Building Integrated Economies in West Africa

Chapter 19. Financial System Structure

Alexei Kireyev
Published Date:
April 2016
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Patrick Imam and Christina Kolerus 

The financial system in the West African Economic and Monetary Union (WAEMU) is dominated by the banking sector, but is evolving rapidly with the emergence of new transnational banking groups and microfinance institutions. The regional securities and equity market is a marginal source of funding, except for governments. The interbank market remains shallow. The banking system in the region is highly heterogeneous. While most banks are adequately capitalized and profitable, pockets of vulnerability, including public banks, were identified. Compliance with prudential norms remains low for a number of ratios, suggesting a degree of regulatory forbearance, and some of these norms are not in line with international standards. Stress tests and financial soundness indicators show that concentration of lending and asset quality pose significant risks. The rising sovereign-bank linkage requires close monitoring.


The financial system in the WAEMU remains largely bank-based. The banking sector comprises 107 banks and 13 financial institutions, which together hold more than 90 percent of the financial system’s assets (Table 19.1). Five banks account for about 50 percent of banking assets (see Figure 19.1). The ownership structure of the sector is changing fast, with the rapid rise of foreign-owned (pan-African) banks. This contributes to higher competition but also rising heterogeneity in the banking system, with large and profitable cross-country groups competing with often weaker country-based (and sometimes government-owned) banks. Nonbank financial institutions are developing quickly, notably insurance companies, but remain overall small.

Table 19.1.Structure of the WAEMU Financial System
Number ofTotal AssetsDeposits OutstandingLoans Outstanding
Institutions as of end-2011Branches as of end-2011Billions of CFA francsPercent of GDPAmount (billions FCFA)Amount (billions FCFA)
Private depository institutions
Microfinance institutions18803,179517501
Nondepository financial institutions14NANANA
Public financial institutionsNANANANA
Total financial system (excluding BCEAO)
Sources: Authorities and IMF staff estimates.

Data for end-2010.

Sources: Authorities and IMF staff estimates.

Data for end-2010.

Figure 19.1.WAEMU: Evolution of the Banking Sector

Microfinance institutions (MFIs) represent a small but rising share of the financial system and contribute strongly to improving access to finance by lower-income households and small- and medium-sized enterprises.1 The WAEMU has 759 registered MFIs. Some 61 entities are classified as large institutions with assets or deposits above CFAF 2 billion and are supervised by the Banking Commission. These entities account for 90 percent of the MFI sector’s assets. Although significantly smaller than the banking system—MFIs’ total loans amount to about 8 percent of total bank credit—more people, particularly in rural areas, have accounts at MFIs than at banks, which helps raise overall access to the financial system from 5 to about 15 percent of the population. In countries such as Benin, Senegal, and Togo, MFIs have helped lift the overall access ratio to more than 20 percent of the population. Most MFIs are operated as credit unions (“Mutuelles”) or by civil society organizations, and have a social mandate such as lending to farmers in remote regions. Overall, the sector is profitable but many of the smaller networks are loss-making and rely heavily on donor financing.

Regional financial markets remain a marginal source of funding except for governments. The regional stock market, based in Abidjan, has about 40 quoted companies. Its capitalization is small (about 12 percent of the WAEMU GDP). Companies listed are mostly in the financial and industrial sectors; Sonatel (a Senegalese telecom company) and Ecobank (a regional bank, headquartered in Togo) are the two largest companies, accounting for close to 50 percent of market capitalization. The debt market consists mostly of government paper and is also small (about 10 percent of the WAEMU GDP). There is no significant secondary debt market, including for government paper.

The Banking Sector

The banking sector has expanded in recent years. Bank credit to the economy has increased substantially in most countries since the mid-2000s (Figure 19.1). The number of bank branches and bank accounts also has increased significantly in recent years. Credit is largely short term, and goes mostly to the manufacturing and service sectors (particularly trade, hotels, and restaurants). Clients vary substantially across banks, with some dealing mostly with bigger firms (including subsidiaries of multinationals, in the case of foreign-owned banks) and others are more focused on domestic retail clients. In some countries, increased competition from MFIs and new business strategies from entrants have led to diversification of the banks’ traditional customer base and higher competition. Most banks are significantly exposed to government securities and more generally to the public sectors.

