The Gambia: Selected Issues

This Selected Issues paper examines economic developments in The Gambia during 1994–98. Although real output growth slowed significantly in the early 1990s and turned negative in 1994/95, both 1997 and 1998 were characterized by an upswing in real economic activity. The 1994/95 output decline of 3.4 percent was primarily owing to a significant downturn in tourist activity. The recovery in the tourist sector and the more favorable weather conditions led to real GDP growth of 4.9 percent in 1997 and an estimated real growth rate of 4.7 percent in 1998.

Abstract

This Selected Issues paper examines economic developments in The Gambia during 1994–98. Although real output growth slowed significantly in the early 1990s and turned negative in 1994/95, both 1997 and 1998 were characterized by an upswing in real economic activity. The 1994/95 output decline of 3.4 percent was primarily owing to a significant downturn in tourist activity. The recovery in the tourist sector and the more favorable weather conditions led to real GDP growth of 4.9 percent in 1997 and an estimated real growth rate of 4.7 percent in 1998.

IV. Financial Sector Reform38

A. Introduction

85. The financial system of The Gambia comprises the Central Bank of The Gambia (CBG), 5 commercial banks, 7 insurance companies, 47 Village Savings and Credit Associations (VISACAs), and numerous informal credit clubs. These institutions operate under the 1992 CBG Act, the 1992 Financial Institutions Act (FIA), and the 1974 Insurance Act. The current state of the financial system has been shaped by the reform efforts initiated in the mid-1980s in conjunction with a comprehensive stabilization program, aimed at liberalizing the foreign exchange market, dealing with the sizeable portfolio of nonperforming loans of the banking system, promoting efficiency, encouraging competition, and strengthening the authority of the CBG. This chapter discusses the developments in The Gambia in restructuring the financial system and the issues that the authorities face at present. The rest of the chapter is organized as follows. Section B briefly reviews the history of the financial system after independence. Section C discusses the efforts of rehabilitation of the banking system and the process of restructuring and privatization of The Gambia Commercial and Development Bank (GCDB), the major commercial bank in the 1970s and 1980s. Section D analyzes the progress achieved in strengthening the authority and independence of the CBG. Section E discusses the formal banking system and Section F focuses on the nonbank financial sector and the role of its most important component, the VISACAs, in mobilizing savings and providing retail credit. Section G concludes this chapter.

B. Historical Background

86. During the first decade after independence in 1965, broadly stable macroeconomic conditions existed in The Gambia. In the decade up to 1985, however, a variety of external shocks and inappropriate policy responses led to a decline in real growth, accelerating inflation, and emergence of external payments arrears. Dissatisfied with the performance of the banking system in promoting economic development, the government started to intervene more actively in the development process through subsidized directed credits. The institutionalization of agricultural credit through the Gambia Cooperative Union (GCU) and the GCDB ultimately led to serious imbalances and relegated the financial system to a secondary role in allocating credit, mobilizing the savings of the population, and developing the economy.

87. The GCU was established in 1959 to assist the groundnut farmers in the provision of agricultural inputs (mainly seeds and fertilizers) and credit, and the procurement of the groundnut crop. The number of primary societies (cooperatives) that were members of GCU rose from less than 25 in 1970 to 86 by 1980, thus enabling the GCU to develop a countrywide network. In 1972, the government created the GCDB. Throughout its existence, the GCDB had operated as a mixture between a financial institution and a development bank, and was the main channel for providing farmers with subsidized directed credits through the intermediation of the GCU and its member cooperatives. In 1973, the government established the Gambia Produce Marketing Board (GPMB) with monopoly rights over the export of the groundnut crop. In addition, in the early 1980s, the government granted the GCU monopoly power over the distribution of fertilizers and seeds, thus effectively eliminating all competition in the cycle of production, financing, and marketing of the groundnut crop. The GCU provided inputs to farmers at highly concessional terms and practiced a liberal loan forgiveness policy, thus exacerbating the inefficiencies of its monopoly position and leading to the accumulation of sizable nonperforming loans. The GCDB was also faced with mounting nonperforming loans which, coupled with insufficient collection efforts and inadequate loan provisioning, created a continuous need for CBG financing (see below). As a consequence, at end-1985, over 44 percent of the GCDB’s liabilities were to the CBG.

