Gabon: Selected Issues

International Monetary Fund

doi:10.5089/9781451813999.002.A003

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Gabon: Selected Issues

Author: International Monetary Fund

Publication Date:: 20 Jun 2006

eISBN:: 9781451813999

Language:: English

Keywords:: ISCR; CR; price; fuel price subsidy; Gabon; loan portfolio; bank assets; credit-risk monitoring; default probability; bank capital; Credit; Loans; Commercial banks; Bank credit

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Efficiency and equity reasons suggest placing a high priority on ensuring that fiscal policy is on a sustainable path. This chapter has sought to estimate the sustainable long-term non-oil primary deficit and the optimal adjustment path toward that level. The banks’ inability to monitor effectively the quality of their loan portfolios, paired with the high interest-rate floor on deposits, are key factors behind the very low degree of financial intermediation. The reform of fuel price subsidies in Gabon is necessary to facilitate pro-poor economic growth.

Abstract

III. Why Do Banks Not Want to Be Banks? Credit Growth and Socio-Economic Development in Gabon ²⁰

Capital is nothing but the lever by which the entrepreneur subjects to his control the concrete goods which he needs, nothing but a means of diverting the factors of production to new uses, or of dictating a new direction to production.
—Joseph A. Schumpeter (1912)²¹

A. Introduction

Gabon’s financial sector is shallow even by regional standards, and banks appear to be withdrawing further from core activities. Notwithstanding an increased availability of funds, credit to the private sector declined from a peak of 13.2 percent of GDP in 2002 to 9.0 percent in 2005 (or, respectively, from 22.6 to 19.0 percent of non-oil GDP). Excess liquidity has been transferred, in part in violation of regional prudential regulations, to correspondent banks outside the Communauté économique et monétaire de l’Afrique centrale (CEMAC). Even though these assets earn a relatively low rate of return, the net foreign asset position of commercial banks has increased by 4.7 percentage points, from -0.3 percent of GDP in 2002 to 4.4 percent in 2005. On the liability side as well, banks continue to enforce restrictions on minimum deposits and/or depositors’ minimum income as a means of limiting financial services to a few “trusted” enterprises, public-sector employees, and expatriates.

The realization of Gabon’s (2006) socio-economic development objectives hinges on private-sector investments at the scale required to increase total factor productivity and, hence, the country’s non-oil growth potential. This presupposes an economic environment in which banks have enough confidence to deepen financial intermediation and extend more credit to the private sector. The limited access to bank credit in sub-Saharan Africa—especially in the CEMAC zone—is one important factor explaining the generally disappointing growth performance. This is a particularly pertinent challenge for Gabon, where real per capita GDP has declined by 17 percent over the past decade, reflecting both the reduction in oil production and anemic growth in the non-oil sector.

This paper aims at identifying the principal obstacles that have precluded the deepening of financial intermediation and limited the access to credit by small and medium-sized enterprises. In seeking to explain the main reasons behind the resistance of Gabonese banks to expand credit to the economy, a simple model is proposed, in which banks maximize profits over monitoring, which is costly. The banks’ caution is thus explained by the declining interest-rate spread between deposits and loans and the banks’ inability to accurately appraise the quality of their loan portfolios.

The remainder of the chapter is organized as follows. Section B identifies critical issues and surveys the literature on the link between financial markets and growth. Section C summarizes financial-sector developments in Gabon. Section D presents the analytical framework and derives a relationship between credits and the credit/deposit interest-rate differential. On that basis, Section E discusses policy measures that promise to increase access to credit, a key ingredient to Gabon’s economic reforms that seek to accelerate economic diversification and foster socio-economic development.

B. Financial Intermediation and Growth

Financial development is a robust leading indicator of long-term economic growth. An extensive literature has analyzed the link between financial depth and economic development—as well as empirical tests of the presumed causality between both variables.²² In extending the results of Goldsmith (1969), McKinnon (1973), and Shaw (1973), who stress the importance of functioning financial markets for the real sector, King and Levine (1993a, 1993b) find strong empirical evidence of financial depth inducing long-term economic growth. They show that “better financial systems stimulate faster productivity growth and growth in per capita output by funneling society’s resources to promising productivity-enhancing endeavors” (1993b). For developing countries, Jalilian and Kirkpatrick (2005) confirm these results, demonstrating that “poorer developing countries will gain most from the growth and development of the financial sector.” Within countries, Beck et al. (2004) find that financial development is “pro-poor” as it raises the income of the more disadvantaged segments of society disproportionately.

