Benin: 2012 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement—Financial Sector Review
Author: International Monetary Fund. African Dept.
Publication Date:
11 Jan 2013
eISBN:
9781475592917
Language:
English
Keywords:
ISCR; CR; debt; current account; real GDP; deficit; private sector; banking system; banking sector; Beninese bank; interbank market; Bank credit
Download PDF (1.7 MB)

Benin has made significant progress in consolidating macroeconomic stability under the IMF-supported program. Its prudent fiscal policy has kept fiscal deficits at manageable levels and is projected to yield a basic primary surplus in 2012. The Executive Board of the International Monetary Fund (IMF) suggested that the authorities hold current expenditures to provide space for infrastructure spending and meet medium-term fiscal objectives. Benin’s authorities are committed to maintain sound macroeconomic policies, pursue the implementation of critical structural reforms, and take further measure to achieve program objectives.

Abstract

Benin has made significant progress in consolidating macroeconomic stability under the IMF-supported program. Its prudent fiscal policy has kept fiscal deficits at manageable levels and is projected to yield a basic primary surplus in 2012. The Executive Board of the International Monetary Fund (IMF) suggested that the authorities hold current expenditures to provide space for infrastructure spending and meet medium-term fiscal objectives. Benin’s authorities are committed to maintain sound macroeconomic policies, pursue the implementation of critical structural reforms, and take further measure to achieve program objectives.

Background

1. Benin has been selected to be the first of several pilot cases for enhanced surveillance of financial systems, called for by the International Monetary Fund’s (IMF) Executive Board in May 2012. The Board stressed the need to widen the scope of financial sector surveillance in low-income countries (LICs) in Article IV consultations to better account for the interplay between financial deepening, macro-stability and the effectiveness of monetary policy, in line with the recommendation of the 2011 Triennial Surveillance Review.1 The call was grounded in the observation that financial underdevelopment amplifies vulnerability to macro-financial shocks, and limits the effectiveness of macroeconomic, growth, and poverty alleviation policies by channeling part of savings toward unproductive investments, raising credit risks to market participants, and limiting the range and efficiency of available policy instruments.2

2. This study has been undertaken as part of the 2012 Article IV consultation with Benin.3,4 It presents a monograph of Benin’s financial system, assesses its soundness and vulnerabilities, identifies impediments to financial deepening, evaluates interactions between the financial system’s structural features and macroeconomic policy choices and effectiveness, and makes recommendations for financial deepening. Benin is a member of the West African Economic and Monetary Union (WAEMU), and a number of key macroeconomic and financial policies are designed and implemented at the union level. In particular, WAEMU members share a common currency, the Communauté Financiére Africaine franc (CFAF), which is pegged to the euro. Under this framework, Benin’s macroeconomic policy is heavily influenced by fiscal policy. This study focuses on Benin-specific issues, which are however embedded in the above-noted union-wide dimensions, notably those related to financial regulation, interbank and securities markets, banking supervision, and monetary policy. This study builds on the findings and recommendations of 2012 Article IV consultation with the WAEMU.5 Another forthcoming pilot study, to be prepared in the context of the 2013 Article IV consultation with the WAEMU, will focus on union-wide issues.

3. Benin has a small and segmented financial sector. The sector consists of three categories of entities: (i) commercial banks; (ii) microfinance institutions (MFIs); and (iii) other nonbank financial institutions (insurance companies, pension funds, postal checking services). These categories operate independently to a large extent. The 2011-12 World Economic Forum’s report on global competitiveness ranks Benin 98 out of 142 surveyed countries in terms of financial market development, with a score of 4 (out of 7) on availability of financial services.

4. Benin’s financial system has gone through considerable changes in recent decades. The banking system collapsed in the late 1980s, following many years of inappropriate economic and financial policies. In 1989, the authorities adopted a rehabilitation plan under which a number banks were liquidated and a legal receiver was appointed to recover bank loans and reimburse depositors. Four new private banks were established during 1988-90 and were since then joined by nine others.6 Saving and loans associations have developed rapidly since the early 1990s and become important financial institutions for collecting savings and providing credit to individuals and small enterprises. The largest microfinance network (Fédération des Caisses d’Épargne et de Crédit Agricole Mutuel, FECECAM) experienced financial and governance problems in the late 1990s. Its rehabilitation program was successfully implemented during the 2000s. Unlicensed microfinance institutions mushroomed over years and a few of them turned into Ponzi schemes during the second half of the 2000s. These schemes attracted official attention after the largest of them collapsed in June 2010.

5. The study incorporates comments received from the authorities. The September 2012 mission prepared an aide-mémoire on its findings and recommendations, which was discussed with the Minister of Finance of Benin and senior officials of the regional central bank (Banque Centrale des États de l’Afrique de l’Ouest, BCEAO) in Dakar and Cotonou. Comments on the aide-mémoire from these counterparts were taken into account in this report.

Financial Deepening in Benin

Benin’s economy has grown at a moderate pace in recent years, despite significant external shocks. To sustain higher growth, financial deepening needs to be strengthened to contribute to the effectiveness of macroeconomic policies. The ambition to make Benin an emerging market economy requires a greater contribution from the financial system in support of economic activity. In particular, implementation of the Poverty Reduction and Growth Strategy for 2011-15 requires a reinforcement of the financial system. Weaknesses in financial intermediation and lack of effective financial markets are hampering the transmission of monetary policy, an important tool for macro-stability.

6. Financial deepening can be defined as the process of increasing depth (financial intermediation and market turnover), breadth (range of markets and instruments), and reach (inclusion) of financial systems.7 These dimensions are interlinked and their analysis in a country context requires assessing the links between the segments of the financial market, the diversity of financial services and products offered, and the outreach and inclusion capacity of the financial system. Financial inclusion refers to a state in which a majority of working-age adults have effective access to credit, savings, payments, and insurance from formal service providers.8 It is an important contributor to sustained economic development and growth because it provides those instruments to households and enterprises allowing them to manage the volatility of their income streams, better smooth consumption intertemporally, diversify risks, and insure against unexpected events. In addition, broad access to payment means facilitates the exchange of goods and services, and lowers transaction costs for individuals and firms.

7. Deepening a financial system is a complex undertaking. It is a multi-dimensional process requiring policy actions that promote the depth, breadth, and reach of the financial system efficiently and in a consistent way. At the same time, this process requires finding the right balance between development and stability because financial deepening can potentially pose risks to financial stability through the generation and transmission of financial shocks. Financial inclusion is also linked to financial stability, financial integrity, market conduct, and financial education of consumers. Allen and others (2012) find that “financial sectors of most sub-Saharan African (SSA) countries remain significantly underdeveloped by the standards of other developing countries.” They also find that “population density appears to be considerably more important for banking sector development in Africa than elsewhere.”

8. So where does Benin stand on financial deepening? Four sets of data are used to examine the depth, breadth, and inclusiveness of Benin’s financial system: the traditional metrics of financial deepening (broad money and credit to the private sector as percent of GDP); data provided by the BCEAO on access to financial services; and two World Bank’s databases—FinStats and Findex.

Depth

9. Traditional metrics indicate that Benin’s financial system has deepened in recent years. Figures 1 and 2 show that the ratios of broad money and credit to the non-government sector to GDP have both increased since 2004-05, translating the extent to which Benin has been increasingly making use of bank services. Compared to other (groups of) countries, the two ratios indicate that Benin underperformed SSA countries, but performed better than SSA countries when Nigeria and South Africa are excluded. However, it overperformed two comparable countries (Rwanda and Zambia), and WAEMU countries.9

Figure 1.
Figure 1.

Sub-Saharan Africa: Broad Money, 2000–11

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: IMF, African Department Database.
Figure 2.
Figure 2.

Sub-Saharan Africa: Credit to Private Sector, 2000–11

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: IMF, African Department Database.

10. The relatively stronger depth of Benin’s financial sector is somewhat confirmed by the benchmarking method underlying the World Bank’s FinStats database. Figures 3a and 3b, generated from that database, indicate that Benin’s private credit to GDP ratio outperformed the income group median, and the estimated statistical benchmark, based on its economic and structural characteristics.10 The ratio of domestic bank deposits to GDP outperformed slightly the income group median, but has come close to its statistical benchmark only recently.

Figure 3a.
Figure 3a.

Benin and Sub-Saharan Africa: Private Credit, 2001–10

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: World Bank, FinStats Database.
Figure 3b.
Figure 3b.

Benin and Sub-Saharan Africa: Domestic Bank Deposits, 2001–10

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: World Bank, FinStats Database.

Breadth

11. Available data on the breadth of the financial system indicate that Benin underperforms its income group and its statistical benchmark. Figure 4a shows the assets of the three largest banks as a share of assets of all commercial banks to measure bank concentration and to provide an indicator of the competition in the banking system. For this indicator, Benin is not far from its income group median, but it underperforms (i.e., higher concentration) its statistical benchmark. Figure 4b presents the ratio between credit from commercial banks to the government and state-owned enterprises and the GDP. It shows that Benin’s performance in this area has deteriorated in recent years, with relative higher shares in 2008-09, compared to the income group median and its statistical benchmark.

Figure 4a.
Figure 4a.

Benin and Sub-Saharan Africa: Three-Bank Asset Concentration, 2001–10

(Percent of assets of all banks)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: World Bank, FinStats Database.
Figure 4b.
Figure 4b.

Benin and Sub-Saharan Africa: Credit to Government and State-Owned Enterprises, 2001–10

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: World Bank, FinStats Database.

Inclusiveness

12. The BCEAO estimates for 2010 show a mixed picture of financial inclusion in Benin. The number of deposit accounts in commercial banks relative to the active population (5 percent in 2010) confirms the relatively low level of access to banking services (Figure 5). Conversely, after including the number of deposit accounts at MFIs and postal services, Benin becomes the most financially inclusive country in the WAEMU (Figure 6), with about 28 percent of the population having access to financial services. The limited supply of banking services is targeted at the high-income urban population. Low population density, the large size of the informal sector, and limited purchasing power of the population, contribute to low access to banking services.

Figure 5.
Figure 5.

WAEMU: Adult Population with a Bank Account, 2010

(Percent)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO).
Figure 6.
Figure 6.