88. By the mid-1980s, in addition to the GCDB, two commercial banks were operating in the country: the Standard Chartered Bank of The Gambia (SCBG), in which the London-based Standard Chartered Group held about 75 percent of the capital and the government had a minority share; and the International Bank for Commerce and Industry, a branch of the Banque Internationale pour le Commerce et l’Industrie, a Senegalese-based bank owned by a consortium of American, Belgian, French, and German banks.39 The Post-Office Savings Bank and two insurance companies, the Gambian National Insurance Company (created in 1974 as a subsidiary of the GCDB) and the Northern Insurance Company, completed the financial system. The Agricultural Development Bank (ADB), which started operations in 1981, was issued a “cease and desist order” in 1982 and was in liquidation by 1990.

C. Rehabilitation of the Banking System

89. In June 1985, The Gambia began implementing a comprehensive adjustment program, the Economic Recovery Program (ERP),40 as the development model pursued by the authorities thus far had proved unsustainable. In particular, the high default rates on state-guaranteed credits to agriculture necessitated a reform of the agricultural sector. At issue was mainly the vertical integration between the GCU, the GCDB, and the GPMB, and their dependence on government financing. The GCDB, the largest bank in The Gambia, was owned by the government (51.7 percent), the GCU (31.7 percent), and the GPMB (16.6 percent). To address the crux of the matter, the government in 1989 privatized the GCU and abolished the export monopoly of the GPMB. Initially, the GCU was able to operate more efficiently in the new environment, as it could also export the groundnuts it was procuring from the farmers. By contrast, the GPMB, which had no procurement network of its own, suffered heavy losses, and was sold in 1992 to The Gambia Groundnut Corporation (GGC), a unit of the Swiss-based Alimenta SA.41 Resolving the issue of the nonperforming loans of the banking system and reforming the institutional environment, however, remained the two most important issues facing the authorities after 1985.

90. During 1986-89, The Gambia undertook the financial restructuring of the GCDB with assistance from the World Bank, including a payment by the government of D 6 million of call capital, the conversion to capital of a D 6 million IDA credit, and the conversion of D 35 million of short- and medium-term loans into long-term loans. In 1987, the government established a Managed Fund that took over the government-guaranteed loans of the GCDB (D 72.6 million, or 40 percent of total private sector credit) and was responsible for their recovery. After new management was installed and the recapitalization of its balance sheet was completed, in 1991 the GCDB was converted into a limited liability company, and was sold to the Meridien Bank in July 1992.42 The deposits and a small fraction of the (performing) loans of the GCDB were sold to the Meridien Bank, while the bulk of the assets (D 223 million, or US$26.2 million), including a sizable portfolio of nonperforming loans (D 188.5 million), were transferred to the newly established Asset Management and Recovery Company (AMRC). The claim of the CBG on the GCDB (about D 45.4 million) was also passed to the AMRC. To cover the transfer of all deposits, the government issued about D 73 million in treasury bills, ultimately to be covered through the collection of the AMRC assets. After the failure of the Meridien Bank/BIAO, the government took control of the Meridien Bank and has been operating it under the name of the Trust Bank. In 1998, following its successful rehabilitation, the Trust Bank was offered for sale.

91. The AMRC was established under the AMRC Act in December 1992 to recover the securities on the nonperforming loans of the GCDB. The gross direct assets to be managed by the AMRC, a total of D 308 million (US$36 million), consisted of the nonperforming loans of the GCDB, the claim of the CBG on the GCDB, and D 84 million from the Managed Fund which was merged into the AMRC; D 40 million in interest accrued but not received was also included in the portfolio. The AMRC aimed to recover 60 percent of the collateral; as of end-1998, about D 128 million (40 percent of assets), has been recovered. Of this amount, D 75 million has been returned to the government and the rest is still on the books of the AMRC. The original life span of the AMRC of five years, was extended as it was believed that more of the collateral could be recovered. In March 1998, an additional portfolio of properties acquired under the Commission of Enquiry (following the transition from military to civilian rule), with an estimated value of about D 50 million, was transferred to the AMRC. Currently, the AMRC has a preferred creditor status in liquidation or seizure, and, unlike other creditors, it does not have to go to court to legalize the seizure and sale of property. In October 1998, the authorities set up a commercial chamber in the High Court to simplify bankruptcy and collateral liquidation procedures. However, staffing constraints do not allow the court to function properly and it will require additional efforts to shorten the time involved in the recovery of collateral (currently about 2-4 years). The government is also considering turning the AMRC into a private debt recovery agency, which would involve the AMRC’s surrendering its preferred creditor status.

