Journal Issue

Central African Economic and Monetary Community (CEMAC): Selected Issues

International Monetary Fund. African Dept.
Published Date:
November 2015
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Cemac: Financial Inclusion, Growth, and Inequality1

Small and medium-size enterprises (SMEs) are typically engines of growth and employment creation. To expand, they need financing. A cross-country survey of enterprises indicates that fewer SMEs in the Central African Economic and Monetary Community (CEMAC) have access to bank credit than in other emerging and developing countries. Collateral requirements for firms to obtain loans in CEMAC are nearly 18 percent higher than in the rest of sub-Saharan Africa (SSA). Similarly, bank intermediation costs are high in CEMAC. The lack of credit registries is one of the contributing factors. Policies aimed at lowering collateral requirements, reducing firms’ participation costs, and lowering intermediation costs could increase firms’ access to credit and would significantly boost their activity. Lower collateral requirements and intermediation costs would mainly benefit firms that are already in the financial system (the “haves”). Lower participation costs would benefit all firms (including the “have-nots”). In addition, the additional economic growth resulting from greater financial inclusion would expand the tax base. This could support higher pro-poor and pro-growth government spending.

A. Background

1. Access to financial services is a key driver of sustained growth and poverty reduction. In low- and middle-income countries, shallow financial systems hold back growth. Companies and households need bank accounts to conduct basic financial transactions and to build precautionary savings. They also need access to credit on reasonable terms to operate and expand. Firms, particularly SMEs, are typically engines of growth and employment creation. They employ a large share of the workers in developing countries (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2011). Moreover, there is a relationship between financial inclusion and inequality, as significant parts of the population tend to have fewer economic opportunities owing to restricted access to financial services.

2. Financial sector development and inclusion is lagging in CEMAC. Drawing on responses to a cross-country World Bank survey of enterprises,2Figures 1 and 2 compare a range of financial access indicators for firms in the CEMAC to those of firms in regional and global peer countries. The data show that CEMAC countries, on average, are characterized by:

  • The highest loan collateral requirements compared to peers. This reflects banks’ uncertainty about loan repayments and enforcement of contracts and imposes an important borrowing constraint on firms.

  • A relatively high interest rate spread (the difference between lending and deposit rates) reflecting insufficient information about borrowers.

  • The lowest proportion of firms with access to credit, with CEMAC countries underperforming considerably relative to peers in Sub-Saharan Africa and other emerging and developing countries.

  • Particularly low access to credit by small and medium enterprises (SMEs) in the CEMAC region relative to similarly sized firms in other emerging and developing countries.

Figure 1.CEMAC: Benchmarking Financial Inclusion, 2005–11

Sources: World Bank, Enterprise Surveys; and IMF Staff calculations. CEMAC average excludes Equatorial Guinea.

Sources: World Bank, Enterprise Surveys; and IMF Staff calculations.

Note: For Republic of Congo, the data is as of 2009. For the remaining countries, we take the latest available data from Enterprise Surveys. CEMAC average excludes Equatorial Guinea.

Figure 2.CEMAC: Financing of Firms

Sources: World Bank, Enterprise Surveys; and IMF Staff calculations.

Note: For Republic of Congo, the data is as of 2009. For the remaining countries, we take the latest available data from Enterprise Surveys. CEMAC average excludes Equatorial Guinea.

3. Access to lines of credit in CEMAC is limited and the banking sector’s contribution to firms’ investment appears limited (Figure 2). Enterprise surveys indicate that although 90 percent of firms possess a bank account, only 20 percent of them access a loan or line of credit on average in CEMAC, well below the average (34.7 percent) of emerging and developing economies. Nearly 70 percent of loans in CEMAC require a collateral. In addition, the value of the collateral, on average, significantly exceeds the value of the loan, pointing at problems with the liquidation of collaterals.

