Bank Distress Prediction Model for Botswana

"Financial distress" has many dierent meanings but generally it is said to be a state of unhealthy condition. Botswana's banking system comprises of commercial, development and savings banks. None of these types of banks has actually failed but rather some of them have experienced some form of distress. The Bank of Botswana uses the CAMELS ratings to measure distress. The CAMELS ratings is based on a score between 1 and 5, with 1 being the best score and indicates strong performance, while 5 is the poorest rating and it indicates a high probability of bank failure and the need for immediate action to rectify the situation. For this study, we consider 1-3 to be good scores (non-distressed) and a bank to be distressed if it has a score of 4-5. Utilising secondary data sources for the period 2015 to 2019, inclusive, the study evaluated the drivers of bank distress in Botswana. The data was sourced from the audited nancial statements and annual reports of the 11 banks involved in the study. Panel data logistic regression was used for analysis. The results of the study showed that Non-Performing Loans (NPL) ratio and Return on Equity (ROE) were the best predictors of bank distress.