BANK OF BOTSWANA

BANK YA BOTSWANA

BANK OF BOTSWANA

BANK OF BOTSWANA

DIRECTIVE ON THE REVISED INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS FOR BOTSWANA (BASEL II/III)

Re-Issue Date:
5 October 2026
Effective Date:
1 January 2027

DIRECTIVE ON THE REVISED INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS (BASEL II)

Table of Contents

1. AUTHORITY, PURPOSE AND SCOPE...................................................................................... 1

(a) Authority.............................................................................................................................. 1

(b) Purpose ................................................................................................................................ 1

(c) Effective Date....................................................................................................................... 1

(d) Scope ................................................................................................................................... 1

2. THE REVISED CAPITAL STRUCTURE.................................................................................... 2

3. MINIMUM CAPITAL ADEQUACY RATIO............................................................................. 13

4. PILLAR I: MINIMUM REGULATORY CAPITAL REQUIREMENTS.................................. 14

5. PILLAR II: THE SUPERVISORY REVIEW PROCESS.......................................................... 21

6. PILLAR III: MARKET DISCIPLINE........................................................................................ 21

7. ABOLISHMENT OF LIMITS AND MINIMA........................................................................... 21

8. REPEAL OF THE BASEL I FRAMEWORK ............................................................................ 21

APPENDICES ..................................................................................................................................... 23

Appendix 1........................................................................................................................................... 24

(a) Summary of Risk-weights under Standardised Approach for Credit Risk......................................... 24

(b) Credit Conversion Factors: Off-balance Sheet Items....................................................................... 25

Appendix 2........................................................................................................................................... 26

Eligible Collateral for Credit Risk .......................................................................................................... 26

Appendix 3........................................................................................................................................... 27

The Legal Criteria for Netting Arrangements and Bilateral Netting Rules (Set-off Principle)................... 27

1. AUTHORITY, PURPOSE AND SCOPE

(a) Authority

1.1 This Directive is issued by the Bank of Botswana (Bank) pursuant to its authority set forth in Section 4C (1) of the Bank of Botswana Act (Cap. 55:01) as amended (Bank of Botswana Act).

(b) Purpose

1.2 The purpose of this Directive is to prescribe the “Revised International Convergence of Capital Measurement and Capital Standards (Basel II/III) as a basis for the determination of the regulatory capital adequacy requirements for banks in Botswana.

1.3 In accordance with Section 22 (1) of the Banking Act, 2023 (Cap. 46:04) (Banking Act), “the minimum capital required in respect of any tier of a bank shall be the greater of such amounts as may be prescribed, or such percentage of its assets, or group of assets and other risk exposures as may from time to time be determined by the Central Bank”. Furthermore, the Banking Act empowers the Bank to set the minimum prudential capital adequacy requirements for licensed banks in Botswana and define qualifying components of capital, taking into account the ability of such owners’ funds and/or long- term debt instruments to absorb losses.

1.4 While retaining the meaning of capital and unimpaired capital, as set out in Section 2 of the Banking Act, the determination of eligible capital, method of computation and composition of regulatory capital shall be as specified in the Directive on the Revised International Convergence of Capital Measurement and Capital Standards (Basel II/III), herein referred to as Capital Directive. This is an abridged version of the more detailed guidelines set out in the Basel Committee on Banking Supervision (BCBS) Basel framework (www.bis.org).

(c) Effective Date

1.5 Effective 1 January 2027, a bank shall maintain paid-up unimpaired capital of at least 12.5 percent of the bank’s total risk-weighted assets, and the composition of regulatory capital should be as defined in the Capital Directive. The total risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 8 (that is, the reciprocal of the minimum capital ratio of 12.5 percent) and adding the resulting amount to the sum of risk-weighted assets for credit risk. This revised framework is explained in paragraphs 2 to 5 below.

(d) Scope

1.6 This Capital Directive applies to a bank licensed by the Bank under the Banking Act and statutory banks.

2. THE REVISED CAPITAL STRUCTURE

2.1 The minimum Capital Adequacy Ratio (CAR) shall be 12.5 percent, as set out under Regulation 9(1) of the Banking Act. The prescribed 12.5 percent CAR comprises CET 1 capital at 8.5 percent, additional Tier 1 capital at 2 percent, and Tier 2 capital at 2 percent. Under the BCBS capital framework, the Capital Conservation Buffer (CCB) should be set as a buffer above the statutory minimum CAR at 2.5 percent but given that the Banking Act has prescribed a high minimum CAR of 12.5 percent, the Bank has decided that the statutory minimum CAR be inclusive of CCB.

2.2 In that regard, a bank would be required to maintain a minimum CET1 capital of 8.5 percent of risk-weighted assets, comprising a minimum CET1 capital of 6 percent and CCB of 2.5 percent, and additional Tier 1 capital of 2 percent. The maximum limit of Tier 2 capital shall be 2 percent of risk-weighted assets. In addition, consistent with Regulation 9 (3) of the Banking Act, the definition of regulatory capital comprises the following elements:

Tier I Capital (Going-concern Capital)

2.3 Tier I Capital is the portion of capital which is permanently and freely available to absorb unanticipated losses on a “going concern” basis. This form of capital, in turn, comprises both common equity tier I (CET1) capital and additional Tier I capital. CET 1 capital is the purest and most predominant form of capital and includes common shares and retained earnings. The definition of regulatory capital continues to emphasise stricter criteria for determining the constituents of additional Tier I capital to ensure that these instruments can also absorb losses of a bank on a “going-concern” basis.

Common Equity Tier I (CET1 Capital)

2.4 CET1 capital consists of the sum of the following elements:

(a) Common shares issued by a bank that meet the criteria for classification as common shares for regulatory purposes;

(b) Share premium (stock surplus) resulting from the issue of instruments included in CET1 capital;

(c) Retained earnings, cumulative general reserves set aside as part of the appropriation from net profit in any given financial year, including interim profits, provided such interim profits are audited. Furthermore, any proposed dividends not yet paid should be deducted from the retained earnings for that year;

(d) Accumulated other comprehensive income1 and other disclosed reserves;

[1] Accumulated other comprehensive income, relating to unrealised gains/(losses) from bonds and treasury bills held as available for sale, will not be recognised as part of capital elements, since these instruments do not form part of capital, and therefore, any associated gains/losses from them are disqualified as well. However, gains on equity investments should be restricted to equity investments in banking, financial and insurance entities.

(e) Common shares issued by consolidated subsidiaries of a bank and held by third parties (i.e., minority interest) that qualify for inclusion in CET1 capital; and

(f) Regulatory adjustments2 applied in the calculation of CET1 capital.

