- Patrick Imam, and Christina Kolerus
- Published Date:
- October 2013
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In addition, there is a public pension fund (“social security fund”). Employees of the formal sector (but not civil servants) contribute to it. Given Senegal’s very young population, the fund is well capitalized. It manages assets of CFAF 175 billion (2.6 percent of GDP) and invests predominantly in long-term deposits in banks and in real estate.
There is a growing consensus in the literature that the degree of bank-based versus market-based system does not matter much for economic growth. It is less important what the particular institutional arrangements that provide financial services to the economy are; what matters is the overall financial development.
All data on individual banks were obtained from the Central Bank of West African States. The labeling of banks 1—19 differs across graphs, and therefore a particular number does not necessarily correspond to the same bank.
The large increase in the number of bank accounts reflects to a large extent the recent obligation for civil servants to have a bank account to receive their salary by bank transfer, and a similar decision for the payment of monthly grants to university students.
The direct impact has been limited because banks (including subsidiaries of foreign banks) are locally funded. An indirect effect has reportedly been felt through (i) lower remittances; (ii) some local clients, who export and were paid with delays from overseas, requested extensions of credit lines by local banks; (iii) corresponding banks in Europe imposed tougher restrictions on Senegalese banks, and tightened credit lines; (iv) subsidiaries of international banking groups were requested by their headquarters to tighten their rules on risk taking. Note that African banking groups appear to have taken the opportunity to expand in the region, counterbalancing some of the negative effect.
Performance vis-á-vis profitability benchmarks is as follows: return on equity (5 percent vs. a target of 15 percent); return on assets (2 percent vs. a target of 3 percent); profit margin (13 percent vs. a target of 20 percent); and cost income ratio (81 percent vs. a target ranging between 40 and 60 percent).
Related party lending rules, although less stringent than in other jurisdictions, do not seem to be a major factor behind the high lending concentration.
The focus on too-big-to-fail banks does not mean that the failure of a smaller bank is not an important issue; such a failure needs to be handled well to avoid raising concerns about the health of the remaining banks.
This exercise considers only the banking market, debt and equity markets, and some nonbank financial institutions. Due to limitations in the dataset, microfinance could not be benchmarked.
The structural benchmarks are calculated based on Al-Hussainy et al. (2010) and FinStats from the World Bank. For a large set of countries, each financial indicator was regressed on a set of structural characteristics, such as GDP per capita and its square, population size and density, the age dependency ratio, country-specific dummies, and year fixed effects. These regressions are expected to be updated regularly.
The Article IV consultation with Senegal focused only on the fiscal implications of a shallow financial system, as monetary policy is set at the regional level. The consequences on the latter was analyzed during the regional consultation held in early 2013.
These issues were discussed in the Senegal Financial Sector Assessment Program (2004) and the West African Economic and Monetary Union Financial Sector Assessment Program (2008), and many analyses and recommendations made at the time remain valid.
The portfolio structure ratio, which requires that at least 60 percent of a bank’s credit portfolio be composed of rated assets, is problematic in an environment where few rated entities exist with the requisite characteristics.
This approach has been followed in the euro area. The European Systemic Risk Board (ESRB) was established in December 2010, charged with providing macroprudential oversight of the EU and the financial system as a whole. In addition, in January 2011, the Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Supervisors, and the Committee of European Securities Regulators were replaced by European Supervisory Authorities to create a new European System of Financial Supervision. The ESRB was tasked with monitoring, identifying, and predicting potential systemic risks and issuing recommendations. At the same time, the ESRB collaborates with European Supervisory Authorities, providing them with the necessary macroprudential input to assist them in carrying out their supervisory functions. One of the ESRB’s first decisions was to recommend the establishment of an efficient macroprudential policy framework in each EU member state. The recommendation was for each member state to designate an authority in national legislation to conduct macroprudential policy. Cooperation between the national macroprudential authorities and the ESRB would be warranted, particularly to enable the timely identification and subsequent discussion of relevant cross-border issues.