Chad: Selected Issues and Statistical Appendix

This Selected Issues paper aims at discussing the impact of the oil windfall on Chad, with a focus on growth, poverty, competitiveness, and fiscal policy challenges posed by the oil revenue outlook. The paper discusses the reforms needed to remove structural factors that constraints the non-oil sector growth, in particular on civil and military services and the microfinance sector. The paper argues that Chad’s current growth potential is seriously limited by low levels of both human and physical capitals and by weak institutions and governance.

Abstract

This Selected Issues paper aims at discussing the impact of the oil windfall on Chad, with a focus on growth, poverty, competitiveness, and fiscal policy challenges posed by the oil revenue outlook. The paper discusses the reforms needed to remove structural factors that constraints the non-oil sector growth, in particular on civil and military services and the microfinance sector. The paper argues that Chad’s current growth potential is seriously limited by low levels of both human and physical capitals and by weak institutions and governance.

VI. Chad’s Microfinance Sector: An Overview69

A. Introduction

1. Microfinance institutions (MFIs) have been successful in improving the population’s access to financial services. Between 2000 and 2004, the microfinance sector grew rapidly: the number of MFIs doubled, the amount of credit extended by such institutions tripled, and their deposits increased sevenfold. This paper examines the status and development challenges of Chad’s microfinance sector.

2. The paper’s main findings are as follows:

A. Microfinance institutions (MFIs) have helped mobilize savings in Chad’s informal sector, especially in rural areas. Compared with commercial banks, MFIs offer financial services to twice as many individuals as banks and are present in 20 times as many locations.

B. However, the microfinance sector in Chad still has limited macroeconomic significance. MFI deposits were equivalent to just 4 percent of commercial bank deposits and MFI loans to just 3 percent of commercial bank loans in 2004.

C. Important development barriers should be addressed to ensure that MFIs are a key ingredient of economic growth and poverty reduction. In particular, the sector’s human resource and information technology systems need to be strengthened to promote more balanced—and sustainable—growth.

3. The paper is organized as follows. The next section describes the structure and regulatory environment of the microfinance sector in Chad. Section C examines how MFIs have helped increase access to credit and mobilize savings. Section D summarizes the main weaknesses and challenges of the country’s MFI sector. Section E concludes and offers recommendations.

B. Background

4. Only a small segment of the Chadian population can access formal financial services. Chad has a very shallow financial market relative to its size (1,284, 000 km2), with only five towns serviced by commercial banks. Only 0.7 percent of the population (about 60,000 people) have accounts with commercial banks. Deposits in the banking system account for only 4.5 percent of GDP (though the ratio of deposits to non-oil GDP, at 7 percent, is close to the average in the Central African Economic and Monetary Community (CEMAC)). The small portion of deposits in the money supply is further evidence of the limited role of Chad’s formal banking system in Chad. In contrast to CEMAC countries, where bank deposits account for about 75 percent of the average money supply, only 42 percent of Chad’s money supply is intermediated through its banking system.

5. MFIs began developing in Chad in the 1980s, a period of growing interest in microfinance as a tool for mobilizing local savings, financing business activities, and supporting rural production through community-based financial intermediation. Chadian MFIs are grassroots savings and loan cooperatives (COOPECs), whose role is to mobilize local savings to allow communities to finance their own development. Of the MFIs, more than two-thirds operate within a network structure that provides them with technical and financial support. According to the Central African Banking Commission (COBAC), by end-2004 Chad had 214 MFIs in three categories: (i) 187 MFIs organized in 6 networks;70 (ii) 23 independent MFIs; and (iii) 4 MFIs linked to foreign-financed development projects. Chad’s MFIs operate in the banking and financial market segment, which is underserved by conventional banks and traditional financial institutions. Nonetheless, Chad’s MFI and bank activities are complementary, in that highly local MFIs mobilize domestic savings, which then get partly deposited in commercial banks.

Table 1.

Chad’s MFI Sector, at June 30, 2004

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Source: Mission of the Commission Bancaire de l’Afrique Centrale for the Evaluation of the Microfinance Credit in Chad (November 2004-February 2005).
Table 2.

MFIs Operating Within a Network Structure, 2004

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Source: Mission of the Commission Bancaire de l’Afrique Centrale for the Evaluation of the Microfinance Credit in Chad (November 2004-February 2005).

6. Chad has the second-highest number of operating MFIs among CEMAC countries, according to the COBAC. The microfinance sector is more developed only in Cameroon, where two-thirds of all CEMAC MFIs are located. The sector is still very small in the Central African Republic, Gabon, and Equatorial Guinea.

Table 3.

