Republic of Congo: Selected Issues Paper

This Selected Issues paper on the Republic of Congo analyzes the challenges of sustainable growth in the Republic of Congo. The paper highlights that it is paramount for the authorities to avoid repeating the experience of the 1980s, particularly in light of the projected decline in oil production over the next decade. It proposes a macroeconomic policy strategy that takes advantage of this unique opportunity to foster higher sustainable growth. The paper also provides a summary of various recent assessments of the quality of the Congo's public financial management system.


This Selected Issues paper on the Republic of Congo analyzes the challenges of sustainable growth in the Republic of Congo. The paper highlights that it is paramount for the authorities to avoid repeating the experience of the 1980s, particularly in light of the projected decline in oil production over the next decade. It proposes a macroeconomic policy strategy that takes advantage of this unique opportunity to foster higher sustainable growth. The paper also provides a summary of various recent assessments of the quality of the Congo's public financial management system.

V. Financial Sector Development Strategy27

A. Introduction

79. This chapter outlines a strategy to strengthen Congo’s financial sector. The first section reviews the crucial importance of a sound financial sector on growth; the second section presents an overview of the financial sector; and the last one recommends ways to increase consumer access to financial services and improve financial sector soundness.

80. The state of a country’s financial sector can significantly affect its growth. A sound, deep, and efficient financial sector mobilizes savings, allows such savings to be put to productive use, monitors the borrowing and enforces corporate controls, facilitates risk management, and expedites contracts and transactions in goods and services (Levine, 1997). An underdeveloped financial sector is a serious obstacle to growth. Even when a country has met other preconditions for economic growth, such as a high level of educational attainment, inadequate financial development can trap the country in poverty because it creates a vicious circle of low competition and limited financial intermediation (Berthelemy and Varoudakis, 1996). It is pivotal, therefore, for a country to build its financial sector.

81. There are several mutually reinforcing aspects to financial sector development. Development may depend on a much diversified range of financial institutions and financial products, a more efficient and competitive operating environment, a sounder legal system, wider access to financial services, and a sounder and more stable financial sector. These aspects are interwoven. For example, a wider range of financial products demands a more sophisticated legal system, which in turn encourages innovation in financial products and improves their liquidity. Among these aspects, two of them are of particular importance: wide access to financial services, and a sound and stable financial sector.

82. Improving access to financial services is essential for low-income countries for economic growth and to reduce poverty. Financial services can help smooth consumption by providing a cushion against income fluctuations. They can also be a convenient vehicle for saving for costly expenditures such as education, health, and productivity-enhancing equipment. Access to credit encourages private sector, especially small and medium enterprises (SMEs), to create and expand businesses, setting the country on the path to long-term economic growth. Credit allocated to education and health services can generate future productivity.

83. A sound and stable financial sector ensures long-term sustainability. Experience suggests that there is a nonlinear relationship between the vulnerability and the size of a financial sector. When the financial sector is small, with few players and an illiquid interbank market, problems in one bank do not necessarily affect other banks. In a large and mature financial market with a variety of players and products, risks can be priced and sold to those capable of managing and hedging them. A medium-sized financial system is most vulnerable because it is not large enough to effectively diversify risk. Hence, when a country’s access to financial services has been increasing and its financial sector is evolving from small to medium-sized, measures to safeguard the stability and soundness of the financial system are crucial to keeping the evolution sustainable.

84. A good legal and efficient environment is another factor contributing to financial sector development. A sound legal system lowers the cost of enforcing contracts and improves recovery of collateral. It reduces the credit risk and makes financial institutions more willing to lend. A diversified range of financial institutions and products means more choices for households and SMEs to allocate savings and secure investment funds. It also helps financial institutions diversify risk. An efficient and competitive operating environment increases access by reducing the cost of services.

B. Congo’s Financial Sector: An Overview

Features of the Financial Sector

85. The Congolese financial sector consists of 4 commercial banks, a government-owned postal savings network, 3 insurance companies, 2 pension funds, and 75 microfinance institutions (Table V.1). Its total assets in 2005 amounted to 10½ percent of GDP. The banking system accounts for 87 percent of total financial sector assets. The four commercial banks are privately owned;28 and the government holds only a small share of capital in three of them. Three are foreign-owned and account for 57 percent of the total balance sheet of the banking sector. The fourth one, La Congolaise de Banque29 has 75 percent of its capital controlled by domestic private interests, but the management of the bank has been entrusted to a foreign strategic partner, the Banque Marocaine du Commerce Extérieur (BMCE), which holds 25 percent of the capital. At year-end 2005, the largest bank, BGFI-Congo, accounted for about 30 percent of deposits and loans, while the share of total assets of the financial sector held by microfinance institutions was 10.5 percent. One of the three insurance companies is government owned; the other two are privately owned.

Table V.1.

Republic of Congo: Financial System Structure, 2005

article image
Sources: COBAC, Ministry of Economy, Finance and Budget; and Fund staff estimates.