WAEMU: Adult Population with an Account at a Formal Financial Institution1, 2010

(Percent)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Banque Centrale des Etat de l’Afrique de l’Ouest (BCEAO).1 In this figure, formal financial institutions include banks, MFIs, and financial postal services

13. The World Bank database (FINDEX) indicates that the level of financial access in Benin is close to that of other WAEMU countries, but is below that of SSA countries and in comparable countries outside Africa. The FINDEX database shows that the share of Benin’s population with an account at a formal financial institution is close to 10 percent, compared to an average of about 22 percent for SSA countries, 27 percent in the Lao PDR, and 28 percent in Bolivia (Figure 7). The discrepancy between BCEAO’s and FINDEX’s statistics on Benin occurs because FINDEX considers only “active” accounts, i.e., accounts that have had at least one deposit or one with withdrawal in the past year. Other methodological differences related to nonbank financial institutions are also at play.

Figure 7.
Figure 7.

Account Penetration, 2011

(Percent)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Global Findex Database, World Bank, 2012.

14. A comprehensive approach to assessing financial inclusion requires assessing also the quality of financial services. The FINDEX database provides additional insights about usage of financial services and their quality, as measured by consumer ability to benefit from them. Accordingly, only 7 percent of the active population in 2011 had savings in a formal financial institution in the past 12 months, while 16 percent (a much higher level than in other WAEMU countries) had savings at informal financial institutions (Figure 8). In addition, 4 percent borrowed from a formal financial institution in the past 12 months, while 32 percent borrowed from an informal one (Figure 9). The same database indicates that only 3 percent of the active population used bank accounts to receive their wages, and 5 percent of those in the bottom 40 percent of income had an account at a formal institution. These statistics would indicate that Benin has a significant gap to fill in terms of financial inclusion.

Figure 8.
Figure 8.

Formal and Informal Savings, 2011

(Percent)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Global Findex Database, World Bank, 2012.
Figure 9.
Figure 9.

Formal and Informal Borrowing, 2011

(Percent)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Global Findex Database, World Bank, 2012.

Conclusion

15. In spite of divergences in data from different sources, financial deepening in Benin is deemed relatively shallow in terms of its breadth and inclusiveness. This is true for the banking sector and—to a lesser extent—for the microfinance sector. For banks, the low penetration rate reflects impediments, such as: (i) the institutional framework that discourages banks from taking risks, considering relatively abundant and lucrative sovereign securities; (ii) difficulties faced by banks in obtaining robust loan guarantees and enforcing them in cases of default; (iii) the small size of the formal sector, and of the manufacturing sector in particular; and (iv) the high cost of establishment in non-urban areas. In the microfinance sector, impediments include (i) lack of suitable management information systems; (ii) lack of long-term funds for use in similar lending; (iii) a degree of public mistrust in the wake of negative experiences; and (iv) the cost of serving remote rural areas.

The Banking Sector

The next two sections show how banks dominate the financial sector in Benin in the volume of operations, but play a limited role in financial inclusion. Conversely, the microfinance sector, whose overall volume of financial transactions is small, has the potential to play an important role in increasing financial inclusion.

The banks are making only a modest contribution to Benin’s economic development in terms of financial services to the public. Development of the banking sector is being held back by the relative shortage of depositors and of solvent borrowers. Obstacles inherent to the business climate, in particular the lack of protection of creditors’ rights, tend to reinforce banks’ reluctance to take risks. Banks’ involvement in financing the economy is also constrained by delays in creating or operationalizing the necessary information databases, such as a credit bureau, a centralized registry of bad debts, and a central registry of corporate balance sheets. Other factors that hamper financial intermediation include the limited scope of mechanisms for guaranteeing collateral and delays in developing electronic financial services.

A. Sector Profile

16. Commercial banks are the main financial players in Benin. At end-2011, the share of banks in the financial sector represented more than 90 percent of deposits from, and loans to, the non-government sector. Twelve banks were operating at end-June 2012, with assets equal to about 50 percent of GDP, half of which was credit to the non-government sector. The sector is dominated by four banks, which accounted for close to two-thirds of deposits and loans at end-May 2012 (Table 1). Two of them are subsidiaries of Pan African banking groups (Bank of Africa Group and Ecobank Transnational Inc.), the other two are subsidiaries of Nigerian and a French banks, respectively. The eight smaller banks are subsidiaries of banks or banking groups based in Nigeria (two banks) and other African countries (six banks). Ten banks are general commercial banks, one bank specializes in mortgage lending, and another, which operates in each WAEMU country, specializes in financing youth’s projects. At end-2010, 98 percent of the banks were privately owned and 69 percent foreign owned (Table 2).

Table 1.

Benin: Banking System, May 2012

article image
Source: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO).
Table 2.

Benin: Repartition of Banks’ Capital, 2008–10

(Units as indicated)

article image
Source: WAEMU Banking Commission, 2010 Annual Report.

17. Although all banks are privately owned, the regional and national public sectors play a significant role as borrowers. At end-June 2012, the government provided about 3.5 percent of the banking system’s deposits and held 20 percent of outstanding bank credit. Government securities represented 24 percent of banking system assets, of which 10 percent were securities issued by the government of Benin.

18. The small size of the formal economy and structural impediments to lending hold back banking activities. Bankable borrowers are few and sluggish economic activity provides limited opportunities for lending. This feature is shown in the 65 percent loans-to-deposits ratio over the last two years, and the concentration of bank loans in the tertiary sector (Table 3). Lending activity is constrained by multiple institutional and structural impediments in the business environment. In particular, creditor rights are jeopardized by lengthy and risky legal proceedings, which reinforce banks’ reluctance to take risks by lending to operators who cannot present first-class guarantees. Banks’ financing of the economy is also constrained by delays in making existing financial information on borrowers effective, timely, and reliable. A project to set up a credit bureau usable by banks is being prepared by the BCEAO. The current information infrastructure includes a corporate financial database (Centrale des bilans) and a centralized registry of bad debts (Centrale des incidents de paiements), which is currently not operational because of a lack of agreement with the telecommunications company involved. Bankers find information provided by the corporate financial database in principle useful, but in practice removed from their time-sensitive and reliable credit-assessment needs. Other factors that hamper bank activities include (i) the limited scope of existing mechanisms for guaranteeing loans to small and medium-size enterprises (SMEs) and for refinancing mortgage loans;11 and (ii) unreliable company financial statements, making running credit risk surveys and developing internal rating systems difficult.

Table 3.

Benin: Sectoral Distribution of Lending, 2005–11

(Percent, unless otherwise indicated)

article image
Source: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO).

19. Banks are actively involved in WAEMU sovereign borrowing. Government securities are attractive to banks for three main reasons: (i) their relatively high yield (around 6 to 7 percent a year, versus an average union-wide inflation rate of some 3.8 percent), which is tax exempt; (ii) the ease with which these securities can be refinanced at a low rate (slightly above 3 percent) at the BCEAO; and (iii) “zero weighting” of WAEMU sovereign risk in the computation of bank solvency, thus requiring no capital provision and providing a high leverage effect on profitability. As a result, most banks, in particular the larger ones, which have structural excess liquidity, tend to give preference to buying sovereign securities to lending to the private sector. In some of the largest banks, the profit derived from sovereign securities almost measures up to the margin generated by loans to the non-government sector. It is mostly the small banks, particularly those that do not meet prudential requirements to access the BCEAO’s refinancing window, that show an interest in lending to customers—but they look for yields higher than what is offered by government securities.

20. Competition between banks has not yet affected the level of commission and fees charged on banking services. Lack of transparency and noncompliance with adequately publishing commissions and fees contribute to keeping banking services expensive. The World Bank’s FinStats database indicates that non-interest income to total income ratio reached an average of about 45 percent in Benin over 2001-10, close to the regional and same income-group countries’ averages. The ratio has been on an increasing trend over the last five years, rising from 42 to 53 percent. This high level of commission and fees hinders financial inclusiveness and protects the low productivity of the banking sector.

21. Electronic banking has hardly started, but is being contemplated as a possible tool to expand access to bank services. Beninese banks offering debit cards are members of the regional network set up by WAEMU banks, which provides widespread money withdrawal services within Benin and the union. Mobile banking and electronic banking (“e-banking”) are still in their infancy. Most banks only offer electronic access to account balances and recent operations, and provide various alerts. The larger banks are considering leveraging their experience in e-banking in other SSA countries to offer payment and transfer services in Benin.12

B. The Interbank Market

22. The interbank market is largely inoperative in spite of the BCEAO’s efforts at the regional level to provide support. At present, interbank operations are sporadic and based on bilateral relationships, within a group, or with a counterpart deemed reliable based on subjective criteria. The current flat interest rate curve and absence of volatility limit the scope of interest-risk-exposure management and provide no incentive for speculative arbitrage. The overall excess liquidity of banks (Figure 10) and the large portfolios of sovereign securities, that are relatively easy to refinance at the BCEAO at a cost lower than the one that would prevail on the interbank market, make it exceptional for banks to borrow from each other. Banks are reluctant to lend to each other because they do not have access to recent and reliable financial information, necessary to evaluate counterpart risks. Pressure by the authorities on banks to improve financial information dissemination seems low, maybe because of the fear of bank-runs that could be triggered by public awareness of the actual situation of some ailing banks. This situation underscores the urgent need for effective bank supervision, prompt remedial action for troubled banks, and rapid bank resolution mechanisms, which are prerequisites for building confidence between banks and promoting an effective interbank market.

Figure 10.
Figure 10.

Benin: Excess Bank Reserves, December 2007-June 2012

(Percent of deposits)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Banque Centrale des Etats de l’Aqfrique de l’Ouest (BCEAO).

23. The BCEAO is currently implementing infrastructure reforms for the regional interbank market. It set up an automated interbank clearing system (SICA-WAEMU) in 2008, and established a new certification mechanism for the real-time payment and settlement system (STAR-WAEMU) in 2009. In parallel, it launched an information campaign for the banking community on the benefits of operating on the interbank market. Standardizing repurchase (“repo”) contracts among banks is also under consideration, after significant legal work has been completed. Substantial progress also has been reported in developing a technical platform, which is being tested (IMFa, 2012, ¶19).