Lack of access to credit can account for long-term stagnation. Rioja and Valev (2004) caution that growth effects from deepening financial intermediation are likely to occur only if banks reach a certain level of development, which they define as a ratio of private credit to GDP of at least 14 percent. Their result supports Saint-Paul’s (1992) hypothesis of multiple equilibria in financial markets, “with the economy staying either at a ‘low’ equilibrium with underdeveloped financial markets and little division of labour, or a ‘high’ equilibrium with strong financial markets and an extensive division of labour,” which “may account for the persistence of GNP level and growth rate differences between countries.” Campos and Coricelli (2002) survey the “credit crunch” literature for transition economies, which has shown that an initial shortage in private-sector loans can lead to a “bad equilibrium” with persistently low output.

Heavy-handed regulation often hampers the development of the banking system in developing countries. In an environment of “financial repression” (Agénor and Montiel 1999), banks are typically required to maintain high reserve and liquidity ratios, while being bound by legal ceilings on interest rates. For some countries in sub-Saharan Africa, Gulde- Wolf et al. (2006) confirm that interest-rate controls adversely affect deposit-taking and lending. Together with legal and institutional weaknesses, these controls are seen as important reasons behind the underdevelopment of the financial sector in most countries of sub-Saharan Africa. Sacerdoti (2005) cites an unsupportive institutional framework as principal reason as to why banks in this region—even though they have the resources—remained hesitant in extending credit to the private sector. In particular, he identifies inadequacies in (i) information on borrowers; (ii) laws governing the enforceability of claims and property rights; and (iii) collateral and real-estate registration.

The situation in the CEMAC zone is even more critical (Figure III.1)(Table III.1): financial depth is not only being shallow but stagnant in periods of accelerating growth and improved macroeconomic balances. In analyzing financial developments within the CFA franc zone as a whole, Claveranne (2005) cites as principal reasons for the underdeveloped banking system the generally low incomes and the fact that more than 60 percent of households participate in the informal sector, which does not offer the minimal securities that banks require to open an account. Christensen and Fischer (2005) refer to (i) the oligopolistic market structure in the CEMAC zone; (ii) the volatility in bank liabilities (given the high ratio of demand deposits and the effects of fluctuating oil prices); and (iii) structural impediments²³ as a possible reasons for the shallowness of the financial sector.

Table III.1.

Sub-Saharan Africa and Transition Economies: Degree of Financial Intermediation

^¹In current U.S. dollars, Atlas method. Source: World Bank, World Development Indicators 2005.

^²Source: IMF, World Economic Outlook database

^³Weighted by population; definition of regional groups as in Figure III.1.

Table III.1.

Sub-Saharan Africa and Transition Economies: Degree of Financial Intermediation

				Per capita	Credit to the Economy²		Broad Money²
				GNI, 2004¹	2001	2005	2001	2005
Sub-Saharan Africa³				608	16.9	19.3	25.8	28.7
	CFA franc zone³			832	12.6	14.4	22.4	24.8
		CEMAC zone³		738	7.8	7.6	14.3	14.9
			Gabon	3,940	12.2	9.0	16.4	17.7
Central Europe and Baltic countries³				7,067	30.7	36.3	32.7	27.0
South-Eastern Europe³				3,103	19.6	32.2	23.9	29.8
Other countries of the former Soviet Union³				2,588	15.7	27.3	9.4	16.3

^¹In current U.S. dollars, Atlas method. Source: World Bank, World Development Indicators 2005.

^²Source: IMF, World Economic Outlook database

^³Weighted by population; definition of regional groups as in Figure III.1.

Table III.1.

Sub-Saharan Africa and Transition Economies: Degree of Financial Intermediation

				Per capita	Credit to the Economy²		Broad Money²
				GNI, 2004¹	2001	2005	2001	2005
Sub-Saharan Africa³				608	16.9	19.3	25.8	28.7
	CFA franc zone³			832	12.6	14.4	22.4	24.8
		CEMAC zone³		738	7.8	7.6	14.3	14.9
			Gabon	3,940	12.2	9.0	16.4	17.7
Central Europe and Baltic countries³				7,067	30.7	36.3	32.7	27.0
South-Eastern Europe³				3,103	19.6	32.2	23.9	29.8
Other countries of the former Soviet Union³				2,588	15.7	27.3	9.4	16.3

^¹In current U.S. dollars, Atlas method. Source: World Bank, World Development Indicators 2005.

