall effect of increased investment into the
financial sector.
 Typically, the existence of excess liquidity in an economy would
normally lead to a fall in interest rate, until demand equal supply.
Given Botswana’s current high rate of inflation, the fall in the
interest rate may be such that it becomes less attractive for
investors in the domestic markets.
 Better control over credit expansion – A significant amount of
lending is being conducted outside the commercial banking
system. Comparatively, most of the loans are consumption loans
(households), not productive lending (businesses and industries),
hence overall effect in the economy is less.
5.3.3 Implications from Global Perspective

i) How will other countries see Botswana?
ii) How will that view affect/translate into cash inflow/FDIs?
iii) What regional pressures exist?
iv) What regional pressure will come to bear?
5.3.4 Botswana’s National Stake

i) How will increased FDIs affect the local financial sector?
ii) Discuss in terms of national/foreign ownership of range of actors in
financial institutions
5.4 Conclusions & Way Forward

Further studies
a) List of questions unanswered in this study
b) List of new questions rose from data/info of study.

Although this study can conclude that there are some potential of wealth
creation within the financial sector in Botswana, the requirement of the size of
the potential economic output will matter for the types of investors that is
attracted. For small business owners and investors, their main objective would
be to support their families. For SME and some entrepreneurs who invest and
create businesses, their purpose might be to gain the highest economic output.
For international investors, Botswana is an attractive market because of its
conducive environment. On the other hand, for a general investor only looking
for economic wealth creation (as opposed to social wealth creation) this paper
has not found concrete evidence that the process can be sustainable in the long
haul.
Therefore, it can be projected that streamlining of the financial sector will not
directly impact or ameliorate all social and economic schisms, but that such
intervention will likely filter though to the rest of the economy with important
spill-overs to other sectors.
Appendix 1
The Development Context
The Present Situation

Botswana has an economy that is largely undiversified. The primary sectors
comprising minerals, trade and tourism and government services remains the
main engine of growth. Mining accounts for 45 percent, trade and tourism
(hotels and restaurants) 10.5 percent and general government services 15.0
percent of total GDP at current prices {STATS BRIEF: National Accounts
Statistics 1996/7 to 2006/7, CSO}. Other important sectors of the economy
include banks, insurance and brokerage services at 9.8%; and manufacturing at
3.5% of GDP. Despite the lack of diversity in economic production, Botswana
has been able to sustain high rates of economic growth over the last four

decades driven especially by mining exports. This has been coupled with
prudent macroeconomic and financial management policies. Paradoxically,
while accounting for recent economic success, the dominance of the mining
sector renders the national economy quite vulnerable to shocks - outputs,
prices, demand and general global fluctuations.
To ensure a more robust economy, National Development Plans have

incorporated economic diversification coupled with aggressive interventions for
poverty alleviation especially in the health and education sectors.8 Efforts at
diversification have achieved modest success evidenced by strong growth in the
services sector with increases in the contribution of the sector to economic
production. The services sector contribution to GNP/GDP increased from
30.50% to 35.25% between 2000 and 2007. Expansion of the services sector
attests to a policy shift in the diversification paradigm: from diversifying
toward manufacturing to diversification toward services industries, including
tourism, financial services, telecommunications and air transport. The other
sectors targeted in NDP 9, namely poverty alleviation, health and education,
have witnessed mixed trends.
 Poverty Alleviation and Employment: the strategy for poverty reduction centers
on implementing policies and programs for economic growth and employment
creation; investing in social services and infrastructure to promote economic
growth and enhance capabilities of individuals; and providing social safety nets
to individuals unable to benefit from opportunities in the economy. National
unemployment is currently estimated at 17.6 percent, an improvement from
the 21.5 percent in 1995/96 (Labour Force Survey). Jobs have increased at a
higher rate than increases in the labour force. If this trend continues,
unemployment will likely decrease in the next years. Additionally, income
poverty has declined over time. In 1985/86, 59 percent of the population
earned incomes lower than the poverty datum line (PDL), declining to 47 and
30 percent in 1993/94 and 2002/03 respectively. There has been some progress
in reducing income poverty, but the figure of 30 percent remains high in view
of given impressive per capita GDP growth. Paradoxically, economic growth has
been accompanied by increasing inequality. Growth has benefited the non-poor
disproportionately more than the poor.
 The Health Sector: The sector has both experienced gains and suffered
reversals in recent years. Life expectancy increased to 67 years in the mid
1990s and declined thereafter to under 50 years in 2006, driven by increases in
HIV/AIDS-related mortality. From 39.25 in 2000 to 33.75 in 2006. 9 Incidence of
HIV in pregnant mothers increased from 18 percent in 1992 to a peak of 38.5
8
National Development Plans (NDP) outline the government’s development priorities for 5-6
year plan periods and the policies, programmes and projects the Government will implement
in pursuit of these priorities. In April 2003, Botswana launched the Ninth National
Development Plan (NDP 9) for 2003/04-2008/09 period. This focused on diversifying the
economy away from mineral production and exports and addressing the problems of
unemployment, poverty reduction, and HIV/AIDS. NDP 9 ends in March 2009. Development of
NDP 10, spanning April 2009 to March 2015, is underway.
9
CIA World Fact Book 2007