Information as of end-2003.

86. The financial sector is underdeveloped, and financial intermediation is lower than in other sub-Saharan African countries (Table V.2). The ratio of total financial sector assets to GDP and broad money to GDP were well below the averages in the CFA franc region and other sub-Saharan African countries. Credit to the private sector in Congo represented 3.0 percent of GDP in 2005, as opposed to 7.4 percent in CEMAC countries. The interbank market is underdeveloped, as the volume traded on the national money market averaged only CFAF 19 billion (0.9 percent of GDP) in 2002–05, mainly because most banks had excess liquidity.

Table V.2.

Selected Financial Indicators, 2004

article image
Source: Sub-Saharan Africa Regional Outlook (2006).

87. Household access to savings facilities is low. Only 2.7 percent of Congo’s population in 2004 had bank accounts (5.1 percent had microfinance institution (MFI) accounts). There are only 22 bank branches in the whole country. Banks tend to charge high fees for opening and maintaining accounts, and minimum balance requirements keep many small-scale savers from opening accounts.30 Customers with bank accounts are generally wealthy. The average size of bank savings accounts is about three times per capita income. Poverty and lack of paved roads also limit both demand for bank accounts and the expansion of branches in rural areas.

88. Consumers have limited access to credit and face high financing costs. As indicated above, bank credit to the private sector in 2005 was just 3.0 percent of GDP. Real lending rates are very high, averaging 15.5 percent (based on maximum lending rates). The main reasons for high lending costs are lack of competition and the risks associated with the high cost of doing business in Congo (Table V.3). The World Bank’s Doing Business survey31 ranks Congo near the bottom (171 out of 175 economies) in terms of the ease of doing business (Table I.1). Credit information about borrowers’ financial status is inadequate. The availability of collateral is limited, and there is no up-to-date property registry. In addition, the process of enforcing contracts and recovering losses is hampered by an inadequate legal system.

Table V.3.

CEMAC: Banking Concentration, 2002–05

article image
Note: 1,000–2,000 = moderate concentration; > 2,000 = high concentration. The index is calculated by summing up the squared relative market shares (in percentage points) of all the banks: INDEX =Σn1Xn2 , where X is the market share in percentage points.Sources: International Monetary Fund (2006).

Macroeconomic Factors Affecting the Health of the Banking System

89. The oil sector dominates the Congolese economy. The country’s heavy dependence on oil exports leaves it vulnerable to external shocks, especially oil price volatility. Oil production is located offshore and managed by joint ventures between foreign companies and the national oil company (Société Nationale des Pétroles du Congo, SNPC). Ancillary oil-related services are largely run by foreign groups, which import most supplies. The non-oil sector comprises a mixture of forestry, traditional agriculture, services, and a relatively large public administration. Congo’s forests, which cover about half of the country, account for less than 5 percent of output and two-thirds of non-oil exports. Agriculture, which employs about a third of the population, accounts for about 5 percent of GDP. It consists mainly of subsistence activities by smallholders, with relatively little commercialization (in part because of poor access roads) and limited export activities. Volatility in world oil prices, under the fixed exchange rate regime, has thus led to volatility in the external current account and in public finance generally. Even though the government’s share of loans in the banking sector has decreased from 23.4 percent in 2002 to 2.8 percent in 2005, a sharp drop in oil prices could increase that share and keep government suppliers and employees from meeting their financial obligations.

90. Given the regional monetary arrangements, and the lackluster performance of the non-oil economy, the government’s role as a client of the banking system is crucial to macroeconomic stability.32 Government deposits in 2002–05 accounted for about 7.3 percent of total bank deposits (compared with 13.5 percent in the CEMAC), while bank credit to the government represented 15 percent of total loans (compared with only 5.5 percent in the CEMAC region). Therefore, potential government arrears, either to banks or to suppliers that use banks, could have a significant impact on the quality of bank loan portfolios.

Performance of the Financing Sector

The Banking System

91. Deposit liabilities are the main source of financing to Congolese banks (Figure V.1). Deposits in 2002–05 represented 94 percent of the banking system balance sheet (compared with 86 percent for the CEMAC region as a whole). About 80 percent of deposits in Congolese banks are short term, compared with an average of 70 percent in the CEMAC region (Table V.4). The high level of short-term deposits limits the availability of funding for long-term financing. The remainder of the banking system liabilities consists mainly of capital and provision for doubtful loans. Congolese banks are less capitalized than banks in countries in the CEMAC region; and capital at Congolese banks represents only about 6 percent of the banking sector’s balance sheet, compared with 14 percent for the CEMAC.

Figure V.1.
Figure V.1.

Structure of Resources, as of end-2005


Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A005

Source: CEMAC.
Table V.4.

Commercial Bank Deposit and Credit Structure, 2002-05

article image
Sources: COBAC; and Fund staff estimates.

