Senegal: Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
20 Aug 2000
eISBN:
9781451833850
Language:
English
Keywords:
ISCR; CR; Senegal; CFA franc; service sector; enterprise; recovery institution; definition result; portfolio risk structure; prudential liquidity ratio; Credit; Liquidity management; Financial sector
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Public consumption has declined from 12 percent of GDP in 1996 to 10.8 percent in 1999 owing to fiscal consolidation: wage increases are moderate, and other current expenditures have grown slowly. Conversely, private consumption has increased from 75.2 percent of GDP in 1996 to 76.9 percent in 1998, and is estimated to have reached 76.6 percent in 1999. Public investment has increased from 6.4 percent of GDP in 1996 to 7.2 percent of GDP in 1998 and is estimated to have reached 8.2 percent of GDP in 1999, whereas private investment has experienced a downward slide.

Abstract

Public consumption has declined from 12 percent of GDP in 1996 to 10.8 percent in 1999 owing to fiscal consolidation: wage increases are moderate, and other current expenditures have grown slowly. Conversely, private consumption has increased from 75.2 percent of GDP in 1996 to 76.9 percent in 1998, and is estimated to have reached 76.6 percent in 1999. Public investment has increased from 6.4 percent of GDP in 1996 to 7.2 percent of GDP in 1998 and is estimated to have reached 8.2 percent of GDP in 1999, whereas private investment has experienced a downward slide.

IV. The soundness of the Senegalese financial sector19

A. Overview

56. The health of Senegal’s financial sector improved significantly over the last decade. In response to a deep financial crisis caused by economic deterioration and mismanagement in the 1980s, Senegal implemented a wide-ranging financial sector-restructuring program between 1989 and 1991. Six banks were closed, the nonperforming assets were consolidated by the Banque Centrale des Etats d’Afrique de l’Ouest (BCEAO), and a loan recovery institution, the Societe Nationale de Recouvrement (SNR), was set up in 1991 to streamline the recovery of nonperforming loans.20 Despite this financial restructuring, the financial sector remained weak prior to the January 1994 CFA franc devaluation, owing to loan repayment difficulties, low demand for credit, and a decline in bank deposits in anticipation of an exchange rate devaluation.21

57. Following the exchange rate adjustment, the health of the banking sector improved somewhat as confidence was restored and the economic situation became more buoyant. The banking sector at that time experienced a surge in liquidity as a result of strong capital inflows, combined with an initial weak demand for credit. After 1996, this excess liquidity dried up progressively as Senegal’s economic recovery took hold and the number of creditworthy projects increased; meanwhile, the growth in deposits remained more moderate. The profitability of the banks was consequently strengthened, and the banking environment became more attractive. Indeed, a new bank was established in February 1999, the first since 1989.22 According to banking sources, the main difficulty encountered by the banking sector now is the absence of a prompt and impartial application of the existing legal framework by the judiciary.

58. The observance of the key prudential ratios by the financial sector has improved slightly in recent years (see Table 2).23 The Banque Senegalo-Tunisienne (BST), the only bank not meeting the minimum capital requirement and the capital adequacy ratio at end-1998, was recapitalized and privatized in March 1999 and is now considered viable. At end-1998, one bank, in addition to the BST, did not meet the liquidity ratio and another did not meet the insider-lending ratio. In 1999, the regional banking commission required two banks to comply with the prudential norm and put one nonbank financial institution under temporary administration.

Table 2.

Senegal: Key Prudential Ratios by Bank, 1992-98

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Sources: BCEAO; and Commission Bancaire.

The BIS resumed operations in October 1996.

Ecobank was established in 1999.

The prudential liquidity ratio does not apply to the NBFIs.

SENINVEST was established in 1993.

59. The Senegalese financial sector consists often commercial banks, five nonbank financial institutions (NBFIs),24 and a number of formal and informal microfmance institutions. The capital of commercial banks and NBFIs is mainly private owned, even if the public sector holds more than 25 percent of the capital of four commercial banks.25 At end- June 1999, the total assets of the banks and NBFIs amounted to CFAF 633.7 billion, while the total capital amounted to CFAF 27.2 billion, with the banking sector accounting for 98 percent of the total assets and 88 percent of the capital. The 320 registered microfinance institutions have grown significantly over the past several years, with a total credit outstanding at end-1998 of CFAF 14.1 billion—equal to 3 percent of the total credit outstanding of the formal sector—and total deposits of CFAF 9.8 billion. There is also a large number of informal savings groups.26

60. Section B will discuss the reform of prudential norms adopted in 1999 and its impact on the observance of prudential ratio by Senegalese banks; Section C will briefly assess the soundness of Senegal’s banking sector.27

B. The Reform of Prudential Norms

61. In July 1999, the WAMU28 Council of Ministers adopted a new set of prudential ratios for commercial banks and NBFIs of the union, driven by four key objectives: (i) to incorporate recent changes in international norms regarding banking supervision; (ii) to strengthen the protection of depositors; (iii) to take financial innovations into consideration; (iv) and to harmonize the prudential measures with the new general accounting plan (SYSCOA) that has been implemented since 1996.

