Chapter

Chapter 12. Themes and Lessons from the Financial Sector Assessment Programs

Author(s):
Paulo Drummond, S. Wajid, and Oral Williams
Published Date:
January 2015
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Author(s)
S. Kal Wajid

The recently completed IMF-World Bank Financial Sector Assessment Programs (FSAPs) for the partner countries of the East African Community (EAC) highlight the growing financial integration in the region.1 The FSAPs acknowledge significant advances in expanding financial sector assets and services, removing barriers to intermediation, and strengthening regulatory and supervisory frameworks. At the same time, they underscore the considerable scope and challenges remaining on the road to further monetary and financial integration in the EAC.

Financial sector depth and soundness varies significantly in the EAC countries. And they also have common concerns, such as limited access to finance, shallow financial markets, challenges in consolidated supervision, and cross-border supervisory and crisis management arrangements, as well as the need for better liquidity management and financial infrastructure. Successfully addressing these issues would encourage financial integration and help to reap its benefits, such as greater competition, expansion of markets, reduced costs of intermediation, and more efficient allocation of capital.

The chapter looks at the main themes and lessons for financial sector integration in the EAC emerging from the FSAPs for the countries in the region. It discusses the findings on financial structure, soundness, and stability (Box 12.1), the financial sector policy framework in the region, as well as financial infrastructure and capital market development. It closes with a look at challenges and lessons.

Box 12.1Key Lessons: Financial Sector Soundness and Stability

Progress has been made in reforming financial systems in the East African Community (EAC), but it has been uneven across countries. The EAC financial systems are still very small, shallow, and bank-centric. While measures of financial depth lag behind those of emerging markets and low-income countries, regional integration could provide opportunities for expansion and risk diversification. Profitability and soundness indicators of banks in the region are generally favorable and provide a good basis for regional banking even though banks face concentration, credit, and operational risks. Major nonbank financial institutions suffer from structural weaknesses and little public confidence, raising concerns about their stability. These institutions could provide long-term financing, but their weak finances and governance are a major constraint on the development of the EAC nonbank financial sector.

Source: Author.

Financial Structure, Soundness, and Stability

Financial Sector Structure

Small, bank-centric financial sectors. The relatively small, bank-centric financial sectors in the EAC countries offer significant economies of scale through regional integration. Although commercial banks continue to play a dominant role and account for the majority of financial sector assets, nonbank financial institutions are gradually increasing in importance. Following the liberalization and opening of markets, ownership in the banking sector has seen greater involvement of foreign and private investors, while nonbank financial institutions remain largely domestically owned. Market concentration in both bank and nonbank sectors remains high (except in Kenya) and has tended to constrain competition, even though the entry of foreign banks over the last few years has had a positive impact in this respect.

  • Low financial depth. Financial depth in the EAC is generally low, except in Kenya, where bank assets in relation to GDP are the highest in the region (at 50 percent). Banking sector assets are the lowest in Burundi, accounting for only 24 percent of GDP (Figure 12.1). Except for Kenya, EAC countries also lag behind emerging markets, other low-income countries, and peers in sub-Saharan Africa in deposit mobilization and private sector credit in relation to GDP. The factors impeding financial sector depth include (1) inadequate financial infrastructure, (2) lack of trust in the existing legal and judicial frameworks and creditor rights, (3) limited competition among banks, (4) an unfavorable business environment, and (5) low per capita income.2
  • Centrality of banks. Financial systems in the region are highly bank-centric, with commercial banks accounting for 60–90 percent of total financial sector assets (Figure 12.2). In terms of assets and deposits, Kenya has the largest banking sector, followed by Tanzania and Uganda. Together, these three countries account for more than 80 percent of total financial intermediation in the region. In Rwanda and Burundi, where financial sectors are much smaller, banks also account for a relatively smaller proportion of the region’s total assets, loans, and deposits.
  • Increasing foreign and private bank ownership. Ownership characteristics in the banking sector have evolved since 2005. Liberalization and changes in licensing criteria have spurred an influx of foreign banks into Rwanda, Uganda, and Tanzania. As a result, the share of foreign ownership has varied from 40 percent in Kenya to as high as 84 percent in Uganda (in 2009).3 The region has also witnessed an expansion of pan-African banks, including subsidiaries of Kenyan, Nigerian, South African, and Togolese banks. Government stakes in the banking sectors have been reduced and the majority of banks in the region now have private shareholders. State ownership in Kenya, Tanzania, and Uganda has declined to around 5 percent of total banking assets, while in Burundi and Rwanda it remains relatively high at 22 percent and 35 percent of bank assets, respectively (Figure 12.3).4
  • Highly concentrated banking sectors. Concentration in the banking sector has generally declined over the last few years, but it remains relatively high in the EAC countries (Figure 12.4). The share of assets of the three top-tier banks in total bank assets ranges from 31 percent in Kenya to 70 percent in Burundi. Measured by total deposits and loans in the three largest banks to all deposits and loans in the banking sector, concentration is even higher—an average of 79 percent for deposits and 74 percent for loans. In the EAC, the top-tier banks usually provide services, mainly to a small group of large corporate and institutional clients, leaving the retail market largely underserved.5
  • Evolving business models. Intermediation through agencies and mobile banking is broadening access to financial services, reducing the cost of mobilizing deposits and transforming the banking business model in the region. Banks tend to compete vigorously for limited corporate business, notwithstanding the high degree of concentration. As a result, they are increasingly venturing down-market into lending to small and medium-sized enterprises (SMEs) and retail clients, and have extended their branch network and services to locations outside the main cities.

Figure 12.1East African Community Banking Sector Depth in 2013

Sources: Central banks in the East African Community; and IMF staff estimates.

Note: EAC = East African Community.

Figure 12.2Structure of Financial Sector Assets in the East African Community, 2012

(percent)

Sources: Central banks in the East African Community; and IMF estimates.

Note: The chart does not include Uganda, for which information on financial sector assets was not available. EAC = East African Community; NBFIs = nonbank financial institutions.

Figure 12.3Ownership Structure in the Banking Sector in the East African Community (EAC), 2012

(percent share of total banking sector assets)

Source: Author’s calculations.

Figure 12.4Concentration of Banking Sector Assets in the East African Community (EAC), 2012

(percent)

Sources: Central banks in the East African Community; and IMF staff estimates.

Note: Concentrations are measured as a share of total banking sector assets accumulated by the three largest banks in each country.