92. Less than a third of bank resources finance credit (compared with almost half in the CEMAC region), while most bank resources (66 percent) are held in liquid assets (Figure V.2). The low level of credit relative to bank resources reflects (i) weak economic activity in the non-oil sector, which limits lending opportunities; (ii) the high cost of credit stemming in part from limited competition among banks (see below); and (iii) unfavorable legal and judiciary procedures, which make it harder for banks to recover delinquent loans and foreclose on collateral. Such conditions make banks reluctant to extend long-term loans; and short-term loans account for the bulk of their lending.

Figure V.2.
Figure V.2.

Structure of Use of Resources, as of end- 2005


Citation: IMF Staff Country Reports 2007, 206; 10.5089/9781451808636.002.A005

Source: CEMAC.

93. Congolese banks are broadly profitable. Return on assets in 2002–05 averaged 2 percent, while return on equity exceeded 25 percent (Table V.5); the high level of the latter partly reflects the low capital base of the banking system. The high profitability of the Congolese banking system results from a strong interest margin of about 12 percent in 2001–05, compared with 9 percent for the CEMAC region. As indicated earlier, the high interest margin reflects limited interbank competition as well as risk pricing by banks. The quality of loan portfolios improved recently, with the ratio of nonperforming loans to total loans decreasing from 6.5 percent in 2004 to 3.5 percent in 2005. For the whole CEMAC region, these ratios were 14.6 percent and 13.6 percent, respectively. The provisioning of nonperforming loans also improved to 84 percent at year-end 2005, putting it on par with the CEMAC level (81 percent).

Table V.5.

Republic of Congo: Financial Soundness Indicators for the Banking Sector

(Percent, at year’s end, unless otherwise indicated)

article image
Source: COBAC and Fund staff estimates.
Compliance with Prudential Regulations

94. The Congolese banking sector is fragile and highly susceptible to risk. The soundness of the banking system in the CEMAC region is assessed on the basis of prudential ratios set by the regional supervisory agency COBAC. This body sets a minimum risk-weighted capital ratio and regulates liquidity, risk diversification, and maturity transformation. Financial soundness and performance indicators show that in the past two years, at least three of the four Congolese commercial banks frequently failed to comply with key solvency indicators based on capital adequacy ratios, though the majority complied with risk and liquidity indicators.

95. The weak financial soundness is attributable mainly to insufficient capital relative to liabilities, against the back of widespread compliance with the minimum capital requirement. At end-2005, none of the four banks complied with the prudential indicator on capital adequacy which requires a capital-risk-weighted ratio of 8 percent (Table V.6). Reflecting the low capital level, two banks failed to meet the required 100 percent fixed assets-to-capital ratio. With respect to credit risk concentration, all but one bank complied with the prudential limit on both individual risks and total large exposures. As a consequence of the high share of sight deposits in total bank deposits, two banks on average have failed to meet the prudential ratio on the transformation coefficient during 2003-05. On a more favorable note, all banks except one complied with the prudential limit on connected lending.33 Under the rating system of the COBAC, three banks were found in good condition at end-December 2005. The fourth bank was reported in a fragile situation, with a rating of 3 (Table V.7).

Table V.6.

Republic of Congo: Number of Banks Complying with Prudential Ratios

article image
Source: COBAC.
Table V.7.

Banks’ Rating in Congo and the CEMAC

article image
Source: COBAC.

A rating of 1 = Strong financial situation, 2 = good financial situation; 3A = light fragile financial situation, 3B = fragile financial situation, 4A = critical financial situation, and 4B = very critical financial situation.


96. Microfinance activity in Congo began in 1984 with the creation of the Mutuelles d’Epargne et de Crédits(MUCODEC). Under CEMAC’s harmonized regulations, adopted in 2003, the COBAC is responsible for external control of the microfinance sector. The number of microfinance institutions in Congo increased from 69 in 2001 to 75 in 2005 (Table V.8). Deposits with, and credits granted by, these institutions increased to 16 percent of total deposits and 8 percent of total credits of the financial system by year-end 2004, respectively. However, lending by microfinance institutions makes up only 25 percent of deposits, on average, mainly reflecting a cautious lending policy stance.

Table V.8.

Recent Developments in Microfinance Activity

article image
Source: COBAC.

97. The MUCODEC network dominates microfinance activity, with 41 percent of microfinance institutions and close to 90 percent of total deposits and credits. The remarkable development of microfinance reflects (i) the population’s low confidence in the banking system, particularly after successive bank failures in the 1990s and in early 2000, and (ii) limited access to traditional banking services, especially after restructured banks closed branches and cut back services.

98. Microfinance institutions continue to mobilize deposits, helping to deepen financial intermediation. Deposit mobilization by microfinance institutions increased to 1.2 percent of GDP in 2004, from 0.7 percent in 2003. Most microfinance institutions operate in Brazzaville and Pointe Noire; only a third operate in rural areas. Credits extended by microfinance institutions mostly finance consumption, reflecting the short-term nature of their resources. In 2004, for instance, 74 percent of the volume of credits extended by microfinance institutions supported consumption. In rural areas, microfinance activity contributes to poverty reduction through the financing of agriculture enterprises. It also promotes savings, increases monetization of the economy, and facilitates financial intermediation.

