## 1bwaea2024004 ## Source details **Canonical URL:** [1bwaea2024004](https://www.imf.org/-/media/files/publications/cr/2024/english/1bwaea2024004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1bwaea2024004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1bwaea2024004.pdf.json) --- ### Executive summary and high-level findings - Supervisory powers remain underdeveloped; the current Banking Act was adopted in 1995 and lacks provisions for consolidated supervision, major acquisitions, and changes in significant shareholding. - Regulatory framework needs more frequent and comprehensive review to keep pace with changing industry and regulatory practice. - Need to align regulation closer with recent Basel norms and guidance in risk management areas specified below. - Supervision tools, methodologies, and guidance need augmentation to make supervision more forward-looking and effective; the planned revision of the Banking Act should address gaps and support more intrusive supervision. - Legislative changes recommended to safeguard operational independence, including removal of certain ministerial powers (e.g., ministerial approvals and powers to overrule BoB decisions on license appeals) and reconsideration of Government/Ministries representatives on the BoB Board. - BSD has experienced staff but is under-resourced and lacks specialized risk expertise (liquidity, market risk, IRRBB, IT); additional risk specialists needed. - Supervisory methodology and bank rating framework need review for forward-looking risk assessment and shorter onsite examination cycles. ### Institutional and market structure - BoB objectives: promote and maintain price stability; contribute to stability of the financial system; foster and maintain a stable, sound and competitive market-based financial system. - Supervisory perimeter: commercial banks, statutory banks, bureaux de change, one deposit-taking microfinance institution (Women’s Finance House). - Mission dates and contacts: - BCP assessment conducted in Gaborone, Botswana from October 12 – November 2, 2022. - Engagements with BoB departments, NBFIRA, FIA, Bankers Association of Botswana, Botswana Accountancy Oversight Association, selection of commercial and statutory banks. - Key institutional arrangements: - Financial Stability Council launched February 2019 (MoU governed); chaired by Governor; BoB acts as secretariat. - Credit Information Act, 2021 mandates Bank to regulate credit bureaus; four credit bureaus engaged. ### Key statistics and banking sector structure (as at December 2021) - Banking sector size relative to GDP: - Ratio of banking assets to GDP: decreased from 65.2 percent in 2020 to 61.0 percent in 2021. - Access: - Ratio of number of depositors to adult population: increased from 76.9 percent to 78.9 percent between 2020 and 2021. - Industry aggregates: - Total assets increased by 5.2 percent from P103.3 billion in 2020 to P108.6 billion in 2021. - Loans and advances grew by 5.1 percent from P65.6 billion to P68.9 billion. - Customer deposits grew by 4.8 percent from P80.5 billion in 2020 to P84.4 billion in 2021. - Deposits constituted 77.7 percent of total liabilities as at end 2021. - Table 1 key figures (exact): - Banking Sector: 13 — 115,879 — 42.3 — 61.0 - Commercial Banks: 10 — 107,452 — 39.2 — 56.6 - Statutory Banks: 2 — 4,278 — 1.6 — 2.2 - Building Societies: 1 — 4,149 — 1.5 — 2.2 - Non-Bank Sector: 786 — 158,207 — 57.7 — 82.2 - Life Insurance: 8 — 18,321 — 6.7 — 9.6 - General Insurance: 12 — 2,514 — 0.9 — 1.3 - Re-Insurer: 4 — 536 — 0.2 — 0.3 - AUM for Retail and Private ... — — 7,346 — 2.7 — 3.9 - Retirement Funds: 87 — 117,549 — 42.9 — 61.9 - Capital Markets: 37 — 721 — 0.3 — 0.4 - Microlenders (Top 20): 20 — 6,316 — 2.3 — 3.7 - Others: 618 — 4,904 — 1.8 — 1.1 - Grand Total: 799 — 274,086 — 100.0 — 143.2 ### Financial intermediation, profitability and funding (selected metrics) - Financial intermediation ratio: - Increased marginally from 81.4 percent in December 2020 to 81.7 percent in 2021. - Capitalization: - Aggregate unimpaired capital declined by 2.7 percent from P14 billion in 2020 to P13.6 billion in 2021. - Asset quality and provisioning: - Total past due loans decreased by 8.3 percent from P3.9 billion in 2020 to P3.6 billion in 2021. - NPLs increased by 3.5 percent from P2.8 billion to P2.9 billion. - NPLs to total loans and advances: decreased from 4.3 percent in 2020 to 4.2 percent in 2021. - Specific provisions decreased by 3.4 percent from P1.71 billion in 2020 to P1.65 billion in 2021. - Specific provisions to NPLs ratio: decreased from 60.7 percent in 2020 to 56.6 percent in 2021. - Ratio of banks’ large exposures to unimpaired capital increased from 149.7 percent in 2020 to 179.7 percent in 2021 (below 800 percent prudential maximum). - Profitability and efficiency: - Net after-tax profit increased by 25 percent from P1.5 billion for 12 months to December 2020 to P1.8 billion in 2021. - Aggregate return on equity increased from 12.9 percent to 16.9 percent. - Return on average assets increased from 1.4 percent to 1.7 percent. - Cost-to-income ratio fell slightly to 60.3 percent from 61 percent. - Liquidity and deposits: - Liquid assets to total deposits ratio (LAR): 16.6 percent as of December 31, 2021 (above 10 percent minimum), down from 19.1 percent in 2020. - Statutory liquid assets declined by 9.1 percent from P15.4 billion in 2020 to P14 billion in 2021. - Long-term deposits: 52 percent of total deposits; short-term deposits: 48 percent. ### Macro backdrop and AML/CFT developments - Macroeconomic growth: - Domestic economy expanded by 11.4 percent over twelve months to December 2021 (BoB Financial Stability Report of May 22, 2022). - Real GDP projected to expand by 4.3 percent in 2022 and 4.2 percent in 2023. - BoB expects inflation to fall within the 3–6 percent target range by the first quarter of 2023. - AML/CFT: - FATF removed Botswana from enhanced-monitoring at October 2021 plenary; EU removed Botswana from EU blacklist on January 7, 2022. - FATF measures regarding AML/CFT risk-based supervision remain not effective since latest Mutual Evaluation Report and first Follow-up Report from April 2019; continuing compliance crucial. - STRs submitted by banks to FIA are transmitted to BoB semi-annually; FIA implemented goAML; mission noted the number of STRs appeared low relative to size and risk profile. ### Legal, institutional and supervisory framework — core deficiencies - Principal objective and mandate: - Section 4(1) of BoB Act sets principal objectives broader than safety-and-soundness; assessment: Materially non-compliant. - Banking Act shortcomings: - Last revised in 1995; has not been comprehensively updated; lacks provisions for consolidated supervision (CP12), corporate governance (CP14), related-party transactions (CP20), change of control (CP6), and major acquisitions (CP7). - Operational independence: - Multiple legislative provisions may impede independence (ministerial powers to overrule license appeals, ministerial approvals, ministerial representatives on BoB Board); no legal protection for supervisors against legal costs; assessment of Principle 2: Materially non-compliant. - Supervisory powers and practice: - Powers exist in law (Sections 11, 13–17, 33–34) but largely moral suasion used in practice; prudential requirements applied uniformly across banks irrespective of risk/systemic importance. - Planned new Banking Act and D-SIB framework expected to strengthen powers; but gaps remain. ### Licensing, significant ownership and major acquisitions - Licensing: - Section 3(1) authorizes BoB to grant banking licences; application processed within 6 months; application fee P15 000 (VAT exclusive). - Assessment of owners/directors uses fit-and-proper checks; weakness: ultimate beneficial owner assessments do not go behind corporate structures to individuals. - Over last five years, BoB received four domestic bank license applications: two withdrawn, one rejected, one granted conditional approval. - Significant ownership (CP6): - Banking Act has no definition of significant ownership; BoB relies on Guidelines on Significant Shareholding with thresholds at "5 percent", "20 percent", "33" and "50 percent"; over "50 percent" a control change is assessed. - No primary legislation requirement to obtain BoB approval for change of control; notification mainly at initial licensing stage; assessment: Materially non-compliant. - Banking Bill Section 21(2)–(4) would empower BoB to reject and reverse unauthorized changes, but unresolved legal enforceability issues remain. - Major acquisitions (CP7): - Primary legislation does not provide a clear framework for major acquisitions; BoB uses licensing framework and draft Guidelines on Mergers & Acquisitions await enactment; assessment: Materially non-compliant. ### Supervisory approach, tools, reporting and SREP (Principles 8–11) - Risk-based supervision: - RBS in place since January 2015; hybrid approach combining CAMEL and qualitative risk matrix across eight risk categories; onsite cycle up to "three-year cycle" (with risk-based shorter cycles for riskier banks). - Offsite returns submitted daily, weekly, monthly, quarterly, annually. - Supervisory gaps: - Need for quality assurance, back-testing, increased forward-looking analysis, and differentiation for systemically important banks. - ICAAPs submitted annually since 2019 but supervisors have not required additional Pillar 2 capital; recommendation to develop Pillar 2 methodologies and use ICAAPs in SREP. - Onsite cycle often too long; in several cases last full-scope onsite examination was approximately four to five years. - Automated validation/MIS lacking historically; FIS Global MIS project scheduled for completion late 2022. ### Capital adequacy (Principle 16) — framework and metrics - Capital framework: - Largely aligned with Basel; minimum prudential capital requirement set higher than Basel (historical minimum 15 percent, reduced to 12.5 percent during COVID; Basel norm 8 percent). - Minimum CET1: 4.5 percent; Additional tier 1: 3 percent; minimum Tier 1: 7.5 percent (4.5 + 3). - No banks use advanced internal models; standardized approaches used for credit risk; basic indicator approach for operational risk. - System metrics (as at end December 2021): - Average CET1 ratio: 12.0 percent. - Average Tier 1 ratio: 12.5 percent. - Total capital adequacy ratio: 18.5 percent. - Tier 2 capital comprises about 32 percent of total regulatory capital. - System-level Tier 2 proportion range: "18.8 to 46.5 percent of total regulatory capital." (range noted in source) - Recommendations: - Develop methodologies to assess Pillar 2 risks (concentration risk, IRRBB, liquidity risk) and consider linking higher minimum capital to Pillar 2 risks. - Reduce reliance on Tier 2 capital to improve capital quality. ### Credit risk, problem assets, provisioning and related supervisory shortcomings (Principles 17–18) - Credit risk framework broadly in place (board-approved policies, credit policy minimum content, stress testing expectations). - Problem assets and provisioning — assessed as Materially non-compliant: - Banks implement IFRS 9; BoB prudential norms act as a backstop but lack explicit enforceable prudential provisioning backstop. - Extensive use of internal IFRS 9 models raises data and model risk concerns; supervisors lack sufficient skills to assess models. - Offsite data insufficiently granular (missing borrower-level NPL details, collateral details, NPL aging beyond 12 months). - Supervisory guidance on eligible collateral, valuation, haircuts and governance needs improvement. - BoB internal guideline expected provisioning levels: 1 percent for performing, 20 percent substandard, 50 percent doubtful, 100 percent loss — but not formal prudential minima. - Supervisory recommendations: - Revise regulatory framework, offsite reporting, supervisory guidance; undertake periodic system-level analyses (e.g., semi-annual) of trends and concentrations in problem assets. ### Concentration risk and large exposures (Principle 19) - Large exposure definitions and limits: - Large exposure threshold: 10 percent of unimpaired capital. - Single/group counterparty limit: 30 percent of unimpaired capital. - Aggregate large exposures limit: 800 percent of unimpaired capital. - System observations: - Aggregate large gross exposure ~95 percent of total regulatory capital (138 percent of Tier 1 capital). - Range for individual banks: aggregate large gross exposure 11 to 165 percent of total regulatory capital (15 to 329 percent of Tier 1 capital). - Effective prudential single counterparty limit (relative to Tier 1) approximately 44 percent due to material Tier 2 capital — significant deviation from Basel 25 percent of Tier 1. - Assessment: Materially non-compliant. - Recommendations: - Broaden concentration supervision to industry, geographic, collateral, product and market concentrations; consider aligning single counterparty limit to Basel norm and avoid routine exemptions. ### Related-party exposures and transactions (Principle 20) - Key gaps (summary): - Definition of exposure to related parties excludes exposure through placements and investment. - Definition of related parties incomplete relative to Basel. - No comprehensive definition of related party transactions for prudential purposes. - No prudential limits on aggregate related party exposures (no explicit deduction from capital for excesses). - Gaps in governance, reporting and write-off reporting for related-party transactions. - System-level data (as at end December 2021): - Gross exposure to related parties: 4.6 percent of total regulatory capital (unimpaired capital). - Net exposure: 1.3 percent. - Range across individual banks gross exposure: 0.4 to 12.3 percent; net: zero to 8.8 percent. - Assessment: Materially non-compliant. - Recommendations: - Comprehensive revision of regulations, offsite reporting and supervisory guidance to align with Basel Core Principle requirements. ### Country and transfer risk (Principle 21) - Current status: - BoB guideline requires banks to have policies and procedures for country and transfer risks. - Gaps and assessment: - Missing grading, provisioning and “ultimate risk” perspective requirements. - Banks do not include country/transfer risks in ICAAP; offsite reporting not established for these exposures. - Assessment: Materially non-compliant. - Recommendations: - Issue explicit regulations and guidance on grading, provisioning and ultimate risk approach; require prudential reporting and supervisory changes. ### Market risk and IRRBB (Principles 22–23) - Market risk exposures small: "0.01 percent to 2.5 percent of total risk-weighted assets as at end-June 2022"; all except two banks below 0.5 percent. - Supervisory gaps: - Need clearer guidance on trading book, marking to model, derivatives, stress testing. - IRRBB measurement needs clarity with reference to economic value impact on equity; banks not fully compliant with measurement techniques; supervisors need tools to assess IRRBB and validate ICAAP inputs. - Recommendations: - Improve offsite reporting, supervisory tools, guidance and training for market risk and IRRBB supervision. ### Liquidity risk (Principle 24) — assessment and recommended enhancements - Legal liquidity requirement: - Section 16(2): maintain daily eligible liquid assets equal to 10 percent of deposit liabilities. - LAR observed at 16.6 percent (Dec 31, 2021); range across banks 14 to 21.3 percent. - Gaps and assessment: - LAR is a stock measure; does not capture flow-based liquidity gaps, foreign-currency specific liquidity, or off-balance sheet commitments. - Intermediation ratio (loans to deposits) ~82 percent system-level (range 63 to 107 percent); no prudential limit though supervisors engage banks above 80 percent. - Top-20-depositor concentration average ~39 percent as at end June 2022; no formal prudential thresholds. - Assessment: Materially non-compliant. - Recommendations: - Introduce flow-based liquidity measures, supervisory thresholds for intermediation and deposit concentration ratios, currency-level liquidity monitoring, enhanced reporting, and supervisor guidance. ### Operational risk, outsourcing, MIS and cybersecurity (Principle 25) - Operational risk framework (BoB Guidelines, Section 8, 2018) sets comprehensive expectations: event/loss databases, BCP/DRS, MIS, IT governance, outsourcing controls. - Supervisory gaps: - No formal sector-level mandatory reporting of operational risk events and losses; reliance on banks’ internal records and auditors. - Outsourcing guidance exists in practice but not always formalised; BoB not explicitly required banks to seek approval for outsourcing though banks do so in practice. - Cybersecurity guideline in advanced stage. - Assessment: Largely compliant. - Recommendations: - Issue explicit regulations on outsourcing, cybersecurity and operational resilience; require structured reporting of operational risk events and losses; formalise supervisory guidance and training. ### Corporate governance, internal control and external audit (Principles 14, 26–27) - Corporate governance: - Material deficiencies: laws/regulations do not explicitly assign board/senior management responsibilities, do not mandate nomination/remuneration/risk committees, nomination procedures unclear, BoB lacks clear power to remove a board or director for poor performance. - Draft Banking Bill and corporate governance guideline expected to address some gaps; BoB approved Guidelines on Corporate Governance in November 2022 (post-assessment). - Assessment (Principle 14): Materially non-compliant. - Internal audit and controls: - Frameworks exist; internal audit should be risk-based and independent; supervisors recommend explicit risk-based audit requirement and review of control staffing/skills; Assessment: Largely compliant. - External audit and reporting: - Section 22(7) requires auditors to report breaches/fraud/large losses to BoB; BoB trilateral/bilateral engagement with auditors annual. - Gap: laws do not explicitly empower BoB to reject/rescind appointment of external auditor or access auditors’ working papers. - Assessment (Principle 27): Compliant with recommendations to seek power amendments. ### Reporting and disclosure (Principle 28) - Banks must submit and publish audited financial statements; Pillar 3 disclosures required annually (capital quarterly disclosures). - BoB publishes monthly Botswana Financial Statistics and Annual Banking Supervision Report. - Assessment: Compliant. - Recommendation: consider additional disclosures on average exposures/turnover and explicit disclosures aligned to corporate governance and related-party prudential expectations. ### AML/CFT supervision (Principle 29) - Legal basis: FI Act (2022) and BoB supervisory mandate for AML/CFT. - Supervisory practice: - Dedicated BSD team (four staff) performs AML/CFT onsite/offsite analysis; FI Act obligations enforced; goAML used by FIA; STRs conveyed semi-annually to BoB. - Risk-based tool and AML/CFT data template under development and being implemented. - Gaps and assessment: - Implementation of risk-based supervision incomplete; STR reporting frequency and interpretation of five-day reporting threshold need clarification. - Assessment: Materially non-compliant. - Recommendations: - Increase frequency of AML/CFT data, fully implement risk-based supervisory tool, strengthen sharing of risk information between BSD and AML/CFT staff, and clarify STR reporting legal interpretations. ### Consolidated supervision, home-host cooperation and resolution (Principles 12–13) - Consolidated supervision: - Banking Act does not provide for consolidated supervision; draft Banking Bill and Guidelines on Supervision of Financial Conglomerates pending enactment. - One bank commenced consolidated reporting January 2022. - Assessment: Materially non-compliant. - Home-host: - BoB actively participates in supervisory colleges and has MoUs with most home supervisors; participation effective but limited ongoing bilateral coordination outside colleges. - BoB is home supervisor for one bank as of mid2022. - Resolution and recovery: - No formal group-level resolution plans for banks supervised by BoB; D-SIB framework designates "two banks are D-SIBs" and includes resolution design; Banking Act under revision to include explicit resolution planning provisions. ### Summary of major recommendations (condensed) - Revise Banking Act to: define significant shareholding; provide consolidated supervision powers; include major acquisitions and change-of-control provisions; reduce ministerial interference; provide legal protections for supervisory staff; enable access to auditors’ working papers and power over external auditors. - Strengthen BSD resourcing and specialist skills (liquidity, market risk, IRRBB, IT/cyber). - Enhance supervisory methodology: quality assurance, SREP using ICAAPs, forward-looking stress-testing, more frequent onsite cycles (esp. newly licensed banks within 12 months), automated MIS and validation. - Improve prudential frameworks: introduce flow-based liquidity metrics, formal thresholds for intermediation and deposit concentration ratios, clearer IRRBB and market risk guidance, explicit prudential provisioning backstops to IFRS 9, comprehensive related-party rules and limits, and concentration limits aligned with Basel norms. - Formalise AML/CFT risk-based supervision, increase STR data frequency, and improve cooperation with FIA and other domestic supervisors. - Issue detailed supervisory guidance on corporate governance, outsourcing, operational risk event/loss reporting and cybersecurity; expand supervisory training and capacity building. *Source: 1bwaea2024004 - INTRODUCTION (IMF country report excerpts on Botswana, chapter/section).* ### INTRODUCTION _________________________________________________________________________________ 8 ### INTRODUCTION ### EXECUTIVE SUMMARY - Despite significant progress since the last assessment in 2007, supervisory powers remain underdeveloped; the current Banking Act was adopted in 1995 and lacks provisions for consolidated supervision, major acquisitions, and changes in significant shareholding. - Need for more frequent and comprehensive review of the regulatory framework to keep pace with changing industry and regulatory practice. - Regulatory framework needs updating to align closer with recent Basel norms, guidance, and principles, particularly in the risk management areas specified below. - Supervision tools, methodologies, and guidance to supervisors need augmentation to make supervision more forward-looking and effective; the planned revision of the Banking Act should address gaps and support more intrusive supervision. - Legislative changes are needed to safeguard operational independence, including removal of certain ministerial powers that may interfere with the Bank of Botswana’s (BoB) operational independence (e.g., ministerial approvals and powers to overrule BoB decisions on license appeals); Government/Ministries representatives on the BoB Board should be reconsidered. - The Banking Supervision Department (BSD) has experienced and committed staff but is under-resourced and lacks risk expertise in areas including liquidity, market risks, interest rate risk in the banking book (IRRBB), and information technology; additional risk specialists are needed. - Supervisory methodology and bank rating framework require review to enable forward-looking risk assessment; existing structured approach to onsite examinations and offsite surveillance needs greater use of qualitative inputs and a shorter onsite examination cycle. - Capital adequacy framework largely aligned with Basel and proportionate; minimum capital requirements are set significantly higher than under the Basel framework. - As at end December 2021, average CET1 ratio: 12.0 percent. - As at end December 2021, average Tier 1 ratio: 12.5 percent. - As at end December 2021, total capital adequacy ratio: 18.5 percent. - Tier 2 capital represents about 32 percent of total regulatory capital. - All banks submit ICAAP assessments annually; BoB has not yet required additional Pillar 2 capital. BoB should develop supervisory methodologies to assess Pillar 2 risks (e.g., concentration risk, IRRBB, liquidity risk) and the additional capital banks might need to hold. - Supervisory approach to problem assets, provisions, and reserves needs revision; reliance on IFRS 9 and external auditors plus use of banks’ internal models for provisioning creates supervisory challenges due to data and model risks; absence of prudential backstop for provisioning weakens oversight. - BoB prudential norms for credit classification act as a backstop to accounting standards but guidance on eligible collateral, valuation, and governance needs improvement. - Regulation and supervision of related-party transactions need substantial improvement; definitions, prudential exposure limits, and governance requirements are not fully aligned with Basel. - Country and transfer risk supervision requires explicit establishment; BoB regulation requires bank policies but is missing elements such as grading and provisioning of country risk. - Key risk areas needing significant improvement and clarification of BoB expectations: credit concentration, IRRBB (measurement with reference to economic value impact on equity), market risk (trading book, marking to model, derivative activities, stress testing), and operational risk (outsourcing, operational risk event and loss database). - Liquidity risk management guidance needed: while banks meet the liquid assets ratio (a stock measure), maturity mismatch and deposit concentration create stress; intermediation ratio and deposit concentration ratio are monitored but lack formal supervisory thresholds; recommendation to introduce flow-based liquidity measures, supervisory thresholds, and enhanced reporting. - Material deficiencies in corporate governance regulations: board and senior management responsibilities are not explicitly established in regulations; risk, nomination and remuneration committees are not mandated even for large banks; nomination process for board members is unclear; BoB lacks clear power to remove a board member or entire board for poor performance. Some deficiencies expected to be addressed through proposed Banking Bill and draft corporate governance regulation, but additional supervisory guidance is needed. ### INTRODUCTION (ASSESSMENT MISSION) - The BCP assessment was conducted in Gaborone, Botswana from October 12 – November 2, 2022. - Mission engagements: - Met with various departments of the BoB involved in supervision and regulation, and financial stability. - Met with Non-bank Financial Institutions Regulatory Authority (NBFIRA) and Financial Intelligence Agency (FIA). - Met with external stakeholders including Bankers Association of Botswana, Botswana Accountancy Oversight Association, and a selection of commercial and statutory banks. - Assessors received full cooperation and all information necessary; authorities provided comments on a draft version and these are reflected in the final assessment. ### INSTITUTIONAL AND MARKET STRUCTURE—OVERVIEW - BoB objectives: promote and maintain price stability, contribute to stability of the financial system, and foster and maintain a stable, sound and competitive market-based financial system. - BoB established the Banking Supervision Department with a mandate to promote and maintain a safe, stable, sound, efficient and competitive banking system. - Legal and regulatory instruments guiding BoB supervision: Bank of Botswana Act, 1996 (BoB Act); Banking Act, 1995 (Cap. 46:04); Banking Regulations of 1995; Bureaux de Change Regulations of 2004; and relevant directives, policies and guidelines issued pursuant to the Banking Act. - BoB promotes market integrity, competition, fair-trading practices, and high governance standards through consultation and open communication with market participants. - Supervisory perimeter: BoB regulates and supervises commercial banks, statutory banks, bureaux de change, and one deposit-taking microfinance institution (Women’s Finance House). - As of December 31, 2021: - Number of licensed commercial banks decreased from nine to eight following the exit of Bank SBI (Botswana) Limited. - Statutory banks remained at three. - Bureaux de change decreased from 58 in December 2020 to 53 in December 2021 (two new licenses issued; seven licenses revoked—six voluntary closures; one failure to comply with regulations). - Eight bureaux de change were granted permission to temporarily cease business citing COVID-19 effects. - NBFIRA role: regulate and supervise non-bank financial institutions to foster safety and soundness, high standards of conduct, fairness, efficiency and orderliness, financial stability, and reduction/deterrence of financial crime. - Business Conduct and Bureaux de Change Supervision Division in BSD is responsible for consumer protection relating to market conduct of banks; there is a market conduct operating manual and guidelines/directives on disclosure and transparency. BoB and Competition and Consumer Authority (CCA) coordinate via periodic meetings to minimize regulatory arbitrage. - FIA mandate: central agency to request, receive, analyse and disseminate disclosures of financial information concerning suspicious transactions to investigatory or supervisory authorities to counter financial offenses and financing of terrorism and proliferation; FIA coordinates AML/CFT/CPF activities, conducts research on trends, and educates the public. ### KEY STATISTICS AND STRUCTURE OF FINANCIAL SYSTEM (as at December 2021) - Banking sector size relative to GDP: - Ratio of banking assets to GDP decreased from 65.2 percent in 2020 to 61.0 percent in 2021. - Access to banking services: - Ratio of number of depositors to adult population increased from 76.9 percent to 78.9 percent between 2020 and 2021. - Banking industry aggregates: - Total assets for the banking industry increased by 5.2 percent from P103.3 billion in 2020 to P108.6 billion in 2021. - Loans and advances grew by 5.1 percent from P65.6 billion to P68.9 billion. - Customer deposits grew by 4.8 percent from P80.5 billion in 2020 to P84.4 billion in 2021. - Deposits constituted 77.7 percent of total liabilities as at end 2021. - Table 1. Botswana: Structure of Financial System (as at December 2021) — key figures exactly as presented: - Financial Institutions: Number of Institutions — Assets in (in BWP millions) — Percent of Total Assets — Percent of GDP - Banking Sector: 13 — 115,879 — 42.3 — 61.0 - Commercial Banks: 10 — 107,452 — 39.2 — 56.6 - Statutory Banks: 2 — 4,278 — 1.6 — 2.2 - Building Societies: 1 — 4,149 — 1.5 — 2.2 - Non-Bank Sector: 786 — 158,207 — 57.7 — 82.2 - Life Insurance: 8 — 18,321 — 6.7 — 9.6 - General Insurance: 12 — 2,514 — 0.9 — 1.3 - Re-Insurer: 4 — 536 — 0.2 — 0.3 - AUM for Retail and Private ... — — 7,346 — 2.7 — 3.9 - Retirement Funds: 87 — 117,549 — 42.9 — 61.9 - Capital Markets: 37 — 721 — 0.3 — 0.4 - Microlenders (Top 20): 20 — 6,316 — 2.3 — 3.7 - Others: 618 — 4,904 — 1.8 — 1.1 - Grand Total: 799 — 274,086 — 100.0 — 143.2 *Source: 1bwaea2024004 - INTRODUCTION* ### 9. The average financial intermediation ratio for the banking industry increased ### 9. The average financial intermediation ratio for the banking industry increased ### Financial intermediation and sector size - The average financial intermediation ratio increased marginally from 81.4 percent in December 2020 to 81.7 percent in 2021. - Banks sustained their intermediation role and were able to retain and attract customers despite the negative effect of the coronavirus disease (COVID-19) pandemic. - Core indicators show the banking sector remains relatively small in relation to gross domestic product (GDP). - Digital transformation, product innovation, changing consumer demands, and improvements in financial infrastructure have the potential to contribute to financial sector growth. ### Capitalization and prudential compliance - Aggregate unimpaired capital for the banking industry declined by 2.7 percent from P14 billion in 2020 to P13.6 billion in 2021. - All banks reported capital adequacy and common equity Tier 1 capital ratios above the prudential minimum limits of 12.5 percent and 4.5 percent, respectively. ### Asset quality and provisioning - Total past due loans decreased by 8.3 percent from P3.9 billion in 2020 to P3.6 billion in 2021. - Non-performing loans (NPLs) increased by 3.5 percent from P2.8 billion to P2.9 billion. - The ratio of NPLs to total loans and advances decreased from 4.3 percent in 2020 to 4.2 percent in 2021. - Specific provisions decreased by 3.4 percent from P1.71 billion in 2020 to P1.65 billion in 2021. - Specific provisions to NPLs ratio decreased from 60.7 percent in 2020 to 56.6 percent in 2021. - The ratio of banks’ large exposures to unimpaired capital increased from 149.7 percent in 2020 to 179.7 percent in 2021, remaining below the 800 percent prudential maximum limit for banks in Botswana. - COVID-19 relief measures (6-month loan moratoriums, loan restructurings, guaranteed loans) and similar measures by non-bank financial institutions may have delayed asset quality deterioration and affected short-term profitability. ### Profitability and efficiency - Banking industry net after-tax profit increased by 25 percent from P1.5 billion for the 12 months to December 2020 to P1.8 billion in the corresponding period in 2021. - Aggregate return on equity increased from 12.9 percent to 16.9 percent between the two periods. - Return on average assets increased from 1.4 percent to 1.7 percent. - Banking profits have trended downwards over the last three years due to increased operating costs from technology investments and subdued income from a low interest-rate environment. - The banking industry’s cost-to-income ratio fell slightly to 60.3 percent from 61 percent. ### Liquidity and deposit structure - Liquid assets to total deposits ratio (LAR) was 16.6 percent as of December 31, 2021, above the 10 percent minimum prudential requirement, down from 19.1 percent in 2020. - Statutory liquid assets declined by 9.1 percent from P15.4 billion in 2020 to P14 billion in 2021. - Long-term deposits constituted 52 percent of total deposits; short-term deposits accounted for 48 percent of total deposits. - If sustained, the shift toward long-term deposits could ease the sector’s maturity mismatch risk. ### Credit, deposits, and interest costs - Annual growth in bank credit was 5.1 percent in 2021 compared with 4.4 percent in 2020. - Customer deposits grew annually by 4.7 percent in 2021. - Average cost of deposits ratio was unchanged at 1.9 percent between 2020 and 2021. - Asset quality improvement is reflected in the decrease of NPLs to total loans and advances from 4.3 percent in 2020 to 4.2 percent in 2021. ### AML/CFT developments and external listings - At its October 2021 plenary meeting, the Financial Action Task Force (FATF) determined that Botswana had strengthened its anti-money laundering and combating the financing of terrorism and proliferation regime and addressed related technical deficiencies; FATF removed Botswana from the list of countries subject to FATF enhanced-monitoring. - The European Union (EU) removed Botswana from the EU blacklist of high-risk third countries on January 7, 2022. - Expected effects of removal from the grey list and EU blacklist: positive effect on the domestic financial system and broader economic development; restoration of reputation as a transparent and credible investment destination; reduced cost of correspondent banking relationships and improved access to global markets. - The FATF measures regarding AML/CFT risk-based supervision of financial institutions remain not effective since the latest Mutual Evaluation Report and first Follow-up Report from April 2019; continuing compliance is crucial to minimize the risk of adverse listing. ### Macroeconomic and monetary policy preconditions - According to BoB’s Financial Stability Report of May 22, 2022, over the twelve months to December 2021, the domestic economy expanded by 11.4 percent, compared with a contraction of 8.7 percent in the same period in 2021. - Real GDP is projected to expand by 4.3 percent in 2022 and 4.2 percent in 2023. - Key inputs supporting growth projections: accommodative monetary conditions; reforms to improve the business environment; Government interventions against COVID-19 (including vaccine roll-out); implementation of the Economic Recovery and Transformation Plan (ERTP) and the Industry Support Facility (ISF). - Macroeconomic risks: economic and price effects of the Russia-Ukraine war, COVID-19 profile and containment measures, and associated supply disruptions. - Monetary policy framework: price stability as main goal; indirect policy instruments; forecasting framework; regular Monetary Policy Committee meetings; annual Monetary Policy Statement released in February and Mid-Term Review in mid-year. - Botswana operates a crawling peg arrangement; a new monetary policy rate was introduced to strengthen monetary transmission. - BoB expects inflation to fall within the 3–6 percent target range by the first quarter of 2023. - Authorities are considering further rate increases but note much inflation reflects higher import prices and that the non-diamond economy is still recovering. ### Institutional framework and supervisory preconditions - Financial Stability Council launched February 2019, comprising leadership of the Ministry of Finance, the BoB, Non-Bank Financial Institutions Regulatory Authority, and Financial Intelligence Agency (FIA). - Regulators pursue intermediate objectives including: minimizing excessive credit growth and leverage; mitigating maturity mismatches and market illiquidity; controlling structural vulnerabilities from interlinkages; limiting exposure concentrations from D-SIFIs; reducing systemic impact of misaligned incentives; monitoring systemic risks outside the banking system; strengthening resilience to aggregate shocks. - Legal and business services supporting supervision: Competition and Consumer Authority; court system with Court of Appeal, High Court and Industrial Court, Magistrates Courts, Customary Courts and lower customary courts; Institute of Internal Auditors; Statistics Botswana. - Bank of Botswana (BoB) powers to take corrective action derive from Sections 11 and 33–34 of the Banking Act. - Credit information framework: Credit Information Act, 2021 mandates the Bank to regulate credit bureaus; four credit bureaus engaged under the CI Act: Credit Reference Botswana (Pty) Limited; Experian Botswana; TransUnion Botswana; Micro Finance Credit Botswana. - BoB capability: analysis of key economic policy issues, statistical collection, and research focused on core mandate including monetary policy and exchange rate policy. ### Detailed assessment methodology and key supervisory shortcomings - Assessment grading scale: compliant; largely compliant; materially noncompliant; non-compliant; “not applicable” in certain circumstances. - The BoB opted to be assessed against essential and additional criteria but graded only with reference to essential criteria. - Main finding on legal powers: - The Banking Act (implemented in 1995) has not been sufficiently updated to reflect international regulatory and supervisory developments and lacks provisions on consolidated supervision, corporate governance, risk management, transactions with related parties, change of control, and supervisory review processes. - BoB lacks adequate powers for effective supervision; recent passage of the BoBAA is a start of necessary reforms. - Prudential requirements for capital and liquidity are applied uniformly across banks in practice, despite BoB’s power to set requirements based on risk profile and systemic importance. - Planned implementation of a new D-SIB framework and revisions to the Banking Act are expected to strengthen BoB powers. - Operational independence concerns: - Multiple legislative provisions may impede BoB operational independence, including ministerial powers to overrule decisions on banking license appeals and ministerial approval requirements that could interfere with independence. - Ministerial representatives sit on the BoB Board; no legal protection for supervisors against legal costs. - Sections 15(2) to (5) of the Banking Act outline removal circumstances for the Governor and Deputy Governors but do not require public disclosure of reasons for removal. - The Banking Bill under consideration does not address appointments or removals of Governors and Deputy Governors (these provisions would be in the BoB Act), leaving concerns unaddressed after enactment. *Source: IMF country report excerpt on Botswana (chapter 9).