4. CEMAC also provides limited access to financial services (Figure 3). A cross country survey3 of adult saving, borrowing, and payment behavior indicates that access to bank branches and automatic teller machines in CEMAC is restricted, as compared to the average in SSA and elsewhere. Moreover, the banking system in CEMAC remains underdeveloped with relatively low deposit-to-GDP and loan-to-GDP ratios, as well as smaller numbers of depositors and borrowers. This relatively low utilization of financial services in CEMAC is prevalent across all age groups (Figure 4).4

Figure 3.CEMAC: Financial Access, 2013

Sources: Financial Access Survey, IMF and IMF staff calculations.

Figure 4.CEMAC: Demographical Characteristics of Financial Access, 2011

Source: World Bank, Findex 2011.

5. Low levels of financial access and the lack of development of the financial system in CEMAC are reflected in the main deposits and payment methods used in the region (Figure 5). As the number of bank branches is low, bank account holders in CEMAC tend to use bank agents (rather than tellers) more frequently to make deposits. The limited use of more advanced payment methods (checks, electronic payments, credit/debit cards) in CEMAC also illustrates the underdevelopment of the financial system.

Figure 5.CEMAC: Deposit and Payment Modes, 2011

Source: World Bank, Findex 2011.

6. Although the ability to save in CEMAC is on par with the SSA average, the use of loans for everyday needs is widespread and points to substantial unmet demand for bank financing (Figure 6). The CEMAC-wide average of survey respondents who indicated they were able to save in the past year is comparable to that of SSA. Yet, the use of loans to pay for health bills, educational fees, or emergencies is on average more prevalent in CEMAC than in comparator countries.

Figure 6.CEMAC: Use of Loans, 2011

Source: World Bank, Findex 2011.

B. Constraints on Financial Inclusion

7. A micro-founded general equilibrium model developed by Dabla-Norris et al. (2015) is used to examine the most binding financial constraints on growth, productivity, and inequality in CEMAC countries (Box 1). The model is calibrated to capture the specific features of firms in CEMAC. These calibrations reflect CEMAC-specific data for 2009 on the fraction of firms with credit, the economy-wide nonperforming loan (NPL) ratio, and the spread between deposit and lending rates.5 The findings of the analysis can help to guide between different financial sector policies in order to achieve desirable goals. The results for CEMAC are compared with the results from the model, calibrated to six other developing countries, comprising three low-income countries and three emerging ones.

Overview of Data (2009)
Target moments:
Savings (percent of GDP)29.7
Collateral (percent of loan value)157
Firms with Credit (percent of total)19.7
Non - Performing Loans (percent of loans)8.1
Interest Rate spread (percentage points)11.8
Sources: Enterprise Surveys; World Bank and IMF Staff calculations.
Sources: Enterprise Surveys; World Bank and IMF Staff calculations.

8. The relaxation of the constraints on different aspects of financial inclusion is found to have beneficial effects on growth, productivity, and inequality. Based on the above model calibration, the effects of relaxing individually each of the three constraints (on financial participation, capacity to lend, bank efficiency—Box 1) are assessed on GDP, productivity, interest rate spreads, income inequality, percent of firms with credit, and the NPL ratio, respectively. These results for CEMAC are compared against those obtained for other countries in Table 1.

Table 1.CEMAC: Gains from Relaxing Constraints on Financial Inclusion
Participation Cost ψBorrowing Constraint λIntermediation Cost χ
GDP (% change)Total Factor Productivity (% change)Gini (Change)GDP (% change)Total Factor Productivity (% change)Gini (% change)GDP (% change)Total Factor Productivity (% change)Gini (Change)
Sources: Dabla-Norris 2015 and IMF Staff calculations
Sources: Dabla-Norris 2015 and IMF Staff calculations

Box 1.CEMAC: Assessing Constraints on Financial Inclusion

The model of Dabla-Norris et al. (2015) permits the examination of the different constraints on financial inclusion and the general equilibrium effects of relaxing these constraints on growth, productivity, and inequality.

In the model, agents differ from each other in wealth and talent and can choose to become entrepreneurs or supply laborers for wages. Workers are paid the equilibrium wage, while entrepreneurs have access to a technology that uses capital and labor for production. In equilibrium, only talented individuals with a certain level of wealth choose to be entrepreneurs, while less talented individuals or those who are wealth-constrained choose to be workers.