Nonbank financial institutions. The low depth of the financial systems in the region reflects relatively small shares of nonbank financial institutions typically associated with long-term financing. These include insurance companies, pension funds, and capital markets (stocks and bonds). While the insurance sector appears generally underdeveloped across all EAC countries, pension funds are of significant size and constitute the second largest segment of the financial sector. Insurance and pensions sectors hold the potential to provide long-term financing for regional infrastructure development, but need to be put on a sounder footing. Capital markets are more developed in Kenya, Tanzania, and Uganda, while they are in a nascent state in Burundi and Rwanda.

  • Pension funds. Pension funds intermediate significant savings, but operate mostly domestically. On average, they account for 10 percent of total financial sector assets (Table 12.1). In Kenya, where the pension system is the most developed, pension funds manage assets equivalent to 16 percent of GDP. In other EAC countries, this varies from 1.4 percent of GDP in Uganda to 7 percent of GDP in Burundi.6 The number of mandatory pension schemes ranges from only one in Rwanda to six in Tanzania. There are also a large number of voluntary occupational schemes. Cross-border pension fund activity, however, is virtually nonexistent.
  • Insurance sector. The insurance sector remains small and largely underdeveloped. Insurance companies account for a small share of total financial sector assets and GDP (Table 12.2), with the number of companies varying from 6 in Burundi to 42 in Kenya. They hold assets equivalent to 0.3 percent of GDP in Uganda (the lowest in the EAC countries) and 10.9 percent in Rwanda (the highest). Market penetration (gross premiums/GDP) also remains low and ranges from 0.6 percent in Uganda to 2.6 percent in Kenya.7 The insurance business is concentrated in non-life insurance, with motor insurance as the dominant business line. Notwithstanding the relatively large number of insurers, the sector is highly concentrated and cross-border activities are limited.
  • Capital markets. Capital markets are nascent, with a limited range of securities. Stock and bond markets in Tanzania and Uganda are limited in scope and volume, while they are nonexistent in Burundi and Rwanda. Activity levels are modest, with total turnover and market capitalization substantially less than those of the Johannesburg stock exchange (Figure 12.5). The number of listed securities and corporate bonds is also small and concentrated in the banking, construction, transport, and telecommunication sectors.8 Cross listings in the context of EAC regional integration has helped boost activity levels in markets other than the Nairobi Securities Exchange, and considerable scope exists for further economies of scale and integration of market infrastructure. It is expected that ongoing liberalization of capital flows and implementation of supporting policies may boost activities in these markets.
Table 12.1Pension Funds Sector in East African Community Countries
BurundiKenyaRwandaTanzaniaUganda
Types of pension plansFour main pillars: occupational pension system, individual schemes, define contribution, civil service pension scheme40 occupational pension schemes dominated by one large government-run institutionSix types of pension schemes, in that five at the mainland and one in ZanzibarMandatory pensions are provided through three main schemes: (civil servants and members of military), National Social Security Fund (workers in formal sector)
Percentage of labor force covered by pensions5% of population10% of labor forcePoor population coverageLess than 3% of the population
Pension fund assets to GDP7% of GDP16% of GDP4.8% of GDP3.3% of GDPNational Social Security Fund account for 1.35% of GDP; data for others are not available
Pension fund assets to total financial sector assets10.3% of assets10.1% of assets13.1% of assets9.2% of assets
Sources: Financial Sector Assessment Program reports; and IMF staff estimates.Note: … = not available.
Sources: Financial Sector Assessment Program reports; and IMF staff estimates.Note: … = not available.
Table 12.2Insurance Sector in East African Community Countries
BurundiKenyaRwandaTanzaniaUganda
Number of insurance companies6428, including large government-run health care insurer2222
Insurance assets as percent of financial sector assets (as percent of GDP)5% (3.2% of GDP)8.6% (7.3% of GDP)10.9% (4% of GDP)3.6% (1.3% of GDP)0.31% of GDP
Gross premiums to GDP (in percent)1% of GDP2.6% of GDPRAMA—2.1% of GDP0.6% of GDP
Sources: Financial Sector Assessment Program reports; and IMF staff estimates.Note: … = not available.
Sources: Financial Sector Assessment Program reports; and IMF staff estimates.Note: … = not available.

Figure 12.5Stock Market Capitalization in the East African Community and South Africa

(percent of GDP)

Sources: Stock exchanges’ websites; and IMF staff calculations.

Banking Sector Soundness and Risks

Soundness indicators. Banking sectors across the region generally report favorable financial soundness indicators and provide a solid basis for region-wide banking (Box 12.2). Banks typically maintain capital levels in excess of the regulatory requirements, although there are variations across institutions and undercapitalization mainly pertains to smaller banks. Asset quality and earnings vary more across countries, with uncertainties about provisioning rules and policies, but liquidity is generally adequate. However, cost structures are heavily skewed toward operating costs, thereby contributing to high net interest margins.9 Cross-border exposures are an increasing source of risk, reflecting capital inflows and the increased presence of foreign banks, including those from within the region.

Box 12.2Key Lessons: Harmonizing Regulatory and Supervisory Frameworks

Considerable effort is needed to strengthen and harmonize regulatory and supervisory frameworks and practices in order to foster regional financial integration.

Substantial staffing and capacity constraints in individual countries impair the adequacy of bank examinations and delay the transition to risk-based supervision.

Significant improvement is needed in the oversight of nonbank financial institutions and capital markets to enhance and sustain public and market confidence. Supervisory frameworks need to be upgraded to deal with increasing cross-sectoral and cross-country operations of financial institutions and any outstanding memorandums of understanding between home and host supervisors need to be finalized and become effective.

The main instruments of crisis management are in place in most countries, but a formal, comprehensive framework specifying the roles and responsibilities of key stakeholders in a crisis is lacking.

The efforts of East African Community authorities to build a common market would require harmonizing licensing, regulation, supervisory practices, and safety net arrangements.

In addition, a framework spelling out the broad principles for emergency liquidity assistance, home-host burden sharing, and resolution will be needed at the regional level.

Source: Author.
  • Capital adequacy and asset quality. Banks in the region are well capitalized, often substantially exceeding regulatory requirements, especially in the larger systemic institutions. Weak capitalization typically afflicts smaller banks. Asset quality has generally been improving with the cleanup of non-performing loan portfolios. However, there is some variation and, in some countries, nonperforming loans remain elevated, with uncertainties regarding loan classification and provisioning rules.
  • Profitability. Bank profitability in the region is high by international comparison, reflecting high-risk premiums and limited competition. However, earnings trends across countries are mixed, with banks in Kenya and Uganda enjoying profits significantly above the regional average, and in Burundi and Tanzania profits are declining to below average. At the same time, bank costs have been increasing across all EAC countries, mainly due to the expansion of branch networks and limited skilled labor.10
  • Liquidity. Banking systems are typically flushed with liquidity, reflecting (1) a captive retail deposit base, (2) limited long-term lending due to risk aversion and the lack of adequate financial infrastructure, and (3) holdings of sizeable precautionary reserve balances and short-term government securities.