C. Macro-Financial Linkages

24. Important macro-financial linkages exist between the cotton and the banking sectors. The cotton sector has been the foundation of rural and agro-industrial economies. Cotton has historically played a dominant role in Beninese exports and represented a large fraction of GDP. Although its importance has declined significantly, it continues to employ a large part of the rural population—it is a source of direct income for 300,000 people (5 percent of the rural work force) and of indirect income for many more. Cotton is mostly produced on small family plots, and is grown by farmers with little to no access to the financial system. Nonetheless, the banking sector is heavily involved in cotton production, because banks provide seasonal credit (crédit de campagne). Until this year, banks typically provided credit to ginners. Separately, but financed by cotton export sales, ginners made loans at the beginning of the planting season to farmers to purchase seed, fertilizer, and other items. The loans are repaid when farmers deliver their harvest to the ginners. In the current campaign, the government has taken on the organization of the cotton campaign and has contracted a large syndicated loan (about 10 percent of 2011 credit to the private sector) from eight banks at commercial rates. Banks’ financial performance is thus closely linked to the performance of the cotton sector. Microfinance institutions are also involved in making loans to farmers. Box 3 and Appendix II of the companion staff report analyze the cotton sector in detail.

25. The interrelations between Nigeria and Benin are critically important for Benin. Trade and financial relations between the two countries proceed through the following channels:

  • Fuel prices and subsidies. About 85 percent of the gasoline sold in Benin is smuggled from Nigeria; trade estimates suggest that about half of imports going through the Port of Cotonou are destined for Nigeria.

  • Remittances. Nigeria is an important destination for emigrants from Benin and an important source of remittances, although data are not available.

  • Banking relations. Three Nigerian banks operate in Benin. They hold about 20 percent of total deposits and provide a similar share of total credit. Banks in Benin derive significant fees from CFA franc/naira exchange operations, which fuel a largely cash-based informal trade and facilitate inflows of remittances.

A change in trade or economic policies in Nigeria would affect the volume and the composition of trade and be a source of financial stress to the Beninese banking system.

The Microfinance Sector

The microfinance sector in Benin has grown exponentially over the last decade. The sector plays a limited role in financial intermediation, given its small dimensions and funding base. It has, however, a significant potential for channeling increased financial resources to micro and small enterprises (MSEs) that currently have almost no access to formal financial services.

A. Sector Profile

26. The microfinance sector in Benin plays both a systemic and a strategic role for economic growth. The exact size of the sector is unknown. A survey conducted in 2011 inventoried 721 MFIs operating in the country. Of these, only 226 are currently licensed. The authorities estimate, however, that the licensed institutions represent about 90 percent of the whole sector in terms of financial volume. Although the volume of deposits and loans is modest, compared to that of banks, the sector has a systemic importance because of the number of people using it. It also plays a strategic role in channeling financial resources to sectors of the economy that are underserved by banks and in providing financial services to the underserved rural population. At end-2011, licensed MFIs served more than 1.5 million customers, compared to an active population of some 4.5 million. They held about 5 percent of the deposits and provided close to 9 percent of the loans of the whole financial system (Tables 4 and 5). The sector is highly concentrated, because a small number of licensed MFIs account for the vast majority of all loans of the sector. The biggest MFI has close to one half of the sector’s total number of clients. The core activity of MFIs is microcredit, their loans ranging from CFAF 20,000 to CFAF 5 million (about US$40 to US$10,000).

Table 4.

Benin: Selected Indicators for Microfinance Institutions, 2008–12

(Units as indicated)

article image
Source: Benin Microfinance Supervision Unit, Ministry of Finance and Economy.
Table 5.

Benin: Commercial Banks and Microfinance Institutions—Selected Indicators, 2008–11

(CFAF billions, unless otherwise indicated)

article image
Sources: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO); Benin Ministry of Finance and Economy.

27. Two main business models exist for MFIs. The first category involves “savings and credit institutions” and the second, “direct credit institutions.”13 The two largest MFIs belong each to one of these categories. MFIs belonging to the first category are more likely to have a substantial part of their loan portfolio dedicated to group lending, while MFIs belonging to the second category tend to privilege individual lending and provide, in general, higher loan amounts. In both cases, loan maturity is usually one year, and interest rates depend on the specific circumstances, varying from 1 percent to 2 percent a month (on the remaining capital). Almost all loans are linked to income-generating activities and only a small percentage of loans are for consumption. It is noteworthy that institutions of the second type are now aggressively campaigning for savings mobilization, because they have realized that this can be an important source of additional funding. This converges the two main business models and fosters a beneficial competition among MFIs for attracting deposits, especially in urban areas where their presence is stronger.14

28. Data for the microfinance sector indicate robust reach but also vulnerabilities. The number of deposit accounts at end-2010 was 1,508,037 for a total amount of deposits of CFAF 57.7 billion and loans of CFAF 83.5 billion. Nonperforming loans represented 7.2 percent of total loans. Prudential ratios and performance indicators at end-2010 show that the sector as whole was in compliance with all but one regulatory norms (Table 6). These indicators hide, however, diversities among the MFIs. Only 39 percent of licensed MFIs were respecting the minimum capital/assets ratio and only 58 percent were in compliance with the minimum liquidity ratio. These numbers highlight the vulnerability of the sector and the need to strengthen supervision.

Table 6.

Benin: Compliance with Prudential Norms by Microfinance Institutions, 2008–101

(Percent)

article image
Source: Microfinance Supervision Unit, Ministry of Finance and Economy.

Data based on financial statements filed by licenced microfinance institutions.

B. Constraints Facing the Sector

29. After a phase of “promotion” that has significantly expanded the reach of the microfinance sector, it is now time to focus on its consolidation and strategic reorientation. It is important to look at the sector not only as a social development tool for the poor, but also as a development tool that could play a crucial role in supporting productive sectors of the economy (i.e., MSEs). The following sections focus on impediments to financial deepening, including (i) data and information constraints; (ii) structural constraints; and (iii) institutional and regulatory constraints. If these constraints are removed, the sector could contribute significantly to economic growth.

Data and information constraints

30. Consolidation and reorientation of the microfinance sector necessitate robust data to formulate a strategy and quantify objectives. This would also help the private sector to adapt the design and delivery of financial services. Unfortunately, the availability of data on financial inclusion (e.g., access and usage of financial services; rural versus urban areas; credit to households versus MSEs) and on other key statistics for the sector (e.g., market shares, transaction volumes, number of non-licensed MFIs) is sporadic and sometimes inconsistent. Institutions involved in data collection fail to provide timely and accurate data. Although the information provided by the 2011 survey on MFIs is useful (as it is rare to know the number and location of institutions providing financial services in the informal economy), it is insufficient, because the number of customers served and the volumes managed by these informal MFIs are relatively unknown.

Structural constraints

31. The microfinance sector lacks a “financing culture” for micro, small, and medium-size enterprises (MSMEs), which constitute the bulk of the productive sector in terms of the number of enterprises. There is no commonly agreed on definition distinguishing categories within MSMEs in Benin, nor a clear strategy on how to engage MSMEs financially. The 2012 World Economic Forum’s report on global competitiveness shows that “lack of access to finance” is indicated by enterprises as the second most important obstacle to doing business in Benin, after corruption. The whole “meso-finance” segment is financially uncovered in Benin,15 giving rise to the “missing middle” where commercial banks do not have incentives to “downscale” their operations, and most MFIs do not have the technical and financial capacity to “upscale” theirs (Figure 11).16

Figure 11.
Figure 11.

Benin: The Missing Middle in Access to Finance

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

32. As in many other LICs, the lack of long-term resources is restraining the microfinance sector in Benin. The sector’s main sources of financing come from savings mobilization (70 percent of total sector-wide resources), financial support from the government (20 percent), and loans from commercial banks (10 percent). Savings mobilization is necessary, but it does not provide sufficient resources to finance investments in the medium-to-long term. Public support, provided mainly through the national fund for microcredit (NFM, Fonds National de Microcrédit), could represent an important source of medium-term resources, but most of the funds provided through this channel are directed to very low-income households at highly subsidized rates and not to productive investment (Box 1). The limited links of MFIs with the banking sector—banks have few incentives to engage the formal microfinance sector because of the perceived risks—hamper the efficacy of monetary policy transmission, because monetary impulses do not reach the large client base served by MFIs.

Benin: National Fund for Microcredit

The National Fund for Microcredit (NFM) was established in 2006 and began operating in February 2007. It is a public entity under the Ministry of Microfinance, Youth Employment, and Women. NFM’s objective is to strengthen the financial and operational capacities of MFIs to provide financial services to the population, farmers, and entrepreneurs. The NFM essentially:

  • Provides microcredit to the poorest households of the population;

  • Finances agricultural activities in rural areas;

  • Supports MFIs through refinancing; and

  • Provides institutional support and capacity building to MFIs.

The FNM’s resources come mainly from government contributions; external donors’ and development partners’ contributions in the form of refinancing and lines of credit; and other grants and subsidies.

Credit to the poorest households represents the bulk of NFM’s activities. It absorbed over 90 percent of total NFM financing between 2007 and 2011, and reached over 800.000 beneficiaries. This activity has a repayment record of 84 percent.

33. Lack of adequate incentives for rural finance. Benin is a predominantly rural economy. Agricultural finance should thus play a key role in promoting economic growth, but at present even MFIs have little incentive to reach out to underserved rural areas. Yet, MFIs have the comparative advantage of operating proximity-type financing through instruments varying from seasonal loans tailored to agricultural cycles, to investments in mobile money technologies. These technologies in fact flourish in many LICs, and in particular in Southern and Eastern Africa. They allow people in remote rural areas to transfer, cash-in, and cash-out money. The potential for Benin to exploit mobile technologies is high because of the large number of mobile phones in use (Figure 12). A couple of commercial banks are currently piloting such services, but only for their clients. A few large MFIs have also started to invest in this technological new frontier.17

Figure 12.
Figure 12.

Benin: Mobile Phone Subscriptions, 2000–10

(Percent of population)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Beninese authorities.

34. Lack of adequate deposit protection. Although financial amounts processed by MFIs are a small proportion of those processed by commercial banks, their relative importance for low-income customers is substantial and requires adequate protection. The systemic importance of over 1.5 million depositors requires adequate measures to preserve the stability of the microfinance system. A project setting up a deposit guarantee fund (fonds de garantie des dépôts) is currently under discussion at the union level. Its implementation should be preceded by enhanced supervision.

