‘Pension industry safe and sound’- Report

• Held cash of P8.9 billion in January 2020

‘Pension industry safe and sound’- Report

Annual pension contributions increased from P4.3 billion in 2018 to P4.6 billion in 2019 while the industry continued to match current assets to current liabilities, recording a liquidity ratio of approximately 97 percent in 2020, a study by the Financial Stability Council (FSC) shows.

According to the FSC study titled Financial Stability Report (FSR), the pensions fund industry recorded a ratio of about 97 percent in 2020 and was able to meet short-term pension obligations. The FSC consists of the Bank of Botswana (BoB) in collaboration with the Ministry of Finance and Economic Development (MFED), the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) and Financial Intelligence Agency (FIA).

According to these financial institutions, the pensions industry held cash of P8.9 billion in January 2020, translating into a prudent liquidity ratio (cash and near cash-to-assets) of 12.4 percent. “Moreover, in January 2021, 88.1 percent of the cash was held in the domestic currency, further enhancing the liquidity profile of the pension industry,” the report reads. “In that regard, the pension funds’ industry was financially sound and stable as at January 31, 2021.”

The report states that significant inter-linkages persist in the financial system, with the banking sector being largely exposed to households. “The household sector accounted for 66 percent of total commercial bank credit, while the sector’s share of bank deposits was 22 percent in March 2021,” it reads. “In addition, households are highly exposed to Non-Banking Financial Institutions (NBFIs), with P100 billion of their assets, mostly pension assets, held by the sector. Non-financial corporations accounted for 44.6 percent total commercial bank deposits while their borrowing represented 30.4 percent of commercial bank credit.”

The FSR states that deposits from other financial corporations or NBFIs represented a significant portion of bank funding at 21.5 percent of total deposits in March 2021. “Thus, the sudden withdrawal of these funds presents potential funding risks to banks,” the report says. “The interlinkages also extend to SOEs that account for 7.1 percent of bank deposits, while loans to the sector account for 2.4 percent of total bank lending.

“In February 2021, a significant amount of NBFI assets (64.4 percent) are also held abroad, exposing them to external financial and economic shocks, albeit providing some portfolio diversification opportunities for NBFIs. Consequently, there are notable vulnerabilities emanating from the interconnectedness between the banking system, the household sector, non-bank financial institutions and the external sector.”

Financial sector assets increase

The FSR also stipulates that the size of the financial system, as reflected by the total assets of bank and NBFIs, increased to P248.6 billion in December 2020, registering a 7.7 percent growth from the P231.2 billion reported in December 2019. It says the developments were largely driven by a significant increase (9.7 percent) of the NBFI sector that in turn was influenced by a 12.9 percent growth in the retirement funds sub-sector. As result, the NBFI sector accounted for 58.5 percent of the system assets in 2020 compared to 41.5 percent of the banking sector

“The sheer size of the financial system translated into 137.5 percent of GDP in 2020 compared to 117 percent in 2019, demonstrating the significance and importance of the financial system to the economy,” the report reads. “The risk of contagion within the financial system, and to the rest of the economy is, therefore, rising in view of the strong interconnectedness and size of the financial system.”