^²Source: IMF, World Economic Outlook database

^³Weighted by population; definition of regional groups as in Figure III.1.

C. Banks in Gabon

The reaction of Gabon’s six commercial banks to the recent increase in liquidity reveals the existence of underlying structural problems. In the absence of a supporting infrastructure (e.g., money and debt markets) and unable to lend to the country’s most important sector (oil companies mostly finance themselves outside the country), financial institutions in Gabon have traditionally focused on a narrow segment of business (IMF 2002). The increased availability of funds, largely a reflection of high international oil prices (Figure III.2), but also because of the government’s clearance of domestic arrears, has accentuated the very cautious approach that banks have taken in Gabon. In response to the average CFAF 77.4 billion increase in deposits between 2002-03 (when oil prices were relatively stable) and 2004-05 (when oil prices increased significantly), banks bolstered their net foreign asset positions by CFAF 97 billion. The assets are mostly low-risk, low-interest correspondent accounts held at parent banks outside the CEMAC zone.²⁴ At the same time, financial institutions felt the need to reduce their loan portfolios, from an average CFAF 430.0 billion in 2002-03 (or 53.4 percent of total assets) to CFAF 390.7 billion in 2004-05 (44.7 percent). As a result, credit to the private sector in Gabon, as a share of GDP, has declined to less than half the average of countries in sub-Saharan Africa (Table III.2). After the relatively stable period of 2002-03, increased oil prices caused a noticeable changes in bank behavior during 2004-05 (Figure III.3).

Table III.2.

Gabon: Commercial Bank Behavior, 2002/03 - 2004/05

Source: BEAC; and staff estimates.

Table III.2.

Gabon: Commercial Bank Behavior, 2002/03 - 2004/05

	Averages		Averages		Averages		Averages
	2002-03	2004-05	2002-03	2004-05	2002-03	2004-05	2002-03	2004-05
	(Billions of CFA francs)		(Percent of total assets)		(Percent of GDP)		(Percent of non-oil GDP)
Deposits	532.6	610.0	69.5	65.2	15.3	14.3	26.3	28.2
Net foreign assets Credits to the economy	26.2	123.2	3.4	12.8	0.8	2.8	1.3	5.7
Credits to the economy	430.0	390.7	56.1	42.2	12.3	9.2	21.2	18.1

Source: BEAC; and staff estimates.

Table III.2.

Gabon: Commercial Bank Behavior, 2002/03 - 2004/05

	Averages		Averages		Averages		Averages
	2002-03	2004-05	2002-03	2004-05	2002-03	2004-05	2002-03	2004-05
	(Billions of CFA francs)		(Percent of total assets)		(Percent of GDP)		(Percent of non-oil GDP)
Deposits	532.6	610.0	69.5	65.2	15.3	14.3	26.3	28.2
Net foreign assets Credits to the economy	26.2	123.2	3.4	12.8	0.8	2.8	1.3	5.7
Credits to the economy	430.0	390.7	56.1	42.2	12.3	9.2	21.2	18.1

Source: BEAC; and staff estimates.

Similar to other CEMAC countries, banks in Gabon have trouble monitoring the quality of their loan portfolio. The regional supervisory agency, the Commission bancaire de l’Afrique centrale (COBAC 2006a), reports that 14.3 percent of credits outstanding at end-December 2005 are problem loans, as compared to 15.8 percent in 2004 and 13.8 percent in 2003 (Table III.3).²⁵ These difficulties—paired with the banks’ preference to finance current-account operations of large enterprises, traders, and distribution companies rather than investment projects—result in the gradual trend increase of the relative share of shortterm credits. In 2005, almost 61 percent of all outstanding credits were short term and only 6 percent long term.²⁶The corresponding figures for 2002-03 are 57 and 4 percent, respectively. More than one-half of all loans support the activities of enterprises in the tertiary sector, with the largest increases being in trade in construction materials and services in transport and enterprise support showing the largest increases. True investment activities were financed mainly in certain sectors of mining, agriculture and, particularly, the processing of wood for non-furniture commodities. In essentially all other sectors of the economy, most notably in forestry, banks provided substantially fewer credits in 2004-05 than in 2002-03 (Table III.3). After difficulties with non-performing loans in the high-risk forestry sector, commercial banks have decreased their loan exposure to this sector from more than CFAF 69 billion (11.9 percent of all outstanding credits) in 2002 to around CFAF 17 billion (4.2 percent) in 2005. This reduction of almost CFAF 52 billion in credits to the forestry sector—most prominently by the largest bank—explains 31 percent of the entire reduction in credit to the economy.