* ### 31. The primary legislation does not specify the BoB’s primary responsibility for promoting ### 31. The primary legislation does not specify the BoB’s primary responsibility for promoting ### Legal framework and institutional objective - The primary legislation does not specify the BoB’s primary responsibility for promoting safety and soundness of banks and the banking system. - The Banking Act specifies a broader suite of objectives which are not subordinated to the primary objective of safety and soundness, resulting in potential conflicts for the BoB. ### Principle 3 — Cooperation and coordination - Effective cooperation and coordination are important given the structure of the banking system with "eight of nine commercial banks subsidiaries of foreign banks." - Domestic arrangements exist (the FSC with MoUs executed with all participants). - Cooperation and coordination at foreign supervisor level has contributed to effective supervision (e.g., supervisory college process). - As banks diversify into bancassurance and wealth management (e.g., capital markets, broking), greater routine cooperation and collaboration is warranted despite the mission acknowledging the relatively minor contribution to group revenue from non-bank activities. ### Principles 4 & 5 — Permissible activities and licensing Findings: - Permissible activities are clearly defined in the Banking Act; the legislation is clear and consistent on what constitutes a bank and limitations on firms using the word “bank.” - Licensing Policy complements the legislation and is strict about activities that can be licensed as a bank. - The Banking Act empowers BoB to be the sole licensing authority for institutions intending to conduct banking business; statutory banks derive mandate from statutes established by Acts of Parliament. - Over the last five years, BoB received "four bank license applications from domestic entities." Of those: - "two applications were withdrawn," - "one was rejected," - "one application was granted with conditional approval." - The licensing policy specifies tests to ensure banks appoint directors and senior management officials that are fit and proper, require suitable operating plans, sound corporate governance systems, disclosure of sources of initial capital, and applicants’ ability to provide additional capital if needed. - Processes for assessing the suitability of ultimate beneficiary owners are not sufficiently robust and need strengthening. Recommendations / supervisory practice: - After licensing there are no special enhanced prudential or reporting requirements for newly established banks. - BoB conducts a pre-operation inspection; an onsite examination should be scheduled ideally within the first 12 months to verify effective implementation of internal controls, risk management, and governance. - Develop internal guidelines to help supervisors detect early signals of emerging weakness or stress for newly licensed banks. ### Principles 6 & 7 — Transfer of significant ownership and major acquisitions Findings: - The Banking Act has no definition of significant ownership. In practice BoB relies on the Guidelines on Significant Shareholding (public on BoB website) with assessment thresholds at "5 percent", "20 percent", "33" and "50 percent"; over "50 percent" a control change is assessed. - BoB applies the licensing framework to assess proposed changes in significant shareholding, but primary legislation contains no requirement to obtain the Bank’s approval for change of control or voting rights in a bank; notification is only done at initial licensing stage. - The lack of provisions in primary legislation means there is no direct legal remedy to reject or reverse a change in significant ownership ex post. - A framework for major acquisitions is not provided in primary legislation; while the Banking Act contains countervailing measures, it is questionable whether the supervisor has necessary powers for the specificities of merger acquisitions. - It is understood the new Banking Act will address deficiencies with explicit references to mergers and acquisitions; internal guidance has been developed to support supervisors when assessing these applications. ### Principles 8–10 — Supervisory approach, tools, and reporting Findings: - BSD adopts a risk-based supervision framework with a mix of onsite and offsite surveillance tools and techniques. - Offsite analysis of statutory returns submitted on "daily, weekly, monthly, quarterly and annually" frequencies informs assessment of financial condition and prudential compliance. - BSD meets annually with bank senior management through structured meetings and ad hoc as needed. - Onsite examinations are performed according to the RBS methodology on a maximum "three-year cycle." Full scope onsite examinations assess all material risk categories. - Onsite and offsite activities are well structured and supported by internal guidance and manuals. Recommendations and enhancements: - Undertake a quality assurance assessment and back-testing to evaluate methodology effectiveness for risk-based supervision. - The BSD currently uses a hybrid approach combining CAMEL (quantitative) with qualitative assessment; factors to evaluate include identification of risk, forward-looking analysis effectiveness, integration of offsite and onsite assessments, and calibration of methodology for risk and impact. - Apply a differentiated supervisory approach proportionate to risk profile and systemic importance; larger systemically important banks should receive proportionally more attention and heightened expectations. - Increase forward-looking analysis and more frequent engagement with non-executive independent directors on risk governance. - Dedicate greater attention to assessment of bank ICAAPs as comprehensive assessments of risks and capital adequacy. - Develop internal guidelines for handling distressed or weak banks to support early identification and targeted measures. - Use periodic meetings with management and Boards to support onsite examination timetable and update changes in business model and risk management. - Implement system-wide stress tests to identify build-up of systemic risks and outliers; currently these exercises are not used. - Implement an automated system for validation checks (current validation is manual and time intensive); BSD is in the process of implementing a new system. - Adjust reporting requirements for systemic importance and review reporting instructions regularly. Group-wide analysis: - Awareness of insurance and other non-bank activities within groups could be expanded; while immaterial for revenue/assets, potential non-financial contagion risks exist. - Limited evidence that non-bank activity inputs materially influence risk assessment of banks in routine supervisory cycle. ### CP 11–12 — Corrective measures and consolidated supervision Findings: - BoB has traditionally used moral suasion to enforce prudential standards; supervisory concerns are communicated to management and findings to Boards. - Limited experience using sanctioning powers in the Banking Act; limited experience restricting licenses or applying more conservative prudential requirements (e.g., higher minimum capital). - No formal guidelines for handling problem and weak banks; no formal framework linking CAMEL ratings to corrective actions. - BoB lacks a formulated corrective action policy framework for distressed banks, though some elements exist in regular prudential requirements. Consolidated supervision: - The Banking Act does not provide for consolidated supervision that evaluates soundness of entire groups across affiliated entities; reforms to the Banking Act are intended to provide for consolidated supervision. - BoB participates in supervisory college meetings and bilateral supervisory meetings; MOUs allow information sharing. - Guidelines on Supervision of Financial Conglomerates have been concluded and will be issued after enactment of the Banking Bill. - As banks diversify into non-bank activities, greater attention to consolidated supervision will be needed despite currently minimal activities of subsidiaries in revenue/assets. ### CP 13 — Home/Host and resolution planning Findings: - BoB actively participates in supervisory colleges with two-way information sharing. - Until "mid2022" BoB was not a home supervisor; with recent demutualization and re-licensing as a commercial bank, BoB is home supervisor for one bank. - BoB has signed MoUs with most home supervisors of parent entities for foreign subsidiaries. - Planning and conducting onsite examinations could be more proactive and deepen collaboration with home supervisors; examples of joint supervision are limited. - Group resolution plans exist at parent group level; resolution plans have not been prepared for commercial banks supervised by BoB. - BoB has developed a D-SIB framework designating "two banks are D-SIBs." - The Banking Act is under revision with explicit provisions for resolution planning. - BoB "has not participated in supervision cross border does not coordinate and plan supervisory activities with any home supervisors." (text as in source) ### Corporate governance, audit, and financial reporting (CP 14, 26–28) Findings: - Material deficiencies exist in regulations for corporate governance: - Laws/regulations do not explicitly assign boards and senior management responsibilities for corporate governance or provide guidance on expectations. - BoB has not undertaken formal, structured assessments of banks’ corporate governance frameworks or developed supervisory guidance for such assessments. - Laws/regulations do not require nomination, remuneration, or risk committees even in large banks. - Nomination procedures for identifying and nominating new directors are not established. - BoB reviews fitness and propriety of board members annually but does not undertake formal documented assessments of board effectiveness or duties of care and loyalty. - Laws/regulations do not explicitly require banks or boards to promote corporate culture and values through code of conduct, conflict of interest policies (other than related party exposures/transactions), or whistleblower policies; BoB has yet to assess availability and adequacy. - BoB lacks power to remove one or more directors or the entire board if they do not act in bank/depositors’ interests or perform poorly. - Some deficiencies are expected to be addressed through the proposed Banking Bill and draft corporate governance guidelines; additional guidance to supervisors is needed. Audit and reporting frameworks: - Regulatory and supervisory frameworks for internal control, internal audit, external audit, financial reporting, and disclosures are well established and effective but can be further aligned with Basel Core Principles by: - Making internal audit risk-based, - Requiring internal audit to review control function resources, - Expanding supervisory assessments to include adequacy of staff in compliance function, skillsets, experience, and training. - BoB should obtain legal powers to reject/rescind appointment of an external auditor deemed inadequate in expertise/independence or non-adherent to standards, and the power to access external auditors’ working papers when required. ### Capital (CP 16) Findings: - Capital adequacy framework is largely aligned with the Basel framework and proportionate to local industry risks and complexities, with minimum capital requirements set significantly higher than Basel. - Definition and components of capital align with Basel III; methodologies for risk-weighted assets for Pillar 1 risks follow Basel II. - No bank implements advanced approaches for computing risk weights; all banks use: - Standardized approach for credit risk, - Standardized maturity method for interest rate risk in trading book, - Basic Indicator Approach for operational risk. - As at "end December 2021": - Average CET1 ratio for the banking sector was "12.0 percent" - Average Tier 1 ratio was "12.5 percent" - Total capital adequacy ratio was "18.5 percent" - Tier 2 capital comprises about "32 percent of total regulatory capital." - All banks are required to make Pillar 3 disclosures annually on their websites and with published financial statements. Recommendations: - BoB needs to develop methodologies to assess Pillar 2 risks and additional capital banks might need to hold. - BoB supervisors review ICAAP documents annually but have not required additional Pillar 2 capital to date. - Develop supervisory methodologies to assess ICAAP documents and Pillar 2 risks (e.g., concentration risk, interest rate risk in banking book, liquidity risk) to make additional capital requirements more sensitive to individual banks’ specific risk profiles. ### Risk management (CP 15, 17–25) Findings: - BoB has regulatory and supervisory frameworks that promote a culture of overall risk management among banks; supervisory guidance is available at a high level. - Supervisors would benefit from more detailed guidance on focused supervision of risk management, risk governance, policies/processes, new product risk management, stress testing, information systems, and risk reporting. - Technological advances, more use of financial models, annual stress testing practices, implementation of IFRS-9, and forward-looking business/capital planning increase model use and exposure to model risks. - This is an area where BoB can explicitly articulate regulatory requirements and supervisory expectations. Provisions, problem assets, and collateral: - Supervisory approach to management of problem assets, provisions and reserves needs revision. - Banks are implementing IFRS 9; BoB has issued prudential norms for loan classification as a backstop to accounting standards, but BoB relies on accounting standards and external auditors for provisioning. - Extensive use of internal provisioning models raises concerns about data availability, quality, history, assumptions, and model risks. - Absence of a prudential backstop for provisioning affects supervisory oversight on provisioning adequacy. - BoB guidelines on capital adequacy list eligible collateral mainly as financial collaterals and do not cover physical collaterals (movable and immovable). - Guidelines need improvement to provide clarity on eligible collateral, valuation, and governance around valuation. Recommendations and supervisory enhancements: - Develop additional guidance for supervisors, supervisory tools/methodologies, and more granular offsite data to improve supervisory effectiveness. - Supplement supervision with periodic system-level analyses of trends and concentrations in relation to problem assets, risk mitigants, and risk mitigation strategies to inform system-level policy and response. *Source: IMF country report content unit 1bwaea2024004* ### 54. Regulation and supervision of exposures to and transactions with related parties need ### Regulation and supervision of exposures to and transactions with related parties need substantial improvement ### Related-party exposures and transactions - Key gaps relative to Basel norms: - Definition of exposure on related parties excludes exposure through placements and investment. - Definition of related parties is incomplete. - Absence of an explicit and comprehensive definition of related party transactions for prudential purposes. - No prudential limits on aggregate related party exposures. - No explicit provision for deducting from capital exposures in excess of prudential limits. - Gaps in governance requirements related to assumption and management of related party exposures and transacting with related parties. - Absence of explicit and comprehensive supervisory (prudential) reporting requirement for transactions with related parties. - Combined effect: significant gaps in the prudential regime for transactions with related parties. ### Country and transfer risk supervision - Current status: - BoB issued a regulation requiring banks to establish appropriate risk management policies, procedures, and arrangements for managing country and transfer risks. - Remaining shortcomings: - Missing elements such as grading and provisioning of country risk. - Laws or regulation do not explicitly require banks to assess country and transfer risks from both immediate risk and ultimate risk perspectives. - Supervision of banks’ management of country and transfer risks is not explicit in the current onsite and offsite frameworks. - Absence of appropriate offsite reporting and analyses and absence of adequate guidance to supervisors for conducting supervision. - Action needed: address gaps in regulation, offsite reporting/analysis, and supervisory guidance. ### Regulatory and supervisory frameworks for other key risk areas - Areas needing significant improvement and clarification of BoB expectations: - Credit concentration: - Expectations on industry, geographic, collateral concentrations are not adequately explicit or detailed. - Prudential limit for exposure to single counterparty or group of inter-connected counterparty is effectively at 44 percent of Tier 1 capital, with scope for assuming higher exposure with BoB approval. - IRRBB: - Need greater clarity on measurement of risk with reference to economic value impact on equity. - Market risk: - Need clarity on trading book and related discipline, marking to model, derivative activities, stress testing. - Operational risk: - Need clarity on requirements related to outsourcing and operational risk event and loss database. - Supervision enhancements required: - More detailed offsite reporting and analyses. - More detailed guidance to supervisors to make supervision more effective for these risks. ### Liquidity risk management and supervision - Current observations: - All banks are meeting the liquid assets ratio (a stock measure) set by the BoB. - There is a maturity mismatch causing stress on bank liquidity management. - Intermediation ratio and deposit concentration ratio are monitored by BoB but are not used effectively due to absence of formal supervisory thresholds. - Recommended enhancements: - Develop guidance for supervisors and supervisory methodologies to encourage higher standards of liquidity risk management. - Include a flow approach to liquidity risk management. - Establish supervisory thresholds for ongoing monitoring. - Enhance reporting requirements. - Modify supervisory reporting and analyses to support these measures. ### AML/CFT supervisory efforts and gaps (Abuse of Financial Services, CP 29) - Current initiatives: - FI Act (and its Regulations) is the main legislation setting out anti-money laundering and countering the financing of terrorism. - A dedicated team within the BoB BSD (consisting of five staff) undertakes onsite and offsite analysis of bank compliance with AML/CFT obligations as stated in the FI Act. - BoB undertakes a range of supervisory activities throughout the supervisory cycle that include risks associated with AML/CFT. - Move to a risk-based approach has commenced with a newly implemented early warning tool to better profile higher risk banks. - Evidence of greater attention being allocated to AML/CFT and integration into risk-based activities including annual bilateral meetings, on-site examinations, and follow-up on quarterly updates of supervisory concerns. - Remaining scope for progress: - Full implementation of the supervision methodology to support a risk-based approach. - Collect more frequent data as inputs into offsite surveillance (currently STR data is submitted by the FIA to the BoB every six months). - Address outstanding issues identified in the most recent FATF follow-up report (April 2021). - Offsite analysis of bank policies and procedures could complement data reported. - Improve feedback loop between BSD risk assessments and staff responsible for AML/CFT to identify early group-wide weaknesses. - Transition to a formal framework for consolidated supervision to strengthen supervision and encourage greater compliance. ### Supervisory powers, responsibilities and institutional framework (Principle 1, EC1) - Legal and institutional arrangements: - Authority for bank supervision established in the Bank of Botswana Act, 1996 (BoB Act). - BoB has primary responsibility for the prudential supervision of banks in Botswana. - Financial Intelligence Agency (FIA), empowered by the Financial Intelligence Act, 2022, also supervises banks on AML/CFT and combatting the financing of terrorism and proliferation of proceeds of crime. - Banking system composition: nine commercial banks (a building society demutualized in 2022 and became licensed as a commercial bank), three statutory banks and one micro-finance lender—all under BoB supervision. - Non-bank financial institutions are supervised by the Non-Bank Institutions Regulatory Authority (NBRA/NBFIRA) covering pension funds, insurance companies, brokers and agencies, stockbrokers, collective investment undertakings, and Botswana Stock Exchange. - Financial Stability Council (FSC): - Established as a multi-agency forum to discuss policy issues to strengthen the financial system, mitigate financial stability risks, and coordinate responses to systemic risks. - FSC is not a decision-making body; it is a coordinating and cooperation mechanism. - FSC comprises senior officials of the Ministry of Finance (MoF), the BoB, Non-Bank Financial Institutions Regulatory Authority (NBFIRA) and the Financial Intelligence Agency (FIA). - FSC is chaired by the Governor; the Bank acts as the secretariat. - Work governed by a memorandum of understanding (MoU). - Primary objective of macroprudential policy framework: limit systemic risk and its transmission to the broader economy. - Credit information regulation: - Credit Information Act, 2021 and the Credit Information Regulations, 2022 empower the BoB to regulate credit bureaus. - BoB met with the four credit bureaus to communicate their statutory obligations following commencement of the statutes. - Public disclosure: - The BoB Act is publicly disclosed through the Ministry of Finance. *Source: IMF country report excerpts on Botswana supervisory framework and prudential supervision* ### Section 4 of the BoB Act set out the principal objectives of the BoB which is ### Section 4 of the BoB Act set out the principal objectives of the BoB which is ### Mandate and principal-objective issues (CP1 / EC2) - Section 4(1) of the BoB Act sets out the principal objectives of the BoB: to first and foremost promote and maintain monetary stability, an efficient payments mechanism and the liquidity, solvency and proper functioning of a soundly based monetary, credit and financial system in Botswana. - This principal objective is broader than the safety-and-soundness focus required by this EC; safety and soundness of banks and the banking system is not specified as the principal objective. - Assessment: Materially non-compliant. - Key concerns: - A broader definition of the BoB’s mandate is described as "a meaningful departure from the requirements of CP1." - The primary legislation does not specify BoB’s primary responsibility for promoting safety and soundness of banks and the banking system. - The Banking Act was last revised in 1995 and has not been subject to regular review; this has led to material deficiencies that undermine effective supervision. ### Supervisory powers, activities and transposition into primary legislation (EC3, EC5, EC6, EC7) - Stated supervisory activities BoB undertakes (noting these are not fully codified in primary legislation): - sets transparent criteria, guidelines and other requirements for market entry as stipulated in licensing policies; - establishes and updates on a regular basis, prudential policies and standards; - monitors solvency, liquidity, large exposures, insider loans, provisioning and risk management, as well as the adequacy of risk management and governance structures for the safe and sound operation of banks; - establishes effective systems for offsite surveillance and on-site examinations, including reporting, accounting auditing and disclosure standards; - ensure timely enforcement of supervisory actions and compliance with the banking sector and other related laws governing the operations of banks in Botswana; and - maintains general market surveillance, monitors and investigates unlicensed or illegal deposit-taking activities and practices to protect the public and integrity of the banking system. - EC3: Legal powers and current practice - BoB is empowered to set prudential rules in respect of institutions it licenses and supervises. - Sections 13 – 17 of the Banking Act give BoB powers to set and enforce prudential standards for banks. - The BoB Act establishes provisions for powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions. - Regulatory architecture includes regulations, directives, circulars and guidelines that augment primary legislation on capital adequacy, liquidity risk management, large exposures, fit and proper assessments, governance, and risk management. - Two commercial banks have been designated domestic systemically important banks (D-SIBs); a D-SIB framework is in early stages of implementation and appears to be based on international standards. - In practice BoB largely uses moral suasion to enforce prudential requirements; few examples exist where the Banking Act was invoked. - All prudential requirements for capital and liquidity are applied consistently across banks despite differences in size, scale, risk profile or systemic importance. - Revisions to the Banking Act were at an advanced stage at the time of the mission to strengthen BoB’s powers; the planned D-SIB framework is expected to support differentiated prudential requirements by systemic importance. - EC5: Access and supervision scope - (a) Section 47 and 48 of the BoB Act empower BoB to have full access to banks’ and banking groups’ boards, management, staff and records. Section 24 of the Banking Act empowers on-site examinations. Assessors saw evidence of free access. - (b) Eight of the nine commercial banks operating in Botswana are foreign owned, but BoB does not practice consolidated supervision. The Banking Act is being reviewed to include consolidated supervision. - (c) BoB has powers to ensure compliance with prudential rules and takes steps to ensure banks operate prudentially. - EC6: Corrective and resolution powers - Sections 33 – 34 of the Banking Act empower BoB to take temporary management responsibility for a bank. - Section 11 empowers license revocation; Sections 35 – 38 allow petitioning courts for winding-up. - EC7: Review of parent and affiliated company activities - The existing legal framework does not establish legal powers for BoB to review activities of parent companies and affiliates. - A draft new Banking Act at an advanced stage explicitly provides for consolidated supervision and will establish legal powers to review parent companies and affiliates. - In practice BoB considers parent-company risk profiles in routine supervision and risk assessments. ### Legal and regulatory framework review and updating (EC4) - The Banking Act has not been subject to regular review; last revision took place in 1995. - Material deficiencies exist in several areas: corporate governance, risk management, transactions with related parties, absence of provisions for consolidated supervision (CP12), major acquisitions (CP7), and change in significant shareholding (CP6). - The review of the Act, regulations and standards is subject to public consultations, as appropriate. - Circulars have been added to adapt to new accounting standards (IFRS). - The report highlights the need for more frequent and comprehensive reviews to ensure legislation remains relevant to changing industry and regulatory practice. ### Independence, governance, accountability and resourcing of the supervisor (CP2 / EC1–EC4) - EC1: Operational independence and governance - Sections 3 – 12 of the Banking Act give BoB authority to grant and withdraw banking licenses. - Statutory banks fall within supervisory purview of BoB under delegated powers of the Ministry of Finance (MoF) with respect to business prudential matters; on other matters BoB uses moral suasion. - Section 7 of the Banking Act empowers the Minister to overrule BoB’s decision in appeals for banking license rejections. - No evidence of political interference in BoB’s supervisory work was found; BoB appears able to exercise full discretion in supervision. - BoB Board composition per Section 9(1) of the BoB Act: Governor as Chairman and eight other members (total of nine). Deputy Governors attend as non-voting unless acting as Chairman or appointed to the Board (Section 10). - Current Board membership (descriptive list as provided in source): Board Chairman and Governor BoB; Permanent Secretary MoF; Industry background; Private sector, consultant; Private sector, Okavango Diamond Company; Government affiliated, Chair of Competition and Consumer Authority, Academic; Private sector, legal; Industry, Botswana Export Development and Investment Authority. - Appointments for other BoB board members provided in Section 10; terms of four years (Section 10(3)); no more than two public officers (Section 10(2)). Currently only one member is serving in public office. - BoB produces an annual report and submits a statutory report to the Minister of Finance by June 30 each year (Section 28 of the Banking Act (Cap. 46:04)); the Bank has consistently complied with this requirement. - Annual report contents include: Licensing; BoB’s supervision activities and highlights of onsite examinations and prudential meetings; Regulatory developments; Participation in international and domestic regulatory and supervisory forums such as supervisory colleges; and Banking system data. - Banking Supervision Department structure: Director with four direct reports: Deputy Director Regulatory Policy and Licensing Division; Deputy Director Prudential Supervision Division; Deputy Director Business Conduct; and Deputy Director Bureaux de Change Supervision Division. Each Division contains Principal Bank Examiners, Senior Bank Examiners and Bank Examiners. Offsite supervision processes use a delegation framework with committee approvals for licensing. - EC2: Appointment and removal processes - Governor and Deputy Governors are appointed by the President for a term not exceeding 5 years (Section 13 of the BoB Act). - Section 15(2) disqualifies the Governor and Deputy Governors for inability to perform functions or for gross misconduct (including insolvency, conviction). - Removal process: President can remove the Governor (Section 15(3)) based on criteria including disqualification (Section 14), insolvency or bankruptcy (Section 15(1)(b)), conviction of an offense, or disqualification from a professional qualification. Process involves a tribunal set up by the President (Section 15(3)), chaired by a judicial officer and at least two other people experienced in banking and finance (Section 15(4)). - The Banking Act does not prescribe public disclosure requirements for removal; the BoB Act is being reviewed to specify and publicly disclose reasons for dismissal. - The appointment process identifies the appointing authority and eligibility criterion ("person recognized experienced in financial matters" per Section 13(2)), but the process to appoint is not prescribed in detail. - EC3: Publication of objectives and accountability - The principal objectives of BoB are in Section 4(1) of the BoB Act and are detailed on the BoB website. - The Supervision Department publishes an annual report with a comprehensive description of activities. - EC4: Internal governance and decision-making - BoB adopts a structured approach to decision-making through its departmental organizational design and delegated committee-based approvals for licensing and supervisory decisions. ### Assessment summary and key deficiencies - Overall assessment for Principle 1: Materially non-compliant. - Principal legal and operational deficiencies highlighted: - Primary legislation does not prioritize safety and soundness as the principal objective. - The Banking Act has not been comprehensively reviewed since 1995, creating material deficiencies across several CPs (CP6, CP7, CP12, CP14, CP15). - Powers to set prudential requirements exist but are infrequently exercised in practice; reliance on moral suasion is common. - Prudential requirements for capital and liquidity are applied uniformly across all commercial banks despite differing risk profiles and systemic importance. - The legal framework does not currently extend supervision to banking groups, a crucial deficiency given that eight of nine commercial banks are foreign owned. - Draft legislation and a D-SIB framework are under development and at an advanced stage of drafting/implementation, which are expected to address several deficiencies. *Source: Content unit 1bwaea2024004 — Section 4 of the BoB Act set out the principal objectives of the BoB which is* ### Section 17(1) of the BoB Act mandate that the appointment of the Bank’s employees ### Section 17(1) of the BoB Act mandate that the appointment of the Bank’s employees ### Governance, appointments, segregation of duties, and conflicts of interest - Section 17(1) of the BoB Act mandates that the appointment of the Bank’s employees be done according to positions sanctioned by the Bank’s Board, on terms and conditions prescribed by the Board. - There is effective segregation of duties throughout all structures of the Bank, with elaborate job descriptions. - Section 18 deals with conflicts of interest with clear prohibitions on members being subject to direction, from receiving financial benefits. - Requirements to disclose any interests (Section 18(2)) extend to every officer and employee of BoB. - Section 43(7) of the Banking Act and Section 19(1) of the BoB prohibit disclosure of information obtained through work to any person unless required by a court of any competent jurisdiction to do so. - Internal guidelines and manuals stipulate responsibilities for production of reports, associated signoffs, and timelines; a structured decision-making framework is evidenced in BSD for offsite analysis and onsite examination reports. - Reporting lines: the Head of BSD reports to the Deputy Governor who reports to the Governor. ### EC5: Credibility, professionalism, integrity, and confidentiality - Minimum entrance qualification for bank supervisors is a bachelor’s degree in specified fields appropriate for the job, in accordance with Section 17(1) of the BoB Act. - There is a code of conduct to be observed by all staff members. - Section 18 of the BoB Act outlines rules on how to avoid conflict of interest by employees of BoB. - Description and findings re EC5: - The supervisor and its staff have credibility based on their professionalism and integrity. - There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed. ### EC6: Resources, financing, and constraints - EC6 components (as listed in source): - (a) a budget that provides for staff in sufficient numbers and with skills commensurate with the risk profile and systemic importance of the banks and banking groups supervised; - (b) salary scales that allow it to attract and retain qualified staff; - (c) the ability to commission external experts with the necessary professional skills and independence, and subject to necessary confidentiality restrictions to conduct supervisory tasks; - (d) a budget and program for the regular training of staff; - (e) a technology budget sufficient to equip its staff with the tools needed to supervise the banking industry and assess individual banks and banking groups; and - (f) a travel budget that allows appropriate on-site work, effective cross-border cooperation and participation in domestic and international meetings of significant relevance (e.g., supervisory colleges). - Description and findings re EC6: - According to the BoB Act, the BoB has discretion to meet its budget as it sees fit. - (a) The supervisory budget is part of the Bank-wide budget as well as the remuneration package for bank supervisors. BoB is subject to the Government Wages Policy requirements and thus constrained in attracting skills commensurate with the size and complexity of supervised institutions and remuneration that could enable it to attract and retain qualified staff. - (b) BOB faces challenges in attracting and retaining qualified staff owing to lack of independence from Government Incomes Policy, with respect to salaries. - (c) BoB can engage external experts when it lacks specific expertise. Such people are subjected to the duty of confidentiality regarding supervisory work they are tasked with. - (d) BoB’s supervisory activities are financed from a budget allocated to the Banking Supervision Department (BSD). This budget is always fully utilized. When the budget gets exhausted and funds are available in other departments, such funds can be used to carry out supervisory work. - (e) A travel budget is prepared annually to enable BoB staff to undertake onsite examinations and participate in meetings. - (f) Short-and long-term training is extended to staff with the view to enabling them to keep pace with developments in banking business and financial matters in general. ### EC7: Skills planning and training - EC7 requirement summary: supervisors regularly take stock of existing skills and projected requirements over the short- and medium-term and implement measures to bridge any gaps. - Description and findings re EC7: - Short- and long-term training is extended to staff with the view to enabling them to keep pace with developments in banking business and financial matters in general. - There is a demonstrated need to augment staffing with the addition of risk specialists, such as in the area of market risk (traded and non-traded), and operational risks such as operational resilience. - This EC is not fully met. ### EC8: Risk-based supervision and resource allocation - Description and findings re EC8: - BoB implemented risk-based supervision (RBS) in January 2015. - RBS designs a customized supervisory program for each bank and focuses much attention on banks that are considered to have potentially high systemic risk. - RBS enables the supervisor to prioritize efforts and focus on significant risks by channeling available resources to banks where risk profile warrants greater attention. ### EC9: Legal protection for staff defending actions taken in good faith - Description and findings re EC9: - This EC is not met. - There is no section in the Banking Act that clearly states that the BoB will protect its staff against costs of defending their actions and/or omissions made while discharging their duties in good faith. ### Assessment of Principle 2 (Independence, governance, resources) - Assessment: Materially non-compliant - Key findings and comments: - BoB has full authority to grant and withdraw commercial banking licenses. - Statutory banks are authorized to conduct banking business by separate statutes, although they fall within the supervisory purview of the BoB under delegated powers of the minister responsible for the Ministry of Finance (MoF). On other matters related to statutory banks, BoB uses moral suasion. - Operational independence concerns: - The BoB Act empowers the minister to overrule BoB’s decision, in the case of appeals for banking license rejections (EC1). - Throughout the Banking Act, there are multiple ministerial touchpoints which could inhibit BoB’s operational independence: (i) Ministerial interventions for appeals of supervisory actions; (ii) Several circumstances where ministerial approval is required; (iii) ministerial representatives are sitting in the BoB Board; (iv) no requirement for public disclosure of the reasons for removal of BoB’s executive management; and (v) no legal protection for supervisors against costs. - The draft Banking Act gives BoB full supervisory powers over statutory banks and supervisory authority to issue regulations independent of MoF. - Removal of Governor and Deputy Governors: - Sections 15(2) to (5) of the BoB Act outline circumstances under which the Governor and Deputy Governors can be removed from office, but there is no provision requiring public disclosure of reason(s) for their removal. The BoB Act is being reviewed to specify that upon dismissal of a Governor and Deputy Governors, reason(s) for removal should be publicly disclosed (EC2). - Legal protection for staff: - There is no section in the Banking Act that clearly states that the Bank will protect its staff against costs of defending their actions and/or omissions made while discharging their duties in good faith. The draft Banking Act includes a section that clearly states that the Bank will protect its staff against costs of defending their actions and/or omissions made while discharging their duties in good faith (EC9). - Staffing and skills: - Short- and long-term training is provided, but there is a demonstrated need to augment staffing with risk specialists (market risk, operational resilience). - The annual resource planning exercise should take stock of existing skills and projected requirements over the short- and medium-term, taking into account relevant emerging supervisory practices (EC7). ### Principle 3: Cooperation and collaboration — arrangements, practice, and confidentiality - Assessment: Largely compliant - EC1 (domestic cooperation) — description and findings: - A multi-agency Financial Stability Council (FSC) was established with objectives to: - mitigate financial stability risks, and take prompt action in response to a perceived build-up of systemic risks; - ensure a coordinated response to financial stability issues that may require cross-agency collaboration; and - to request information from any financial institution, exchange information on financial stability issues, and communicate systemic risk warnings. - The FSC is primarily a coordinating and cooperation mechanism and not designed for decision-making. - Membership and governance: - The FSC comprises senior officials of the Ministry of Finance (MoF), the BoB Non-Bank Financial Institutions Regulatory Authority (NBFIRA) and the Financial Intelligence Agency (FIA). - The FSC is chaired by the Governor and the BoB acts as the secretariat. - The work of the FSC is governed by a memorandum of understanding (MoU). - MoUs have been signed with Botswana Accountancy Oversight Authority and the Competition and Consumer Authority. - Communication and outputs: - Outcomes of the FSC deliberations are communicated through a press release shortly after a meeting, informing the public of discussions and conclusions regarding stability of the domestic financial system and highlighting key risks and recommendations. - Policy actions are communicated through a circular to all affected financial institutions by the relevant agency (BoB, MoF, NBFIRA or FIA). - The FSC publishes a biannual Financial Stability Report (FSR) that assesses vulnerabilities to the stability and resilience of the Botswana financial system and provides analytical and performance updates. - EC2 (foreign cooperation) — description and findings: - Licensing: BoB’s Licensing Policy prescribes internal processes addressing foreign ownership (see Section 5 of the policy). Subsidiaries of foreign financial institutions shall be licensed subject to: - the home supervisory authority gives a report that it is satisfied with respect to the prudent management and overall financial soundness of the applicant; and, - the Bank is satisfied as to the nature and scope of the supervision exercised by the home supervisory authority. - Despite assurances from the home supervisor, BoB must satisfy itself on prudence of applicant’s operations (business plan, internal controls, accounting and other records, staffing and management arrangements). - Once licensed, supervision is a shared responsibility between the Bank (host supervisor) and the relevant home supervisor in accordance with Basel principles. - BoB actively participates in supervisory colleges; structured processes exist around colleges with evidence of successful sharing of risk analysis, group structure analysis, and discussion of resolution and recovery plans. - EC3 (confidential information transmission) — description and findings: - The legal framework provides for transmission of confidential information to foreign supervisors; information passed to another agency is required by Section 43(10) of the Banking Act to remain confidential. - There is no legal provision for information sharing with domestic supervisors (NBFIRA and the Ministry of Finance), except for the Botswana Unified Revenue Services (BURS). - EC4 (use and protection of received confidential information) — description and findings: - Confidential information in the hands of the supervisor is adequately protected in accordance with Section 43 of the Banking Act. - Such information can only be divulged where there is a court order or statutory request by authority which qualifies to receive such information. - EC5 (support for resolution authorities) — description and findings: - No provisions in the current legislation to support resolution. - The Banking Act is being reviewed and the revised Banking Act is intended to address these deficiencies. - Comments: - Effective cooperation and coordination are important given that eight of nine commercial banks are subsidiaries of foreign banks. - Arrangements are in place (FSC, MoUs), but sharing of risk analysis and collaborative work between domestic agencies, mainly between the NBFIRA and BoB, was at a limited stage. - With banks diversifying into bancassurance and wealth management activities, greater cooperation and collaboration in routine supervision is warranted. - Cooperation with foreign supervisors contributes to effective supervision, particularly via supervisory colleges where home and host supervisors share information and analysis (e.g., group resolution policies). *Source: 1bwaea2024004 - Section 17(1) of the BoB Act mandate that the appointment of the Bank’s employees* ### Section 2 of the Banking Act clearly defines the interpretation of “bank” in Botswana. It ### 1bwaea2024004 - Section 2 of the Banking Act clearly defines the interpretation of “bank” in Botswana. It ### Definition of “bank” and banking business (Section 2) - “a company, incorporated in accordance with the provisions of the Companies Act, which is licensed under this Act to conduct banking business;” - Banking business defined to hinge on taking of deposits and provision of traditional intermediation services (i.e., taking of deposits and extending credit (“loans”)). - Specific elements of banking business (as defined in Section 2): - (i) the business of accepting deposits of money repayable on demand or after fixed periods or after notice, as the case may be, by cheque or otherwise; and/or - (ii) the employment of deposits in the making or giving of loans, advances, overdrafts or other similar facilities and in the making of investments or engagement in other operations authorized by law or under customary banking practice, for the account of, and at the risk of, the person or persons accepting such deposits, and includes the discounting of commercial paper, securities and other negotiable instruments, for the purpose of extending loans or other credit facilities. ### Permissible activities, limitations, and explicit prohibitions (Sections 17 and related) - Section 17 outlines limitations on specified operations and activities of licensed institutions; Part II of the Licensing Policy also outlines permissible activities. - Explicit prohibitions and limitations include (text preserved as in source): - “No bank shall directly or indirectly acquire, hold any part of the share capital of any financial commercial agricultural industrial or other undertaking, except such shareholding as may be acquired in the course of the satisfaction of a debt (where the shareholdings shall be disposed of at the earliest possible moment)” (Paragraph 10). - “No bank shall, directly or indirectly purchase acquire or take a lease on immovable property, except where may be necessary for the purpose of conducting its business” (Paragraph 11). - Additional provisions: - Exceptions where the prohibitions “shall not apply”: - (a) to any shareholding in any company approved by the Central Bank and set up for the purpose of insuring deposits, or of promoting the development of a money market or securities market in Botswana, or of improving the financial mechanism for the financing of economic development; - (b) to any shareholdings in other undertakings the aggregate amount of which does not at any time exceed such percentage of the sum of its unimpaired capital as may be determined by the Central Bank; or - (c) to any shareholdings acquired in the course of the administration of the estate of a deceased person. - (11) No bank shall, directly or indirectly, purchase, acquire or take a lease on immovable property, except as may be necessary for the purpose of conducting its business, including provision for any future expansion or for housing its staff, or in such other circumstances as the Central Bank may determine. - (12) A bank may secure an accommodation on any immovable property and, in default of repayment, may acquire such property for resale as soon as possible, and in any event within four years of acquisition. - (13) No bank shall, without the written permission of the Central Bank, encumber its assets in any way, and every bank shall hold its assets in its own name. - (14) For the purposes of this section "accommodation" means a loan, advance or other credit facility, financial guarantee or other liability granted or incurred by a bank to or on behalf of any person. ### Use of the word “bank” and enforcement (Sections 3(2) and 5) - Section 3(2) restricts the use of the word “bank” and its derivatives to licensed banks, but empowers Bank of Botswana (BoB) to allow use where “the public cannot be misled into thinking that the business, whose name contains this word, is a bank” (examples include “blood bank”). - Section 5 provides BoB with comprehensive powers to investigate unlicensed banking activities (Section 5(1) to (9)); BoB may issue a cease-and-desist order where violations of the Act are identified. - At the time of the mission, no examples were available where BoB had exercised these powers against firms using the term “bank” without a license. - The use of “bank” and derivations (including domain names) is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled. ### Deposit-taking and public accessibility of licensing information (EC4 and EC5) - Deposit-taking is strictly reserved for banks (commercial and statutory banks). Banks, including some statutory banks, are the only institutions that accept deposits in Botswana. - BoB publishes a list of licensed institutions in its Banking Supervision Annual Report and announces in the Government Gazette any licences granted or revoked. BoB also publishes a Directory of Financial Institutions on its website. ### Licensing authority, process, and timelines (EC1–EC4) - Section 3(1) authorises Bank of Botswana to grant a banking licence; Section 6 empowers BoB to be the sole licensing authority for institutions intending to do banking business. - Section 53(2) empowers the Bank to supervise statutory banks; Section 8(3) empowers BoB to consult with the Ministry of Finance to determine prudential requirements for different classes of banks. - Application requirements under Section 6 include certified copies of: - Applicant’s certificate of incorporation in Botswana; - the memorandum and articles of association; and, - financial documents and data. - BoB can call for supplemental information “as it may require” and “conduct an investigation as it deems necessary”. - Procedure and timing: - Within 30 days after it has received the application the BoB shall inform the Minister that it has been received, and that it is being duly processed. - An application is processed within 6 months after which the BoB can reject or grant a banking licence. - An application is to be in the format decided by BoB, made in writing, and to be gazetted. - The Banking Regulations (Section 3) further define submission requirements. - Licensing Policy operational steps: - A preliminary meeting with applicant; applicant receives an application package and pays an application fee of P15 000 (VAT exclusive). - Assessment encompasses: ownership structure and governance; start-up capital; financial strength of the shareholders and ability to provide additional capital; strategic and operating plans; technical partnership; product offering; staffing arrangements; risk management and internal controls; branch network; infrastructure and projected financial condition; and likely effect on the domestic financial sector. - Objective: ensure a licensed bank is adequately capitalised, likely to be prudently managed and possesses a business strategy that adds value to local economic and social needs. - The Bank of Botswana uses Licensing Policy and Guidelines on appointments to assess fit and proper tests; compliance is checked through on-site examination and off-site surveillance. ### Suitability of owners, fit and proper assessments, and identified weakness (EC5–EC7) - Licensing Policy requires disclosure of all shareholders who directly or indirectly hold shares or other interest representing 5 percent or more of the capital or voting rights. - BoB conducts background investigations of directors, executive officers and controlling shareholders as it deems fit; beneficial owners are assessed to ensure they are fit and proper in accordance with the Directive on Significant Shareholding in Banks. - Identified weakness: The assessment of ultimate beneficial owners at licensing “extends only as far as the corporate level and does not go behind the corporate structure to individual shareholders.” For regionally active banks with privately held corporate structures, BoB should undertake suitability assessments of the ultimate beneficial owner to rectify this gap. - Fit and proper criteria applied at authorization include assessment of board members and senior management for expertise and integrity, and potential conflicts of interest; the Licensing Policy specifies tests to ensure directors and senior management are fit and proper. ### Minimum initial capital and capital treatment (EC6) - Section 13(9) and Regulation 7(3) require commercial banks to have a minimum capital of the higher of P5 million or 8 percent of the bank’s risk weighted assets. - Section 7(3) of the Banking Regulations specifies minimum capital by category: - (a) Commercial banks – greater of P5 000 000; - (b) Credit Institutions – greater of P2 500 000; - (c) Investment Banks/Merchant Banks – greater of P5 000 000; and - (d) Discount Houses – greater of P2 500 000. - Initial funds should be own funds and unencumbered; subsequent injections of capital can be done with assets other than cash after the bank has begun operations. - At licensing, BoB will evaluate the source of funds requesting financial statements for groups, existing companies and individuals. - The concept of “unimpaired capital” is referenced throughout the Banking Act, indicating minimum capital must be free to meet the financial needs of the bank without exception or impediment. ### Assessment conclusions and compliance - Assessment of Principle 4: Compliant. - Comments: Legislation is clear and consistent in determining what constitutes a bank, limitations on use of the word “bank”, and activities undertaken by a bank. Permissible activities are clearly defined in legislation and supplemented by a strict Licensing Policy. - Identified recommendation/weakness: - BoB’s licensing processes should be strengthened to undertake look-through suitability assessments to identify ultimate beneficial owners where corporate structures may conceal individuals who could exert significant influence. *Source: IMF country material provided in the content unit.