Criteria for Classification as part of CET1 Capital

2.5 For purposes of paragraph 2.3 above, CET1 capitalshall have the following characteristics:

(a) Represents the most subordinated claim in the liquidation of a bank;

(b) It is entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (i.e., has an unlimited and variable claim, not a fixed or capped claim);

(c) The principal is perpetual and never repaid outside of liquidation (setting aside discretionary repurchases or other means of effectively reducing capital in a discretionary manner that is allowable under the relevant law);

(d) A bank does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation;

(e) Distributions are paid out of distributable items (retained earnings included). The level of distribution is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items);

(f) There are no circumstances under which the dividend payment or distributions are obligatory. Non-payment is, therefore, not an event of default;

(g) Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital;

(h) It is the issued capital that takes the first and proportionately greatest share of losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going concern basis, proportionately and pari passu with all the others;

(i) The paid in amount is recognised as equity capital (i.e., not recognised as a liability) for determining the statement of financial position insolvency;

(j) The paid-in amount is classified as equity under the relevant accounting standards;

(k) It is directly issued and paid-in and a bank cannot directly or indirectly have funded the purchase of the instrument;

[2] See paragraph 4.6.

(l) The paid-in amount is neither secured nor covered by a guarantee of the issuer or related entity or subject to any other arrangement that legally or economically enhances the seniority of the claim;

(m) It is only issued with the approval of the owners of the issuing bank, either given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorised by the owners; and

(n) It is clearly and separately disclosed on a bank’s statement of financial position.

Regulatory Adjustments in the CET1 capital

2.6 The following items shall be deducted from the CET1 capital of a bank, subject to threshold deductions, as outlined under paragraph 2.6;

(a) Goodwill and other intangible assets3 ;

(b) Advances of a capital nature4 granted to connected persons5 ;

(c) Deferred tax assets (DTA) that rely on the future profitability;

(d) Investments in own shares, whether directly or indirectly;

(e) Unrealised revaluation losses on investments in securities;

(f) Defined benefit pension fund assets;

(g) Reciprocal holdings in the capital of banking, financial and insurance entities;

(h) Cash flow hedge reserve; and

(i) Gains on sales related to securitisation transactions.

Threshold Deductions

2.7 Instead of a full deduction, the following items may each receive limited recognition when calculating the CET1 capital of a bank, with recognition capped at 10 percent of a bank’s common equity (after the application of all regulatory adjustments set out under paragraph 2.5):

[3] A bank may use IFRS 3 for the definition of goodwill and IAS38 for the definition of intangible assets to determine which assets are to be classified as such and are thus deductible.

[4] Defined as injection of risk capital to an entity owned, directly or indirectly, by a connected person, other than the provision of a loan.

[5] Includes all of the following without limitations: (1) Significant shareholder; (2) Member of a board of directors or audit committee; (3) Principal Officer and senior management officials; (4) Any person who is related to such significant shareholder, member of the board of directors or audit committee, Principal Officer or senior management official by family or business interest; (5) Subsidiary of a bank; (6) Company or undertaking in which at least a 5 percent interest is held by a bank; (7) Parent company of a bank; (8) Company that is under common control with a bank; and (9) A company that holds at least a 5 percent interest of another company in which a bank holds at least a 5 percent interest.

(a) Significant investments in the common shares of unconsolidated financial institutions (banks, insurance and other financial entities);

(b) Deferred tax assets that arise from temporary differences;

(c) Mortgage servicing rights6 ;

(d) Aggregate investments by a bank or its subsidiary in the equity of other banks and financial institutions, where the aggregate investment is equal to or greater than 10 percent of the capital of the institutions in which the investment is made. The amount above the 10 percent threshold shall be deducted from CET1 capital, and the amount below the threshold shall be appropriately risk-weighted. That is, the excess above the 10 percent threshold must be deducted and the threshold amount shall be risk-weighted as appropriate; and

(e) The amount of the three items (a,b,c) not deducted in the calculation of CET1 capital (threshold amounts) will be treated as other assets and risk-weighted at 250 percent.

Additional Tier I Capital of a Bank

2.8 Additional Tier I capital consists of the sum of the following elements:

(a) Instruments issued by a bank that meet the criteria for inclusion in additional Tier I capital (and are not included in CET1 capital);

(b) Share premium (stock surplus) resulting from the issue of instruments included in additional Tier I capital;

(c) Instruments issued by consolidated subsidiaries of a bank and held by third parties that meet the criteria for inclusion in additional Tier I capital, and are not included in CET1 capital. Such instruments may receive recognition in additional Tier I capital of a bank, only if issued by a bank.

(d) Regulatory adjustments applied in the calculation of Additional Tier I capital.

Criteria for Classification as Additional Tier I Capital

2.9 For purposes of paragraph 2.7 above, qualifying instruments shall be subject to the following conditions:

[6] A contractual agreement where the right, or rights, to service an existing mortgage are sold by the original lender to another party who specialises in the various functions of servicing mortgages. Common rights included are the right to collect mortgage payments monthly, set aside taxes and insurance premiums in an escrow account6 , and forward interest and principle to the mortgage lender. Mortgage servicing may be performed by the original lender, or the lendermay sell the right to service a mortgage to another company, which performs the service for a fee.

(a) Issued and paid-in;

(b) Subordinated to depositors, general creditors and subordinated debt of a bank;

(c) Is neither secured nor covered by a guarantee of the issuer or related entity, or other arrangement that legally or economically enhances the seniority of the claim vis-àvis bank creditors;

(d) Is perpetual, i.e., there is no maturity date and there are no step-ups or other incentives to redeem;

(e) May be callable at the initiative of the issuer only after a minimum of five years:

(i) To exercise a call option, a bank must receive prior supervisory approval; and

(ii) A bank must not do anything which creates an expectation that the call will be exercised;

(f) A bank must not exercise a call unless:

(i) It replaces the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of a bank7 ; or

(ii) A bank demonstrates that its capital position will be well above the prescribed minimum capital requirement, following the exercise of the call option.

(g) Any repayment of principal (e.g., through repurchase or redemption) must be with prior supervisory approval and a bank should not assume or create market expectations that supervisory approval will be given;

(h) Dividend/coupon discretion:

(i) The bank must have full discretion at all times to cancel distributions/payments;

(ii) Cancellation of discretionary payments must not be an event of default;

(iii) A bank must have full access to cancelled payments to meet obligations as they fall due; and

(iv) Cancellation of distributions/payments must not impose restrictions on a bank, except in relation to distributions to common stockholders;

[7] Replacement issues can be concurrent with, but not after the instrument is called.

Directive on the Revised International Convergence of Capital Measurement and Capital Standards for Botswana (Basel II)

(i) Dividends/coupons must be paid out of distributable items;

(j) The instrument cannot have a credit sensitive dividend feature, that is, a dividend/coupon that is reset periodically, based in whole or in part, on a bank’s credit standing;

(k) The instrument cannot contribute to liabilities exceeding assets, if such statement of financial position test forms part of national insolvency law;

(l) Instruments classified as liabilities for accounting purposes must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the following effects:

(i) Reduce the claim of the instrument in liquidation;

(ii) Reduce the amount re-paid when a call is exercised; and

(iii) Partially or fully reduce coupon/dividend payments on the instrument;

(m) Neither a bank nor a related party over which a bank exercises control or significant influence can have purchased the instrument, nor can a bank directly or indirectly have funded the purchase of the instrument;

(n) The instrument cannot have any features that hinder recapitalisation, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame; and

(o) If the instrument is not issued out of an operating entity or the holding company in the consolidated group (e.g., a special purpose vehicle (SPV), proceeds must be immediately available without limitation to an operating entity8 or the holding company in the consolidated group, in a form which meets or exceeds all of the other criteria for inclusion in additional Tier I capital.

