3. Financial Sector: Risks, Development, and Inclusion
- Dalia Hakura, Adrian Alter, Matteo Ghilardi, Rodolfo Maino, Cameron McLoughlin, and Maximilien Queyranne
- Published Date:
- February 2015
In the aftermath of the global financial crisis, sub-Saharan Africa is emerging as a fast-growing region. It is attracting investors from all over the world and raising its people’s standard of living. Nonetheless, limited access to finance is still holding down the standard of living in the region and hindering poverty alleviation.
Striking the appropriate balance between maintaining financial stability, managing financial risks, and fostering a competitive and inclusive financial environment is a critical policy issue. On the one hand, financial inclusion—that is, the share of people and firms with access to financial services—can help lower poverty by reducing credit constraints on the poor. In particular, when markets open up, finance can help small firms, entrepreneurs, and households reach new opportunities. Furthermore, people and firms with access to financial products can better manage their risk (for example, loans to smooth consumption and purchase durable goods and agricultural insurance products). On the other hand, improving financial development does not mean lax lending standards. Rapid credit growth, weak supervision, and defective regulatory frameworks can easily trigger financial instability.
As of 2012, almost three-quarters of the SSA adult population lacked access to formal financial services, compared with the rest of the world, where about 50 percent of adults had a formal financial account. The Republic of Congo’s metrics related to financial development and inclusion are below even the SSA averages. Like many other SSA countries, Congo seeks to make inroads against poverty by incorporating those who are outside the formal financial system. Rapid diffusion of information and communications technologies in African countries is associated with growth in telephone subscribers, personal computer users, and Internet access faster than in other developing regions of the world.14 Mobile phone banking in Congo today provides an opportunity to reach mass markets in an efficient and effective manner.
This chapter argues that a deeper and more inclusive financial sector in Congo could help reduce poverty and improve the standard of living of its citizens. Based on the information in a comprehensive World Bank database, this chapter highlights critical issues in Congo related to financial inclusion and development and discusses possible policy implications, including financial risk mitigation. The chapter places access to financial services by the people of Congo in the SSA context by comparing several metrics with its peer countries and by discussing the role of new technologies in promoting financial inclusion—by stressing the potential of mobile banking in the country.15
A Comparative Analysis
Underdevelopment of financial services and lagging financial inclusion are chronic problems in the Republic of Congo, as is true in other SSA countries. Recent research shows that the SSA region suffers from a “financial development gap”—measured by comparing financial development indicators with those in countries at a similar stage of overall economic development.16 Only 9 percent of the total adult population has a formal financial account, placing Congo behind the CEMAC average (Figure 14, panel 1). Financial inclusion can be highlighted also from the perspective of the contrast between the bankable “better-off” and “poor.”17 In Congo, 20 percent of the better-off population has a formal account compared with only 1.1 percent of the poor. The ratio of bankable better-off to poor people is about 18, making Congo one of the least financially inclusive in the SSA region (Figure 14, panels 2 and 4).
Figure 14.Republic of Congo: Financial Inclusion Statistics
Sources: World Bank Global Findex database; and IMF staff calculations.
Note: CAR = Central African Republic, CMR = Cameroon, CEMAC = Central African Monetary and Economic Community, TCD = Chad, COG = Republic of Congo, GAB = Gabon.
Lack of financial access and wealth inequality are closely associated. For example, access to loans and insurance creates heterogeneous opportunities for businesses and growth.18 Moreover, diversifying income sources to include interest and dividend payments can augment returns and build wealth.19 Thus, when the better-off population enjoys better access to financial services than the poor they have a better chance of becoming richer, tilting the income distribution accordingly. The latest reported Gini coefficient (0.39 in 2011) from the World Bank shows that income inequality in Congo is similar to that in Cameroon, Chad, and Gabon. Shallowness can be traced back to a lack of progress in improving the availability of creditor information and protecting investors’ rights (Singh, Kpodar, and Ghura 2009).