* ### Part V of the Banking Act requires a Board and Principal Officers of a bank (essentially ### Part V of the Banking Act requires a Board and Principal Officers of a bank (essentially the senior leadership team) to have requisite skills, integrity and competence. ### Legal and regulatory requirements for board and principal officers - Section 29 of the Banking Act requires that: - (1) No person shall become the principal officer, by whatever name called, of any bank, unless upon the determination of the board of directors of such bank he is a fit and proper person, for such position, having regard to- - (i) his probity and competence; - (ii) the diligence with which he is likely to fulfil his responsibilities; and - (iii) his previous conduct and activities in business, particularly whether he has been guilty of any fraud or other act of dishonesty. - (2) Where the Central Bank has reason to believe that any person, by virtue of his shareholding in a bank or otherwise, is in a position to influence the principal officer, or the board of directors of that bank, and is exercising his influence in a manner which is likely to be detrimental to the interests of depositors, the Central Bank may request the bank to remedy the situation. - (3) Where a bank fails to comply with the instructions of the Central Bank following a request made under subsection (2), the Central Bank may, with the approval of the Minister, revoke the license of such bank in accordance with section 11 of this Act. - (4) No person shall become a director of a bank unless he is a fit and proper person in accordance with such criteria as may be determined by the Central Bank. - The Licensing Policy and the Guidelines on Appointment of New Directors and Senior Management Officials of Banks (published on BoB website) enshrine the evaluation of proposed directors and senior management’s expertise and integrity. ### Documentation and assessment procedures for fitness and probity - Required documents for determination of fitness and probity of board and senior management officials: - a. personal questionnaire – requires provision of personal details, employment history, answers to questions that enable assessment of an individual’s reputation and character and references that may be contacted for verification of information. - b. police clearance and security vetting and authorization form – individuals seeking to be appointed as board members or senior management officials of banks are required to provide a report from the police department in the jurisdiction in which an individual resides, indicating that the proposed board or senior management official has not committed or is being investigated for committing any crimes. Furthermore, for board members, principal officers and senior management officials in core positions, such as chief financial officer and treasurer, the Bank requires them to fill a security vetting and authorization form that is sent to relevant stakeholders to check if the individual is not being investigated in different jurisdictions for committing crimes, or has committed a crime in a different jurisdiction; and - c. Board resolution – this is required to ensure that the bank has assessed and agreed on the fitness and probity of an individual for appointment as a board member or senior management official of a bank. - BoB conducts assessment of significant shareholders of banks at the application stage or where there is a proposed change in the significant shareholder, in accordance with the Guidelines on Significant Shareholding in Banks. ### Licensing assessment scope and supervisory integration (EC8, EC9, EC10, EC11) - EC8: Licensing authority reviews proposed strategic and operating plans including corporate governance, risk management, internal controls, detection and prevention of criminal activities, oversight of proposed outsourced functions, and that operational structure reflects scope and degree of sophistication of proposed activities. - BoB evaluates the proposed bank’s five-year financial projections, business plan/strategy, completed personal questionnaires and police clearance certificates for proposed Board members and Principal Officer. - EC9: Licensing authority reviews pro forma financial statements and projections to assess adequacy of financial strength to support strategic plan and financial information on principal shareholders. - Pro forma financial statements and projections for proposed banks are reviewed against the business plan and statements of parent bank and business strategy to ascertain how realistic they are. - EC10: For foreign banks, before issuing a license the host supervisor establishes that a no objection or statement of no objection from the home supervisor has been received and whether the home supervisor practices global consolidated supervision. - BoB requests a “letter of consent from the primary supervisory authority” and verifies that the home supervisor has no objection and can undertake effective consolidated supervision of the group. - EC11: Licensing authority or supervisor has policies/processes to monitor progress of new entrants and determine that supervisory requirements outlined in the license approval are being met. - Monitoring is done through bilateral and trilateral meetings and review of periodic reports. - After licensing there are no special requirements for newly established banks; BoB conducts a pre-operation inspection and applies the uniform supervisory cycle and other prudential requirements consistently. The cycle for onsite examination is determined by risk assessment outcomes. ### Findings on licensing activity, suitability assessment, and supervisory practice - Assessment of Principle 5: Largely compliant. - Over the last five years, BoB received four bank license applications from domestic entities: - two applications were withdrawn, - one was rejected, and - one application was granted conditional approval. - The Bank of Botswana had two commercial bank licenses surrendered in the past 5 years, and the Bank has not imposed any conditions on licenses in the last 5 years. - The Banking Act empowers BoB as sole licensing authority for institutions intending to conduct banking business; unsuccessful applicants may appeal to the Minister. Section 8(3) stipulates conditions for issuing a banking licence and empowers BoB to consult with MoF for prudential requirements for different classes of banks. - The licensing policy specifies tests to ensure banks appoint directors and senior management that are fit and proper and requires applicants to submit operating plans, systems of corporate governance, and disclosure of sources of initial capital and capacity for additional capital. - Suitability assessment of ultimate beneficial owners at licensing does not extend past the corporate ownership structure to the individual level. For larger systemic banks major shareholders are widely-held global investment firms; regionally active banks have privately held corporate structures that should be subject to assessment at the individual shareholder level. - Supervisory practice gap identified: - After licensing there are no special enhanced prudential requirements for newly established banks. While BoB conducts a pre-operation inspection, an onsite examination should be scheduled ideally within the first 12 months to verify effective implementation of internal controls, risk management framework and governance functions. Internal guidelines should be developed to assist supervisors to detect early signals of emerging weakness or stress for a newly licensed bank (EC11). ### Transfer of significant ownership and controlling interests (Principle 6; EC1–EC3) - EC1: Definition and legal basis for significant ownership and controlling interest: - A definition is not included in primary legislation. The Banking Bill under revision makes provision for transfer of significant ownership or controlling interest. Significant shareholding is defined in a guideline – ‘Guidelines on Significant Shareholding of Banks’. Within the Guidelines, significant shareholding is a person (physical or juridical) holding, directly or indirectly: - (1) 5 percent or more of the equity or voting rights of a bank; or - (2) an equity or other interest in a bank that enables the holder to exercise significant influence over its management or activity. - EC2: Requirements to obtain supervisory approval or provide immediate notification of ownership changes: - Any person who proposes to hold a significant shareholding requires prior written authorization (Section 3.1). Below the 5 percent threshold no approval is required. If a significant shareholder seeks to increase shareholding past 20 percent, the shareholder needs to provide the BoB with a written notice. Written notice is needed for subsequent increases in shareholding by a significant shareholder to exceed 33 percent and 50%. To exceed 50%, a significant shareholder requires prior authorization by the BoB (Section 3.2). The Guideline contains a comprehensive description of supporting materials aligned with licence application materials (Annex 1). - BoB does not include explanations in primary legislation on how to aggregate share or voting rights for individuals, affiliated companies, relatives, etc., to assess significance of ownership. Internal guidance material has not been developed. BoB’s internal Licensing Policy (Annexure II) requires BoB approval for change of control or voting rights; Clause 4.29 requires prior approval for transfer of shares exceeding 5 percent. The Guidelines describe timeframes for decision-making (Section 3.7). - BoB requires banks to report, annually, names of all significant shareholders who own 5% or more, including identities of beneficial owners of shares held by custodians, number and type of shares held, and percentage of total shares outstanding (Section 5.1). - EC3: Supervisor’s power to reject or reverse changes in significant ownership: - Guidelines set out ‘decision factors’ (3.9) including: suitability of proposed shareholder to avoid detrimental influence on principal officer or board; technical knowledge, integrity, experience, financial condition and history; adequacy of capital structure; character of business and management qualifications; fitness and probity of any proposed new directors or senior management; convenience and needs of community and market; and non-contravention of the Act. - Section 4.3 states that transfers without prior written authorisation or proper advance notice shall have no legal effect. It is unclear by what mechanism BoB could reverse such change; BoB has not had experience exercising this section. Section 4.4 allows BoB to prohibit a significant shareholder from acquiring additional shares if information would serve as basis to deny an application or object to a notice, but it is uncertain whether BoB could rely on this to reverse ownership ex post. - Guidelines on Significant Shareholding are available on the Bank’s website and provide for supervisory approval to directly or indirectly hold significant shareholding or notice of intent to transfer shareholding. ### Experience and examples - The Bank has approved two requests for transfer of significant ownership in the past five years: - Absa Bank Botswana Limited – Barclays sold its shareholding in Barclays Bank of Botswana Limited to Absa Group Limited; the bank was renamed and rebranded as Absa Bank Botswana Limited. - Access Bank Botswana Limited – African Banking Corporation Holdings sold its shareholding in African Banking Corporation of Botswana Limited to Access Bank Plc; the bank was thereafter renamed and rebranded as Access Bank Botswana Limited. - A change in ultimate beneficial ownership of one of the commercial banks was initiated in 2018; BoB was apprised of progress throughout the sale process but ultimately did not approve the change in the ultimate beneficial owner. ### Key supervisory observations and suggested actions (from source) - BoB’s licensing assessment process is relatively robust and applied appropriately, including tests for fitness and probity and review of operating plans and capital sources. - Identified shortcomings: - Suitability assessment of ultimate beneficial owners does not extend to individual level for complex private ownership structures. - Lack of special enhanced supervisory cycle or adjusted onsite scheduling for newly licensed banks; recommendation that an onsite examination be scheduled ideally within the first 12 months to verify effective implementation of internal controls, risk management and governance functions. - Need for internal guidance on aggregation of share or voting rights for individuals, affiliated companies, relatives, etc., and mechanisms to reverse unauthorized transfers of significant shareholding are unclear and untested in practice. *Source: Excerpt from IMF country material on Botswana (Part V of the Banking Act and related supervisory guidelines).* ### Section 21(2) of the Banking Bill which is designed to replace the existing Banking Act ### Section 21(2) of the Banking Bill which is designed to replace the existing Banking Act ### Ownership transfer, beneficial ownership, and supervisory powers - Section 21(2) of the Banking Bill outlines conditions under which BoB shall not approve an application of transfer of significant or controlling interest. - Section 21(3) empowers the Bank to reject any proposal for change in significant ownership. - Section 21(4) empowers the Bank to reverse any change of control or significant shareholding done without regulatory approval. - The definition for ultimate beneficial owners is provided in the Financial Intelligence Act, 2022: the beneficial owner is a natural person who ultimately owns or controls a customer or a natural person on whose behalf a transaction is being conducted, including a natural person who exercises ultimate effective control over a legal person or arrangement. - The Bank requests banks to annually submit the shareholding structure, including names of significant shareholders and beneficial owners, clear indication of percentage shareholdings and the group ownership structure. ### Findings and assessments relevant to EC4–EC6 (ownership and notification) - EC4 (supervisor obtains names and holdings of significant shareholders and beneficial owners) - Banks provide an annual report of all significant shareholders; material is assessed by the Licensing Team. - Clause 4.27 of the Licensing Policy requires banks to provide annually full particulars of shareholders or beneficial owners of 5 percent or more of a bank’s share capital. - Supervisors also request details of all significant shareholders during on-site examinations. - EC5 (power to modify, reverse or address change of control without prior approval) - Licensing Policy and Banking Regulation 3(1)(c) require institutions to notify the Bank of any proposed change in shareholding structure before implementation. - Clause 4.3 of the Licensing Policy requires notification of ultimate beneficial ownership of a shareholding constituting more than 5 percent of the shares or voting rights. - Guidelines on Significant Shareholding in Banks state the transfer would have no legal effect (see EC3), but legal enforceability is uncertain and in doubt. - EC6 (requirement for banks to notify supervisor of material information adversely affecting suitability of major shareholder) - Not explicitly covered in the primary legislation; there is a good faith expectation that banks would notify. ### Assessment of Principle 6 (Significant ownership and control) - Overall assessment: Materially non-compliant - Key points: - The Banking Act has no definition of significant ownership and controlling interest. - In practice, BoB relies on the Guidelines on Significant Shareholding (publicly available) with minimum thresholds: 5 percent, 20 percent, 33 percent, and 50 percent; over 50 percent shareholding, a control change is assessed. - BoB applies the licensing framework to assess proposed changes in significant shareholding. - There are no requirements to obtain the Bank’s approval for change of control or voting rights in a bank; notification is only done at the initial licensing stage. - Lack of provisions in the primary legislation means no direct legal remedy to reject or reverse a change in significant ownership ex post. - Revisions in the Banking Bill make provision for transfer of significant or controlling interest and define terms; the Bill outlines conditions under which BoB shall not approve an application of transfer of significant or controlling interest. - However, an unresolved issue remains: the Banking Bill does not address whether the Bank will have legal enforceability to reject or reverse changes ex post; the Bank will therefore continue to be non-compliant with this criterion once the new draft bill is enacted into law. ### Principle 7 (Major acquisitions) — legal framework, findings, and assessment - Essential findings: - Primary legislation (Banking Act) does not provide a framework for major acquisitions; countervailing powers exist: - Power to amend conditions of bank licenses and restrict activities (see CP5). - No bank shall establish a subsidiary in Botswana or cross-border without prior approval of BoB (Banking Act, Sections 6 & 7). - Banking Act prohibits a bank from directly or indirectly acquiring or holding shares of other undertakings (Section 10). - Activities other than banking must be undertaken in a separate corporate entity as a subsidiary requiring BoB approval. - BoB has an MoU with the Consumer and Competition Authority (CCA) established under the Competition Act; Section 73 of the Competition Act allows coordination mechanisms between regulators. - BoB is responsible for evaluation and analysis of mergers and acquisition transactions in terms of Section 9(9), Section 17(10) and Section 34 of the Banking Act. - Draft Guidelines on Mergers & Acquisitions and Significant Shareholding in Banks completed and await enactment of the Banking Bill. - Outside formal powers, BoB uses moral suasion and industry good faith to seek approvals and notifications. - Laws or regulations do not clearly define what types and amounts of acquisitions and investments need prior supervisory approval; major acquisitions by controlling shareholders or group entities do not require prior BoB approval or notification. - No provision within primary legislation contains criteria by which to judge individual proposals; internal guidance for licensing is used as a framework. - BoB applies licensing assessment framework to acquisitions; draft Banking Bill includes a Section on Mergers and Acquisitions. - BoB allocates significant attention to assessing risks and demonstrated rigorous assessment of new licenses. - The draft Guidelines on Mergers & Acquisitions and Significant Shareholding in Banks has been completed and awaits enactment. - Assessment of non-banking activities: banks have expanded into insurance; BoB’s focus has been on insurance but awareness could be expanded to other activities; limited evidence that non-bank activity inputs materially affect routine supervisory risk assessments. - AC1: Banking Act requires prior approval to establish a subsidiary; BoB becomes aware of proposed new business lines; BoB has powers to prohibit excessive investments; consolidated supervision framework development will enhance capabilities. - Assessment of Principle 7: Materially non-compliant - Comments: - Framework for major acquisitions is not provided in primary legislation; countervailing measures exist but may be insufficient for specificities of major acquisitions and investments. - New Banking Act is understood to address deficiencies with explicit references to mergers and acquisitions; internal guidance developed to support supervisors. - Group-wide analysis of non-bank activity (notably insurance) needs expansion; potential non-financial risks (e.g., contagion) may not be fully captured in routine supervisory cycle. ### Principle 8 (Supervisory approach) — methodology, processes, and resolution powers - EC1–EC2 (risk-based methodology and forward-looking assessment) - BoB has adopted the RBS framework and uses off-site and on-site surveillance to identify risks. - Risk management guidelines issued for banks; the Department uses “Risk-Based Supervision Methodology” and ICAAP to assess risk profile and capital capacity. - Banking Act does not provide for consolidated supervision; consolidated supervision is provided for under the revised Banking Act. - BoB participates in Supervisory college meetings and bilateral supervisory meetings; MoUs allow information sharing. - The scope and frequency of onsite examinations are risk-based: for riskier banks the cycle is 18 months while for large banks it is 3 years. Onsite examinations are risk based. Off-site supervisory approach is uniform across banks. - EC3–EC5 (compliance, macro and system-wide monitoring) - Strong focus on compliance with prudential regulations; multiple offsite processes verify compliance with key prudential requirements: - Daily liquidity checked daily - Weekly forex - LE returns on a monthly basis verified for compliance with limits - MCR 15% (reduced temporarily to 12.5% during COVID) is confirmed - Monthly early warning report for the banking system produced; analyses balance sheet and income statement structure evaluating capital adequacy, asset quality, liquidity, and prudential ratios. - Risk profiling quarterly and annual banking sector report produced. - BoB identifies and monitors risks monthly and quarterly and proactively addresses serious threats; communicates significant trends and emerging risks to banks and relevant authorities. - Thematic review performed on bank exposures to a single name after identifying concentration risk. - EC6–EC7 (resolvability and crisis handling) - Sections 33 and 34 of the Banking Act empower BoB to manage or dissolve a bank and to take temporary management. - Section 33(3) empowers BoB to take temporary management of an ailing bank; Section 34 requires temporary management for a period of 90 days, within which BoB ought to restore the bank to its board or owners or take other measures as stipulated. - No resolution and recovery plan framework in place. - Internal processes are not fully documented to support handling banks in times of stress; no formal arrangements in place to undertake recovery or resolution. - EC8 (activities outside regulatory perimeter) - Primary legislation prohibits non-banking business being undertaken except in separately incorporated subsidiaries. - NBFIRA regulates non-banks; communication strategies exist between BoB and NBFIRA; Sections 3 and 5 empower BoB to investigate unlicensed banking; Sections 11, 17 and 27 empower BoB to act where a bank conducts business unlawfully or unsoundly. - Assessment of Principle 8: Largely compliant - Comments and suggested enhancements: - BoB’s RBS framework and supervisory college participation are strengths. - Banking Act currently lacks provisions for consolidated supervision (to be provided in revised Banking Act). - BSD transitioning from a CAMEL risk rating to a hybrid approach combining quantitative assessment and risk management assessment; mission suggests quality assurance and back-testing of methodology, including: - (i) How well the methodology identifies risk; - (ii) The effectiveness of forward-looking analysis; - (iii) Integration of offsite and onsite assessments for forward-looking risk assessment; - (iv) Calibration of methodology for risk and impact. - No formal early intervention and resolution framework (EC7). - Inclusion of group-wide risks, especially non-bank activities (insurance and capital markets), needs to be enhanced as banking groups diversify. ### Principle 9 (Supervisory techniques and tools) — on-site and off-site integration, planning, and information use - EC1–EC2 (mix and planning of on-site and off-site supervision) - BSD employs a structured approach to onsite and offsite analysis with internal tools, processes and guidelines. - CAMEL system used for quantitative off-site analysis; BSD transitioning to a risk-based ratings approach. - Current hybrid system combines CAMEL ratings with a risk matrix across eight inherent risk categories: - Credit - Liquidity - Interest rate - Foreign exchange - Operational - Legal and compliance - Strategic - Reputational - Composite score (risk matrix + CAMEL) determines supervisory plan, including frequency and intensity of onsite activities. - Onsite and offsite supervision are performed within the same unit; examiners responsible for both, promoting integration. - Operating Manual and Risk-Based Supervision Policy Framework guide planning and execution, with internal timelines, responsibilities and approvals. - Offsite surveillance reports: - i. Daily liquidity returns - ii. Weekly foreign exchange returns - iii. Monthly returns - iv. Quarterly returns - Onsite examination types: - I. Full scope examination - II. Follow-up/limited scope examination - III. Thematic onsite examinations - Supervisory plan established annually and reviewed half-yearly; on-site and off-site activities conducted by same division. - EC3–EC5 (information sources, tools, stress testing) - Primary inputs for offsite surveillance are statutory returns signed by the Principal Officer and two directors; returns are audited at year-end. - Onsite examinations verify accuracy of data and regulatory reporting; banks submit quarterly reports on remediation of onsite findings. - BSD uses a range of tools: - (a) Analysis of financial statements and accounts (core of offsite surveillance) - (b) Business model analysis (mainly during onsite) - (c) Limited use of horizontal peer reviews; example: analysis of banks’ exposures to a single counterparty - (d) Review of stress test outcomes submitted via ICAAPs - (e) Analysis of corporate governance, risk management and internal controls (onsite) - Routine supervisory inputs include licensing-stage analyses, consumer complaints and product reviews, outputs from supervisory colleges, Pillar 3 reports, and quarterly remediation reporting. - BoB communicates findings from onsite and offsite analysis in a timely and structured way. - Supervisory stress testing: BoB uses off-site surveillance to assess market risks but there is a need for supervisory stress tests to be performed (gap noted). - EC6 (reliance on internal audit) - The supervisor evaluates the work of the bank’s internal audit function and determines the extent to which it may rely on internal auditors’ work (finding text for EC6 was truncated in source; no additional details provided). ### Overall supervisory gaps and priorities highlighted in the source - Legal and structural gaps: - No definition of significant ownership and controlling interest in the Banking Act. - No explicit legal requirement to obtain BoB approval for change of control or voting rights; notification limited to initial licensing. - No comprehensive statutory framework for major acquisitions and investments; draft Banking Bill and Guidelines await enactment. - No resolution and recovery plan framework; internal processes for handling distressed banks are not fully documented. - Banking Act lacks consolidated supervision provisions (to be included in revised Banking Act). - Supervisory practice and methodology gaps: - Offsite surveillance approach currently uniform across banks; further risk-proportionate tailoring of offsite activities may be needed. - Transition from CAMEL to a hybrid risk-based approach requires quality assurance and back-testing. - Limited incorporation of non-bank activities (insurance and other group entities) into routine risk assessments and group-wide analysis. - Need for supervisory stress testing capability. *Source: 1bwaea2024004 - Section 21(2) of the Banking Bill which is designed to replace the existing Banking Act* ### Section 22(3) (b) of the Banking Act require banks’ auditors to submit auditor’s report ### Section 22(3) (b) of the Banking Act require banks’ auditors to submit auditor’s report ### Supervisory engagement with boards, auditors, and management (EC7–EC9, EC11) - Section 22(3)(b) of the Banking Act requires banks’ auditors to submit auditor’s report to BoB. - BoB reviews banks’ internal audit, staffing levels, qualifications, job descriptions and reports, and vets Head of Internal Audit for fitness and probity. - BoB considers the quality of the Board and its management during on-site examinations. - Routine engagement modalities: - Three annual meetings for all commercial banks: - Trilateral meetings with banks: attended by BoB, External auditor, and the bank to discuss audited financial accounts and effectiveness of internal controls; BSD’s Supervisory Manual contains instructions for this meeting. - Bilateral meeting with external auditors: BoB and the external auditor discuss audit issues relevant to BoB’s supervisory responsibilities and the financial condition of the bank. - Bilateral meeting with the regulated bank: BoB and the bank discuss strategic matters such as business mode, three-year strategy and risk management, including capital adequacy, Pillar 1 risks (credit, market and operational risks) and Pillar 2 risks (concentration risks). - Ad-hoc meetings and correspondence with a bank’s Board, non-executive board members and senior and middle management as necessary. - Engagement practice: - BoB engages with banks at the senior manager level including the senior leadership team. - Engagement with the Board is not a typical part of the BoB’s supervisory cycle in practice; greater frequency of meetings with independent non-executive directors is suggested. - Use of third parties (EC11): - Section 27(b) of the Banking Act empowers BoB to appoint a third party to advise a bank following an examination. - Section 22(6) of the Banking Act empowers BoB to entrust an auditor to carry out additional investigations or remedial duties. - BoB has not utilized third parties to carry out supervisory tasks. ### Communication of supervisory findings and follow-up (EC8–EC9) - Onsite communication process (EC8): - BSD follows a structured onsite examination process per the ‘Supervisory Manual’. - At conclusion of onsite, a preliminary exit meeting is held with the bank where examination findings are presented to relevant divisional heads; this is typically very timely and completed after branch inspections and before exiting the bank. - A draft exam report is shared with the bank and comments requested; internally a draft report is submitted to the Deputy Director within two weeks of the preliminary exit meeting. - BSD submits a report addressed to the Board containing main findings and financial condition of the bank. - BSD conducts follow-up onsite reviews to monitor progress via verification of implementation of onsite findings. - Follow-up expectations (EC9): - Banks are expected to respond to examination findings and other supervisory concerns within a reasonable time. - BSD’s internal operating manual indicates banks provide an update on a quarterly basis, but there is no specific required response time. - Implementation of onsite recommendations is monitored by BoB on a quarterly basis and progress is included in the quarterly institutional profile produced by the BSD; progress informs BSD’s risk assessment. ### Information systems and data analysis (EC12) - Historical and current reporting: - Historically banks submitted statutory returns both manually and automated; majority transitioned to automated submissions during the COVID pandemic. - BSD does not have an automated MIS system that performs quality testing on data to identify outliers; this process is conducted manually by bank examiners. - Automation project: - BoB has engaged FIS Global for the provision of a management information system expected to process, monitor, and analyze prudential information and identify areas requiring follow-up action. - The project is scheduled for completion in late 2022. - Effectiveness: - Despite a manual and time-consuming analysis process, the process to identify areas for follow-up action appeared to be effective. ### Additional criterion: periodic independent review (AC1) - BSD is subject to internal audit. - A formal framework for periodic independent reviews of the adequacy and effectiveness of supervisory tools and their use is not in place. - Recommendation: BSD would benefit from an independent review of its supervisory tools and their use. ### Assessment and recommendations for Principle 9 - Assessment: Largely compliant. - Observations and recommendations: - An overly elongated cycle for full-scope onsite examinations was observed; in several cases the last full-scope onsite examination was performed approximately four to five years. - A more differentiated approach to supervisory activities is warranted, with greater differentiation in scope and frequency of onsite examinations to allow more frequent targeted onsite reviews on specific risk areas. - Offsite analysis could be augmented by more qualitative information (policies and procedures, risk appetite, business plans and funding plans). - Greater frequency of meetings with independent non-executive directors is suggested, especially where group structures exist. - System-wide stress tests should be used with greater emphasis and integrated into assessment of banks’ ICAAPs to identify emerging systemic risks and outliers. ### Supervisory reporting framework and practices (Principle 10, EC1–EC10) - Legal reporting powers and frequency (EC1, EC6, EC7, EC8): - The Banking Act (Sections 19, 20 and 21) empowers BoB to require supervised banks to submit information on annual accounts, returns and any information concerning operations; banks must submit monthly returns of a statement of assets and liabilities no later than 21 days after the end of month. - Sections 20(2) and 21(2) empower BoB to require banks to audit returns and any other information prior to submission; each bank is required to audit its year-end statutory return. - Section 25(1) empowers examiners to examine all documents deemed fit during on-site examinations; Section 18 requires banks to maintain records in Botswana; Section 21 empowers BoB to request information when necessary. - Banking Act contains fines for non-compliance with reporting: any bank that fails to supply any information called for by the BoB, or fails to supply it within the time, or extended time, shall be guilty of an offence and liable to a fine of BWP 10 000. Sections 20(3) and 25(2) provide for penalties for non-compliance. - The Bank requires that all statutory returns should be signed by either CEO or CFO. - Reporting content and periodicity (EC1, EC4, EC5): - Monthly: statement of assets and liabilities (IFRS basis) no later than 21 days after month end; daily liquidity ratios (Liquid Asset Ratio); weekly foreign exchange reports; monthly large exposure returns. - Quarterly: a more complete suite of statutory returns including profit and loss, trading returns, changes in risk-weighted assets; quarterly submission is the most complete submission for supervisory analysis. - Annual: audited year-end statutory return. - Since 2017, banks submit ICAAP documents assessing Pillar 1 and Pillar 2 risks and capital adequacy; assessment of ICAAPs is evolving. - Banks submit solo returns; for one bank consolidated reporting commenced in January 2022. - Reporting requirements are uniform across banks and are not adjusted for systemic importance; two banks recently identified as D-SIBs have not had reporting requirements adjusted. - Reporting standards and validation (EC2, EC3, EC9, EC10): - All banks have adopted IFRS and report to BoB on that basis; reporting standards are published and available on BoB’s website. - Statutory returns must be signed by one principal officer (Chief Financial Officer) and two directors. - The external auditor is required to audit the last quarter of a bank’s financial year to provide assurance over processes that produce financial returns submitted to the supervisor. - BoB relies on external auditors to determine the validity of submitted information and may require audited returns prior to submission. - The supervisor utilizes policies and procedures to determine validity and integrity of supervisory information; periodic verification is conducted by supervisor staff or external experts as empowered by the Act. *IMF assessment content provided in the source PDF.