How to get started as a lender in Botswana

In Botswana, 16% of the adult population either has no access to formal financial services or relies solely on informal channels. What does this tell us?

It tells us that the financial landscape is fertile, ripe for innovation, and ready for disruption.

Botswana may not have the scale of larger African economies, but what it lacks in size, it makes up for in potential. With nearly a third of adults outside the formal banking system, the need for accessible, flexible, and lending solutions for consumers has never been greater.

Lending is one of the foundational tools to unlock economic potential, not just for individuals but for the growth of Botswana’s SMEs, which are critical to driving employment and economic diversification.

According to recent data, only 8% of SMEs have successfully obtained bank credit—a number that has remained stagnant over recent years.

This isn’t due to a lack of creditworthy borrowers; rather, it’s a sign that traditional financial institutions are not adequately meeting the needs of these businesses. This is where you, as a prospective lender, come into play. The gap between demand and supply of credit represents a significant opportunity.

The government, along with the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), is working to create a more accommodating environment for non-traditional lenders.

As regulatory frameworks evolve to promote financial inclusion, new entrants who understand the market dynamics can gain a foothold and build successful lending operations.

This article walks you through everything you need to know to get started as a lender in Botswana—from understanding the regulatory landscape to identifying underserved customer segments, and from the importance of digitizing operations to avoiding common pitfalls.

A snapshot of Botswana’s economy and financial inclusion status

Botswana has long been recognized for its relative political stability and prudent economic management, transitioning from one of the poorest countries in Africa at independence in 1966 to an upper-middle-income economy today.

The backbone of this transformation has been its mining sector, specifically diamonds, which contribute approximately 80% of export earnings and more than a third of the GDP.

However, reliance on diamonds comes with risks. In recent years, the government has increasingly focused on economic diversification to reduce vulnerability to external shocks.

This is where the importance of SMEs comes into play—Botswana’s efforts to promote sectors like tourism, agriculture, and financial services have made SMEs the focal point of growth.

Despite the intent, these SMEs face significant barriers, and one of the biggest is access to finance.

Financial inclusion and the lending gap

Botswana’s financial inclusion numbers tell an intriguing story. According to the most recent data from the Bank of Botswana, approximately 82% of the adult population is financially included through formal channels, which reflects significant progress.

But when you break down the data, it’s evident that inclusion primarily benefits those who are already economically active and well-served by the banking sector.

Informal services still play a considerable role—2% of adults depend entirely on these services, and 16% remain entirely excluded from any financial access.

For comparison, financial inclusion in Kenya stands at over 83%, driven by the success of mobile money platforms like M-Pesa.

This gap shows there is an untapped market in Botswana that innovative lending services can capitalize on, especially given that traditional banks remain reluctant to cater to lower-income individuals and small businesses due to perceived risks.

SMEs are the underserved growth engine

When it comes to SMEs, the statistics are even more compelling. Despite being key drivers of employment—responsible for about 70% of private-sector jobs—only 8% of SMEs have managed to secure loans from banks.

The reasons are manifold: bulky paperwork, rigid collateral requirements, and a lack of tailored financial products are just a few of the obstacles.

This is the opportunity for you as a prospective lender.

Provide alternative credit solutions—whether through microloans, digital lending platforms, or even group financing models— and you can address the unmet needs of this vital segment. The data shows that there is a wide gap between what traditional financial institutions offer and what these businesses require to thrive.

The gatekeepers you need to meet

To operate legally and successfully, there are several “gatekeepers” you must be familiar with and collaborate with. These gatekeepers include regulatory authorities, government bodies, and other financial ecosystem players that hold the keys to establishing and scaling your lending operations.

1. Non-Bank Financial Institutions Regulatory Authority (NBFIRA)

The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) is your first major gatekeeper. Established to regulate and supervise non-bank financial entities, NBFIRA plays a pivotal role in ensuring market stability and consumer protection. Any lender wanting to operate in Botswana without being a traditional bank must obtain a license through NBFIRA, making them the ultimate gatekeeper.

Getting a license involves meeting several requirements, including proof of financial stability, a robust business plan, compliance policies, and evidence of consumer protection measures. The regulatory framework has been evolving to make it easier for non-bank lenders to enter the market, but NBFIRA still maintains strict oversight to avoid potential predatory lending practices. Prospective lenders need to ensure they understand the compliance requirements in detail, as failing to meet these standards could result in delays or outright denial of licensing.