The aspect of financial inclusion related to gender inequality reveals a clear pattern in the SSA region. Women in Congo have much less access to financial services. Only 6.8 percent of women have a formal financial account compared with 11.3 percent of men. The ratio of men to women holding accounts is about 1.66 and is much higher than in SSA frontier and emerging market economies, where this ratio is only 1.22 (Figure 14, panel 3).20
Mobile banking, as an alternative to traditional forms of financial services, is well represented in Congo (Figure 14, panel 5). A recent survey found that almost 40 percent of the adult population has, on occasion, used mobile phone services to make financial transactions, pay bills, or transfer or borrow money. This is the second highest share in the CEMAC and CFA franc areas after Gabon and the fourth highest in the SSA region (according to the Global Findex database, Demirgüç-Kunt and Klapper 2012b).
The share of adults with formal savings is hovering around 5.5 percent in Congo. Compared with its CEMAC peers, it is the second lowest after the Central African Republic. Nevertheless, the potential is very high. More than 30 percent of the population has saved money, many informally. This ratio represents the second highest share in the CEMAC region. Most of these savings could be transferred to institutions that are safer and formally regulated (Figure 14, panel 6).
The most important constraint people cite behind not having a formal account is the lack of money (Figure 15, panel 1). This reason is cited more than the averages across CEMAC, SSA, and frontier economies. In this regard, banks in Congo are blamed for imposing strict requirements (for example, documentation) and charging so much for their services (for example, opening and maintenance fees) compared with other banks in the region. These high transaction costs are probably related to the relatively high overhead costs (Figure 16) in Congo.
Figure 15.Republic of Congo: Analysis and Relationships of Financial Access and Development
Source: Global Findex database (World Bank) and IMF staff calculations.
Figure 16.Selected Indicators of Financial Development and Risks
Sources: World Bank, World Development Indicators (WDI) database; country authorities; and IMF staff calculations.
Note: CAR = Central African Republic, CMR = Cameroon, GNQ = Equatorial Guinea, TCD = Chad, COG = Republic of Congo, GAB = Gabon, SEN = Senegal, CIV = Côte d’Ivoire.
There is a strong relationship between the average standard of living (measured as GDP per capita) and access to financial services in the SSA region (Figure 15, panel 1). The CEMAC region lags other African countries. For Congo, the financial access corresponding to the level of income is far below the SSA average. Compared with SSA countries, more than 20 percent of the adult population should have access to financial services according to this measure. Similarly, the comparison with the Human Development Index reveals a corresponding potential level of 28 percent of the population (Figure 15, panel 4).
The supply of financial services (proxied by the number of commercial bank branches per capita) corresponds to the SSA average based on the level of financial accounts in Congo. In terms of banking networks, Congo is at the bottom of the list. Countries in the region with more developed networks, such as Gabon (with more than double the number of branches per capita), have a much higher penetration of financial access (about 19 percent).
Box 2.Mobile Banking
Led by rapid mobile phone penetration, mobile banking (monnaie électronique) is emerging as an innovative financial product in the Republic of Congo and CEMAC area. At the end of 2013, there were only two active banks in Congo: BGFI Bank and Ecobank, each working in collaboration with a telecommunications operator (Airtel and MTN Congo, respectively). The market has recently been liberalized, and telecom operators are now able to collaborate with several financial institutions.
The mobile banking market has developed considerably in recent years, enhancing financial access. The number of active users with one of the banks almost tripled last year. In 2013, the electronic monetary base at this institution averaged CFAF 385 million, and the transaction volume peaked in the third quarter at about CFAF 8.5 billion (Figure 2.1).
Figure 2.1.Evolution of Mobile Banking at a Congo Bank
Sources: BEAC; and IMF staff calculations.
