Cameroon: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
17 Jul 2014
eISBN:
9781498396011
Language:
English
Keywords:
ISCR; CR; wage bill; public-private partnership; IMF staff estimate; Cameroon; base salary; financial system; microfinance sector; balance sheet; banking sector; deposit base; Microfinance; Loans; Credit; Commercial banks; Global
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In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Financial Sector Review

The banking system appears to be undercapitalized, but profitable and liquid. Three small banks remain troubled. Equity participation of the state in the financial sector raises concerns about a level playing field, besides implying large contingent liabilities. Financial access and depth have improved, but remain constrained by structural bottlenecks. The main hurdles are informational asymmetries; poor judicial environment; lack of property and creditor rights; and regulatory and supervisory issues. The financial system could gain from reforms that foster financial stability and development.1

Financial Sector Profile

1. Cameroon’s financial system is the largest in the Economic Community of Central African States (CEMAC), accounting for about half of this region’s financial assets. At end-December 2013, the Cameroonian financial sector consisted of 13 commercial banks with a network of 231 branches; a postal savings network (CAMPOST); 24 insurance companies, 1 pension fund, and 407 microfinance institutions. Total financial system assets were estimated at about 39 percent of GDP in 2012, up by nearly 3 percentage points since 2010.

2. The banking system accounted for about 70 percent of total financial sector assets and 27 percent of GDP at end-2013. Most banks’ core business consists in collecting deposits, lending to bigger firms, including subsidiaries of multinational companies, and holding government securities. Between 2010 and 2013, banks’ total assets expanded by about 31 percent and contributed to about 68 percent to the increase in financial system total assets (Table 1 and Figure 1).

Table 1.

Cameroon: Financial Sector Assets, 2010–13

(CFAF millions)

article image
Sources: Cameroonian authorities; and IMF staff estimates.
Figure 1.
Figure 1.

Cameroon: Financial Sector Profile, 2010–13

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: Cameroonian authorities; and IMF staff estimates.

3. The microfinance sector plays a vital role in Cameroon by providing credit to the poor. Because of low capitalization, microfinance institutions cannot expand and are vulnerable. Their operating costs are high and their profit margins are low. At end-2013, the sector employed about 10,000 people directly and an estimated 5,000 indirectly (as agents) and had some 1.5 million clients. Over 50 percent of deposits are lent to members.

4. The insurance industry is underdeveloped but offers lucrative growth prospects. The market is competitive and fragmented, with 24 companies: 16 are non-life insurers and 8 are life insurers. Total employment in this sector stood at about 1,350 people at end-2012. Vehicle and transport insurance dominates the sector with 75 percent share of the market, while fire and other hazards insurance accounts for the remainder. The insurance penetration rate (number of insured people to total population) for life insurance stood at about 2 percent at end-2012 and did not improve much over the three previous years. Total turnover of the industry was estimated at about CFAF 159 billion (1 percent of GDP) at end-2013 (Figure 2).

Figure 2.
Figure 2.

Cameroon: Insurance Companies’ Total Assets, 2011–13

(CFAF billions)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: Cameroonian authorities; and IMF staff estimates

5. The insurance sector is regulated by the Inter-African Conference on Insurance Markets (CIMA), which is the central insurance supervisory authority in French-speaking sub-Saharan African (SSA) countries. The Regional Insurance Control Commission licenses insurance companies and imposes penalties. Moreover, the National Director of Insurance can withhold licenses approved by the Regional Insurance Control Commission. The insurance sector poses certain challenges on account of the lack of enforcement of mandatory vehicle insurance.

6. The state has an equity stake in the capital of three foreign-controlled banks and lately recapitalized one troubled bank. This makes it a prime actor in the financial sector, as it also has controlling interests in the country’s mortgage financial institution, the public pension scheme, and postal savings institution. Recently, the regional supervisor (Commission Bancaire, COBAC) authorized the setting up of a new bank for small and medium enterprises (SMEs; Box 1).