99. As in other CEMAC countries, the financial state of microfinance institutions is fragile and volatile. Because of low capitalization, microfinance institutions cannot expand and are vulnerable in other ways. Operating costs are high, yet their profit margins are low. In Congo, although the sector has surplus liquidity, MFIs cannot meet the funding needs of their members owing to the dominance of short-term deposits—on average only 25 percent of deposits are lent out. Accounts with maturities beyond six months account for less than 2 percent of total deposits. Over a third of MFIs are run by volunteers. So far, microfinance activities in the Congo have benefited from limited external technical assistance from the Agence Française de Développement (AFD), and International Fund for Agriculture and Development (IFAD). Only MUCODEC and the Caisse de Participation à la Promotion des Entreprises et à leur Développement (CAPPED) receive external financing.

Insurance Sector

100. Congo’s three insurance companies account for a small share of the financial sector (only 2.4 percent of total assets, or 0.3 percent of GDP). Vehicle and transport insurance dominates the sector with 68 percent share of the market, while fire and other hazards insurance accounts for 13 percent (Table V.9). Life insurance still only accounts for about 0.7 percent of the market. The government-owned insurance company, which accounts for 62 percent of the market, is a critical financial situation and needs to be restructured.

Table V.9.

Republic of Congo: Structure of Insurance Market, 2004

article image
Source: Congolese authorities; and Fund staff estimates.

Postal Savings Network

101. The postal savings network is currently inoperative and almost bankrupt. At year-end 2004, about CFAF 7 billion (0.3 percent of GDP) was due to small depositors. The authorities are planning to restructure the postal system (including the postal savings network).

Pension Funds

102. Both the Caisse nationale de sécurité sociale of a deposit guarantee fund in Central Africa (CNSS) which provides social security to private sector employees and the Caisse de retraite des fonctionnaires (CREF), which provides social security to civil servants, are facing serious financial difficulties. At year-end 2004, payment arrears of pension benefits payable by the CREF were estimated at about CFAF 90 billion (3.6 percent of GDP). The CREF was owed CFAF 115 (4.6 percent of GDP) in contribution arrears (CFAF 62.5 billion by public enterprises and CFAF 52.5 billion by the Treasury). The World Bank is expected to provide technical assistance in restructuring these two pension funds.

C. A Strategy to Improve Access to Financial Services

More Savings Facilities for Households

103. The cost of financial services should be reduced. The first step would be to create a more competitive environment, which may force financial institutions to improve services and lower prices. In this regard, the ministry of finance may consider surrendering licensing right to the COBAC to lower the administrative barriers for new financial institutions to enter the market. A second step would be to encourage regional financial integration. Given that financial institutions are subject to economies of scale and scope, they can lower their operating costs by expanding their activities through the CEMAC region. This would diversify their loan portfolios and reduce their exposure to specific business sectors. For this reason, a single CEMAC banking license procedure was adopted in July 2001, which allows banks in the region to open branches in another member country. So far, though, no CEMAC institution has applied to COBAC for a regional single license. There are at least three obstacles to such licensing requests: (1) limited effectiveness of the single license procedure, (2) gaps in infrastructure and markets (e.g., shallow regional interbank market, no debt market, and a rudimentary payment system), and (3) reputational effects and consumer preferences. Because these obstacles are at the regional level, the authorities might cooperate with other regional member countries to address these hurdles and pave the way for regional financial integration.

104. Promoting habit formation in consumption of financial services would increase the use of banking services. Many households are unaware of the types of services available to them. The authorities might use public awareness campaigns to promote the concepts of saving and credit, and the role of financial institutions. The authorities might also distribute savings books to civil servants and encourage them to use banking services. To keep civil servants from withdrawing cash right after payday,34 a practice that adds to bank costs, banks might design contractual savings vehicles for consumers who do not have liquidity constraints. To promote credibility and transparency in the financial sector, COBAC might also encourage financial institutions to publish their audited financial reports according to international accounting standards. Greater bank transparency could also help expedite implementation of a deposit guarantee fund in Central Africa (Fonds de Garantie des Dépôts en Afrique Centrale (FOGADAC)), which in turn would promote a credit culture.

105. Better infrastructure such as improved transport systems, new technology, and well-functioning payment system will considerably broaden access. Improved transportation would make financial services more accessible. Banks would also be more willing to open branches in rural areas, which could result in higher growth and poverty reduction.35 New technology, such as ATM machines, point-of-sale machines, and electronic bank cards, can lower the transport and transaction costs of financial services. Access to ATM machines, for example, could reduce the costs arising from civil servants lining up at banks after each payday. In Congo, one of the most urbanized countries in Africa, such products could be cost effective. In addition, well-functioning payment systems are needed to tap this new financial services technology. Retail payment systems and regional real-time gross settlement procedures in CEMAC are under construction, though lack of experience, capacity, and coordination at the BEAC have delayed implementation. There is no senior body responsible for all aspects of the payment systems. Problems could arise in information dissemination between the national units and the region. An electricity breakdown, in particular, could jeopardize the functioning of the Congolese payment unit.