92. Although the authorities created the AMRC to resolve the issue of the nonperforming loans of the GCDB, no mechanism was established to deal with the nonperforming loans of the GCU to the government and to the SCBG. The government’s claim on the GCU was initially transferred to the AMRC which then transferred it back to the government. An agreement between the government and the SCBG on the nonperforming loans of the GCU was reached only in 1998 in conjunction with the liquidation of the GCU (see below).

D. Central Bank Reform

93. In the mid-1980s, the government began, together with the rehabilitation of the GCDB, the process of liberalization of the financial sector with the purpose of promoting the development of a more competitive banking system and efficient financial markets. The CBG Act and the FIA, both passed in 1992, were designed to stimulate the development of a formal financial system. One of the main elements of the financial sector reform was the strengthening of the role and authority of the CBG. The CBG Act clearly defined the objectives of the CBG and improved its ability to formulate and implement independent monetary policy. In addition to operational independence, the FIA empowered the CBG as the sole regulator and licensor of financial institutions in The Gambia in accordance with the Basle core principles.

94. Currently, the CBG uses exclusively indirect instruments for monetary policy. The major instruments for liquidity management are the three and six-month treasury bills that the CBG has been auctioning on behalf of the Department of State for Finance and Economic Affairs (DoSFEA) biweekly since 1986. Prior to each auction, the CBG announces the amount offered and participants submit their sealed bids (amount and yield). The CBG then proceeds to satisfy the bids starting from the lowest bid (in terms of yield) until it fills the auctioned amount. The auction format, therefore, is discriminatory and competitive, as bidders pay their winning bids. To improve liquidity management, in September 1990, the CBG started issuing CBG-bills, with characteristics identical to those of the treasury bills and using auctions of similar format. Although the CBG limits the amount of CBG-bills issued in order not to endanger its profitability, the amount outstanding has more than doubled, rising from 2½ percent of treasury bills outstanding at end-1997 to more than 6 percent at end-1998.

95. The discount rate, announced by the CBG after each treasury bill auction, is determined by rounding to the nearest ½ of one percentage point of the weighted average of the accepted bids. The small and known number of bidders in the auctions and the high concentration of the banking system raise concerns about the competitiveness of the auctions and the market determination of the treasury bill rate. Proceeds from the auctions are deposited in the treasury bill account at the CBG and transferred as needed to the treasury account (the “212 account”). In 1998, the CBG issued D 160 million in treasury bills, of that amount, about D 75 million (or less than 50 percent of the total amount issued) was used for domestic financing of the budget deficit which illustrates the use of treasury bills as an instrument for liquidity management and highlights the operational independence of the CBG.

96. The high fiscal deficits and continuous need for budget financing in The Gambia, together with the operational independence of the CBG in conducting a tight monetary policy and issuing treasury bills, has led to a combination of low inflation (Table 22), and high real interest rates. In particular, the discount rate stayed at 16 percent from October 1995 until September 1998, when it started to decline to its current level of 14 percent. Average annual inflation, as measured by the consumer price index (CPI), declined from 4 percent in 1995 to 1 percent in 1998. The rigidity of the treasury bill rate translates into lack of flexibility for the economy, as almost all other interest rates are explicitly linked to it.43 Because of the high real interest rates, public enterprises and commercial banks have been the largest holders of treasury bills (42 percent and 49 percent, respectively as of end-1998),44 which keeps them from engaging in more productive activities. In addition, the limited array of maturities for the treasury securities, the absence of a rate providing a signal as to the intentions of monetary policy, as well as the small and constant spread between the treasury bill and the resale rates, neither facilitate the development of a money market nor promote competition among the financial institutions.