* ### Section 27(b) of the Banking Act empowers BoB to appoint qualified external persons ### Section 27(b) of the Banking Act empowers BoB to appoint qualified external persons ### Legal empowerment to appoint external persons and external audit scope - Section 27(b) of the Banking Act empowers BoB to appoint qualified external persons to conduct supervisory task, after an examination of a bank. BoB specifies the terms of reference for each external expert it engages to conduct supervisory tasks. - Section 22(6) of the Banking Act empowers the Bank to influence the scope of the external audit. - Section 22(7) requires the external auditor to bring to the attention of the BoB a breach of the Act or non-compliance and other associated malfeasance. - The BoB undertakes an annual trilateral meeting between the bank, the external auditor and the BoB whereby the annual accounts are discussed, and the external auditor’s opinions are sought to identify any potential issues. ### EC11 — External experts must report material shortcomings - EC11: The supervisor requires that external experts bring to its attention promptly any material shortcomings identified during the course of any work undertaken by them for supervisory purposes. - Description and findings re EC11: - The Banking Act clearly requires the external auditor to bring to the attention of the BoB a breach of the Act or non-compliance and other associated malfeasance (see Section 22(7)). - The BoB holds an annual trilateral meeting with the bank and the external auditor to discuss annual accounts and to seek the external auditor’s opinions to identify potential issues. ### EC12 — Periodic review of supervisory information and reporting framework - EC12: The supervisor has a process in place to periodically review the information collected to determine that it satisfies a supervisory need. - Description and findings re EC12: - Two reviews of the reporting instructions were conducted: the first in 2014 as part of the Basel II implementation process and the second more recent review to prepare for the implementation of IFRS. - There is a need to conduct a comprehensive review of the reporting framework to align with the changes in the primary legislation and to align with changes in the financial system, bank business organizational approaches and supervisory needs. - Recommendation noted: Reporting instructions should be comprehensively reviewed on a more frequent basis. The revision to the Banking Act should provide the BSD an opportunity to revise the adequacy of supervisory returns to support risk identification. (EC12) ### Assessment of Principle 10 — Reporting and consolidation - Assessment of Principle 10: Largely compliant - Comments and findings: - Financial statements are not required to be submitted in both solo and consolidated formats. - One commercial bank commenced reporting on a consolidated basis January 2022, but this has not been accompanied with broader guidance for all commercial banks to report on a consolidated basis potentially creating differences in balance sheets impacting a meaningful comparative analysis (EC1 and EC5). - The reporting requirements of banks are not adjusted for the systemic importance of banks. Reporting requirements are uniform with no change in reporting requirements for a larger bank and a smaller bank. - Two banks have recently been identified as D-SIBs, yet their reporting requirements have not been adjusted to reflect their size and scale and systemic importance (EC4). ### Principle 11 — Corrective and sanctioning powers of supervisors (overview) - Principle 11: Corrective and sanctioning powers of supervisors. The supervisor acts at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system. The supervisor has at its disposal an adequate range of supervisory tools to bring about timely corrective actions. This includes the ability to revoke the banking license or to recommend its revocation. ### EC1 — Early engagement, escalation, and follow-through - EC1: The supervisor raises supervisory concerns with the bank’s management or, where appropriate, the bank’s Board, at an early stage, and requires that these concerns be addressed in a timely manner. Where the supervisor requires the bank to take significant corrective actions, these are addressed in a written document to the bank’s Board. The supervisor requires the bank to submit regular written progress reports and checks that corrective actions are completed satisfactorily. The supervisor follows through conclusively and in a timely manner on matters that are identified. - Description and findings re EC1: - BoB has established practice where supervisory concerns that require prompt corrective action are communicated directly to a bank’s board. - The Banking Act prescribes penalties for non-compliance with prudential requirements, e.g., Section 11; Section 13(2); Section 16(6); Section 20(3); Section 21(5); Section 25(2)-(3); Section 26(c); Section 29(3); Section 32; and Section 52. - BoB undertakes offsite analysis of statutory returns which are submitted daily, weekly, monthly, quarterly, and annually. If issues are identified, the BSD raises with bank points of contact and if necessary, senior bank management. Supervisory concerns are escalated according to the severity of the issue. - The supervisory plan includes an annual meeting with bank senior management. During these meetings, supervisory concerns are raised. - Following onsite examinations, BoB communicates findings to the bank via a letter addressed to the Board. The bank reports quarterly progress against onsite examination findings and the BSD incorporates the results into the bank’s institutional profile. ### EC2 — Availability of supervisory tools - EC2: The supervisor has available an appropriate range of supervisory tools for use when, in the supervisor’s judgment, a bank is not complying with laws, regulations or supervisory actions, is engaged in unsafe or unsound practices or in activities that could pose risks to the bank or the banking system, or when the interests of depositors are otherwise threatened. - Description and findings re EC2: - The Banking Act provides for several supervisory tools that the BoB can deploy where banks are not complying with laws, regulations or if the bank is engaged in unsound practices. In addition to moral suasion, the BoB can impose conditions on banks restricting their activities. The tools include: - Section 11 of the Banking Act empowers the BoB to revoke a banking license of a bank, - Section 13 (2) of the Banking Act empowers BoB to take regulatory action against a bank for failure to comply with minimum capital requirements, - Section (20) empowers the Bank to charge a bank if it fails to submit statutory returns, and - Section 27 empowers the Bank to vary licensing conditions or revoke if a business is conducted in an unlawful or unsound manner. - Section 12 of the Banking Act also allows BoB to amend, add to or vary the license conditions which could be used broadly. In practice, however, the BoB has not used this section of the Banking Act. ### EC3 — Power to act when banks fall below regulatory thresholds - EC3: The supervisor has the power to act where a bank falls below established regulatory threshold requirements, including prescribed regulatory ratios or measurements. The supervisor also has the power to intervene at an early stage to require a bank to take action to prevent it from reaching its regulatory threshold requirements. The supervisor has a range of options to address such scenarios. - Description and findings re EC3: - Sections 10, 11, 12 and 33 of the Banking Act specify several measures that the BoB can use to ensure correction of deficiencies noted in the operation of banks. - Section 27 empowers the Bank to vary licensing conditions or revoke if a business is in an unlawful or unsound manner. ### EC4 — Range of measures and practical application - EC4: The supervisor has available a broad range of possible measures to address, at an early stage, such scenarios as described in essential criterion 2 above. These measures include the ability to require a bank to take timely corrective action or to impose sanctions expeditiously. In practice, the range of measures is applied in accordance with the gravity of a situation. The supervisor provides clear prudential objectives or sets out the actions to be taken, which may include restricting the current activities of the bank, imposing more stringent prudential limits and requirements, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from the banking sector, replacing or restricting the powers of managers, Board members or controlling owners, facilitating a takeover by or merger with a healthier institution, providing for the interim management of the bank, and revoking or recommending the revocation of the banking license. - Description and findings re EC4: - Sections 10, 11, 12 and 33 of the Banking Act specify several measures that the BoB can use to ensure correction of deficiencies noted in the operation of banks. Sections 33 and 34 of the Banking Act empower BoB to take action when necessary (temporary management). - Examples and practical notes: - a) restricting the current activities of the bank - the Banking Act permits the BoB to vary license conditions which can restrict their activities of banks. However, no experience exercising this power. - b) imposing more stringent prudential limits and requirement - the Banking Act permits the BoB to place restrictions on banking licenses, which can restrict the activities of banks. However, no experience exercising this power. - c) withholding approval of new activities or acquisitions, *Source: 1bwaea2024004 - Section 27(b) of the Banking Act empowers BoB to appoint qualified external persons* ### Section 41 of the Bank of ### Section 41 of the Bank of ### EC5 — Supervisor applies sanctions to bank and individuals - Description and findings re EC5: - Sections 26, 30 and 32 of the Banking Act prescribes sanctions to be imposed on directors, principal officer and other employees when they fail to take reasonable steps to ensure compliance with the provisions of the Act. - The Banking Act also empowers BoB to operate effectively as per prescribed criteria (Section 11, 12, 33,34, 35 of the Banking Act). ### EC6 — Power to take corrective actions including ring-fencing - Description and findings re EC6: - No legal provision for ring-fencing of the bank from its related parties in matters that could impair the safety and soundness of the bank or the banking system. - A draft policy on the supervision of distressed banks is in place. ### EC7 — Cooperation with relevant authorities for orderly resolution - Description and findings re EC7: - Not covered in the Banking Act or any guideline. - BoB cooperates and collaborates with relevant authorities when dealing with problem banks in accordance with the provisions of Section 33 of the Banking Act. - BoB does not have a clear framework of dealing with problem banks. - As banks enter bancassurance, particularly insurance subsidiaries, resolution may require cooperation with NBFIRA, which is not occurring. - Arrangements are in place at the FSC where the BoB and NBFIRA meet (see also CP3). ### Additional criteria — AC1 and AC2 - AC1 — Laws or regulations guard against undue delay of corrective actions: - Description and findings re AC1: Not covered in the Banking Act or any guideline currently in place. - AC2 — Informing non-bank supervisors when taking formal corrective action: - Description and findings re AC2: - BoB has signed an MoU with the NBFIRA, which calls for exchange of information on regulatory matters. - The BSD does not have formal internal procedures in place that address the exchange of information with regards to formal corrective action with the non-bank supervisor NBFIRA. ### Assessment of Principle 11 - Largely Compliant - Comments: - The BoB has traditionally used moral suasion to enforce prudential standards. - Supervisory concerns are communicated to bank management and in the case of onsite examination findings to the Board. - In practice, there has been limited experience using sanctioning powers provided for the Banking Act. - Limited experience restricting bank licenses and applying more conservative prudential requirements on individual banks such as higher minimum capital requirements. - Formal guidelines for handling problem and weak banks have not been developed. - No formal framework linking the CAMEL risk rating system and approaches to corrective actions. - BoB does not have a formulated corrective action policy framework for distressed banks, although it has some of its elements in the form of regular prudential requirements. - EC6 ring fencing not developed in the Banking Act and no experience in practice. - EC7 not met with regards to resolution of problem banks. - AC1 not met. - AC2 not met. --- ### Principle 12 — Consolidated supervision (overview) - Principle statement: - The supervisor supervises the banking group on a consolidated basis, adequately monitoring and, as appropriate, applying prudential standards to all aspects of the business conducted by the banking group worldwide. ### EC1 — Understanding group structure and material activities - Description and findings re EC1: - Banks have begun to diversify their business models through the addition of insurance which is required to be undertaken via the establishment of a subsidiary. NBFIRA is the insurance regulator. - The Banking Act requires the establishment of a subsidiary to be approved by the BoB. An application to the BoB for establishment of a subsidiary includes all relevant material about the new subsidiary. - The group structure is included in the institutional profile which is updated quarterly where bank business models are discussed (see CP8 and 9). - During supervisory colleges the BoB evaluates group structure and risks across the entire group, including from other regulators (see also CP13). - At the time of licensing, BoB requires information about a bank’s group structure during the licensing stage to determine potential risks associated with the group. - All the banks operating in Botswana are subsidiaries of foreign-owned entities. However, BoB does not practice consolidated supervision. The supervised banks are subsidiaries of international and regional banks. BoB is a host supervisor. - The revised Banking Bill includes a section on consolidated supervision. - The Banking Act has no provision for consolidated supervision. - BoB has memorandum of understanding with home supervisors of the parent banks of the subsidiaries operating in Botswana. - The new Banking Bill covers consolidated supervision. ### EC2 — Prudential standards and consolidated reporting - Description and findings re EC2: - The BoB does not have the power to apply prudential standards across a banking group such as a non-operating holding company parent entity to a bank and affiliates. - Currently all prudential requirements are applied at the solo (Level 1) bank level. - Analyses of the banking system suggests that minor sources of revenue and assets and activities are operated outside of the solo bank (Level 1). - As of January 2022, there is one bank that is submitting its statutory return on a consolidated basis. - During bilateral and trilateral meetings held annually with the banks’ management, corporate governance policies and practices are discussed to determine if they are robust (board composition, board committees, board’s role in risk oversight, succession planning and evaluation, directors’ compensation, training and self-assessment). - These processes are also verified during an on-site examination through the review of board packs and minutes. - The draft Banking Act includes a section on consolidated supervision. ### EC3 — Oversight of foreign operations by parent management - Description and findings re EC3: - BoB is not a home-regulator to the eight commercial banks operating in Botswana. - Home regulators of the commercial banks operating in Botswana have access to all the material information from their subsidiaries. - Local management of these banks has the necessary expertise to manage these subsidiaries in a safe and sound manner and in compliance with supervisory and regulatory requirements. - For statutory banks, they have only domestic operations and no cross-border activities. ### EC4 — Home supervisor visits and on-site examination policy - Description and findings re EC4: - The BoB participates in supervisory colleges on an annual and two-year cycle. - Within the college process, the BoB evidenced active communication of risk information in a two-way exchange that helped inform the supervision of the subsidiary. - Outside of the supervisory college, no formal ongoing interaction with the home supervisor is undertaken. - Ad hoc and issues-based communication takes place and there is no obstacle for BoB to share information with home supervisors. - BoB evidenced onsite examinations with home supervisors (e.g. Zimbabwe) and prior to the disruption to the supervision cycle caused by COVID-19, the BoB had planned a joint onsite examination with the South African Reserve Bank. ### EC5 — Review of parent companies and affiliated companies - Description and findings re EC5: - The BoB takes into account the risks associated with the parent banks in their assessments. - Information about the foreign parent banks is included in the institutional profiles which is a key part of the supervisory process (see also CP13 for a discussion of supervisory colleges). - However, there is no ongoing or periodic analysis of group structure as part of offsite analysis. ### EC6 — Limiting consolidated group activities and locations - Description and findings re EC6: - The revised Banking Act permits the BoB these powers and addresses deficiencies. ### EC7 — Supervising individual banks in the group on a stand-alone basis - Description and findings re EC7: - The BoB supervises banks on an individual basis. - Total value of activities is small compared with the bank. ### Additional criterion — AC1 (fit and proper standards for owners and senior management of parent companies) - Description and findings re AC1: - Corporate ownership of banks is not prohibited by the Banking Act; however the ownership structure of the commercial banks is by non-operating holding companies which are in turn owned by banks and part of a banking group. - The BoB undertakes fit and proper analysis of parent companies. ### Assessment of Principle 12 - Materially non-compliant - Comments: - The Banking Act does not have a section on consolidated supervision. - Draft guidelines on the Supervision of Financial Conglomerates have been completed and will be issued to the market after the enactment of the Banking Bill. --- ### Principle 13 — Home-host relationships (overview) - Principle statement: - Home and host supervisors of cross-border banking groups share information and cooperate for effective supervision of the group and group entities, and effective handling of crisis situations. Supervisors require the local operations of foreign banks to be conducted to the same standards as those required of domestic banks. ### EC1 — Supervisory colleges for cross-border groups - Description and findings re EC1: - Eight of the nine commercial banks are subsidiaries of foreign banks. BoB actively participates in supervisory colleges on a regular basis. - Frequency of colleges: typically every two years and in the case of one larger bank an additional arrangement on an annual basis. - Participation in supervisory colleges was evidenced for Firstrand Group, Absa group, Standard Bank, Standard Charted Bank UK, Capricorn Group, Bank of Baroda, and FMB Capital Holding Group. - The college provides for the sharing of risk assessments and communication of relevant information and exchange of materials. - BoB is able to effectively communicate its risk assessment to the home supervisor and raise awareness. - Group structure and business models were discussed. Presentations made by executives from the parent bank to discuss strategy and management priorities. - Example: In the case of Absa bank where there was a change in ownership of the ultimate parent bank, discussions regarding the processes and associated risks were communicated. - The supervisory college represents the main mechanism by which the BoB interacts with home supervisors and the mission saw evidence of the college process working effectively as a two-way exchange of information and risk assessments. - Typically, there is limited interaction with home supervisors outside of the college process. - The statutory banks are domestically owned and have no cross-border activities or subsidiaries. ### EC2 — Information sharing bilaterally and through colleges - Description and findings re EC2: - The BoB has executed formal MoUs with the following home supervisors: - (a) Bank of Mozambique - (b) Reserve Bank of Malawi - (c) Reserve Bank of India - (d) Reserve Bank of Zimbabwe - (e) South African Reserve Bank - (f) Bank of Namibia - An MoU is being developed for Nigeria which is the home supervisor for one of the commercial banks. - For one commercial bank, the BoB has not signed a MoU. - Types of information include financial performance, regulatory and supervisory issues of concern, particularly in relation to risk management and corporate governance. - Examples of joint supervisory work with foreign supervisory authorities: - South African Reserve Bank – FNBB – 2016 (AML/CFT On-site with Financial Intelligence Authority) - South African Reserve Bank – 2017 Prudential meeting - Reserve Bank of Zimbabwe BancABC - 2017 - There was limited evidence of joint supervisory work with foreign supervisors in the normal supervision cycle and limited information exchange on a bilateral basis with home supervisors. ### EC3 — Coordination and planning of supervisory activities - Description and findings re EC3: - The BoB actively participates in the supervisory college to understand and evaluate the risks associated with parent banks. - The college process enables the BoB to understand the key risk drivers of the group and uses this information in its risk assessment. - Changes in group structure and strategy are taken into account and included in the institutional profile as a comprehensive risk assessment. - The framework exists for BoB to participate in cross-border on-site examinations of parent banks; however this has not occurred in practice. - BoB has not participated in supervision cross border does not coordinate and plan supervisory activities with any home supervisors. - Planning and conducting onsite examinations is one example where the BoB could be more proactive and deepen their collaboration with home supervisors. - While there have been examples of joint supervisory activities, the number of examples is limited across the population of banks. ### EC4 — Communication strategy between home and host supervisors - Description and findings re EC4: - The BoB is the home supervisor for one commercial bank. It does not operate cross-border and was recently licensed after demutualizing as a building society. - The main channel of communication is via the supervisory college. ### EC5 — Cross-border crisis cooperation and coordination framework - Description and findings re EC5: - BoB evaluates and assesses resolution plans at a Group level. - The analysis is undertaken jointly with the home supervisors and discussed during supervisory colleges which are conducted frequently. ### EC6 — Group resolution planning and information sharing - Description and findings re EC6: - Group resolution plans have been developed by the parent groups; however, resolution plans have not been prepared for the commercial banks supervised by BoB. - BoB has recently developed a D-SIB framework which includes resolution. - The framework designates two banks are D-SIBs. - The Banking Act is under revision which has explicit provisions for resolution planning. - Group resolution planning is discussed at supervisory colleges. ### EC7 — Host laws require cross-border operations to meet domestic prudential standards - Description and findings re EC7: - BoB’s laws and regulations are applied uniformly to all banks operating in Botswana. - All cross-border operations of foreign banks are required to be subsidiaries by practice. - In effect, this means that all banks are treated uniformly in terms of prudential, inspection and regulatory reporting. ### EC8 — On-site access for home supervisors - Description and findings re EC8: - (Content ended at EC8 in the source; no additional descriptive text provided.) *Source: Section 41 of the Bank of (content unit 1bwaea2024004)* ### Section 43(4) of the Banking Act has a provision which would permit a home ### 1bwaea2024004 - Section 43(4) of the Banking Act has a provision which would permit a home ### Cross-border supervision and on-site access (EC9, EC10, Principle 13) - Section 43(4) of the Banking Act has a provision which would permit a home supervisor on-site access to local offices to assess the subsidiary’s safety and soundness. - At the time of the mission, there were no examples where a home supervisor had exercised this provision. - An onsite examination by a foreign supervisor had been planned but had not taken place owing to the disruption by COVID. - EC9: BoB does not permit booking offices or shell banks. BoB has demonstrated a preference for the banking system not to have branches of foreign banks, with foreign bank operations structured under subsidiaries. - EC10: Information sought from other supervisors detail the purpose for which it is going to be used. Consequential action taken based on information received from other supervisors will be made aware. The supervisory college is the main channel for BoB to communicate with home supervisors, particularly for exchange of risk assessments and BoB’s supervisory stance and supervision activities. - Outside of supervisory colleges, there has not been an example of communication with home supervisors regarding material actions taken with banks. - Assessment of Principle 13: Largely compliant. - Comments: - BoB is not a home supervisor to any bank or banking group but participates in supervisory colleges for supervised banks. - BoB has signed MoUs with most home supervisors of subsidiaries incorporated in Botswana. - The revision of the Banking Bill has specific provisions regarding cross-border supervision and bank resolution which will address current deficiencies. - Formal MoUs are in place and BoB permit the sharing of information with have not been entered into for one large commercial bank; while there were some examples of joint supervisory work with foreign supervisors, opportunities exist to expand home-host cooperation. - As non-bank activities of banks expand, BoB will need to strengthen coordination of supervisory activities with NBFIRA. - The framework exists for BoB to participate in cross-border on-site examinations of parent banks; however this has not occurred in practice. - BoB does not coordinate and plan supervisory activities with any home supervisors; planning and conducting onsite examinations is an example where BoB could be more proactive and deepen collaboration. - While there have been examples of joint supervisory activities, the number of examples is limited across the population of banks. - Related supervisory planning note: - Group resolution plans have been developed by parent groups; resolution plans have not been prepared for the commercial banks supervised by BoB. - BoB has recently developed a D-SIB framework which includes resolution. The framework designates two banks are D-SIBs. - The Banking Act is under revision which has explicit provisions for resolution planning. (EC6) ### Prudential regulations and requirements — Principle 14 (Corporate governance) - Principle 14: The supervisor determines that banks and banking groups have robust corporate governance policies and processes covering strategic direction, group and organizational structure, control environment, responsibilities of the banks’ Boards and senior management, and compensation. These policies and processes are commensurate with the risk profile and systemic importance of the bank. #### EC1 — Laws, regulations, supervisory guidance on board and senior management responsibilities - The Banking Act establishes requirements for: - audit committee of the board (S.23), - fit and proper requirements for the principal officer (CEO) (S.29), - disqualifications of directors, principal officers, and senior management (S.30), - disclosure of interest by director (S.31), - offences by directors, CEO and senior management (S.32). - Laws or regulations do not explicitly assign each bank’s board and senior management the responsibility with respect to corporate governance. - Current requirements relate to fit and proper requirements for appointment of new directors, principal officer (CEO), and senior management, role and responsibilities of the audit committee, risk management and disclosure and transparency. - Risk management committee references exist in guidelines but banks are not required to establish one and the guidelines do not elaborate the role or duties of the risk management committee. - BoB guidance is limited to expectations around fit and proper requirements for senior management. BoB is in the process of issuing comprehensive guidelines on corporate governance to address these gaps. #### EC2 — Supervisor assessment of corporate governance policies and implementation - Sections 22(8) and (9) of the Banking Act empower BoB to, at least once a year, arrange trilateral and bilateral meetings with each bank and its auditors to discuss corporate governance policies and practices. - Topics discussed include board composition, board committees, board’s role in risk oversight, succession planning and evaluation, directors’ compensation, training, and self-assessment. - These processes are verified during on-site examinations through review of board packs, board minutes and interviews with senior management. - BoB assesses annual declarations of board of directors and senior management officials to review fit and proper status. - BoB has not yet undertaken a formal and structured assessment of a bank’s corporate governance framework, policies, processes, and practices, and is yet to develop supervisory guidance for such assessments. #### EC3 — Board nomination/appointment structures and committees - Section 29(4) of the Banking Act (1995) requires prior written consent of BoB for any person to serve as a director of a bank. - BoB guideline: banks must inform BoB of intended appointments of senior management officials. - Guideline restricts representation of related persons on the board to one-third of board membership. - A person employed full-time by the holding company or its subsidiaries may serve as non-executive director unless their conduct or executive authority could be construed to direct day-to-day management. - BoB’s decision to approve or not a proposed director is based on “fit and proper” determination. - Section 23 of Banking Act (1995) and Section 3 of the BoB guidelines (2009) set audit committee requirements: - Each bank shall have an Audit Committee of at least three board members, majority independent non-executive directors. - Audit Committee members should have relevant experience and a balance of skills. - Audit Committee functions include recommending accounting policies, evaluating internal controls, facilitating communication among board, senior management, internal and external auditors, recommending appointment/dismissal/compensation of external auditors, oversight of auditors’ independence, enhancing integrity of financial statements, reviewing audit scope, receiving and reviewing audit reports and management letters, ensuring timely corrective action, reviewing audited financial statements and recommending to the board, establishing confidential submission procedures by employees. - Laws and regulations currently require only constitution of the audit committee; other board sub-committees (remuneration, risk, nomination) are optional. - Laws and regulations do not explicitly establish nomination procedures for identifying and nominating new directors. #### EC4 — Board members’ qualifications, effectiveness, duties - BoB’s guidelines provide vetting and review of prospective board and senior management candidates for “fit and proper” status. - BoB reviews continued fitness and propriety of board members annually but does not undertake formal documented assessment of board members’ effectiveness or whether they exercise their duty of care and duty of loyalty. #### EC5 — Board oversight of strategy, risk appetite, corporate culture, conflicts - Offsite supervisors review banks’ risk management strategies, risk appetite, risk management policies and processes during annual bilateral and trilateral meetings. - Banks must share board-approved strategies and policies ahead of onsite examinations; supervisors review these during on-site work to assess senior management’s execution. - Supervisors review board minutes to assess attendance and contributions by directors. - Laws or regulations do not explicitly require banks or their boards to promote corporate culture and values through code of conduct, conflict of interest policies (other than related party exposures and transactions), or whistleblower policies. - Availability and adequacy of these policies are not explicitly assessed and recorded in supervisory assessments. #### EC6 — Fit and proper standards, succession planning, oversight of senior management - Section 29 of the Banking Act (1995) sets criteria for a principal officer to be a “fit and proper” person, including: - propriety and competence, - diligence to fulfil responsibilities, - previous conduct and activities in business, particularly whether guilty of fraud or dishonesty. - BoB may request banks to remedy situations where a person is able to influence the principal officer or board detrimentally; failure to comply can lead to license revocation with Minister’s approval (section 11). - Section 4 of BoB guideline on appointment of directors and senior management lists “fit and proper” criteria, including technical knowledge and experience, integrity, no bankruptcy, satisfactory financial condition and history, not being a significant shareholder/director/official of a “problem bank”, absence of detrimental external influence, and no evidence of supplying false or misleading information. - During annual bilateral and trilateral meetings and on-site work, BoB supervisors review boards’ succession plans, fit and proper standards, senior management execution of board strategies, and frameworks for monitoring senior management performance. #### EC7 — Board oversight of compensation systems - Section 8.5 of BoB guideline on risk management (2018) requires banks’ compensation policies to be aligned to the bank's statement of risk appetite and tolerance, long-term strategic direction, financial goals and overall safety and soundness, and balance risk and reward. - At least once a year, supervisors try to review/confirm pay structure alignment during trilateral and bilateral meetings. - Laws and regulations do not require establishment of a remuneration committee; responsibilities are discharged by the board or any delegated committee. #### EC8 — Board and senior management understanding of operational structure and opaque structures - Board and senior management are expected to be familiar with bank and group structure at licensing and continuously. - Any bank establishing a special purpose vehicle or a subsidiary requires prior regulatory approval under Section 9(6) of the Banking Act. - BoB has adopted a risk-based supervision framework requiring board and senior management to be abreast of institution risk profiles. - Bank structures operating in Botswana are described as simple and easy to comprehend; currently no bank has established SPVs and related structures. #### EC9 — Power to require changes in board composition - The supervisor has the power to require changes in board composition if it believes individuals are not fulfilling duties related to satisfaction of criteria. *Source: 1bwaea2024004 - Section 43(4) of the Banking Act has a provision which would permit a home* ### Section 30 of the Banking Act (1995) lays down that without prejudice to anything ### 1bwaea2024004 - Section 30 of the Banking Act (1995) lays down that without prejudice to anything ### Corporate governance: Section 30 and legal powers - Section 30 of the Banking Act (1995) requires that, without prejudice to the Companies Act, any person who is a director, a principal officer or other officer concerned with the management of a bank shall cease to hold office if he is: - (i) declared bankrupt or makes a composition with his creditors; or - (ii) convicted of an offence involving fraud or any other act of dishonesty. - No person who has been a director of, or indirectly concerned in the management of, a bank that has been liquidated shall, without the written authorization of the Central Bank, act or continue to act as a director of, or be directly or indirectly concerned in the management of, a bank. - Any person who acts in breach of this section shall be guilty of an offence and liable to a fine of BWP 5000 and to imprisonment for two years. - While BoB can use these powers to remove a director when she/ he does not meet the minimum eligibility criteria stipulated in the Act, this section does not empower the BoB to remove one or more directors, or remove the entire board, if they do not operate in the best interest of the bank or its depositors, or do not perform well. ### Additional criteria and gap analysis (Principle 14) - AC1: Laws, regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material and bona fide information that may negatively affect the fitness and propriety of a bank’s Board member or a member of the senior management. - Description and findings re AC1: Laws or regulations do not currently have such requirement. The draft Banking Bill under consideration also does not address this gap. - Assessment of Principle 14: Materially non-compliant - Identified gaps in regulatory and supervisory frameworks on corporate governance: - (i) Laws or regulations do not explicitly assign each bank’s board and senior management the responsibility with respect to corporate governance or provide guidance to banks on expectations for sound corporate governance. - (ii) BoB is yet to undertake a formal and structured assessment of a bank’s corporate governance framework, policies, processes, and practices, and develop supervisory guidance for undertaking such assessments. - (iii) Laws and regulations do not currently require nomination committee, remuneration committee or risk committee even in large banks, and do not establish the nomination procedures to be followed by the board while identifying and nominating new directors. - (iv) BoB reviews the continued fitness and propriety of the board members every year, but does not undertake formal documented assessment of the board members’ effectiveness or if they exercise their duty of care and duty of loyalty. - (v) Laws or regulations have not explicitly required banks or their boards to promote corporate culture and values through code of conduct, conflict of interest policies (other than related party exposures and other related party transactions), or whistle blower policies. The availability and adequacy of these have not been assessed. - (vi) BoB does not have the power to remove one or more directors, or remove the entire board, if they do not operate in the best interest of the bank or its depositors, or do not perform well. - Recommendations: - BoB should initiate changes to law to obtain the powers that they might not have for requiring, supervising and enforcing good corporate governance in banks. - Issue guidance on corporate governance that addresses the identified gaps, and provide more and specific guidance to supervisors to be able to conduct effective supervision of corporate governance arrangements in banks. - Developments in progress: - The BoB is in the process of issuing a dedicated guideline on corporate governance and the Banking Bill is also in an advanced stage of being enacted. These two are expected to address some of the gaps that have been flagged above. - Note: The Guidelines on Corporate Governance for Banks/Financial Institutions Licensed and Supervised by the Bank of Botswana were approved in November 2022 (after the assessment mission) and broadly address gaps identified at (i), (iii) and (v) in the Comments Section. ### Risk management process (Principle 15) — overview - Principle 15 expectation: The supervisor determines that banks have a comprehensive risk management process (including effective Board and senior management oversight) to identify, measure, evaluate, monitor, report and control or mitigate all material risks on a timely basis and to assess the adequacy of their capital and liquidity in relation to their risk profile and market and macroeconomic conditions. This extends to development and review of contingency arrangements (including robust and credible recovery plans where warranted). The risk management process is commensurate with the risk profile and systemic importance of the bank. - Footnotes and context: - The Guidelines on Corporate Governance for Banks/Financial Institutions Licensed and Supervised by the Bank of Botswana approved in November 2022 broadly address some identified gaps. - A bank’s risk management framework should take an integrated “bank-wide” perspective and cover group-wide exposures where relevant. ### Essential criteria (EC1–EC10) — findings and supervisory arrangements - EC1: Board-approved risk management strategies and suitable risk appetite; board ensures: - (a) a sound risk management culture is established throughout the bank; - (b) policies and processes are developed for risk-taking consistent with strategy and appetite; - (c) uncertainties attached to risk measurement are recognized; - (d) appropriate limits established and communicated; and - (e) senior management monitors and controls material risks. - Findings and supervisory expectations: - BoB guideline on risk management (2018) sets supervisory expectations including board approval of business strategies and significant policies, board composition and designation of members for risk oversight, board oversight of management consistent with risk strategy and appetite, demand for periodic reports, and management responsibility for day-to-day consistency with the bank's risk strategy. - Specific expectations: documented policies, procedures and limits; review and adjustment to reflect changing conditions; MIS and reporting requirements; review of new activities before adoption. - Supervisory practice: BoB supervisors review risk management frameworks during onsite examinations, review board packs and minutes, rely on compliance and internal audit functions, use offsite surveillance and ICAAP reviews, and conduct annual bilateral and trilateral meetings. Supervisors also leverage external auditors. - Supervisory gaps: Supervisors can benefit from more detailed and specific guidance on closer or more focused supervision of risk management, governance, policies, information systems and risk reporting. - EC2: Comprehensive risk management policies and processes to provide bank-wide view and address macroeconomic risks. - Findings: - Banks are required to establish comprehensive risk management strategies, policies and processes covering bank-wide exposures. - BoB guidelines require stress testing as part of risk management; stress testing used to factor macroeconomic risks and inform risk limits. - EC3: Documentation, regular review and communication of strategies, policies, processes and limits; prompt attention to exceptions. - Findings: - Banks must properly document, regularly review and adjust, and communicate risk management strategies, policies and processes. - BoB guidelines require MIS to monitor exposures against limits and timely reporting of exceptions to senior management. - EC4: Board and senior management obtain sufficient information and understand risks and relation to capital and liquidity; review measurement limitations. - Findings: - Requirements and supervisory practices include ICAAP conducted annually; banks prepare ICAAP documents and share with supervisors; ICAAP discussed at annual bilateral meetings. - Onsite supervisors assess senior management understanding through interviews, review board reports and minutes, and assess deviations and board approvals. - EC5: Banks have internal processes for assessing overall capital and liquidity adequacy; supervisor reviews ICAAP and ILAAP where applicable. - Findings: - Supervisors review ICAAP offsite and discuss with management, but due to lack of adequate guidance and supervisory tools to validate or challenge banks’ conclusions, supervisors are yet to undertake detailed reviews or evaluations of ICAAP documents and capital and liquidity strategies. - BoB has not required banks to undertake internal liquidity adequacy assessments or share these assessments with the BoB; BoB relies on banks’ stress testing of liquidity risk and liquidity contingency plans. - EC6: Use of models — supervisory standards, board understanding of limitations, independent validation and testing. - Findings: - Banks use models for IFRS 9 (probability of defaults and expected credit losses), fair value measurement, internal credit risk rating and stress testing. - BoB has not issued directives, guidelines or circulars articulating regulatory requirements and supervisory expectations about the use of financial models; has not established supervisory standards or undertaken review/assessment of models; offsite framework and supervision manual lack guidance on model risk. - Recommendation: BoB should develop appropriate guidelines and standards for models; periodically obtain information on types of models in use; develop supervisory guidance and skills to review models and model risk management. - EC7: Information systems (MIS) adequate under normal and stress conditions for measuring, assessing and reporting exposures across all risks; timely reports for board and senior management. - Findings: - BoB guideline on risk management (2018) requires effective MIS: monitoring reports should be frequent, timely, accurate and informative and distributed to appropriate individuals. - Specific MIS expectations: address all material risks; document and test key assumptions and data sources; structured reports to monitor exposures and compliance; accurate and timely reports to board and management; MIS must keep pace with risk profile and business complexity. - Supervisory practice: BoB reviews IT and information security frameworks to gain insights into MIS and assesses system outputs and reports. Supervisors would benefit from explicit guidance on assessing and testing banks’ MIS for stress/crisis availability. - EC8: Policies and processes to ensure boards and senior management understand risks in new products, material modifications and major initiatives; board approval required. - Findings: - New products and major initiatives are submitted to BoB for approval once approved by respective boards or committees. BoB considers effects on risk profile and capital and expects details including industry charges comparison, monthly maintenance and minimum/maximum amounts, benefits and customer risks, and target customers. - BoB reviews do not extend to assessment of banks’ internal policies and processes, board and senior management involvement and understanding of risks, or adequacy of related improvements to risk management frameworks. - Supervisory gap: need for more explicit guidance to assess internal approvals and associated governance. - EC9: Risk management function covering all material risks with sufficient resources, independence, authority and access to the board; clear segregation from risk-taking functions; reporting and internal audit review. - Findings: - BoB guideline requires a risk management function headed by a senior management official (executive level) independent