62. Regulations pertaining to registered microfinance institutions have not been changed. In Senegal, the government recognizes credit unions (mutuelles) –cooperatives that belong to their members – and local savings institutions (caisses d’épargne et de crédit). The regulation of the credit unions is being developed in the context of a regional initiative to establish a common system of registration and regulation, including prudential norms, and various deposit insurance mechanisms are being considered. The local savings institutions do not benefit from any deposit insurance mechanisms and are subject to a less strict set of regulatory norms. The numerous small financial institutions, such as village associations (groupements), operate without formal government recognition.

63. The reform of prudential norms for banks and NBFIs covers not only the definition of the capital base but also the thresholds and the mode of calculation of the ratios. The definition of the capital base, which was previously limited to core capital,29 has been broadened in line with the recommendations of the Basel Committee for Banking Supervision and now includes supplementary capital. The reform includes modifications of almost half of the thresholds (see Box 2). Notably, in line with the broadening of the capital base definition, the minimum requirement for the capital adequacy ratio has been increased from 4 percent to 8 percent. Moreover, in order to better distinguish among high, medium, and low risks, the weights used in calculating the capital adequacy ratio have been modified (see Box 3). Additional technical amendments have also been introduced regarding the regulation of insider lending and the mode of calculation of the liquidity ratio and of the coverage of medium-and long-term liabilities by medium-and long-term assets ratio. These new prudential ratios came into effect in January 2000, but a two-year transition period for meeting the capital adequacy ratio was granted to the banks.

64. To evaluate whether the modifications in financial regulations have strengthened banking surveillance, the BCEAO made preliminary simulations based on the new key prudential ratios for Senegal’s banking system. These simulations30 indicate that (i) the new definition of the capital base involves a slight decrease of the overall banking system’s capital base, (ii) the regulation on the capital adequacy ratio has been tightened through combined effects (see below), and (iii) the requirements for liquidity and for coverage of medium-and long-term liabilities by medium-and long-term assets may not have been strengthened.

Banking Sector Prudential Norms - Old and New Thresholds

The minimum capital requirement has been left unchanged at CFAF 1 billion for a commercial bank and CFAF 300 million for a NBFI.

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New Weights Used in Calculating the Capital Adequacy Ratio

Bank assets have different degrees of exposure to credit risk. The risk weighting is intended to reflect default probabilities for each category of risk.

After the reform of the prudential norms, the balance sheet and off-balance-sheet risks for the calculation of the capital adequacy ratio of the WAMU banks and NBFIs are weighted mainly as follows:

  • A risk weight of 0 percent applies mainly to:

    • - cash and its equivalent; and

    • - bills and loans to governments, public entities, and central banks.

  • A risk weight of 20 percent applies mainly to:

    • - bills and loans guaranteed by governments, public entities, and central banks; and,

    • - lending to banks and other financial institutions and bills issued by banks and other financial institutions or guaranteed by them.

  • A risk weight of 50 percent applies mainly to:

    • - loans secured by mortgage on properties; and,

    • - credits benefiting from an accord de class ement of the central bank

  • A risk weight of 100 percent applies to all other assets

Compared with the old weighting system, the main changes are the following:

  • - The lending to, and bills issued by, financial institutions, which are now weighted at 20 percent, were previously weighted at 50 percent.

  • - Credits benefiting from an accord de classement of the central bank, which are now weighted at 50 percent, were previously weighted at 65 percent.

  • - Securities without conveyance, which are now weighted at 50 percent, were previously weighted at 100 percent.

A two-year grace period for meeting the capital adequacy ratio has been granted to the financial sector.

65. According to the preliminary simulations, the mechanical impact of the introduction of a new capital base definition results in a slight decrease of about 5 percent of the overall banking system capital base. The absence of a supplementary capital base in the banks and the exclusion in the new capital base definition of grants given to bank branches explain this drop. Two banks experienced a decline in their capital base, while it remains broadly unchanged in the other banks.

66. The new regulation results in a strengthening of the capital adequacy ratio requirement.31 The new weighting system leads to a decrease of the risk-weighted value of the loan portfolio for almost all of Senegal’s banks because of the lower risk assigned to several claims (see Box 3). Because the risk-weighted assets (denominator) generally decrease while the capital base (numerator) contracts only slightly, the capital adequacy ratios of nine of the ten banks improve mechanically under the new regulation; the ratio for the entire banking system becomes 11.4 percent, versus 10.8 percent under the previous regulation (Table 3). With the increase of the floor to 8 percent, three banks do not meet the new requirement, whereas none failed to meet it under the previous regulation.

