The UK-based research firm Business Monitor International (BMI) has warned that Botswana’s banking sector is facing escalating challenges that could hinder its performance this year.
BMI highlighted that the sector may also struggle to support the recovery of Botswana’s economy amid a difficult operating environment.
In its recent forecast, BMI indicated that while the banking industry is expected to remain broadly stable in 2026, buoyed by strong capital buffers and low levels of non-performing loans, the tough operating conditions could restrict balance sheet growth, liquidity, and profitability. According to BMI, Botswana’s banking environment will be burdened by weak macroeconomic growth, tighter monetary policy, and rising macro-fiscal risks, all exacerbated by the ongoing US-Iran conflict.
The firm noted that subdued economic growth in Botswana could limit credit demand. It projects real Gross Domestic Product (GDP) to grow by 1.5 percent this year, following a 0.7 percent contraction in 2025, citing weak demand for Botswana’s exports and persistent uncertainty in the diamond sector. With diamonds as the country’s primary export, continued global demand weakness and pricing pressures, alongside questions about De Beers’ long-term role in Botswana’s mining industry, are expected to result in only a modest domestic economic rebound.
BMI’s projections reveal that this fragile growth outlook is likely to directly curtail banking activity. The firm explained that household incomes may remain under pressure, suppressing consumer credit demand, while businesses could postpone investment decisions amid uncertainty. “As a result, we expect loan growth to remain subdued, with banks maintaining cautious lending standards and prioritizing lower-risk segments such as secured and corporate lending,” BMI stated. “While financial stability will remain intact, supported by strong capitalization and loan quality, the sector’s ability to support economic recovery will be limited.”
Tight liquidity conditions are expected to remain a central challenge for Botswana’s banks throughout 2026, further constraining lending. Despite some improvement in 2025 following interventions by the central bank and increased government spending, structural vulnerabilities persist. These include high deposit concentration, reliance on short-term funding, and uneven liquidity distribution across the system, BMI observed. The firm’s analysts noted that the implementation of Basel III liquidity requirements, particularly the Liquidity Coverage Ratio introduced in December 2025, will tighten conditions further. “Banks will be required to hold higher levels of liquid assets at a time when funding is already constrained, limiting their ability to expand lending.”
BMI analysts also pointed to the likelihood of sustained high interest rates and elevated inflation during the second half of 2026, which will escalate borrowing costs. They project Botswana’s inflation rate to average 9.7 percent this year, well above the central bank’s 3.0 to 6.0 percent target range, and expect the Bank of Botswana to raise its benchmark rate by 50 basis points in the coming months. “Higher interest rates will translate into elevated borrowing costs across the economy. For the banking sector, this presents a dual challenge. On one hand, higher lending rates will suppress credit demand and reduce affordability, particularly among households. On the other, banks will face increasing pressure on the liability side, as they compete more aggressively for deposits in an already constrained liquidity environment,” the analysts explained.
This dynamic, they said, will limit credit growth while simultaneously raising funding costs, weighing on banks’ net interest margins and overall profitability. “We forecast client loan growth of 4.2 percent year-on-year by the end of 2026, a modest increase from 3.3 percent at the end of 2025 but still well below the previous decade’s average of 7.0 percent, reflecting weak demand conditions and reduced borrowing capacity.”
The analysts added that elevated interest rates, which are expected to slow loan growth, could also lead to a rise in non-performing loans (NPLs). Although NPLs are projected to remain broadly contained in the near term, recent data points to emerging strains on loan quality. According to BMI, the NPL ratio surged sharply to 3.8 percent in January 2026 before easing slightly to 3.4 percent in February.