Risk assessments. EAC FSAPs have focused on the implications of the global economic environment, potential sector-specific shocks, political uncertainties, and supervisory weaknesses. With generally moderate to high likelihoods of such risks materializing, their impact on financial stability was assessed to be moderate in most cases. Stress tests indicate that credit, concentration interest rate, liquidity, and operational risks are potential sources of vulnerability in the region, although these are more pronounced in some countries than others.

  • Credit risk. Credit problems for countries in the region could arise from terms-of-trade shocks and a sharp drop in external assistance. This could lower some banks to below the minimum requirement, especially of small and medium-sized banks. Credit risk stemming from housing loans was seen to be particularly high for Rwanda, while the concentration of credit exposures to a few large borrowers was a major risk in Burundi, Tanzania, and Uganda. Although the concentration of credit exposures reflects economic structure to some extent, the availability of government guarantees for some industries, and the use of cash collateral, banks appeared to be highly vulnerable to potential shocks affecting their major customers. At the same time, indirect credit risk for banks seems to be relatively contained since the majority of foreign currency loans are concentrated in the tradable sectors and individual borrowers’ exposures are typically hedged by their foreign currency incomes.
  • Interest rate and liquidity risk. Banks are vulnerable to interest rate risk, particularly in Kenya and Tanzania. In both countries, banks hold a large share of assets in government securities and a sharp change in short-term rates could have a serious impact on their balance sheets. At the same time, liquidity risk appears to be contained in these two countries (mainly due to large holdings of government securities and a reliance on retail deposits), while it is quite significant for banks in Burundi, Rwanda, and Uganda. Liquidity risk was found most pronounced for banks in Uganda, with significant concentration of large deposits in a few banks.
  • Operational risk. The growing complexity of operations and rapid expansion has increased the exposure of banks to operational risk, particularly in Kenya and Uganda. Domestic banks have been tapping more frequently into low-income and rural markets and reaching out to new market segments and product lines; while this is desirable, it also entails new risks.

Caveats. The stress testing analyses contained in the EAC FSAPs are subject to important caveats about data. In particular, the quality of data in some countries was impaired by shortcomings in the reporting and auditing infrastructure (Burundi), inconsistencies in data on nonperforming loans and provisioning (Tanzania), as well as the lack of detailed information on some smaller banks where weaknesses were concentrated (also Tanzania).

Macroprudential policies. To deal with financial sector systemic risks in a cohesive and comprehensive manner, the EAC countries need to embark on designing macroprudential tools and policy frameworks. As in many other countries, macroprudential policies in the EAC countries are at an early stage of development and further work in this area is desirable. Explicit coverage of this area in FSAPs has been limited, as they took place between 2009 and 2011, when the international guidelines and principles in this area were still nascent.

Nonbank Financial Sector Risks and Vulnerabilities

  • Financially weak pension funds and insurance companies. The pension funds and insurance segments are financially weak in most EAC countries, which is a major impediment to the regional intermediation of long-term savings. A number of FSAPs judged public confidence in the pension fund sectors to be low (for instance, the Ugandan FSAP discusses the issue of past arrears and irregularities, which led to erosion of the public’s faith in the National Social Security Fund. In a similar vein, the health of the insurance sector is seen as a reason for concern, and the FSAPs have identified a range of issues that need attention. These issues include (1) the limited availability of long-term assets and the need to develop investment guidelines (Rwanda); (2) the need to upgrade the legal framework and enhance the information produced by insurers (Kenya); (3) the lack of disclosure requirements for insurance brokers (Tanzania); and (4) the poor financial health of insurers and lack of compliance with regulations on share capital, solvency margins, and technical provisions (Burundi). Addressing the structural weaknesses and nonadherence to common regulatory guidelines and standards is an essential prerequisite for an EAC-wide pensions and insurance industry. Pension reforms have been adopted in some cases, and a sole regulator for the sector has been established in Rwanda, Tanzania, and Uganda.
  • Stress testing of pension funds. The FSAP for Kenya highlighted the key risks on the balance sheets of the pension funds. Stress tests on the assets side of the balance sheets of a sample of 16 occupational pension schemes, representing about 45 percent of the market, indicated that they were exposed to concentration risk in government securities, equities, and real estate. On the liability side, the test found that longevity risk was the most important vulnerability, compounded by the absence of solvency standards and regulations.
  • Pension funds’ solvency concerns. The financial health of pension funds was judged to be at risk in a number of FSAPs. In addition to the low public confidence in Uganda mentioned previously, the FSAP for Burundi noted that the pension system had been in deficit since 2007, with implications for reserves, which were expected to be exhausted by 2015. Similarly, actuarial studies in Rwanda indicated that the large government-run pension fund will be in deficit by year 2030, while in Tanzania the investment portfolios of pension funds were found to be undiversified and illiquid.
  • Insurance sector health. A number of FSAPs underscored the poor financial health of insurance companies. The FSAP for Kenya, in particular, noted expansion of underreserved motor insurance companies that were at risk of not being able to meet their future liabilities. Similarly, a lack of compliance with regulations on share capital, solvency margins, and technical provisions were discussed for Burundi, while the low minimum required capital for both insurers and brokers was raised as an issue in the cases of Tanzania and Uganda. The insurance sectors in Rwanda and Tanzania were also found to be highly dominated by government-owned institutions.

Volatile financial markets. Capital markets remain susceptible to global market developments, particularly in Kenya where there are no restrictions on capital flows. As a result of the crisis in Europe, stock markets suffered substantial declines in Kenya (25.5 percent) and Uganda (14.8 percent) (Figure 12.6). In Kenya, the market remains vulnerable to loss of investor confidence and clearing and settlement failures. The brokerage industry remains concentrated, with five brokers accounting for 55 percent of equity trading, and internal controls and professional standards are weak. In the run up to the FSAP, market abuses, including unauthorized trading of clients’ securities and theft, required the closure of three brokers. These offenses focused attention on the Capital Market Authority’s (CMA) weak enforcement. The CMA is currently overhauling capital market legislation. Management of clearing and settlement risks is also a concern. The clearing and settlement agency should move to a structure where it does not bear settlement risk.