Table 3.

Senegal: Key Prudential Ratios of the Senegalese Banking System Under Previous and New Regulations

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Sources: BCEAO; and staff calculations.

67. Under the new regulation, the liquidity requirements for the banks remain broadly constant. The increase in the required floor for the liquidity ratio32 (from 60 percent to 75 percent) is offset by the mechanical rise of the ratio resulting from the new definition. Indeed, the contraction implied by the new weights used in the calculation is larger in current liabilities (denominator) than in short-term assets (numerator). Consequently, the liquidity ratio of the overall banking system rises from 62.8 percent to 77.4 percent and remains slightly above the requirement, as under the previous regulation. Three banks do not meet the new liquidity ratio, versus four under the previous regulation.

68. The new regulation has no significant impact on the coverage of the medium- and long-term liabilities by medium- and long-term assets, as the ratio remains at about 58 percent for the overall banking system. Four banks do not meet the requirement of 75 percent, the same as under the previous regulation.

69. The slight tightening of the prudential ratios might, however, not be sufficient to ensure the soundness of the banking system. Recent studies on banking regulation in developing countries (e.g., Honohan, 1997) and in WAMU countries (Laurin, 1999) suggest that even tighter regulations should be adopted. For instance, these studies point out that the capital requirements for risky assets adopted by industrial countries and endorsed by the Basel Committee were calibrated for those countries whose economies are generally large and not too vulnerable to exogenous shocks. However, these capital requirements appear to be inadequate for most developing countries. Therefore, numerous developing countries have decided to adopt a capital adequacy ratio higher than the 8 percent recommended internationally.33 Furthermore, these studies consider the application of a zero-risk-weighting scheme to government debt to be questionable for developing countries. Finally, although the WAMU has now endorsed the “octuple rule,”34 the single-debtor limitation, at 15 percent of the capital base, remains significantly higher than the Basel recommendation of 25 percent.35

C. The Soundness of the Senegalese Banking System

70. The evaluation of Senegal’s banking system is mixed. On the one hand, the banking system appears to be sound, with a diversified portfolio, significant profits, and the share of nonperforming loans kept under control. On the other hand, its impact on growth and income redistribution remains below potential because of a lack of depth and insufficient supply of long-term loanable funds.

71. Senegal’s banking portfolio is increasingly diversified, and its exposure to the public sector is not worrisome, with the bulk of the claims directed at the private sector. In September 1999, the exposure of commercial banks to the public sector was limited to 14.7 percent of domestic credit. Also, the loan portfolios of commercial banks in Senegal are relatively diversified, compared with commercial banks in Mali, Burkina Faso, or Benin, where there is a very high concentration of loans to the cotton sector, or, to a lesser extent, with banks operating in Cote d’lvoire, where there is a high exposure to the cocoa sector. The groundnut sector is no longer predominant in the portfolio of Senegalese banks sector because of (i) the contraction of groundnut production (2.8 percent of GDP in 1998), and (ii) a structural decline in the bank financing of the groundnut company (SONACOS), which now essentially issues its own commercial paper on the regional market instead of relying on bank financing. In fact, most of the credits to the private sector are granted to the tertiary sector (53.5 percent in June 1999), which consists of a wide array of activities not obviously interlinked or, as a group, likely to suffer from a terms of trade shock.

72. Since the CFA franc devaluation of 1994, the profitability of Senegal’s banking sector has been restored. The profitability ratio (profits/capital) reached 23 percent at end-1996 and 24 percent at end-1997, but fell to 15.5 percent at end-1998 because of the need to make substantial provisions. Senegal’s banking system, together with those of Benin and Burkina Faso, was the most profitable among the WAMU countries over 1996-98, reflecting the wide margin between deposit and lending interest rates (about 10 percent) resulting from the lack of competition in the sector.

73. According to figures provided by the commercial banks, nonperforming loans seem to remain manageable. At end-June 1999, the level of gross nonperforming loans represented 19.8 percent of total credit outstanding, while the net ratio amounted to 7.6 percent. While those ratios are slightly higher than the WAMU average (respectively, 18.9 percent and 5.9 percent), they represent a significant improvement from the end of the 1980s, when the value of nonperforming loans was estimated at half of total outstanding credit (Lewis, 1997).

74. Overall, however, the financial sector in Senegal remains underdeveloped, and financial intermediation is still inadequate. Although deposits in the banking system increased recently (18.1 percent of GDP at end-1999), they have just recovered the level of 1991 (17.7 percent of GDP) and compare unfavorably with those of other members of WAMU. The high level of deposits held abroad partially explains this lack of financial depth and indicates that confidence in the Senegalese banking system has not yet been totally restored (Lewis, 1997).