percent in 2000, and declined to 32.4 percent in 2006. Infant, under-five, and
maternal mortality rates generally declined prior to 2001, increasing
thereafter. In 2001, Infant Mortality Rate was 57 per 1000 births and U-5
mortality rate at 74 per 1000 births, significantly higher than the 2011 targets
of 27 and 21. Botswana registers higher child mortality rates than Lesotho,
Namibia, Swaziland and South Africa despite a higher per capita income than
the first three. If this trend continues, it is evident that the 2011 MDG-related
target will not be achieved. Under-five malnutrition rates evidenced better
consistency in terms of declining rates. In this sub-sector, the MDG-aligned
2011 target is already achieved reflecting aggressive implementation of a
supplementary feeding program.
 The Education Sector: Adult literacy rates have generally risen although there
have been reversals in recent years. In 2002, the rate stood at 80 percent,
compared to the MDG 2010 target of 90 percent. Marginal increments to the
literacy rate have decreased so that bridging the gap of 10 points over eight
years would pose a challenge. As with health indicators, Lesotho, Namibia,
South Africa, Swaziland and Zambia have higher adult literacy rates although,
until recently, education in Botswana has been free. Challenges in the sector
include the need to improve the quality of education at primary and secondary
levels, tackling the mismatch between vocational and tertiary education
curricula on the one hand and the requirements of industry on the other, and
aligning educational outputs to requirements of the labor market, with
corresponding adjustments to the curricula.
Future Directions
Despite recent economic gains, Botswana currently lags behind some of its sub-
regional neighbours with regard to development of social sectors. This is
demonstrably the case despite a smaller population size, higher gross national
products in recent years, and higher per capita incomes. Consequently, from
both regional and global perspectives, strategic repositioning toward a more
competitively advantageous position is required if is to benefit from
investments flows. Such requirements can be encapsulated into four axes based
on Brenthurst Foundation prescriptions with regard to “actions that African
nations can take to become more globally competitive and to develop faster”,
as follows:
 Good governance: ensure transparency and rule of law, and improve

regulatory oversight activities;
 Skilled labour force: institute policies to attract valuable skills in
selected priority sectors;
 Robust infrastructure: improve on trade, investment and transportation
infrastructures;
 Sustainable energy: enforce strategies to ensure cost-effective supply of
power.
(Adapted from Brenthurst Foundation, “Strengthening Africa’s Economic Performance,”
June 2007).