97. In the periods between auctions, the CBG uses transactions in treasury bills and CBG-bills to mop up or provide liquidity as necessary, and it outright purchases, discounts, and rediscounts treasury bills maturing within 93 days of CBG acquisition to provide liquidity to the system. In addition to this standing facility, the CBG outright purchases, discounts, and rediscounts (i) bills of exchange and promissory notes for bonafide commercial, industrial, or agricultural purposes, maturing within 124 days of CBG acquisition; and (ii) loans of maturity up to 180 days, secured by collateral in the above categories. Because of the standing CBG facility and the large fraction of treasury bills in banks’ portfolios, an interbank market in treasury securities has not been able to develop and the CBG is party to virtually all transactions involving treasury bills. The lack of an interbank market also affects adversely the outcome of the treasury bill auctions, as banks tend to roll over the maturing treasury bills in their portfolios, thus keeping the amounts bid at fairly constant levels.

E. The Banking System

98. At end-1998, five commercial banks in The Gambia were registered and regulated by the CBG under the FIA: the SCBG, the International Bank for Commerce, the Trust Bank, the Continent Bank, and the Arab-Gambia Islamic Bank (AGIB) (Table 40).45 With the exception of the government-owned Trust Bank, all other banks are fully privately owned. The Trust Bank was offered for sale in August 1998 and bids continue to be received; the CBG expects to complete the sale by mid-1999. So far, no bank has applied for a license under the 1993 Offshore Company Act.

99. The banking system is highly concentrated, with the largest bank in the country, the SCBG, dominating the market both in terms of deposits (51 percent of the total for the banking system) and of loans extended (51 percent, Table 11). The top three banks account for almost 90 percent of the market in terms of loans and more than 90 percent in terms of deposits; the Herfindahl index of the top five banks in The Gambia is 0.34 (0.37) in terms of loans (deposits), close to the average for sub-Saharan Africa (0.38 in 1996 in terms of deposits).46

Table 11.

The Gambia: Selected Ratios of Banking Sector Institutions 1/

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Source: Central Bank of The Gambia.

Standard Chartered Bank of The Gambia (SCBG); International Bank for Commerce, Ltd. (IBCL); Trust Bank Limited (TBL); Continent Bank, Ltd. (CBL); and the Arab-Gambia Islamic Bank (AGIB).

The required capital adequacy ratio is 8 percent.

The required liquidity ratio is 30 percent of total deposit liabilities and other short-term borrowing.

100. In comparison with sub-Saharan Africa, the indicators of financial deepening for The Gambia reflect a modest degree of financial intermediation in the economy despite the ongoing reform efforts (Figure 9). The ratio of broad money to GDP increased during the period 1984-96, and at 24 percent at end-1996, it is still below the level for sub-Saharan Africa (about 25 percent). The holdings of currency declined slightly from 6.6 percent of GDP in 1988 to 6.2 percent in 1997. Credit to the private sector47 in percent of GDP declined rapidly from more than 40 percent in 1984 to 9.2 percent in 1997, and, since 1989, it has been consistently below the level for sub-Saharan Africa. The high levels of credit in the early to mid-1980s reflect the significant amount of subsidized directed credit to agriculture. Moreover, the ratio of narrow to broad money was lower than that for the sub-Saharan Africa during 1984-96 and declined from 59 percent in 1987 to less than 50 percent at end-1997.

Figure 9.
Figure 9.

The Gambia: Indicators of Financial Deepening, 1984-96 1/

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A004

Sources: The Gambian authorities; and Fund staff estimates.1/ Data for sub-Saharan Africa are unweighted averages.

101. As of end-1998, holdings of treasury bills and CBG-bills comprised more than 50 percent of the net domestic assets of the commercial banks, while claims on the private sector accounted for about 48 percent. The high real interest rates give an incentive to banks to hold treasury securities, while commercial lending is severely constrained. In addition to the high real interest rates, the liquid asset requirement, adopted by the CBG in 1994, also tends to favor government securities over commercial loans on the banks’ books. The liquid asset requirement stipulates that all commercial banks must hold liquid assets equivalent to 30 percent of their total deposit liabilities and other short-term borrowing. As of end-December 1998, all commercial banks except the Continent Bank met this requirement by a substantial margin (Table 11).