Regulatory Adjustments in Additional Tier I Capital

2.10 The following items shall be fully deducted from Additional Tier I capital:

(a) Direct investments in own additional Tier I capital, net of any short positions, if the short positions involve no counterparty risk;

(b) Indirect investments in own additional Tier I capital (e.g., through holdings of index securities in which the bank itself is a constituent), net of any short positions;

(c) Any own additional Tier I capital, which the bank could be contractually obliged to purchase;

[8] An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right.

(d) Reciprocal cross holdings and the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation9 ; and

(e) Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (i.e., where the bank owns more than 10 percent of the issued common share capital or where the entity is an affiliate).

Additional Tier I Capital Threshold Deductions

2.11 Instead of a full deduction, aggregate amount of non-significant investments in additional Tier I capital of unconsolidated financial institutions (banks, insurance and other financial entities), shall receive limited recognition when calculating additional Tier I capital, with recognition capped at 10 percent of the bank’s common equity (after the application of all regulatory adjustments set out under paragraph 2.9). That is, the excess above the 10 percent threshold must be deducted and the threshold amount shall be risk-weighted as appropriate.

Tier II Capital (Gone-concern Capital)

2.12 Tier II capital is capital that can absorb losses on a "gone-concern” basis, or capital that absorbs losses in insolvency, before losses can be incurred by general creditors and depositors. That is, it helps to ensure that general creditors and depositors get repaid if the bank fails. It includes instruments issued by a bank that meet the criteria for inclusion in Tier II capital, general provisions and current year’s unpublished profits.

2.13 Tier II capital consists of the sum of the following elements:

(a) Instruments issued by a bank that meet the criteria for inclusion in Tier II capital (and are not included in Tier I capital);

(b) Share premium (stock surplus) resulting from the issue of instruments included in Tier II capital;

(c) Instruments issued by consolidated subsidiaries of a bank and held by third parties that meet the criteria for inclusion in Tier II capital, and are not included in Tier I capital (minority interests);

(d) General provisions/general loan loss reserves—Provisions or loan-loss reserves held for future, presently unidentified losses, which are freely available to meet losses which subsequently materialise. NB: Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, do not qualify to be included in Tier II capital. Furthermore, general provisions/general loan-loss reserves eligible for inclusion in Tier II capital will be limited to a

[9] Holdings of Additional Tier 1 capital or similar instruments that are part of a reciprocal cross holding arrangement.

(e) Current year’s unpublished profits; and

(f) Regulatory adjustments applied in the calculation of Tier II capital.

Criteria for Inclusion in Tier II Capital

2.14 An instrument shall meet or exceed the following minimum set of criteria in order for it to be included in Tier II capital:

(a) Issued and paid-in;

(b) Subordinated to depositors and general creditors of a bank;

(c) Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general bank creditors;

(d) Maturity:

(i) Minimum original maturity of at least five years;

(ii) Recognition in regulatory capital in the remaining five years before maturity will be amortised on a straight line basis. That is, during the last five years to maturity, a cumulative discount factor (amortisation) of 20 percent per annum will be applied to reflect the diminishing value of these instruments as a continuing source of financial strength, and

(iii) There are no step-ups or other incentives to redeem.

(e) May be callable at the initiative of the issuer only after a minimum of five years:

(i) To exercise a call option, a bank must receive prior supervisory approval;

(ii) A bank must not do anything that creates an expectation that the call will be exercised10;

(iii) A bank must not exercise a call unless:

    - It replaces the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank11; or

[10] An option to call the instrument after five years, but prior to the start of the amortisation period, will not be viewed as an incentive to redeem, as long as the bank does not do anything that creates an expectation that the call will be exercised at this point.

[11] Replacement issues can be concurrent with, but not after the instrument is called.

maximum of 1.25 percentage points of credit risk-weighted assets;

• A bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised12 .

(f) The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation;

(g) The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organisation’s credit standing;

(h) Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument; and

(i) If the instrument is not issued out of an operating entity or the holding company in the consolidated group, eg, SPV, proceeds must be immediately available without limitation to an operating entity13 or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Tier II capital.

Regulatory Adjustments in Tier II Capital

2.15 The following items shall be deducted in full from Tier II capital:

(a) Direct investments in own Tier II capital, net of any short positions, if the short positions involve no counterparty risk;

(b) Indirect investments in own Tier II Capital (e.g., through holdings of index securities in which a bank itself is a constituent), net of any short positions;

(c) Any own Tier II capital, which the bank could be contractually obliged to purchase;

(d) Reciprocal cross holdings and the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation; and

(e) Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (i.e., where a bank owns more than 10 percent of the issued common share capital or where the entity is an affiliate).

[12] Minimum refers to the regulator’s prescribed minimum requirement, which may be higher than the Basel III Pillar 1 minimum requirement

[13] An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right.

Tier II Capital Threshold Deductions

2.16 Instead of a full deduction, the aggregate amount of non-significant investments in Tier II capital of unconsolidated financial institutions (banks, insurance and other financial entities), shall receive limited recognition when calculating Tier II capital, with recognition capped at 10 percent of the bank’s common equity (after the application of all regulatory adjustments set out under paragraph 2.13). That is, the excess above 10 percent threshold must be deducted and the threshold amount shall be risk-weighted as appropriate.

Capitalisation of Interim Profits

2.17 During the year, a bank licensed under the Act is authorised to capitalise its mid-year audited interim profits, net of proposed interim dividends and an auditor’s certificate to that effect must be issued.

2.18 It is expected that in deciding to capitalise half year’s net profits, a bank would take a “whole year” view of the performance to avoid capitalisation of interim profits only to be eroded by losses in the second half of the year.

2.19 A bank must notify the Bank of Botswana of any subsequent dividend payout, which would result in the reduction of the latest audited capital position of the institution.

Limiting Tier 2 Capital to 2 Percent of Total Risk-weighted Assets

2.20 In alignment with the BCBS requirements, which places greater emphasis on going-concern loss-absorbing capital, Tier 2 capital is limited to 2 percent of risk-weighted assets. Banks with excess Tier 2 capital would be subjected to gradual phasing out of the excess Tier 2 capital over a five-year period to guard against destabilising capital planning of banks as well as mitigate the possible contravention of the 12.5 percent statutory minimum capital requirement.