Figure 12.6East African Community: Stock Market Index (June 29, 2009 = 100)

Sources: Bloomberg L.P.; and IMF staff estimates.

Note: EFSF = European Financial Stability Facility.

Financial Sector Policy Framework

Regulation and Supervision

Stronger common standard. Strengthening supervision and regulation to a common standard will be critical for establishing a robust financial policy framework supporting regional integration. While noting significant progress in this area, the FSAPs in the region focus on challenges in improving regulation and supervision. Regulatory and supervisory frameworks in Kenya, Tanzania, and Uganda are assessed favorably, with a higher degree of compliance with international standards. The FSAPs for these countries stress the need for further transition from compliance-based to risk-based supervision in banking and the importance of strengthening nonbank supervision. Significant scope for improving banking supervision is seen in Burundi and Rwanda given substantial staffing and capacity constraints. Overall, less-than-full compliance with the Basel Core Principles is common in the areas of abuse of financial services, corrective and remedial powers, consolidated supervision, market risk, and home-host relationships.

Banking

Progress in legislation and prudential guidelines. Banking supervision assessments underscore progress in updating relevant legislation and strengthening prudential guidelines. Appropriate amendment of key legislation, adoption of risk management and prudential guidelines, full implementation of risk-based supervision, and better onsite and offsite procedures have been highlighted in the EAC FSAPs, especially for the larger countries (Kenya, Tanzania, Uganda). In Rwanda, while legislation and prudential guidelines have been strengthened, the FSAP notes the need to further augment capital adequacy requirements and bolster provisioning rules. In Burundi, in light of the weaknesses in the legal and judicial framework and governance of financial institutions, significant reform of the supervisory framework is needed to conform to international standards.

Challenges in implementation. The FSAPs point to greater challenges in effective implementation and day-to-day conduct of supervision. Notwithstanding improved onsite and offsite supervision, staffing and skill constraints are a recurrent theme, limiting the frequency and quality of bank examinations and making the implementation of risk-based supervision more difficult. In most cases, the skills shortage goes beyond the official sector and extends to the banking industry more broadly, constraining banks’ risk management capacity.

Variation in Basel Core Principles compliance. Assessments of compliance with Basel reveal significant variation both across countries and principles in the degree of compliance. Not unexpectedly, countries with relatively more sophisticated banking systems are generally more successful in meeting the standards than those with less developed systems, although full compliance eludes even these countries. In terms of principles, material or outright noncompliance is clustered around (1) licensing criteria; (2) transfer of significant ownership; (3) market, country, and transfer risks; (4) abuse of financial services; (5) consolidated supervision; and (6) home-host relationships. Significant shortcomings are also evident in corrective and remedial powers of supervisors.

Insufficient supervisory coordination. The FSAPs draw attention to insufficient supervisory coordination and lack of consolidated supervision. In light of cross-border expansion of banks and establishment of domestic financial groups, this was seen as a major challenge. Some efforts have been made to strengthen the framework of cross-border supervision, but these have fallen short of what is needed. The EAC countries signed a multilateral memorandum of understanding (MOU) in 2008 among the supervisory authorities and a joint onsite inspection has been carried out in Rwanda. However, in most cases, understandings (in MOUs) with the home supervisors of all foreign banks operating in the country remain to be reached.

Nonbank Financial Institutions

Weak regulation and supervision. The regulatory and supervisory framework for nonbank financial institutions is weak compared to that for banking, and there does not seem to be an effective mechanism for regional harmonization. This may be due to their small share in overall financial activity and significant public sector involvement, especially in the pension and insurance sectors (in some countries). Capital market oversight is more advanced in the larger countries with more developed and deeper markets (Kenya, Tanzania, Uganda), although there is much scope for strengthening in specific areas, even in these countries. A growing concern is the regulation and supervision of other small-scale intermediaries such as microfinance institutions and savings and credit cooperatives.

  • Pension sector oversight and solvency. In the pension sector, long-term solvency and oversight are the main concerns. Among EAC countries, the pensions sector is important in Kenya and Tanzania and is very small in other countries. Regulation of the sector is not uniform across the region, and there are significant deficiencies in oversight. In Kenya, while there is an established regulatory body (the Retirement Benefits Authority), it needs to strengthen its offsite analysis of vulnerabilities, particularly of defined benefit schemes. Minimum standards for actuarial evaluation and funding rules need to be introduced and the capacity to assess the impact of shocks on the financial positions of the schemes needs to be enhanced. In Tanzania, while a regulatory agency for the sector (Social Security Regulatory Authority) had been set up by the time of the FSAP, it was not operational, and effective oversight framework was lacking. In the other three countries, the sector is in the early stages of development and reforms are needed to improve solvency, promote long-term savings, limit governmental involvement, and strengthen supervisory capacity.
  • Insurance sector oversight weak. Progress in the oversight of the insurance sector remains limited. Original FSAPs in most EAC countries highlighted the underdevelopment of this source of long-term savings and investment. Only limited progress, mostly on the legal and institutional front, has been made since then and there remains a need to strengthen solvency rules and supervision. The FSAP Update for Kenya, for instance, notes the establishment of the Insurance Regulatory Authority as an autonomous body but expresses some concern about its regulatory capacity and scarce specialized skills. It welcomes the increased minimum capital requirements and the establishment of a policyholder’s protection fund, but underscores the lack of a modern solvency test, early intervention mechanisms, and risk-based supervision. Such concerns are also underscored in the FSAPs for Tanzania and Uganda as well as for Burundi and Rwanda. The latter stresses the small size and undeveloped potential of the sector, in addition to the regulatory and supervisory deficiencies.
  • Progress in capital market oversight. Some EAC countries are strengthening oversight of capital markets. Capital markets are most developed in Kenya, followed by Tanzania and Uganda, and are embryonic or nonexistent in Rwanda and Burundi. Issues of oversight are thus addressed more prominently in the FSAPs for the largest three countries and focus on stronger legislation, more rigorous oversight and enforcement, and risks in clearing and settlement. In the FSAPs for countries with smaller markets, greater emphasis is placed on regional integration initiatives and related oversight issues.
    • Kenya. The FSAP observed the CMA’s efforts to overhaul the governing legislation and strengthen enforcement in response to weaknesses revealed by cases of market abuse. The FSAP called for a comprehensive enforcement strategy, encompassing regulations governing market participants; their licensing, fit, and proper tests for securities firms and individuals; and better disclosure of enforcement actions. More broadly, it suggested strengthening the CMA’s supervisory processes through risk-based supervision, close monitoring of weak intermediaries, and better recruitment practices. The management of clearing and settlement risks also needed to be strengthened.
    • Tanzania. The FSAP recommended overhauling relevant legislation to grant greater independence to the Capital Markets and Securities Authority, empower it to undertake inspections and investigations, and collaborate and share information with other domestic and international regulatory agencies. It also recommended enhancing risk management in the settlement system by requiring guarantees from brokers’ settlement banks of their obligations, initial and variation margin payments from settlement banks, and introducing a guarantee fund.
    • Uganda. The Uganda FSAP underscored the limited market depth and drew attention to the need to address the funding and staff resource constraints of the CMA. It also stressed the required improvements in domestic market infrastructure and recommended that the Bank of Uganda (BOU) and the Uganda Securities Exchange implement full dematerialization of private sector securities. It suggested specific measures to ensure settlement through proper delivery-versus-payment arrangements.
    • Small-scale financial services. Expansion of small-scale financial services providers poses regulatory and supervisory challenges. While improving access, new financial services and institutions, such as mobile payments and banking, microfinance institutions, and savings and credit cooperatives, entail new risks and call for appropriate regulation and supervision. Most EAC FSAPs—especially for Kenya, the leader in the region in mobile payments and banking—drew attention to the need for addressing the regulatory gap in this area. Concerns about the oversight of mobile payments were also prominent in Uganda where enactment of a National Payments System Law was recommended. The FSAPs for Burundi, Rwanda, and Uganda focused more on the regulation and supervision of microfinance institutions and savings and credit cooperatives. For example, the establishment of an apex institution, owned by the savings and credit cooperatives and providing training to its member institutions and ensuring that they meet their regulatory requirements was seen as a promising approach in this context.