In the last few years, NBFIRA has introduced digital submission systems for licensing applications to make the process more efficient. Still, understanding their expectations and getting expert advice can greatly streamline your entry into the market.

2. Ministry of Finance and Economic Development

The Ministry of Finance and Economic Development also plays a significant role in the lending landscape, as it oversees broader financial inclusion and economic growth strategies. The Ministry’s policies are crucial because they set the tone for the economic environment you will enter. Initiatives like the Financial Inclusion Roadmap and the development of a supportive legal environment for financial technology signal that the government is actively promoting access to credit for underserved segments.

To thrive in Botswana’s lending ecosystem, aligning with the Ministry’s goals for financial inclusion is key. This alignment not only ensures regulatory compliance but also helps position your business as a partner in the country’s socio-economic growth. Establishing good working relationships and being informed of the Ministry’s upcoming policies will help in navigating any macroeconomic changes that might impact your business.

3. Bank of Botswana and Credit Reference Bureaus

The Bank of Botswana, while primarily focused on the banking sector, is a major stakeholder in the overall financial stability of the country. As a lender, it’s important to align with the regulations set forth by the central bank, particularly concerning financial reporting and the broader financial system’s health.

In addition, Botswana has been making strides in establishing a more robust credit infrastructure, including credit reference bureaus. These bureaus are essential gatekeepers for accessing credit histories, which in turn helps you make informed lending decisions. Currently, Botswana’s credit information sharing is still developing, but its role is growing. For you as a lender, establishing a good relationship with the existing credit bureaus and understanding how to integrate with them will be crucial. Doing so not only minimizes your risk but also contributes to the ecosystem by reporting on your customers’ credit behaviors.

4. Technology service providers and payment gateways

Another often-overlooked gatekeeper is the role of technology service providers. In a market that is becoming increasingly digital, your lending platform must integrate with mobile payment solutions, USSD services, and other technology-driven infrastructures. Providers like Mascom, Orange, and other mobile networks are integral partners in enabling payments and communications with borrowers. Likewise, payment gateway partnerships are critical for smooth disbursements and collections. Aligning with reliable technology service providers ensures that your lending services are not only accessible but also seamless for your customers.

Botswana’s high mobile penetration rate—around 180%, according to the latest reports—indicates a population ready for digital financial services. Partnering with technology providers who understand the local market dynamics and have reliable infrastructure is a key factor in setting up an efficient lending system. Without them, the scalability of your operations could suffer.

What you need to set up shop before you start lending

Setting up a lending business in Botswana requires more than just ambition and capital. It involves strategic preparation to ensure you’re compliant, have the right technology, and financially ready.

Capital is the first and perhaps the most obvious requirement.

But, it’s not just about having money; it’s about having the right kind of funding.

The minimum capital requirements for each type of lending under NBFIRA guidelines can vary depending on the nature of the lending institution and the products offered. Based on recent data:

• Microfinance lenders: Typically require a minimum capital adequacy of around BWP 250,000 to BWP 500,000, depending on the size and type of microfinance operations.
• Consumer loan providers: For consumer loans, the minimum capital requirement is generally higher, starting from BWP 1 million, as these loans often require greater liquidity to manage larger disbursements and to cover credit risks.
• SME loan providers: For lending to SMEs, the capital requirements can range from BWP 2 million to BWP 5 million, reflecting the increased risk and the higher amounts typically involved in SME financing.

One thing to note is that traditional banks in Botswana are quite conservative with SME and retail lending, because of the high perceived risk.

This hesitancy is where money lenders can step in.

But to do it well, you need not only enough money to start but also some extra funds to cover any risks if borrowers can’t pay back on time. This might involve finding investors who know the market well or getting support from international organizations like the African Development Bank (AfDB), which has been working to boost funding for small businesses in the region.

Having a detailed business plan that outlines your financial projections and identifies potential risks will also help to secure funding. Investors and regulators need to see that you understand the landscape and are prepared for both the opportunities and the challenges.

Get licensed and approved by NBIFRA

The licensing process is multi-faceted and involves providing proof of sufficient capital, a robust business plan, risk management policies, and compliance frameworks. The application will require details about your lending products, the interest rates you plan to offer, and your target market segments.