Basel III Capital Buffers

2.21 In addition to the minimum CAR of 12.5 percent, comprising CET 1 capital of 8.5 percent (inclusive of CCB), additional Tier 1 capital of 2 percent and Tier 2 capital capped at 2 percent of risk-weighted assets, banks are also required to maintain a countercyclical capital buffer (CCyB) and capital charge for systemically important banks (D-SIB buffer), which must be met with CET 1 capital. Details of the operational aspects of the buffers are explained as follows:

(i) Countercyclical Capital buffer

2.22 For the CCyB, the credit-to-GDP gap is the basis for determining the buffer rate. The CCyB rate ranges from 0 percent to 2.5 percent of risk-weighted assets as prescribed by the BCBS. As an initial position, the buffer rate for banks in Botswana has been set at zero percent since the credit-to-GDP gap for Botswana is less than 2 percent. The buffer, however, would be raised when the credit-to-GDP gap exceeds 2 percent. An increase in the CCyB will be preannounced by up to 12 months to give banks time to meet the additional capital requirements before they are implemented, while a reduction in the buffer would take effect immediately to help reduce the risk of credit supply being constrained by regulatory capital requirements.

(ii) Capital Buffer for Systemically Important Banks (SIB)

2.23 Systemically important banks (SIBs) are banks within a country that are deemed crucial to the stability of the financial system and economy because of their size, complexity, and interconnectedness. A failure of those banks could cause significant disruption to the broader financial system and the economy. In the BCBS capital buffers framework, systemically important banks are required to hold a capital buffer proportional to their systemic importance to mitigate the effect of disruption to the financial system in the event of their failure. As guided by the BCBS, the capital surcharges for SIBs range from 1 to 2.5 percent of risk-weighted assets.

2.24 The scheme for allocating the loss-absorbency requirement categorises banks of systemic importance into five using a score range that reflects the systemic importance of a bank. A SIB with the lowest category range score attracts a low capital charge of 1 percent of risk-weighted assets, while a SIB with a higher category range score attracts a higher capital charge of 2.5 percent. Using the results of D-SIB methodology of December 2024, capital surcharge for systemically important banks has been set at 1 percent of risk weightedassets.

2.25 The breach of CCyB and D-SIB capital buffer requirements will trigger dividend restrictions with immediate effect. Dividend distribution constraints will be imposed on a bank when capital levels fall within the buffer conservation range, as indicated in table 1.

Table 1: Individual Bank Minimum Capital Conservation Standards

Common Equity Tier 1 Including Buffers	Minimum Capital Conservation Ratios Expressed as a Percentage of Earnings	CET1 Capital if the Bank is Subject to a 2.5 Percent Countercyclical Capital Buffer Requirement	CET1 Capital if the Bank is Subject to a 1 Percent Domestic-Systemically Important Capital and Countercyclical Buffer Requirements
Within first quartile of the respective buffer	100%	8.5-9.125	8.5-9.375
Within second quartile of the respective buffer	80%	9.125-9.75	9.375-10.25
Within third quartile of the respective buffer	60%	9.75-10.375	10.25-11.125
Within fourth quartile of the respective buffer	40%	10.375-11	11.125-12
Above top of buffer	0%	>11	>12

Minimum Total CAR

2.26 The minimum total CAR would thus be 12.5 percent (inclusive of CCB) and 13.5 percent for non-D-SIBs and D-SIBs, respectively. Should the CCyB increase to the maximum of 2.5 percent, the minimum total CAR would increase to 15 percent and 16 percent for non-D-SIBs and D-SIBs, respectively, as per Table 2.

Table 2: Capital Framework for Botswana Inclusive of Capital Buffers Based on the Basel III
Framework

Capital tiers	CET 1 Capital Requirement (Percent)	Additional Tier 1 Capital	Tier 1 Capital Requirement (Percent)	Tier 2 Capital	Total Capital Requirement (Percent)
Minimum for Botswana	6	2	8,0	2	10,0
Capital Conservation buffer range	2.5				2.5
Minimum Capital Adequacy Ratio					12.5
Countercyclical Buffer (0–2.5 percent)	Up to 2.5	-	-	-	2.5
Domestic Systemically-Important Bank capital add-on (1–2.5 percent)	1	-	-	-	1
Minimum Capital Adequacy Ratio Including Buffers	12 (D-SIBs) 11 (Non-DSIBs)	2	8	2	16 (D-SIB) 15 (Non-DSIB)

LEVERAGE RATIO

2.27 The Bank is introducing a leverage ratio to supplement the risk-based capital requirement by monitoring the leverage associated with both on- and off-balance-sheet exposures. The leverage ratio is intended to achieve the following objectives:

• constrain leverage in the banking sector, thus helping to mitigate the risk of destabilising deleveraging processes which can damage the financial system and the economy; and

• introduce additional safeguards against model risk and measurement error by supplementing the risk-based measure with a simple, transparent, independent measure of risk

2.28 The BCBS has set the leverage ratio at a minimum of 3 percent, measured as the ratio of Tier 1 capital to total on- and off-balance-sheet assets. Consistent with the BCBS requirements, all banks are required to maintain a minimum leverage ratio of 3 percent.

Capital Adequacy Assessment

2.29 A bank shall be required to establish appropriate systems, which will enable them to accurately determine the adequacy of its levels of capital, for the existing business risks. Through its oversight function, a bank’s board will also be expected to ensure that annual tests to obtain independent assurance about the adequacy of a bank’s capital are carried out. Furthermore, all banks must be able to demonstrate the adequacy of their capital bases to the Bank, as may be required, either during an on-site examination or through the offsite monitoring process, using statutory returns.

Provisions to be made for Certain Items

2.30 In accordance with Section 24 of the Banking Act, in making any calculations necessary to ascertain whether or not the capital of a bank is adequate for the purpose of complying with the requirements of Section 22 of the Banking Act, account shall be taken, to the satisfaction of the Bank, and in accordance with International Financial Reporting Standards, of the following items:

(i) collectively and individually assessed impairments for bad and doubtful debts;

(ii) depreciation of assets (to be calculated at least once in each financial year);

(iii) operating and accumulated losses;

(iv) preliminary expenses relating to the organisation or extension of the purchase of any business or goodwill; and

(v) such other items as may be prescribed.

2.31 Each bank shall either:

(a) maintain a primary reserve account that is, in the opinion of the Bank, adequate, and which is reserved exclusively for the purpose of making good any loss resulting from the negligence or dishonesty of any director, principal officer or any other officer or employee of the bank; or

(b) Subject to the minimum provisioning requirements set by the Bank and provisioning methodology adopted by a bank, the Bank’s examination team shall assess the level and adequacy of provisions for impairments based on the performance status of loans and advances using a methodology determined by the Bank.

2.32 If the Bank concludes, based on its review of the reports of a bank or the results of an examination of a bank, that the bank’s provisions for losses and impairments and other items identified in Section 24 of the Banking Act are inadequate to provide for the realistic probability of loss or reduction, the Bank may order the bank to establish additional provisions for such losses and other items identified in Section 24 of the Banking Act.