7. The state-run pension fund provides pension services to employees in the private sector and in public enterprises (Caisse Nationale de Prévoyance Sociale, CNPS). The state also manages the pension services for civil servants. Some private insurance companies have started offering pension products lately. Employers typically contribute 4.2 percent and employees, 2.8 percent of their salary. The employee base is nearly 1 million and total assets of the CNPS stood at an estimated CFAF 127 billion at end-2013. The collected contributions are deemed insufficient by the CNPS to cover its pension obligations. In addition, the state has some long-standing financial obligations vis-à-vis the CNPS (estimated at about CFAF 146 billion). There is an actuarial review underway at the CNPS, which will chart a path for possible reforms.

The Bank for Small and Medium Enterprises

The Bank for Small and Medium Enterprises (SME) is set to start operations in late 2014 and its capital of CFAF 10 billion was totally subscribed by the state. The bank would initially employ 55 people and will be located in Yaoundé, with a branch in Douala. In the short term, the Bank will tap the network of existing banks and microfinance institutions to finance its operations. In the medium term, the state plans to divest its shares to the private sector. The Bank aims to build up to 0.5 percent of market share for both deposits and loans in its first year of operation. Currently, the state is setting up the board of directors, the majority of whom will be public officials, along with a few independent directors.

It is claimed that the creation of the Bank is warranted on the premise that the SME sector is denied access to credit by existing banks. Political intervention in credit allocation, which artificially depresses lending rates in attempts to “assist” the ultimate clients, often generates misallocation of resources. The setting up of a risk mechanism to assess the creditworthiness of borrowers should be the first-order principle of the Bank. The financing practices of the Bank should be considered along with a strategy of pursuing fiscal discipline.

Ratnovski and Narain (2007) argue that more stringent oversight is required for public financial institutions, as they are (i) likely to have higher risks—the volatility of the SME sector is typically above economy average—and the higher risks are amplified by the low diversification and low profitability of the public financial institutions; (ii) likely to have worse managerial incentives on account of the bureaucratic environment that accommodates low transparency, under-reporting of risks, and concealment of losses; (iii) subject to limited market discipline owing to government guarantees, thus paving the way for low-quality, politically driven, connected lending; and (iv) likely to create contingent liabilities for the state.

8. The domestic capital market remains a negligible source of funding and is largely illiquid. The Douala Stock Exchange (DSX) started operations in 2006 with one listed company. Since then, there have been only two new listings. The DSX had a capitalization of CFAF 133.7 billion (0.9 percent of GDP) at end-December 2013, and little trading. The development of this market is constrained by the high listing costs and administrative hurdles. Companies prefer to borrow from banks.

9. The Cameroonian postal service (CAMPOST) also provides banking and savings services. It offers postal checking accounts; postal savings accounts; and postal money orders. At end-2013, it owed some CFAF 87 billion (0.6 percent of GDP) to its small depositors. However, this figure is subject to an ongoing audit. CAMPOST is contemplating the setting-up of a postal savings bank, which would be fully state-owned. In doing this, it hopes to leverage its nation-wide network to reach out to clients outside the traditional banking system.

10. The Crédit Foncier du Cameroun (CFC) is the only mortgage finance institution, with the purpose of promoting housing. The government owns 75 percent of its capital and the rest is held by the CNPS (20 percent) and CAMPOST (5 percent). The CFC is funded by all employees, who contribute 2.5 percent of their salary. It also collects deposits from the public, who intends to borrow from the institution later. CFC’s total assets were estimated at about CFAF 300 billion (2 percent of GDP) at end-2013. However, its financial situation is marred by its high level of nonperforming loans (NPLs), estimated at CFAF 80 billion. Furthermore, the CFC has yet to finalize its accounts for 2012 and 2013. The state’s outstanding obligations vis-à-vis the CFC were estimated at about CFAF 300 billion at end-2013.

11. A regional framework for a deposit insurance fund (FOGADAC) was launched in 2004. Banks contribute 0.2 percent of their outstanding deposit liabilities into this fund; deposits collected are held at the central bank. Deposits collected amounted to CFAF 40 billion at end-2013.