Botswana’s financial regulators have observed the pitfalls that have occurred in other African markets, such as aggressive lending and exploitative interest rates, which have often led to regulatory crackdowns.

As such, NBFIRA requires non-bank lenders to adhere to fair lending practices:

• Licensing: Lenders must obtain a license from NBFIRA, demonstrating sufficient capital, a solid business plan, and risk management policies.
• Consumer protection: Lenders must ensure transparency in loan terms, including interest rates and fees, and must follow fair lending practices.
• Capital adequacy: Lenders are required to maintain minimum capital levels, which vary based on the type of lending (e.g., microfinance, consumer loans, SME loans).
• Compliance reporting: Regular compliance reports must be submitted to NBFIRA, including financial statements and borrower data.
• Credit reporting: Lenders must report to credit bureaus to build borrower credit histories and improve transparency.
• AML and CDD: Compliance with Anti-Money Laundering (AML) and Customer Due Diligence (CDD) requirements is necessary to prevent financial crimes.

You either digitize or fizzle out quickly

Botswana’s mobile penetration rate is estimated to be around 185%, which means there are almost twice as many mobile subscriptions as there are people in the country. This high rate makes it ideal for digital lending solutions, and a reliable Loan Management System (LMS) is crucial to support these services.

Some of the loan management software companies you can use for your lending operations in Botswana include Lendsqr, ApPello, Kreyon Systems, and Allvue.

As competition grows and more players enter the market, you would need to provide a seamless user experience that will set you apart.

Your operational infrastructure should also include human resources

Beyond technology, your lending operation needs qualified staff. Key hires include compliance officers who ensure adherence to NBFIRA requirements, risk analysts who can assess creditworthiness accurately, and customer service teams to handle borrower inquiries and complaints.

Given Botswana’s focus on fair lending practices, having staff who understand the importance of consumer protection is a strategic asset.

Prepare for the unpredictable with risk management

Lending is inherently risky—especially in a market where a significant portion of the population is still financially excluded or underserved.

Traditional credit scoring models might not be applicable to many potential borrowers in Botswana, especially those without formal financial histories.

This is where alternative data can be valuable. Mobile money usage, utility bill payments, and even transaction histories can provide insight into a borrower’s creditworthiness.

The default rates in Botswana are currently low, suggesting that borrowers are generally able to meet their repayment obligations. It’s because of the favorable interest rate environment, which is expected to remain stable throughout 2024.

Still, use data analytics to identify early warning signs of default, engage proactively with borrowers, and offer flexible repayment options to manage defaults.

Featured read: Credit bureaus, credit scoring, and payment providers for lenders in Botswana

How to reach your target audience

Digital marketing can be a powerful tool here. With over 70% of Botswana’s population using mobile phones, a well-targeted digital marketing campaign focusing on social media, USSD engagement, and SMS campaigns can help you reach potential borrowers effectively.

Plus, community engagement and partnerships with local SMEs or cooperatives can build trust and enhance your credibility.

Understanding the market segments in Botswana to find customers

Identifying the right market segments is the foundation of any successful lending strategy. Let’s dissect the major customer segments, examine their characteristics, and highlight the opportunities each group presents to a new lender.

1. SMEs are the backbone of economic growth but starved for credit

Small and Medium Enterprises (SMEs) are the backbone of Botswana’s economy, providing about 70% of private-sector jobs.

But, only 8% of these businesses have managed to get loans from banks.

Why? Mainly because banks demand collateral that SMEs don’t always have, and their rigid loan requirements make it hard for small businesses to qualify.

This is where non-bank lenders can step in by offering flexible financing options like revenue-based or invoice financing. Sectors like agriculture, tourism, and retail are growing, and supporting them with tailored loans can make a huge difference.

2. Informally employed individuals are an untapped credit market

The informal sector is a big part of Botswana’s economy, contributing around 30% of the GDP.

But many people working in this sector can’t get loans because they don’t have the paperwork that banks need. Non-bank lenders have a chance to change that.

By using alternative ways to assess credit—like checking mobile money transactions, utility bills, or even spending patterns—you can determine if someone is likely to repay a loan.

Mobile money and USSD services make it easy to offer these loans to people, even in rural areas, giving them access to small loans when they need it most.