An important recent development has been the emergence in the WAEMU of cross-border (pan-African) banking groups. This has often occurred through the purchase of domestic banks, in particular by Moroccan and Nigerian groups seeking to expand out of their home markets. Twenty large groups, accounting for most of the banking system, are involved in cross-border activities within the WAEMU (Figure 19.1). These groups, which are mostly incorporated as subsidiaries, are funded through local deposits. This funding model, coupled with their domestic orientation, explains why the direct impact of the global crisis was rather mild on these banks. European banks have remained engaged in the region, while pan-African banking groups have taken the opportunity to expand.

However, banking in the WAEMU is still conducted within national borders. Cross-border flows to households or corporations within the region are largely in the form of syndicated loans involving a sister bank located in the country of the client; in the recent period, Côte d’Ivoire and Senegal were net recipients of these flows, while most other countries were net exporters. The flows are still relatively small. Limited integration is also attested by large differences in lending and deposit rates for households and enterprises across countries. Limited banking integration reflects a number of factors, such as still-limited economic integration, but also the importance of local knowledge for lending activities. The main cross-border financial flows in the WAEMU involve bank purchases of government paper.

On average, the banking system is liquid and well capitalized, although the situation varies substantially across banks and countries (Box 19.1, Figure 19.2, and Table 19.2). As mentioned, banks are very heterogeneous with regard to business models, size, geographical coverage, profitability, and vulnerabilities. Aggregate information hides this diversity and therefore needs to be complemented by a more granular approach. The analysis of financial soundness indicators (which are highly aggregated, available with long lags, and backward looking) and the results of the stress tests (which rely on bank-by-bank data) confirm the need for a dual approach. Both lending concentration, which is high in all countries of the region, and quality of assets, as reflected in high gross nonperforming loans, represent the main risks. Lack of data regrettably did not allow us to assess risks related to the exposure of banks to WAEMU sovereigns, but this exposure is clearly increasing, raising new (possibly systemic) risks. The broader exposure of banks to the public sectors (that is, through public enterprises) is even more substantial. The emergence of cross-border banking groups also brings new risks; for instance, cross-border banks may propagate foreign shocks into the domestic economy. Another potential risk arises when large banking groups have similar portfolios making them susceptible to similar shocks. In this case, while the diversification of the banking portfolio reduces the probability of an idiosyncratic failure, it increases the probability of a systemic crisis. Some of these banking groups are large enough to be considered domestic systemically important financial institutions.

Figure 19.2.WAEMU: Financial Soundness

Sources: Central Bank of West African States; IMF, African Department database; and IMF, Regional Economic Outlook database.

Table 19.2.WAEMU: Financial Soundness Indicators 2010–14(Percent, unless otherwise indicated)
2005 Dec.2006 Dec.2007 Dec.2008 Dec.2009 Dec.2010 Dec.2011 Dec.2012 Dec.2013 June2013 Dec.2014 June
Solvency Ratios
Regulatory capital to risk weighted assets987101011.110.710.710.710.19.3
Tier I capital to risk-weighted assets98691010.610.19.910.09.38.3
Provisions to risk-weighted assets151413121112.110.410.511.010.510.4
Capital to total assets654666.
Composition and Quality of Assets
Total loans to total assets636259595855.355.
Concentration: loans to 5 largest borrowers to capital1897492814343.234.4106.999.597.8130.1
Sectoral distribution of loans
Extractive industries111112.
Electricity, water and gas434333.
Retail and wholesale trade, restaurants and hotels383937333331.932.334.733.533.532.7
Transportation and communication101012121313.611.210.111.511.210.9
Insurance, real estate and services665565.
Other services111213171717.017.116.816.716.215.6
Gross nonperforming loans to total loans202119191717.615.916.017.015.415.7
Provisioning rate676666686163.764.263.460.761.059.3
Net nonperforming loans to total loans887777.
Net nonperforming loans to capital839191696962.054.156.566.266.676.7
Earnings and Profitability
Average cost of borrowed funds222332.
Average interest rate on loans10910111010.99.79.810.7
Average interest margin1878888.
After-tax return on average assets (ROA)
After-tax return on average equity (ROE)55521512.613.710.114.6
Noninterest expenses/net banking income586163616464.861.661.060.2
Salaries and wages/net banking income272828272727.126.425.726.2
Liquid assets to total assets424138373433.333.632.531.932.231.2
Liquid assets to total deposits555451504645.146.145.844.747.145.3
Total loans to total deposits848279827884.084.386.
Total deposits to total liabilities767575737374.172.971.171.368.568.9
Sight deposits to total liabilities2383838373636.737.836.536.835.535.6
Term deposits to total liabilities383736363737.535.134.634.533.033.3
Source: Central Bank of West African States.

Excluding tax on bank operations.

Including saving accounts.