102. At end-June 1998, commercial banks derived D 24 million in income from treasury securities (more than one-third of total income) and more than D 42 million from commercial activity. However, only D 16 million of the latter income comes from loans and advances, while the larger part, D 26 million, is from commissions and fees, mainly related to trade. The total stock of loans extended by the banking system was about 13 percent of GDP. Banks tend to lend for high turnover, short-term projects with expected returns in line with the high real returns on treasury securities. As a result, loans to distributive trade (commerce), related primarily to the booming reexport trade, have risen significantly since the mid-1980s and now account for more than 40 percent of the total loan portfolio of the banking system, while tourism accounts for only 3½ percent, after reaching a peak of 12 percent at end-1991. After bottoming at 7½ percent in 1991, the fraction of agricultural loans in the total loan portfolio has been relatively stable over the last several years at about 11-12 percent (Figure 10). The decline of new loans to agriculture is related to the demise of the GCU and the large stock of agriculture-related nonperforming loans. During 1997-98, personal loans represented a sizable fraction of the loan portfolio—more than 23 percent—but this increase was also largely related to the reexport trade.

Figure 10.
Figure 10.

The Gambia: Distribution of Credit by Commercial Banks, December 1985-December 1998

(In percent of total)

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A004

103. Despite the efforts made in settling the issue of bad debts burdening the banking system and enforcing the prudential regulations of the CBG, nonperforming loans still constitute a sizable fraction of bank portfolios. At end-1998, nonperforming loans accounted for 22½ percent of total bank loans, although for the individual banks the amounts ranged from 3 percent to 53 percent (Table 12). More than 90 percent of the nonperforming loans were over a year past due and more than one-third of the total portfolio was accounted for by the D 45 million bad debt of the now defunct GCU to the SCBG. Almost ¾ of all bad debts are in distributive trade (commerce) and agriculture. Of the agricultural sector nonperforming loans, more than 90 percent are accounted for by the bad debt of the ex-GCU. However, the amount of bad loans to commerce as a proportion of total loans is in line with the share of new loans to the sector (Figure 10), while the proportion of nonperforming loans to agriculture is much higher than the share of fresh loans to the sector. That is, at end-1998, the old nonperforming agricultural loans remained a major burden for the banking system. In early 1999, the authorities reached an important agreement with the SCBG on dealing with the nonperforming loans of the ex-GCU to the SCBG. The agreement envisages that after a substantial write-off, the remaining debt of D 30 million will be settled as follows: D 12 million of the GCU assets would be transferred to the SCBG, the government will make a cash payment of D 5 million to the SCBG in 1999, and the SCBG will get D 13 million in tax credits over 6 years, starting in 1999.

Table 12.

The Gambia: Nonperforming Loans of the Commercial Banks, December 1998 1/

(In dalasis, unless otherwise indicated)

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Sources: The Gambia authorities; and Fund staff calculations.
Figure 11.
Figure 11.

The Gambia: Developments in Output and Prices, 1991/92-1998 1/

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A004

Sources: The Gambian authorities; and staff estimates.1/ Until 1996/97, fiscal years (July-June); from 1997, calendar years.
Figure 12.
Figure 12.

Gambia: External Sector Developments, 1989/90-98

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A004

Source: The Gambian authorities; and Fund staff estimates.1/ Until 1996/97, fiscal years (July-June); from 1997, calendar years.
Figure 13.
Figure 13.

Gambia: Exchange Rate Developments, January 1988-August 1998

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A004

Source: IMF, Information Notice System.
Figure 14.
Figure 14.

Gambia: Fiscal Developments, 1989/90-98 1/

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A004

Source: The Gambian authorities; and Fund staff estimates.1/ Until 1996/97, fiscal years (July-June); from 1997, calendar years.
Figure 15.
Figure 15.