Cross-Sector and Cross-Border Coordination

Consistency and coordination. Consistency of approaches to cross-sector regulatory and supervisory coordination will be important for regional integration. These issues received relatively limited attention in most EAC FSAPs, except for Kenya, where they are more germane. The latter stressed the need to bring regulatory agencies at par in terms of supervisory methods, staff skills, and regulatory capacity. It argued that prudential standards should seek to prevent significant regulatory inequalities and supervisory gaps through uniform definitions of eligible capital instruments, types of risks, minimum capital levels, and other relevant prudential risk limits. The MOU among domestic financial supervisors covering a wide set of issues, including information exchange, licensing, ongoing supervision and onsite inspections, and confidentiality, was seen as a positive step that needed to be reinforced by prompt implementation.

MOUs step forward. The signing of a multilateral MOU among regional supervisory authorities is seen as a welcome step to address home-host issues. In this connection, the FSAP for Kenya calls for a process for exchanging information and mapping local and regional groups, including relevant nonfinancial groups, their ownership structures, and parties related to significant ultimate beneficiary owners. There remains a need for MOUs to include an explicit protocol for communication and coordination in crisis situations (discussed in the following). For systemic cross-border banking groups, the establishment of formal supervisory colleges to undertake supervisory programs and assess risks is suggested.

Crisis Management Arrangements

Need for overarching framework. An overarching crisis management framework would be important in an integrated EAC market. The FSAPs find that, for most countries in the region, the main instruments of crisis management are in place and the central banks have adequate capacity to deal with individual bank failures. However, a formal comprehensive framework for dealing with systemic crisis is generally lacking. This is also the case in the larger countries—Kenya, Tanzania, and Uganda—where the legislation grants the central banks broad powers to intervene in order to prevent bank failures and to provide emergency liquidity assistance. Nonetheless, at the time of FSAPs, there were no formal protocols for a systemic crisis resolution, which would clearly define the roles of the main stakeholders (central banks, supervisory agencies, ministries of finance, home supervisors of foreign-owned institutions), and their respective responsibilities in a crisis. Deposit insurance schemes are also in place as a safety net, except in Burundi and Rwanda.