Table III.3.

Commercial Banks’ Credit Portfolios, 2002-05

(Billions of CFA francs; unless otherwise indicated)

Source: COBAC * and BEAC. Difference on total amounts of credits to the economy between COBAC and BEAC are due to classification differences.

Table III.3.

Commercial Banks’ Credit Portfolios, 2002-05

(Billions of CFA francs; unless otherwise indicated)

							2002	2003	2004	2005
Credits (gross) *							553.0	503.8	463.1	473.2
		Problem loans					63.0	69.7	73.0	67.8
				in percent of total credits			11.4	13.8	15.8	14.3
		Provisions					41.9	54.9	57.2	54.4
	Credits (net)						511.2	379.1	333.0	351.0
Credits (gross) *							553.0	503.8	463.1	473.2
	Government						59.4	52.3	39.1	31.3
	Public enterprises						14.2	9.5	16.6	7.7
	Private sector						466.5	431.2	376.2	424.7
				in percent of total credits			84.4	85.6	81.2	89.8
	Non-residents						3.5	6.1	25.6	3.3
	Other						9.4	4.7	5.6	6.1
	Credit to the economy (in percent)						100.0	100.0	100.0	100.0
			Short term				59.0	55.7	54.3	60.6
			Medium term				39.4	38.3	39.4	33.3
			Long term				1.5	6.0	6.3	6.1
	Credit to the economy (in percent)						100.0	100.0	100.0	100.0
			Primary sector				17.1	14.9	9.8	10.0
					Of which:wheat, fruit, vegetables		0.3	0.4	0.7	1.1
					Of which:forestry		11.9	11.5	6.7	4.2
					Of which:mining		0.0	0.4	0.5	0.8
			Secondary sector				13.6	10.5	12.1	15.7
					Of which:non-furniture wood		2.0	0.8	5.9	6.9
			Tertiary sector				69.3	74.6	78.1	74.4
					Commerce		16.7	18.9	18.6	23.0
						Of which:construction materials	0.4	0.3	0.3	3.2
					Services		52.6	55.7	59.5	51.4
						Of which:transport	1.3	1.4	2.2	3.1
						Of which:telecommunications	1.4	1.9	3.6	2.5
						Of which:enterprise support	8.2	9.2	13.1	14.1

Source: COBAC * and BEAC. Difference on total amounts of credits to the economy between COBAC and BEAC are due to classification differences.

Table III.3.

Commercial Banks’ Credit Portfolios, 2002-05

(Billions of CFA francs; unless otherwise indicated)

							2002	2003	2004	2005
Credits (gross) *							553.0	503.8	463.1	473.2
		Problem loans					63.0	69.7	73.0	67.8
				in percent of total credits			11.4	13.8	15.8	14.3
		Provisions					41.9	54.9	57.2	54.4
	Credits (net)						511.2	379.1	333.0	351.0
Credits (gross) *							553.0	503.8	463.1	473.2
	Government						59.4	52.3	39.1	31.3
	Public enterprises						14.2	9.5	16.6	7.7
	Private sector						466.5	431.2	376.2	424.7
				in percent of total credits			84.4	85.6	81.2	89.8
	Non-residents						3.5	6.1	25.6	3.3
	Other						9.4	4.7	5.6	6.1
	Credit to the economy (in percent)						100.0	100.0	100.0	100.0
			Short term				59.0	55.7	54.3	60.6
			Medium term				39.4	38.3	39.4	33.3
			Long term				1.5	6.0	6.3	6.1
	Credit to the economy (in percent)						100.0	100.0	100.0	100.0
			Primary sector				17.1	14.9	9.8	10.0
					Of which:wheat, fruit, vegetables		0.3	0.4	0.7	1.1
					Of which:forestry		11.9	11.5	6.7	4.2
					Of which:mining		0.0	0.4	0.5	0.8
			Secondary sector				13.6	10.5	12.1	15.7
					Of which:non-furniture wood		2.0	0.8	5.9	6.9
			Tertiary sector				69.3	74.6	78.1	74.4
					Commerce		16.7	18.9	18.6	23.0
						Of which:construction materials	0.4	0.3	0.3	3.2
					Services		52.6	55.7	59.5	51.4
						Of which:transport	1.3	1.4	2.2	3.1
						Of which:telecommunications	1.4	1.9	3.6	2.5
						Of which:enterprise support	8.2	9.2	13.1	14.1