The Gambia: Monetary Developments, 1991/92-1998 1/

Citation: IMF Staff Country Reports 1999, 071; 10.5089/9781451815399.002.A004

Sources: The Gambian authorities; and staff estimates.1/ Until 1996/97, fiscal years (July-June); from 1997, calendar years.

104. The difficulty in resolving the nonperforming loan issue has focused the attention of the CBG on the importance of full reserve provisioning for ensuring a stable and efficient banking system. Although financial regulations in place required banks to provision for non-accrual credits and potential unforeseen losses, commercial banks reported a significant underprovisioning prior to 1998.48 As of end-1998, commercial banks’ bad loan provisions significantly improved, increasing from 54 percent of required at end-1997 to 90 percent. The improvement is in line with the agreement on full reserve provisioning, reached in December 1998, between the CBG and the commercial banks, which stipulates that by mid-1999 all banks would be fully provisioned.

105. The CBG Act of 1992 introduced reserve requirements for all Gambian financial institutions.49 Required reserves are not remunerated and failure to meet average targets results in a hefty penalty of 5 percentage points above the treasury bill rate for each day of non-compliance. Since June 28, 1998, the required reserve ratios have been unified at 14 percent and interbank deposits have been exempted from the deposit base for the purpose of calculating required reserves. Because of their higher risk and difficulty in monitoring, non-bank financial institutions have higher reserve requirements, as discussed in Section F.

106. Commercial banks are the most important players in the interbank foreign exchange market. Besides the commercial banks, a number of exchange bureaus are engaged in carrying out foreign exchange operations. Since 1986, the dalasi has floated freely and the CBG intervenes only to smooth seasonal fluctuations and to maintain its gross official reserve position above five months of import cover. The foreign exchange market is completely liberalized, except that commercial banks are not allowed to accept foreign currency deposits. The authorities are carefully evaluating the issue before making a decision on allowing such deposits. In addition, there is a prudential limit on the amount of foreign exchange that commercial banks can hold; the amount is determined by the CBG on the basis of the banks’ share in the interbank foreign exchange market and their capital. Any amount above the limit must be offered for sale within seven days of the weekly meeting of the foreign currency review committee which is chaired by the CBG and includes representatives of the commercial banks and the foreign exchange bureaus. Compliance with this measure has been satisfactory, although it sometimes makes some banks dependent on short-term credit from their overseas parents or partners in order to meet demand for foreign exchange.

F. The Nonbank Financial Sector

107. After independence, the existing formal banking sector was not adapted to support The Gambia’s development needs or to intermediate foreign donor assistance. As a result, several nongovernmental organizations (NGOs) that had been engaged primarily in projects related to education, health, and agricultural extension services began to promote financial sector development. Despite the success of the NGOs and the efforts of the formal banking system, a significant proportion of the population still lacks access to institutional credit. The inadequate financial infrastructure in rural areas, ultimately determined by large differences in income between urban and rural dwellers,50 as well as by the low average level of income, acts as a barrier for individuals to enter into relationships with formal financial institutions. Thus, microentrepreneurs and individuals who need financing or saving mechanisms have to rely on informal financial arrangements and nonbank financial institutions (NBFIs). With the liberalization of the exchange regime in 1986 under the ERP, the authorities began to create more favorable conditions for the development of the nonbank financial sector, namely the NBFIs (VISACAs, credit unions, and other informal financial clubs and arrangements) and the insurance industry.

108. The VISACA is the most important component of the nonbank financial sector. The VISACA concept was introduced in 1988 under the initiative and financial support of the International Fund for Agricultural Development (IFAD) and the Centre International de Développement et de Recherche through the Jahally-Pacharr Rice Project, with financing provided by the African Development Bank (AfDB), the Kreditanstalt für Wiederaufbau from Germany, and the Government of The Gambia. In the initial stage of the project, three VISACAs were established in the Jahally-Pacharr area. As of end-1998, 47 VISACAs had started operation in The Gambia, supported by six promotors (facilitators) which had been granted the status of NGOs,51 and four more VIS AC As were in the process of being set-up. Under the FIA, a NBFI with paid-up capital of at least D 3,000 that meets certain basic requirements52 is registered as a financial intermediary, while an institution with paid-up capital of at least D 500,000 is registered as a finance company. Currently, only six VISACAs are registered as financial intermediaries (Table 13) and one (The Gambia’s Women’s Finance Association) is registered as a finance company.