Agents also face financial frictions across three dimensions:

  • Participation costs (ψ) which limit access to credit, in particular for smaller and poorer entrepreneurs. This relates to factors, such as physical distance to banks or automated teller machines (ATMs), the documentation required for opening or maintaining an account, or applying for a loan, and the use of electronic payments and new technologies that influence the cost to firms of participating in the financial system.

  • Intermediation costs (χ) and inefficiencies due to asymmetric information between banks and borrowers, which result in growing deposit-lending spreads, as banks have to monitor their clients. Also, limited bank competition can increase inefficiencies and raise intermediation costs.

  • Imperfect enforceability of contracts which result in high collateral requirements and thus smaller collateral leverage ratios (λ).

In the model, increasing financial inclusion impacts growth and inequality through two different channels. Firstly, it tends to increase the optimal level of capital among entrepreneurs already participating in the market. Secondly, the relaxation of financial constraints permits new entrepreneurs to access the market. Both of these channels tend to increase GDP. However, the first channel tends to increase inequality, while increasing access to credit markets tends to reduce inequality, as more businesses are able to access credit. The extent to which each of these constraints on financial inclusion is binding depends on country-specific characteristics. The relaxation of each constraint has important effects on GDP, productivity, inequality, and financial stability.

Moreover, each of these constraints on financial inclusion may be associated with different aspects of the policy environment. High collateral requirements often result from poor legal, regulatory, and institutional frameworks that fail to adequately protect property and creditor rights and hence discourage lending. Elevated participation costs tend to reflect poor rates of access to banking and financial services. High intermediation costs often stem from a lack of public information on borrowers, for example through credit bureaus or credit registries. The model therefore permits quantification of policy options for improving the different aspects of financial inclusion and illustrates the tradeoffs associated with different financial sector policies.

9. Increasing financial access by lowering participation costs could increase the fraction of firms with access to credit substantially. Lower credit participation costs increase investment by enabling more firms to have access to credit, and more capital to be invested in production. Moreover, fewer funds would be wasted in unproductive contract negotiations freeing up more capital for investment. Total factor productivity (TFP) also increases as capital is more efficiently allocated among entrepreneurs. In this case, income inequality decreases, as lower participation costs disproportionately benefit constrained workers and entrepreneurs who hitherto did not have access to credit. It allows them to invest capital into production thereby reducing income inequality.

10. Lowering collateral constraints is the most effective method to increase output, a result which is similar to results obtained for other SSA countries, such as Uganda and Kenya. In particular, by lowering the collateral requirements for bank lending, firms can borrow and invest more easily, which in turn increases output and productivity, as firms can operate at a larger scale. Addressing borrowing constraints would mainly allow firms that are already in the financial system and that have relatively higher income to borrow more. New small firms would continue to find it difficult to acquire credit. As a consequence, the relaxation of credit constraints may lead to a marginal increase in inequality. However, to the extent that banking supervision is weak and commercial courts work slowly and unpredictably, the relaxation of credit constraints and the resulting increased bank lending could lead to an increase in NPLs. Therefore, there is a tradeoff between growth and financial stability that needs to be carefully managed.

11. Reducing intermediation costs could have a stronger effect on GDP and productivity in CEMAC countries than in other low-income and emerging countries. Lowering intermediation costs has a smaller effect on GDP and productivity than relaxing collateral constraints and lowering participation costs. Interest rate spreads follow an inverted V curve, as two opposing forces are in play. The decline in the cost of borrowing induces entrepreneurs to increase bank borrowing. This tends to push up the share of NPLs and thereby increases the interest rate spread. At the same time, provided there is adequate competition in the banking system, lower intermediation costs decrease the interest rate spread by definition. Inequality would tend to increase as more efficient intermediation would disproportionately benefit firms, which have borrowed more.

