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Competition Declines in Botswana’s Banking Sector

The level of competition in Botswana’s banking sector has declined, according to the central bank. In its 2014 Banking Supervision Annual Report, the Bank of Botswana says the Herfindahl–Hirschman Index2 (HHI) increased from 0.18 in 2013 to 0.20 in 2014, thus indicating deterioration in the level of competitiveness in the banking sector. The trend over a five year period from 2010 to 2014 shows that the HHI remained above the theoretical threshold of 0.18 for high concentration during this period, says the report. HHI measures the degree of competition in a market, and it takes into account the relative size and distribution of companies in a market. HHI approaches zero when a market consists of a large number of firms of relatively equal size.

The degree of competitiveness in the banking sector is determined by the size and structure of the sector. Competitiveness ranges from highly competitive market conditions, for many banks (of more or less the same size) to uncompetitive and monopolistic conditions where the sector is dominated by one bank. Moreoften, however, markets are oligopolistic, the main feature of which is a few players in the market, the bank notes.

A monopolistic market will have high concentration levels, which would result in an increase in market power, a factor that could lead to anti-competitive behaviour and consequently higher cost of banking services for customers. In an oligopolistic situation, the market will also be highly concentrated in a few large banks, having substantial market control, although not to the same extent as in a monopolistic situation. In general, a higher number of banks of comparable size in the market ensures that banks price competitively, thus reducing the degree of market power and opportunities for collusion, says the report.

There are 11 commercial banks (including one offshore) three statutory banks, 56 bureaux de change and one micro-finance institution according to the report. The large banks are Barclays Bank of Botswana Limited, First National Bank of Botswana Limited, Stanbic Bank Botswana Limited and Standard Chartered Bank Botswana Limited. A large bank is one with total assets that constitute 10 percent or more of the aggregate banking sector total assets as at 31st December 2014, the report says.

The Bank of Botswana further mentions in the report that during the year under review, it signed a Memorandum of Understanding (MoU) with the Competition Authority on 6th June 2014 which is consistent with the spirit and principles enshrined in the mandate of the Authority

The main objective of the MoU is to “(a) foster supervisory cooperation between the Bank and the Competition Authority in the regulation of anti-competitive behaviour in the banking and financial services sector; (b) promote collaboration between the Bank and the Competition Authority in the investigation, analysis and combating of anti-competitive practices in the broader economy; and (c) facilitate smooth functioning of the financial system infrastructure.

“The MoU was entered into in recognition of the respective mandates of the institutions. It neither affects the operational independence nor abrogates the powers, responsibilities and any legally binding obligations; it also does not supersede any laws and regulations governing the respective institutions,” the central bank notes in the report.