Source: Central Bank of West African States.

Excluding tax on bank operations.

Including saving accounts.

Box 19.1.Banking System Soundness: Findings from the Stress Tests

In collaboration with WAEMU authorities, stress tests were performed on the banking systems of seven of the eight WAEMU countries. Data for Guinea-Bissau were not available. The stress tests were based on data from the end of 2011; for two countries, granular data were only available for the end of 2010. The stress tests covered all banks—public, private, and foreign owned—and tested for market risk, credit risk, and interest-rate risk. Stress tests were not performed for exchange-rate risks, given the credible peg to the euro, or for sovereign risks because of insufficient data. The lack of recent and comprehensive data is an important limitation to the use of stress tests for crisis prevention purposes. The tests performed did not incorporate macro-economic feedbacks and other second-round effects, and assumed no policy response. The stress tests calibrated a series of large but plausible shocks, which comprised sectoral risks, including default by the largest individual borrower, interest rate spikes of 500 basis points as well as liquidity shocks—deposit runs with losses of 5 percent of deposits per day for 10 days.

The results illustrated some of the known strengths and vulnerabilities of the system.

  • Limited interest-rate risk—As the asset side of banks’ portfolios are typically short-term in nature (reducing maturity mismatches) and bonds are typically held until maturity, banks in most countries are resistant to large changes in interest rates.
  • Limited liquidity risk—With large liquidity buffers in most banks, only smaller ones face liquidity risks.
  • Severe sectoral/company concentration—The lack of economic diversification and the large informal sector lead banks to concentrate lending on only a few sectors and corporations. In the WAEMU, the 50 largest companies account for 1/3 of total bank credit. This is a major vulnerability for banks, and the risk can be systemic if banks are substantially exposed to the same large borrower (like ICS in Senegal a few years ago).
  • Weak asset quality—While varying across banks, the generally weak quality of assets is reflected in large nonperforming loan ratios (even after accounting for provisioning). Local accounting rules take longer to write off nonperforming loans compared with rules in most jurisdictions, with some of these nonperforming loans likely to be old and potentially reflecting difficulties in exercising guarantees through the judicial system. Data on nonperforming loan flows were not available to assess recent trends.

Other vulnerabilities, known but not explored in the stress tests, include:

  • Political instability—This risk is high in the region, as shown by the crises in Côte d’Ivoire, Mali, and Guinea-Bissau in the past two to three years.
  • Weather-related risks—Given the still important role of the agricultural sector in the WAEMU economy, climate hazards (for example, floods and droughts) subject the system to large, exogenous shocks.
  • Sovereign-bank relationship—WAEMU banks hold over 70 percent of public debt issued by eight WAEMU sovereign countries, and cross-border holdings are sometimes large. In the case of Côte d’Ivoire in late 2010 (when the crisis started), more than half of the debt was held by residents of other WAEMU countries, generally banks. A default on this debt could have created a systemic bank crisis in the region.

Compliance with prudential norms remains low for a number of ratios. As shown in Figure 19.1, compliance varies across countries and across ratios. Also, there are banks in all countries breaching the capital adequacy ratio (lack of granular data did not permit us to scale the compliance of prudential ratio by banks’ assets). Compliance has improved recently, but this reflected changes made to two ratios (the transformation ratio, which was lowered from 75 to 50 percent; and the ratio on portfolio structure, which was abolished). Progress over the last few years has been limited, which suggests a degree of regulatory forbearance. In addition, some of these norms are not in line with international standards. Low compliance is particularly problematic for ratios that are less demanding than are international standards, such as the one on risk division. As discussed in the last section, there are other important issues to address with regard to the supervision of regional groups and the crisis prevention and resolution frameworks.


Following a rapid expansion, the microfinance sector is consolidating in many countries. The quick expansion of microfinance networks in the early 2000s was welcome from the perspective of access to finance. For example, in Benin, authorized MFIs serve 1.5 million customers in a total active population of 4.5 million. However, the quick expansion led to a proliferation of often small and unprofitable MFIs, which have partially operated out of the authorities’ control. Consolidation is ongoing in most countries both through mergers and acquisitions among MFIs and at the initiative of the authorities. Some countries are well advanced in the consolidation process—more than 100 institutions have been closed in Senegal—while others are still registering existing networks. A survey conducted in Benin in 2011, for example, revealed that 721 MFIs were operating then in the country, but only 226 were licensed (IMF 2012). Overall, the number of branches or points of service in the WAEMU has remained broadly constant since 2004. Outstanding credit, however, has increased significantly in most countries (see Figure 19.3). Microfinance is particularly developed in Senegal (Imam and Kolerus 2013).