12. Electronic banking is still in its infancy. Banks offer electronic access to account balances and recent operations, and provide various alerts. The number of automated teller machines (ATMs) has been on the rise and is estimated at about a hundred (Figure 3). Internet banking is still new in Cameroon and one of the central issues is low internet penetration (6.5 percent in 2013 according to Internet Worldstats, 2014; Figures 4–5).

Figure 3.
Figure 3.

Sub-Saharan Africa: Automated Teller Machines Network, 2012

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: IMF Financial Access Survey database.
Figure 4.
Figure 4.

Sub-Saharan Africa: Credit and Debit Cards in Circulation, 2011

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Financial Development, World Bank.
Figure 5.
Figure 5.

Sub-Saharan Africa: Electronic Payments Used to Make Payments, 2011

(Percent of population of age 15+)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Financial Development, World Bank.

13. Mobile banking offers an opportunity to serve the “unbanked.” The limited access to financial services stems particularly from deficient infrastructure, geographical isolation, financial illiteracy, all of which result in very high cost of providing banking services. Cameroon lags its peers in mobile banking (Figure 6). Mobile banking costs are lower2 than in West Africa, but significantly more expensive than in East Africa. There is scope for improving these costs to increase mobile phone penetration and thus, boost mobile phone transactions.

Figure 6.
Figure 6.

Sub-Saharan Africa: Mobile Phone Usage, 2011

(Percent of population of age 15 +)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Financial Development, World Bank.

14. There were 26 registered foreign exchange bureaus at end-2013, mostly in Douala and Yaoundé. This sector is supervised by the Ministry of Finance, which licenses the bureaus and undertakes periodical inspections. However, there are no recent data on their operations for lack of adequate supervision.

15. The interbank market is largely inoperative in spite of development efforts at the national and regional levels. Interbank operations are limited to bilateral relationships with a counterpart deemed reliable, based on subjective criteria, or within a group, based on similar considerations. Banks are reluctant to lend to each other because they do not have access to recent and reliable financial information, necessary to evaluate counterparty risks. The excess liquidity of some banks hinders the development of this market.

Financial Deepening and Inclusion

16. Improving access to financial services is essential for enhancing economic growth and reducing poverty. An efficient financial system boosts economic development by: (i) providing payment services and reducing transaction costs; (ii) pooling savings; (iii) economizing on screening and monitoring costs to finance investment and improve resource allocation; and (iv) lowering liquidity risk to enable long-term investment through maturity transformation.

17. The literature lists the following obstacles to financial deepening: (i) informational asymmetries—lack of information on borrowers owing to the limited size of the formal sector, the limited availability of audited company statements, and the absence of credit bureaus, which increases adverse selection and moral hazard issues leading to credit rationing; (ii) business and judicial environment—the absence of formalized property rights increases the difficulty of using land as a collateral and the inability to recoup losses at a reasonable cost discourages lending; (iii) tax regime—the relatively high taxes and fees on banking and stock exchange operations raise the costs of financial services and reduce demand for them; (iv) regulatory and supervisory framework—some regulatory ratios, such as the transformation ratio, are perceived to be excessively constraining and curbing the development of medium- and long-term credit; and (v) skills—the quality of human capital is critical to provide the necessary risk-management expertise and the ability to design and sell the products that customers need.

18. Strengthening the financial infrastructure is thus considered crucial to address structural and institutional challenges in the financial sector. The prerequisites include (i) strengthening the regulatory frameworks and supervisory capacity; and (ii) improving corporate governance, by enhancing transparency and accountability, improving information and disclosure requirements, promoting investor education and financial literacy, and encouraging accounting and auditing standards in line with international good practices.

19. Enhancing financial inclusion and deepening financial intermediation are priorities for the government, as stated in the National Strategy for Financial Inclusion. Economy-wide bottlenecks that hamper financial deepening comprise (i) the institutional framework that hinders risk-taking by banks; (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 (iv) the high operational costs in rural areas. In the microfinance sector, impediments include (i) lack of suitable management information systems; (ii) lack of long-term funds for same horizon lending; and (iii) a degree of public distrust in the wake of negative depositor experiences.

