Why is the Cost of Financial Intermediation Rising in Botswana?

The Botswana banking system has witnessed substantial deregulation in the past three decades with the entry of foreign banks, mergers and acquisitions in the banking system and policy aimed at deregulating interest rates by moving towards more market determined interest rates. These measures should increase competition and reduce inefficiency in the banking system both resulting in lower costs of financial intermediation. However, the cost of financial intermediation has not only remained high but is also rising. This work uses data from the three largest banks from Botswana to investigate the impact of bank specific, industry specific and macroeconomic factors in determining the cost of financial intermediation. Our results show that balance sheet factors, industry specific and macroeconomic variables account for wide bank spreads and hence the high cost of financial intermediation in Botswana. The paper concludes by suggesting that better focused regulatory oversights by the central bank, a reform plan that will boost the supervision of the panoply of non-bank financial institutions and a further strengthening of the fiscal and exchange rate to ensure sustainable macroeconomic position will help to contain the rising cost of financial intermediation.