Source: COBAC * and BEAC. Difference on total amounts of credits to the economy between COBAC and BEAC are due to classification differences.

Although prices are stable, interest rates remain high, especially for deposits. To prevent large-scale capital outflow, the BEAC fixes a minimum deposit rate on savings accounts.²⁷ At 4.25 percent (4.75 percent up until March 2006), this floor is binding (although fees and commissions lower the implicit deposit rates to about 3.5 percent). The regional central bank has also defined a maximum rate for lending, currently set at 15 percent (17 percent up until March 2006). This rate appears binding for most individuals and, to a lesser extent, small and medium-sized enterprises, but—due to the additional funds circulating within the financial system—effective credit rates have come down for the lowest-risk corporate clients (Figure III.4). As a result, there are large standard deviations around the average (effective) lending rates, excluding the effects of the value-added tax and other banking fees, which are applied on top of the mandated rates. Although the monetary authorities do not regularly monitor the development of effective interest rates, the COBAC has reported effective credit rates for the period 2001-04. With increased liquidity, these fell in 2004 and—according to information provided by commercial banks—have fallen further since, thereby reducing the interest-rate spread between deposits and credits.

D. The Banks’ Profit Maximization Problem

Banks maximize profits over (costly) monitoring.²⁸ The following representation—while abstracting from issues of asymmetric information—is modified to fit the specific Gabonese context. The model abstracts from inflation and country risk premia. It treats bank capital as exogenous. Financial intermediation is assumed to take place in a banking sector with J atomistic banks, with j = {1, ... J}. Apart from officially regulated minimum reserves and required loans to the government, which are not considered in the model, banks must decide whether to invest their liabilities—i.e., the sum of insured²⁹ and uninsured deposits ( ${\overset{—}{K}}_{j}$ , and K_j − ${\overset{—}{K}}_{j}$ respectively)—in risky loans to the private sector, $K_{J}^{L}$ , or in riskless deposits held at commercial banks abroad (“net foreign assets”), K_j − $K_{J}^{L}$ . Consistent with Gabon’s institutional setup, banks have no access to treasury bills, bonds, stocks, or other financial instruments. The length of each bank’s balance sheet, net of the officially required investments, is K_j, with $K = Σ_{J = 1}^{J} K_{j}$ ; see Table III.4.

Table III.4.

A Commercial Bank’s Balance Sheet

Table III.4.

A Commercial Bank’s Balance Sheet

Assets	Liablilities
Net foreign assets, K_j − $K_{J}^{L}$	Insured deposits, ${\overset{—}{K}}_{j}$
(on which the bank receives a risk-free rate r)	(on which the bank pays a risk-free rate r)
Loans to the private sector, $K_{J}^{L}$	Subordinated debt, K_j − ${\overset{—}{K}}_{j}$
(on which the bank receives a risk-free rate r^L)	(on which the bank pays a risk-free rate r^B)

Table III.4.

A Commercial Bank’s Balance Sheet

Assets	Liablilities
Net foreign assets, K_j − $K_{J}^{L}$	Insured deposits, ${\overset{—}{K}}_{j}$
(on which the bank receives a risk-free rate r)	(on which the bank pays a risk-free rate r)
Loans to the private sector, $K_{J}^{L}$	Subordinated debt, K_j − ${\overset{—}{K}}_{j}$
(on which the bank receives a risk-free rate r^L)	(on which the bank pays a risk-free rate r^B)

Table III.5.