Transitional Arrangements

Non-qualifying Capital Instruments

2.33 A bank will phase out over a period of five years, beginning 1 January 2027, the Tier 2 capital that is above the 2 percent maximum prudential limit. Fixing the base at the nominal amount of such outstanding instruments on 1 January 2026, recognition will be capped at 80 percent from 1 January 2027, with the cap decreasing by 20 percentage points in each subsequent year. The cap applies to the total outstanding amount of Tier 2 capital that exceeds the Tier 2 regulatory maximum limit of 2 percent. To the extent that the instrument is redeemed, or its recognition in capital is amortised, after 1 January 2027, the nominal amount serving as a base shall not be reduced.

2.34 Only Tier 2 capital instruments issued before 1 January 2026 qualify for the above transitional arrangements.

New Regulatory Adjustments

2.35 Regulatory adjustments introduced by Basel II (i.e., items not currently required to be deducted in the existing capital framework), were gradually phased in over a period of five years, beginning 1 January 2016. In particular, regulatory adjustments began at 20 percent of the required adjustments to the relevant tier on 1 January 2016, 40 percent on 1 January 2017, 60 percent on 1 January 2018, 80 percent on 1 January 2019 and 100 percent on 1 January 2020. During the transition period, the balance not deducted from capital continued to be subject to the existing treatment.

3. MINIMUM CAPITAL ADEQUACY RATIO

3.1 In the BCBS Basel III capital framework, banks are required to maintain higher quality capital, with a capacity to absorb losses on a going-concern basis. In that regard, the proportion of Tier 1 capital to risk-weighted assets shall be at least 10.5 percent of the total risk-weighted assets, that is, CET 1 capital at 8.5 percent (inclusive of CCB) and additional Tier 1 capital at 2 percent, while Tier 2 capital is capped at 2 percent of risk-weighted assets, as indicated in Table 3. Nonetheless, any bank may hold all or most of its capital as Tier I capital.

Table 3: Capital Adequacy Requirements (Percent)

	Common Equity Tier1 Capital	Additional Tier I Capital	Tier I Capital (Core Capital)	Tier II Capital	Total Capital
Prudential Minimum	8.5	2	10.5	2	12.5

3.2 If, as a consequence of a review of capital adequacy, both with regard to risk-weighted assets and with regard to other activitiesthat expose a bank to risks, undertaken by the Bank as part of its examinations under Section 38(1) of the Banking Act, the Bank determines that the capital and reserves of a bank are inadequate, the Bank may call for corrective measures as authorised by Section 40 (a) of the Banking Act.

3.3 Consistent with Section 22(8)(a) of the Banking Act, where a bank fails to maintain its unimpaired capital at the level required in accordance with paragraph 3.1, the Bank may impose on and collect from it a levy not exceeding 0.1 percent of the amount by which such unimpaired capital falls short of the amount prescribed.

3.4 A bank’s audited financial statements and statutory returns should show the unimpaired capital elements. Furthermore, the Bank’s on-site examination reports must include a page measuring capital through the capital convergence method of risk-weighting for on-balance and off-balance sheet items.

4. PILLAR I: MINIMUM REGULATORY CAPITAL REQUIREMENTS

4.1 Under Pillar I of the Basel II framework, in addition to credit risk, a separate and explicit computation of the regulatory capital for market risk and operational risk is introduced. Therefore, the minimum amount of regulatory capital is derived through the summation of capital charges for credit risk, operational risk and market risk. The computation of the regulatory capital adequacy requirements by a bank shall be based on an approach prescribed by the Bank for credit risk, market risk and operational risk. Where applicable, capital charges for other types of risks not included in the calculation of the regulatory capital adequacy ratio (e.g., liquidity risk, interest rate risk in the banking book, business risk and credit concentration risk) shall be assessed under Pillar II.

4.2 Each bank shall compute its capital adequacy requirements based on the standardised approach (SA) for credit risk, a choice between the basic indicator approach (BIA) and standardised approach (SA) for operational risk, and standardised measurement method (SMM) for market risk. These methods are explained in the Basel II document.

4.3 The formula for the computation of the regulatory capital adequacy ratio shall be:

CAR14 = UC/(RWA for CR + (Capital Charge for OR + Capital Charge for MR) * 8) * 100 ≥ 12.5 percent

It must be noted that the risk-weighted on- and off-balance sheet assets for credit risk will be determined by multiplying the credit exposures by the appropriate risk weights, dependent on the counterparty’s risk rating, as applicable. However, the amount of the risk-weighted assets for both operational risk and market risk shall be determined by multiplying the respective capital requirements by 6.715 , the result of which is added to the risk-weighted assetsfor credit risk, to arrive at the total risk-weighted assets of a bank.

(a) Capital Charge for Credit Risk: Standardised Approach

4.4 The computation of the credit risk capital charge of a given bank will be based on risk-weights assigned for each borrower and other exposures (Appendix 1), on- and off-balance sheet, calibrated by allowable credit risk mitigation techniques (CRMs). The SA (which is closest to Basel I) is the simplest approach for calculating the capital charge for credit risk.

[14] Capital Adequacy Ratio (CAR); Unimpaired Capital (UC); Risk-weighted Assets (RWA); Credit Risk (CR); Operational Risk (OR); Market Risk (MR).

[15] The 8 is the inverse of the 12.5 percent prudential minimum CAR (1/0.125).

The main distinguishing factors of this approach, in comparison to Basel I, is that it is more risk sensitive and counterparty risk weights are based on external credit ratings. It also entails eligibility and qualification criteria for different types of exposures and external credit rating agencies. However, where external credit ratings do not exist for an exposure (unrated), a bank must allocate a 100 percent risk weight for such an exposure. This approach also allows for the capital of a bank to be adjusted (reduced) by the amount of the eligible CRMs (e.g., collateral in the form of cash or securities, third-party guarantees, derivative financial instruments and/or set-off/on-balance sheet netting of a loan by the amount of deposit held by the bank for the same customer in the same currency).

4.5 The other major highlights of the SA approach for credit risk are the lower risk-weights for qualifying retail exposures and residential mortgages. For example, under Basel I, all unsecured private sector loans and advances (corporate and retail exposures) were assigned a blanket risk-weight of 100 percent. Under the Basel II framework, retail exposures, which meet the set qualifying criteria, are risk-weighted at 75 percent. Owner-occupied residential mortgages or rented for residential purposes, meeting the set qualifying criteria, are assigned a 35 percent risk weight compared with 50 percent under Basel I.

External Credit Assessment

4.6 For purposes of assigning risk weights for claims on counterparties, a bank shall recognise the ratings of Global Ratings, S&P, Moody’s Investors Service, and Fitch Ratings. The Bank shall also, at its discretion, recognise the ratings of any other external credit assessment institution (ECAI) upon application by the ECAI, or the bank on behalf of the ECAI, provided that they meet the eligibility criteria specified in the Basel II document.