3. Target salaried employees with flexible credit

Salaried employees are usually considered lower risk, but banks can still make borrowing tough with their slow approval processes and strict conditions.

Many of these individuals need personal loans for things like medical bills, school fees, or home improvements—and they need them quickly.

Alternative lenders can stand out by offering faster loans with more flexible terms.

Setting up payroll deductions or check-off systems means repayments happen automatically, making it easier for both the borrower and the lender.

Plus, offering a smooth digital application process can make your lending service even more appealing.

Featured read: How to use Lendsqr to power your company employee loans

4. Women-owned enterprises need credit too

Women play a major role in Botswana’s economy, but they often struggle to get the funding they need, mostly because they don’t have the kind of collateral that banks require.

Women-owned businesses, especially in sectors like agriculture, crafts, and retail, need support that’s tailored to their situation.

Offering group loans or unsecured microloans can help women entrepreneurs access credit.

Partnering with organizations focused on empowering women can also help you reach this market effectively, supporting both economic growth and gender equality.

5. Target youths with capital for their startups

Botswana’s young people are an important demographic driving economic diversification, but getting startup capital is a big hurdle for them.

Banks are often hesitant to lend to young entrepreneurs because they lack experience and collateral. This is where non-bank lenders can step in with loans that are based on the business idea’s potential, not just on collateral.

Collaborating with local business incubators and youth programs can help you identify promising startups and reduce risk through shared support.

Also, offering financial literacy support can help these young entrepreneurs make better financial decisions, increasing their chances of success.

Common pitfalls you need to avoid

Many lenders, especially those unfamiliar with local market dynamics, fall into common traps that not only lead to financial losses but also damage their credibility.

1. Don’t underestimate the regulatory requirements for lending in Botswana.
2. Do not ignore educating borrowers about your loan products/terms. Botswana has a significant portion of its population—especially in the informal sector—that is unfamiliar with formal credit products. As a result, they may either avoid borrowing altogether or misuse loans due to a lack of understanding. This can lead to high default rates, customer dissatisfaction, and ultimately a loss of trust in your brand.
3. Do not ignore proper credit assessment. Non-performing loans (NPLs) in Botswana’s financial sector remain at 3.3%. Poor credit assessment can inflate this number, leading to unsustainable losses.
4. Focusing too heavily on a single customer segment or loan product can increase risk exposure. Economic shocks can have a cascading effect on SMEs, so not diversifying into personal loans or microloans could mean significant losses during economic downturns when small businesses are hit the hardest.
5. Do not fail to set up effective collection strategies from the start. You already know managing defaults is hard.
6. Do not overlook Lendsqr loan management software in your operations. Many new lenders start with manual processes, which may work initially but soon become bottlenecks as the business grows.

How to get paid and manage defaults as a lender in Botswana

Botswana’s payment landscape is evolving, with traditional cash-based transactions being complemented by digital solutions that make repayment more convenient for borrowers and more efficient for lenders.

• Digital payment solutions include: Orange Money and Mascom’s MyZaka. Integrate them into your lending operations and reduce the need for borrowers to visit physical locations to make payments.
• USSD and mobile banking: Given the widespread use of USSD technology, this is another reliable channel for receiving repayments. Offer multiple repayment channels, cater to a wider audience and make it easier for borrowers to meet their repayment obligations.
• Checkoff systems for salaried employees: This is especially useful when you;re offering payday loan products to salaried employees. In this system, repayments are automatically deducted from the borrower’s paycheck by their employer and remitted to the lender.

To manage defaults easily, follow these tips:

1. Use early warning systems—such as sending reminders, offering counseling, or restructuring repayment schedules—to prevent a borrower from defaulting.
2. Offer flexible repayment plans. For instance, farmers may be able to repay more after harvest season, while retailers might prefer increased repayments during peak sales periods.
3. Restructure loans for borrowers facing genuine financial difficulties.
4. For larger loans, requiring a guarantor who has a stable income or assets can also reduce default risks.
5. Use an automated Loan Management System (LMS) like Lendsqr for real-time monitoring of repayments, send reminders, and flag potential risks.
6. As a last resort, take legal action against defaulting borrowers, although it can be time-consuming and costly. Reporting defaults to credit bureaus is an important step as well, so future lenders can use credit histories to assess risk.