Banks’ Expected Loan Pay-Offs

Loans to the private sector default with probability ρ, with 0 ≤ ρ ≤ ½, ³⁰ adjusted for the banks’ credit-risk monitoring, which is denoted μ. The bank will receive r^L ∙ K_j on outstanding loans with certainty and never default, if it monitors the quality of the loan portfolio fully ( μ =1); see Table III.5. Monitoring, however, is costly. For mathematical simplicity, and to be able to obtain a closed-form solution, a quadratic monitoring-cost schedule à la Cordella and Yeyati (2002) will be assumed :

\begin{matrix} (1) & V (μ) = ξ ∙ μ^{2} . \end{matrix}

The bank operates for one period and fails if the pay-off to the loan portfolio is zero.If the bank succeeds, subordinated debt holders will receive r^B on their deposits. In case the bank fails, γ represents the probability that the government will compensate uninsured depositors with γ ∙ r^B. As subordinated debt holders are assumed to be risk averse, they require to be compensated for risk. For simplicity, the following relationship is assumed to hold:

\begin{matrix} (2) & r^{B} = r + (1 - γ) ∙ (1 - μ) ∙ (r^{L} - r) . \end{matrix}

Equation (²) implies that r ≤ r^B; ≤ r^L and, more specifically, that

\begin{matrix} (3) & r^{B} = {\begin{matrix} r i f {\begin{matrix} γ = 1 or \\ μ = 1, \end{matrix} \\ r^{L} i f {\begin{matrix} γ = 0 a nd \\ μ = 0. \end{matrix} \end{matrix} \end{matrix}

According to (³), households face no additional risk investing their assets in uninsured bank deposits if (i) the government guarantees, if necessary, to bail out 100 percent of subordinated debt ( γ = 1); or (ii) banks fully monitor the quality of their loan portfolio (μ =1). In that case, banks do not have to compensate households for any additional risk, and subordinated debt holders accept to receive the risk-free rate r. By contrast, if the government can commit (credibly) to not bailing out subordinated debt holders ( γ = 0 ), and if banks concomitantly refuse to monitor the quality of their loan portfolios ( μ = 0 ), the banks will have to compensate depositors for their additional risk by offering an interest rate equivalent to the loan rate.

Banks are run by risk-neutral managers who maximize bank profits. Given their relative size, all banks are price-takers. Assuming that all banks are identical, the banking system’s profit-maximization problem over the choice variable μ looks as follows:

\begin{matrix} \begin{matrix} (4) \end{matrix} & \max_{{μ}} π & = & \begin{matrix} (1 - ρ + μ \cdot ρ) \cdot (r^{L} \cdot K^{L} + r \cdot (K - K^{L}) - r \cdot \overset{}{\bar{K}} - r^{B} \cdot (K - \overset{}{\bar{K}})) - V (μ) \cdot K \end{matrix} \\ = & \begin{matrix} \begin{matrix} (1 - ρ + μ \cdot ρ) \cdot (r^{L} - r) \cdot (K^{L} - (1 - γ) \cdot (1 - μ) \cdot (K - \overset{}{\bar{K}})) - ξ \cdot μ^{2} \cdot K . \end{matrix} \end{matrix} \end{matrix}

Equation (⁴) yields the following first-order condition:

\begin{matrix} (5) & \frac{\partial π}{\partial μ} \end{matrix} : - 2 ∙ μ ∙ ξ ∙ K + (r^{L} - r) ∙ ((1 - γ) ∙ ((1 - 2 ∙ (1 - μ) ∙ ρ) ∙ (K - \overset{}{\overset{—}{K}}) + ρ ∙ K^{L}) \equiv 0 .

The optimal level of banking sector monitoring, μ*, therefore equals

\begin{matrix} (6) & μ^{* =} \frac{1}{2} ∙ \frac{(r^{L} - r) ∙ ((1 - γ) ∙ (1 - 2 ∙ ρ) ∙ \frac{K - \overset{}{\overset{—}{K}}}{K} + ρ ∙ \frac{K^{L}}{K})}{ξ - (1 - γ) ∙ ρ ∙ (r^{L} - r) ∙ \frac{K - \overset{}{\overset{—}{K}}}{K}} . \end{matrix}

Capacity and institutional constraints are assumed to limit the bank’s ability to monitor the quality of its loan portfolio beyond a certain degree—i.e., $0 < µ \leq \overset{—}{µ}$ , with $\overset{—}{µ} < 1.$ Hence, if the profit-maximizing level of monitoring established in (⁶) exceeds the limit of the attainable degree of oversight—if $µ * > \overset{—}{µ}$ —banks will respond by reducing their exposure to private-sector loans; see (⁶). Thus, for $µ * > \overset{—}{µ}$ , optimal bank conduct is represented by

\begin{matrix} (7) & \frac{K^{L *}}{K} \end{matrix} = \frac{(1 - γ) ∙ (1 - 2 ∙ ρ + 2 ∙ \overset{}{\overset{—}{µ}} ∙ ρ)}{ρ} ∙ (\frac{K - \overset{}{\overset{—}{K}}}{K}) - \frac{2 ∙ \overset{—}{\overset{}{μ}} ∙ ξ}{ρ} ∙ (\frac{1}{r^{L} - r}) .