35. Lack of adequate financial education. Financial education is important for clients of any financial institution, because it contributes to consumer protection. Financial education in Benin needs to be scaled up, and this is especially important for low-income clients whose exposure to fraudulent financial practices can have a significant impact on income. The government has an important role in supporting MFIs in conducting financial education campaigns to promote transparency and boost public confidence in financial services and products.

36. Excessive market concentration and lack of competition. As noted earlier, the microfinance sector is highly concentrated. Most MFIs operate in urban centers, leaving most rural areas either financially uncovered or under the monopoly of a single MFI. 18 Promoting competition in rural areas by offering incentives to institutions to open a branch in underserved areas could be an effective way of serving two purposes: lowering the cost of services to final beneficiaries and promoting economic activity in rural zones.

Institutional and regulatory constraints

37. Limitation on activities other than savings and loans. The prudential regulations applicable to MFIs, defined by the BCEAO at the union level and promulgated as a national law in Benin by the president in March 2012, constitute a major step forward in strengthening supervision and the stability of the microfinance sector. However, the law imposes a 5 percent limit on operations other than deposit collection and loan extension, which significantly curtails options for MFIs to engage in new services, such as microinsurance and money transfer. While there is merit in keeping MFIs focused on savings and loans, excessive concentration on these two activities unnecessarily prevents the MFIs from venturing into new areas where they have a comparative advantage and can make a contribution to economic activity. Providing microinsurance and money transfer services is usually a profitable “niche” activity for MFIs, whose earnings allow risk diversification, reach critical mass, and spread overhead costs.

38. Weakness of the business environment and of the judiciary. Shortcomings in the business environment limit financial intermediation. The World Bank’s Doing Business Indicators suggests that the overall cost of doing business in Benin is higher than the corresponding average cost in SSA. The legal and judicial environment is a factor of significant uncertainty for banks and MFIs willing to provide loans to the private sector. The lack of clarity on property rights, lack of land titles, and the uncertain status of certificates of land occupation sometimes used in lieu of land titles, all have a negative impact on safe collaterals, and hence makes financial institutions hesitant to provide credit, unless the borrower can provide exceptional guarantees.

39. Lack of adequate management information systems. Most MFIs’ information systems are rudimentary and preclude timely transmission of data between headquarters and field offices. The new regulatory and supervisory requirements imposed by the microfinance law imply that MFIs should be able to collect accurate and timely information for their own management and internal control purposes, as well as for transmission to the supervisory authorities. Investment in upgrading information systems is a necessity. Adequate information systems would in turn facilitate the enhancement of the union-wide borrower risk registry (Centrale des risques). In addition to this project, which may take some time to materialize, Benin has implemented a credit registry at the national level, managed by a private company, with participation from most licensed MFIs. The registry shares information on microfinance borrowers (Box 2).

Benin: Credit Registry

The credit registry for the exchange of risk information (Centrale d’échange d’informations sur le risque crédit des institutions financiéres), was established in January 2012 by ALAFIA, the professional association of MFIs, with five other members. The registry aims at increasing access of MSMEs to credit, securitizing MFIs’ portfolios, and developing the financial sector in Benin.

The registry is managed by a private Beninese company, headquartered in Cotonou. Its services are offered to MFIs, banks, and other financial institutions, but are currently used only by participating MFIs. The services include credit reporting, history of loan repayment, and history of residential addresses.

40. Lack of adequate professional skills in MFIs. MFIs provide financial services, which require adequate professional skills. This means that MFI personnel need to have basic banking knowledge, augmented by specific skills tuned to the peculiarities of microfinance operations. The professional association of MFIs (ALAFIA) can play an important role by offering specialized training and classes. It is also important that MFI personnel understand the new legislation and the related requirements.

41. Limited diversity in financial services and products. Benin’s microfinance services, as in most WAEMU countries, are insufficiently diversified to satisfy the financing needs of the economy. Only the largest MFIs are able to offer a wider range of saving products (e.g., current and savings accounts and term deposits at different maturities) and of loan products (e.g., specialized loans to government employees, military personnel, women, students). Other basic products, like micro-insurance and mobile money transfer, are not common. More sophisticated financial products, such as leasing, factoring, venture capital, and investment capital (which could provide alternatives to bank financing) are almost inexistent.

Other Financial Institutions

Benin’s other financial institutions are few and have a marginal role in financial deepening.

42. Benin has two pension funds. The pension system is composed of two entities: one for permanent civil servants (Fonds national de retraite du Bénin, FNRB) and a second one for private sector employees and contractual civil servants (Caisse nationale de sécurité sociale, CNSS).

  • The FNRB is a public entity whose financial operations are embedded in the government’s budget. It has limited power in managing and allocating its financial resources. A reform to strengthen the sustainability of the fund is under preparation, with involvement of all stakeholders.

  • The CNSS is an autonomous entity with a management board composed of nine representatives of employers, employees, and the government (three for each constituency). Its resources essentially come from employees’ and employers’ contributions, and from investment in real estate and financial assets. Management decisions to allocate assets is supervised by a board. CNSS’s net operating results have been positive since 2007, increasing from CFAF 17 billion in 2007 to CFAF 47 billion in 2011. These positive results are mostly due to the raising of the retirement age in 2007 from 55 to 60 years. Net results are expected to start declining in 2013, when the bulk of those who were 55 in 2007 will be retiring. According to CNSS’s by-laws, an actuarial evaluation has to be updated every five years. The main constraints currently faced by the CNSS are: (i) finishing the review of the regulatory framework; (ii) upgrading the information system; (iii) strengthening human resources trough training and new recruitment; and (iv) granting some flexibility to the management team in the allocation of the investment portfolio. As a provider of financial services for long-term savings and risk sharing, a more flexible allocation of CNSS’s portfolio would contribute to financial market deepening.

43. The insurance industry is small and dominated by non-life insurers. Total turnover of the industry was about CFAF 34 billion (1 percent of GDP) in 2010. There are six non-life insurers and six life insurers in Benin. All insurers, except three, belong to large international financial groups.19 Non-life insurers generate a large part of the industry’s turnover, but their market share declined from 78 percent in 2006 to 71 percent in 2010. Both life and non-life insurers have been profitable over the last five years. Industry investment appears to be conservative, thus limiting insurers’ exposure to market risk. In 2010, the industry’s assets were composed of bank deposits (36 percent); African Conference of Insurance Markets (ACIM) members’ bonds (31 percent);20 real assets (16 percent); shares in other companies (12.5 percent); and other assets (4.5 percent). The share of Beninese government bonds (about 5 percent) held by Beninese insurers is far lower than similar assets held by Beninese banks. The insurance industry in Benin is governed by ACIM’s regulatory framework. The supervision is jointly performed by the Ministry of Economy and Finance (MOFE) and an ACIM commission.

44. The insurance industry is shallow. The insurance penetration rate (number of insured people to total population) for life insurance increased from 0.2 percent in 2006 to 0.3 percent in 2010. For non-life insurance, the rate was about 0.7 percent during the same period. To improve penetration, insurers have recommended to require mandatory insurance for two-wheel vehicles, residential buildings, and execution of public contracts.

Financial Supervision

Financial supervision, divided between the union and Benin, is complex and needs strengthening.

A. Bank Supervision

45. Regulatory and supervisory functions are vested in the BCEAO and WAEMU’s banking commission (BC-WAEMU). License attribution and disciplinary decisions made by BC-WAEMU are announced to concerned banks by decrees of the minister of finance of the member country where the bank is located. The minister may appeal decisions of BC-WAEMU to the union’s Council of Ministers.

46. Developments in Benin’s banking sector call for stronger bank resolution mechanisms. Two banks have been insolvent for years without being resolved and have embarked on aggressive deposit collection to cover their operating losses. For one of them, a provisional administrator has been appointed with a mandate to restructure the bank and approach potential investors. The second bank has recorded losses ever since it has started operations. Its recapitalization by the regional, intergovernmental development bank (Banque Ouest-Africaine de Développement, BOAD) is under consideration and a restructuring plan is being devised. A third bank, which had been insolvent for several years, was closed in March 2012 and is being liquidated. Long delays in resolving banks with negative equity damage the reputation of the whole banking system and the credibility of banking supervision.

47. Consolidated supervision within WAEMU needs to be developed. Three banks in Benin are controlled by holding companies incorporated in other WAEMU countries and one bank operates as a branch of a bank incorporated in another union country and that has benefited from the “single union license” procedure. The BC-WAEMU holds supervisory power over banks and branches of holding companies operating in a WAEMU country. However, no prudential framework applies to the holding companies themselves, and the BC-WAEMU does not deliver licenses to these holding companies. Its supervisory power is exercised through receiving and analyzing quarterly reports of each bank and holding company, followed by on-site inspections if deemed necessary.

48. Cross-border information sharing and supervision remains generally limited, although eight banks are operating in Benin as subsidiaries of foreign financial holding companies headquartered outside the WAEMU. International cooperation between home and host authorities is currently vested in the BC-WAEMU. The current cross-border cooperation operates mostly in cases where there is a need to get a non-objection letter of the home country when a foreign bank applies for a license. No periodic common analysis is run by supervisory entities on the strategies, risk exposures, and regulatory requirements of involved banking groups.

B. Prudential Norms and Bank Soundness Indicators

49. There has been a gradual improvement in compliance with prudential norms since 2009 (Table 7). Nevertheless, there is also significant forebearance. Two banks (holding about 4 percent of bank deposits) are noncompliant with virtually all prudential norms and have negative capital. Two other banks face difficulty in complying with the liquidity and the asset transformation norms and have been benefiting from a transitory derogation to allow them to restore their compliance. All banks have been systematically missing the structure-of-portfolio norm, which requires that 60 percent of total loans be extended to borrowers rated by the BCEAO as eligible to refinancing.

Table 7.

Benin: Number of Banks in Violation of Prudential Ratios, 2009–12

article image
Source: Banque Centrale des Etats de l’Afrique de L’Ouest (BCEAO).

Risks are calculated on the basis of predermined regulatory weights for each category of assets.

The amount of provisioning of nonperforming loans is deducted to get net risks.

Ratio of assets that can be easily mobized in the short term (over three months) over liablities coming due in the short term and liabilities due in the short run (over three months).

Ratio of outstanding loans that are rated by the BCEAO on total gross credit of the bank.

Ratio of stable financial resources (Tier 1 capital, deposits and other financial resources with maturity of more than two years) on total medium-and long -terms uses (over two years).

