BOTSWANA STOCK EXCHANGE OPENING BELL CEREMONY
Official Remarks
by
Moses D Pelaelo
Governor, Bank of Botswana
November 1, 2018
Distinguished Guests, it is my great pleasure and honour to
have been able to accept the invitation from the Chief
Executive Officer of Botswana Stock Exchange Limited
(BSEL), Mr Thapelo Tsheole, to make a few remarks on the
occasion of today's event, marking the sixth "Opening Bell"
ceremony.
Let me start by acknowledging the important symbolism
surrounding the "opening bell" ceremony. This refers to the
signal that a stock exchange is open for business. A bell itself
is only used in a few instances, notably in New York, where
the current practice of ringing the bell at the start and close of
each day's trading dates back to 1895, initially using a
Chinese gong. But the phrase is used more generically across
exchanges and, needless to say, among financial journalists.
The use of a bell is, of course, most appropriate in the
environment, typically hectic, of "open outcry" trading where
the volume of the bell is an effective means of directing
proceedings. In other words, the bell was necessary as a
form of regulation, albeit self-regulation.
This traditional system of trading has been largely overtaken
by more efficient technologies, first by telephonic and then
electronic trading systems. The New York Stock Exchange
still conducts a small proportion of trades (although typically
high-value) through floor traders. In Europe, the famous "ring"
London Metal Exchange (LME) remains a bastion of the
tradition; although it too has recently been experimenting with
the use of more modern systems.
Director of Ceremonies, the rapid advances in technology,
more so in financial services, appears inexorable; indeed, this
has long been the case. Today, the power of the internet;
super computers, social media and "big data"; as well as the
potential opportunities offered by new technologies, such as
block chain, dominate financial news and public discourse.
But innovation and disruptive technologies have been a
recurring feature of progress and development for centuries.
For financial services, it is progress in communications
technology, including the collation, storage and transfer of
information, that has often been the key. There are many
examples in this regard, including:
 The origins of iconic City of London institutions such as
Lloyds and the London Metal Exchange coffee houses
where like-minded patrons gathered to share news;

"Cable", the colloquial term used by currency traders for
the United States dollar-sterling exchange rate; it relates
to a nineteenth century undersea communications cable
used to transmit key financial information across the
Atlantic Ocean; and
 American Express, the financial services multinational,
began as an express mail business.
Recognising the historical context, it should be little surprise
that financial and communications regulators must in many
cases operate in tandem, while adopting smart and cost-
effective ways to deal with risks. Today, given the current,
dizzying, pace of ICT development, it is more crucial than ever
that central banks and financial sector regulators are alive to
these trends. This adds a further dimension to the challenge,
in both developing and developed economies, of finding the
right balance between being, on the one hand, a prudential
regulator and, on the other, a facilitator for market
development.
The latter goal is something to which the Bank of Botswana is
unreservedly committed. As I have observed elsewhere,
informed research has repeatedly indicated a causal
connection between financial sector development, economic
growth and poverty reduction. However, in many Sub-
Saharan African countries, Botswana included, financial
systems remain mostly small, fragmented and un-diversified,
providing only limited services to an exclusive section of the
population at a relatively high cost. Equally, while Botswana's
financial sector is comparable in size to other countries in the
region; it remains relatively smaller and less developed
compared to that of its middle-income peers.
Notwithstanding, during the past ten years, Botswana
financial sector has expanded rapidly, both in size and the
range of services covered. In this period, cumulative growth
of the financial sector, in real terms, has been almost exactly
100 percent, compared to 52 percent for the economy as a
whole. A major driving force in this development has been
the rapid growth of the domestic pension fund industry.
Indeed the role played by the financial sector in supporting
inclusive and sustainable economic growth was the central
theme of the 2017 Bank of Botswana Annual Report.
Distinguished Ladies and Gentlemen, in broad terms, how
should we go about addressing this challenge? Here, I start
by making an obvious, but nonetheless important, point. A
well-functioning, liquid and regulated market is good for
development. It gives both investors and consumers
confidence that their interests are protected in an industry
where information asymmetries remain a chronic problem. At
the same time, regulation can help confer legitimacy on
regulated service providers.
As central bank Governor, I should also extend this point
further. The sustainable development of financial markets is
supported by macroeconomic and financial stability.
Botswana has been lauded for its strong macroeconomic
environment, a position which was recently reaffirmed by the
2018 Global Competitiveness Index. The macroeconomic
environment was the best performing pillar for Botswana,
with the country ranked first, globally, supported by a public
debt to GDP ratio of 15.6 percent and inflation of just about 3
percent. To further support financial markets development,
the Bank has recently initiated important changes in the
communication of monetary policy, including the launch of
the inaugural Monetary Policy Report (MPR) on September 9,
2018 at National Business Conference in Francistown. And
on Monday, this week, the Bank published the second MPR
following the Monetary Policy Committee meeting of October
22, 2018.