Assuming that (i) the constraints on bank capability to monitor the quality of loan portfolios; (ii) monitoring costs; (iii) loan default probabilities; and (iv) implicit bail-out probabilities are time-invariant, equation (⁷) sees lending decisions as a function of the bank holdings of subordinated debt relative to the balance sheet and the interest-rate differential between deposit and credit rates:

\begin{matrix} (8) & \frac{K^{L *}}{K} = β_{0} ∙ (\frac{K - \overset{}{\overset{—}{K}}}{K}) - β_{1} ∙ (\frac{1}{r^{L} - r}), \end{matrix} with β_{0} = \frac{(1 - γ) ∙ (1 - 2 ∙ + 2 ∙ \overset{}{\overset{—}{µ}} ∙ ρ)}{ρ}, and β_{1} = \frac{2 ∙ \overset{}{\overset{—}{µ}} ∙ ξ}{ρ} .

In a situation without operational deposit insurance, as is currently the case in Gabon, $\overset{—}{K} = 0$ and $(K - \overset{—}{K}) / K = 1$ . Subsequently, equation (⁸) becomes

\begin{matrix} (9) & \frac{K^{L}}{K} = β_{0} - β_{1} ∙ (\frac{1}{r^{L} - r}) . \end{matrix}

Equation (⁹) shows that the banks’ willingness to increase the share of credits relative to the exogenously given length of their balance sheets increases with a larger interest differential between lending and deposit rates (given the assumption of no inflation and an unchanged country risk premium). While the relation between credit to the economy as a share of total assets and the negative and inverse expression of the interest-rate spread (Figure III.5) appears to support this result, the lack of regular reporting on effective interest rates precludes a formal econometric assessment.

Any structural reforms that would lower the cost of monitoring increase ratio of credit to the economy and bank capital, as

\begin{matrix} (10) & \frac{\partial μ^{*}}{\partial ξ} \end{matrix} < 0

(without monitoring constraints); see equation (⁶), or

\begin{matrix} (11) & \frac{\partial (K^{L^{*}} / K)}{\partial ξ} < 0 \end{matrix}

(with monitoring constraints); see equation (⁷).

Equation (¹⁰) shows that lowering monitoring costs would induce banks to increase monitoring. In the presence of structural constraints limiting the amount of monitoring, the lowering of monitoring costs would increase credit to the economy as a share of total bank capital; see equation (¹¹). These results combined would suggest a two-pronged approach to modernizing the banking sector in Gabon, viz., to (i) increase the interest-rate spread³¹ (i.e., to lower the administratively fixed deposit rate or eliminate such a floor entirely) and (ii) lower ξ by improving the institutional environment required to monitor more effectively the quality of credit applications, verify financial documentation, register collaterals and be able, if need be, to enforce corresponding contracts in a timely fashion.

E. Policy Implications and Preliminary Conclusions

The banks’ inability to monitor effectively the quality of their loan portfolios, paired with the high, central bank-determined interest-rate floor on deposits, are key factors behind the very low degree of financial intermediation. Recent financial developments in Gabon, particularly while oil prices are high, combined with the results of a simple, profitmaximizing bank model point to such a result. However, the fact that neither the BEAC nor the COBAC consistently collect information on effective interest rates precludes a more formal, econometric analysis, and conclusions can only be preliminary.