of risk-taking functions and reporting functionally to the board or relevant sub-committee. - Risk function responsibilities: identify current and emerging risks; develop assessment and measurement systems; establish policies, practices and controls; develop risk-tolerance limits; monitor positions and report to senior management and board. - BoB’s risk-based framework requires banks to develop appropriate, tailored risk management systems with focus on board/senior management oversight, comprehensive tools, credible policies/procedures/limits, effective internal audit and robust MIS. - Supervisory practice: BoB assesses risk management policies, controls and strategies during on-site examinations and offsite bilateral/trilateral meetings. - EC10: Larger and more complex banks to have a dedicated risk management unit overseen by a Chief Risk Officer (CRO) or equivalent; removal of CRO requires board approval, public disclosure and discussion with supervisor. - Findings: - BoB guideline requires each bank to establish a risk management function headed by a senior management official (executive level) considered the chief risk officer, though designation may differ across banks. *Source: 1bwaea2024004 - Section 30 of the Banking Act (1995) lays down that without prejudice to anything* ### Section 3.2 of the BoB guidelines on appointment of new directors and senior ### Section 3.2 — BoB guidelines on appointment of new directors and senior management officials of banks ### Appointment and notification requirements - "No person shall serve as a senior management official of a bank unless the bank informs the BoB of the intended appointment, and the BoB conveys it’s no objection to such appointment." - Laws or regulations do not explicitly require that removal of a bank's CRO be: - with the prior approval of the Board, - generally disclosed publicly, or - discussed with the supervisor (BoB) together with reasons for the removal. - In practice, supervisors assert that banks discuss with BoB all cases of transfer, resignation and removal of CROs. ### Risk management standards (EC11–EC14) - EC11: The supervisor issues standards related to credit risk, market risk, liquidity risk, interest rate risk in the banking book and operational risk. - BoB’s guidelines on risk management, risk-based supervision and capital adequacy collectively establish requirements and supervisory expectations for these risk areas. - BoB is working on a new guideline on cybersecurity risk management to supplement current guidelines. - EC12: The supervisor requires banks to have appropriate contingency arrangements (including recovery plans where warranted by risk profile and systemic importance). - The supervisor, working with resolution authorities as appropriate, assesses adequacy and feasibility of contingency arrangements and seeks improvements when deficiencies are identified. - BoB is the resolution authority for banks, but the Banking Act and the BoB Act do not explicitly establish the framework for recovery and resolution of banks. - EC13: The supervisor requires forward-looking stress testing programs commensurate with banks’ risk profile and systemic importance, and regularly assesses these programs. - BoB’s guideline on risk management (2018) sets expectations for stress testing across credit, liquidity, market, interest rate, operational, and country and transfer risks. - Stress test outputs are expected to be reviewed periodically by senior management, include contingency plans, and be incorporated into policy and limit processes. - Onsite, supervisors review banks’ use of stress testing and how results inform risk management and limits. - In the absence of detailed guidance to supervisors on stress testing review elements and methodology, supervisors have not assessed stress testing frameworks for adequacy, appropriateness of scenarios, underlying assumptions, and board/senior management involvement. - EC14: The supervisor assesses whether banks account for risks (including liquidity impacts) in internal pricing, performance measurement and new product approval processes. - Laws or regulations in Botswana do not explicitly require banks to account for risks in internal pricing, performance measurement and new product approval processes. ### Other material risks (AC1) - The supervisor requires banks to have policies and processes for assessing reputational and strategic risks. - BoB has issued explicit requirements on management of reputational and strategic risk (included in BoB guideline on risk management), covering identification, measurement, mitigation, monitoring, control, and reporting. - BoB’s guideline on risk-based supervision framework provides high-level guidance for onsite examinations with reference to strategic risk management. - Supervisors lack detailed guidance on supervision of reputational risk and have yet to perform detailed reviews of banks’ strategic and reputational risks. ### Assessment of Principle 15 — Comments - Assessment: Largely compliant. - Findings and supervisory needs: - BoB has regulatory and supervisory frameworks promoting overall risk management culture and management of individual risks. - Supervisory guidance is available at a high-level; supervisors would benefit from more detailed guidance on: - closer or more focused supervision of banks’ risk management, risk governance, risk management policies and processes; - management of risks around new products or material modifications; - stress testing, information systems and risk reporting. - Areas for explicit articulation in regulations and supervisory practice include: - model risk (linked to increased use of financial models, stress testing, IFRS-9), - establishing linkages between product pricing, performance measurement and compensation and risk, - requiring banks to obtain board approval for the removal of the CRO and inform or discuss with BoB the reasons for the removal. ### Capital adequacy — Principle 16 (EC1) - Legal and regulatory framework: - Section 13 of the Banking Act, read with Banking Regulation 7, prescribes capital levels and qualifying components of capital. - BoB has issued a Directive on the Revised International Convergence of Capital Measurement and Capital Standards for Botswana (Basel II) and a Guideline on the Revised International Convergence of Capital Measurement and Capital Standards for Botswana (Basel II) covering capital structure, qualifying criteria, risk weighting by asset classes, pillar 2 and pillar 3 requirements. - Statutory and prudential minimum capital requirements (brief details): - The minimum statutory capital requirement for banks operating in Botswana is the greater of BWP 5 million and 8 percent of the bank’s risk weighted assets. - The minimum prudential capital requirements for banks operating in Botswana is 15 percent of the bank’s risk weighted assets (reduced to 12.5 percent in the wake of COVID 19). - The components of capital, their qualifying features and deductions and adjustments are aligned with Basel III norms. - The minimum common equity tier 1 (CET1) capital ratio is 4.5 percent, the minimum Additional tier 1 capital ratio is 3 percent, and the minimum Tier 1 ratio is 7.5 percent (4.5 + 3). - Consistent with Section 13(2) of the Banking Act (1995), where a bank fails to maintain its unimpaired capital total regulatory capital at the level of 15 percent (now reduced to 12.5 percent), the BoB may impose on and collect from the defaulting bank a levy not exceeding 0.1 percent of the amount by which such unimpaired capital falls short of the amount prescribed. - Observations on capital composition: - As an outcome of the structuring of regulatory capital, banks in Botswana have substantial Tier 2 capital. - At the level of the banking system, Tier 2 capital is about 32 percent of total regulatory capital. *Source: Section 3.2 and related excerpts from the BoB guidelines and assessment provided in the supplied content.* ### 18.8 to 46.5 percent of total regulatory capital. ### 1bwaea2024004 - 18.8 to 46.5 percent of total regulatory capital. ### Capital adequacy framework and system-wide capital metrics - As at end December 2021, the average CET1 ratio for the banking sector in Botswana was 12.0 percent. - As at end December 2021, the average Tier 1 ratio for the banking sector in Botswana was 12.5 percent. - As at end December 2021, the total capital adequacy ratio was 18.5 percent, reflecting a high level of Tier 2 capital in the system. - The capital adequacy framework in Botswana is largely aligned with the Basel II framework, with the definition of capital more closely aligned to Basel III. - Basel framework minimum risk-weighted capital requirement: 8 percent. - Botswana minimum risk-weighted capital requirement: 15 percent (previously); reduced to 12.5 percent in response to the COVID pandemic and related developments, and remains 12.5 percent. - The capital adequacy framework requires capital for both on- and off-balance sheet exposures and prescribes Pillar 1 capital for credit risk, market risk and operational risk. - All banks maintain capital under: - standardized approach for credit risk, - standardized maturity method for interest rate risk in trading book, - basic indicator approach for operational risk. ### Supervisor powers and regulatory tools (EC2–EC4) - For internationally active banks, the definition of capital, risk coverage, calculation methods and thresholds are not lower than applicable Basel standards. - Sections 13(1), 13(7) and 13(9) of the Banking Act (1995) empower the Bank of Botswana (BoB) to impose capital charges and set minimum capital; BoB has used these powers to require higher minimum capital for all banks and to set capital for a non-deposit taking development bank as per Basel 1 norms. - 13(1) Every bank shall maintain paid up unimpaired capital at least equal to such percentage of such bank's total assets as may be prescribed. - 13(7) The unimpaired capital and liabilities of any bank shall be of such kinds, and computed in such manner, as may be determined by the BoB. - 13(9) The minimum capital required in respect of any bank shall be the greater of such amount as may be prescribed, or such percentage of its assets, or groups of assets, and other risk exposures as may, from time to time, be determined by the BoB. - BoB uses a soft leverage ratio of 3 percent of Tier 1 capital for CAMEL grading in quarterly offsite surveillance to flag build-up of leverage. - The prescribed capital requirements are uniform across banks but reflect bank-level risk profiles through differentiated risk weights; BoB required a higher minimum (15 percent, now 12.5 percent) because banks operate primarily in Botswana and have no foreign branches or subsidiaries. ### Use of internal models and forward-looking capital management (EC5–EC6) - Currently no bank in Botswana uses internal assessment approaches (internal models) for computing risk inputs for regulatory capital. - BoB guidelines (Basel II, 2015) set out forward-looking capital planning requirements, including: - Banks must assess overall capital adequacy based on material risks and develop a strategy to maintain capital consistent with risk profile and business plans. - Capital planning must be dynamic and forward-looking over a capital planning horizon of at most three years. - Banks must conduct rigorous, forward-looking stress testing as an integral part of ICAAP. - Results of stress tests should inform capital plans and internal capital targets; remedial actions should be identified. - Banks must evaluate the quality and loss-absorbency capacity of capital components and disclose internal capital targets expressed as regulatory capital ratios (total capital, Tier-1, common equity). - Senior management must conduct formal capital planning and assessment at least annually, with results reported to the Board. - Banks in Botswana are required to establish ICAAPs and submit ICAAP documents and results to BoB every year, commencing from 2019. - In practice, BoB encourages capital plans that include buffers and capital-raising initiatives; in some cases letters of comfort from parent banks are used. - BoB has received ICAAP documents but supervisors have not made extensive use of them due to lack of guidance on assessment and how ICAAP results feed into ongoing supervision; onset of COVID affected progress in using ICAAP or SREP as supervisory inputs. - Recommendation (from assessment): BoB should develop guidance and tools for reviewing and assessing banks’ ICAAP documents and supervisory methodologies to assess Pillar 2 risks and additional capital requirements; BoB should consider linking the higher minimum Pillar 1 capital to specific Pillar 2 risks or bank risk profiles and work with banks to reduce reliance on Tier 2 capital to improve capital quality. ### Group-level capital allocation (AC1–AC2) - Capital adequacy requirements are applied uniformly to all banks, including non-internationally active banks, and are broadly consistent with applicable Basel principles. - BoB guideline requires banks to maintain capital adequacy at the solo bank level. - Group entities within consolidated banks are not material: group entities account for less than 0.02 percent of the banking system’s total assets; the largest single bank group entity share is 0.14 percent of the bank’s total assets. ### Credit risk framework and supervisory practices (Principle 17, EC1–EC5) - Banking system asset composition: - loans and advances: about 65 percent of total assets, - investment and trading securities: about 13 percent of total assets, - placement with other banks and credit institutions: about 17 percent of total assets. - Loan portfolio composition: - households: 66 percent, - private businesses: 28 percent, - public sector entities and the financial sector: 6 percent. - BoB risk management guideline requires each bank to formulate and implement a structured credit risk management strategy approved and reviewed at least annually by the Board. - Minimum components expected in credit risk management: - identification of credit risks and development of sound credit policies, - effective credit granting, documentation and collection processes, - comprehensive procedures to monitor and control credit portfolio nature and quality. - Credit policy minimum content includes (non-exhaustive list from guideline): - types of credit by exposure type, sector, location, currency, maturity, target markets and desired portfolio mix; - guidelines for portfolio mix, risk diversification and concentration management; - lending authority structure, approval limits and procedures for exceptions; - board responsibilities for reviewing and approving loans; - acceptable collateral and terms for unsecured loans; - terms and conditions for pricing and non-price items; - limits on maximum volumes of credits individually and by exposure type; - credit documentation, monitoring and classification; - appropriate collection procedures for defaults; - reporting and internal communication of exceptions. - Supervisory review practices: - Onsite examinations review Board, audit committee and risk committee minutes, credit files, adherence to approval limits, MIS adequacy, legal covenants, collateral and loan grading systems. - Offsite supervision follows up via bilateral and trilateral meetings with banks and external auditors and reviews compliance with prudential limits for single counterparties, large exposures and related party transactions. - Supervisors may perform follow-up short onsite visits to verify implementation of recommendations. - Specific credit-risk controls and expectations in BoB guidance: - do not unduly rely on lead underwriter analyses in loan syndications; perform independent due diligence; - entry into transactions should be based primarily on borrower creditworthiness, not collateral substitution; - collateral policies must cover acceptability, ongoing valuation and enforceability; - banks are encouraged to develop internal credit rating systems appropriate to size and complexity; large loans must be individually assessed and rated; - internal ratings should be periodically reviewed and validated, including mapping to recognized external rating agencies where applicable; - independent ongoing assessment of credit risk management and internal audit reviews are required; - effective MIS to monitor risk levels and generate timely reports; - establishment and communication of risk limits with documented exceptions and mitigation tools; - where models are used, limitations must be understood by Board and Management; models must be validated, tested and independently reviewed. - Credit information infrastructure and foreign-currency lending: - Three credit information bureaus operate in Botswana; banks often use more than one bureau. - Banks rely on audited financial statements for corporate indebtedness assessment. - Foreign-currency lending is generally limited to borrowers with foreign-currency income; unhedged foreign currency exposure is unusual and limited. - Related-party and conflict-of-interest concerns: - The supervisor requires credit decisions to be made free of conflicts of interest and on an arm’s length basis. - There are gaps in the definition of related parties and related party transactions noted under CP 20 that affect the treatment of related-party exposures. ### Assessment of compliance - Assessment of Principle 16 (Capital adequacy): Largely compliant. - Comment summary: - Botswana’s capital adequacy framework can be viewed as Basel II–plus (Basel II methodologies with capital components aligned closer to Basel III). - BoB has established a capital framework compliant with Basel requirements while requiring higher minimum capital. - All banks submit ICAAP annually; BoB has not required additional Pillar 2 capital to date. - Recommendations include linking higher Pillar 1 minima to Pillar 2 risks/risk profiles, developing ICAAP assessment guidance and Pillar 2 supervisory methodologies, and encouraging higher quality capital by reducing reliance on Tier 2. *Source: IMF country report content provided.* ### Section 3.2 of BoB guidelines on transactions with related parties of a bank requires ### Section 3.2 of BoB guidelines on transactions with related parties of a bank requires ### Policy requirement for related-party transactions - The bank’s board of directors shall establish and ensure that senior management officials implement a written policy covering all transactions, including deposit-taking and credit-granting, between the bank and its related persons. - Processes should be established in each bank to allow the board of directors to monitor compliance with the policy. - The board of directors shall review the policy on at least an annual basis. - The BoB requirements established through risk management guidelines (section 5.28) and the related onsite and off-site supervision generally address banks’ credit policy framework from a conflict-of-interest perspective, except for gaps relating to related party exposures and transactions. ### EC6 — credit policy prescripts and findings - Requirement summary: The supervisor requires that the credit policy prescribes that major credit risk exposures exceeding a certain amount or percentage of the bank’s capital are to be decided by the bank’s Board or senior management. The same applies to credit risk exposures that are especially risky or otherwise not in line with the mainstream of the bank’s activities. - Legal provisions: - Section 17(1) read with Banking Regulation 9(1) of the Banking Act requires banks to obtain the permission of the board for credit facilities that exceed 10 percent of the bank’s unimpaired capital. - Section 17(3) requires banks to obtain prior approval from BoB for credit facilities that exceed 30 percent of the bank’s unimpaired capital. - BoB guidance: - Section 5.13(iii) of the BoB guideline on risk management requires that each bank’s credit policy should detail the structure of the credit approval authority and process, approval limits and approval lending authority of each loan officer, management, or board credit committee, including procedures for granting exceptions. - Identified gap: - Law or regulations do not explicitly provide for a similar framework for credit risk exposures that are risky or otherwise not in line with the bank’s activities. - Supervisory practice: - Supervisors generally rely on banks’ internal control, compliance, and internal audit frameworks to be assured about the availability of these controls on credit granting and compliance with these controls. - During onsite examinations, supervisors review compliance with these controls and treatment of exceptions. - During onsite examinations, supervisors review the minutes of the Board, its audit committee, and its risk committee to understand progress, and issues and challenges in implementing board-approved strategies, policies, and processes for credit risk management. ### EC7 — access to information and personnel - Requirement summary: The supervisor has full access to information in the credit and investment portfolios and to the bank officers involved in assuming, managing, controlling and reporting on credit risk. - Legal provision: - Section 21(1) of the Banking Act (1995) provides that the BoB may, for the purpose of the administration of this Act, call for any information which it may require, from any bank, concerning its operations in Botswana or those of its affiliates in Botswana and subsidiaries abroad, if any. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1bwaea2024004.pdf* ### Section 25 of the Act provides that BoB supervisors are entitled to examine all books, ### 1bwaea2024004 - Section 25 of the Act provides that BoB supervisors are entitled to examine all books, ### Supervisory powers and access to information - Section 25 of the Act: BoB supervisors are entitled to examine all books, minutes, accounts, cash, securities, vouchers and any other documents in the possession or custody of the bank or any of its affiliates, and to require such information concerning its business or that of its affiliates in Botswana or abroad, if any, as is considered necessary or desirable, and the bank concerned shall comply with all requests made pursuant to this subsection. - Through these powers BoB supervisors have full access to all relevant information and bank officers involved in assuming, managing, controlling and reporting on credit risk. ### Principle 17 — Stress testing and EC8 (supervisory requirement for stress testing) - Assessment of Principle 17: Largely compliant. - BoB requirement (BoB guideline on risk management (2018), Sections 5.7 to 5.9): - Each bank should periodically employ stress testing and back testing in evaluating the quality of its credit risk-assessment models and establish internal tolerance limits for differences between expected and actual outcomes; and have processes for updating limits, as conditions warrant. - Stress testing of the credit portfolio should involve identifying possible events or future changes in economic conditions that could have unfavorable effects on a bank's credit exposures and assessing the bank's ability to withstand such changes. Three areas that a bank could usefully examine are: - (i) economic or industry downturns (both in the whole economy and in particular sectors), - (ii) market risk events (interest rate risk and foreign exchange risk); credit-risk events higher than expected levels of delinquencies and defaults, and - (iii) liquidity conditions. - Stress testing could range from relatively simple alterations in assumptions about one or more financial, structural or economic variables to the use of highly sophisticated financial models. - The output of the tests should be reviewed periodically by senior management and appropriate action taken in cases where the results exceed agreed tolerances. Stress test analyses should include contingency plans regarding actions management might take given certain scenarios. The output should also be incorporated into the process for assigning and updating policies and limits. - Supervisory practice: - During onsite examinations, supervisors review adequacy and appropriateness of the stress factors and scenarios used by banks, the stress test results and how these are used for risk management. - Comment: - BoB’s regulatory and supervisory framework with reference to credit risk management, at the broad level, is largely in place and is seen to be implemented. - BoB requirements established through risk management guidelines (section 5.28) and the related onsite and off-site supervision generally address banks’ credit policy framework from a conflict-of-interest perspective, except for gaps related to related party exposures and transactions (discussed in CP 20). - To improve compliance, law or regulations should explicitly require that credit risk exposures that are risky or otherwise not in line with the bank’s activities should also be subjected to extra due-diligence and where required, approved by the board or its committee. ### Principle 18 — Problem assets, provisions and reserves (Assessment: Materially non-compliant) - Principle 18 objective: The supervisor determines that banks have adequate policies and processes for the early identification and management of problem assets, and the maintenance of adequate provisions and reserves. - Overall Assessment of Principle 18: Materially non-compliant. - Key systemic findings and gaps: - Banks required to implement IFRS and comply with IFRS 9; BoB prudential classification acts as a backstop but BoB guidelines do not lay down minimum provisioning requirements. - Supervisory oversight over provisioning for credit risk is considered inadequate due to lack of explicit and enforceable prudential backstop to IFRS 9 provisioning and limited supervisory capacity to assess model-based IFRS 9 outputs. - Offsite data are insufficiently granular to assess classification, provisioning, recoveries and write-offs on an ongoing basis (examples of missing data provided below). - BoB has not established prudential requirements for periodic valuation of collateral, applicable haircuts, or minimum write-off requirements; thematic reviews have not been conducted. - Threshold for individual assessment of significant exposures is effectively allowed at 10 percent of bank’s total regulatory capital, which may be too high and exclude material exposures from individual assessment. - BoB does not undertake regular or periodic system-level analyses of trends over multi-year horizons; reviews focus on previous 6 months and do not consider geographical concentrations or concentration in risk mitigants. - Specific supervisory recommendations (from source): - BoB should consider reviewing and revising the regulatory framework, data and information obtained from banks through offsite statutory reports, and supervisory guidance and tools to address the specific gaps identified. - BoB should also consider undertaking periodic, say on semi-annual basis, a system-level analyses of trends and concentrations in relation to banks’ problem assets or risk mitigants or risk mitigation strategies to be able to initiate any system level response measures. ### EC1 — Laws, regulations or supervisor require policies/processes for identifying/managing problem assets - Description and findings re EC1: - Trend in non-performing loans and specific provisions (BWP million): - Gross loans and advances: 58,332 (2018); 62,770 (2019); 65,554 (2020); 68,920 (2021) - Non-performing loans (NPLs): 3,166 (2018); 3,051 (2019); 2,824 (2020); 2,922 (2021) - Specific provisions: 1,352 (2018); 1,775 (2019); 1,713 (2020); 1,654 (2021) - Net NPLs: 1814 (2018); 1276 (2019); 1111 (2020); 1268 (2021) - Percent metrics: - NPLs to gross loans and advances: 5.4% (2018); 4.9% (2019); 4.3% (2020); 4.2% (2021) - Specific provisions to NPLs: 42.7% (2018); 58.2% (2019); 60.7% (2020); 56.6% (2021) - Net NPLs: 3.2% (2018); 2.1% (2019); 1.7% (2020); 1.9% (2021) - The level of loans classified as special mention accounts in the banking system was around 1.3 percent in December 2021 and the range among individual banks was 0.6 to 4.7 percent. - COVID response measures: - BoB allowed repayment moratoria on loans with a good repayment history for up to six months, and restructuring for affected entities; government guaranteed loans to affected sectors. - Regulatory forbearance exercised regarding assessment of non-performing loans and determination of expected credit losses for loans benefiting from COVID support measures; measures extended and still in force at time of report. - Reportedly, COVID related restructuring and moratorium measures were extended to about 8.5 percent of total loans as of December 2021. - In June 2022, NPLs represented 3.7 percent of total loans. - BoB guideline on risk management (2018) requires banks to develop procedures and information systems to monitor loan quality, define criteria for identifying and reporting potential problem credits, and require more frequent monitoring, corrective action, classification and/or provisioning. - Definitions and operational rules from the guideline: - Problem asset identification, impaired classification (including >90 days past due), re-classification to performing (arrears cleared, continued timely repayments), responsibility allocation for workout, consistency in loan accounting, provisioning for expected credit losses from origination (forward-looking), consideration of off-balance sheet exposures. - Supervisory practice limitations: - Off-site reviews are based on limited aggregate data and do not support assessment of classification and provisioning for individual significant exposures. Onsite inspections review adequacy of grading/classifying and provisioning but threshold and guidance gaps remain. ### EC2 — Supervisor determines adequacy of bank policies/processes for grading/classifying and provisioning - Description and findings re EC2: - Prudential norms for classification are in BoB guideline (2018). Banks implement IFRS 9; supervisors expect banks to comply with the more stringent of prudential or IFRS 9 requirements. - BoB guidelines do not lay down minimum provisioning requirements. - BoB guidelines do not explicitly require banks to classify all exposures to a counterparty in the same lowest classification category assigned to any of these exposures. - Banks’ compliance with IFRS 9 ensured through independent external annual audits; supervisors review audited financial statements off-site and in detail on-site. - Classification categories and mapping to IFRS 9 stages: - Banks required to classify all credit facilities in five prudential asset quality categories: standard, special mention/ watch, substandard, doubtful and loss. - Performing status: standard; Special mention/ Watch (performing/non-performing depends on risk) - Non-performing: substandard, doubtful, loss - Mapping: - Stage 1: standard exposures and special mention/ watch exposures without significant credit risk - Stage 2: special mention/ watch exposures with significant credit risk - Stage 3: substandard, doubtful and loss exposures - Collateral rule: collateralization or received guarantees should have no direct influence on classification as nonperforming. - Supervisory determination of adequacy of provisions is unclear (see EC4). ### EC3 — Off-balance sheet exposures included in classification and provisioning - Description and findings re EC3: - BoB guideline explicitly requires non-performing exposures to be categorized for the whole exposure, including when non-performance relates to only part of the exposure (e.g., unpaid interest). - For off-balance sheet exposures (loan commitments, financial guarantees), the whole exposure is the entire non-cancellable nominal amount. - Supervisors review banks’ processes during off-site reviews and on-site inspections to confirm inclusion of off-balance sheet exposures. ### EC4 — Provisions and write-offs reflect realistic recovery expectations - Description and findings re EC4: - BoB guideline requires consistent loan accounting, forward-looking provisioning for expected credit losses from origination (ECL), and consideration of off-balance sheet exposures; banks must hold adequate capital for unexpected losses. - Current practice issues: - Banks’ provisioning determined by IFRS 9 internal models; PD, collateral realization and recovery data are not systematically compiled, and available data are for limited periods, making model outputs tentative. - Absence of explicit and enforceable prudential provisioning requirement can have implications. - Provision coverage ratio for NPLs: around 57 percent at end December 2021; declined from about 58 percent in 2019 and about 61 percent in 2020. - BoB has yet to undertake an analysis or study to independently assess adequacy of provisions after withdrawal of prudential requirement. - No established prudential requirements for periodic valuation of collateral or applicable haircuts; banks set their own policies; no thematic review conducted by BoB. - No established minimum requirements or expectations for write-off of non-performing exposures; banks set their own write-off policies; no thematic review by BoB. - Offsite data lacking granularity: missing (i) breakdown of NPLs by age for periods longer than 12 months, (ii) borrower level details of top 50 or 100 non-performing exposures, (iii) details of collateral available in non-performing loans. - Supervisory tools and guidance: - BoB supervisors rely on an internal guideline for assessing adequacy of provisioning for NPLs: expected provisioning levels are 1 percent for performing loans, 20 percent for substandard loans, 50 percent for doubtful loans and 100 percent for loss loans. - Supervisors are not well equipped with appropriate skills to assess IFRS 9 models and model risks; internal guidelines might not be adequate to enforce as a minimum requirement if a bank were to be holding less provisions. - BoB supervisors review write-offs from a compliance perspective, referencing banks’ internal policies. ### EC5 — Early identification, oversight and collection processes for deteriorating assets - Description and findings re EC5: - Banks implement IFRS 9 and BoB prudential norms for five classification categories; combination helps identify asset quality deterioration early. - BoB reviews banks’ classification and external auditors review IFRS 9 compliance. - BoB guidelines on prudential treatment of rescheduled loans align with Basel norms, but monitoring and enforcement unclear. - As at end December 2021, rescheduled and restructured loans and advances were about 2.1 percent of total loans at sector level; range for individual banks was zero to 8.9 percent. - Offsite data on rescheduled/renegotiated loans do not include details of loan classification, provisions held, and loan-level details; not adequate for assessing compliance ongoingly. - Onsite examinations do not always include review of rescheduled loans; no explicit guidance to supervisors on reviewing rescheduling and restructuring (forbearance). ### EC6 — Regular information and documentation to supervisor on classification and provisioning - Description and findings re EC6: - BoB offsite reporting includes: - Monthly schedule of recoveries, write-offs and new charges by type of counterparty - Quarterly schedule of past due and non-accrual loans by type of counterparty, indicating no of days past due (30 to 90 days, 90 to 180 days and more than 180 days) and value of collateral available from each counterparty type - Quarterly schedule of renegotiated and repossessed loans and advances by type of counterparty, indicating original amount, foreclosure amount, value of collateral available and the carrying amount - Identified shortcomings (see EC4 and EC5): data obtained by supervisor are not adequate for verifying asset classification and provisioning. - Though BoB has not explicitly required banks to have adequate documentation to support classification and provisioning levels, supervisors can seek and obtain requisite details or documents while onsite. ### EC7 — Supervisor powers to require adjustments to classification, provisioning and remedial measures - Description and findings re EC7: - BoB can verify classification and require banks to adjust classifications and related provisioning where deviations are observed. - BoB can require a bank to increase provisions under Section 14(1)(i) of the Banking Act if specific provisions are deemed inadequate; examples provided where BoB required banks to raise additional provisions. - However, supervisory ability to assess adequacy of provisioning is limited (see ECs 1–4). ### EC8 — Valuation of risk mitigants (collateral, guarantees, credit derivatives) - Description and findings re EC8: - BoB has not established clear and explicit requirements on permissible collateral, valuation approach, prudential haircuts, and need to reckon net realizable value based on prevailing market conditions. - BoB guideline on capital adequacy allows certain items of financial collateral and guarantees for capital adequacy purposes; real estate and some movable collateral used in practice are not adequately covered by the guideline. - BoB guideline on risk management requires banks to establish policies on acceptability of collateral, ongoing valuation procedures, and enforceability/realizability checks; guarantees must be evaluated for coverage and guarantor creditworthiness. - Verification of credit mitigants conducted during on-site examinations by reviewing valuation reports, guarantee letters and counterparty financial information, but such verification is not explicitly documented in onsite examination reports. ### EC9 — Criteria for identifying problem assets and reclassification to performing - Description and findings re EC9: - BoB guideline explicitly defines non-performing exposures to include: - (a) all exposures that are "defaulted" under the Basel II framework, - (b) all exposures that are credit-impaired according to applicable accounting framework, - (c) other exposures that are material exposures more than 90 days past due or where full repayment is unlikely without realization of collateral, - (d) forborne exposures meeting specific criteria, - (e) collateralization or guarantees have no direct influence on categorization as non-performing. - Re-categorization to performing requires all of: - counterparty does not have any material exposure more than 90 days past due, - repayments made when due over a period of at least three continuous months as specified by the supervisor (longer for forborne exposures), - counterparty's situation improved so full repayment likely, and - exposure not "defaulted" under Basel II or "impaired" under applicable accounting framework. - Situations that do not lead to re-categorization: partial write-off, repossession of collateral until disposed and proceeds realized, extension/granting of forbearance for an already identified non-performing exposure (subject to exit criteria). - Compliance monitoring gap: offsite data on rescheduled and renegotiated loans lack loan-level details; onsite examinations do not always include reviews of rescheduled loans; no explicit guidance to supervisors on assessing rescheduling/restructuring. ### EC10 — Board receives timely and appropriate information on asset portfolio condition - Description and findings re EC10: - BoB guideline requires banks to establish independent ongoing assessment of credit risk processes and communicate results to senior management and board; internal credit review and reporting system required; internal audits periodic. - Law or regulations do not explicitly require bank boards to obtain timely and appropriate information on asset portfolio condition, classification and provisioning, major problem assets, comparative trends, and measurements of anticipated deterioration and expected losses. - During on-site examinations BoB reviews board packs and minutes to determine whether board obtains timely and appropriate information and assesses board oversight. ### EC11 — Individual assessment for significant exposures - Description and findings re EC11: - BoB guideline requires valuation, classification and provisioning for significant exposures on individual item basis; banks should set and regularly review thresholds; remainder of portfolio grouped for collective assessment. - Banks must demonstrate impairment measurement techniques for individually assessed loans; collective assessment should reflect historical net charge-off rates adjusted for trends/conditions. - Supervisory practice: - Periodic off-site reviews based on limited aggregate data do not support assessment for individual significant exposures. - On-site inspections review adequacy of policies and processes for significant exposures. - Absence of explicit guidance means threshold set by banks (acceptable to supervisors) for individual assessment is often 10 percent of bank’s total regulatory capital — potentially too high and excluding material exposures from individual assessment. ### EC12 — System-level assessment of trends and concentrations - Description and findings re EC12: - BoB does not undertake regular/periodic system-level analyses of trends over the past few years; current reviews focus on previous 6 months. - Reviews do not consider geographical concentrations, concentration in risk mitigants or risk mitigation strategies, nor extent of provision coverage in individual banks or system level. - Consequently, supervisor does not systematically assess sector-wide trends and concentrations in risk build-up related to problem assets. ### Final comments and suggested supervisory actions (from source) - Key gaps to address: - No explicit prudential backstop to IFRS 9 provisioning requirements. - Inadequate supervisory oversight on: - individual assessment of significant exposures, - eligible collateral/risk mitigants and periodic valuation/haircuts and recognition for provisioning, - classification and provisioning of multiple exposures to same borrower where one becomes non-performing, - oversight of rescheduled/restructured loans and advances, - banks’ framework for timely write-offs reflecting realistic recovery expectations. - Inadequacy of off-site data for ongoing effective supervision of asset classification, provisioning, recovery and write-off. - Lack of periodic assessment of trends and concentrations across the banking system for problem assets and risk mitigation strategies. - Recommended BoB actions (as suggested in source): - Review and revise regulatory framework, offsite reporting requirements, supervisory guidance and tools to address identified gaps. - Consider periodic (e.g., semi-annual) system-level analyses of trends and concentrations in relation to banks’ problem assets and risk mitigants to initiate system-level response measures where relevant. *Source: 1bwaea2024004 - Section 25 of the Act provides that BoB supervisors are entitled to examine all books,* ### Section 2 of BoB guideline on large exposures (2009) define the terms exposure, large ### Section 2 of BoB guideline on large exposures (2009) define the terms exposure, large ### Definitions and scope of "Exposure" - Exposure: The amount of a bank’s exposure is calculated as the sum of loans and credit facilities granted, either directly or indirectly, to a person or group of inter-related persons, such as: - term loans, overdrafts, credit lines and other credit facilities, - trade bills discounted, invoice discounted and factoring, - credit substitutes, such as guarantees, acceptances, letters of credit and bills, and finance lease receivables, - underwriting of debt and equity securities, and other forms of participation, - securitized assets and other transactions with recourse, - credit derivatives, futures and forwards, swaps and option contracts such as credit default swaps and other derivatives, - contingent liabilities, such as commitments to extend credit, performance bonds and warranties. - Less the amount by which the above-listed accommodations are irrevocably secured by: - collateral in the form of cash deposits placed with a bank that granted the accommodation (the lending bank), - collateral in the form of cash deposit placed with another bank in Botswana, - an eligible guarantee by any sovereign with a credit rating of AA or better, issued by a recognized external credit rating agency, - any listed financial instrument of a company listed in Botswana (treasury bills, listed bonds, etc.). - Exclusions explicitly noted: - The above definition does not include the counterparty credit exposures that arise in outstanding over-the-counter derivatives, and exposures on account of placements and investment in the bonds and equity issued by the counterparty. - Note on connected counterparties: “Connected counterparties may include natural persons as well as a group of companies related financially or by common ownership, management or any combination thereof.” ### Group of Inter-related Persons - Definition: Two or more persons holding exposures from the bank, whether on a joint or separate basis, who are mutually associated with at least one of the following: 1. a controlling interest (fifty percent of voting shares plus one); 2. common ownership or control; 3. common management; 4. common directors; 5. cross guarantees; 6. direct