- Patrick Imam, and Christina Kolerus
- Published Date:
- October 2013
© 2013 International Monetary Fund
Joint Bank-Fund Library
West African Economic and Monetary Union (WAEMU): financial depth and microstability / Patrick Imam and Christina Kolerus. —Washington, D.C.: International Monetary Fund, c2013.
p.: col. ill. ; cm.
Includes bibliographical references.
Series: African departmental paper
1. Union économique et monétaire ouest africaine -Evaluation. 2. Finance Africa, West—Evaluation. 3. Financial institutions—Africa, West—Evaluation. 4. Banks and banking—Africa, West—Evaluation. 5. Microfinance—Africa, West—Evaluation. I. Kolerus, Christina. II. International Monetary Fund.
Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
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This enhanced review of West African Economic and Monetary Union’s (WAEMU’s) financial sector is one of several pilot reviews called for by the Executive Board in May 2012. The purpose of the reviews is to go beyond the traditional surveillance focus on banking system soundness and solvency by analyzing in more depth the interplay between financial development, macroeconomic and financial stability, and effectiveness of macroeconomic policies in low-income countries. As the WAEMU is a monetary union composed of eight countries, a number of key macroeconomic and financial policies—including monetary policy and supervision—are designed and implemented at the union level, whereas responsibility for others rests with national authorities. This study focuses therefore on WAEMU-specific issues. This follows and complements the two previous pilots on Benin and Senegal.
The financial system in the WAEMU is dominated by the banking sector, but it is evolving rapidly with the emergence of new transnational banking groups and microfinance institutions. The regional securities and equity market is a marginal source of funding, except for governments. The interbank market remains shallow. The banking system in the region is highly heterogeneous. Although most banks are adequately capitalized and profitable, pockets of vulnerability, including public banks, were identified. Compliance with prudential norms remains low for a number of ratios, suggesting a degree of regulatory forbearance, and some of these norms are not in line with international standards. Stress tests and financial soundness indicators show that concentration of lending and asset quality are significant risks. The rising sovereign-bank linkage requires close monitoring.
Although financial development broadly reflects the region’s structural characteristics, there is scope for further deepening and broadening. This would facilitate the financing of growth, improve financial inclusion and the ability of firms and households to cope with a volatile environment, and increase the effectiveness of macroeconomic policies. Financial development will bring new challenges.
A significant strengthening of the regulatory and supervisory framework is necessary to address existing and new risks. The emergence of regional banking groups requires the development of supervision on a consolidated basis and strengthening of cooperation with banking supervisors in countries where these groups operate. The increasing exposure of banks to sovereigns is also a risk that needs to be recognized, including through a nonzero weight on government paper in capital adequacy calculations. Microprudential regulation should be revised to bring certain prudential standards closer to international best practice—for example, on risk concentration, classification of claims, and provisioning—while taking into account the regional context. The move to Basel II will be a good opportunity to address many of these issues.
The financial crisis prevention and management framework could also be strengthened. Crisis prevention requires greater transparency, including through the regular and timely compilation and publication of financial soundness indicators for all member countries. Regular stress tests would be a welcome step toward the introduction of an early warning system. There is scope for improving the bank resolution framework, which would reduce the budgetary cost of government intervention. Swift action in this area, including by giving broader powers to the supervisor and close collaboration with other supervisors in the case of cross-border groups, is necessary.