20. The 2013–14 World Economic Forum report on global competitiveness ranks Cameroon 107th out of 148 countries in terms of financial market development, with a score of 3.6 out of 7. Access to financing is viewed as the second most problematic factor for doing business. The World Bank’s Doing Business Surveys show that the credit information index had not improved and the public coverage registry index remained low (Figure 7). The authorities have pledged to address these issues with background work starting on the establishment of a private credit bureau. In addition, the National Credit Council has come forward with a number of initiatives to improve credit quality and sensitize borrowers to repay loans. The authorities have lately put in place the necessary infrastructure for enhancing new financing options for businesses, such as venture capital and factoring.

Figure 7.
Figure 7.

Cameroon: Selected Doing Business Indicators, 2005–14

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: The Doing Business Survey, World Bank.

21. Against this backdrop, the benchmarking exercise carried out in last year’s country report is extended to compare Cameroon’s financial system to peer countries in SSA, using the World Bank’s FinStat database. The peer countries are defined as other CEMAC member states, Benin, Burkina Faso, Ghana, Nigeria, Senegal, Tanzania, and Uganda.

22. Depth. Despite the uptrend noted in the past fifteen years, the banking system remains shallow. The updated analysis shows that Cameroon’s banking depth indicators have not improved in 2012 when compared to their benchmarks. Cameroon underperforms the benchmarks for private sector credit and deposits to GDP, lying near the 25th percentile frontier (Figure 8).

Figure 8.
Figure 8.

Sub-Saharan Africa: Selected Indicators on Financial Sector Depth, 1996–2012

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: World Development Indicators, World Bank; and FinStat.

23. Breadth and efficiency. The banking sector remains concentrated and competition is relatively low, as evinced by the asset concentration of the three largest banks, which have maintained a share of about 70 percent of total assets of all commercial banks (Figure 9). These three banks continue to dominate the banking landscape and could be seen as market setters in terms of pricing of financial products and services.

Figure 9.
Figure 9.

Sub-Saharan Africa: Selected Indicators on Financial Sector Breadth and Efficiency, 1996–2012

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: FinStat, World Bank.

24. Profitability. Two usual indicators, return on assets (ROA) and return on equity (ROE) show comfortable rates of return over the past five years, broadly matching those of CEMAC countries. However, both indicators mask the frailties of the problem banks in Cameroon (Figure 10).

Figure 10.
Figure 10.

Sub-Saharan Africa: Selected Profitability Indicators, 2002–12

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: FinStat, World Bank.

25. Inclusiveness. Household access to banking services is low. Only 13.5 percent of the population in 2013 was estimated to hold bank accounts. The authorities prescribed some minimum banking services that banks ought to provide at minimal or no cost. Customers with bank accounts are generally in the upper income brackets. The average size of bank accounts is about CFAF 3 million (about US$6,000), which represents about four times per capita income. The number of deposit accounts in banks relative to the active population confirms the relatively low level of access to banking services. Conversely, after including the number of deposit accounts at microfinance institutions and postal services, Cameroon’s inclusiveness reaches 20 percent of the population (Figure 11).

Figure 11.
Figure 11.

Cameroon: Selected Indicators on Financial Sector Inclusiveness, 2004–12

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Findex, World Bank.

26. Consumers have limited access to credit and face high financing costs. Bank credit to the private sector in 2013 was just 15.0 percent of GDP. Real lending rates are high, with maximum rates averaging 15 percent. The main reasons for high lending costs are the lack of competition and the risks associated with the high cost of doing business. Credit information about borrowers’ financial status is inadequate. The availability of collateral is limited, and there is no up-to-date property registry. The process of enforcing contracts and recovering losses is hampered by an inadequate legal system.

27. Inclusiveness has also been assessed using the World Bank’s Enterprise Surveys, which show how firms finance their operations. Excessive reliance on internal funds is a sign of potentially inefficient financial intermediation. Figures 12–14 illustrate various enterprise-level indicators of financial inclusiveness in Cameroon and peer countries.

Figure 12.
Figure 12.

Sub-Saharan Africa: Relative Use of Various Sources to Finance Investment, 2011

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Findex Database, World Bank.
Figure 13.
Figure 13.