4.7 A bank must use the chosen ECAIs and their ratings consistently for each type of claim, for both risk-weighting and risk-management purposes. A bank will not be allowed to “cherry-pick” the assessments provided by different ECAIs. In the case of unrated exposures, the applicable risk weight shall be 100 percent or more, as may be prescribed by the Bank from time to time.

4.8 A bank shall only be permitted to use solicited ratings.

4.9 External assessments for one entity within a corporate group cannot be used to risk-weight other entities within the same group.

Multiple Assessments

4.10 If there are two assessments by ECAIs chosen by a bank, which map into different risk weights, the higher risk weight will be applied.

4.11 If there are three or more assessments with different risk weights, the assessments corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights will be applied.

Domestic Currency and Foreign Currency Assessments

4.12 Where a borrower’s domestic currency ratings are separate from the foreign currency ratings, a bank shall use a borrower’s domestic currency rating for exposures denominated in domestic currency and foreign currency ratings for exposures denominated in foreign currency. For example, for an exposure to a South African bank denominated in rand, use South Africa’s domestic/local currency rating; and for an exposure to a South African bank denominated, say, in US dollars, use South Africa’s foreign currency rating.

4.13 For risk-weighting purposes, only long-term assessments shall be allowed in this capital standard.

Criteria for Inclusion in the Regulatory Retail Portfolio

4.14 Claims that are included in the retail portfolio, which meet the qualifying criteria, shall attract a risk weight of 75 percent, except as provided under the paragraph for past due loans (paragraph 4.18). Such claims must meet the following criteria:

(a) Orientation criterion: The exposure is to an individual person or persons or to a small business;

(b) Product criterion: The exposure takes the form of any of the following: revolving credits and lines of credit (including credit cards and overdrafts), personal term loans and leases16 and small business17 facilities and commitments. Mortgage loans and securities (such as bonds and equities) are excluded from this category;

(c) Granularity criterion: No aggregate exposure to one counterparty18 should be allowed to exceed 0.2 percent of the overall retail portfolio;

(d) Low value of individual exposures: The maximum aggregated retail exposure to one counterparty and groups of related counterparties must not exceed P10 million; and

(e) Other retail portfolio not meeting any of the criteria under (a) to (d) above, will be risk-weighted at 100 percent.

4.15 On an ongoing basis, the Bank will evaluate the risk-weights assigned to the retail portfolio based on the default experience of these exposures and accordingly determine if these

[16] A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset.

[17] Small business classification should be done in relation to turnover/revenue per annum up to a maximum of P4 million (as defined in the revised statutory returns).

[18] Aggregate exposure means gross amount (i.e., not taking any credit risk mitigation into account) of all forms of debt exposures (e.g., loans or commitments) that individually satisfy the three other criteria. In addition, “to one counterpart” means one or several entities that may be considered as a single beneficiary (e.g., in the case of a small business that is affiliated to another small business, the limit would apply to the bank’s aggregated exposure to both businesses).

exposures warrant a risk-weight higher than 75 percent. Where this discretion is executed by the Bank of Botswana, it would apply to the banking industry as a whole.

Criteria for Inclusion as Claims Secured by Residential Property (owner-occupied residential mortgages)

4.16 Claims secured by residential property, up to P10 million or such other figure as may be determined by the Bank from time to time, shall be risk-weighted at 35 percent, except as set out at paragraph 4.18 of the Basel II document for past due loans. This preferential risk-weight is subject to the following conditions:

(a) Lending must be fully-secured by mortgage on the financed residential property;

(b) The residential property must be owner-occupied or rented by the borrower to a third party, but used for residential purposes;

(c) The residential property must be valued according to strict valuation rules19 and a the bank must ensure that the value of the property is assessed at least once every three years, or more frequently, if market conditions show signs of volatility;

(d) A bank must not only rely on the underlying property provided as collateral, but rather on the borrower’s capacity to repay the debt from other sources;

(e) The property must be insured by a recognised third party insurer for fire and other perils throughout the lifespan of the loan;

(f) The loan-to-value ratio20 must not exceed 90 percent. Where the LTV ratio exceeds 90 percent, the excess shall be risk-weighted at 75 percent; and

(g) Other “owner-occupied)” residential property not meeting any of the criteria under (a) to (e) above, will be risk-weighted at 75 percent.

4.17 On an ongoing basis, the Bank will evaluate the risk-weights assigned to claims secured by residential property based on the default experience of these exposures and accordingly determine if these exposures warrant a risk-weight higher than 35 percent. Where this discretion is executed by the Bank of Botswana, it would apply to the banking industry as a whole.

Treatment of Past Due Loans (more than 90 days, net of specific provisions)

4.18 For any unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more than 90 days, net of specific provisions (including partial write-

[19] The valuation should be carried out by accredited valuers who are members of the Real Estate Institute. This includes but is not limited to a person who possesses the necessary qualifications, experience and is independent from the credit decision process.

[20] The loan-to-value ratio is defined as outstanding loan amount divided by the open market property value multiplied by 100.

offs), shall be assigned risk-weights in line with the table below:

Specific Provision (SP)	Risk-weight (Percent)
SP < 20 percent of outstanding loan amount	150
SP between 20 percent and 50 percent of outstanding loan amount	100
For loans secured by residential property, where such loans are past due for more than 90 days, and their SP < 20 percent	100
SP more than 50 percent of outstanding loan amount	50
For loans secured by residential property and SP is greater than 20 percent of outstanding loan amount	50

Minimum Requirements for the Recognition of Credit Risk Mitigation (CRM) Techniques

4.19 Consistent with the SA for credit risk, banks in Botswana will be permitted to take into account CRMs, as shown in Appendix 2.

4.20 In order for a bank to obtain regulatory capital relief for the use of any CRM technique, the following conditions shall be met:

4.21 A bank should meet the CRM disclosure requirements as detailed under Pillar III - Market Discipline21;

4.22 All documentation used in collateralised transactions and for documenting on-balance sheet netting, guarantees and credit derivatives, must be binding on all parties and legally enforceable in all relevant jurisdictions. A bank must have undertaken sufficient legal review to verify this and have a sound legal basis to reach this conclusion, and undertake such further reviews as necessary to ensure ongoing enforceability;

4.23 The legal mechanism by which collateral is pledged or transferred must ensure that a bank has the right to liquidate or take legal possession of it, in a timely manner, in the event of default, insolvency or bankruptcy of the counterparty (and where applicable, take legal action on the custodian holding the collateral or legal possession of collateral);

4.24 A bank shall take all steps necessary to fulfill those requirements under the law applicable to a bank’s interest in the collateral for obtaining and maintaining an enforceable security interest, i.e., by registering it or for exercising a right to net or set-off in relation to title transfer collateral (see Appendix 3 for legal criteria and bilateral netting rules);

4.25 In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty, or by any related group entity, would provide little protection and so would be ineligible;

[21] See Basel II document

4.26 A bank must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed and that the collateral can be liquidated promptly;