Fees are more competitive than those of traditional banks. Transactions from a bank account to a mobile bank account are free of charge. The other way around, transaction fees vary depending on the amount transferred and can be as low as 0.2 percent. The costliest operation is cash withdrawal, which can carry a fee as high as 4 percent.
Risks related to mobile banking are mainly operational. The telecom operator must collateralize the entire monetary base in an escrow account at the partner bank. Given the steady increase in the number of operations, operational risks could be addressed by the following (see Khiaonarong 2014):
- Including mobile transfers in the payments system regulatory framework to ensure customer protection;
- Updating the coverage of operational risks—such as potential disruptions or compromises to system integrity—as more operators enter into the market;
- Implementing anti-money-laundering/combating the financing of terrorism measures to safeguard mobile payment systems from financial crime; and
- Coordinating with other CEMAC countries’ cross-border payments and, in particular, risk controls in interbank payment systems.
The banking sector lacks depth and remains small and concentrated, with relatively high overhead costs:
- Although deposits and credit have grown rapidly in recent years, they remain small in proportion to GDP (Figure 16). 21 The growth in deposits reflects the intensification (increase) in operations related to issuance of new instruments. Deposits are short term, as are loans, thereby avoiding maturity mismatch. On the one hand, credit to the private sector, which is below the 2012 benchmarks for low-income countries, remains negligible, hovering around 10 percent of GDP.22 While bank intermediation should be a critical aspect of financial deepening and economic growth, it has yet to happen in Congo.23 On the other hand, the ratio of deposits to GDP stood at 25 percent at the end of 2013. As a consequence, the loan-to-deposit ratio, which currently stands at 40 percent of GDP, has shown lackluster improvement since 2005, remaining below the benchmark for comparable countries.
- The financial sector is dominated by commercial banks, which are, mostly, privately owned subsidiaries of foreign institutions. The number of banks increased from six in 2010 to ten in 2013, including the state-owned Banque Congolaise de l’Habitat and the Banque Postale du Congo, which started operations in January 2013. The three largest commercial banks have almost 60 percent of total assets in the banking system, well below the benchmarks and all other CEMAC countries. Nonetheless, commercial bank network development has not been robust, and the number of commercial bank branches remained well below the benchmark for similar countries.
- Overhead costs remain high, not just compared with other CEMAC countries but with benchmarks as well. The financial infrastructure constraints contribute to high overhead costs, which have increased compared with the 2005 data. Shortcomings in credit information lead to higher screening costs for financial institutions, translating into higher overhead. Similarly important is the ease of enforcing contracts and the cost involved. The longer it takes to foreclose on collateral and the more uncertain and expensive the process, the lower the actual value of the collateral provided by the borrower and the higher the risk premium the bank charges for the loan.
Banks remain highly liquid (Table 2). At the same time, banks maintain large deposits at the BEAC. This excess liquidity is a result mainly of the difficulty in identifying sufficient lending opportunities, absence of a domestic securities market, and lack of a proper legal framework and a well-functioning judicial system. However, one Congo bank has subscribed to bond issuances of Gabon and Cameroon. In particular, it participated in more than 11 percent of Cameroon’s issuance from November 2011 to November 2013 and 15 percent of Gabon Treasury bill issuance during 2013. These transactions indicate the search for yield by banks in the region and the need to develop a regional market for government securities.