Sub-Saharan Africa: Use of Various Sources to Finance Investment, 2011

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Findex Database, World Bank.
Figure 14.
Figure 14.

Sub-Saharan Africa: Use of Financial Markets by Firms, 2007-13

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Findex Database, World Bank.

28. Cameroon is broadly in the middle of its peers when financial deepening and financial inclusiveness are combined. Financial deepening, measured by the ratio of credit to GDP, is plotted against financial inclusion, measured by the percent of the adult population holding an account in a formal institution (Figure 15). The plot shows that in both dimensions Cameroon has room for progress.

Figure 15.
Figure 15.

Sub-Saharan Africa: Financial Access and Deepening, 2012

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Global Findex Database, World Bank.

A. Banking Sector Soundness

This note is presented against the background of a forthcoming Financial Sector Assessment Program (FSAP) mission for the CEMAC, which will dwell deeper in the issues covered and present a broader list of policy recommendations.

29. The banking system dominates the financial sector. The five largest banks account for about three-quarters of the system’s total assets; collecting more or less the same proportion of deposits and extending a similar share of loans to the private sector (Table 2 and Figure 16). Banks have excess liquidity; rely on short-term deposits; and prefer to deal with large corporations and a few high-net-worth individuals, considered to be less risky.

Table 2.

Cameroon: Banking System Structure, 2013

article image
Sources: COBAC; and IMF staff estimates.
Figure 16.
Figure 16.

Cameroon: Banks’ Total Assets Distribution, December 2013

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: COBAC; and IMF staff calculations.

30. Overall, the system-wide3 capital adequacy ratio (CAR) remains below the minimum regulatory requirement of 8 percent at end-December 2013 (Figure 17). Excluding the troubled banks which were carrying negative equity, the remaining banks are sound. Financial soundness indicators point to the banking system, as a whole, as being undercapitalized, but profitable and liquid. Deposit liabilities are the main source of financing for banks—at end-2013, deposits represented 78 percent of the banking system’s balance sheet. Nearly 50 percent of deposits were short-term, although they tend to remain in the banks for relatively long periods. The transformation ratio imposed by the regulator hinders maturity transformation. The ratio of non-interest income to total income, approximately 40 percent, provides an indication of the importance of bank commissions and fees in generating income.

Figure 17.
Figure 17.

Cameroon: Capital Adequacy Ratios, 2011–13

(In percent)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: COBAC; and IMF staff calculations.

31. The aggregate CAR masks wide disparities among banks. The foreign-controlled banks maintained a CAR almost twice as much as the minimum required level. Conversely, three banks were undercapitalized, but they are small and do not pose a systemic risk. A forthcoming change to the regulatory environment, scheduled for end-June 2014, will mandate a minimum capital of CFAF 10 billion—this will require further re-capitalization of the three distressed banks.

32. Asset quality has not shown much improvement lately. Although the ratio of gross NPLs to total loans has dropped for the entire banking sector, from 11.6 percent at end-2012 to 10.3 percent at end-2013, this decline masks significant variations at individual banks. Exposures have to be monitored closely, as the macroeconomic outlook exposes the banking sector to credit risks, warranting a strengthening of crisis prevention and management capabilities.

33. High, although declining, NPLs have been a persisting problem. The recent reductions in the ratio of NPLs to total loans reflect in part the sector’s rapid credit expansion, as well as the transfer of one commercial bank’s NPLs to an asset recovery company, as part of its restructuring. Credit quality is broadly an issue, with an NPL ratio4 of 13.9 percent of gross loans at end-2013 (Figure 18). Provision for NPLs stood at 60 percent and thus was deemed insufficient. In all, banks would need to inject an additional CFAF 58 billion (0.4 percent of GDP) to provision NPLs fully. The provisions-to-loans ratio shows the importance of credit growth in reducing NPLs (Table 3). It would be appropriate for the regulator to monitor NPLs by business activity to detect vulnerabilities in particular sectors (e.g., the public enterprise sector).

Figure 18.
Figure 18.

Cameroon: Non-Performing Loans, 2008–13

(In percent of gross loans)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: COBAC.
Table 3.