Democracy: From a macro perspective, Botswana is well-placed along many of
the “globally competitive” economies. Whilst recent interventions augur well,
there is a need for major improvements in the others. The country boasts the
most institutionalised democratic pluralist system in Africa, combined with
robust competitive capitalism albeit state-driven. From independence in 1966
through 2007, there have been parliamentary elections resulting in four
changes of presidential leadership; each process conducted entirely free of
violence. Additionally, over the last 10 years, the country has been ranked
among the least corrupt countries in Africa.
Education: Although the education system was neglected during colonial
period, Botswana now has a well-resourced education and training system by
African standards. Most highly skilled (and high-levelled) personnel are
(initially) trained at the University of Botswana. Total enrolments have grown
rapidly from just under 8,235 in 1997 to over 15,485 in 2007. Despite the rapid
growth, science, engineering and technology account for only 16.5% of the
2006/07 graduates.10 The university does not produce the relevant skills needed
in the banking/financial sector. Until recently, Batswana either did not have
the experience-based expertise of expatriates or those with the requisite skills
are generally not available. Enterprises are able to draw from a large pool of
experienced workers especially from South Africa and neighbouring countries.
Economy: In order to accelerate the rate of economic growth, some major
public and private sector projects are planned to be implemented in the next 5
years. One of these major projects include increasing the capacity of the
Marupule Power Station (estimated cost of USD600 million or P3.6 billion) to
600MW by the year 2010, and the construction of the Mmamabula power plant
(est. USD16 billion or P106 billion). Botswana currently imports 70% of its
electricity. Current usage is approximately 500MW of which Botswana Power
Corporation generates 120MW. It is estimated that both power plants will
generate an additional 3000 MW of power by 2013, of which a surplus of about
2000 KW available for export.
Infrastructure: It is important for Botswana (with regional partners) to develop
the inter-country infrastructure, particularly the provision of intra-community
rail, air and road links, as the catalysts for regional integration and
investments.
SUMMARY: With regard to prescription for global competitiveness for the newly
emerging economies, Botswana has been exceptional in the provisions of the
four axes discussed above. It has taken laudable steps to improve regulatory
oversight activities. The Non-Bank Financial Institutions Regulatory Authority
Bill provides for the establishment of a self-financing parastatal regulatory
authority of non-banking institutions for the purposes of enhancing their safety
and soundness. The Livestock and Meat Industries Bill seeks to bring under one
central authority the control and inspection of slaughter houses and processing
of livestock products; and the Industrial Development Bill seeks to repeal and
10
University of Botswana Enrollment Committee 2007/08

re-enact with amendments, the Industrial Development Amendment Act, which
is deemed outdated and no longer responsive to the needs of investors, have all
recently been passed. However the country’s current level and production of
skilled manpower is still inadequate to meet the needs of an expanding
financial services sector. The Botswana government need a detailed and
comprehensive human resources strategy which would focus on key growth
sectors of the economy.
The development of a labour market system for real growth is essential. With
the escalating cost of oil, it is important for the country to improve on
alternate infrastructures such as railway lines, IT (video conferencing) and air
transportation.
Although the Mmamabula project is rumoured to have been scaled down, it is
important that the project generate enough power to make Botswana self-
sufficient. There cannot be economic gains, diversification of the economy and
attraction of FDIs if ‘load-shedding’ and brown-outs become the norm.
Appendix 2
Key Concepts and Definitions

Asset management deals with money and the various ways in which it is
separated and channelled into various investment vehicles. Separation is
geared to achieving a balanced return on investments; spreading capital over
several investment vehicles to smooth out the annual rate of return, diversifies
the portfolio, and minimizes volatility as well. Asset-managing has as its main
goal, the selection of an optimal mix of investments which reaps the highest
returns for the least risks. This does not necessarily converge on a single basket
with an optimal permutation of investments. Investors have different
tolerances to risks, and therefore through expression of respective individual or
institutional preferences will end up with varying combinations of investment
vehicles, including savings accounts, insurance policies, equities, bonds,
mutual funds, bank certificates, options and futures.
The focus of this paper is on institutional as opposed to individual asset

management. Proper asset management in a well-structured financial
environment represents significant investment for a company, organization or
institution. Adequate understanding and thorough analysis of funding,
ownership, management and other issues is required for effective use of assets.
Some key components for a well-designed asset management strategy are
listed and explained below.
 Financial & Investment Objectives

A well-functioning financial system should offer a wide range of financial services
and products from a diversified set of financial intermediaries and markets. Asset
managing objectives should involve:

1. Maintaining at the minimum, assets value in real terms;
2. Producing a consistent and sustainable return that covers expenditures
and fees;
3. Delivering above value and return with acceptable levels of risk.
 Maintain Capital
The asset managing policy should delineate a strategy for capital preservation by
setting minimum attainable goals such as:
1. Protect assets by earning returns higher than current inflation rate;
2. Use inflation index that averages out the previous eight quarters in
order to neutralize temporal hiccups.
 Effective Valuation Techniques