But, important as these developments are, neither
observations address the key issue. That is, how can central
banks deal with the problem that, at some point,
developments in financial services that are otherwise
legitimate and desirable may be held back, discouraged, or
even halted by over-, or outdated, regulation? Here, I would
highlight two distinct risks that must be addressed:

First, the nexus between prudence and innovation may
prove to be a challenge and too often financial sector
regulators favour the status quo which, in turn, almost
inevitably works to frustrate radical, but beneficial
innovation. Moreover, this risk may be amplified by lack of
appreciation for trends in modern technologies;
 Second, there is also a danger that the regulators
overcompensate against this risk, by adopting too lax an
approach, and welcoming all kinds of start-up entities so
as not to stifle innovation. This may be aggravated in
cases where more than one regulator has an interest, a
situation which calls for greater collaboration, proper
coordination and effective communication.
Navigating these risks remains work in progress, with central
banks across the world adopting a wide variety of
approaches. From my perspective key elements of a robust
approach by central banks should include the following six
elements:
First: clear leadership, guidance and consultation on the
desirable direction for the development of the financial sector,
including reforms to the regulatory environment. For this
reason, the Bank of Botswana strongly advocates the
updating of the Financial Sector Development Strategy, which
is now two years past its end date of 2016. In terms of
consultation, the Banking Committee, Botswana Financial
Markets Committee and the recently established Financial
Stability Council, provide important channels for consultation.
Second: leadership through advocacy and by example. The
Bank is keenly aware that key legislation is out of date or
missing. Regulations to support the growth of electronic
payments have been finalised, while both the Bank of
Botswana Act and Banking Act are in the process of revision.
The Bank is also providing strong support for key
developmental initiatives, including the development of the
government bond market, within the established parameters
of fiscal discipline, both through more active primary issuance
and supporting the secondary market through establishment
of a Central Securities Depository.
Third: as I have already indicated, central banks should invest
time and resources to have necessary awareness in
developments in ICT. Here, the subject of distributed ledger
technologies (DLT), fintechs and crypto-assets comes to
mind.
Fourth: where practicable, there should be some scope for
easing the burden of regulations to allow innovations to be
tested. Here, a particularly promising approach is the use of
so-called regulatory "sandboxes" and other proof of concept
frameworks, adopted by many jurisdictions including
Singapore, Indonesia, Canada and, nearer home, in South
Africa, where the South African Reserve Bank, working
alongside commercial banks, recently successfully led the
"Khokha" project to test the viability of DLT for processing
wholesale interbank payments. Such sandboxes allow small-
scale experiments under live conditions while being exempt
from some legal requirements to keep down start-up costs
and remove constraints on innovation.
Fifth: in scrutinising innovations in financial services, a simple
five-fold test should be applied: is it a solution to a real
economic problem, in a cost-effective way; does it offer a
better service; is it faster; does it democratise access
(improves financial inclusion); and, are there serious negative
side effects? Many recent developments, notably the use of
mobile payments systems, would pass these tests with flying
colours. In contrast, despite the headlines and the hype they
generate, the so-called crypto-currencies, such as bitcoin and
ethereum, at least at their present state of development,
would fail on all counts. For example, these crypto assets
cannot serve as a reliable unit of account, trusted store of
value or universally accepted means of payment. By the way,
Bitcoin turns 10 today.
In conclusion, Paul Volcker, the former Chairman of the
United States Federal Reserve, once famously said that the
ATM was the only really useful financial innovation in
banking. This was undoubtedly going too far: as I have
already made clear, many Fintech innovations hold
tremendous promise for improved security and speed of
transactions and, importantly, financial inclusion. But it makes
the point that central bankers have conservatism, and with it
scepticism, ingrained in our DNA. This is how it should be.
Not least, together with our co-regulators, Non-Bank Financial
Institutions Regulatory Authority, the Financial Intelligence
Agency and Botswana Communications Regulatory Authority,
we act and serve public interest; collectively and in our
respective statutory roles, are responsible for alleviating
system-wide risks that are not always so readily appreciated
by individual operators. As a case in point, measures to
combat money laundering and other forms of financial crimes
are undoubtedly inconvenient at the individual level. But this
would be nothing compared to the inconveniences that would
be experienced if international sanctions were imposed
against Botswana for falling short of the required minimum
standards on anti-money laundering and the combatting of the
financing of terrorism.
That said, central bankers must also do their part to avoid the
risk of what might be termed "reckless conservatism", and
embrace opportunities that not only meet customer needs but
also, in many instances, reduce systemic risks.
Chairman of BSEL, Director of Ceremonies and Distinguished
Ladies and Gentlemen, I thank you for your kind attention.