  • Emergency liquidity assistance. Procedures for emergency liquidity assistance in a systemic crisis should be formalized. EAC FSAPs indicate that the central banks have adequate mechanisms for meeting the liquidity needs of banks in normal conditions and for dealing with an individual solvent bank with transitory liquidity problems. Most central banks maintain standing facilities for lending against eligible collateral (typically government securities) although the maturity varies. However, the framework for emergency liquidity assistance during systemic stress is not fully articulated. In such situations, it is often difficult to distinguish between illiquidity and insolvency, and support may need to be extended to institutions outside the banking system. A number of FSAPs (Burundi, Kenya, Tanzania) recommended explicit protocols for such situations.
  • Provisions for systemic bank failures. Although provisions for dealing with individual bank failures seem adequate across EAC countries, they remain untested under a systemic stress. Most EAC FSAPs assessed the framework for bank intervention and resolution to be broadly adequate for a single nonsystemic bank failure. They found sufficient legal authority for supervisory action in cases of unsound bank operations, illiquidity, and insolvency. In most countries, there is relevant experience with supervisory intervention. However, there are questions about intervention efficacy and dealing with nonbank financial institutions in a systemic crisis. For instance, while noting the BOU’s considerable experience in resolving failed institutions, the FSAP for Uganda doubted the capacity for timely bank intervention in a systemic crisis, reflecting staffing constraints. The FSAP for Burundi recommended establishing a special legal arrangement for liquidating insolvent banks (i.e., bank resolution regime), as the bankruptcy law was not designed for the banking system.
  • Nonbank financial institutions resolution. Experience in resolving non-bank financial institutions is generally lacking in the region. The FSAP for Kenya in particular stresses that nonbank financial regulators have little experience in the resolution of institutions they supervise. For instance, the Kenyan Insurance Regulation Agency is empowered to be named as either a conservator or receiver to administer resolution, but has no experience in doing so. On the other hand, the CMA in Kenya has gained some experience in dealing with market abuses in the brokerage industry and is strengthening its supervisory and enforcement capacity. Similarly, the FSAP for Tanzania calls for explicit logistical arrangements for communication and cooperation among the Bank of Tanzania, the Ministry of Finance and Economic Affairs, and other supervisory agencies in a systemic crisis to widen scope for discretionary action, if needed.
  • Safety net arrangements. Safety net arrangements are narrow, are strapped for resources, and differ across EAC countries. At the time of the FSAP Updates, deposit insurance schemes in Kenya, Tanzania, and Uganda had a relatively narrow mandate and limited role in bank supervision, but since then were being reformed in Kenya and Tanzania. In Kenya, the Kenya Deposit Insurance Corporation has been created, independent of the Central Bank of Kenya. Further reforms are expected to enable the Kenya Deposit Insurance Corporation to become involved in problem banks at an earlier stage. In Uganda, while the previous FSAP recommendation to establish Deposit Insurance Fund as a separate legal entity within the BOU was being implemented, the FSAP Update noted that staffing limitations in the BOU constrained administration of the scheme. In Tanzania, while the role of the Deposit Insurance Fund has been restricted to repaying depositors, the Deposit Insurance Board has liquidation responsibilities and can participate in onsite examinations. There is no deposit insurance scheme in Burundi and Rwanda, although one was being considered in Rwanda. The FSAPs also underscore that available resources for deposit insurance funds are limited in certain cases (Tanzania) and coverage and participation premium varies from country to country (Table 12.3).
Table 12.3Comparison of Deposit Insurance Schemes in East African Community Countries
BurundiKenyaRwandaUgandaTanzania
FundNo DIS. There is an implicit state blanket guarantee. The FSAP recommended studying the desirability of establishing a DIS.The Deposit Protection Fund Board was created in 1985. In 2011, the Deposit Protection Fund Board was reorganized as an independent institution.No DIS at the moment. As mandated by the LOB, the authorities intend to prepare a separate legislation on a DGF. If such a law moves forward, it is important that an effective process is in place for resolving banks, and the scheme will need to be carefully designed to ensure its effectiveness. In particular, the coverage should be limited to household deposits. Given current supervisory capacity, it is not advisable to extend the DGF to cover depositors in other financial institutions, such as microfinance institutions and savings and credit cooperatives.Deposit Protection Fund, started operating in 1997.Deposit Insurance Board, instituted in 2006.
MembershipAll commercial banks, financial institutions, mortgage companies, and building societies.All deposit taking institutions.Commercial banks and nonbank financial institutions.
CoverageK Sh 100,000 or about US$986U Sh 500,000,000 or about US$1,759T Sh 1,500,000 or about US$883
Memorandum item: Local currency/US$ exchange rate (as of October 14, 2011)1012,8421,700
Sources: FSAP reports for EAC countries; websites of respective authorities; and Bloomberg L.P.Note: Since the conclusion of the FSAP missions, the funding and coverage of deposit insurance schemes have been increased in Kenya, Tanzania, and Uganda. DGF = deposit guarantee fund; DIS = deposit insurance scheme; FSAP = Financial Sector Assessment Program; K Sh = Kenya shillings; LOB = Law Concerning Organization of Banking; T Sh = Tanzania shillings; U Sh = Uganda shillings.
Sources: FSAP reports for EAC countries; websites of respective authorities; and Bloomberg L.P.Note: Since the conclusion of the FSAP missions, the funding and coverage of deposit insurance schemes have been increased in Kenya, Tanzania, and Uganda. DGF = deposit guarantee fund; DIS = deposit insurance scheme; FSAP = Financial Sector Assessment Program; K Sh = Kenya shillings; LOB = Law Concerning Organization of Banking; T Sh = Tanzania shillings; U Sh = Uganda shillings.

Stepped up efforts. Authorities in the EAC countries have stepped up their efforts to address risks from growing cross-border activity, but key aspects of a regional crisis management framework remain to be spelled out. The authorities have dealt with the supervisory challenges through MOUs among supervisors. An MOU among the EAC countries was signed in January 2009, and some central banks in the region have begun to explore the possibility of signing MOUs with the central banks of other home countries. The MOUs to date cover a number of areas such as information sharing, licensing, and coordination of onsite inspections, but do not cover the very important area of crisis management. In particular, the broad principles for emergency liquidity assistance to cross-border entities and home-host burden sharing remain to be addressed. Most FSAPs also recommended that the authorities conclude MOUs with all non-EAC supervisory authorities, whose banks are represented in EAC countries, clearly spelling out cooperation and coordination on crisis contingency planning and crisis management issues.

Financial Infrastructure and Capital Market Development

Payment and Securities Settlement Systems

Upgrading payment systems. Payment systems are being upgraded and adapted to regional needs, but scope remains for achieving greater regional synergies. In the more developed countries in the region, real-time gross settlement (RTGS) systems have been operating for a few years, but recent FSAPs call for enhancements and stronger legislative underpinning and oversight, especially of mobile payments. In particular, they stress the need to link the RTGS system with central securities depositories to achieve delivery-versus-payments and promote market development. Payments efficiency can be enhanced in some cases by linking small value automated clearing houses with the RTGS and by promoting interoperability of automated retail payments.

Mobile phone payments. A notable development in the region is the emergence of payments using mobile phones as an alternative to traditional banking and retail payments products. Providers of payments services and products involving mobile phones and nonbank correspondent networks remain largely unregulated and lack interoperability with other payments infrastructures. This reflects the lack of comprehensive payments legislation that renders the central bank vulnerable to legal challenges, handicaps its oversight function, limits the resolution of potential systemic risks in payments, and creates regulatory uncertainty (as stressed in the Uganda FSAP).11 FSAPs in the region typically called for better regulation and supervision of these payments mechanisms.

A regional payment system. The central banks, and to a limited extent the banking industry, share a common vision to make the payment systems work for all segments of the population. At the regional level, the East Africa Cross Border Payments System aims to integrate national RTGS systems by linking the RTGS systems in Kenya, Tanzania, and Uganda. The integrated system, which was expected to become operational in 2012, will allow cross-border financial transactions to be settled in local currencies. Based on the FSAPs in EAC countries, further regional synergies can be achieved by adopting policy initiatives that support system modernization, enhanced cost and process efficiency, and realize improved access. These policies could include:

  • Developing a regional payment system vision and strategy and bringing together various stakeholders and providing legislative and regulatory clarity, including by establishing central banks’ regulatory and oversight roles over national payments infrastructures.
  • Developing an integrated payment processing system, integrated processing infrastructure comprising the RTGS system, automated clearing house, and the central securities depository.
  • Implementing other measures such as dematerialization of government and private sector securities and establishment of an electronic link between the stock exchanges securities depositories and the RTGS system.