12. The expected paths of growth, productivity and inequality that arise from enhanced financial inclusion differ by the type of financial constraint. Starting from the initial position of CEMAC (bold diamond in Figures 79; it moves to the right along the curve, as the constraint is relaxed), lowering participation and collateral constraints would induce steady increases in GDP, TFP, and the percent of firms with credit. The expected paths of inequality are however more varied. In CEMAC, a reduction in participation costs is disproportionally more beneficial for constrained workers and entrepreneurs without access to credit, which enables relatively poorer agents to earn a higher income, driving down the Gini coefficient. Relaxation of collateral constraints tends however to slightly increase inequality, as talented entrepreneurs can take more leverage and increase their profits. Increasing intermediation efficiency disproportionally benefits highly leverage firms, which already have higher income than workers, thus slightly increasing inequality.

Figure 7.CEMAC: Lowering Participation Costs

(Bold diamond indicates initial position and moves from left to right)6

Citation: 2015, 308; 10.5089/9781513510583.002.A003

Figure 8.CEMAC: Lowering Collateral Constraints

(Bold diamond indicates initial position and moves from left to right)

Figure 9.CEMAC: Lowering the Cost of Intermediation

(Bold diamond indicates initial position and moves from left to right)

C. Policy Implications

13. The governments of CEMAC countries can play an important role in raising output and efficiency gains by relaxing financial frictions. The biggest gains for growth and productivity would come from relaxing borrowing constraints. Concretely, this could involve strengthening the protection of creditors’ rights, regulating the conduct of banks, and putting in place recourse mechanisms to protect borrowers. Firms would benefit from a stronger legal and regulatory framework for banks and the private sector.

14. Reducing the cost of participating in the financial sector is also important for harnessing growth and productivity gains. This could be achieved, for example, through reducing transactions costs and documentation requirements, increasing bank competition, and increasing bank penetration and the offering of low-fee bank accounts. Enhancing information sharing can also be expected to provide important benefits. In this regard, the government and the monetary authorities (BEAC and COBAC) can set standards for disclosure and transparency, promote credit-information-sharing systems and collateral registries, and educate and protect consumers.

15. Increased inequality could be addressed through government redistribution. Lowered borrowing constraints and increased financial intermediation efficiency could lead to greater inequality, as firms, which are already in the financial system, would initially likely benefit the most. However, the resulting additional economic growth expands the tax base thereby providing an opportunity for the government to raise more revenue. These funds could be used to support higher pro-poor and pro-growth government spending. Provided this is supported by ongoing reforms to increase the quality of government spending, this could put the economy on a virtuous trajectory with higher and more-equitable growth.

16. The monetary authorities can also play an important role in supporting financial inclusion. Mechanisms can be set up to monitor financial inclusion to support actions taken at the national level. Financial supervision should be strengthened in tandem with deepening financial inclusion to promote benefits and manage the associated financial stability risks. Indeed, the increased bank lending associated with the relaxation of credit constraints could lead to an increase in NPLs to the extent that banking supervision is weak and commercial courts work slowly and unpredictably.


    AyyagariM.Demirguc-KuntA. and MaksimovicV. (2011) “Small vs. young firms across the world: contribution to employment, job creation, and growthPolicy Research Working Paper Series 5631The World Bank.

    Dabla-NorrisE.JiY.TownsendR. & Filiz UnsalD. (2015). “Distinguishing Constraints on Financial Inclusion and Their Impact on GDP and InequalityNBER Working Papers 20821National Bureau of Economic Research, Inc.

    Enterprise Surveys (

    Findex (2011) The World Bank.

Prepared by Adrian Alter, Dalia Hakura, and Cameron McLoughlin, with support from Azanaw Mengistu.

Financial Access Survey, IMF.

Global Financial Inclusion (Global Findex) Database, World Bank Group.

The performance of CEMAC against its peers along many of these dimensions has been outlined above.

In Figures 79, the bold diamond indicates the initial position of CEMAC in relation to the respective constraints on financial inclusion. The blue line traces the path of each response variable to the relaxation of the relevant constraint on financial inclusion.

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