Credit to Private Sector

106. More appropriate pricing of credit would encourage bank lending. Of the few profitable businesses outside of the oil sector, most are financed from abroad. The floor on deposit rates and ceiling for lending rates set by the BEAC may be out of line with market fundamentals. Hence, banks deposit excess liquidity in the central bank rather than to lend. As suggested by the CEMAC FSSA, the floor on deposit rates may be lowered, and the ceiling on lending rates may be increased without reaching usurious levels.

107. To better assess the credit risk, banks need the reliable credit information, suitable collateral, efficient property registry system, and a strong judicial system that enforces contract. However, in Congo, financial institutions find it difficult to assess creditworthiness because information from the Centrale des Risques is limited and standards for accounting and auditing practices are poor, putting the accuracy of financial statements in doubt. In terms of collateral, currently, farm production is on such a small scale that it is difficult for farmers to use their products as collateral. Moreover, Congo’s record of property registry and contract enforcement compares poorly with other countries (see Table I.1). Banks have little confidence in the legal system and are critical of the complexity of Organization for the Harmonization of African Business Law (OHADA) (CEMAC FSSA, 2006).

108. Accordingly, the authorities might encourage the formation of an effective credit bureau to collect credit information about both SMEs and individual borrowers. Credit information should include not only default history but also standardized ratings of creditworthiness based on a basic rating system. The national association of MFIs for Congo is planning to set up a credit information bureau. However, instead of setting up a parallel credit bureau, the BEAC might encourage the association to join in the Centrale des Risques, through which the information is shared not only by banks but also by nonbank financial institutions in the region. Acknowledging the importance of improving accounting practices, the authorities might consider requiring adherence to the OHADA accounting system. At the same time, the authorities might revise and enforce their regulation of the accounting profession to improve the quality and transparency of accounting practices.

109. The authorities might encourage farmers to form cooperatives, which in turn can set up warehouses that enable the farmers to use warehouse receipts as collateral. This practice has worked well in Madagascar (Sacerdoti, 2005). The authorities might also encourage large agricultural marketing companies to obtain large long-term loans and redistribute them to individual farmers for longer-term investment.

110. As for the hurdles in the property registry and contract enforcement, the authorities might identify the main costs of the property registry and then reform the property registry system to streamline the whole process. They might also identify and alleviate problems with contract enforcement and allocate more resources to train judges in commercial, financial, and credit-related legal matters.

111. Developing capital markets can widen access to financial services. Capital markets provide savers with a variety of investment choices with long maturities. Companies can raise long-term funds from capital markets at a lower cost than from banks. Pension funds and insurance companies can invest in capital markets to manage duration of their portfolios. Developing capital markets takes time, and it requires appropriate sequencing and financial sector deepening as well as a sound macroeconomic environment, high income levels, transparent institutions, law and order, and good governance.

112. Stock market activity is organized at the regional level. Two stock exchanges—the Douala Stock Exchange (DSX) in Cameroon and the Central African Stock Exchange (BVMAC) in Gabon—provide limited capital liquidity. The former was recapitalized in 2005. The BVMAC is also facing capital constraints. Nevertheless, the Congolese authorities might educate companies about the role played by stock exchanges and promote transparency in business operations.

113. A bond market could be established with treasury bonds. The yield curve on treasury bonds would set a benchmark for pricing corporate bonds. A wide spectrum of maturities of treasury bonds is conducive to the development of other fixed-income products. Again, it takes time to develop a yield curve. Nevertheless, the authorities might start to test the debt market by swapping government loans held by banks with short-term treasury papers. If possible, the authorities might adopt a system of primary dealers to boost market-making capacity and liquidity in the secondary market. Banks could use these papers as collateral in interbank operations, and repo (repurchase agreement) activities could be developed. Of course, efficient collateral recovery procedures are required to smooth these activities. Since all the members of CEMAC have adopted the CFA franc, the Congolese authorities could market treasury papers throughout the region.

The Role of Microfinance Institutions

114. The role played by MFIs could be strengthened to tap their flexibility in providing financial services. MFIs mostly serve poor and rural households and the informal private sectors. They can provide loans to SMEs that are not able to meet lending criteria set by traditional banks; therefore, they play an important role in promoting entrepreneurship and economic development. MFIs are flexible in collecting and mobilizing savings because the limits for deposits and loans can be easily adjusted to meet local needs. In Ghana, the MFIs have expanded the susu collector36 function with “mobile banking” services that both accept savings and provide loans (Basu, Blavy, and Yulek, 2004).