financial interdependence which cannot be substituted in the short-term. - Operational guidance: Where banks are uncertain on grouping connections for large exposure reporting, clarity and guidance may be sought formally and in writing from the Bank. ### Large Exposure (definition) - Large Exposure: A bank’s aggregate exposure, direct or indirect and net of eligible collateral, to any person or group of inter-related persons which equals or exceeds 10 percent of the bank’s unimpaired capital (total regulatory capital). ### Prudential limits and approval regime (Sections 3–5) - Prudential limits: - Single or group of interconnected counterparties limit: 30 percent of a bank’s unimpaired capital (i.e., total regulatory capital). - Aggregate limit for all large exposures: 800 percent of the bank’s unimpaired capital. - A bank may exceed the 30 percent limit only with the prior approval of BoB, subject to conditions. - Treatment of groups: If interests of two or more persons make them a “group of inter-related persons”, total exposures to all persons in that group shall be combined for applying limitations. - Discovered group designation by BoB: If BoB designates a group not designated by the bank and total exposure exceeds limits, the bank may dispose of the excess within a reasonable period determined by BoB, in any case within a period of not more than 12 months. - Approval to exceed 30 percent — required criteria considered by BoB (selected): - the bank is currently meeting its minimum requirement for unimpaired capital and maintains a ratio of unimpaired capital to total risk-weighted assets of at least 15 percent, - including the subject accommodation, the total notional amount of large exposures do not exceed 800 percent of its unimpaired capital, - there is no supervisory enforcement action outstanding or pending against the bank, - the bank’s existing credit risk management system and management information system are adequate, and the bank has adequate financial, managerial and organizational resources to handle the increased concentration risk, - the bank has a history of properly reporting and managing large exposures, - extent to which the accommodation will be secured by cash in whole or in part, Government of Botswana securities, bills eligible for discounting at the BoB, assets eligible for liquidity support pursuant to the Bank’s Guideline on Managing Liquidity Risk, or other assets as may be acceptable to the Bank, - the person(s) incurring the subject accommodation has made full disclosure of any “group of inter-related persons” in which the person(s) is included, and which also has exposure to the bank, - apart from exceeding the 30 percent limit on large exposures, the accommodation meets all of the bank’s credit-granting standards based on current audited financial information as stipulated in the bank’s written application, - the Board of Directors or its duly authorized sub-committee has approved the large exposure, subject to the approval of the Bank, - the aggregate amount of the large exposure will be reduced to a level below 30 percent of the bank’s unimpaired capital within 12 months, in accordance with a specific plan of reduction presented by the bank in its application. ### Governance, policies, reporting and supervisory monitoring (Section 3 and Section 6) - Board responsibilities: - The Board of Directors shall formulate a policy on large exposures and put in place measures to ensure effective implementation by management. - The policy shall constitute an integral part of the bank’s overall credit policy and, at a minimum: - address concentrations of risk arising from individual large exposures and total large exposures, including those to groups of inter-related persons; - impose strict and binding limits on large exposures, including those to groups of inter-related persons, which do not exceed the limitations contained in BoB guideline. - Any large exposure to any counterparty must be approved by the bank’s Board of Directors or a duly authorized Sub-Committee thereof (in accordance with Section 17(1) of the Banking Act (1995)). - Reporting requirements: - Section 6 requires each bank to submit to the BoB a report on all large exposures, as at the end of each quarter and in the format prescribed by the Bank. - BoB also obtains every month details of: - (i) banks’ loans and advances exposure to each economic sector, - (ii) bank’s reliance on top 20 depositors, - (iii) bank’s loans and advances exposure by currency. - Supervisors use these reports to review concentration risks and prepare quarterly consolidated analyses for the banking system. ### Supervisory findings on compliance and measurement - Definitions and measurement: - The BoB definition of exposure includes off-balance sheet exposures but does not include counterparty credit exposures arising in outstanding over-the-counter derivatives, and exposures from placements and investment in bonds and equity issued by the counterparty. - The measure of credit exposure for large exposures should reflect the maximum possible loss and should not use Basel risk weighting for measuring credit concentrations (cited rationale from “Measuring and controlling large credit exposures, January 1991”). - Monitoring and inspection practices: - Supervisors review during onsite inspections: - bank’s systems and procedures to identify and aggregate exposures across the bank, - the availability of a clear methodology or mechanism to identify relevant customers and their interconnectedness, - gaps in bank’s identification of groups of connected counterparties, - the bank’s risk appetite and internal limits, senior management and board oversight over risk concentrations. - BoB supervisors monitor bank exposures to single and group of inter-connected counterparties based on quarterly offsite reports/data and rely on bank risk management, compliance and internal audit to confirm incidence of excesses over prudential limits. ### Quantitative system-level and bank-level statistics reported - System-level and bank-range measures (as reported): - At the system level, aggregate large gross exposure is about 95 percent of total regulatory capital (138 percent of Tier 1 capital), - Range for individual banks for aggregate large gross exposure: 11 to 165 percent of total regulatory capital (15 to 329 percent of Tier 1 capital). - At the system level, aggregate exposure to top 20 counterparties is 75 percent of total regulatory capital (111 percent of Tier 1 capital), - Range for individual banks for exposure to top 20 counterparties: 11 to 165 percent of total regulatory capital (15 to 329 percent of Tier 1 capital). ### Assessment, gaps, and supervisory expectations (Principle 19 and related ECs) - Assessment of Principle 19: Materially non-compliant. - Identified gaps and issues: - The regulatory and supervisory framework covers only limited types of concentrations (focused on large exposures, single counterparty and group of inter-connected counterparties) and does not explicitly cover concentration to industry, geographical regions, collateral, product and markets. - Definition of exposures is not comprehensive (notably excludes certain over-the-counter derivative counterparty credit exposures and investments in counterparty bonds/equity). - Prudential limit for single counterparty and group of inter-connected counterparties is at significant variance from Basel norm: - BoB limit is 30 percent compared to the Basel norm of 25 percent. - The base for the limit in Botswana is total regulatory capital compared to Tier 1 capital used in the Basel norm. - As Tier 2 capital is a material part of total regulatory capital for banks in Botswana, the effective prudential limit, computed at the system level would be about 44 percent of tier 1 capital, which is a significant deviation from Basel norm. - Regulations allow banks to seek exemptions from BoB to exceed prudential limits and BoB allows it. - Compliance with prudential limits is assessed with reference to net exposures (net of collateral and bilateral netting), but gross exposures are not monitored. - BoB has not explicitly articulated supervisory expectations regarding banks’ stress testing of concentration risk (EC7). - Supervisory observations (EC2–EC6 summary): - EC2: Supervisor determines banks’ information systems should identify, aggregate, and facilitate active management of exposures creating risk concentrations and large exposure. BoB guideline on risk management (2018) lays down requirements re banks’ information systems. - EC3: Laws/regulations do not explicitly establish comprehensive supervisory requirements for bank concentration risk management framework beyond large exposures and single counterparty/group of inter-connected counterparties. BoB monitors concentrations among depositors (top 20), economic sectors and currency-wise concentration, but has not established prudential limits on these types. - EC4: BoB regularly obtains information enabling review of sectoral, geographical and currency concentrations via quarterly large exposure reports and monthly sector/depositor/currency data. - EC5: BoB explicitly defines group of connected counterparties (inter-related persons) and allows banks to seek BoB guidance where uncertain. - EC6: Laws/regulations set prudential limits (30 percent single/group, 800 percent aggregate). Senior management monitoring and limits oversight described; banks may exceed limits with prior BoB approval subject to conditions. - EC7: Supervisor requires banks to include impact of significant risk concentrations into stress testing programs — BoB has not explicitly articulated this expectation. ### Recommendations summarized - Consider reviewing and revising regulations to: - introduce a more comprehensive approach to supervision of concentration risk management in banks that explicitly covers concentrations by industry, geographic region, markets, products, and collateral; - reconsider allowing case-by-case exemptions to exceed prudential single counterparty or group of connected counterparty limits; - supplement regulatory changes with corresponding changes to the supervision manual, offsite reporting and analyses, including guidance to strengthen SREP with reference to concentration risk management by banks; - expand monitoring to include gross exposures in addition to net exposures; - clarify supervisory expectations regarding stress testing of concentration risks. *Source: 1bwaea2024004 - Section 2 of BoB guideline on large exposures (2009) define the terms exposure, large* ### Section 17(7) of the Banking Act (1995) lays down the broad restrictions on lending to ### 1bwaea2024004 - Section 17(7) of the Banking Act (1995) lays down the broad restrictions on lending to ### Definitions and scope of related parties and related party transactions - Related parties can include: the bank’s subsidiaries, affiliates, and any party (including their subsidiaries, affiliates and special purpose entities) that the bank exerts control over or that exerts control over the bank; the bank’s major shareholders, Board members, senior management and key staff, their direct and related interests, and their close family members as well as corresponding persons in affiliated companies. - BoB Guidelines (2008) definition of related person includes without limitations: - (1) significant shareholder; (2) member of a board of directors or audit committee; (3) principal officer and senior management officials; (4) any person who is related to such significant shareholder, member of the board of directors or audit committee, principal officer or senior management official by family or business interest; (5) subsidiary of a bank; (6) company or undertaking in which at least a 5 percent interest is held by a bank; (7) parent company of a bank; (8) company that is under common control with a bank; and (9) a company that holds at least a 5 percent interest of another company in which a bank holds at least a 5 percent interest. - The Basel Committee definition includes additional parties not explicitly covered by BoB: (a) subsidiaries, affiliates and special purpose entities of any party that exerts control over the bank; (b) bank's key staff (other than directors, principal officer, and senior management); (c) direct and related interests of board members, senior management, and key staff; (d) close family members of key staff; (e) board members, senior management and key staff in affiliated companies, their direct and related interests, and their close family members. - Related party transactions include on-balance sheet and off-balance sheet credit exposures and claims, as well as dealings such as service contracts, asset purchases and sales, construction contracts, lease agreements, derivative transactions, borrowings, and write-offs. The term transaction should be interpreted broadly to include situations where an unrelated party subsequently becomes a related party. ### Governance, board oversight, and conflicts of interest - Section 3.2 of BoB guidelines requires the board to establish and ensure senior management implements a written policy covering all transactions between the bank and its related persons; the board shall review the policy at least annually. - Policy minimum requirements include: - prohibit a bank from providing favorable treatment to related persons and require all such transactions to be on an arm’s-length basis. Prohibited favorable treatment includes, but is not limited to: - reduction of credit-granting standards, collateral requirements, collection efforts or any other policies of a bank, - providing preferential rates on deposits or credits, - covering trading losses, and - waiving fees. - impose strict and binding limits on exposures to related persons which do not exceed the limitations set out in the Guidelines. - prohibit related persons who have an interest in an accommodation or other transaction with a bank from being involved in the administration, assessment or decision-making process relating to the transaction. - require that transactions with related persons, including all deviations from a board approved policy, be reported to the board of directors on a regular basis. - Section 3.4 of BoB guidelines requires each bank to have an approved policy on extension of credit to related persons; directors with an interest must abstain from board consideration; minutes must document approval, terms, and determination that the transaction was at arm’s-length. - Supervisory practice: BoB supervisors obtain and review bank policies offsite and verify implementation onsite, reviewing periodic board reports, internal audit reports, and compliance reviews. ### Approval requirements and write-offs - Section 17(1) of the Banking Act (1995) and Section 2(l) and 3(c) of BoB guidelines on large exposures: any exposure, direct or indirect, equal to or exceeding 10 percent of the unimpaired capital of the bank must be approved by the bank’s Board of Directors or a duly authorized Sub-Committee. - Thus, exposures to related parties which equal or exceed 10 percent of the bank’s unimpaired capital must be approved by the bank’s board of directors. - BoB guidelines prohibit related persons with an interest in a transaction from participating in administration, assessment, or decision-making related to that transaction. - Gaps identified: - Reporting obligations do not explicitly include write-offs of related party exposures. - Laws or regulations do not explicitly require approval by the board for write-offs of related party exposures that pose special risks. - Section 17(4) of the Banking Act (1995) allows BoB to deduct excess large borrower exposures taken without approval, but a similar explicit provision for related party exposures is not present. ### Prudential limits, collateral, and capital treatment - Statutory and regulatory limits (exact text preserved): - Section 9(3) of Banking Regulations (1995): prescribed maximum unsecured amount of aggregate loans, advances and other credit facilities made to bank's own directors and their related interests without the permission of the Central Bank shall be 10 per cent of a bank's core capital, provided that: - no bank may extend, or allow to be outstanding, to any of its directors or their related interests, facilities which in aggregate exceed the higher of P50,000 or 1 per cent of the core capital, without the approval of the majority of its entire board of directors, - no bank may extend or permit to be outstanding, to any of its own directors or their related interests, facilities which in aggregate exceed 25 per cent of the bank's unimpaired capital, even if such facilities are secured by tangible security acceptable to the Bank of Botswana. - Section 4 of BoB guidelines: - The unsecured amount of a bank’s exposures to a senior management official or employee (other than a director) shall not exceed one-year’s emoluments of such senior management official or employee. - The unsecured amount of a bank’s exposure to any related person other than a senior management official, including a group of inter-related persons, shall not exceed 10 percent of the bank’s core capital. - A bank’s total exposure to any related persons, including groups of inter-related persons, shall not exceed 25 percent of the bank’s unimpaired capital. - Prudential limits table (values preserved as in source): - Maximum unsecured amount of aggregate loans, advances and other credit facilities made to bank's own directors and their related interests without the permission of the Central Bank: 10 (% of Core capital) - Extend, or allow to be outstanding, to any of its directors or their related interests, without the approval of the majority of its entire board of directors, facilities which in aggregate exceed the higher of BWP 50,000 or 1% (% of Core capital) - Extend or permit to be outstanding, to any of its own directors or their related interests, facilities - even if such facilities are secured by tangible security acceptable to the BoB: 25 (% of unimpaired capital) - The unsecured amount of a bank’s exposures to a senior management official or employee (other than a director): One-year’s emoluments - The unsecured amount of a bank’s exposure to any related person other than a senior management official, including a group of inter-related persons: 10 (% of Core capital) - Bank’s total exposure to any related persons, including groups of inter-related persons: 25 (% of unimpaired capital) - Note 1: Core Capital is same as Tier 1 capital - Note 2: Unimpaired capital is total regulatory capital - Additional regulatory provisions: - Section 2(i)(ii) of BoB regulation on related party exposures allows set-off of related party exposure with: - collateral in the form of cash deposits placed with a bank that granted the accommodation, and - an eligible guarantee by any sovereign with a credit rating of AA or better, issued by a recognized external credit rating agency. - Observations on effectiveness of limits: - Prudential sub-limits apply at the level of unsecured exposures, implying actual exposures (including secured exposures) can be higher; aggregate exposure to all related parties, including secured exposures, is capped at 25 percent of bank’s unimpaired capital. - Effective prudential limit for aggregate related party exposures is around 44 percent of banks’ Tier 1 capital, which is identified as a significant deviation from Basel expectations of around 25 percent of Tier 1 capital. - Related party exposures reckoned for prudential purposes do not include exposures through placements and investment in debt and equity instruments. ### Monitoring, reporting, and supervisory findings - BoB obtains data every quarter on each bank’s exposures to related parties. - System-wide exposures as at end December 2021: - gross exposure to related parties: 4.6 percent of total regulatory capital (unimpaired capital) - net exposure: 1.3 percent - Range across individual banks as at end December 2021: - gross exposure: 0.4 to 12.3 percent - net exposure: zero to 8.8 percent - Supervisory review practice: - BoB supervisors review board oversight and compliance with internal policies during onsite visits and rely on banks’ compliance and internal audit functions to assess handling and management of related party transactions and exposures. - Identified supervisory and legal gaps: - Laws, regulations or BoB guidelines are silent on some related parties included in Basel definition (see Definitions section). - Laws or regulations do not explicitly allow BoB to exercise discretion in applying the related party definition on a case-by-case basis. - Laws and regulations have not defined related party transactions comprehensively and are not explicit about elements where preferential treatment could occur (e.g., tenor, amortization schedules, terms of evaluation or haircuts applied to collateral). - The Banking Law and BoB regulations are silent on a framework for handling conflicts of interest and arms’-length elements for transactions beyond credit facilities, deposit taking and trading losses (e.g., service contracts, asset purchases and sales, construction contracts, lease agreements, derivative transactions, borrowings, write-offs). - Write-offs of related party exposures need not be reported to the board of directors under current formulation. ### Supervisory assessment against CPs (summary of EC findings) - EC2: Laws, regulations or the supervisor require that transactions with related parties are not undertaken on more favorable terms than corresponding transactions with non-related counterparties. BoB guidelines prohibit favorable treatment and require arm’s-length terms; however, laws and regulations are silent on certain transaction elements and some related party definitions. - EC3: Supervisor requires transactions with related parties and write-offs exceeding specified amounts or posing special risks to be subject to prior board approval. BoB requires reporting of transactions and board approval for exposures ≥ 10 percent of unimpaired capital, but does not explicitly require board approval for write-offs or transactions posing special risks. - EC4: Supervisor determines banks have policies/processes to prevent persons benefiting from a transaction from being part of granting/managing the transaction. BoB guidelines require exclusion of interested related persons and supervisors verify policies and implementation. - EC5: Laws/regulations set, or supervisor can set, limits for exposures to related parties; BoB prescribes sub-limits and aggregate limits as detailed above, but effective aggregate limit relative to Tier 1 capital departs from Basel expectation. - EC6: Supervisor determines banks have policies/processes to identify, monitor, report, and independently review related party exposures; BoB guidelines require policies, monitoring, reporting, and independent oversight through internal audit and compliance, with supervisory verification. *Source: 1bwaea2024004 - Section 17(7) of the Banking Act (1995) lays down the broad restrictions on lending to* ### Section 5.1 of BoB guidelines on transactions with related parties of a bank requires ### Section 5.1 of BoB guidelines on transactions with related parties of a bank requires ### Reporting and supervisory practice on related-party transactions - Each bank shall submit to the BoB a quarterly report in the format prescribed by the BoB, showing all exposures to related persons and evidencing compliance with the Guidelines. - Laws or BoB guidelines have not required banks to establish a framework whereby banks monitor and report on individual related party exposures and transactions with related parties through an independent credit review or audit process. - During onsite examinations, supervisors: - review processes to determine exceptions to policies; - verify if senior management monitors these transactions on an ongoing basis; and - verify if these are appropriately escalated to obtain approvals as needed. - Off‑site analyses of periodic statements and data received from banks on their exposures to related parties and large exposures are used to pursue corrective actions when breaches of prudential limits are observed. - Onsite examinations review internal control reports, compliance reports and internal audit reports to identify frequency of breaches, related exception reporting and approval processes, implementation of board‑approved policies and procedures by senior management, and board oversight. - The information system and internal control arrangements suffer from gaps in: - definition of related party; and - definition/scope of related party transaction. - Referenced cross‑findings: EC1 and EC2 (details not reproduced here). ### EC7 — Supervisor obtains and reviews aggregate exposures to related parties - BoB obtains a quarterly report from each bank indicating exposures by type of facility, approved limit, outstanding amount, excess over limit, loan performance classification, provisions held, collateral held and value of collateral to each type of related party (associates, subsidiaries, affiliates, joint ventures, senior officials, significant shareholders, executive directors, and non-executive directors). - Supervisors review these reports and include a gist in the quarterly institutional profile prepared in the Banking Supervision Department; where necessary, they pursue the bank on any observed breach. - BoB supervisors become aware of an exposure on any related party when the exposure to that related party exceeds 10 percent of unimpaired capital, via prudential reporting on large exposures (see CP19 reference in source). - Offsite data and information obtained by BoB suffer from the same gaps in definition of related party and scope of related party transaction (see EC1 and EC2). ### Assessment — Principle 20 - Assessment: Materially non-compliant - Key divergences from Basel norms identified: - gaps in definition of exposure on related parties (do not include exposure through placements and investment); - gaps in definition of related parties; - absence of an explicit and comprehensive definition of related party transactions for prudential purposes; - absence of prudential limits on aggregate related party exposures; - absence of explicit provision for deducting from capital exposures in excess of prudential limits; - gaps in governance requirements; and - absence of explicit and comprehensive supervisory (prudential) reporting requirement for transactions with related parties. - These gaps collectively result in significant weaknesses in the prudential regime for transactions with related parties. - Recommended actions (high level): - review and revise the regulatory and supervisory framework to align with this core principle; - revise offsite reporting and analyses; - update guidance in supervision manuals for onsite supervision of related‑party transactions. ### Principle 21 — Country and transfer risks: context and regulatory expectations - Principle 21 summary: supervisor determines banks have adequate policies and processes to identify, measure, evaluate, monitor, report and control/mitigate country risk and transfer risk in international lending and investment activities on a timely basis. - Country risk definition (from source): risk of exposure to loss caused by events in a foreign country; broader than sovereign risk and covers lending/investment to/with individuals, corporate, banks or governments. - Transfer risk definition (from source): risk that a borrower will not be able to convert local currency into foreign exchange and so will be unable to make debt service payments in foreign currency. ### EC1 — Requirements and findings on country and transfer risk - BoB guidelines on risk management (2018) define country risk and transfer risk and require banks engaging in granting credit outside Botswana to: - have board‑approved policies and procedures to identify, measure, evaluate, monitor, report and control country and transfer risk; - have processes consistent with risk profile, systemic importance, and risk appetite, considering market and macroeconomic conditions and providing a comprehensive bank‑wide view; - identify, monitor and manage country exposures (including intra‑group exposures) on regional and individual country basis and ensure adherence to limits; - monitor and evaluate developments in country and transfer risk and apply countermeasures; - ensure information systems, risk‑management systems and internal controls accurately aggregate, monitor and report country exposures (including intra‑group) on a timely basis and ensure adherence to country‑exposure limits; - include appropriate scenarios into stress‑testing program to reflect country and transfer‑risk analysis; and - submit sufficient information to the BoB for review on a timely basis. - Findings: - Supervisory and banks’ practice is oriented towards the immediate risk perspective rather than also the ultimate risk perspective (e.g., source of repayment or location of collateral). - BoB has yet to establish offsite reporting requirements to obtain details of banks’ exposures, though guidelines require submission of “sufficient information”. - Banks do not include country and transfer risks in their Pillar 2 – ICAAP assessments. - Supervisors are not alert to banks’ exposures to country and transfer risks or banks’ risk management/governance frameworks for these risks. - Anecdotal evidence: banks have limited loan portfolio exposure to country and transfer risks, but exposures exist via investments, placements and nostro balances; absence of offsite reporting prevents comprehensive supervisory view. ### EC2–EC6 — Summary of supervisory shortcomings - EC2 (Board oversight): achievement of EC2 requirements is not explicitly or documented due to gaps in supervision (see EC1). - EC3 (Information systems): BoB has not issued specific regulations or requirements for measurement/grading or periodical reporting of country and transfer risk exposures; supervisory focus on adequacy of systems for country/transfer risk is limited. - EC4 (Provisions): No explicit requirements for provisioning for country and transfer risk exposures; BoB has not established prudential provisioning requirements for credit risk exposures (see CP18). - EC5 (Stress testing): BoB guidelines require inclusion of country/transfer risk in stress testing, but banks do not include these exposures in ICAAP and do not share stress test results separately with supervisors; supervisors do not review stress testing from this perspective. - EC6 (Periodic information): BoB is yet to establish periodic reporting requirements for country and transfer risks; supervisors do not obtain regular data and are constrained in monitoring these risks. - Assessment: Principle 21 — Materially non-compliant ### Principle 21 — Recommended supervisory actions (from source comments) - BoB must: - (a) issue explicit regulations and guidance on grading country and transfer risk exposures and provisioning as distinct risks from counterparty risk; - (b) require explicit adoption of the "ultimate risk" approach to these risks; - (c) introduce appropriate prudential reporting requirements to monitor banks’ exposures and stress‑testing results; - (d) introduce appropriate corresponding improvements to the supervisory manual; - (e) amend the supervisory methodology to include an explicit and dedicated component on management of country and transfer risks by banks; and - (f) as required, supplement these changes with appropriate training and capacity building to enhance supervisory skills relevant for regulating and supervising country and transfer risks. *Source: Excerpt from the provided PDF content.* ### Section 16(2) of the Banking Act (1995) stipulates that every bank in Botswana must ### Section 16(2) of the Banking Act (1995) stipulates that every bank in Botswana must ### Legal and prudential liquidity requirement - Section 16(2) requires every bank in Botswana to maintain daily, specified eligible “liquid assets” as a percentage of its “deposit liabilities”. Currently, this requirement is equal to 10 percent. - Section 16(5) defines: - “Liquid assets” as freely transferable assets, unencumbered by any charge or lien whatsoever, including treasury bills and other securities issued by the Government of Botswana or the BoB and maturing within 370 days, negotiable instruments of such types as the BoB may approve and payable within a period of 184 days, and generally such other assets as the BoB may, from time to time, approve. - “Deposit liabilities” include total deposits, and other liabilities maturing in less than one year. - Section 16(6) authorizes BoB, where a bank fails to maintain required liquid assets, to impose and collect a levy not exceeding 0.1 percent of the amount by which such assets fall short of the amount required in accordance with section 16(2). ### Observed liquidity metrics and system-level statistics - The liquid assets to deposit ratio (LAR) decreased from 19.1 percent in 2020 to 16.6 percent in 2021 but remained above the 10 percent prudential minimum. - The LAR varied across banks within a range of 14 to 21.3 percent. - BoB has not defined or identified any bank as internationally active. - At end December 2021: - Intermediation ratio (total loans and advances to total deposits) for all commercial banks was about 82 percent. - Intermediation ratio for individual banks was in the range of 63 to 107 percent. - Supervisors engage with banks where the intermediation ratio is above 80 percent, though no prudential limit is set. - As at end June 2022: - Average share of top 20 depositors in total deposits for all commercial banks was about 39 percent. - Average for four smaller banks was about 48 percent. - Average for the top four banks was about 37 percent. - For all commercial banks, the range was from about 26 percent to about 54 percent. - Foreign currency metrics: - About 20 percent of bank deposits are in foreign currency. - About 4 percent of loans are in foreign currency. - Banks generally maintain about 15 percent of their total assets in nostro accounts. ### Findings on prudential framework and gaps (EC2) - The LAR is applied uniformly to all banks and reflects liquidity risk from a stock-perspective. - BoB considers the LAR appropriate for the liquidity risk profile of banks operating in Botswana. - Identified limitations of the LAR: - The LAR does not include off-balance sheet liabilities (commitments) expected to result in outflows in the next one year. - The LAR is applied at the aggregate level and does not consider liquidity position in foreign currency either for all foreign currencies collectively or at the level of individual material foreign currencies; compliance with aggregate LAR does not ensure compliance in foreign currency. - The LAR does not capture liquidity risk from a flow (liquidity gap) perspective and may not identify near-term negative liquidity gaps in time-bands like 1 to 7 days and 8 to 15 days. - BoB’s guidelines on liquidity risk management partially address flow perspectives, but regulatory requirements, guidance, and supervisory tools to assess liquidity risk from a flow perspective are required. ### Liquidity risk management framework and supervisory practices (EC3, EC4) - BoB’s guidelines on risk management (2018) require banks to: - Define, identify, and manage liquidity risks across all legal entities, branches, and subsidiaries. - Evaluate each major on- and off-balance sheet position, including embedded options and contingent exposures. - Consider interactions between funding liquidity risk and market liquidity risk and factor in asset value deterioration under stress. - Recognize and consider interactions between liquidity risk and other risks (market, interest rate, credit, operational, reputational). - Effectively manage and monitor net funding requirements, with ability to calculate liquidity positions on an intra-day basis, day-to-day for shorter horizons, and over longer periods. - Set limits relevant to business location, complexity, products, currencies and markets served. - Design early warning indicators and establish diversified funding strategies and strong relationships with fund providers. - Regularly gauge capacity to raise funds quickly, limit concentration in any one funding source or tenor, ensure wholesale funding diversification, and maintain higher proportions of unencumbered, highly liquid assets if reliant on wholesale funding. - Have access to diverse sources of liquidity in each currency where active in multiple currencies, maintain market access, actively manage collateral positions (differentiating encumbered/unencumbered assets), and monitor collateral legal entity and location. - Conduct regular stress tests for short-term and protracted bank-specific and market-wide scenarios, use stress test outcomes to adjust strategies and develop contingency plans. - Maintain a formal contingency funding plan (CFP) with clear invocation and escalation procedures, lines of responsibility, and regular testing. - Establish and maintain MIS that enables senior management, risk committees, and the board to monitor liquidity positions (including trends) in all currencies with material activity; project liquidity positions and future cash flows over different time periods including daily and minimum three months, ideally six months; review exposures against board limits; determine compliance with policies and statutory liquidity requirements; and report compliance with prudential regulatory liquidity requirements. - BoB supervisors: - Closely monitor daily LAR compliance via offsite reports. - Assess adequacy and appropriateness of liquidity risk management strategies, policies, board oversight and compliance primarily onsite. - Review MIS, board-level reports, and committee discussions (Board Audit Committee, ALCO) to assess oversight and quality of liquidity risk management. - Review CFPs during onsite examinations, particularly feasibility and updates reflecting market evolution. - Use annual bilateral meetings with banks, bilateral meetings with external auditors, and trilateral meetings with banks and auditors for further review and follow-up. ### Funding strategy, monitoring and concentration (EC5) - BoB monitors funding risk via: - Intermediation ratio (loans and advances to deposits). - Deposit concentration via share of top 20 depositors. - Observations and supervisory practice: - No prudential limit has been set for the intermediation ratio; supervisors engage with banks where ratio is above 80 percent. - No prudential limit has been set for the top-20-depositor concentration metric; supervisory responses where concentration exceeds thresholds (e.g., 40 or 50 percent) are unclear. - Suggested supervisory improvements: - Consider analysis of these ratios and establishment of clear internal supervisory thresholds to trigger specific supervisory responses. ### Contingency funding plans and stress testing (EC6, EC7) - BoB guidelines require banks to: - Conduct regular stress tests for a variety of short-term and protracted scenarios and use outcomes to inform liquidity strategies and CFPs. - Maintain formal CFPs outlining strategies for liquidity shortfalls across stress environments, clear lines of responsibility, and invocation/escalation procedures; CFPs must be regularly tested and updated. - Supervisory assessment: - Onsite examinations determine whether banks conduct stress tests, use results to inform strategies and CFPs, and test CFPs periodically. - Offsite, supervisors review stress test scenarios and results submitted in annual ICAAP documents and review CFP testing results and internal audit/compliance reviews. - Supervisors discuss CFP issues during bilateral and trilateral meetings with external auditors. ### Foreign currency liquidity (EC8) - BoB’s supervisory focus is on aggregate liquidity management irrespective of currencies. - Currency exposure: - For almost all banks, US Dollar (USD) is a significant foreign currency; for a few, South African Rand (ZAR) and Euro are also significant. - Banks prefer to keep foreign currency deposits in nostro accounts and generally do not undertake material foreign currency liquidity transformation because deposits are typically short term (less than 3 months) and banks generally do not lend to borrowers without a natural hedge. - Identified gap and suggested actions: - The extent of foreign currency liquidity risk in the banking system is not clear and warrants detailed analysis. - BoB can obtain data on foreign currency composition of assets, liabilities and off-balance sheet commitments, undertake detailed analyses to determine materiality of foreign currency liquidity transformation, and consider establishing currency-level liquidity risk management requirements (including offsite reporting and analyses) for significant foreign currencies. ### Encumbrance, asset use and supervisory control (AC1) - Deposit funding predominates; other funding sources include Tier 2 bonds and borrowing from parent or group entities. - Banks normally do not encumber assets to borrow; interbank borrowing is largely unsecured. - Section 17(13) of the Banking Act (1995) requires regulatory approval to encumber assets. - Encumbered assets are not included as part of the liquid assets. ### Assessment, conclusion and supervisory recommendations - Assessment of Principle 24: Materially non-compliant. - Key reasons: - The LAR is a stock measure and does not assess liquidity risk from a flow perspective, does not address currency-wise liquidity risk in a nuanced way, and does not incorporate off-balance sheet commitments. - Supplementary metrics (intermediation ratio and deposit concentration) lack explicit prudential or supervisory thresholds, limiting their effectiveness. - Recommendations to improve compliance with the CP: - Include flow-based liquidity measures in the supervisory toolkit (for example, liquidity gap approach using contractual residual maturity and behavioral residual maturity). - Introduce explicit regulatory and/or supervisory limits for the intermediation and deposit concentration ratios. - Assess liquidity and funding risks at the level of each significant foreign currency (for example, each currency where bank’s assets or liabilities account for more than 5 percent of total liabilities) in addition to aggregate-level assessment. - Improve offsite reporting and analyses to better capture flow and currency-specific liquidity risks. - Provide more guidance to supervisors to assess flow-based and currency-specific dimensions of liquidity and funding risks and reflect these adequately in supervised banks’ liquidity risk profiles. *Source: 1bwaea2024004 - Section 16(2) of the Banking Act (1995) stipulates that every bank in Botswana must* ### Section 8 of BoB guidelines on risk management (2018) establish the following ### Section 8 of BoB guidelines on risk management (2018) — Operational Risk Management ### Definition and scope - Operational risk as defined by the Committee: "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events." The definition "includes legal risk but excludes strategic and reputational risk." - Sectional references used in the guidelines: Section 3.16; Section 8; Section 8.18 to 8.20; Section 8.32 to 8.37. ### Core requirements for banks (operational risk framework) - Every bank should establish a comprehensive system to identify, assess, monitor, and control or mitigate operational risk. This includes: - Codifying all policies and procedures for risk management controls. - Designing the operational-risk assessment methodology. - Establishing a risk-reporting system for operational risk. - The board of directors should approve and review a risk appetite and tolerance statement for operational risk that articulates the nature, types, and levels of operational risk the bank is willing to assume. - The board should establish a code of conduct that sets clear expectations for integrity and ethical values and identifies acceptable business practices and prohibited conflicts. - Senior management should ensure staff training on operational risk tailored to "the seniority, role, and responsibilities" of individuals. - Senior management should identify and assess operational risk inherent in all material products, activities, processes, and systems. - The board and senior management should implement a process to regularly monitor operational-risk profiles and material exposures to losses. - Banks should systematically track and record the frequency, severity, and other information on individual loss events to inform exposure assessment and mitigation policies. ### Board governance, oversight, and approval processes (EC2, EC3) - Section 3.16 requires the board to "approve the overall business strategies and significant policies of the bank, including those related to taking and managing risks" and to ensure management has skills, expertise, and competence commensurate with the bank's nature, scale, and complexity. - The supervisor requires banks’ operational risk strategies, policies and processes (including operational risk appetite) to be approved and regularly reviewed by the board; the board must oversee implementation. - Supervisory review practices: - Onsite: supervisors review board minutes, audit committee and risk committee records, and test implementation of approved strategies, policies, and