Botswana’s financial system remains broadly stable but increasingly exposed to rising liquidity pressures, fiscal strain, and a deepening downturn in the diamond industry, according to the Financial Stability Council’s Financial Stability Report for October 2025.
While banks and non-bank financial institutions continue to demonstrate resilience, the FSC warns that macroeconomic vulnerabilities are mounting and require coordinated policy intervention.
The report paints a picture of a system “stable but tightening,” with liquidity shortages, growing sovereign risks and weakening economic fundamentals elevating the overall balance of risks.
Liquidity Tightens as Banking Sector Feels the Squeeze
A historic liquidity crunch has emerged as one of the most significant threats to domestic financial stability. Excess balances in the banking system fell to P764 million in March 2025, the lowest in years, before stabilising to P1.557 billion in Q2 following increased government spending financed largely by SACU receipts.
To ease the pressure, the Bank of Botswana cut the primary reserve requirement to zero, extended the maturity of repo facilities to 30 days, and widened foreign-exchange trading margins. These interventions helped revive interbank activity but have not resolved deeper structural weaknesses.
Banks continue to meet all regulatory liquidity thresholds, maintaining a 17.8% liquidity ratio in June 2025. However, the FSC notes that the system remains unusually dependent on concentrated wholesale deposits from pension funds and insurers. This interconnection poses a growing contagion threat: any liquidity strain within NBFIs could rapidly transmit to the banking system.
Economic Conditions Deteriorate as Diamond Sector Contracts
Botswana’s macroeconomic outlook has weakened significantly. The economy contracted 2.8% in Q1 2025, and total output for the year is now expected to fall below earlier projections of -0.4%.
The collapse of the diamond market remains a central factor in this downturn. Output shrank a dramatic 37.8% in Q2 2025, driven by sluggish demand from China and the U.S. and growing competition from lab-grown diamonds. Foreign reserves declined to P47.8 billion in July 2025, down 26% year-on-year, covering just 6.1 months of imports.
Sovereign pressures intensified further after Moody’s downgraded Botswana from A3 to Baa1 in October, following a similar downgrade by S&P Global Ratings in September. Both agencies cited the erosion of fiscal buffers and limited progress in economic diversification.
Credit Trends Stable But Household Exposure a Concern
Overall, commercial bank credit grew 8.5% year-on-year in September 2025, up from 4.5% the prior year, largely driven by increased overdraft usage by parastatals and higher household demand for mortgages and motor vehicle loans.
Household credit remains the dominant segment, accounting for 63% of all lending. But the structure of this debt is a concern: unsecured personal loans represent 70% of total household borrowing. The FSC warns that elevated indebtedness, combined with sluggish income growth, increases the risk of repayment distress should interest rates rise or employment conditions weaken.
Even so, the banking sector’s loan book remains healthy, with non-performing loans slightly lower at 3.4%, compared to 3.6% a year earlier.
Non-Bank Financial Institutions Remain Large and Systemically Important
NBFIs, including pension funds, insurers and asset managers, continue to expand their influence, holding a substantial share of national financial assets. Their role as major providers of bank funding creates a structural vulnerability: redemption shocks or asset repricing events in the NBFI sector could trigger funding shortfalls in banks.
Supervisory actions by NBFIRA demonstrate a shift toward risk-based oversight. Enforcement actions declined from 89 in 2024 to 33 in 2025, but monetary penalties increased to P6.4 million, signalling more targeted interventions against high-risk entities.
Payments Systems Stable Amid Rising Financial Crime Alerts
Payments infrastructures remain robust, supporting growing digital transaction volumes. However, the FIA reported a surge in suspicious transaction activity. Between April and August 2025, STRs rose to 360 cases valued at P139.1 million, up from 338 cases worth P68.1 million previously. Banks accounted for the vast majority of submissions, with recurring themes including illegal deposit-taking, tax evasion and fraud.
External Spillover Risks Remain Elevated
The FSC warns that Botswana remains highly exposed to global financial volatility. Tightening international financial conditions, shifts in investor sentiment and rising FX market fragility are key channels through which external shocks could hit domestic markets.
The accelerated depreciation of the Pula crawl rate and wider FX trading margins reflect mounting pressures on reserves, measures that, while stabilising markets, increase inflation risks.
Financial Cycle Weakens, Signalling Heightened Stress
The domestic financial cycle continues to trend downward, indicating weaker risk appetite, tighter credit standards and subdued activity across markets. Combined with declining fiscal buffers and a narrowing export base, the trend highlights a financial system more sensitive to shocks than in previous years.
Path to Stability Runs Through Diversification and Stronger Risk Management
The report concludes that safeguarding financial stability will require deepened economic diversification, stronger liquidity management across the banking and non-banking sectors, and more robust macroprudential oversight. The FSC stresses that coordinated reforms, including liquidity backstops, enhanced stress testing and structural economic transformation, are essential for protecting Botswana’s financial system as global and domestic pressures continue to build.