Formerly on the brink of a crisis, Senegal’s banking environment has changed impressively
The economic and financial difficulties of many Sub-Saharan African countries have been compounded by a banking crisis, which has been adversely affecting most sectors of their economy, including their external trade. The lack of adequate financial intermediation disrupts economic activity as frozen deposits and nonperforming loans prevent the banking system from carrying out its vital role of collecting and redistributing domestic savings, attracting foreign capital, and facilitating commercial transactions. The solution to these problems usually requires an indepth reorganization of the existing financial system. One country that attempted to do this was Senegal.
By the middle of the 1980s, Senegal’s banking problems seriously hampered financial intermediation and the conduct of monetary and fiscal policies. The problems arose from inadequate lending risk assessment, financing of loss-making public enterprises, and poor management, all of which contributed to sizable and growing nonperforming loans. Hence, the Government of Senegal had to move decisively to redress the rapidly deteriorating situation of a number of ailing banks. In cooperation with the Central Bank of West African States (BCEAO), the authorities embarked on an ambitious multiyear reform program in 1988. They were helped by sizable technical and financial assistance from the BCEAO (through refinancing), the World Bank (in the form of an adjustment loan), the IMF (in the context of a three-year arrangement under the enhanced structural adjustment facility), and bilateral creditors and donors, including France and the United States. The program’s structural component is now nearing completion, while the recovery of nonperforming loans is scheduled to continue for another four years. Today, some three years later, the reform of Senegal’s banking system is one of the most advanced in West Africa. An indicator of the banking system’s transformation is the fact that Senegal, which was a net borrower from the West African Monetary Union’s money market until end-1988, has become a net creditor in that market.
The objective of the reform program was to provide the Senegalese economy with an independent, efficient, and well-managed banking system capable of fostering a sound business environment, while supporting the monetary authorities’ policies. At the same time, the program aimed at disengaging the Government from the management of the banks and reducing its share in their equity to a maximum of 25 percent. The program encompassed a wide range of measures to rehabilitate, recapitalize, restructure, privatize, or close various troubled banks, as well as to consolidate and/or refinance their nonperforming or illiquid portfolios. As a result, the banking environment in Senegal has improved markedly, with the disappearance of a number of insolvent banks, the strengthening of others, the significant reinforcement of foreign banking partner participation in management, and the substantial withdrawal of the Government from the financial sector, coupled with the creation of a new bank and a loan recovery institution. Alltogether, the number of operating financial institutions declined from 16 at end-1988 to nine at end-1991. In addition, the monetary authorities have been introducing a number of credit and banking regulations aimed at consolidating the results of the reform and reinforcing banking supervision, while promoting indirect credit controls.
In retrospect, the reform of the banking system turned out to be more complex than initially envisaged. The authorities, however, have adopted a pragmatic approach, continuously adapting the reform in light of the difficulties encountered and the experience gained. Thus, the banking system is now more streamlined and government equity participation in the banks is smaller than expected. The reform process can be examined in the two stages described below.
First stage, July 1989-June 1990
The authorities had initially divided the banking system into three groups: (a) banks that were to undergo structural and/or financial rehabilitation but were to continue to operate; (b) banks that were to be shut down; and (c) new financial institutions that were to be created.
The authorities’ initial priority was to complete the required financial audits and feasibility studies, with a view to quickly halting the degradation of the banking system. In this respect, the Banque Internationale de l’Afrique de l’Ouest-Senegal (BIAOS) was the most important commercial bank to be rehabilitated. In the context of its restrarturing plan, the BIAOS received an infusion of liquidity and implemented a series of measures aimed at reducing its operating costs. This plan proceeded well during 1989/90 (July-June), with the Government’s equity participation being lowered from 35 percent to 18 percent. The rehabilitation of the Banque Senegalo-Koweitienne (BSK) and the Massraf Faycal Al-Islami du Senegal (MFIS), two private banks, was dependent on the provision of the requisite financial resources by their shareholders. As this did not materialize, the BCEAO suspended their operating licenses in November 1989 and put the first one under receivership.
The reform program initially envisaged the liquidation of six banks. The closing of the Union Senegalaise de Banques was essentially completed by mid-1989, as the Credit Lyonnais-Senegal (CLS)—a new, privately owned commercial bank with only 5 percent government participation—took over part of its performing assets and corresponding liabilities. In addition, during 1989/90, three public sector banks were closed, and liquidation procedures were initiated for a development bank and a third private commercial bank. Their performing loans were to be taken over by a second new bank, the Credit National du Senegal (CNS), and their nonperforming assets were to be transferred to a loan recovery institution. However, the CNS, which was incorporated formally in January 1990 as a commercial company, pending the receipt of a banking license, did not start its operations as it could not secure a banking license for lack of private capital subscription.