115. Several measures may help increase the role of MFIs. The Ministry of Small and Medium-sized Enterprises is negotiating with the MUCODECs to create a program to finance small enterprises and handicraft producers, and it has established a guarantee fund to improve SMEs’ access to credit. However, the fund’s total budget to constitute guarantees and cover operating costs is CFAF 200 million, a small amount compared with the average financing needs of CFAF 50 million for small enterprises and CFAF 250 million for medium-sized ones. Therefore, no banks will accept this public guarantee. Nevertheless, the ministry, the National Association of MFIs, BEAC, and COBAC might promote closer cooperation between commercial banks and MFIs. For example, they might encourage banks to simplify procedures for MFIs to open bank accounts, as has been done in Guinea and Benin, and help launch MFIs, as a few banks in Cameroon have done. In Guinea, commercial banks even provide liquidity management services such as lines of credit to MFIs (Basu, Blavy, and Yulek, 2004). The National Association of MFIs can also provide training and other technical support to MFIs to improve operations accounts as overhead costs are high, and strengthen accounting practices.

D. Strategy to Improve the Soundness of the Financial Sector

Improving Prudential Regulations


116. To better supervise banks, COBAC would need greater operational independence. An independent regulator would be free of political pressure and could make unbiased, prompt decisions. However, COBAC enforcement of regulation is inhibited because finance ministries throughout CEMAC retain the right to license banks. Hence, as a first step in strengthening the role of the regional supervisor, the ministry may consider releasing rights to issue and revoke bank licenses to COBAC.

117. COBAC also needs staff to undertake its regulatory mandate. As pointed out in the CEMAC FSSA (2006), there is an increasing gap between COBAC’s missions and its resources. This understaffing limits the capacity of conducting timely on-site and off-site examinations. At the national level, only one staff member in the BEAC acts as a local correspondent of COBAC. The correspondent’s role is to liaise with COBAC, provide it with data, and stay in contact with banks. Nevertheless, this liaison does not work well. Therefore, COBAC might hire more staff, and it might assess its correspondent’s workload and assign more resources, if needed.

Microfinance Institutions

118. COBAC will begin regulating MFIs in 2007 according to regional regulations adopted in 2002. CEMAC classifies MFIs under a three-category system, and prudential regulations vary by category. There is still some confusion about the legal and reporting requirements that will govern COBAC supervision. Some MFI representatives and donors think that prudential ratios and other traditional regulatory mechanisms are too complicated and restrictive for MFIs. COBAC, with help from the National Association of MFIs, might test such ratios in Congo to see whether they can be realistically used for MFIs.

119. Regional regulation will require cooperative networks to have enough capacity to aggregate their members’ balance sheets. Otherwise, data inaccuracies and dissemination delays will make it difficult for the regulator to identify, monitor, and control sectoral risks. The MUCODEC already has such capacity. COBAC and the National Association of MFIs might work with other cooperative networks to assess their capacity to consolidate their members’ balance sheets and, if not, to give them the advice and resources they need to build such capacity.

Insurance and Pension Funds

120. The insurance sector is regulated through the Inter-African Conference on Insurance Markets (CIMA). The Regional Insurance Control Commission licenses insurance companies and imposes penalties. Because commission members are appointed by national authorities, they may be subject to political pressures. Moreover, the National Director of Insurance can withhold licenses approved by the Regional Insurance Control Commission.

121. As pointed in CEMAC FSSA, the division of responsibilities and labor between the CIMA and the National Director of Insurance is not clear. The National Director of Insurance’s participation in inspecting, following-up, and monitoring insurance companies is not clearly defined and is limited by its low institutional capacity. The authorities might clarify this and improve the institutional capacity. The National Director of Insurance might also ensure that insurance companies pay CIMA the mandated fees. Given that the state-owned insurance company is in critical financial condition, the National Director of Insurance might consider cooperating with CIMA as well as with international financial institutions to privatize the company.

122. The pension funds’ supervisor, the Ministry of Labor, should be empowered to strengthen the finances of the two funds. CNSS and CREF are both having serious difficulties in meeting their obligations. CREF’s problem is that its key contributors, the central government and public enterprises, are in arrears. There is no payment of contribution to the CNSS by private companies. Therefore, the supervisor might be given the right to demand the full amount of owed contributions. If immediate payment is not possible, the supervisors might work with contributors to reach agreements on a timetable to settle arrears.

123. A range of appropriate regulatory and supervisory framework might be established to oversee pensions. The two pension funds should be audited by audit firms of international reputation. Moreover, the supervisor should assess the existence and effectiveness of regulatory framework (pension laws, governance structures, accounting and auditing rules and practices, disclosure, investment regulations, etc.) and the supervisory framework (approach to supervision, legal status and internal structure of the supervisory agency, regulatory and enforcement powers of supervisor, ability to carry out early interventions, and relationship with other supervisors.37)

Improving Risk Management

124. Financial institutions are exposed to risks from different angles. A volatile macroeconomic situation (i.e., a high inflation rate) distorts the price of credit, impairs confidence in the financial sector, and thus hinders its development. Credit risk arises from uncertainty about whether a borrower can meet its obligations. Default on its obligations drives up NPLs and reduces asset quality. Interest rate risks can weaken financial institution balance sheets when interest rates move in an adverse direction. Exchange rate risks arise from mismatches in the currency composition of assets and liabilities. Liquidity risks arise when an investment cannot be bought or sold quickly enough to prevent or minimize a loss.