Loans provided by a bank to people particpating in the management of the bank.

Total volume of risky assets for an individual bank.

Risks on a single individual or signature, including on and off-balance sheet risks.

50. Compliance with the regulatory prudential norms raises a number of observations:

  • Long-term resources. Banks’ transformation capacity is hindered by the scarcity of medium- and long-term resources, which currently come only from shareholders’ equity funds and institutional investors’ time-deposits. Accordingly, banks have had difficulty in meeting the regulatory ratio requiring that not less than 75 percent of their medium- and long-term loans be funded by similar resources.

  • Credit concentration. The regulatory framework encourages excessive credit concentration. Current regulation caps lending to a single borrower at 75 percent of regulatory capital, a very high limit by international standards (typically 20-25 percent).21 Loans thus tend to be concentrated on a small number of large borrowers (mostly utility companies), raising the potential for systemic risk if a large common borrower falters or is hit by an adverse shock. At end-2011, the five largest borrowers accounted for about 60 percent of the banking systems’ regulatory capital.

  • Borrower qualification. None of the banks meet the ratio requiring that no less than 60 percent of their credit portfolio be made up of credits rated by BCEAO as eligible for its refinancing. This situation seems to be a union-wide feature of all the banks and explain the authorities’ forbearance regarding the nonrespect of this ratio. This general infringement of the regulation likely has to do with (i) the limited size of the formal economy, which makes it difficult to find borrowers meeting the requirement of providing reliable financial statements using appropriate accounting standards; and (ii) the lack of incentives for banks to incur administrative costs to determine eligibility while they have a large and easy access to BCEAO refinancing for their stocks of government securities.

  • Deposit concentration. The excessive weight of a small number of large depositors makes some banks vulnerable. For instance, a withdrawal of funds by large institutional depositors, such as the private sector social security fund, could have a major impact on some banks. This deposit concentration risk is not captured by the prudential norms.

51. The soundness of the Beninese banking system has improved over the last few years (Table 8).22 The capital adequacy ratios for the sector as a whole have exceeded the norm of 8 percent since 2010, and credit concentation on the five largest borrowers of each bank has declined gradually since 2007 to 60 percent at end 2011. However, gross NPLs to total loans have been in the range of 16-17 percent since 2009, a relatively high level compared to other SSA countries (Figure 13).23 At the same time, provisions for NPLs were maintained in the range of 55-65 percent. The profitability of the banking sector, measured in terms of return on equity turned positive in 2007 and has gradually increased since then, reaching 14 percent in 2011. It has approached the corresponding average in SSA countries in the last two years.

Table 8.

Benin: Financial Soundness Indicators, 2005–11

(Percent, unless otherwise indicated)

article image
Source: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO).

Excluding taxes on banking operations.

Including savings accounts.

Figure 13.
Figure 13.

Benin and SSA Countries: Financial Soundness Indicators, 2006–11

(Units as indicated)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Sources: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO);IMF, African Department Database.

52. Although financial soundness indicators suggest that the sector as a whole is in relative good health, a number of risks are not captured by these indicators:

  • Asset concentration. The risk inherent in asset concentration in government securities is not reflected by the solvency ratios because these assets are zero-weighted regardless of their actual underlying creditworthiness. Banks intensively engaged in the primary securities market have a high leverage and a strong capital adequacy ratio. The uniform application of zero-risk weighting to all sovereign assets leads to an overestimation of the apparent solvency of the banks in comparison with the solvency that would be derived from the methods recommended by the Basel II approach for risk weighting.24

  • Liquidity ratios. These ratios can give a more favorable impression of the situation than is actually the case. Two specific bank practices contribute to this. First, with belated payments on loans to beneficiaries of government contract, resulting from delays in government payments to borrowers, banks do not systematically downgrade the quality of the loans concerned. Second, overdrafts are routinely extended, and loans are often restructured in such a manner that allows them to continue to be classified as liquid assets, while in reality they are frozen assets.25

  • Counterpart risk. Claims on financial institutions are attributed a risk weight of 20 percent, regardless of the actual credit-worthiness of each institution. This Basel I approach is inconsistent with newer, risk-based supervision, and does not incite banks to assess their counterpart-risk exposures adequately.

53. The soundness indicators for the sector as a whole hide large disparities across banks. For instance, the relatively high capital adequacy ratio in Benin is largely attributable to the four largest banks. These highly leveraged banks had a return on equity above 20 percent, while new banks are still barely profitable. The largest banks hold large portfolios of government securities and re-invest the proceeds from these portfolios in similar securities. This practice results in an increase in these banks’ leverage, which thus boosts their return on equity.

C. Supervision of the Microfinance Sector

54. The microfinance sector has a complex oversight system. Multiple entities are involved in licensing, regulating, supervising, and promoting the sector. The MOFE has the right to license an MFI, after a qualified opinion is issued by the BCEAO. Progress in licensing MFIs has been, however, quite slow since 2005 (Figure 14). The supervision of the sector is under the responsibility of the MOFE, which exercises it through a special unit in charge of decentralized financial entities (Cellule de surveillance des structures financières décentralisées, CSSFD). The BCEAO, through its national branch in Cotonou, and the BC-WAEMU perform the supervision of MFIs with deposits or loans exceeding CFAF 2 billion. The promotion of the sector is the responsibility of the Ministry of Microfinance, Youth Employment, and Women. This ministry elaborates and oversees the implementation of the national strategy for the development of the microfinance sector. ALAFIA provides inputs on the regulation and promotion of the sector to protect the interests of its members. Several donors are also involved in the financing of the sector or specific MFIs.

Figure 14.
Figure 14.

Benin: Licensed Microfinance Institutions, 2000–12

(Units)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Cellule de Surveillance des Structures Financières Décentralisees (CSSFD), Ministry of Economy and Finance.

55. The authorities regard the strengthening of the regulation and supervision of the microfinance sector as a priority. The National Assembly adopted a new law, transposed from a union-wide regulatory framework for MFIs, in January 2012 in the wake of the rapid expansion of the sector and the emergence of fraudulent financial schemes. The framework tightens the conditions for creating an MFI, and gives enhanced supervisory powers to the MOFE and the BC-WAEMU.26

56. Limited supervisory capacity and effectiveness. Efforts are under way to help unauthorized MFIs to meet the criteria required for obtaining a license. The sector has gone through a serious crisis in 2010 because of illegal Ponzi-type schemes (Box 3). The reputational risk associated with these unauthorized financial intermediaries is thus high, and it undermines consumer confidence in the microfinance system.

Benin: Ponzi Schemes

Financial Ponzi schemes (i.e., entities engaging in scams and fraudulent financial operations) began operating at the end of 2006 and attracted deposits from the general public with the promise of high returns. The first and the largest of these schemes—Investment Consultancy and Computing Services, ICCS—collapsed in June 2010. The collapse caused some social tensions. Similar fraudulent schemes collapsed later, causing further social tensions.

Fraud developed in the informal financial sector starting with unauthorized deposit taking entities. These entities, which took various names and legal forms, did not state that taking deposits was their principal purpose. They took advantage of the existence of widespread financial cooperative practices in the informal economy (i.e., savings clubs called “tontines”) and thus the public was receptive to seemingly lucrative returns offered by these informal institutions.

Illegally collected funds were estimated at CFAF 161 billion (14.7 percent of the deposits of the authorized MFIs and banks), but the total amount of the deposits taken illegally may have been much higher. These funds came from about 150.000 depositors. The average deposit was around CFAF 500,000. Collected deposits were initially used to pay high interest to depositors to entice large-scale deposit collection. Later, some of the deposits were diverted to fraudulent purposes.

The authorities responded to the emergency by appointing an interministerial crisis committee and seizing the assets of the entities and of their managers, some of whom were arrested. Funds deposited by the illegal entities in banks amount to about CFAF 8 billion and have been frozen by the authorities. In addition, about 120 vehicles and some real estate, whose value has yet to be estimated, were seized. It is also possible that some of the funds invested in businesses may be recouped. The authorities’ intent is to refund depositors with the proceed from these collection efforts.

The collapse of these schemes had limited impact on the banking system, where deposits continued to increase. A rise in repayment problems was reported at the time in the microfinance sector. The reputational damage to the microfinance sector is difficult to assess but it could have a lasting impact on the general public’s confidence in the microfinance system.

The Government Securities Market

The regional government securities market has evolved positively since its establishment in 2001 and has been regularly used by Benin over the last seven years. The market has two alternative issuance methods. There is no secondary market in government securities. The regional authorities face the challenge to enhance the depth and the functioning of the market, notably through redirecting the market to long-term maturities, improving issuance predictability and coordination, and creating an effective secondary market.

57. Benin has been active on the primary regional government securities market since 2005. At end-June 2012, outstanding treasury bills (T-bills) and T-bonds issued by Benin through the central bank (auction) amounted to CFAF 225.2 billion and CFAF 98.8 billion, respectively. All T-bills were of one-year maturity, with an interest rate of 5.8 to 6.5 percent. T-bonds issued so far have had 7 to 10 years of maturity, with an interest rate of 5.5 to 6.5 percent. Of the outstanding securities issued by Benin through auctions, Beninese banks held CFAF 188 billion (58 percent) at end-June 2012. Beninese banks also held CFAF 263 billion worth of securities issued by other WAEMU governments.27

58. The securities market is characterized by the existence of two alternative issuance methods. Securities issuance can be done by auction through the BCEAO or by syndication through the CREPMF. Auctions have several advantages over syndication: (i) they are more transparent and cost the issuing government less; and (ii) auctioned securities are accepted as collateral in monetary policy operations. At end-June 2012, Benin had an outstanding debt of 68 billion (17 percent of total securities) from T-bonds issued through syndication in 2011, at 6.5 percent a year and with a 6-year maturity.

59. The securities market is beset by a number of weaknesses. These include limited-term structure, uncoordinated security issuance schedules, and absence of an effective secondary market that could reduce the cost of borrowing.

  • Limited-term structure. Issued securities are concentrated in short-term maturities. Unlike T-bills, T-bonds are of limited interest to banks, owing to their longer maturities. Banks have a preference for investing in T-bills because they offer an attractive yield on relatively short maturities, are considered risk-free in the calculation of the solvency ratio, and are accepted as collateral in refinancing operations with the BCEAO. Purchases of medium- and long-term T-bonds are also made difficult by the prudential regulation on maturity transformation.28

  • Uncoordinated security issuance schedules. Governments are required to provide a schedule of planned issuances to the BCEAO at the beginning of each year. The schedules are, however, not binding nor coordinated among members.