Systemic Liquidity and Debt Management

Coherent liquidity management. Effective and coherent systemic liquidity management across EAC countries will be essential for the development of a regional money market. EAC FSAPs generally consider proper liquidity management an important precondition for deepening the domestic money markets. Particular emphasis was placed on the transparency of monetary and exchange rate policies. Price stability is the principal objective of monetary policy in all the EAC countries, and central banks pursue this by relying either on monetary aggregates (Burundi, Rwanda, Tanzania) or on interest rates (Kenya, Uganda). Countries face varying degrees of implementation challenges, which tend to be more acute for countries with underdeveloped and shallow financial markets. For example, in Burundi, managing short-term liquidity has been problematic due in part to lack of securities for collateral in interbank operations.12 Similarly, the FSAP for Rwanda calls for the National Bank of Rwanda to improve the issuance of government securities and automate the payment and settlement infrastructure in order to improve liquidity management.

Managing surges in liquidity. This is the principal focus of central banks in Kenya, Tanzania, and Uganda. The BOU, in particular, has adopted a more flexible approach by seeking to achieve relatively stable money market rates through the operation of the standing rediscount and Lombard facilities available at the counterparties’ discretion against collateral—generally 91-day Treasury bills—at penalty rates. More generally, in these countries there is growing recognition that effective systemic liquidity management is essential for monetary and financial stability as well as for the development of the financial sector.

Public debt management. Some FSAPs (such as Burundi) considered effective public debt management important for the development of the financial sector. EAC FSAPs did not uniformly address public debt management and separate assessments of Medium Debt Management Strategy frameworks were undertaken in some cases. However, against the backdrop of exchange rate and interest rate volatility, developing a comprehensive debt management strategy is seen as a priority. Efforts to build capacity in public debt management and develop medium-term debt strategies should help the other EAC countries to contain the cost and risk of borrowing as well as smooth-out debt repayment schedule and ensure timely repayments. In some countries, the stock of government securities is small and concentrated in short-term maturities, while a secondary market trading is almost nonexistent. A larger stock of government paper with longer maturities and development of secondary markets in the context of sound public debt management as well as fiscal policies could help deepen the market and develop a yield curve as a benchmark for pricing of risk. In addition, better institutional coordination is needed between monetary and debt management policies to facilitate the development of money and government securities markets.

Box 12.3Key Lessons: Upgrading Financial Infrastructure

Attention to regional consistency in upgrading financial infrastructure and systemic liquidity management will be important for regional financial integration, especially in developing a regional money market.

There is a need to articulate a vision and strategy, including legislative and regulatory framework and the role of central banks in the oversight of regional and national payments infrastructure.

Greater coherence in liquidity operations and instruments and increased availability of marketable securities for liquidity management are also needed.

Finally, a regional approach to capital market development, including stronger legal and regulatory frameworks, can contribute greatly to regional integration.

Source: Author.

Capital Market Development

Capital markets and long-term funding. Capital markets in EAC countries can be further developed and deepened (Box 12.3). Most EAC FSAPs considered the development of stock and bond markets essential for increasing access to long-term funding and broadening investment opportunities, especially for institutional investors. They generally saw regional integration as a promising avenue for deepening bond and equity markets, but also focused on the need to strengthen oversight, improve clearing and settlements infrastructure, and, in some cases, liberalization of the capital account. Considerable attention was also paid to the governance of key institutional investors, such as pension funds and insurance companies. For instance, the weak governance arrangements of the National Social Security Fund, their weak investment management, and the lack of adequate custodial arrangements, received considerable attention in both the Kenya and Uganda FSAPs.

Specific capital market measures. A number of measures could promote capital market progress toward a regional EAC market. The primary market issuance framework in the region is biased toward equity, and more flexible regulations are needed to promote development of the nongovernment bond market.13 Consideration could be given to mutual recognition of intermediaries and collective investment schemes among EAC partner states. Demutualization of the stock exchanges can also prove useful for enhancing competitiveness and overall soundness of the market. In addition, it would be important to ensure tax neutrality between different capital market products. Another promising avenue for deepening the securities market is greater government issuance activity, particularly in longer maturities.

Legal and regulatory framework. A stronger legal and regulatory framework could pave the way for regional harmonization and market integration. Key priorities are (1) demutualization of the stock exchange and the establishment of the central securities depository as a separate entity; (2) removal of limitations on foreign investment in listed corporations; (3) elimination of restrictions on foreign participation in the domestic government and corporate bond market; (4) adoption of regulations implementing common licensing standards for market intermediaries in the framework of the East African Member States Securities and Regulatory Authorities; (5) adoption of regulations implementing common prudential standards for institutional investors, to be agreed in the framework of the East African Member States Securities and Regulatory Authorities; (6) passage of double-taxation treaties with other partner states; and (7) prudent and sequenced capital account liberalization, supported by sound macroeconomic policies.

Financial Inclusion and Development

Common challenges. EAC countries face several common challenges in financial development. These are not covered exhaustively in this chapter as the implications of many topics for regional integration are ambiguous. Nonetheless, two themes were recurrent and prominent in EAC FSAPs: (1) increasing inclusion and access to financial services and (2) promoting long-term financing.

Financial inclusion. Despite progress, broadening financial inclusion remains a critical policy challenge for the authorities in the EAC (Box 12.4). Large segments of the population in these countries have no access to financial services, in the formal or informal markets, especially in the rural areas. The share of under-served population is lowest in Kenya and Uganda, where only about one-third of the population is without access. In Rwanda and Tanzania, about one-half of the population has no access, while in Burundi access to financial services is very limited (the share of population having access, through formal or informal arrangements, is only a few percent).14

Box 12.4Key Lessons: Financial Inclusion

  • Broadening access to financial services remains an important challenge for the East African Community countries, and success in this would contribute to furthering financial integration.
  • Microfinance institutions are likely to play a central role in this process, supporting growing small and medium-size enterprise sector. Capacity, governance, and regulatory issues with microfinance and small and medium-size enterprises have to be properly addressed.
  • The success in developing longer-term financing requires government involvement, for instance, through development finance institutions. However, institutional and regulatory weaknesses need to be addressed to ensure their long-term soundness. Housing sector and infrastructure investment depend critically on the availability of longer-term financing.
Source: Author.

Informal services. Informal markets are crucial in providing the public access to financial services in the region. For instance, more than 40 percent of the population in Uganda uses the informal market, because coverage of the formal banking sector in terms of loans and deposits is still limited. In Kenya and Uganda, slightly more than 20 percent of the population has access to formal banking services, while in Rwanda and Tanzania the share is 10–15 percent.15 Nonbank services are also offered, but these do not represent a significant part of financial services in most EAC countries, with the possible exception of Kenya, where almost 20 percent of the population uses them.