Provisions should establish a proper and transparent basis for valuing assets agreed
on by those involved in the investment management and the beneficiaries:
1. Legal provisions should require assets to be valued for
accounting, reporting, actuarial and funding purposes. Ideally, permitted
valuation methodologies for these purposes should be consistent, and where
inconsistent, the differences in methodologies should be transparent;
2. Where current market valuations for securities are not available,
a fair value methodology should be formulated and agreed upon;
3. Special methods may be needed to value securities in less liquid markets and
assets such as real estate. The legal provisions may set out specific
methodologies for valuing such assets which should, as far as possible, take into
account the risk inherent to illiquid markets.
 Maintain a Plan Suited to Organizational Needs:

Ensure appropriate consideration is given to the most effective use of funds
available to carry out activities and that adequate provision is made for reviewing
results and adjusting plans throughout the investment term.
 Identify and Assess Risks:

Risk analysis assesses factors that influence return on investments. Careful
consideration of industry trends, market fundamentals and economic factors
reflects a portfolio’s true drivers. Investment risks stem from 5 major categories:
economic, liquidity, political, legal and environmental, and financial business &
management.11
11
Economic. Investors should analyze demand influences such as employment, income and
population; and supply influences which generally come from competition, and factor them
into their decisions.
Liquidity. This relates to an investor’s ability to convert assets into cash while preserving
capital. Generally, as liquidity risks increases, the required return rate (or premium) over
more liquid investments also increases.
Political, Legal & Environmental Risks. Investors need to monitor local, state, and federal
controls, fees and regulations because they can act as market constraints or, in some
cases, incentives. For instance, in Zambia, there is a move to nationalize companies in the

In addition to leverage, risk is inherent in loan terms, such as prepayment
penalties and variable rate clauses, which cause investors to shift or accept future
interest rate risk: lenders bear the interest rate risk on fixed-rate loans while
variable-rate loans shift the risk to borrowers.
 Credit Rating
This is frequently applied to assess credit worthiness. Ratings are based on
financial history and current assets & liabilities. At the national level, a country's
sovereign credit rating plays a decisive role in determining economic development
and attractiveness to investors. Sovereign credit ratings reflect the risk level
associated with the investment environment in a country and are potent indicators
of a country's ability to repay its (sovereign) debts. Factors that contribute
positively to analysis of credit rating include favorable microeconomic policies;
decline in debt; high economic growth; and demonstrated commitment to fiscal
policies.
The above key concepts and definitions are important to enable a proper analysis of
the processes and activities of asset managers. Questions and concerns would be
expressed in terms of compliance with the above listed guidelines. Is it intended to
show and guide policy prescriptions.
Appendix 3
Profile of Asset Managing Companies
African Alliance Botswana

This company is part of South Africa’s Brait Group which is listed in the
Johannesburg, London and Luxembourg stock exchanges. It was the first
banking group to be given two tax certificates to operate under IFSC rules: the
first for administration and management of funds outside of Botswana domestic
funds and the second for the provision of structured financing services. In 2007,
AA was removed as one of the managers of the BPOPF although all operating
criteria were seemingly met. Litigation between the company and BPOPF
trustees is ongoing. AAB’s portfolio under management is approximately
P81.963 million as of March 31st, 2008
mining sector. In Zimbabwe, farmlands are being redistributed for political reasons, in the
name of equity. These are examples of political/legal risks that investors must monitor and
factor into their projections of income, expenses, and possible capital expenditures for
compliance.
Business & Management Risks. Owners and investors have some degree of control over
business risks that are inherent in management decisions influencing an asset's cash flow
and operating expenses. These may include how the type of industry, size of company and
growth stage can change or alter risks.
Financial Risks. Financing is the only risk category in which asset managers have a great
deal of influence. They control their debt leverage, or the proportion of debt financing
used. This leverage directly affects the volatility of the cash returns to the equity position
anytime something unexpected occurs.