processes. - Offsite: supervisors follow up through banks’ ICAAP submissions and during "two annual bilateral meetings (one with the bank and another with the external auditors) and the annual trilateral meeting with the bank and the external auditors jointly." - Supervisors obtain periodic updates on implementation of BoB recommendations and may undertake follow-up short onsite visits. ### Supervisory assessment factors used by BoB - Key factors considered when assessing operational risk management adequacy: - Existence of board-approved credible and comprehensive policies, procedures and limits across key operational areas. - Active Board Audit Committee with well-defined terms of reference and approved comprehensive annual audit program. - Full-fledged, independent, and adequately staffed internal audit function with clear reporting lines to the Board Audit Committee. - Robust Management Information System (MIS) facilitating accurate and timely management reports. - Operational Business Continuity Plan (BCP) and Disaster Recovery Site (DRS). - Clear organizational structure with positions of authority and reporting lines. - Clear job descriptions, objective periodic performance appraisals, appraisal instruments, and ongoing comprehensive training programs. - Board-approved risk management coordination framework via a Risk Manager or Risk Management Committee. - Prompt senior management compliance with internal and external auditors’ reports. - Implementation of KYC, AML, and CFT laws/regulations/procedural guidelines. ### Business continuity and resilience (EC4) - Sections 8.32 to 8.37 set requirements for business continuity and resilience. Banks are mainly required to: - Have business resiliency and continuity plans to ensure ongoing operations and limit losses in severe business disruption. - Establish continuity plans commensurate with the nature, size, and complexity of operations, considering plausible scenarios. - Identify critical business operations, key internal and external dependencies, and appropriate resilience levels. - Have contingency strategies, recovery and resumption procedures, and communication plans for management, employees, regulatory authorities, customers, suppliers, and, where appropriate, civil authorities. - Periodically review continuity plans to ensure contingency strategies remain consistent with current operations, risks, threats, resiliency requirements and recovery priorities. - Test business continuity and resiliency plans periodically to ensure recovery and resumption objectives and timeframes can be met; "Where possible, a bank should participate in disaster recovery and business continuity testing with key service providers." - Report the results of formal testing activity to senior management and the board. - At licensing, BoB determines whether a bank has a disaster recovery site and business continuity plans. Internal auditors participate as observers in periodic disaster recovery drills. Supervisors verify testing and results during bilateral and trilateral meetings and onsite examinations; supervisors also rely on internal audit reviews of disaster recovery drills. ### Information technology and cybersecurity (EC5) - Section 8.18 to 8.20 set out IT risk management requirements: - Technology governance and infrastructure risk management programs must address risks introduced by technological products, activities, processes, and delivery channels. - An integrated approach to identifying, measuring, monitoring, controlling, and managing technology risks should encompass: - Governance and oversight controls aligning technology and outsourcing with business objectives. - Policies and procedures for risk identification and assessment, establishment of risk appetite and tolerance statements, and performance expectations. - Implementation of an effective control environment and risk-transfer strategies. - Monitoring processes that test compliance with policy thresholds or limits. - Management should ensure sound technology infrastructure meeting current and long-term business requirements, including capacity for normal and peak activity levels, and ensuring data and system integrity, security, and availability. - BoB is in an advanced stage of issuing a new guideline focused on cybersecurity risk management to enhance cyber posture, create a common approach, achieve minimum cyber resilience levels, manage systemic cyber risk, and comply with Principle 7 of the Principles for Operational Resilience (Basel Committee). - Supervisory activities include IT specialists supporting onsite reviews. Examples of identified IT weaknesses include: - Unsatisfactory management of back-up tapes at disaster recovery site. - Inadequate data center replication technology to meet recovery time objectives or to support data growth. - Ineffective deployment of patches and upgrades. - Unavailability of hot site for mission-critical servers/services. - Inadequate change management processes. - Insufficient testing facility for locally available servers. - Operations anchored on complex IT infrastructure (more than 200 systems and applications). - Lack of system interfaces between retail banking credit origination system and intermittent failures in internet banking and instant money transactions. ### Management information systems and operational risk data (EC6) - Guidelines require each bank to put in place an effective MIS to monitor risk levels and facilitate timely review of risk positions and exceptions. - MIS and reporting requirements include: - Risk monitoring and reporting should address all material risks. - Key assumptions, data sources and procedures used in monitoring risk should be appropriate, adequately documented and tested for reliability on an ongoing basis. - Reports should be consistent with activities, structured to monitor exposures and compliance with limits, and compare actual versus expected performance where appropriate. - Reports to the board and management should be accurate, timely, and contain sufficient information to identify adverse trends and evaluate risk levels. - Risk monitoring must be supported by an information system that provides timely reports on the financial condition, operating performance, and risk exposure; sophistication must keep pace with risk profile, complexity and new products. - Reporting formats should clearly delineate likely occurrence (frequency) and impact and be signed at regular intervals by relevant senior management officers and board members. - Supervisors rely on internal control and internal audit frameworks and discuss MIS adequacy during bilateral and trilateral meetings and onsite examinations. - Recent supervisory findings on MIS and data weaknesses: - Inadequate or ineffective incident reporting processes. - Non-aggregation of operational risk events reported through sub-systems. - Non-estimation of operational losses on several reported incidents, resulting in incomplete data and understating internal loss. - Supervisors pursue resolution of such weaknesses until satisfactorily addressed. ### Reporting to supervisor and capital for operational risk (EC7) - Reporting requirements to supervisor: - Banks must submit prudential reporting on capital adequacy every quarter that includes computation of capital maintained for operational risk. - Banks in Botswana maintain capital for operational risk using the Basic Indicator Approach; at least one bank uses the standardized approach for management reporting. - Minimum internal reporting requirements established by BoB guidelines: - Operational-risk reports should include: (i) breaches of the bank's risk appetite and tolerance statement, as well as thresholds or limits; (ii) details of recent significant internal operational risk events and losses; and (iii) relevant external events and any potential impact on the bank and operational risk capital. - Data capture and risk-reporting processes should be analyzed periodically to enhance risk management performance and advance policies, procedures, and practices. - Appropriate reporting mechanisms should be in place at board, senior management and business line levels to support proactive management. - Banks should continuously improve operational-risk reporting quality to ensure reports are comprehensive, accurate, consistent, and actionable; reports should be manageable in scope and volume. - Reporting should be timely and producible in both normal and stressed-market conditions; frequency should reflect risks and operating environment changes. - Supervisory reports should be reported internally to senior management and the board, where appropriate. - Banks should systematically track and record frequency, severity, and other information on individual loss events to assess exposure and develop mitigation policies. *Source: Section 8 of BoB guidelines on risk management (2018), as reproduced in the supplied content.* ### Section 22(7) of the Banking Act (1995) requires that the external auditor shall report ### 1bwaea2024004 - Section 22(7) of the Banking Act (1995) requires that the external auditor shall report ### External auditor reporting obligations (Section 22(7)) - The external auditor shall report to the BoB if, in the course of audit duties for a bank, the auditor is satisfied that: - (i) there has been a serious breach of, or non-compliance with, the provisions of the Banking Act, the Bank of Botswana Act, the Companies Act, or any regulations issued under those Acts, or any directions or guidelines issued by the BoB; - (ii) a criminal offence involving fraud or other dishonesty has been committed; - (iii) losses have been incurred which reduce the paid-up capital of the bank by fifty per cent or more; - (iv) serious irregularities have occurred in the affairs of the bank, particularly such irregularities that jeopardize the security of depositors and creditors; - or the auditor is unable to confirm that the claims of depositors and creditors are still covered by the assets of the bank. ### Operational risk reporting and supervisory practices - Current practice: - BoB has not introduced formal supervisory reporting on operational risk events and losses. - Banks reportedly apprise BoB of major operational lapses or events (for example, internal and external frauds), changes in information technology systems, and changes in key management positions. - BoB supervisors rely on: the bank’s internal data base, reporting by external auditors, internal audit findings, internal reports submitted to management and board reports on operational risk events and losses, and review of banks’ resolution of unresolved sources of operational risk. - Limitations: - Reliance on secondary information can result in analysis and assessments being performed with a lag and may be inadequate for handling highly sensitive or high magnitude events and developments. - Recommendation: - BoB should establish formal and periodic, structured, and unstructured, reporting by banks on operational risk events and losses. - Guidance should be provided to banks on: - identification of events and losses; - tracking resolution of events; - appropriate categorization of events; - measurement of losses. - Benefits: - Establishment of good databases within each bank and at sector level; - Promotion of more informed supervision / SREP. ### Outsourcing risk management (EC8) — supervisory expectations and findings - EC8 expectation: The supervisor determines that banks have established appropriate policies and processes to assess, manage and monitor outsourced activities covering: - (a) conducting appropriate due diligence for selecting potential service providers; - (b) structuring the outsourcing arrangement; - (c) managing and monitoring the risks associated with the outsourcing arrangement; - (d) ensuring an effective control environment; and - (e) establishing viable contingency planning. - Outsourcing policies/processes require comprehensive contracts and/or service level agreements with a clear allocation of responsibilities between the outsourcing provider and the bank. - Description and findings: - BoB guidelines on risk management require banks to have governance and oversight controls ensuring technology and outsourcing arrangements align with business objectives. - BoB holds boards and senior management responsible for understanding operational risks from outsourcing and for effective risk-management policies and practices. - BoB requires outsourcing policies to encompass, among others: - procedures for determining whether and how activities can be outsourced; - processes for conducting due diligence in selection of potential service providers; - sound structuring of the outsourcing arrangement, including ownership and confidentiality of data, as well as termination rights; - programs for managing and monitoring risks associated with the outsourcing arrangement, including the financial condition of the service provider; - establishment of an effective control environment within a bank and the service provider; - development of viable contingency plans; - execution of comprehensive contracts and/or service level agreements with a clear allocation of responsibilities between the outsourcing provider and the bank. - BoB has not explicitly required banks to seek its approval for outsourcing activities, but banks inform BoB in advance and seek its approval or no objection in practice. - Example: a bank sought prior approval/no objection for outsourcing processing of government bond trades through a group entity in another jurisdiction; BoB reviewed and accorded no objection subject to compliance with principles for outsourcing. - Principles imposed (example case): - The bank’s board of directors retains responsibility for activities undertaken under the service agreement. - Bank should establish a comprehensive outsourcing risk management program to address outsourced activities and relationships with group offices (as relevant). - Bank should ensure outsourcing does not diminish ability to fulfil obligations to customers and regulators nor impede effective supervision by the BoB. - The outsourcing contract should clearly describe all material aspects, including rights, responsibilities and expectations of both parties. - Supervisory guidance and practices: - In absence of explicit supervision guidance, supervisors use Basel Committee guidelines on Outsourcing in Financial Services to review outsourcing policies and processes. - BoB requires banks to have contracts and service level agreements; banks reportedly submit SLAs for BoB review before signing, though not required. - Recommendations: - BoB should issue explicit guidelines and requirements to formalize current outsourcing practices. - Prepare guidance for supervisors to assess banks’ outsourcing arrangements and supervision of outsourcing risks. - Consider introducing reporting requirements whereby banks periodically submit to BoB key details of their outsourcing arrangements. ### Additional criteria (AC1) — concentration and common points of exposure - AC1 expectation: The supervisor regularly identifies any common points of exposure to operational risk or potential vulnerability (e.g., outsourcing of key operations by many banks to a common service provider). - Findings: - BoB has not required banks to submit details of their outsourcing arrangements. - Despite this, BoB can informally identify common points of exposure via internal coordination among supervisors. - BoB recently became aware of potential concentration among service providers in cash management, cash handling services, records management, and disaster recovery arrangements. ### Assessment, overall findings and suggested regulatory/supervisory improvements - Assessment of Principle 25: Largely compliant. - Comments: - Current legal, regulatory and supervisory frameworks and BoB’s offsite and onsite frameworks/practices are largely compliant with EC requirements in this CP. - Gaps identified: - Lack of specific detailed requirements in laws or regulations that deal with outsourcing; - Lack of supervisory reporting on operational risk events and related losses. - The draft proposed guidelines on cybersecurity risk will strengthen regulation and supervision of this component of operational risk. - More detailed guidance to supervisors and articulation of supervisory expectations in the supervision manual can improve scope and depth of onsite supervision. - To improve compliance BoB can: - (a) issue explicit regulations on outsourcing, cybersecurity (currently in draft stage), and operational resilience; - (b) suitably modify the offsite framework to systematically obtain periodic and structured and unstructured data/reports on operational risk events (including near-misses) and related losses, promote analyzes of this data to better inform supervision and strengthen SREP; - (c) incorporate additional guidance to supervisors on the above and other specific elements relevant for supervision of operational risk management in banks in the supervision manual. - Supplement changes with appropriate training and capacity building to enhance supervisory skills relevant for regulating and supervising operational risk management by banks. ### Internal control and audit (Principle 26) — EC1 and EC2 findings - Principle 26 expectation: The supervisor determines that banks have adequate internal control frameworks to establish and maintain a properly controlled operating environment, including delegation of authority, separation of functions, reconciliations, safeguarding assets, and appropriate independent internal audit and compliance functions. - EC1 requirements and findings: - Sections 3.22 to 3.26 of BoB guidelines on risk management (2018) specify requirements for internal control systems and procedures, including: - establishment and maintenance of effective system of controls, enforcement of official lines of authority and appropriate separation of duties (e.g., trading, custody, back-office); - interrelated elements: management oversight and control culture; risk recognition and assessment; control activities and segregation of duties; information and communication; monitoring activities and correcting deficiencies. - Failure to implement/maintain adequate separation of duties can lead to serious losses and may warrant formal enforcement action by BoB. - Audit and risk management committees should review adequacy and effectiveness of internal control systems and means through which risk exposures are managed. - Internal controls should be tested by an independent internal auditor who reports directly to board or audit committee. - Requirements for adequacy of internal controls and audit procedures include: - system of internal controls appropriate to type and level of risks; - organizational structure with clear lines of authority and responsibility; - reporting lines ensuring independence of control areas and separation of critical functions (e.g., business origination, payments, reconciliation, risk management, accounting, audit, compliance); - official structures reflecting actual operating practices; - financial, operational, and regulatory reports that are reliable, accurate and timely with exceptions promptly investigated; - adequate procedures for compliance with laws and regulations; - independence and objectivity of internal audit or control review practices; - adequate testing and review of internal controls and information systems with documentation of coverage, procedures, findings and responses; - identified material weaknesses to receive appropriate and timely high-level attention and objective verification of management’s corrective actions; - audit committee or board to review effectiveness of internal audits and control review activities regularly. - Section 3.3 of BoB guidelines on banks’ audit committees, annual independent external audit and publication of audited financial statements (2009) require audit committees to: - recommend accounting policies, standards and controls and supervise compliance; - assist board in evaluating adequacy, efficiency and effectiveness of internal control systems, accounting practices, information systems and auditing processes; - introduce measures to enhance integrity of financial statements and operational control environment, financial disclosures and reporting; - receive and review internal and external audit reports including management letter and ensure senior management takes appropriate and timely action to correct weaknesses. - EC2 findings: - RBS framework does not explicitly address specific elements in EC2, but supervisors review staffing and balance of skills and resources at bank and key functional unit level. - Supervisors do not systematically undertake reviews of staffing and skills in control functions and back/middle offices. - Reference: see EC1 for details about independence and access to board. *Source: 1bwaea2024004 - Section 22(7) of the Banking Act (1995) requires that the external auditor shall report* ### Section 10 of BoB guidelines on risk management (2018) establishes BoB’s ### Section 10 of BoB guidelines on risk management (2018) — Banks’ compliance risk management ### Compliance risk management: scope and core requirements - Section 10 establishes BoB’s expectations and requirements around banks’ compliance risk management covering definition, identification, measurement, monitoring, control and mitigation, and reporting. - Requirements for banks’ compliance function: - It should be independent, with sufficient resources and clearly specified activities. - The compliance staff, especially the head of compliance, should not be in a position where conflict of interest between his/her compliance responsibilities may arise. - The head of the compliance function should be a member of senior management and should not have direct business line responsibilities. - Compliance risk should be included in the risk-assessment methodology of the bank. - The audit program should cover the adequacy and effectiveness of a bank's compliance function, including testing of controls commensurate with the perceived level of risk. - This implies the compliance function and the internal audit function should be separate to ensure independent review. - The audit function should keep the head of compliance informed of any audit findings related to compliance risk management. - Compliance responsibilities may be discharged by staff in different departments, or all compliance responsibilities may be conducted by the compliance unit/department. - Note on terminology: “compliance function” does not necessarily denote an organizational unit; compliance staff may reside in operating business units or local subsidiaries and report up to operating business line management or local management, provided such staff also have a reporting line through to the head of compliance who should be independent from business lines. ### Required content of banks’ compliance policy - Each bank’s compliance-risk management policies and procedures should be clearly defined and consistent with the nature and complexity of the bank's activities. - The compliance policy should address: - define responsibilities and ultimately ensure that the board and senior management are fully acquainted with material compliance events, - its relationship with other risk-management functions within the bank and with the internal audit function, - in cases where compliance responsibilities are carried out by staff in different departments, how these responsibilities are to be allocated among the departments, - express the compliance function’s right to obtain access to information necessary to carry out its responsibilities and the corresponding duty of bank staff to cooperate in supplying this information, - compliance function’s right to conduct investigation of possible breaches of the compliance policy, - compliance function’s right to freely express and disclose its findings to senior management, and - compliance function’s right of direct access to the board of directors or a sub-committee of the board. ### Supervisory framework, assessment factors, and current supervisory activities - BoB’s risk-based supervision framework: - Supervisors assess inherent risks by their impact on the supervised financial institution’s earnings and capital and set goals/objectives. - Quantitative and qualitative factors are applied in risk assessment. - BoB has identified eight risk categories deemed most prevalent; these include compliance risk. - Key factors BoB considers when assessing adequacy of compliance risk management systems: - adequacy, soundness, reasonableness and completeness of the supervised financial institution’s policies and procedures governing compliance risk. - consistency in the supervised financial institution’s track record of compliance with applicable laws, implementing regulations, prudential requirements, guidance notes, supervisory recommendations and directives, internal policies and limits, internal and external audit, - recommendations, statutory requirements, codes of practice promoted by industry associations and internal codes of conduct applicable to staff members of the bank. - Existence of an independent compliance function and whether the compliance risk management is reviewed by internal audit function. - Current supervisory activities related to compliance function: - As part of BoB’s fit and proper framework, supervisors conduct due diligence with reference to the head of compliance, as she/he is a senior management personnel. - During the annual bilateral and trilateral meetings with banks, supervisors review board oversight of risk management, compliance, and internal audit functions. - Supervisors review banks’ compliance function during onsite examinations. In two large banks, supervisors required greater independence for head of compliance — requiring reporting to the CEO instead of to the CRO. - Supervisory assessments can be expanded to explicitly include assessment of adequacy of staff assigned to compliance function, their skillsets, experience, and training. - Limitation noted: - As compliance function in banks is a recent requirement and due to COVID-19 related disruptions, BoB is yet to establish formal supervisory guidelines for conducting comprehensive or thematic reviews of the compliance function in banks. ### Internal audit function requirements (EC4 and EC5) - EC4 summary: supervisor determines banks have an independent, permanent and effective internal audit function charged with: - (a) assessing whether existing policies, processes and internal controls (including risk management, compliance and corporate governance processes) are effective, appropriate and remain sufficient for the bank’s business; and - (b) ensuring that policies and processes are complied with. - Statutory and guideline provisions supporting EC4: - S 23 of Banking Act (1995) and Section 3 of the BoB guidelines on Banks’ audit committees, annual independent external audit and publication of audited financial statements (2009) lay down role, responsibilities and requirements of each bank’s audit sub-committee. - Audit Committee requirements include: - Each bank shall have an Audit Committee, consisting of at least three members of the board of directors, the majority of which must be independent non-executive directors. - Members should have relevant experience and a balance of skills and expert knowledge commensurate with complexity of banking organizations. - Functions include recommending accounting policies, evaluating internal controls, facilitating communication among board, senior management, internal and external auditors, recommending appointment/dismissal/compensation of external auditors, oversight of auditors, reviewing audit scope, receiving and reviewing internal and external audit reports including management letter, ensuring timely corrective action, receiving audited financial statements and recommending them to the board, and establishing procedures for confidential employee submissions regarding inappropriate accounting and other business matters. - EC5 summary: supervisor determines the internal audit function: - (a) has sufficient resources, and staff suitably trained and experienced, - (b) has appropriate independence with reporting lines to the Board or audit committee, - (c) is kept informed in a timely manner of material changes to risk management strategy, policies or processes, - (d) has full access to staff and records, - (e) employs a methodology that identifies material risks, - (f) prepares an audit plan based on its own risk assessment, - (g) has authority to assess outsourced functions. - BoB risk management guidelines' specific internal audit requirements: - Audit and risk management committees should review adequacy and effectiveness of internal control systems and means through which risk exposures are managed. - Internal Auditors should have appropriate skills, knowledge, authority and independence to ensure senior management reacts to and acts upon recommendations. - Internal auditors and other risk control functions should be adequately staffed and have sufficient expertise and authority for reviewing various risks and related risk management functions. - Internal audit should perform periodic checks on whether the bank’s risk-management system is properly implemented and policies and control procedures are complied with. - Internal audits of credit risk processes should be conducted periodically and assess compliance with the bank's credit policies and procedures. - Validation of internal credit risk assessment models should be subject to periodic review by qualified, independent individuals (e.g., internal, external auditors and bank supervisors). - Particular attention to irregularities in profit and loss, abnormal foreign exchange trading patterns or trends, frequent excesses of limits; internal auditors should ensure incidents are properly followed through. - An audit program that covers the adequacy and effectiveness of a bank's compliance function should be established, including testing of controls commensurate with the perceived level of risk. - All aspects of reputational-risk management should be subject to an internal audit review. - Observations and supervisory follow-up: - Discussions and reviews indicate banks have internal audit functions that report directly to the Board Audit Committee. - Commercial banks that are subsidiaries of foreign banks rely on group compliance and internal audit frameworks and BoB is working with these banks to transfer or develop relevant skills to local staff. - Where BoB finds inadequate staffing of the internal audit function, supervisors pursue rectification with the bank. - BoB requires compliance and internal audit functions have unfettered access to information and board/sub-committees and be informed in a timely manner about developments or changes relating to bank’s strategy, policies, processes. - Internal audit plans are reported by supervisors to be risk-based and consider internal audit grading of riskiness, key emerging risks, process changes, new products, reorganizations, operational risk events and losses, and developments with potential impact on banks' financial statements. - Banks’ internal audit functions are authorized to review services provided by other service providers and can assess outsourced functions. ### Assessment findings and recommended supervisory enhancements - Assessment of Principle 26: Largely compliant. - Comments and suggested improvements for BoB: - (a) Explicitly require the internal audit function to adopt a formal framework of risk based internal audit, - (b) explicitly review the staffing and skills in control functions and back/middle offices, - (c) expand supervisory assessments to explicitly include assessment of adequacy of staff assigned to compliance function, their skillsets, experience, and training. - Principle 27 (Financial reporting and external audit) — EC1–EC3 findings: - EC1: Legal provisions require recordkeeping and preservation: - Section 18(1) of the Banking Act 1995: banks shall keep records necessary to exhibit clearly and accurately the state of its affairs and preserve every such record for at least five years as from the date of the last entry therein. - Section 18(2): Central Bank may issue directives as to minimum standards applicable to financial records; all banks shall comply. - Section 18(3): breach of Section 18 provisions or directives is an offence liable to a fine of P1000 for each day on which the offence occurs or continues. - Section 19(1): not later than three months after expiration of its financial year, every bank shall prepare balance sheet and profit and loss account in accordance with generally accepted accounting practices in Botswana and in such form as BoB may approve, audited per section 22, under joint signatures of principal officer and two directors. - Section 22(1): every bank shall appoint, annually and at its own expense, an independent auditor acceptable to the Central Bank who shall make a report to shareholders on the annual balance sheet and profit and loss account in accordance with Companies Act auditing requirements and generally accepted accounting standards in Botswana and other directives issued by the Central Bank. - Section 4.4 of BoB guidelines (2009): independent auditor shall fulfil Sections 19 and 22 requirements; conduct audit and prepare audit report, audit opinion and management letter in accordance with Companies Act 2003, International Financial Reporting Standards (IFRS) and International Standard on Auditing (ISA). - While laws do not explicitly state BoB will hold board and management responsible, it is implicit in Section 19(1) and supervisors inform assessors BoB will hold Board and/or senior management responsible in case of breach. - EC2: See EC1 findings — banks must have financial statements audited by qualified independent external auditor per Companies Act, IFRS and ISA; BoB will hold Board and/or senior management responsible in case of breach. - EC3: Banks must comply with IFRS when preparing financial statements, including IFRS 9 requirements for recognition and measurement, impairment, de-recognition and general hedge accounting; audited by qualified independent external auditor (Companies Act, IFRS, ISA); compliance ensures valuation practices are consistent with widely accepted accounting and auditing processes and fair value estimation is subject to independent verification and validation. *Source: Section 10 and related sections of the BoB guidelines on risk management (2018) and BoB supervisory assessments as presented in the supplied content.* ### Section 7.1 of BoB guidelines on Banks’ audit committees, annual independent ### Section 7.1 of BoB guidelines on Banks’ audit committees, annual independent external audit and publication of audited financial statements (2009) ### Overview requirement (Section 7.1) - Each bank’s statutory auditor must, as part of the statutory audit of a bank, certify that the information contained in the Statutory Returns submitted by banks to the BoB as at the end of the financial year is in agreement with the audited books of accounts. - Purpose: provides assurance to the BoB about the consistency of the valuation practices followed by banks for accounting and regulatory reporting. ### EC4 — Scope and standards of external audits - Laws or regulations set, or the supervisor has the power to establish, the scope of external audits of banks and the standards to be followed; these require use of a risk and materiality-based approach in planning and performing the external audit. - Description and findings: - Section 22(6) of the Banking Act provides BoB may impose additional duties on a bank’s independent external auditor: (a) submit additional information related to the financial audit as BoB considers necessary, (b) carry out any other investigation or establish any procedure in any particular case, (c) submit a report on matters referred to in (a) and (b); the bank shall remunerate the auditor for these additional duties. - BoB requires external auditors of all banks to review and certify statutory regulatory reports submitted by banks and their Pillar 3 disclosures each year, in addition to the financial audit. - Tasks performed by external auditors follow IFRS and ISA, which require a risk and materiality-based approach. ### EC5 — Audit coverage of key risk areas - Supervisory guidelines or local auditing standards determine that audits cover loan portfolio, loan loss provisions, non-performing assets, asset valuations, trading and other securities activities, derivatives, asset securitizations, consolidation of and other involvement with off-balance sheet vehicles, and the adequacy of internal controls over financial reporting. - Description and findings: - Banks in Botswana comply with IFRS; independent external audits are conducted in accordance with ISAs. - The BAOA, the independent oversight authority, verifies and enforces compliance. - Bank audits in Botswana cover the specific areas identified in the EC and more. ### Timely submission of audit deliverables (Section 4.8) - Requirement: each bank must submit to BoB within 15 days from the date that its year-end audited financial statements have been prepared: the audit report, audit opinion, management letter and other documents required under Sections 19 and 22 of the Banking Act (1995). - Management letter: - Separate from the audit opinion; addressed to management. - Discloses weaknesses and limitations found in internal control structure and operating procedures. - Provides comments on accounting records, operating systems, internal controls examined during the audit. - Identifies specific deficiencies and makes recommendations for improvement. ### EC6 — Power to reject or rescind auditor appointment - Supervisor has power to reject and rescind appointment of an external auditor who is deemed to have inadequate expertise or independence or does not adhere to established professional standards. - Description and findings: - Section 22(1) of the Banking Act: every bank shall appoint, annually, and at its own expense, an independent auditor acceptable to the Central Bank. - Sections 4.2 and 4.3 of BoB guidelines require the independent external auditor to be professionally qualified and acceptable to the BoB, including that the auditor: - (i) be a member of the Botswana Institute of Accountants (BIA) and/or equivalent body and in good standing, - (ii) have relevant professional experience and competence, - (iii) be subject to a quality assurance program by BIA, - (iv) demonstrate objectivity and impartiality, - (v) comply with ethical standards for auditing and the “Code of Ethics for Professional Accountants” of the BIA and International Federation of Accountants, - (vi) not have any interest in the bank other than as a depositor or borrower in the ordinary course of business. - BoB has power under Banking Act section 22(4) to appoint an auditor if a bank fails to appoint one in accordance with section 22(1), or if BoB is not satisfied with the report of the auditor appointed by the bank. - Gap: Laws or regulations do not explicitly empower BoB to reject and rescind the appointment of an external auditor on grounds of inadequate expertise or independence or non-adherence to professional standards. ### EC7 — Mandatory rotation of auditors/partners - Supervisor determines that banks rotate their external auditors (either the firm or individuals within the firm) from time to time. - Description and findings: - Section 4.5 of BoB guidelines requires banks to rotate their lead external auditor or coordinating partner or the partner responsible for reviewing the audit after every five years. - BoB will not approve the appointment of the auditor until this is complied with. ### EC8 — Periodic meetings with external audit firms - Supervisor meets periodically with external audit firms to discuss issues of common interest relating to bank operations. - Description and findings: - Sec 22(8) of the Banking Act and section 6.1 of BoB guidelines require BoB to arrange a trilateral meeting with officials from each bank and the independent auditor to discuss matters arising in the annual independent audit. - Main topics in trilateral meetings include: - (i) relevant aspects of the bank’s business; accounting and internal control systems, and annual balance sheet and profit and loss statement; - (ii) major auditing issues, appropriate accounting policies, current accounting problems, new instruments, products and transactions, financial innovations; - (iii) other issues of mutual concern. - Section 22(9) and section 6.3 permit BoB to arrange bilateral meetings with auditors if desirable or necessary in the interests of depositors. Main bilateral topics include: - (i) audit strategy, main audit matters and issues raised in the management letter; - (ii) the bank’s risk profile (corporate governance, risk management strategies and compliance matters); - (iii) updates on auditing and accounting standards; - (iv) updates on supervisory developments. - BoB holds these bilateral and trilateral meetings annually. ### EC9 — Auditor reporting to supervisor and confidentiality protections - Supervisor requires external auditor to report to supervisor matters of material significance; laws provide that auditors who make such reports in good faith cannot be held liable for breach of confidentiality. - Description and findings: - Section 22(7) of the Banking Act requires the external auditor shall report to the BoB if, in the course of duties, the auditor is satisfied that: - (a) there has been a serious breach of, or non-compliance with, the provisions of the Banking Act, the Bank of Botswana Act, the Companies Act, or any regulations or directions or guidelines issued by the BoB, - (b) a criminal offence involving fraud or other dishonesty has been committed, - (c) losses have been incurred which reduce the paid-up capital of the bank by fifty per cent or more, - (d) serious irregularities have occurred in the affairs of the bank, particularly irregularities that jeopardize the security of depositors and creditors, or the auditor is unable to confirm that the claims of depositors and creditors are still covered by the assets of the bank. - Section 22(10) provides that no duty of confidentiality to which an auditor may be subject shall be regarded as contravened by reason of the auditor's communication, in good faith, to the BoB any information or opinion relevant to BoB’s functions under the Banking Act (1995). ### AC1 — Access to auditors’ working papers - Additional criterion: supervisor has the power to access external auditors’ working papers, where necessary. - Description and findings: - Laws or BoB regulations do not explicitly provide BoB shall have access to external auditors’ working papers. - BoB supervisors have not felt the need to seek access to auditors’ working papers. ### Assessment of Principle 27 and recommendations - Assessment: Compliant. - Comments and recommendations: - Legal, regulatory, and supervisory frameworks and actual practice in Botswana are generally in compliance with the requirements of this core principle. - To further improve compliance with the essential criteria and the additional criterion, BoB should seek amendment to the Banking Act (1995) (and any other relevant law(s)) to: - (i) have explicit powers to reject and rescind the appointment of an external auditor who is deemed to have inadequate expertise or independence, or does not adhere to established professional standards; - (ii) have the power to access the working papers of external auditors, as that might be required in rare but extreme situations. *Source: Section 7.1 of BoB guidelines on Banks’ audit committees, annual independent external audit and publication of audited financial statements (2009).