Improving access. Improving access to financial services, therefore, remains unfinished business. Sustained effort is necessary to reach rural areas. Microfinance institutions and savings and credit cooperatives have served to broaden access to deposit and credit products in some EAC countries (such as Burundi, Kenya, and Uganda), but these are not without problems. Advances in technology offer alternatives to traditional banking services (branch network). For instance, mobile banking can expand access to services to those who own a mobile phone. In Kenya and Uganda, mobile phones are increasingly used for remittances and bill payments. Important obstacles remain, however, as noted in the FSAPs:

  • Inadequate capacity. Weak management capacity and poor accounting practices, lack of understanding of key products, pricing mechanism, information technology system, and risk management continue to contribute to poor business performance, governance problems, and insolvency. These issues seem most pressing in Burundi and Rwanda. Government involvement in the financial sector (such as in Rwanda and Kenya) has tended to create an uneven playing field and undermine efficiency in the financial sector.
  • Lack of creditor protection. The absence of reliable credit information and weak creditor rights (collateral recovery) is contributing to high borrowing costs and poor repayment records (such as Burundi and Tanzania). The establishment of credit reference bureaus together with legislative reforms, under way in Uganda, Rwanda, and Tanzania, is likely to help address these concerns. Inability to provide collateral (for example, in Burundi) also remains an obstacle.
  • Weak regulation and oversight. Strengthened financial sector regulation (e.g., Kenya has recently introduced microfinance and pension laws) would enhance efficiency in the microfinance institutions and savings and credit cooperatives sectors. Strong supervisory oversight will be critical for ensuring financial soundness. Given the large number of microfinance institutions and savings and credit cooperatives, the authorities need to avoid overex-tending the limited supervisory resources (leads to creation of an apex bank).

Long-term financing. Promotion of long-term financial intermediation is a common concern in all EAC countries. In this connection, the importance of developing and strengthening capital markets and insurance and pension sectors received much attention in the FSAPs (as noted). Limited availability of longer-term investment products reflects the underdevelopment of national equity and debt security markets, as well as a shortage of development financing in the region. Adequate supply of longer-term debt financing, however, would be essential to provide investment alternatives to pension funds and life insurance companies.

Limited longer-term financing is an important obstacle for the development of housing markets in the EAC countries. In Uganda, for instance, in the absence of longer-term loans, microfinancing for housing has not developed and as a result lenders are increasingly moving to shorter-term home improvement loans that can be rolled over.

Housing markets would also benefit from better land code and land registry. The legal status of land as collateral needs to be clarified and its utilization for loans need to be made simpler (often too many requirements and permissions are needed to make the title as a solid collateral). Improved property registration systems would make it easier for banks to register mortgage liens and transfer the title. The authorities also need to develop standards for the valuation of land and other properties, and provide training for people on these matters. Developing a database for land and other property prices would benefit both the lenders and buyers of properties.

Developing a vibrant SME sector would also require better access to credit. Inability to obtain credit, including at longer maturities, hampers the operations and growth of SMEs. In part, this is due to weaknesses in financial reporting, the low capacity of SMEs to keep records, availability of good collateral, and weaknesses in the juridical system to protect creditors.

Institutional and regulatory concerns. Institutional and regulatory concerns are hampering the development of longer-term funding markets. In Kenya, for instance, progress in developing longer-term financing has been hindered by the unsound financial position of development finance institutions, while subsidized lending has prevented the emergence of private sector alternatives. Underdevelopment of a corporate debt market in Kenya has reflected regulatory weaknesses (favoring equity issuance over issuance of debt securities) and tax distortions. In Rwanda, the government is merging existing guarantee and refinance facilities into a single development institution to provide funding for the SMEs, while significant governance issues remain to be addressed. In Uganda, improving domestic market infrastructure for trading and facilitating the leveraging of regional opportunities through the EAC integration will over time contribute to deepening capital markets in the country. An effective risk management system and supervision of the capital markets will be essential for developing the longer-term markets in Tanzania.

This chapter is based on a paper prepared by an IMF team comprising George Anayiotos, Etibar Jafarov, Arto Kovanen, Bozena Radzewicz-Bak, and Wilson Varghese, and led by S. Kal Wajid.
1The EAC countries are Burundi, Kenya, Rwanda, Tanzania, and Uganda. Of these, only Burundi was a first-time FSAP, while the others were FSAP Updates. The FSAPs took place between 2009 and 2011 against a backdrop of the global financial crisis. In some cases, significant changes have taken place since the assessment. To the extent possible, this chapter takes these into account.
2Total deposits in EAC countries amounted to 27.5 percent of GDP in 2013 compared with the sub-Saharan African average of 44 percent and the ratio of private credit to GDP was 21 percent compared with to the sub-Saharan African average of 28 percent.
3In Uganda, the expiration of a moratorium on new licensing in 2007 triggered an influx of foreign banks. Nine banks were approved for operation, with four entering anew and four through an acquisition.
4Among EAC countries, Rwanda has the highest direct state ownership of bank assets: 25 percent of bank assets are held by the largest bank, which is 100 percent owned by the state. In Burundi, the state is the majority shareholder in two banks, with over 55 percent of the capital, and also in the two financial institutions specializing in housing and development lending, with 80 percent of their capital.
5For example, in Uganda only about 21 percent of the population has formal access to banking services.
6Data for Uganda pertain to assets of only the largest pension fund National Social Security Fund.
7There is a lack of information on the penetration rate in Tanzania.
8Corporate bonds are mostly issued by banks or large state-owned companies for financing infrastructure and housing finance.
9The FSAP confirmed that the macroeconomic, bank industry, and bank-specific factors have been the main drivers of persistently high interest rate spreads and margins in the EAC countries.
10Employee costs account for the largest portion of overheads and have increased across the EAC countries over the last few years, mostly because of labor market pressures resulting from new entrants and increased lending activities.
11For example, the lack of basic norms related to the finality and irrevocability of payments settled through the RTGS system or the automated clearing house has the potential to trigger a gridlock in the systems and a systemic crisis, in case of judicial disputes related to bankruptcy or insolvency of one of the participants.
12To align rates with market realities, following the 2009 FSAP mission, Burundi Central Bank removed interest rate ceilings on its monetary operations.
13Though pension funds are the largest holders of corporate bonds, corporate bonds are a small percentage of their portfolio because of insufficient issuance. Onerous issuance requirements are imposed to protect retail investors in equity but impede bond market development. Bond instruments are more suitable for institutional investors so regulations being drafted by the CMA to provide a full disclosure approval process would assist institutional investors’ ability to invest, and facilitate bond financing by infrastructure and project finance companies.
14FinScope.
15For comparison, in South Africa, over 60 percent of the population has access to formal banking services.

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