  • Absence of an effective secondary market. Such a market is practically inexistent. Limited interest in it is due largely to the above-noted structural excess liquidity at banks, and the lack of infrastructure and a legal framework needed to secure transactions in such a market. The establishment of a regulatory framework for primary dealers and repurchase operations (repos) could contribute to the development of this market.

60. The BCEAO is considering reforms to strengthen the operations of the regional securities market. These reforms include producing reliable annual schedules of government securities issuance; issuing all securities by auction; putting in place a network of primary dealers; establishing a legal framework for repos; promoting foreign participation; and setting up a government securities issuance coordination committee under the authority of the union’s Council of Ministers.

Challenges to Macroeconomic Policy

The shallowness of financial markets in the WAEMU does not overly constrain fiscal policy in Benin, but it offers little traction to monetary policy.

61. Government financing is not overly constrained by the shallowness of Benin’s financial sector because of the existence of a liquid regional market. There is currently no explicit ceiling on how much government securities a WAEMU member may issue through auction or syndication. The union’s monetary policy committee may, however, impose a limit on new issuances by union members through the BCEAO. But even this constraint is not fully binding, because a government might still issue bonds through syndication. The real limit seems to be in the absorptive capacity of the regional market. This capacity is not unlimited and thus it could be tested in case a government needed to finance a large need quickly, in response, say, to an unexpected shock. The test would be even more severe if several governments were confronted with simultaneous shocks. Moreover, Benin’s T-bonds are mostly acquired by domestic banks, which also have a limited absorptive capacity.29 This likely stems from external investor’s low confidence in Benin’s long-term securities. A significant shift to long-term bonds could potentially crowd out private sector lending.

62. The existing empirical evidence is consistent with the view that there are strong a priori reasons to believe that monetary transmission may be both weak and unreliable in shallow financial systems, like in Benin. A survey of empirical evidence completed by Mishra and Montiel (2012) concluded that there was very weak evidence for the effectiveness of monetary transmission in LICs in SSA, whether an interest rate or the monetary base is considered to be the policy variable and whether identification of the monetary policy shock is achieved through recursive or structural means. A study by Saxegaard (2006) on excessive liquidity and effectiveness of monetary policy in the CEMAC, Nigeria, and Uganda, found that involuntary excess liquidity (which is calculated as total excess liquidity minus estimated excess liquidity held for precautionary purposes) weakened the monetary policy transmission mechanism in those countries, and thus the ability of monetary authorities to influence demand conditions in those countries. In the context of the WAEMU, Samaké’s study on Benin (2010) concluded that excess bank liquidity lowers the effectiveness of monetary policy instruments through the credit channel. A recent study conducted by Ouedraogo (2011) on WAEMU countries reached the conclusion that bank concentration negatively affected credit supply and constrained the transmission of monetary policy in the union.

63. Bank lending rates in Benin do not seem to be sensitive to changes in policy rates. Figure 15 shows that the two policy rates were revised down only two times since January 2009 (in June 2009 and May 2012). The short-term interest rate on the money market (not shown in Figure 15 because too close to the minimum rate of auctions) remained between the two policy rates and the minimum rate of auctions. The recent changes in policy rates did not seem to have a notable impact on the average bank lending rate, which has remained in the range of 10.8-12.3 percent since January 2009. This observation is thus consistent with the empirical evidence presented above. However, it would need to be firmed up through a more thorough analysis and over a longer period.

Figure 15.
Figure 15.

Benin: Policy, Deposit, and Lending Interest Rates, 2009–12

(Percent)

Citation: IMF Staff Country Reports 2013, 009; 10.5089/9781475592917.002.A002

Source: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO).

64. Several factors limit the effectiveness of monetary policy transmission in Benin. The monetary transmission mechanism, i.e., the channels trough which monetary policy actions are transmitted to the ultimate objective of the policy, depends on two links: one between monetary policy actions and the availability and cost of bank credit; and another link between the availability and cost of bank loans and aggregate credit demand. In the context of Benin, these linkages seem to be weak because of the following factors:

  • Structural excess liquidity. Excess liquidity in the Beninese banking sector was around CFAF 37 billion (3.4 percent of bank deposits) on average during June 2009-June 2012 (Figure 10). In such a context, availability of liquidity is not a constraining factor on bank credit. A cut in policy rates is unlikely to push banks to use the central bank’s refinancing facility to get more and cheaper liquidity, as they have already non-remunerated excess reserves. Consequently, the pass-through from the change in policy rates to bank lending rates and to the availability of bank credit is likely to be weak.

  • Absence of an operational interbank market. The interbank market is supposed to fulfill the essential function of lender of first resort to banks in need of liquidity. The absence of such a market prevents a recycling of available liquidity among banks, thus limiting the volume of credit that the whole banking sector can extend. The absence of an interbank market that can play an arbitrative role between supply and demand of liquidity in the banking system makes credit conditions less responsive to changes in monetary policy.

  • Insufficient competition in the banking system. In the case of a strong concentration in the banking sector, a reduction in banks’ cost of funds resulting from a change in monetary policy may be reflected in increased profit margins, rather than in banks’ lending rates.30

  • Limited link between the microfinance and banking sectors. A reduced cost of funds could be used by microfinance institutions as an opportunity to acquire cheaper resources from banks to expand their lending activity. Given their relative small size in the financial sector, weaknesses in the supervision of this sector, and the limited link between the microfinance and banking sectors, this channel would not, in the case of Benin, play a significant role in the effectiveness of monetary policy.

  • Institutional and structural impediments to bank lending. In case of a cut in the policy rate or in the reserve requirement, a poor institutional environment makes banks reluctant to reduce their lending rate to attract new borrowers because of imperfect information about borrowers and the resulting increase in the riskiness of the bank’s loan portfolio. The high level of NPLs on the balance sheets of commercial banks, for which the banks are required to hold provisions, is an important factor leading to reluctance to respond to change in monetary policy instrument. Banks would need to sort out their legacy asset problems before they can raise lending to the private sector.

  • Existence of a large informal sector. Besides the weak link between monetary policy and availability and cost of bank credit resulting from the factors presented above, the link between availability and cost of bank credit and aggregate credit demand is weakened by a large informal sector in Benin. A reduction in bank lending rates may have relatively little effect on informal lending rates—customers of the informal sector cannot present the guaranties required by banks to move from the informal to the formal financial system and thus cannot exert downward pressure on the informal rates in the case of a cut in the policy rate. Only the relatively small number of borrowers of the formal financial system would be sensitive to a decline in bank lending rates.

Recommendations for Financial Deepening

The recommendations in this section focus on actions that could be implemented by Benin or put forward by Benin to union decision-making bodies. They authorities welcomed this forthcoming study and noted that its recommendations will be considered, especially since similar recommendations are being debated at the level of the union. The recommendations below are intended to enhance financial deepening, foster macro-financial stability, and improve macroeconomic policy effectiveness in Benin. They build on previous IMF technical assistance (Box 4). Another pilot review, to be prepared in the context of the Article IV consultation with WAEMU, will make recommendations on union-wide issues.31

Benin: IMF Technical Assistance to the Financial System

IMF staff has provided policy advice to Benin on financial sector issues through surveillance, technical assistance, and program reviews. In the last two years, two IMF technical assistance missions visited Benin in (i) September 2010 to advise on managing a crisis generated by illegal deposit-taking entities; and (ii) December 2011 to carry out a diagnosis of the financial sector. The 2010 Article IV consultation assessed the risks posed by banks that were not in compliance with prudential regulations, and by unauthorized MFIs, which were operating fraudulent financial schemes. It advised the authorities to take prompt action to mitigate these risks. Subsequent Extended Credit Facility (ECF) program review missions assessed progress made in implementing the recommendations.

IMF staff advice also was provided on a range of issues related to the financial systems of the WAEMU, with implications for Benin. A mission in May 2011 advised the BCEAO on the implementation of recommendations made in 2007 under the Financial Sector Assessment Program (FSAP), public debt management, macro-prudential supervision, and an operational framework for monetary policy. The 2012 Article IV consultation with WAEMU also examined risks and vulnerabilities faced by the regional banking system, and progress made in bank supervision, monetary operations, interbank and government securities markets, and union-wide financial deepening.

A. Banking Sector

65. Facilitate risk assessment. To encourage banks to extend credit to the private sector beyond the limited circle of large businesses, financial information on borrowers should be made timely, available, and reliable to help banks assess risks, particularly for SMEs and non-salaried clients. In this vein, work on making the central registry of bad debts (Centrale des incidents de paiements) operational and on establishing a credit bureau should be accelerated. A credit bureau for banks would help to rein in the current proliferation of unreliable financial statements. A generalization of the existing unique tax identification number (identifiant fiscal unique) would make it easier to centralize data on individual borrowers.32

66. Improve the legal infrastructure to support credit contracts and their enforcement. Strengthening property rights and ensuring proper contract enforcement are critical elements for a better protection of the legal rights of creditors. This would give banks the means to recover their collateral through prompt and reasonably priced court procedures. The National Credit Council (NCC),33 together with the Professional Bankers’ Association and concerned public entities (justice, police, tax administration), could propose actions aimed at removing obstacles in this area.

67. Enhance the quality, coverage, and dissemination of information on banks’ operating fees. Without financial transparency, there cannot be any credible prospect for an active interbank market or an attractive banking industry. Banks need reliable financial information that allows comparison among players and over time in order to assess counterpart risks. Customers are also entitled to information on the strengths and weaknesses of the bank to which they entrust their deposits. Providing financial information to the general public and to the media is one way of developing healthy competition and a “financial culture,” and promoting modernization of financial instruments. In the absence of a financial communication agency, such as Reuters, an important step would be to encourage the prompt publication of detailed and audited annual financial statements by banks, and interim financial information, at least on a semi-annual basis. These statements could be posted in newspapers and on the internet to improve their dissemination.34 The same goes for the publication of up-to-date bank charges and lending conditions, in order to allow potential customers to shop around.