* ### Section 19 (2) of the Banking Act 1995 and Section 5 of the BoB guidelines on Banks’ ### Section 19 (2) of the Banking Act 1995 and Section 5 of the BoB guidelines on Banks’ ### Disclosure requirements for audited financial statements and Pillar 3 - Banks must: - Send copies of audited statement of financial position and statement of income, on both an individual and consolidated basis as applicable, and an audit opinion to the BoB. - Publish these in at least two newspapers of general circulation in Botswana. - Exhibit these in each place of business in Botswana, excluding mobile sites, within 15 days from the date that its year-end audited financial statements have been prepared, but not later than the 15th day of the 4th month following a bank’s financial year-end (after receiving consent from the BoB). - Always display these throughout the year in a conspicuous position in each of the bank’s places of business in Botswana. - Financial statements must be prepared in compliance with the IFRS, and audited in compliance with the ISA. - Pillar 3 disclosures (BoB guidelines on Basel II (2015)): - Must be published in the prescribed formats on banks’ publicly accessible website and in their published financial statements. (S 12.8) - Should be made on an annual basis, except regulatory capital disclosures which must be disclosed on a quarterly basis. - Any material changes of information on risk exposures or other items prone to rapid change must be disclosed in the interim. - Main Pillar 3 disclosure areas include: regulatory capital requirements; risk management processes; remuneration; scope of application of capital requirements; Common equity Tier 1 instruments and reserves; main features of capital instruments; capital adequacy; credit risk – general disclosures; credit risk – standardized approach disclosures; credit risk mitigation disclosures for standardized approach; general disclosures for exposures related to counterparty credit risk; market risk disclosures for banks using standardized approach; operational risk; equity disclosures for banking book; and interest rate risk in the banking book. ### EC2 — Scope and content of required disclosures - Required disclosures include both qualitative and quantitative information on: - Financial performance, financial position, risk management strategies and practices, risk exposures, aggregate exposures to related parties, transactions with related parties, accounting policies, basic business, management, governance and remuneration. - Scope, content, level of disaggregation and detail are commensurate with the risk profile and systemic importance of the bank. - Findings: - Banks comply with disclosures required under IFRS 7 and IFRS 12 and BoB’s Pillar 3 of Basel II. - BoB-prescribed disclosure templates require disclosure of risk management strategies and processes, structure and organization of the relevant risk management function, including the title or position of Board and senior management official that oversees risk management. - Additional Pillar III disclosure requirements on remuneration cover main components of sound compensation practices, and the governance and committee structures. - In absence of explicit BoB disclosure requirements regarding corporate governance policies and processes and related party transactions, bank disclosures are determined by accounting standards. - Policy consideration: - With implementation of recommendations under CP 14 (Corporate governance) and CP 20 (Related party transactions), BoB can consider establishing explicit disclosure requirements in these areas to reflect prudential requirements and expectations. ### EC3 — Group structure disclosures - Laws, regulations or the supervisor require banks to disclose all material entities in the group structure. - Findings: - Banks are required to comply with IFRS 12, which requires disclosure enabling users to evaluate (i) the nature of, and risks associated with, interests in other entities, and (ii) effects of those interests on financial position, financial performance and cash flows. - IFRS 12 applies to interests in subsidiaries, joint arrangements (joint operations or joint ventures), associates and unconsolidated structured entities. ### EC4 — Review and enforcement of disclosure standards - Responsibilities and arrangements: - Botswana Accountancy Oversight Authority (BAOA) reviews and enforces compliance with accounting standards. - BoB reviews and enforces disclosures required by the Banking Law, BoB’s directives, guidelines and circulars, including Pillar 3 disclosures and the disclosure of audited financial statements and auditors’ opinion. - BoB has a memorandum of understanding (MoU) with BAOA that includes cooperation, coordination, and exchange of information. - Banks’ external auditors are required to review and certify banks’ Pillar 3 disclosures. ### EC5 — Public aggregate information on the banking system - BoB publications: - Monthly Botswana Financial Statistics based on statutory returns from each bank; principal vehicle for disseminating aggregate data on assets, liabilities, off-balance sheet items, income and expenses, liquid assets, reserves, deposits (by type, by holder, foreign currency deposits), loans and advances (by maturity, by interest rates, by economic sector, in arrears), and liquid assets ratio. These are available on the BoB’s website. - Annual Banking Supervision Report publishing aggregate financial performance and conditions of the banking industry, available on BoB’s website. ### Additional criterion AC1 — Disclosures useful for understanding risk exposures over reporting period - Findings: - Public disclosures are usually annual as part of financial statements in conformity with IFRS, which require qualitative and quantitative disclosures on financial performance, financial position, the nature and extent of risks at the reporting date, and how the entity manages those risks. - Banks’ quantitative disclosures in the public domain provide a point-in-time perspective. - Law, regulations or accounting standards do not explicitly require disclosure of data on average exposures or turnover during a financial reporting period. - Policy recommendation: - BoB can review and revise laws and regulations to promote disclosure of average exposures or turnover during the reporting period or other information to help understand a bank’s risk exposures during a financial reporting period. - To supplement accounting-standard disclosures, BoB can consider establishing explicit disclosure requirements for corporate governance and related party transactions reflecting prudential expectations (linked to CP 14 and CP 21 recommendations). ### Assessment of Principle 28 - Assessment: Compliant - Comment: - Legal, regulatory and supervisory frameworks and actual practice in Botswana comply with this core principle. - Suggested actions for further alignment: revise laws/regulations to require disclosure of average exposures/turnover during reporting periods; establish explicit BoB disclosure requirements for corporate governance and related party transactions. ### Principle 29 — Abuse of financial services (EC1 and EC2) - EC1 — Legal and supervisory framework for AML/CFT: - BoB is required to regulate and supervise institutions for compliance with the Financial Intelligence Act (FI Act), including through on-site inspections (see Section 49(1)(b)). - The Financial Intelligence Act, 2022, (FI Act) prescribes customer due diligence rules. Section 14 and 16 require banks to implement and maintain a customer acceptance policy, internal rules, programs, policies, processes, procedures to protect its system from financial offences and conduct customer due diligence. - BoB supervises banks, bureau de change, money and value transfer services and electronic payment system entities. - BoB industry guidelines issued (examples): - Guidelines on Identification, Monitoring and Reporting of Suspicious Transactions. - Guidelines on Identification of Beneficial Owners of Legal Persons and Arrangements. - Guidance for Specified Parties and Accountable Institutions in Detecting Terrorist Financing (FIA). - Trend Report and Study on Cross-Border Cash Declarations in Botswana (FIA). - EC2 — Policies and processes to prevent use for criminal activities: - FI Act obligations highlighted: - Section 38 requires entities to report suspicious transactions to the Financial Intelligence Agency (FIA) – (STRs). FIA is central for requesting, receiving, analyzing and disseminating disclosures of financial information concerning suspicious transactions to investigatory, supervisory or competent authorities. - Section 29 requires entities to monitor complex transactions, unusual transactions or unusual pattern of transactions that have no apparent or economic purposes. - Section 30 requires entities to terminate an existing business relationship where unable to obtain customer due diligence information, and to report such termination to FIA. - Section 14 requires entities to designate a compliance officer who shall meet fit and proper criteria enumerated in subsection (a)–(f). - BoB supervisory approach and tools: - BoB undertakes onsite and offsite supervision to assess effectiveness of banks’ internal controls under the FI Act. Section 49 (1) (e) mandates BoB to supervise and conduct risk-based AML/CFT of supervised entities. - A dedicated team within the BoB BSD consisting of four staff undertakes onsite and offsite analysis of bank compliance with AML/CFT obligations. - Offsite analysis uses data submitted by banks; onsite examinations assess policies, processes, risk management and control effectiveness. - After on-site inspections, BoB issues recommendations; banks must report quarterly remediation of identified issues. - BoB receives AML/CFT data from banks in June and December to assess ML/TF risks and to identify banks for onsite examination. - Development and implementation of supervisory tools: - BoB is developing an AML/CFT supervisory model/tool to operate as an early warning system to identify banks with highest ML/TF risks and prioritize supervisory action. The tool is yet to be fully implemented. - An AML/CFT data-gathering template is being developed and implemented to collect financial data twice in a year from supervised financial institutions, covering customer base, products and services, delivery channels, and business activities including branch network, customer deposits by type, risk profile, business type, business or economic activity and residence status, credit information and other products such as wire transfers, remittances and prepaid cards. - Submitted information is captured in a risk-based model (risk matrix) used for identification, measurement, and monitoring of ML/TF risks, development of institutional risk profiles, supervisory strategies, annual inspection program, and allocation of supervisory resources. - The risk matrix is a three-component model: - (a) structural factors, - (b) business factors, and - (c) internal controls. - Structural factor elements and considerations (relative weights assigned): (i) size of a bank (total assets); (ii) corporate ownership; (iii) holding company location; (iv) branch network; (v) customer risk categories; and (vi) turnover in key positions. - Business factors capture type of customers, products and services, geographic location, and delivery channels; a relative weight is assigned to each. - The current working model comprises core banking and other exposures. - 1. Core banking includes deposits and credits. - Other banking exposure includes wire transfers, foreign exchange, prepaid cards and mobile banking. *Source: Section 19 (2) of the Banking Act 1995 and Section 5 of the BoB guidelines on Banks’ audit committees, annual independent external audit and publication of audited financial statements (2009); BoB guidelines on Basel II (2015); Financial Intelligence Act, 2022 – as presented in the source content.* ### 2. The risk of non-compliance is assessed during the AML/CFT on-site ### 2. The risk of non-compliance is assessed during the AML/CFT on-site ### On-site examination framework and frequency - The full-scope examination covers all the AML/CFT requirements and compliance with the Financial Intelligence Act. - The Bank of Botswana (BoB) reviews institutions’ ML/TF risk profile periodically (twice a year) and assesses risks of non-compliance during on-site examinations. - On-site examinations are informed by risks identified in the AML/CFT Risk-based tool which is updated twice a year; and are also triggered when there are major events in the operations of the financial institution. ### Reporting of suspicious transactions (EC3 and EC4) - In accordance with Section 6 of the FI Act, STRs are filed with the Financial Intelligence Agency (FIA) for analyzing and disseminating to an investigatory authority or supervisory authority. - The FIA implemented an automatic system for bank reporting of large transactions and STRs – goAML. - For banks licensed and regulated by the BoB: - STRs are transmitted from the banks to the FIA and in turn to the BoB; the BoB does not receive STRs directly from entities. - FIA can disseminate any suspicious transactions to the BoB where such activities are material to the safety, soundness or reputation of an institution. - STRs are submitted to the BoB on a semi-annual basis. - The mission observed that the number of STRs appeared low compared with the size, scale and risk profile. - A memorandum of understanding has been signed between the BoB and FIA to facilitate transmittal of reporting and cooperation on AML/CFT policies. - If the supervisor becomes aware of additional suspicious transactions through supervision, it informs the FIA and, if applicable, other designated authorities; the FIA will not typically inform the BoB immediately. - Through on-site inspection, BoB assesses whether processes are in place to prevent and detect STRs and directs banks to report any identified unreported transactions to the FIA. ### Customer due diligence (CDD) requirements and findings (EC5) - The FI Act imposes obligations on banks to develop and implement CDD policies; the BoB assesses adequacy and effective implementation during on-site examinations. - Essential elements of a CDD management program (as stated in EC5) include: - (a) customer acceptance policy identifying business relationships the bank will not accept; - (b) customer identification, verification and due diligence program on an ongoing basis, including verification of beneficial ownership and understanding the purpose and nature of the business relationship; - (c) policies and processes to monitor and recognize unusual or potentially suspicious transactions; - (d) enhanced due diligence on high-risk accounts with escalation to senior management for high-risk relationships; - (e) enhanced due diligence on politically exposed persons (PEPs) including senior management approval and source of wealth/funds checks; and - (f) clear rules on records to be kept on CDD and individual transactions with at least a five-year retention period. - Relevant FI Act sections and provisions: - Section 14(1)(e) requires institutions to implement and maintain customer acceptance policies and controls. - Section 16: triggers for conducting CDD measures (including when establishing a business relationship; occasional transactions equal to or in excess of the prescribed amount; linked transactions; wire transfers; doubt about previously obtained ID; suspicion of financial offence). - Section 19: ongoing CDD for existing business relationships, including periodic review. - Section 20: requirements to establish and verify identity of customer and beneficial owner; collect information on anticipated purpose and intended nature; obtain senior management approval for high risk jurisdictions or high risk business. - Sections 21, 22, 23, 24: enhanced due diligence where a customer is high risk, for high-risk jurisdictions, for international organizations, and for prominent influential persons. - Section 31: records retention and ability to keep records in electronic form. - Section 38: requires entities to report suspicious transactions to the FIA. ### Correspondent banking (EC6) - Section 24 of the FI Act provides requirements for cross-border correspondent banking services; it requires that a financial institution providing such services: - (a) gather sufficient information about a respondent bank to understand the nature of the respondent’s bank business; - (b) determine, from publicly available credible sources, the reputation of the respondent bank including (i) quality of supervision and (ii) whether the respondent bank has been subject to investigations or regulatory action for non-compliance with counter financial offence measures; - (c) assess the respondent institution’s counter financial offence controls; - (d) be satisfied that the respondent bank has conducted CDD on customers with direct access to correspondent accounts; - (e) be satisfied that a respondent bank does not permit its accounts to be used by a shell financial institution. - Section 26 prohibits banks from establishing or maintaining accounts with a shell bank. - The BoB examines the nature and adequacy of bank policies on correspondent banking during on-site examinations. ### Controls, systems, and supervisory powers (EC7 and EC8) - During on-site inspections the supervisor determines if an institution has sufficient controls and systems to identify, monitor and report suspicious transactions. - The Bank issued guidelines on identification, monitoring and reporting of suspicious transactions to support implementation of the FI Act. - The FI Act provides a range of criminal, civil and administrative sanctions for natural or legal persons that fail to comply; administrative sanctions are imposed by the supervisor. - The report notes one case at the Directorate of Public Prosecution: STATE V CARTER MORUPISI, set for judgement on October 31, 2022. ### Internal governance, staffing, training and reporting lines (EC9, EC10, EC11) - Requirements and findings: - (a) Internal audit: Section 14(1)(d) requires development and maintenance of an independent audit function to evaluate policies and processes for compliance with the Act. - (b) Compliance officers: Section 14(1)(a) requires designation of an anti-money laundering and counter financing of terrorism compliance officer at management level with timely access to customer identification data, transaction records and other relevant information. - (c) Screening of employees: Section 14(1)(b) requires procedures to ensure high standards of integrity and evaluation of personal, employment and financial history when hiring employees. - (d) Staff training: Section 14(1)(c) requires banks to maintain ongoing employee training programs on obligations under the FI Act. - The FIA Act requires appointment of a Money Laundering Reporting Officer (MLRO) responsible for coordinating identification of suspicious transactions and reporting obligations. - The Bank’s guideline paragraph 3.19 requires banks to have a monitoring system that detects unusual or suspicious transactions or patterns, commensurate with the size, activities and complexity of the business. - During on-site examination, the BoB assesses whether institutions have adequate MIS, including systems for monitoring suspicious transactions, sanctions screening, CDD systems. - Section 47(1) of the FI Act provides that any civil or criminal proceedings shall not lie against any person for having reported in good faith; Section 47(2) restricts admissibility of identity of a person who made a report unless the person testifies. ### Domestic and foreign cooperation, resources and guidance (EC12 and EC13) - Section 43(10) of the Banking Act requires the Central Bank to disclose information to a central bank in a foreign country to assist in exercising corresponding functions. - The BoB has signed MOUs with other central banks or supervisory authorities which hold majority shares in banks in Botswana; MOUs prescribe sharing of information relating to financial activities. - BoB has signed an MOU with the Non-Bank Financial Institutions Regulatory Authority and the FIA to enable exchange of information relating to financial crime. - The BoB has a dedicated unit within the Banking Supervision Department for AML/CFT supervision with a staff compliment of four technical staff reporting to a Deputy Director. - The FIA produces trend reports on risks of money laundering and terrorist financing and shares them with the supervisor; the reports are cascaded to banks. - BoB has issued industry Guidelines: - Guidelines on Monitoring and Reporting of Suspicious Transactions; and - Guidelines on Identification of Beneficial Owners of Legal Persons and Arrangements. ### Assessment of compliance and key supervisory observations - Assessment of Principle 29: Materially non-compliant. - Comments and supervisory observations: - The FI Act (and its Regulations) is the main legislation for AML/CFT. BoB undertakes supervisory activities throughout the supervisory cycle that include AML/CFT risks. - A dedicated team within BoB BSD (four staff) undertakes on-site and off-site analysis of bank compliance with AML/CFT obligations of the FI Act. - AML/CFT received heightened attention by the BoB after ESAAMLG’s initial mutual examination report identified significant weaknesses; subsequent actions remediated recommendations with work ongoing. - The move to a risk-based approach has commenced with a new early warning tool; effective implementation will help profile higher risk banks and adjust the supervision cycle. - Evidence of greater attention to AML/CFT is integrated into risk-based activities including annual bilateral meetings, on-site examinations, and follow-ups on quarterly updates of supervisory concerns. - There is scope for greater sharing of risk information between BSD supervisors and those responsible for AML/CFT. - According to the FIA Act, a STR must be reported within five-days; there is a lack of clarity in interpretation of the FIA’s guidance regarding the five-day reporting threshold for STRs, impairing the BoB’s ability to sanction banks if the five-day threshold is not met. - Analysis of data shared with the BoB from the FIA indicates a relatively low number of STRs reported by banks to the FIA, suggesting more follow-up may be needed to ensure banks have fully implemented CDD programs and KYC. *Source: 1bwaea2024004 - 2. The risk of non-compliance is assessed during the AML/CFT on-site* ### 1. Responsibilities, objectives and ### 1. Responsibilities, objectives and powers ### Overall assessment - Material deficiencies in the Bank of Botswana’s (BoB) responsibilities, objectives and powers undermine effective supervision. - Primary legislation does not specify BoB’s primary responsibility for promoting safety and soundness of banks and the banking system; the Banking Act specifies a broader suite of objectives that are not subordinated to safety and soundness (see EC2). - The legal framework has not been subject to regular review; the Banking Act had not been reviewed since 1995 and was under review (at an advanced stage of approval) at the time of the mission. - Significant deficiencies in powers across multiple areas: absence of provisions for consolidated supervision (see also CP12); major acquisitions (see CP7); corporate governance standards (CP14); risk management standards (CP15); and change in significant shareholding (see also CP6). - While BoB has powers to increase prudential requirements in law, in practice these powers have not been exercised; moral suasion is used more often than formal exercise of statutory powers. - Prudential requirements for capital and liquidity are uniform across all commercial banks despite BoB having the power to set and enforce prudential requirements based on risk profile and systemic importance; planned implementation of the new D-SIB framework combined with Banking Act revisions may strengthen BoB’s powers, but at the time of the mission there was insufficient evidence of exercise of such powers. - Legislation covers individual banks but does not extend to banking groups; this is a crucial deficiency given that eight of nine commercial banks are currently foreign owned. A draft bill is being prepared to address this deficiency. - Deficiencies in this CP will be treated under CP12 Consolidated Supervision for grading purposes. ### Independence, accountability and resourcing - Lack of operational independence from potential ministerial interference in supervisory oversight. - Inadequate resources to fulfill BoB’s mandate. ### Cooperation and information sharing - Further reform of the legal framework is needed to facilitate sharing of confidential information with domestic supervisory agencies. ### Permissible activities and licensing - Definition of ‘bank’ is clear and the term ‘bank’ is restricted. - Newly licensed banks are not subject to an enhanced supervision plan. - Analysis of ultimate beneficial ownership is not undertaken to identify the individual shareholder. ### Ownership changes, major acquisitions and corrective powers - No provision for significant shareholding in the primary legislation with no legal remedies to reject, modify or reverse a transfer of significant ownership ex post (CP6). - No provision for significant shareholding in the primary legislation with no legal remedies to reject, modify or reverse a major acquisition ex ante (CP7). - Need to develop the range of corrective measures; link the risk rating methodology with processes to handle weak and distressed banks (CP11). ### Supervision approach, techniques and reporting - No internal guidelines for handling distressed or weak banks. - System-wide stress tests not conducted. - Limited engagement with independent non-executive directors on a routine basis. - No reporting requirements for banks on a solo and group basis. ### Consolidated supervision and home-host relations - No provisions for consolidated supervision in the primary legislation (CP12). - Implement MoUs with all home supervisors and increase frequency of information sharing with home supervisors in addition to supervisory colleges. ### Corporate governance (CP14) - Gaps include: - Laws or regulations do not explicitly assign board and senior management responsibilities for corporate governance or provide guidance on expectations. - BoB has not undertaken a formal and structured assessment of a bank’s corporate governance framework, policies, processes, and practices, nor developed supervisory guidance for such assessments. - Laws and regulations do not require nomination committee, remuneration committee or risk committee even in large banks, nor establish nomination procedures for boards. - BoB reviews fitness and propriety of board members every year but does not undertake formal documented assessments of board effectiveness or exercise of duty of care and duty of loyalty. - Laws or regulations do not explicitly require banks or boards to promote corporate culture and values through code of conduct, conflict of interest policies (other than related party exposures), or whistleblower policies; availability and adequacy not assessed. - BoB does not have the power to remove one or more directors, or remove the entire board, if they do not operate in the best interest of the bank or its depositors, or do not perform well. ### Risk management and capital (CP15–CP16) - BoB has regulatory and supervisory frameworks that promote overall risk management and assessment of banks’ risk management frameworks; guidance to supervisors is high-level and needs elaboration. - Regulations and supervisory expectations not sufficiently articulated on model risk management, linking product pricing/performance/compensation to risk, and requiring board approval or BoB notification for removal of CRO. - Capital adequacy framework is compliant with Basel requirements and requires banks to hold much higher minimum capital; higher minimum capital is not explicitly linked to specific risks or pillar 2 risks — BoB should consider establishing linkage to risk profile to allow flexibility in calibrating higher capital without imposing additional burden. ### Credit risk, problem assets and provisioning (CP17–CP18) - Broadly, credit risk management regulatory and supervisory framework is largely in place and implemented; BoB requirements established through risk management guidelines (section 5.28). - Prudential framework for asset classification does not cover all forms of credit exposures; no explicit and enforceable prudential provisioning framework that back-stops accounting. - Gaps include inadequate supervisory expectations/oversight on: - Individual assessment of significant exposures. - Framework for eligible collateral/risk mitigants, periodic valuation, estimation of net realizable value and recognition for provisioning. - Classification and provisioning of multiple exposures to same borrower where one becomes non-performing. - Ongoing oversight and compliance on rescheduled/restructured loans and advances. - Banks’ framework for timely write-offs reflecting realistic repayment and recovery expectations, considering market and macro-economic conditions. - Additional gaps: inadequacy of off-site data for ongoing supervision of asset classification, provisioning, recovery and write-off; lack of periodic assessment of trends and concentrations in problem assets across the banking system. ### Concentration risk and large exposures (CP19) - Prudential requirement gaps: - Framework covers only limited types of concentrations; does not explicitly cover concentration to industry, geographical regions, collateral, product and markets. - Definition of exposures is not comprehensive. - Prudential limit for single counterparty and group of interconnected counterparties is at significant variance from Basel norm of 25 percent of Tier 1 capital. - Regulations allow banks to seek exemptions from BoB to exceed prudential limits and BoB allows it. - Compliance assessed with reference to net exposures (net of collateral and bilateral netting); gross exposures are not monitored. ### Related-party transactions (CP20) - Key divergences from Basel norms: - Gaps in definition of exposure to related parties (do not include exposure through placements and investment). - Gaps in definition of related parties and absence of explicit and comprehensive definition of related party transactions for prudential purposes. - No prudential limits on aggregate related party exposures or explicit provision for deducting from capital exposures in excess of prudential limits. - Gaps in governance requirements and absence of explicit and comprehensive supervisory (prudential) reporting requirement for related-party transactions. - These gaps collectively result in significant weaknesses in the prudential regime for related-party transactions. ### Country and transfer risk (CP21) - Laws/regulation do not explicitly require banks to assess country and transfer risks from immediate and ultimate risk perspectives, grade and provision exposures, or provide explicit supervision of banks’ management of these risks in current onsite/offsite frameworks. ### Market risk and interest rate risk (CP22–CP23) - Market risk exposures were small: "0.01 percent to 2.5 percent of total risk-weighted assets as at end-June 2022; all except two banks were below 0.5 percent." - Banks’ market risk exposures stem from foreign currency risk and interest rate risk in the trading book (IRR-TB); banks do not engage in commodity or equity trading. - Regulatory requirements broadly in place but supervisory gaps arise from knowledge/skills shortages, lack of guidance and supervisory tools, and inadequate offsite reporting; supervision tends to be less intrusive with reliance on banks’ assurance functions. - Interest rate risk frameworks do not explicitly distinguish IRR in the trading book from IRR in the banking book; banks are not adequately complying with key elements of regulation (measuring interest rate impacts on economic value of equity, using at least two techniques for measuring interest rate risk), and supervisors lack tools to determine extent of individual bank IRRBB exposure and to validate banks’ internal measurements for ICAAP purposes. ### Liquidity risk (CP24) - BoB’s prudential liquidity requirement (Liquid Assets Ratio - LAR) is a stock measure of liquidity. - BoB supplements LAR with intermediation ratio and deposit concentration ratio. - These measures do not assess liquidity risk from a flow perspective, do not adopt a nuanced currency-wise approach, and do not consider liquidity risk from off-balance sheet commitments. - The two supplementary metrics are used mainly for monitoring funding risk and concentration risk but lack explicit thresholds (regulatory requirements or supervisory thresholds) that would trigger supervisory responses. ### Operational risk, internal control, audit, reporting and disclosure (CP25–CP28) - Operational risk: legal, regulatory and supervisory frameworks and BoB’s practices are largely compliant with ECs for this CP; however, absence of detailed requirements on outsourcing and supervisory reporting on operational risk events and losses forces supervisors to rely on internal bank sources. - Internal control and audit: frameworks and practices are generally in compliance with this core principle. - Financial reporting and external audit: frameworks and practices are generally in compliance with this core principle. - Disclosure and transparency: frameworks and practices are in compliance with this core principle. *Source: 1bwaea2024004 - 1. Responsibilities, objectives and powers* ### 29. Abuse of financial services MNC Greater sharing of risk information between the BSD ### 29. Abuse of financial services MNC Greater sharing of risk information between the BSD ### Recommended Actions to Improve Compliance with the Basel Core Principles and Effectiveness of Regulatory and Supervisory Frameworks - Principle 1 - Revise the Banking Act to broaden supervisory powers to contain relevant provisions to cover existing gaps e.g., corporate governance, risk management, transactions with related parties, change of control. - Implement a regular program to undertake a comprehensive review of the regulatory framework to ensure financial sector legislation remains relevant to changing industry and regulatory practice. - Principle 2 - Revise Banking Act to remove the need for ministerial approvals when exercising BoB powers. Multiple provisions in the Banking Act need to be addressed to reduce Ministerial involvement. Other amendments to legislation needed include protections for supervisors in the case of legal action to cover staff legal costs. - Undertake a regular program (e.g., annual) to determine the adequacy of skills, such as risk specialists. - Principle 3 - Implement a regular program of information sharing whereby the BoB exchanges risk analysis and undertaking collaborative work with NBFIRA where appropriate. - Principle 4 - No recommendation - Principle 5 - Implement an enhanced supervision program for newly licensed banks such as a targeted onsite examination within the first twelve months from licensing. - Undertake more rigorous suitability assessment of the ultimate beneficial owner during licensing. - Principle 6 - Revise the Banking Act to include an explicit definition of ‘significant shareholding’. - Publish standards for criteria that a change in significant shareholding will be assessed against. - Principle 7 - Revise the Banking Act to include explicit provisions for major acquisitions. - Principle 8 - Conduct regular quality assurance assessments of the supervision framework and methodology. - Develop internal guidance for the handling of weak and distressed banks. - Principle 9 - Greater differentiation of supervisory activities for systemic banks. More frequent engagement with independent non-executive directors. - Perform regular system-wide stress tests to identify areas of vulnerability. - Principle 10 - Develop reporting requirements for banks on a solo and group basis. - Refresh reporting instructions on a regular basis. - Greater depth of detail for risk areas such as: IRRBB, credit risk and market risks. - Principle 11 - Broaden the range of corrective measures. - Link the risk rating methodology with processes to handle weak and distressed banks. - Principle 12 - Revise the Banking Act to contain provisions for consolidated supervision. - Expand prudential guidance for banks and internal guidance to support supervision in addition to staff training. - Principle 13 - Implement MoUs with all home supervisors. - Implement more frequent sharing of information with home supervisors in addition to supervisory colleges. - Principle 14 - Initiate changes to law to obtain the powers that BoB might not have for requiring, supervising, and enforcing good corporate governance in banks, including power to remove a board member or the entire board, for poor performance; issue guideline on corporate governance that address the identified gaps, and provide more and specific guidance to supervisors to be able to conduct effective supervision of corporate governance arrangements in banks. - Principle 15 - Improve guidance to supervisors on, among others, how they can undertake closer or more focused supervision on banks’ risk management systems, risk governance, risk management policies and processes, management of risks surrounding new products or material modification to existing products, stress testing, information systems and risk reporting. - Explicitly articulate the regulatory requirements and supervisory expectations in the areas of model risk management, the need for establishing linkages between product pricing, performance measurement and compensation and risk, and requiring banks to obtain board approval for the removal of the CRO and inform or discuss with BoB the reasons for the removal. - Principle 16 - Develop guidance and tools for reviewing and assessing banks’ ICAAP documents and feeding these into ongoing supervision. - Consider developing appropriate supervisory methodologies to assess Pillar 2 risks and the additional capital that banks might need to hold thereagainst. Such methodologies can equip the supervisors to challenge or validate the internal assessments of capital by banks in their ICAAP documents. These can also help the BoB in linking the higher minimum capital to specific risks as recommended in the previous paragraph. - Work with banks to reduce their reliance on Tier 2 capital, to improve the overall quality of capital. - Principle 17 - Explicitly require that credit risk exposures that are risky or otherwise not in line with the bank’s activities should also be subjected to extra due-diligence and where required, approved by the board or its committee. - Principle 18 - Review and revise the regulatory framework, data and information obtained from banks through offsite statutory reports, and supervisory guidance and tools to address the specific gaps identified. - Undertake periodic, say on semi-annual basis, a system-level analyses of trends and concentrations in relation to banks’ problem assets or risk mitigants or risk mitigation strategies to be able to initiate any system level response measures that may be relevant to address any negative trends or build-up of risk concentrations. - Principle 19 - Review and revise regulations to introduce a more comprehensive approach to supervision of concentration risk management in banks, that addresses the gaps identified in the assessment. - Review and revise the prudential limits on single and group of inter-connected counterparties to comply with the Basel norm of 25 percent of Tier 1 capital; and avoid allowing case-by -case exemptions to exceed the prudential limit. - Make the regulatory requirements and supervisory expectations more explicit and detailed for management of other types of concentrations (e.g., industry, geographic, collateral, products). - Make corresponding changes to the supervision manual, offsite reporting, and analyses, to strengthen SREP with reference to concentration risk management by banks. - Principle 20 - Review and comprehensively revise the regulation and supervision of exposures to and transactions with related parties to bring these on par with the specific requirements of this core principle. - Make corresponding improvements to the offsite reporting and analyses, and guidance provided in supervision manuals for conducting onsite supervision of transactions with related parties. - Principle 21 - Explicitly establish regulatory requirements and supervisory expectations on identification, measurement, monitoring and management of country and transfer risks from immediate and ultimate risk perspectives, including grading these risk exposures and provisioning therefor. - Introduce appropriate prudential reporting requirements, and revisions to supervisory manual. - Provide appropriate training and capacity building to enhance relevant supervisory skills. - Principle 22 - Improve the offsite reporting. Develop supervisory tools, and guidance for assessment of banks’ exposure to market risks and their management of these risks. - Incorporate the above and other specific elements relevant for supervision of market risks in the supervision manual and include an explicit and dedicated component on management of market risks by banks. - Supplement the above by appropriate training and capacity building to enhance the supervisory skills relevant for regulating and supervising management of market risks by banks. - Principle 23 - Improve the offsite reporting, develop supervisory methodologies for assessment of banks’ exposure to IRRBB and the potential impact on banks’ capital to better inform supervision and strengthen SREP. - Incorporate the above and other specific elements relevant for supervision of IRRBB in the supervision manual and include an explicit and dedicated component on management of IRRBB by banks. - Supplement the above by appropriate training and capacity building to enhance the supervisory skills relevant for regulating and supervising management of IRRBB by banks. - Principle 24 - Include flow-based liquidity measures in BoB toolkit, - Introduce explicit regulatory and/or supervisory limits for the intermediation and deposit concentration ratios, - Assess liquidity and funding risks at the level of each significant foreign currency in addition to assessing these risks at the aggregate level (for all currencies), - Improve off-site reporting and analyses to better capture liquidity and funding risks, and - Provide more guidance to supervisors to assess these dimensions of liquidity and funding risks and reflect these adequately in the supervised bank’s liquidity risk profile. - Principle 25 - Review and revise laws, regulations, and supervisory manual / guidance in the following areas: (a) issue explicit regulations on outsourcing, cybersecurity (currently in draft stage), and operational resilience, (b) suitably modify the offsite framework to systematically obtain periodic and structured and unstructured data/reports on operational risk events (including near-misses) and related losses, promote analyzes of this data to better inform supervision and strengthen SREP, (c) incorporate additional guidance to supervisors on the above and other specific elements relevant for supervision of operational risk management in banks in the supervision manual, (d) supplement the above with adequate training and capacity building. - Principle 26 - Review and revise laws, regulations, and supervisory manual / guidance to address the following (a) Explicitly require the internal audit function to adopt a formal framework of risk based internal audit, (b) explicitly review the staffing and skills in control functions and back/ middle offices, and (c) expand supervisory assessments to explicitly include assessment of adequacy of staff assigned to compliance function, their skillsets, experience, and training. - Principle 27 - Seek amendment to the Banking Act (1995) (and any other relevant law(s)) to (i) have explicit powers to reject and rescind the appointment of an external auditor who is deemed to have inadequate expertise or independence, or does not adhere to established professional standards, and (ii) have the power to access the working papers of external auditors, as that might be required in rare but extreme situations. - Principle 28 - To supplement the disclosures under the accounting standards, with the implementation of the recommendations under CP 14 (Corporate governance) and CP 21 (Related party transactions), BoB can consider establishing explicit disclosure requirements in these two areas that reflect prudential requirements and expectations. - Principle 29 - Address legal interpretation of the five-day threshold for STR reporting. - Increase the frequency of data for inclusion in offsite surveillance (e.g., STRs). ### Authorities’ Response to the Assessment - Paragraph 61 - The Bank of Botswana (Bank) has received the Financial Sector Assessment Programme (FSAP) Report, which was conducted by a joint International Monetary Fund/World Bank Team between October 12 and November 2, 2022. - Paragraph 62 - The Botswana 2022 FSAP took place within the context of a significant financial sector reform agenda. Legal changes aimed at strengthening financial sector supervision, including the Bank of Botswana Amendment Act and the Banking Act, both of which enhance the supervisory powers of the Bank of Botswana, had been implemented by the time of the FSAP. It is essential to note that the BCP assessment methodology does not provide detailed information on regulations or laws that were not in effect during the BCP Assessment. Consequently, such regulations and laws were not taken into account in the assessment of various principles. Looking ahead, Botswana is dedicated to continuously improving its regulatory framework and financial sector supervision practices to further strengthen its financial sector. - Paragraph 63 - The Botswana FSAP report fairly reflects Botswana’s compliance position, the state of the financial market infrastructure, the operational and financial performance of financial institutions, and the operating environment for these institutions. Furthermore, the report has largely incorporated comments made on earlier drafts that were submitted to the FSAP Team. - Paragraph 64 - The Bank extends its gratitude to the IMF and the World Bank assessment team for their valuable assessment. Botswana remains strongly committed to the FSAP process and recognizes the valuable insights it provides into a country's financial system. *Source: 1bwaea2024004 - 29. Abuse of financial services MNC Greater sharing of risk information between the BSD* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1bwaea2024004.pdf_