Figure 19.3.WAEMU: Microfinance

Source: BCEAO.

Note: Three-letter International Organization for Standardization abbreviations used for country names. WAEMU = West African Economic and Monetary Union.

The authorities have started to address governance and profitability problems of the sector. The MFI sector is profitable overall, but the situation varies greatly depending on the size of the institutions, with the largest being the most profitable. Nonperforming loans are on an increasing trend and governance problems are frequent due to a lack of accountability. A regulatory reform initiated in 2008−09 has led to a reorganization of supervisory responsibilities, with the larger institutions holding assets and/or deposits of more than CFAF 2 billion now supervised by the WAEMU Banking Commission. Smaller institutions remain supervised by national authorities, typically ministries of finance, and countries have started to build up their capacities in this area. Many MFIs report access to refinancing as a major issue, given their relatively high transformation ratio, as well as short-term resources (cash deposits), and an increasing demand for longer-term financing. Larger MFIs are able to get refinancing from banks, and these loans have recently become eligible for refinancing at the BCEAO. However, smaller MFIs cannot avail themselves of this option. The BCEAO is also considering how to include MFIs in the payment system, as the current MFI license does not allow for money transfer. Mobile banking is just starting in the WAEMU.

Regional Markets

Despite signs of development, interbank market activity remains limited. Interbank loans have amounted to less than 2 percent of total bank loans in the past five years. Loan maturity has tended to increase in recent years and the slope of the implicit, yet imperfect, yield curve has become positive; it was virtually flat a decade ago. Moreover, the interbank rate has remained broadly within the policy rate corridor since 2009 (Figure 19.4). However, the interbank market does not yet perform a major role in the reallocation of liquidity. Despite excess reserves at the banking system level, the BCEAO still needs to inject massive amounts of liquidity to a large number of banks that cannot get this liquidity from the market. This phenomenon is another illustration that the banking system is highly heterogeneous and segmented. In the absence of collateralized operations, highly liquid banks—in general, though not exclusively, the subsidiaries of large foreign banks, which also happen to be the more profitable ones—are reluctant to lend to others. As a result, most interbank loans take place within banking groups to avoid any counterparty risk. Because access to the BCEAO’s standing facility for liquidity provision is not yet fully electronic and therefore entails significant transaction costs, some operations on the interbank market still take place at rates greater than the higher policy rate of the BCEAO. These operations may also reflect implicit profit transfers between banks belonging to the same group.

Figure 19.4.WAEMU: Interbank Market

The regional debt market has developed rapidly in the past years, mostly for government paper (Figure 19.5). Securities can be issued by private companies and governments on the regional stock exchange, the Bourse Régionale des Valeurs Mobiliéres (referred to as BRVM, its French acronym). The BRVM has 46 bond lines, of which 28 are from private issuers and the rest from four sovereign countries of the WAEMU. Government bond issues represented 75 percent of all issuance by syndication in 2011, with Côte d’Ivoire and Senegal the most active issuers. The average interest rate on sovereign bonds was at 6.7 percent in 2011 (average duration: 5.5 years), while the average interest rate on listed bonds issued by private corporations was 6.8 percent (at similar duration). Interest rates, however, do not provide a full account of differences in the cost of financing between the public and private sector. Private sector issuance required until recently a 100 percent guarantee by a certified institution (for example, the West African Development Bank), which added the equivalent of 1 to 2 percentage points to issuance costs. Overall, the BRVM debt market remains small. Its total capitalization stood at about 2.4 percent of GDP at the end of 2014. It is not a significant source of financing for the private sector and there is no significant secondary market.

Figure 19.5.WAEMU: Debt Markets

Most government debt, however, is still issued to banks through auctions organized by the BCEAO. This segment has been very dynamic in recent years and outstanding government debt issued on this market is about 10 times larger than that issued at the BRVM. Debt issued this way is mostly in the form of Treasury bills. It has a relatively short average maturity and can be used for refinancing at the BCEAO. There is no significant secondary market for this type of government debt.

The regional equity market remains shallow (Figure 19.6). Launched in 1998, the BRVM started off with 36 listed companies carried over from the previous stock exchange in Abidjan. The number of companies listed has remained broadly stable, with 37 in early 2013, as new listings broadly offset the number of companies taken off the list. Market capitalization increased from 4.3 percent of GDP in 2002 to 13.2 percent of GDP end 2014. Foreign investors are allowed in, and their stakes in Sonatel and ETI (Ecobank) are reportedly fairly large. The average market return in 2011 was 8.6 percent in local currency, and 27 companies paid dividends. BRVM is supervised by the Regional Council for Public Savings and Financial Markets.