125. Though day-to-day risk management is the responsibility of financial institutions, the authorities can take supportive measures, and regulators can enforce risk regulations. Financial institutions manage risk by analyzing exposures to risk and determining how best to handle them. By providing macroeconomic stability, adequate infrastructure, and a sound legal system, the authorities can help financial institutions better handle their risk exposure. The regulators should enforce regulation to reduce the vulnerability.

Exposure to Risk

126. Credit risk is the main source of vulnerability (CEMAC FSSA 2006). The loan portfolio, and thus credit risk exposure, is highly concentrated in the forestry sector. A downturn in forestry revenue would severely strain banks. Moreover, the process of enforcing contracts and recovering losses is hampered by an inadequate legal system and lack of an updated property registry. Also, as mentioned before, Congolese financial institutions are exposed to macroeconomic risk mainly through the economic dominance of the oil sector.

127. Congolese banks are somewhat exposed to interest rate risks. Loans are overwhelmingly (80 percent) short term, and demand deposits account for 92.9 percent of total deposits. This short duration of deposits and loans reduces the interest rate risk, especially duration risk. Nevertheless, because most bank loans are at fixed rates, an increase in the short-term fund rate will affect the capital adequacy ratios of Congolese banks, as noted in the CEMAC FSSA (2006).

128. Congolese banks’ exposure to exchange rate risk should be limited. Congo’s currency, the CFA franc, is pegged to the euro and, through an Operations Account, the French treasury guarantees the unlimited convertibility of the CFA franc at a given rate. In principle, residents cannot hold foreign exchange accounts domestically, and the following surrender requirement applies: “export proceeds received in currencies other than Euros or those of other Operations Account countries must be surrendered within one month of collection.38” Nevertheless, banks have net long foreign currency positions, which expose them to risk. A CFA franc depreciation against the U.S. dollar would improve their capital adequacy ratios and vice versa.

129. Banks’ exposure to liquidity risk is limited. As shown in the CEMAC FSSA (2006), a 25 percent withdrawal of all deposits or 50 percent reduction of public sector deposits has a modest effect, which is explained by a low loan deposit ratio (25.9 percent compared with the CEMAC average of 48.0 percent). Nevertheless, Congolese banks rely on a high share of government and public enterprises deposits, and a shock from the oil sector will affect the stability in the financial system.

Handling Risk Exposure

130. The government might cease borrowing from commercial banks. This would help them handle oil sector shocks. A policy of zero direct government borrowing from commercial banks would keep government fiscal solvency problems from being transmitted to the financial sector. Government borrowing from commercial banks may also crowd out private sector investment by stimulating higher interest rates. In Congo, though excess reserves offset the crowding-out effect, government borrowing nevertheless may have distorted the price of credit. Keeping all the government deposits in the Treasury Single Account (TSA) at the BEAC may also increase the transparency of fiscal management (see Chapter III).

131. It is important for Congo to diversify the economy and improve its business environment. Though it takes time to diversify the economy, efforts in this direction might broaden the client base for financial institutions, enabling them to diversify and stabilize their loan and deposit portfolios and therefore reduce credit and liquidity risk.

132. A liquid interbank market helps banks to manage liquidity risk. A well-functioning interbank market could effectively channel liquidity from banks with surplus liquidity to those in need, allowing banks to trade liquidity to manage liquidity and interest rate risk. Because the current interbank market is shallow (which is partly explained by the excess reserves), the national BEAC should work with the BEAC headquarter to overcome obstacles to market development. As only four banks dominate the financial sector in Congo, COBAC might analyze whether allowing MFIs, at least the MUCODEC network, to participate in the interbank market could increase liquidity.

E. Conclusion

133. The financial sector in Congo is still underdeveloped, and financial intermediation is low. Households and SMEs have limited access to financial services. The financial sector is fragile and susceptible to risk. These features keep the financial sector from playing a greater role in promoting growth and reducing poverty.

134. This paper proposed a comprehensive financial sector strategy. The strategy calls for authorities to (i) widen access and lower the cost of financial services by facilitating the intermediation of new financial instruments; (ii) increase competition through a more open licensing policy and by encouraging regional financial integration in the CEMAC; (iii) reduce credit risk by strengthening loan recovery procedures and widening the types of collateral; (iv) improve the health of the nonbank financial sector (particularly insurance companies and pension funds); and (v) require the sector to follow sound regulatory and prudential practices. Such measures, if implemented, could contribute to financial sector development, thus increasing financial intermediation. This, in turn, could contribute to higher sustainable growth.