4.27 Where the collateral is held by an independent custodian or an equally independent third party, a bank must take reasonable steps to ensure that the custodian segregates the collateral from its own assets;

4.28 When cash on deposit, certificates of deposit or comparable instruments issued by a lending bank are held as collateral at a third-party bank, in a non-custodial arrangement, if they are openly pledged/assigned to a lending bank, and if the pledge/assignment is unconditional and irrevocable, the exposure amount covered by the collateral (after any necessary haircuts for currency risk), will receive the risk-weight of the third-party bank;

4.29 A capital requirement will be applied to a bank on either side of the collateralised transaction: For example, both repos and reverse repos will be subject to capital requirements. Likewise, both sides of a securities lending and borrowing transaction will be subject to explicit capital charges, as will the posting of securities in connection with a derivative exposure or other borrowing and;

4.30 Where a bank, acting as an agent, arranges a repo-style transaction (i.e., repurchase/reverse repurchase and securities lending/borrowing transactions) between a customer and a third party, and provides a guarantee to a customer that the third party will perform on its obligations, then the risk to a bank is the same as if the bank had entered into the transaction as a principal. In such circumstances, a bank shall be required to calculate capital requirements as if it were itself the principal.

CRM Approaches22

4.31 A bank shall select one, but not both of the following approaches, and apply that approach to its entire on- and off-balance sheet banking book exposures that are subject to credit risk mitigation:

(a) The simple approach; or

(b) The comprehensive approach to credit risk mitigation.

4.32 A bank shall advise the Bank, which of the above CRM approaches it has chosen to use for its banking book exposures. With respect to trading book exposures, only the comprehensive approach will be allowed.

4.33 A bank shall also use the comprehensive approach to calculate the counterparty risk charges for over-the-counter (OTC) derivatives and repo-style transactions in the trading book.

[22] See Basel II document

4.34 Partial collateralisation shall be recognised in both approaches.

4.35 Mismatches in the maturity23of the underlying exposure and the collateral shall only be allowed under the comprehensive approach.

4.36 Where there is a maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not recognised for regulatory capital purposes, i.e., hedges with maturity mismatches will only be recognised when their original maturities are greater than or equal to one year. In addition, partial recognition for maturity mismatches shall be given to the CRM for regulatory capital purposes.

(b) Capital Charge for Operational Risk24

4.37 The new capital framework has introduced a separate capital charge for operational risk using either the basic indicator approach, standardised approach or advanced measurement approaches (AMA). In Botswana, banks will be permitted to use either the BIA or SA. The use of SA by a bank is subject to prior approval by the Bank, while the BIA is the default entry approach for all banks. For both approaches, gross profit is used as a proxy for the computation of the operational risk capital charge.

(c) Capital Charge for Market Risk25

4.38 The capital charge for market risk shall be computed using the SMM. Banks are required to assess, measure and apply capital charges in respect of market risk in the trading book; this section does not apply to the banking book. For purposes of this framework, risks subject to this requirement are those arising from interest rate related instruments, foreign exchange risk, commodities risk and equity positions risk.

5. PILLAR II: THE SUPERVISORY REVIEW PROCESS26

5.1 Pillar II - the supervisory review process (SRP), aims to ensure that a bank has adequate capital to support its operations at all times. It also promotes the adoption of a more forward looking approach to capital management. In addition, it covers capital for other risks not fully captured or factors not taken into account under Pillar I (concentration risk, interest rate risk in the banking book and liquidity risk), factors external to a bank (business cycle effects) and encourages a bank to develop and employ more rigorous risk management techniques. Furthermore, Pillar II requires a bank to always operate above the prescribed minimum prudential capital requirements. Thus, the underlying aim of the SRP is to enhance the link between a bank’s risk profile, its risk management systems and capital, at

[23] For the purpose of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of a hedge is less than that of the underlying exposure.

[24] See Basel II document for computation.

[25] See Basel II document for computation.

[26] See Basel II document

all times. Banking supervisory authorities are required to assess and take appropriate action to ensure that the risk-based capital management of any bank is robust and effective.

5.2 The SRP has four principles, namely that:

(i) Banks should have processes for assessing the adequacy of capital in relation to their risk profiles, commonly referred to as the Internal Capital Adequacy Assessment Process (ICAAP);

(ii) The supervisory authority should review and evaluate banks’ internal capital adequacy assessments and strategies;

(iii) The supervisory authority should expect banks to operate above the regulatory minimum capital requirements, where the minimum statutory requirement is the floor;

5.3 The supervisory authority must intervene, at an early stage, and take remedial action to prevent capital falling below minimum levels required to support the risk characteristics of a particular bank. This implies that the supervisory authority must have highly skilled and knowledgeable staff members to be able to provide the required guidance to banks and ensure that their internal capital assessments are comprehensive and proportionate to the nature and scale of the business operations of a particular bank.

5.4 Every bank is required to ensure that, at all times, it manages its capital over a planning horizon of at most three years. The capital planning process must be dynamic and forward-looking in relation to a bank’s risk profile. A bank should, therefore, ensure that capital levels remain above the minimum regulatory capital requirements, as well as the capital required to support its overall risk profile. The size of the required additional capital should take into account current and anticipated changes in a bank’s risk profile and business plan and/or strategy. A bank should also be cognisant of the stage of the business cycle in which it is operating, given the potential changes in the external environment. Therefore, rigorous and forward-looking stress testing should form an integral part of a bank’s ICAAP.

6. EFFECTIVE DATE

6.1 The revised directive shall come into effect on 1 January 2027.

6.2 Any question pertaining to the interpretation and application of the directive should be addressed to the director responsible for banking supervision.

Issued on: 5 October 2026

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DIRECTOR
PRUDENTIAL AUTHORITY AND PAYMENTS OVERSIGHT DEPARTMENT

APPENDICES

Appendix 1

(a) Summary of Risk-weights under Standardised Approach for Credit Risk

Claims on Exposure	AAA to AA- Credit Rate	A+ to A-	BBB+ to BBB-	BBB+ to B-	Below B-/BB	Unrated Risk-Weight /CCF percentage
Government of Botswana and Bank of Botswana						0
Cash						0
Cash items in the process of collection						20
Sovereigns and Central Banks	0	20	50	100	150	100
Bank for International Settlements, IMF						0
Domestic Public Sector Entities						20
Foreign Public Sector Entities	20	50	100	100	150	100
Domestic banks						20
Foreign banks	20	50	100	100	150	100
Security firms	20	50	100	100	150	100
Eligible Retail						75
Other retail						100.
Mortgages27 35
Corporates /insurance companies	20	50	100	100	150	100 100
Multilateral Development Banks	20	50	50	100	150	50 0/100
Commercial Real Estate	100	100	100	100	100	100 100
Other Assets28 100
Off-balance Sheet Items						CCF as approved by central bank
Past Due Items						100(20); 100(20); 150(20)
Other Non-Qualifying Residential Property						75
Investmentsin equity and regulatory capital instruments issued by unconsolidated financial institutions						250
Mortgage Servicing Rights						250
Deferred Tax Assets						250
Investments in commercial entities						1250
Venture capital and private equity investment						150