Table 13.

The Gambia: Selected Data for Non-Bank Financial Intermediaries, September 1998

(In dalasis, unless otherwise indicated)

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Source: Central Bank of The Gambia.

Data for 25 unregistered VISACAs which have submitted financial statements to the CBG.

109. Under the 1992 FIA, NBFIs are subject to regulatory requirements similar to those established for the formal banking sector. Reserve requirements for the NBFIs, however, are set at 20 percent, higher than the 14 percent unified required reserve ratio for commercial banks. VISACAs must also meet a cash on hand regulation (a more stringent requirement than the liquidity ratio regulation for commercial banks), which stipulates that cash on hand with the NBFI must be not less than 15 percent or more than 40 percent of total deposits. In addition, VISACAs cannot make a loan if it would cause liquid assets to fall below 15 percent of deposit liabilities. Like banks, VISACAs are required to submit financial statements and technical information on a periodic (at least quarterly) basis; as of end-September 1998, 31 VISACAs had statements on file with the CBG.

110. The VISACAs operate on a village basis and membership is automatic, as long as members pays the annual fee of about D 10-20. The village general assembly outlines the broad policy of the VISACA, and elects its management committee, cashiers, and internal auditors. The management committee is responsible for all loan appraisals and subsequent recovery, while cashiers are responsible for the daily bookkeeping activities. The primary function of the VISACAs is to mobilize savings through time and sundry (passbook savings) accounts; however, VISACAs cannot issue checking accounts and are required to pay deposits on demand. Since VISACAs cannot attract medium- or long-term financing, they are able to provide only short-term, retail-size loans. According to CBG estimates, more than one-half of the loans extended by the VISACAs in 1998 were for trading activities and about one-quarter were for personal use, figures roughly comparable to those for the commercial banks. At end-September 1998, loans outstanding for the 31 VISACAs that had submitted financial statements to the CBG, amounted to D 2.2 million, and the loan repayment ratio exceeded 95 percent.

111. The VISACAs’ success built on the basis of several types of informal financial practices to be found in The Gambia, most notably the kafos and the osusus. The kafos are village-based groups whose members have similar characteristics, such as age, gender, ethnicity, or occupation, and typically run small businesses. Kafos mobilize savings and extend emergency assistance to their members; however, they do not provide any financial services, and thus resemble rotating savings and credit associations.53 In 1988, loans extended by the kafos typically ranged in size from D 10 to D 100 at interest rates of 10-60 percent per annum.54 Osusus, on the other hand, are informal savings associations that provide financial services but are unregulated by the CBG. Members pay monthly contributions at regular intervals and in every period some member has the right to take the whole amount of savings.

112. At end-1998, seven insurance companies and four insurance brokers, licensed under the 1974 Insurance Act, operated in The Gambia. All companies are privately owned and operated. Despite the large number of entities, two companies, The Gambia National Insurance Company (GNIC) and GAMSTAR, dominate the industry. In January 1998, as required by the new constitution adopted in 1997, the Commissioner of Insurance was placed under the supervision of the CBG. Under the current law, the companies must submit their annual audited accounts to the CBG; under the proposed revision of the Insurance Act, expected to be implemented in 1999, the companies would also have to submit solvency ratios. Any rate changes in the industry must be approved by the CBG, although staffing constraints do not permit the full and efficient supervision of the sector. As of end-1997, about 50 percent of all outstanding policies were for motor insurance, 20 percent for fire insurance, 14 percent for company accidents, and about 13 percent for marine accidents.