  • African Development Fund, 2006, Republic of Congo, Project in Support of the Socio- Economic Reintegration of Disadvantaged Groups, Appraisal Report. (Côte d’Ivoire: African Development Fund).

    • Search Google Scholar
    • Export Citation
  • Basu, Anupam, Rodolphe Blavy, and Murat Yulek, 2004, “Microfinance in Africa: Experience and Lessons from Selected African Countries,” IMF Working Paper 04/174 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Banque des Etats d’Afrique Centrale (BEAC), 2004, “Bulletin du Marché Monétaire” No. 125, Novembre 2004. (Yaoundé : BEAC)

  • Berthelemy, Jean-Claude, and Aristomene Varoudakis, 1996, “Economic Growth, Convergence Clubs, and the Role of Financial Development,” Oxford Economic Papers, Vol. 48, pp. 30028.

    • Search Google Scholar
    • Export Citation
  • Burgess, Robin, and Rohini Pande, 2004, “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment,” CEPR Discussion Papers 4211.

    • Search Google Scholar
    • Export Citation
  • Commission Bancaire de l’ Afrique Centrale (COBAC), “Rapport d’Activités 2002,” (Yaoundé : COBAC)

  • Commission Bancaire de l’Afrique Centrale (COBAC), “Rapport d’Activités 2003,” (Yaoundé : COBAC)

  • Christensen, Jakob, 2004, “Domestic Debt Markets in Sub-Saharan Africa,” IMF Working Paper 04/46 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Department for International Development, the United Kingdom Government, 2004, “The Importance of Financial Sector Development for Growth and Poverty Reduction,” (London: DFID)

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2001, Senegal, Financial System Stability Assessment, IMF Country Report No. 01/189 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2002, Gabon, Financial System Stability Assessment, IMF Country Report 02/98 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2003, Morocco, Financial System Stability Assessment, IMF Country Report 03/212 (Washington: International Monetary Fund)

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2003, Mauritius, Financial System Stability Assessment, IMF Country Report 03/321 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2003, Ghana, Financial System Stability Assessment update, IMF Country Report 03/396 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2005, Central African Economic and Monetary Community---Recent economic Developments and Regional Policy Issues, IMF Country Report 05/403 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, 2006, Sub-Saharan Africa Regional Economic Outlook, (Washington: International Monetary Fund).

  • International Monetary Fund, 2006, Central African Economic and Monetary Community, Financial System Stability Assessment, IMF Country Report 06/321 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Levin, Ross, 1997, “Financial Development and Economic Growth,” Journal of Economic Literature, Vol. 35, pp. 688726.

  • Sacerdoti, Emilio, 2005, “Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies,” IMF Working Paper 05/166 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Saxegaard, Magnus, 2006, “Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa,” IMF Working Paper 06/115 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Veyrune, Roman, 2006, “Fixed Exchange Rate and Autonomy of Monetary Policy: the Franc Zone Case,” Unpublished.

  • The World Bank and International Monetary Fund, 2005, Financial Sector Assessment, a Handbook (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation

Prepared by Joseph Karangwa and Yinqiu Lu.


Including COFIPA bank, which was privatized in September 2006.


La Congolaise de Banque was created in June 2004 following the privatization of the Crédit pour l’Agriculture, l’Industrie et le Commerce (CAIC).


Some banks require customers to deposit at least CFAF 200,000 (one-fifth of per capita GDP) to open a checking account and at least CFAF 1,000,000 to open a savings account that maintains a minimum balance of CFAF 500,000.


The World Bank, Doing Business-benchmarking business regulations,


Congo is a member of the Economique et Monétaire des Pays de l’Afrique Centrale(CEMAC), an economic and monetary union of six countries. The CEMAC countries’ common currency is the CFA franc, which is issued by the common central bank, the Banque des Etats de l’Afrique Centrale(BEAC), and is pegged to the euro. Banking supervision in the CEMAC region is conducted by a common supervisory agency, the Commission Bancaire de l’Afrique Centrale. As a consequence of belonging to an economic and monetary union with a fixed exchange rate regime, fiscal policy is the key instrument for the Congo and other members of the CEMAC to ensure macroeconomic stability. Monetary policy is conducted at the regional level by the BEAC with the objective of sustaining low inflation and maintaining the zone’s foreign exchange reserves at a comfortable level.


Connected lending consists of lending to bank’s shareholders, associates, managers, and employees. Banking system regulations limit connected lending to 15 percent of capital.


The authors thank Jerome Vacher for pointing this out.


The link between expanding branches to rural areas and its impact on growth and poverty reduction can be found in Burgess and Pande (2003).


Based largely in Ghana, susu collectors, who exercise a form of microfinance, charge a small fee and provide an informal means for Ghanaians to securely save and access their own money and gain limited access to credit.


The World Bank and International Monetary Fund, 2005.


See IMF (2006).