[27] Owner occupied or rented by the borrower to a third party but used for residential purposes

[28] Excludes cash items in the process of collection

(b) Credit Conversion Factors: Off-balance Sheet Items

Maturity/Commitment	Credit Conversion Factor (CCF) Percentage
Commitments:
• Original maturity up to 1 year	20
• Original maturity over 1 year	50
• Unconditionally cancellable commitments without notice	0
Direct credit substitutes:
• Acceptances and endorsements
• Guarantees on behalf of customers
• Letter of credit issued by the bank with no title to underlying shipment;
• Letter of credit confirmed by the bank; and Standby letters of credit serving as financial guarantee	100
Repo style transactions:
• Sales and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank.	100
Lending of banks securities or posting of securities as collateral:
• Repurchase/reverse repurchase agreements and securities/borrowing transactions.	100
Forward asset purchases:
• Commitment to purchase at a specified future date on prearranged terms, a loan, security or other asset from another party, including written put options on specified assets with the character or a credit enhancement.	100
Placements of forward deposits:
• An agreement between a bank and another party where the bank will place a deposit at an agreed rate of interest at a predetermined future date.	100
Partly paid shares and securities:
• Amounts owing on the uncalled portion of partly paid shares and securities held by a bank representing commitments with certain draw down conditions by the issuer at a future date.	100
Certain transaction related contingent items:
• Performance bonds, warranties and indemnities
• Bid or tender bonds;
• Advance payment guarantees;
• Customs and excise bonds;
• Standby letter of credit related to particular contracts and non-financial transactions.	50
Note issuance facilities and revolving underwriting securities:
• An arrangement whereby a borrower may draw down funds up to a prescribed limit over a predetermined period by making repeated note issues to the market. If the issue is unable to be placed in the market, the unplaced amount is to be taken up or funds made available by a bank being committed as an underwriter of the facility.	50
Short-term self-liquidating trade LCs/Trade related contingent items with an original maturity below 6 months:
• These are contingent liabilities arising from trade-related obligations, secured against an underlying shipment of goods for both issuing and confirming bank.	20

Appendix 2

Eligible Collateral for Credit Risk

Eligible Collateral Under the Simple Approach
Cash (including CoDs) deposit with the bank which is incurring the counterparty exposure or similar products issues by the lending bank.
Debt securities rated by a recognised external credit assessment institution where either:
• At least BB- if issued by sovereigns or PSEs that are treated as sovereigns;
• At least BBB- if issued by other entities, including banks and securities firms; or
• At least A-3/P-3 for short-term debt instruments.
Securities that are issued by:
• Government of Botswana (Treasury bills, bonds)
• Bank of Botswana (Bills)
Debt securities not rated by a recognised external credit assessment institution where these are:
• Issued by a bank;
• Listed on recognised stock exchange;
• Classified as senior debt;
• All rated issues of the same seniority by the issuing bank must be rated at least BBB-/P-3 by a recognised credit assessment
institution; and
• The bank holding the debt has no information that suggests that the debt security justifies a rating below the above level.
Bank of Botswana approval must be sought before recognising these as eligible collateral.
Undertakings for Collective Investment in Transferable Securities (UCITS) and mutual funds where:
• A price for the units is publicly quoted daily; and
• The UCITS/mutual fund is limited to investing in instruments listed above.
Equities (including convertible bonds) included in a main index Eligible Collateral Under the Comprehensive Approach All of the instruments in Eligible Collateral Under The Simple Approach; Equities (including convertible bonds) which are not included in a main index but which are listed on a recognized exchange; UCITS/mutual funds which include such equities. Eligible Guarantors/Protection Providers for Credit Risk

1. Sovereigns29
   , PSEs, banks30 and security firms with a risk-weight of 20 percent or better and a lower risk-weight than the counterparty.

[29] This includes the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community, as well as those MDBs currently eligible for a 0 percent risk weight.

[30] This includes other MDBs.

Directive on the Revised International Convergence of Capital Measurement and Capital Standards for Botswana (Basel II)

2. Other entities rated A- or better. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor.

Appendix 3

The Legal Criteria for Netting Arrangements and Bilateral Netting Rules (Set-off Principle)

To get approval for netting arrangements, a bank must satisfy the Bank that:

(i) it has executed a written, bilateral netting agreement with the counterparty that creates a single legal obligation, covering all included bilateral master agreements and transactions, such that a bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative (a) closeout values of any included individual master agreements and (b) marked-to-market values of any included individual transactions, in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances;

(ii) it has written and reasoned legal opinions31 that conclude, with a high degree of certainty that, in the event of a legal challenge, relevant courts or administrative authorities would find a bank’s exposure under the netting arrangement to be the net amount under the laws of Botswana. In reaching this conclusion, legal opinions must address the validity and enforceability of the entire Netting Arrangement under its terms and the impact of the netting arrangement on the material provisions of any included bilateral master arrangement;

(iii) it has internal procedures to verify that, prior to including a transaction in a netting set, the transaction is covered by the legal opinions that meet the above criteria;

(iv) the bank undertakes to update the legal opinions, as necessary, to ensure continuing enforceability of the netting arrangement, in light of possible changes in the relevant law;

(v) the netting arrangement does not include a walkaway clause. A walkaway clause is a provision which permits a non-defaulting counterparty to make only limited payments, or no payment at all, to the estate of the defaulter, even if a defaulter is a net creditor;

(vi) both transactions (debit and credit balances) must be denominated in the same currency;

(vii) counterparty(ies) prompting the debit and credit balances (netting) must have local resident status;

(viii) deposits must be blocked until the liability (loan) is fully discharged;

(ix) the accounts can only be off-set against each other provided that the account is held in the same right. Thus, a bank cannot set-off a debit balance against a credit balance of a

[31] A legal opinion must be generally recognised as such by the legal community in the firm’s home country or a memorandum of law that addresses all relevant issues in a reasoned manner.

Directive on the Revised International Convergence of Capital Measurement and Capital Standards for Botswana (Basel II) 29 customer which, to the banker’s knowledge, is held in a representative or fiduciary capacity or for a special purpose; (x) each included bilateral master agreement and transaction included in the Netting Arrangement satisfies applicable legal requirements for recognition of bilateral netting of derivative contracts in the main text; (xi) a bank maintains all the required documentation in its files; and (xii) the net position will be used in assessing compliance with the capital adequacy requirements only. Primary and liquidity reserve requirements, as well as the level of provisions, should be assessed on the basis of the actual balances. However, where money in a fixed deposit account is pledged as a security, the amount of this cash security will continue to be deducted from the amount of loans, before determining the required level of specific provisions. Docusign Envelope ID: BF9453BF-457D-8ED2-8170-1D8C572CE16A Docusign Envelope ID: B6849C18-05FE-8D31-8130-F95CD08E80A0