68. Revise the prudential regulation on banks’ credit portfolio. No bank has been able to meet this norm. Accordingly, it would need to be revised at the union-level to avoid bringing prudential regulations as a whole into disrepute.

69. Strengthen banking supervision. Effective banking supervision requires proper observation and analysis, a decision-making body that can move promptly to take corrective action in case of need, and means for enforcing that action. The fact that two banks have been operating in Benin with negative equity over a long period and may continue to collect deposits to cover losses, is not consistent with this approach. This situation distorts competition among banks and risks undermining public confidence in the banking system. Concerned authorities should address this situation promptly.

70. Strengthen macro-prudential oversight.35 The financial markets are influenced by developments in the real economy. In particular, trends in the major economic sectors (port, cotton sector, construction, etc.) and worker remittances have a significant impact. These developments—some of them cyclical—may be out of phase with the factors underpinning regional monetary policy. Coordination of regional and national policies should be enhanced to (i) track divergences between developments in the regional and national economies; (ii) identify, analyze, and measure the consequences of these divergences; and (iii) ensure that monetary policy objectives and prudential instruments converge on aligned incentives (e.g., regulations on refinancing and on risk weighting, relative levels of interest rates, etc.). In light of its composition and its advisory role, the NCC seems a suitable forum for developing proposals for macro-prudential measures that could improve the impact of monetary policy and help protect macro-financial stability in Benin.

71. Promote innovative forms of banking. Introducing mobile payments on a large scale will require enhanced provision of public infrastructure (in particular telecommunications) to reduce the cost of new services and the expansion of financial services to reach underserved areas. Agency banking36 is another innovative way of extending the reach of banks at low cost. These innovative forms of banking will require an updated regulatory framework to allow their safe expansion.

B. Microfinance Sector

72. Strengthen data production and dissemination. The survey conducted in 2011 should be updated and extended, and the CSSFD should be strengthened in its data gathering capacity, so that stakeholders have a robust perspective of the sector. In particular, it is recommended to collect, and regularly update, the number of clients (depositors and borrowers) and transaction details for each identified MFI.

73. Address vulnerabilities of the microfinance sector:

  • Resolve distressed MFIs. Some ten MFIs are currently in financial distress, mostly because of governance problems, lack of proper internal controls, and inadequate management information systems. The recent experiences of fraudulent financial schemes have undermined confidence in the microfinance sector. Against this background, it is important that distressed MFIs be either restructured or liquidated rapidly. This would send a strong signal to the whole sector.

  • Strengthen CSSFD. The capacity of the CSSFD should be strengthened through additional means and technical assistance to increase the frequency of its on-site inspections.

  • Simplify licensing requirements and procedures to reduce the delay for obtaining a licence to less than six months, as stipulated by the law. MFIs, which are not licensed, should move quickly to obtain authorization. To facilitate completion of this procedure in six months, unlicensed MFIs should be offered technical and material assistance to submit their applications in time and proper form. Authorities should send a strong signal to the microfinance sector by closing institutions which are operating illegally and are not in the process of being regularized.

74. Increase the resources of MFI supervisory bodies. The regulatory framework for microfinance has been reinforced with the National Assembly’s adoption of new regional legislation in January 2012 and its promulgation by the president in March 2012. The provisions of that law should now be put into effect. MFIs that are not of a sufficient operating scale could be encouraged to merge or to be taken over by licensed institutions. The resources and the capacity of the CSSFD should be boosted to cope with the anticipated increase in the number of licensed MFIs. Similarly, the Committee on Financial Stability and Rationalization of the Microfinance Sector (CFSASM), created in April 2012, needs to operate effectively to accomplish its important mission.

75. Provide MFIs with long-term funding. Because the resources of the MFIs consist essentially of demand deposits, it would be appropriate to provide them with medium- and long-term resources through an appropriate funding mechanism. Such financing should be made available to MFIs on a commercial basis, along with the provision of supportive technical assistance. This role is successfully played in many LICs by “apex institutions.” An apex institution is a second-tier (or “wholesale”) fund that channels public resources to multiple retail financial providers—often MFIs—for on-lending. Apex institutions typically have an objective of developing the institutional capacity of early-stage MFIs, by providing grants and capacity-building assistance. They are generally a good solution in environments where medium-to-long term funding is in short supply; for instance, where commercial banks do not have confidence in MFIs’ creditworthiness. Apex facilities have become increasingly popular with LIC governments, as well as with development finance institutions and multilateral development agencies.37 The NFM, whose current setup and function resembles the concept of an apex institution, could potentially be used to play this role in Benin to foster MFI lending to MSEs. However, its current strong bias towards a microcredit approach focused on the poorest households would require adaptation to its contemplated new role.

76. Offer appropriate incentives to MFIs to reach out to underserved rural areas. These incentives could take the form of government participation in (i) the purchase or construction of the necessary infrastructure; (ii) the purchase of equipment (computers, safe deposit boxes, motor bikes); and (iii) in certain cases, the temporary funding of the salaries of staff of the new units. External grants could be raised for this purpose through the NFM.

77. Allow MFIs to expand the range of their services. For the time being, union-wide regulations set a limit of 5 percent of total assets on activities other than savings and credit services. By lessening this constraint, MFIs could venture into new, profitable activities, such as microinsurance and money transfer. This would contribute to financial deepening and breadth expansion.38

78. Strengthen MFIs’ management capacity and human resources quality. The authorities, and more specifically the Microfinance Ministry, should help MFIs reinforce their capacities, working perhaps through ALAFIA, to raise their capacity to abide by governing regulations. MFIs should be helped to secure information tools for their internal management and supervision.

79. Take steps to educate the public in microfinance matters. Such education would be particularly useful for low-income populations that are likely to benefit the most from microfinance services. They are also the groups that are most exposed to fraud. The authorities should work together with MFIs in this endeavor.

Selected Bibliography

  • Allen, F., Carletti, E., Cull, R., Qian, J., Senbet, L., and Valenzuela, P., 2012, Resolving the African Financial Development Gap: Cross-Country Comparisons and a Within-Country Study of Kenya, NBER Working Paper No. 18013

    • Search Google Scholar
    • Export Citation

  • Banque Centrale des États de l’Afrique de l’Ouest, 2012, Note sur le Conseil National du Crédit, Cotonou, Benin

  • Barajas, A., and Chami, R., 2012 The Finance and Growth Nexus Re-examined: Do all Countries Benefit Equally? Unpublished paper, International Monetary Fund,

    • Search Google Scholar
    • Export Citation

  • Consultative Group to Assist the Poor (CGAP), 2011, Global Standard-Setting Bodies and Financial Inclusion for the Poor: Toward Proportionate Standards and Guidance, available via http://www.cgap.org/gm/document-1.9.55147/CGAP_WhitePaper_Global_Standard_Setting_Bodies.pdf

    • Search Google Scholar
    • Export Citation

  • Goyal et al., 2011, Financial Deepening and International Monetary Stability, IMF Staff Discussion Note No. 11/16, Washington, DC, USA

  • Group of 20 (“G20”), 2010, Interim Report

  • International Monetary Fund, May 2010, Benin Country Report 10/195, Washington, DC, USA

  • International Monetary Fund, March 2012, West African Economic and Monetary Union Country Report 12/59, Washington, DC, USA

  • International Monetary Fund, May 2012, Enhancing Financial Sector Surveillance in Low-Income Countries: Financial Deepening and Macro-Stability, Executive Board Document FO/DIS/12/66

    • Search Google Scholar
    • Export Citation

  • Mishra P., and Montiel, P., 2012, How effective is monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence, International Monetary Fund, WP/12/143

    • Search Google Scholar
    • Export Citation

  • Ouedraogo, S., Concentration Bancaire et Efficacité de la Politique Monétaire dans l’UEMOA, in Mbaye, A., Diarisso, S., and Diop I., Quel Secteur pour le Financement des Economies de l’UEMOA?, L’Harmattan, 2011

    • Search Google Scholar
    • Export Citation

  • Samaké I., 2010, “A Macro Model of the Credit Channel in a Currency Union Member: The Case of Benin”, International Monetary Fund, WP/10/191

    • Search Google Scholar
    • Export Citation

  • Sanders, T., and Wegener C., 2006, Meso-Finance, Filing the Financial Service Gap for Small Business in Developing Countries, Position Paper, Available on www.Bidnetwork.org

    • Search Google Scholar
    • Export Citation

  • Saxegaard, M., 2006, Excess Liquidity and the Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa, IMF Working Paper 06/115

    • Search Google Scholar
    • Export Citation

  • Veinard, C., 2010, How Agent Banking Changes the Economics of Small Accounts, Global Savings Forum, Bill & Melinda Gates Foundation

  • World Bank, 2012, FinStats 2012, User Guide and Benchmarking Methodology, DC, USA

  • World Economic Forum, 2012, Report on Global Competitiveness

2

The economic literature recognizes in general that the financial system performs four basic functions essential to economic development and growth: mobilization of savings; allocation of resources; facilitation of transactions and risk management; and provision of corporate control (Barajas, A. and Chami, R., 2012). Another function noted by some authors is information generation for market actors.

3

This study was initiated in July 2012 during the Article IV discussions in Cotonou, Benin, and was later completed by a staff visit in September to the headquarters of the regional central bank in Dakar, Senegal, the regional banking commission in Abidjan, Côte d’Ivoire, and financial institutions in Cotonou.

4

This supplement was prepared by Fabien Nsengiyumva and Mario de Zamaróczy, with substantive inputs from Francesco Strobbe (World Bank) and Donat Branger (external expert).

6

One of them became insolvent for several years and was closed in March 2012.

9

Zambia and Rwanda are the only countries with complete series of data, among countries suggested by the World Bank’s FinStats database as peer countries for Benin, based on GDP per capita and population data.

10

The statistical benchmark is estimated in FinStats by regressing each financial indicator on a set of structural factors, such as GDP per capita, the square of GDP per capita (to account for potential non-linearities), population size, population density, the age-dependency ratio, and country-specific factors, such as the presence of an offshore financial center or the status of being an oil exporter (World Bank, 2012). The number of countries used for the income group benchmarks varies from 25 to 31 for 2001-10.