CEMAC: Number of MFIs per Country, 2004

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Source: Mission of the Commission Bancaire de l’Afrique Centrale for the Evaluation of the Microfinance Credit in Chad (November 2004-February 2005).

As of 2003.

7. MFIs, which at first operated informally, are now being incorporated into the CEMAC regulatory framework on microfinance adopted in 2002.71 This regulatory framework defines the scope of permissible activities for credit cooperatives, essentially ensuring that they limit their size and activities to agreed-upon parameters and operate within a network structure. The main elements of the regulations are as follows: (i) MFIs need to hold a valid license to operate; (ii) MFIs can operate only in the country in which they are registered and must join that country’s professional MFI association; and, (iii) COBAC will be responsible for regulating and sanctioning MFIs. In addition, prudential regulations, which are stricter for MFIs than for commercial banks, vary by type of MFI and fall into three categories: category-one MFIs collect deposits and lend exclusively to their members; category-two MFIs collect deposits and lend to nonmembers; and category-three MFIs lend only to third parties without accepting deposits. In 2004, most MFIs were classified as category one. In compliance with the CEMAC regulations, Chad has set up a professional association for MFIs and a department for microfinance issues within the Ministry of Finance. The MFI licenses issued by this department are in the process of being verified and validated by the COBAC.

8. The government and donors recognize the importance of MFIs in financing the Chadian economy. The National Poverty Reduction Strategy (NPRS) views microfinance as a poverty reduction tool, prompting some banks and donors to back selected MFIs (see Ministry of Plan, Cooperation, and Development, 2002 and 2003).

C. Saving Mobilization by MFIs

9. MFIs have successfully mobilized deposits and promoted domestic saving, in part because banking system outreach remains limited. Because banks operate only in a few urban areas, accessing bank accounts is too costly for most people, especially for those living in rural areas. MFIs have been successful in promoting a culture of saving in villages and small towns. In 2004, MFIs offered financial services to twice as many individuals as banks and were present in 20 times as many locations (Table 4). In addition, MFIs have fostered entrepreneurship by financing the establishment of businesses and the creation of cooperatives and partnerships. Also, the flexibility and accessibility of MFIs make it possible to combat usury in the informal sector.

Table 4.

Banks and MFIs in Chad, at June 30, 2004

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Source: Mission of the Commission Bancaire de l’Afrique Centrale for the Evaluation of the Microfinance Credit in Chad (November 2004-February 2005).

10. MFIs have been innovative in establishing credit tailored to borrowers’ specific circumstances. Lending rates range between 14 and 60 percent per year, with the majority of loans carrying a rate of 24 percent rate (significantly above the 12-18 percent per year offered by commercial banks). Required collateral includes cattle, land, equipment, and personal endorsement. Loans offered by MFIs comprise:

  • Commercial loans, targeted to members in the business sector, particularly people establishing new enterprises. The terms of these loans vary from 1 to 12 months.

  • Construction/housing loans, which are becoming increasingly popular in towns. Low-income individuals who permanently deposit their wages in MFIs can obtain loans for housing construction or home improvement. The terms of these loans range from 6 to 24 months.

  • Agricultural loans. Despite the importance of agriculture, which employs approximately 4.5 million workers, private investment in the sector is still limited, owing to structural underfunding (which has kept the sector from advancing technologically). Bank credit for farming accounts for only 1 percent of the total volume of credit extended annually. By contrast, most MFIs are located in villages, near farmers.

  • Educational and social loans, offered at the beginning of each school year so members can buy school supplies and pay school fees. The terms of these loans range from 2 to 6 months.

  • Social loans, which vary in type, but are mostly emergency loans and are usually granted to help members deal with unforeseen family problems, such as illness or death. Extenuating circumstances are taken into account in the disbursement of these loans.

11. The bulk of the loans are geared toward income-generating economic activities, including business, investment, and crop credits. Women account for 87 percent of total borrowing.

Table 5.

Share of Loans by Activity and Gender of Beneficiary in N’Djamena (Percent)

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Source: Regional Union of Saving and Loan Cooperatives of N’Djamena (URCOOPEC), 2004, Fact Sheet.

D. Weaknesses and Challenges of Chad’s Microfinance Sector

12. The microfinance sector’s expansion has been geographically uneven, and the size of its operations remains only a fraction of the commercial bank sector’s. MFIs are unevenly distributed throughout the country, with most located in the central and southern regions, where the bulk of the economic activity takes place. While there are many MFIs, the scale of their deposits (4 percent of commercial banks’) and credits (3 percent of commercial banks’) remains small.