Figure 19.6.WAEMU: The BRVM–Stock Market

Sources: Bourse Régionale des Valeurs Mobilières (BRVM), Conseil Régional de l’Epargne Publique et des Marchés Financiers (CREPMF).

Systemic Risk And Surveillance

Systemic risk is defined as any threat of disruption to financial services that is caused by an impairment of all or part of the financial system and that has the potential to have serious negative consequences for the real economy. It is a form of negative externality that occurs when a bank failure, market seizure, or breakdown of the infrastructure can have serious adverse implications for market participants. Systemic risk can be decomposed into time-series and cross-sectional risk. In the time-series dimension, the buildup of risk over time interacts with the macroeconomic cycle. Financial institutions and borrowers may take on excessive amounts of leverage in the upswing of an economic cycle only to become overly risk averse in a downswing. This amplifies the boom and bust cycle in the supply of credit and liquidity—and by extension in asset prices—that can be damaging to the real economy. In the cross-sectional dimension, the growing size and complexity of the financial system is raising interconnectedness and common exposures, which may increase contagion when problems arise. As a result, the failure of one institution—particularly one of significant size or with strong interconnections—can threaten the system as a whole.

As discussed in Imam and Kolerus (2013), time-series systemic risk might be limited at this juncture in the WAEMU, though some cross-section risks are present. No sector seems highly leveraged in Senegal. Banks tend to finance mostly prime borrowers with short-term credit such as trade finance, implying that risks to the financial system, besides from exogenous shocks, are likely to be low, except for concentration risk. Capital inflows and outflows are limited. Many of these features likely apply to other WAEMU countries.

However, some systemic linkages are evolving rapidly and could change this assessment in the near future. These include:

  • Cross-sector linkages—Those that exist between the financial and nonfinancial sectors. These are on the rise as banks are increasingly lending to sovereigns through the regional market.
  • Cross-border linkages—Those between the financial system of the WAEMU and the world economy, but also those within the WAEMU. These are intensifying as large WAEMU banks and foreign banks, especially from Morocco and Nigeria, seek opportunities within the WAEMU and the region.
  • Cross-institution linkages—Those that exist between bank and nonbank financial institutions. The Senegal pilot showed the increasing linkages among banks and insurance companies and MFIs, whether through equity ownership, debt holdings, or deposits.

Financial stability in the WAEMU also faces particular challenges. In a heterogeneous monetary union, business cycle synchronization is limited, as is the case in the WAEMU (see Chapter 5, Shocks to Growth). In such circumstances, monetary policy may not necessarily act as a stabilizing force to all the national financial systems, as a focus on average regional inflation might imply that monetary policy is too accommodative in some parts of the Union that have high inflation levels and too tight in others that have low inflation levels. Limited financial development also means that the scope for countercyclical fiscal policy is reduced, as it may be difficult to issue large amounts of government paper in a shallow market during a downturn, although such policy should play a critical role in absorbing asymmetric shocks (and even symmetric ones given the limited effectiveness of monetary policy). With limited shock-absorption mechanisms, a robust financial crisis prevention and resolution framework is even more critical.

As indicated in Imam and Kolerus (2013), there is in principle a clear division of labor between national and regional authorities on the supervision of the financial system. The banking sector and MFIs with more than CFAF 2 billion in deposits or loans are supervised by the WAEMU Banking Commission. Smaller MFIs are supervised by national authorities. The regional financial market is under the supervision of the Regional Council for Public Savings and Financial Markets. Ministries of Finance, together with the regional regulator, supervise the insurance sector. Finally, the Financial Stability Committee is responsible for macroprudential supervision and for guaranteeing the stability of the overall financial system at the regional level. As banking licenses are provided by the BCEAO—after a qualified opinion is issued by the WAEMU Banking Commission—following request from the national governments, there is an understanding that banks and subsidaries that are in trouble will have to be supported by the governments of the countries in which they are located, and not of the country of the parent company.


    ImamPatrick and ChristinaKolerus.2013. “Senegal: Financial Depth and Macrostability.African Departmental PaperInternational Monetary FundWashington.

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    International Monetary Fund. 2012. “Benin Article IV: Financial Sector Review.Washington: International Monetary Fund.

1Access to finance refers to the possibility that individuals or enterprises can access financial services, including credit, deposit, payment, insurance, and other risk-management services.

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