11

One mechanism for guaranteeing loans that is operating in Benin is funded by an international organization specialized in loan guarantees: the African Guarantee and Cooperation Fund (Fonds Africain de Garantie et de Coopération Économique, FAGACE). At end-2010, the fund had 34 Beninese projects in its portfolio, with guarantees amounting to about CFAF 36 billion. A regional financial institution for refinancing mortgage loans (CRRH-UÉMOA) was launched in 2010. Its first refinancing operation became effective in August 2012.

12

Allen and others, 2012, page 4, find “that the minimum viable banking sector scale is best achieved in major cities, and that technological advances, such as mobile telephone payments, could be one way to facilitate African financial development, especially outside metropolitan areas.” Kenya’s experience confirms this finding.

13

Savings and credit institutions collect deposits and provide loans. Direct credit institutions do not collect deposits but, lend resources borrowed from banks or obtained from the government and donors.

14

Based on data for over 70 percent of total deposits in the sector, term-deposits are currently remunerated at an initial 3 percent over 6 months, and then gradually increasing, according to the amount deposited.

15

“Meso-Finance” is the term often used to describe the financial needs of the “missing middle,” which is represented by the financing gap affecting those MSEs whose financing needs are above those offered by the traditional microfinance providers, but below the level of services offered by commercial banks (Sanders, T. and Wegener C., 2006).

16

Allen and others, 2012, page 6, note that generally “most established commercial banks view the sectors targeted by MFIs as “unbankable.”

17

In Kenya, the launching of a nation-wide mobile phone plan was financially helped by an external donor. Elsewhere, mobile phone companies were able to do the same with their own resources and were able to recoup the initial fixed cost. In Benin, the largest MFI (FECECAM) offers instant money transfer service by mobile phone.

18

No recent data could be obtained on the checking services of the Postal Office (Centre de chèques postaux). Given their capillary distribution over the territory, they have good access to the rural population. They could be energized to reach out and provide enhanced financial services. Currently, these services are not considered as financial ones and therefore are not regulated by the financial sector supervisory authorities.

19

Beninese nationals hold majority shares in the other three insurance companies.

20

Beninese insurers are authorized to buy bonds issued by ACIM member countries (the 14 countries of the WAEMU and the Central African Economic and Monetary Union (Communauté Économique et Monétaire de l’Afrique Centrale, CEMAC). Details on the issuers of ACIM members’ bonds held by Beninese insurers are not available.

21

Some argue that in small markets these international standards should not have full sway.

22

IMFa, 2012, presents the same table for WAEMU’s consolidated banking system for 2006-10. Appendix IV of the report quoted presents an analysis on union-wide financial deepening in the same period.

23

Of 28 SSA countries for which data on NPLs are available for 2011, only two (Liberia and Mali) had a ratio of NPLs to total deposits higher than Benin. The high NPL ratios in Benin are explained in part by the obligation for banks to keep NPLs in their books until the end of long judiciary proceedings, regardless of the likelihood of the assets’ recovery. For this reason, NPL write-offs are rare, and banks keep adding new NPLs to the stock of old ones. The low flow of NPLs gives a more relevant view of the actual risk and explains the relatively high return on equity.

24

The BCEAO is considering moving to the Basel II regulatory framework in the future (IMFa, 2012, ¶27).

25

This practice also underestimates NPLs.

26

“To prevent a re-emergence of Ponzi schemes, the government created a committee for financial stability and rationalization of the microfinance sector (Comité de Stabilité Financière et d’Assainissement du Secteur de la Microfinance, CSFASM) in December 2011. The committee was tasked with (i) setting up and running a monitoring system over the microfinance sector; (ii) establishing a secure system for the exchange of information among all entities involved in the oversight of the sector; (iii) gradually closing all illegal microfinance entities; and (iv) ensuring that sanctions are taken against entities in violation of legal and regulatory measures governing the sector. The committee started its activities in April 2012 and had, as of mid-September 2012, launched investigations against a number of illegal entities.

27

Benin’s issuance of private corporate bonds and shares on the regional financial market (based in Abidjan) is limited. Only one Beninese company is listed on the stock market and there have been only four issuances of private corporate bonds so far, totaling CFAF 37 billions, of which CFAF 4 billion was outstanding at end-September 2010 (last available information). However, Beninese asset management companies operate actively as intermediaries on the regional financial market. Data provided by the Regional Council for Public Savings and Financial Markets (Conseil Régional de l’Épargne Publique et des Marchés Financiers, CREPMF) indicate that Beninese asset management companies held CFAF 476 billion of public and private bonds in their portfolios at end-September 2010.

28

The prudential regulation requires banks to cover at least 75 percent of their long-term assets with long-term resources (of two years minimum).

29

Almost all T-bonds issued through auction and outstanding at end-June 2012 were held by Beninese banks.

30

Under limited competition, an increase in banks’ cost of funds would generate an asymmetrical effect, because banks are likely to pass on the increase in lending rates instead of reducing their profit margins.

31

IMFa, 2012, provides union-wide recommendations that are relevant also to Benin and reports on the regional authorities’ views on financial deepening (¶35-37).

32

This recommendation is consistent with two structural benchmarks under Benin’s ECF arrangement with the IMF.

33

The NCC in Benin is composed of the Minister of Finance, a representative of the national branch of the BCEAO, members of the monetary policy committee, the Director of the Treasury, and representatives of the banking association, consumer associations, and academia. The NCC is an advisory body, which monitors the operations and functioning of the financial system, and credit conditions. The NCC also advises on the macroeconomic framework implemented by the authorities (BCEAO, 2012).

34

In some countries, banking supervisors offer space on their own web-sites where banks post their accounts under their own responsibility. In other countries, banks are encouraged to post their financial statements in a timely manner on their own web-site. In any case, financial statements may be published before formal approval by the supervisory authorities, external auditors, or shareholders, provided these publications carry a warning on their provisory status. Conversely, disseminating false financial data or fake statements should be sanctioned severely.

35

There are three main components to macro-prudential policy: (i) its objective, which is to limit systemic risk, namely the risk of extended breakdowns in the provision of financial services with the consequent adverse impact on the real economy; (ii) its coverage, which extends to the financial system as a whole, and its interaction with the real economy; and (iii) its instruments, namely the prudential tools targeting sources of systemic risk (Interim report to the G20, November 2010).

36

Agency banking involves an existing business facility (e.g., a shop) acting as an agent and providing limited banking services on account of a bank (Veinard, C., 2010).

37

A CGAP mapping exercise identified 76 apex institutions in 46 countries. In 2009, the largest 15 of them disbursed US$1.5 billion. Public funding was the main source of their resources. Typically, national finance ministries were the main source of funding, followed by multilateral development agencies, and bilateral donors. In some exceptional cases, apex institutions were funded by commercial banks or by non-governmental organizations and private investors. Most apex institutions were funded with subsidized resources (grants, or loans at well below market interest rates). As apex institutions grow, retained earnings become an increasingly important source of their funds.

38

WAEMU authorities are reportedly considering raising the limit from 5 percent to 10 percent.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Benin: 2012 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement—Staff Report; Staff Supplements; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2013: Issue 009
Publisher:
International Monetary Fund
ISBN:
9781475592917
ISSN:
1934-7685
Pages:
146
DOI:
https://doi.org/10.5089/9781475592917.002
  • View in gallery

    Sub-Saharan Africa: Broad Money, 2000–11

    (Percent of GDP)

  • View in gallery

    Sub-Saharan Africa: Credit to Private Sector, 2000–11

    (Percent of GDP)

  • View in gallery

    Benin and Sub-Saharan Africa: Private Credit, 2001–10

    (Percent of GDP)

  • View in gallery

    Benin and Sub-Saharan Africa: Domestic Bank Deposits, 2001–10

    (Percent of GDP)

  • View in gallery

    Benin and Sub-Saharan Africa: Three-Bank Asset Concentration, 2001–10

    (Percent of assets of all banks)

  • View in gallery

    Benin and Sub-Saharan Africa: Credit to Government and State-Owned Enterprises, 2001–10

    (Percent of GDP)

  • View in gallery

    WAEMU: Adult Population with a Bank Account, 2010

    (Percent)

  • View in gallery

    WAEMU: Adult Population with an Account at a Formal Financial Institution1, 2010

    (Percent)

  • View in gallery

    Account Penetration, 2011

    (Percent)

  • View in gallery

    Formal and Informal Savings, 2011

    (Percent)

  • View in gallery

    Formal and Informal Borrowing, 2011

    (Percent)

  • View in gallery

    Benin: Excess Bank Reserves, December 2007-June 2012

    (Percent of deposits)

  • View in gallery

    Benin: The Missing Middle in Access to Finance

  • View in gallery

    Benin: Mobile Phone Subscriptions, 2000–10

    (Percent of population)

  • View in gallery

    Benin and SSA Countries: Financial Soundness Indicators, 2006–11

    (Units as indicated)

  • View in gallery

    Benin: Licensed Microfinance Institutions, 2000–12

    (Units)

  • View in gallery

    Benin: Policy, Deposit, and Lending Interest Rates, 2009–12

    (Percent)

Sub-Saharan Africa: Broad Money, 2000–11

(Percent of GDP)

Sub-Saharan Africa: Credit to Private Sector, 2000–11

(Percent of GDP)

Benin and Sub-Saharan Africa: Private Credit, 2001–10

(Percent of GDP)

Benin and Sub-Saharan Africa: Domestic Bank Deposits, 2001–10

(Percent of GDP)

Benin and Sub-Saharan Africa: Three-Bank Asset Concentration, 2001–10

(Percent of assets of all banks)

Benin and Sub-Saharan Africa: Credit to Government and State-Owned Enterprises, 2001–10

(Percent of GDP)

WAEMU: Adult Population with a Bank Account, 2010

(Percent)

WAEMU: Adult Population with an Account at a Formal Financial Institution1, 2010

(Percent)

Account Penetration, 2011

(Percent)

Formal and Informal Savings, 2011

(Percent)

Formal and Informal Borrowing, 2011

(Percent)

Benin: Excess Bank Reserves, December 2007-June 2012

(Percent of deposits)

Benin: The Missing Middle in Access to Finance

Benin: Mobile Phone Subscriptions, 2000–10

(Percent of population)

Benin and SSA Countries: Financial Soundness Indicators, 2006–11

(Units as indicated)

Benin: Licensed Microfinance Institutions, 2000–12

(Units)

Benin: Policy, Deposit, and Lending Interest Rates, 2009–12

(Percent)