13. In general, the management and financial performance of Chad’s MFIs are weak. Most MFIs have poor management procedures, high administrative costs, and poor internal controls mechanisms. In addition, the quality of staffing is still substandard, given the sector’s grassroots nature and lack of trained managers. Indeed, MFIs are often managed by unqualified personnel with limited strategic vision for developing the enterprise. Some MFIs face serious cash shortages and are not financially viable. For example, one MFI in N’Djamena faced serious financial problems, after it extended large amounts of credit to civil servants who faced salary arrears. Several MFIs supported by foreign partners rely on subsidies.

14. In addition, rapid MFI growth has made it significantly more difficult to manage and monitor their activities. MFI staff credentials and MFI information management system have not kept pace with the industry’s growth. Some managers, accountants, cashiers, and loan officers are overwhelmed by the functional complexity of transactions, especially since these transactions are still handled manually. The scant use of information technology tools makes MFI operations less secure, slows service delivery, and creates important bottlenecks. Delays in the production of a borrower database on borrowers have undermined the networks’ ability to monitor grassroots MFI activities.

15. A number of institutional challenges continue to hamper the development of Chad’s microfinance sector, including (i) the absence of a national microfinance policy and strategy; (ii) poor dissemination of microfinance legislation; (iii) a lack of coordination among ministries responsible for regulating and promoting MFIs (agriculture, finance, and planning and development); (iv) a lengthy process for closing a nonviable MFI; (v) widespread insecurity, which threatens MFI deposits generally; and (vi) a lack of human and technological resources within the microfinance department of the ministry of finance, which monitors MFI operations (see Ministry of Finance, 2003).

E. Conclusions and Recommendations

16. The emergence of MFIs in Chad has helped improve the population’s access to financial services. However, MFI expansion has been geographically uneven, the operations of such institutions remain small, and MFI management and financial performance are weak. In addition, rapid MFI growth has created pressure for improved human resource and information technology systems.

17. Promoting the balanced and sound development of the microfinance sector is essential to implementing Chad’s poverty reduction strategy and achieving sustained economic growth. Related measures include (i) training MFI staff and management in bookkeeping, reporting standards, internal controls, and credit decision making, (ii) improving MFI technology systems, (iii) furthering efforts to regulate the microfinance sector, and (iv) strengthening the general judicial environment.

References

  • Commission Bancaire de l’Afrique Centrale (COBAC), 2005, Inventory and assessment of Microfinance Institutions in Chad, Report elaborated by the COBAC evaluation mission from November 2004-February 2005.

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  • Ministry of Finance, 2003, Brief on the status of microfinance in Chad, November.

  • Mourji, F., 2002, Le financement semi-formel du secteur informel au Maroc: le micro-crédit, une alternative à l’impasse ?, Université Hassan II Ain Chock, Casablanca, Maroc.

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  • Regional Union of Saving and Loan Cooperatives of N’djamena, 2004, Fact sheet, Ndjamena, November.

  • Ministry of Plan, Cooperation, and Development, 2002, National policy paper on microfinance in the Republic of Chad, N’Djamena, November.

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  • Ministry of Plan, Cooperation, and Development, 2003, National Poverty Reduction Strategy Paper, Ndjamena, June.

Chad: Summary of the Tax System - To be updated to end-2005

(Amounts expressed in CFA francs)

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Chad: Basic Data

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Sources: Chadian authorities; and IMF staff estimates.

Excludes official transfers.

Includes official transfers.

After stock-of-debt operation.

In percent of exports of goods and nonfactor services.

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Sources: Chadian authorities; World Bank, World Development Indicators Online, 2006; and IMF staff estimates.
Table 1.

Chad: Gross Domestic Product by Sector of Origin, 1998-2005

(At current prices)

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Sources: Chadian authorities; and IMF staff estimates.

Includes oil production and transportation.

Includes investment of the oil sector related to the construction of the pipeline and explorations works.

Table 2.

Chad: Gross Domestic Product by Sector of Origin, 1998-2005

(At constant 1995 prices)

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Sources: Chadian authorities; and IMF staff estimates.

Includes oil production and transportation.

Includes investment of the oil sector related to the construction of the pipeline and explorations works.

Table 3.

Chad: Supply and Use of Resources at Current Prices, 1998-2005

(In billions of CFA francs)

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Sources: Chadian authorities; and IMF staff estimates.
Table 4.

Chad: Supply and Use of Resources at Current Prices, 1995-2005

(In percent of GDP)

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Sources: Chadian authorities; and IMF staff estimates.
Table 5.

Chad: Consumer Price Index, 1997-June 2006

(January 1994 = 100)

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Sources: Chadian authorities; and IMF staff estimates.
Table 6.

Chad: Production of Main Food Crops, 1994/95-2004/05 1/

(In thousands of metric tons)

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Sources: Chadian authorities; and IMF staff estimates.

Crop year starting in November.