|(Percent, at year’s end)|
|Regulatory capital/risk-weighted assets||19.0||13.1||9.9||12.7||11.9|
|Percent of banks at 10% or more||100.0||83.3||57.1||77.8||70.0|
|Percent of banks between 6% and 10% minimum||0||16.7||28.6||11.1||20.0|
|Percent of banks at less than 6%||0||14.3||14.3||11.1||10.0|
|Foreign exchange loans to total loans||2.0||8.7||12.5||0.8||0.4|
|Past-due loans to gross loans||1.2||1.0||0.4||n.a.||n.a.|
|Provision as percent of past-due loans||91.0||60.0||75.3||60.0||58.7|
|Benefits and Profitability|
|Net profit (before tax)/net income||33.6||45.4||42.8||32.0||35.1|
|Return on assets||1.9||1.8||1.4||1.3||1.9|
|Return on income||23.3||22.0||19.7||17.4||20.8|
|Liquid assets/total assets||59.0||51.4||42.7||37.2||29.1|
|Liquid assets/short-term commitments||270.0||245.0||196.4||172.4||142.7|
|Liquid assets/total deposits||68.0||61.1||49.4||42.2||34.2|
|Excess reserves/broad money||14.0||38.0||20.0||16.0||27.0|
Congo’s insurance market has developed significantly in recent years supported by vigorous economic activity in the country. Four companies now operate in the market. As of the end of June 2013, collective turnover stood at CFAF 25.8 billion. The forecasts for all four companies for 2013 call for turnover of CFAF 16.1 billion. Three main factors account for this expansion: the opening of the market to competition, structural development (improving the penetration rate, which was barely 0.6 percent in 2012), and the expansion of the scope of insurance requirements in 2013. In addition to automobile liability and construction risk policies, coverage requirements were imposed for imported merchandise, creating the conditions for the development of transportation insurance.
The banking system is sound, showing satisfactory compliance with CEMAC prudential ratios (see Table 2). The ratio of nonperforming loans (NPLs) to total loans has remained low during the past decade, and banks have maintained capital above the minimum levels (8 percent). Nevertheless, rapid credit growth—fueled by activity in construction, transportation, telecommunications, and tourism—poses risks: banks could loosen their standards in an attempt to gain market share. Furthermore, some banks are not respecting limits (thresholds) regarding individual lending. Although profitability has shown a remarkable path in recent years in a rapidly growing banking system, dividend and profit repatriation has also been high, signaling limited domestic investment. Return on assets and on equity ratios improved in 2013 to reach 1.9 and 20.8, respectively. Notwithstanding a decrease in gross NPLs to 2.3 percent in 2013—after reaching 2.9 percent in 2012—banks’ provisioning in relation to NPLs continued to deteriorate in 2013.
The microfinance environment in Congo is expanding—dominated by the network of credit unions—and remains relatively concentrated in Brazzaville and Pointe-Noire.24 The sector includes 62 institutions—the majority in Brazzaville (23) and Pointe-Noire (13). In addition,
- MUCODEC institutions represent more than half of all microfinance institutions (33). Between 2009 and 2012, the total customer base increased by 10 percent on average in the sector to reach 344,000 at the end of 2012. Close to four-fifths of customers are affiliated with the MUCODEC network. The microfinance sector employs 1,499 people, of whom one-third work for the MUCODEC.
- Over the period 2009–12, the rate of growth of deposits (averaging 17 percent a year) outpaced that of credit (2 percent). Deposits increased from CFAF 125.3 billion in 2009 to CFAF 191.9 billion in 2012, more than 80 percent going to the credit union network. While credit increased by 7 percent between 2011 and 2012, deposits grew by 20 percent. Over 80 percent of credit is from MUCODEC institutions.
The microfinance sector is increasingly important in the Republic of Congo, and an effective implementation by the Central African Banking Commission—the institution in charge of banking supervision and regulation in the CEMAC region—of prudential rules is critical at this stage. Microfinance accounts for a significant and probably increasing share of deposits and credit in the country, but the exact size is difficult to assess. However, there is room to continue to strengthen corporate governance and management practices and the sector’s regulatory framework.
The policy agenda should include measures to address the main barriers to financial access. Improving legislation, property rights, and documentation (such as related to the establishment of a well-functioning national credit registry and the registration of land ownership) should increase access to finance. The efforts to create a good environment for microfinance and mobile banking should continue by fostering collaboration between commercial banks and microfinance institutions and telecommunications companies. Ongoing implementation of the electronic payment system for taxes and utilities must move forward, and development of the bank branch network should be encouraged.25