G. Conclusion

113. After more than a decade of reform, the financial system of The Gambia has made limited progress in achieving significant penetration or financial intermediation. Nonperforming loans, although declining, continue to present a persistent problem, and with continuing high real interest rates, credit to the private sector remains constrained. The significant domestic debt buildup, which continued in 1998, provides a strong incentive for commercial banks to hold treasury securities in their portfolios and to finance primarily high turnover, short-term projects. The lack of an interbank market in treasury securities significantly impedes financial development, as banks continue to rely on the CBG for rebalancing their liquidity positions. Therefore, the authorities must aim for sustained fiscal restraint and a significant reduction in domestic debt as the main avenue for improving the macroeconomic environment and creating the conditions for development of the banking system.

114. The authorities must complete the sale of the Trust Bank and carry out their plan for settling the nonperforming debt of the now defunct GCU to the SCBG. Drawing on past experience, prudential regulations on full reserve provisioning must also be enforced in order to avoid a fresh accumulation of substantial nonperforming loans. Streamlining the bankruptcy and liquidation process and the related commercial legislation, and making the commercial chamber in the High Court effectively operational, would improve collection efforts and provide important security needed to encourage private sector lending.

115. The banking system remains highly concentrated. The authorities must take steps to encourage competition, especially from foreign banks, in order to improve the penetration of the banking system and access to institutional credit. At the same time, the CBG should step up the enforcement of the prudential regulations already in place with view to safeguard the soundness of the banking system while ensuring that efficiency is substantially improved.

Table 14.

The Gambia: Gross Domestic Product by Sector at Constant Prices, 1991/92-1998 1/

(In millions of dalasis; at constant 1976/77 prices)

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Sources: The Gambian authorities; and staff estimates.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.

Includes banking and insurance; imputed bank service charges; personal and household services; and social, recreational, and related services.

Table 15.

The Gambia: Gross Domestic Product by Sector at Current Prices, 1991/92-1998 1/

(In millions of dalasis)

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Sources: The Gambian authorities; and staff estimates.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.

Includes banking and insurance; imputed bank service charges; personal and household services; and social, recreational, and related services.

Table 16.

The Gambia: Supply and Use of Resources, 1991/92-1998 1/

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Sources: The Gambian authorities; and staff estimates.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.

Defined as GDP minus consumption.

Table 17.

The Gambia: Savings and Investment Balance, 1991/92-1998 1/

(In percent of GDP)

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Sources: The Gambian authorities; and staff estimates.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.

Consists of both official and private transfers.

Includes public enterprise sector.

Government current expenditure (excluding Gambia Local Fund), less capital component of recurrent budget, plus current component of development budget.

Domestic revenue (excluding capital revenue) less government consumption.

Gross national savings excluding official transfers.

Development expenditure (excluding net lending), plus capital component of recurrent budget, less current component of development budget.

Domestically generated financial balances.

Table 18.

The Gambia: Agricultural Production, 1991/92-1998 1/

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Source: The Gambian authorities.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.

Including double-cropped area.

Including area intercropped with groundnuts.

Table 19.

The Gambia: Minimum Producer Prices for Agricultural Commodities, 1991/92-1998 1/

(In dalasis per ton)

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Sources: The Gambian authorities, The Gambia Cooperative Union, and The Gambia Groundnut Corporation.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.

The producer price for groundnuts was eliminated with effect from the 1989/90 crop season and replaced by a purchase price for the delivery of groundnuts to the buying depots.

Table 20.

The Gambia: Indicators of Tourism Activity, 1991/92-1998 1/

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Source: Tthe Gambian authorities.

Until 1996/97, fiscal years (July-June); from 1997, calendar years. Indicators refer to air charter tourists.

Amount spent in The Gambia; excludes the cost of package tours.

Table 21.

The Gambia: Energy Statistics, 1991/92-1998 1/

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Sources: The Gambian authorities; and the National Water and Electricity Company Ltd.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.

January-June 1998 figures.

Table 22.

The Gambia: Overall Consumer Price Index for Low-Income Households in Banjul and Kombo St. Mary, January 1991-December 1998

(Base year 1974=100)

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Source: The Gambian authorities.

Based on calendar years.

Based on the old fiscal years (July-June).

Table 23.

The Gambia: Public Sector Wage Scale, 1991/92-1998 1/

(In dalasis per year)

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Source: The Gambian authorities.

Until 1996/97, fiscal years (July-June); from 1997, calendar years.