75. Senegalese commercial banks tend to grant essentially short-term loans (56 percent of total credit disbursed at end June-1999) and, to a lesser extent, medium-term loans (26.8 percent); clients continue to face difficulties in obtaining long-term financing. For commercial banks, the immediate obstacle to increasing long-term lending seems not to be the access to long-term loanable funds (about half of the deposits are time deposits), but difficulties in collecting on claims and enforcing guarantees. The legal code regulating the financial sector appears to be appropriate and has been improved recently through the regional initiative of business law harmonization (OHADA); the main problems concern the prompt and impartial application of the existing legal framework by the judiciary. According to banking sources, the application of the law is biased in favor of debtors. Therefore, the cost of financial intermediation is increased, which has a negative impact on the profitability of investments.

References

  • UEMOA, Projet de texte relatif au dispositif prudentiel applicable aux banques et aux établissements financiers de I’UEMOA à compter du ler janvier 2000, June 1999

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  • Laurin, Alain, 1999, “La supervision bancaire dans I’UMOA”, (unpublished, Washington: World Bank).

  • Honohan, Patrick, 1997, “Banking System Failures in Developing and Transition Countries: Diagnosis and Prediction”, BIS Working Papers No.39, (Basel, Switzerland: Bank for International Settlements).

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  • Lewis, Mark, “Financial Sector Developments and Financial Deepening in Senegal, 1989-96”, in Senegal - Selected Issues and Statistical Appendix IMF Staff Country Report, No. 97/94, by David T. Coe and others (Washington: International Monetary Fund).

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19

Prepared by Vincent Caupin.

20

At end-June 1999, the amount of claims recovered reached CFAF 46.3 billion (at end-1990, the amount of nonperforming assets was estimated at CFAF 291 billion, of which CFAF 54 billion was to be met through loan recovery). CFAF 29.3 billion was reimbursed to depositors, a little more than half of the stock of outstanding frozen deposits of CFAF 54.8 billion.

21

Bank deposits fell froml7 percent of GDP in 1992 to 15.1 percent in 1993; meanwhile, according to Bank for International Settlements figures, deposits of Senegalese held abroad rose from about US$500 million in 1992 to about US$600 million in 1993.

22

For future years, opening of new banks, and hence competition in the banking market, might be facilitated by the zone-wide licensing agreement adopted at the WAEMU regional level in 1999.

23

The figures used here are those provided on a regular basis by banks and NBFIs to the BCEAO. The regional banking commission, which undertakes an on-site visit of each bank and NBFI normally every other year to audit the accounts, can recommend some balance sheet adjustments (notably, further provisions).

24

Three large banks, five other nonspecialized banks, two specialized banks (agriculture and housing), two leasing institutions and three investment companies.

25

The public sector holds the majority of the capital of the Caisse Nationale de Credit Agricole du Senegal (CNCAS).

26

Senegal has a long tradition of local mutual savings institutions modeled on rotating savings club (tontines), in which members contribute a fixed amount to a common fund that is then lent in sequence to each member.

27

Senegal will be subject of the Financial Sector Assessment Program, under which a more detailed analysis on the subject will be provided.

28

The West African Monetary Union (WAMU) groups Senegal, Benin, Burkina Faso, Cote d’lvoire, Guinea Bissau, Mali, Niger, and Togo. Monetary policy and financial sector surveillance are conducted at the regional level.

29

The Basel Committee recommends dividing the total capital in two tranches: the core capital and the supplementary capital, also respectively called tier-1 and tier-2 capital.

30

These simulations concern the capital base, the capital adequacy ratio, the liquidity ratio, and the coverage of medium- and long-term liabilities by medium- and long-term assets. No simulations have been done for the other ratios and for the NBFIs. The discussion here will consequently focus on commercial banks.

31

The capital adequacy ratio is the quotient of the capital base (numerator) to the risk weighted assets (denominator).

32

The liquidity ratio compares short-term assets to current liabilities.

33

Moreover, the recommendation from the Basel Committee to adjust the required level of the capital base to the risk profile of the banks has not been taken into account in the WAMU reform.

34

According to the new regulation, the combined amount of loans representing more than 25 percent of the capital base cannot exceed eight times that base. Nevertheless, the octuple rule usually concerns loans representing more than 15 percent of the capital base.

35

This recommendation is already considered a minimum, and several countries are planning to reduce the limit to 15 percent.

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Cover IMF Staff Country Reports
Senegal: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 2000: Issue 091
Publisher:
International Monetary Fund
ISBN:
9781451833850
ISSN:
1934-7685
Pages:
126
DOI:
https://doi.org/10.5089/9781451833850.002