Allan Gray Asset Management
Allan Gray Botswana, a wholly-owned subsidiary of Allan Gray Limited, was
registered in August 2003. It started operating in February 2004 as a
freestanding, institutional investment management company specializing in
long-term wealth creation. Allan Gray Botswana offers investment management
for institutional and individual clients with at least P5 million. As of March 31 st,
2008, the company had approximately P2.9 billion total assets under
management, all offshore.
Botswana Insurance Fund Managers

The BIFM Company is 54 percent owned by Sanlam, a South Africa-based
company and 46 percent owned by shareholders of the Botswana public. BIFM
was founded in 1975 as Botswana’s first “Fund” manager. Its uniqueness as an
asset manager is that the company plays a lead role in investing in local
economic developments. BIFM is a long-standing player in the local private
equity market, effecting ground-breaking investments in Botswana enterprises.
Currently, BIFM has about P8.68 billion of assets under its management.
Coronation Fund Managers

Coronation Fund Managers (Botswana Pty) Limited is jointly owned by
Coronation Fund Managers (S.A. Pty - 51%), Botswana staff (25%), a citizen trust
(14%) and Club M10 (a group of female business professionals – 10%). The
business commenced operations in March 2005 and provides institutional clients
with investment products tailored locally and internationally. The company
currently manages approximately P2.08 billion. BPOPF Assets are managed by
Coronation Fund Managers’ offices in South Africa, Ireland and the United
Kingdom.
Fleming Asset Management

Fleming Asset Management is a locally-incorporated company founded in 1994
as Ngamiland Asset Management, and provides specialist fixed income solutions
to its clients. The initial objective of establishing the company was to fulfill a
market need for segregated portfolio management locally and internationally.
The only option previously available was pooled insurance based funds. The
flag ship company within the Fleming Group is Fleming Asset Management
Botswana which manages P5.35 bn on behalf of pension funds in Botswana.
Imara Asset Management

Botswana-registered Imara Asset Management is a subsidiary of Imara Holding
Ltd and one of Southern Africa’s leading issuer of equity capital with offices in
Gaborone, Johannesburg, Harare and London and representation in Zambia,
Malawi and Namibia. Its shares traded OTC in 2006 but are currently traded on
the BSE. In addition, Botswana-based empowerment entitles Pinnacle Africa
Group and Isago Holdings hold a strategic stake. It manages P200 million of

assets, mostly in two equity funds: the Imara Africa Opportunities Fund (IAOF)
and the Imara Global Fund (IGF). Fund management is done locally.
Investec Asset Management

The group established its presence in Botswana in 1995. Following the sale of
its securities business in a citizen-empowerment transaction in 2001 and the
sale of its banking business in November 2003, Investec now operates only an
asset management business in Botswana engaged in institutional fund
management. Twenty-four percent of its shares are owned by BDC and the rest
listed on the Foreign Companies Board of the Botswana Stock Exchange. The
company currently has approximately P8.5 billion assets under management.
Assets are managed by their global offices offshore.
Legae Investors
Formed in 2005 in Botswana, they provide investment management, advisory
and wealth management. Investment funds include money market funds, Legae
Growth and Income Fund, Global Balance Fund, Legae Crocodile Fund and the
Legae Global Equity Funds. Current assets under management are unknown and
all assets are managed offshore.
Metropolitan Asset Management

Metropolitan Botswana was established in 1996 and started operations in 1997
and offers specialized financial services. It has a dual shareholding comprising
of the Botswana Development Corporation (25%) and Metropolitan South Africa
(75%). The business has shown solid growth and Metropolitan is reported to be
now fully committed to a programme of expansion within Botswana. Assets
under management are unknown and are managed offshore.
Stanbic Investment Management
Stanbic Botswana established its investment arm, Stanbic Investment
Management Services, in 2002. Ownership is 50 percent to Standard Bank SA
and 50 percent to Liberty Company. On October 16th 2007, SIM launched its first
equity fund, Stanbic Equity Fund, for retail and institutional clients. It
currently manages P4.25 billion in assets; P200 million in retail. Assets are
managed both on and offshore. Stanbic Investing Management is a new addition
to the group of establishments that manage the BPOPF.
Appendix 4
Snap Survey for

Capacity Building for Asset Management In Botswana
The Firm

1. How long has company been in business (existence)? 0 – 1 year ___, 1-
3yrs___,
3-5yrs___, 6-9yrs___’ over 10yrs______.
2. Describe present scope of business? (Quasi) Govt.___, Large Private____,

Small
Private___, Other_______(explain).
3. Is focus” a) onshore investments___, offshore investments___,

Both___, None __
4. What is the approximate size of the company’s portfolio?
5. Can you approximate the investment breakdown in percentages?
Staff Capacity
6. How many ‘professionals’ (e.g. college degrees) in your outfit? 0-5___ 6-
10___ 11-20____ Over 21____
7. How many support (other/non-professional) staff?