To successfully implement Gabon’s development strategy, it is crucial that the financial sector feel comfortable increasing access to credit to the private sector, possibly at rates lower than those currently prevailing. Two reform steps should help in this endeavor, viz.,

(i) to reduce the minimum rate on deposits³² (if not fully liberalize it); and
to overcome the structural obstacles that have kept banks from objectively assessing and accurately monitoring the credit risk of loan applicants’ investment proposals.³³

By increasing flexibility in the banking sector, lowering the interest-rate floor on deposits (or no longer applying it) should help to increase access to financial services. This would lower deposit rates, which would better align the costs of bank liabilities in Gabon with those of their international competitors. As minimum deposit or minimum income requirements for deposits would no longer be necessary, banks could broaden their customer base and increase the stability of their deposits. The resultant increase in the interest-rate spread between deposits and loans, which would—in all likelihood—permit a further decline in the effective lending rate, would create an incentive for banks to offer loans to new customers.

These reforms need to be complemented by structural changes that would allow banks to assume more risk and extend credit to customers with whom they have not yet developed a “personal relationship of trust”. The reform agenda should therefore include measures to (i) strengthen the legal and regulatory environment for commercial matters; (ii) facilitate registration of collateral and accelerate foreclosure on collection; (iii) reinforce creditor rights; and (iv) improve corporate accounting practices.³⁴ While many of these changes need to be addressed on the regional level, it would thus become easier to realize promising private-sector investments, and to do so at greater numbers—which would help Gabon to increase total factor productivity and its non-oil growth potential.

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Prepared by Jan-Peter Olters. Valuable comments by Jakob Christensen, Anne-Marie Gulde-Wolf, Roger Nord, Anton op de Beke, Jérôme Vacher, and participants at the Ministry of Finance-organized seminar in Libreville, including those from the Banque des Etats de l’Afrique centrale (BEAC), are gratefully acknowledged. The standard disclaimer applies.

See Redvers Opie’s 1934 translation, p. 116.

For literature reviews, see, e.g., Levine (1997) and—with a particular focus on developing and transition economies—Holden and Prokopenko (2001).

They discuss the improper accounting and book-keeping practices in the corporate sector, weak legal systems, and expensive and cumbersome registration of collaterals.

The fact that the BEAC has not been enforcing prudential regulations on net foreign exchange positions in the CEMAC zone has facilitated the banks’ transfer of liquidity to correspondent accounts abroad; see also IMF (2002). In fact, banks in Gabon have few options, given that (i) there is no domestic market for treasury bills; (ii) banks have no access to an operational interbank market; (iii) the BEAC remunerates deposits at very low rates and is not actively engaged in absorbing excess liquidity. Apart from the lack of alternatives, banks have increased their net foreign asset positions against the experience of occasional difficulties to obtain foreign currency within the region. In this environment, banks benefit from Presidential Order No. 3563 of January 24, 1963 that requires them to transfer 10 percent of all deposits to the government as investment credit (bons d’équipement), remunerated at a—by now—attractive rate of 7.5 percent per annum.

The corresponding figure for January 2006 was 15.1 percent (COBAC 2006b).

Unless banks can raise sufficient amounts of longer-term deposits, providing long-term loans will result in maturity mismatches and—possibly excessive—liquidity risk, especially in light of Gabon’s non-operational interbank market.

In IMF (forthcoming), it is argued that the cost of resources for Gabonese banks are the highest in the region, with the minimum deposit rate not only applying to savings accounts (comptes d’épargne sur livrets) but to most term deposits as well. Specifically, the report hints at the existence of nationally negotiated deposit rates in excess of those being applied within the CEMAC region.

See, e.g., Holmstrom and Tirole (1997) and Gropp and Olters (forthcoming).

To date, the CEMAC does not have an operational deposit insurance, notwithstanding years of discussion on the establishment of a Fonds de garantie des dépôts en Afrique centrale.

It is thus implicitly assumed that repayment is more probable than default.

Given that only the minimum deposit rate is binding in Gabon, this would imply a reduction in that rate. Against this background, the BEAC’s decision to lower this rate by half a percentage point on March 6, 2006 is very welcome.

At the current level, the CEMAC rate is more than twice the one prevailing in the euro area.

These recommendations contrast to an often observed reaction by policy-makers—inside and outside the region—to create state-owned “development” banks that are (politically) charged to support lending to domestic enterprises. However, the past performance of these types of institutions, in Gabon as well as in other countries, has shown that such measures do not only not substitute for the implementation of structural reforms to increase the proper functioning of the market but typically add to the difficulties in this sector.

These recommendations are in line with those presented in, e.g., IMF (2002), Christensen and Fischer (2005), Gulde-Wolf et al. (2006), and IMF (forthcoming).

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