Second stage, July 1990-June 1991
During the second period of the reform, the authorities focused their efforts on reorganizing the banking system. It soon became evident, however, that the initial reform plans had to be amended, as the expected foreign capital inflows destined for the recapitalization of the troubled banks had only partially materialized. Concurrently, progress on the recovery of the closed banks’ outstanding loans remained slow. Against this backdrop, the authorities decided to accelerate bank closures and avoid the multiplication of loan recovery institutions. In the group of the banks to be rehabilitated, the restructuring of the BIAOS was completed in 1990/91. The restructuring involved an additional recapitalization, the further reduction of the Government’s equity share to only 10 percent, and the securing of a foreign banking partner.
In September 1990, the operating licenses of the BSK, the development bank, and the third private commercial bank were revoked, and liquidators were appointed; the assets of the latter two institutions were combined, pending their transfer to a recovery institution. During 1990/91, no change occurred in the situation of the MFIS, as the envisaged capital subscription did not materialize and the bank’s operations remained suspended. Since the recently created CNS could not secure the required capital subscription during 1990/91, the BCEAO eventually resorted to selling most of the liquidated banks’ performing assets and rediscounting the remainder.
As the reform program progressed, the Government realized that the setting up of several loan recovery institutions would lead to an unnecessary dispersion of means and reduce the efficiency of the recovery process. Therefore, it was decided to create a single loan recovery body, the Societe Nationale de Recouvrement (SNR), which took over the nonperforming assets and corresponding liabilities of all liquidated banks. The SNR was instituted in February 1991 and immediately empowered with exceptional legal rights to facilitate and accelerate its recovery activities. Its supervisory board, including a central bank representative, has since adopted a document defining the general recovery strategy; the criteria to be used to reimburse frozen deposits, with preference given to small depositors; the monitoring of the recovery process; and the limitation of operating costs to 5 percent of the net recovery.
An important step in the rationalization of the Monetary Union’s policies was the streamlining of the interest rate structure.
In the context of its divestiture strategy, in March 1991, the Government reduced its equity participation in the capital of a major commercial bank from 42 percent to 25 percent by selling shares to private investors, including employees of the bank. The Government has adopted a similar approach vis-à-vis the agricultural credit bank, with a view to reducing its equity participation from 68 percent to 25 percent in the medium term.
Credit and banking regulations
An important step in the rationalization of the Monetary Union’s policies was the streamlining of the interest rate structure, including the elimination in October 1989 of the preferential rediscount rate, which applied primarily to crop credit. In order to strengthen banking supervision, the BCEAO set up a supranational banking supervision commission, which became operational in October 1990. The commission is based in Abidjan, Cote d’lvoire, and has the mandate to conduct frequent audits of all banks operating in the Union. In late 1990, preparations were undertaken to eliminate the required prior authorization of loans and to replace it with a new creditworthiness rating system for all lending decisions. As a result, starting in January 1992, any loan exceeding CFAF 200 million (about US$700,000) is to be reported a posteriori to the BCEAO, which then has 60 days either to approve or disapprove the financial soundness of the loan. After a three-year transitional period, at least 60 percent of any bank’s portfolio will have to consist of approved loans. Finally, the monetary authorities decided to introduce prudential reserve requirements at a later stage.
Developments since July 1991
Following the collapse of a multinational commercial bank in a foreign country, the Dakar branch of that bank was shut down, as a provisional measure, and a receiver was appointed in July 1991. Reimbursement of depositors should not pose any difficulties, as the bank was liquid and a net creditor in the Union’s money market; other banks have already expressed an interest in taking over its loan portfolio. The monetary authorities are exploring the possibility of transforming all the branches of that bank into a new Union-wide bank rather than liquidating them. In Senegal particularly, this would avoid sending a wrong signal to the financial community at a time when the structural reform of the banking system has been virtually completed.
Senegal has made considerable progress in reforming its banking system, moving from a system facing a major crisis because of sizable nonperforming loans and pervasive government intervention to a lean financial network, supported by streamlined and ratio-nalized monetary and credit policies. The new system is now operating satisfactorily with minimum government involvement and lends a significant amount of capital to the Union’s money market. It needs to be noted, however, that because of its complexity, the reform has needed several years, and has absorbed sizable domestic and external financial resources. It is therefore critical to consolidate the progress made and monitor closely future developments.
Mario de Zamaróczy