0-5___, 6-10____, 11-20___, Over 21____.
8. Approximately what percentage and numbers of staff have:

Graduate deg________, Undergrad deg__________, High school
dip_________, Certificate________(specify) Other ________(specify)
7. Is management satisfied with experience/training of the professional

staff?
Mostly____, Somewhat_____, No____.
Explain areas of weakness (if not satisfied)
………………………………………………..
Explain areas of strengths (if satisfied)…………………………………………………….
8. Does organization provide further training? Yes____, No______.

Certification or Diploma after training?
9. Do staff avail themselves of other training opportunities? Yes____,

No______.
If “yes”, organized by whom?
10.Does your organization experience a large turnover? Yes____, No_____;

% _____
If yes, how would you account for this?

Future Directions
11.Indicate willingness for alternate investment vehicles.
Very____, Somewhat____, None____.
12.What is your assessment of the firm’s opportunities/strengths, and

constraints?
What are your critical needs?

Assets Management in Botswana Wealth Creation or Wealth Dissipation?

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Assets Management in Botswana Wealth Creation or Wealth Dissipation?

Загружено:

Авторское право:

Доступные форматы

ASSETS MANAGEMENT IN BOTSWANA

Wealth Creation or Wealth Dissipation?

Botswana Institute for Development Policy Analysis

November 14, 2008

Assets Management In Botswana Page III

Chapter 1.0 Introduction to Study

Chapter 2.0 Profile of the Financial Sector

Chapter 3.0 Assets Management in Botswana

Chapter 4.0 Comparative Assessment of the Financial Sector

Chapter 5.0 Prospects and Strategies for Sector Expansion

Assets Management In Botswana Page IV

Assets Management In Botswana Page V

Assets Management In Botswana Page VI

Assets Management In Botswana Page VII

The financial services sector is assuming increasing importance especially in

Assets Management In Botswana Page 9

1.2 Approach and Report Structure

Approach and Methodology

Structure of the Report

Assets Management In Botswana Page 10

Assets Management In Botswana Page 11

2.2 Financial Institutions

The Banking Sub Sector

The Non-Banking Sub Sector

Asset management companies, including African Alliance, Allan Gray, Botswana

Assets Management In Botswana Page 12

Insurance companies in Botswana include Botswana Life, Regent Life Botswana,

There are 46 Bureau de Change entities in Botswana. Most of them have

Statutory development finance institutions include the Botswana Development

2.3 Financial Environment

Monetary Policy Objectives and Instruments

- The inflation objective is to achieve a sustainable, low and predictable level of

Assets Management In Botswana Page 13

Fiscal Objectives and Instruments

Assets Management In Botswana Page 14

Mineral revenues are currently the single largest contributor to government

2.3.2 Regulation of the Financial Sector

Regulation of Banking Institutions

Assets Management In Botswana Page 15

Regulation of Non-Banking Institutions

- The Insurance Industry Act: provides the requirements for registration,

- The Collective Investment Undertakings Act: provides for the registration,

- In December 2006, Parliament approved the Non-Bank Financial Institutions

Assets Management In Botswana Page 16

Bank of Botswana Certificates

The total outstanding balance of the Bank of Botswana Certificates (BoBCs),

Shares / Company Stocks

The total number of listed companies increased from 15 in 1999 to 16 in 2001.

Assets Management In Botswana Page 17

Cash / Bank Deposits

Assets Management In Botswana Page 18

Graph 2.1 Commercial Bank Deposits by Type

Source: Bank of Botswana Financial Statistics, 2008

The Fund Markets

Assets Management In Botswana Page 19

2.5 Summary Profile of Financial Sector

Assets Management In Botswana Page 20

3.1. Assets and Asset Managing Companies

Asset management in Botswana has expanded from a small base to reach a

Chapter 3 reviews patterns and trends in assets management and analyses

The Botswana Public Officers Pensions Fund

Assets Management In Botswana Page 21

(Source: BPOPF Trustee Reports 2001 – 2006)