Cameroon: Financial Soundness Indicators, 2011–13

article image

Defined as the ratio of capital to total assets

Source: IMF’s Financial Soundness Indicators (FSI) Database.

34. Nearly two-thirds of banks loan portfolios are directed to private enterprises while 12 percent of loans are channeled to public enterprises. Household credit makes up 13 percent of total loans. With regards to banks’ deposit base, household deposits represent 38 percent of the total deposits, while private enterprises account for about 29 percent (Figure 19).

Figure 19.
Figure 19.

Cameroon: Sectorwise Distribution of Bank Loans and Deposits, 2010–13

(In CFAF billions)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: COBAC; and IMF staff estimates.

35. The major risks to the sector emanate from loan concentration and asset quality. Single obligor credit concentration is a serious risk in the banking system. Credit exposure to “strategic” public enterprises represents a risk that requires close monitoring. Borrowings of the three largest public enterprises are shown in Figure 20. Their borrowing accounted for over 100 percent of banks’ regulatory capital in 2011 and 2012; it declined to 90 percent in 2013.

Figure 20.
Figure 20.

Cameroon: Borrowings of Three Largest Public Enterprises, 2011–13

(In CFAF billions, unless otherwise indicated)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: COBAC; and IMF staff estimates.

36. The banking industry is profitable, as evidenced by returns on asset and equity. The largest banks exhibit the highest profitability ratios, reaping the benefits of economies of scale and being price setters in some segments. These banks typically focus on lending to strategic companies and major oil and export-oriented enterprises with low-to-moderate risk profiles.

37. Liquid assets5 represent 27 percent of banks’ assets. The low level of credit relative to bank resources reflects (i) weak economic activity in the non-oil sector, which limits lending opportunities; (ii) the high cost of credit stemming, in part, from limited competition among banks; and (iii) unfavorable legal and judiciary procedures, which make it hard for banks to recover delinquent loans and foreclose on collateral. Such conditions make banks reluctant to extend long-term loans; not surprisingly, short-term loans account for the bulk of their lending.

38. Stress testing has been applied to gauge the resilience of banks to adverse events arising from the concentration of exposures. The stress tests covered all banks in Cameroon. Solvency and liquidity tests followed a bottom-up approach using end-2013 balance sheet data. Banks’ capital needs were assessed against the regulatory requirement of 8 percent of risk-weighted assets. The tests also examined the impact of shocks due to fiscal slippages and to a sudden drop in confidence and a deposit run on the banking system (Appendix I, Tables 1-3).

39. Although the stress test results call for caution given data quality concerns, they show that system-wide capitalization is vulnerable to credit shocks and credit concentration. Solvency stress tests were based on sensitivity analysis of shocks using end-2013 as the baseline. Tests were run to assess the implications of a default by the top obligor of banks. Such a default would reduce the capital adequacy ratio by about two-thirds for the banking sector as a whole; and by about 27 percent for foreign banks and 37 percent for the five largest banks, respectively.

40. The banking system is also vulnerable to liquidity shocks. The testing simulated the implications of a run down in deposits on banks by the public sector (fiscal slippage) and a loss in confidence in the economy. Private demand deposits made up about 55 percent of total deposits at end-December 2013. The tests were calibrated with reference to changes in deposits at end-2013 and assumed a 10 percent decline in demand deposits on a daily basis The analysis considered “cash and deposits at the BEAC” as liquid assets.

41. The banking system was found to withstand a daily withdrawal of 10 percent of public sector deposits over a five-day period, but it is vulnerable to a run on demand deposits from the private sector. By day five, four banks (of which three are the troubled banks) would be faced with liquidity problems. The banking system as a whole would nonetheless withstand liquidity risk over the five-day period. This result is not surprising given the high liquidity levels at most banks.

B. The Microfinance Sector6

42. Microfinance is culturally rooted in Cameroon. The microfinance movement can be traced back to the 1960s with the creation of the first cooperative by a Dutch missionary in the North-West region. This cooperative was the precursor to the Cameroon Cooperative Credit Union League (CAMCCUL). Traditional microfinance institutions (MFIs) continue to provide access to credit and to some basic micro-insurance for the rural and urban communities. They are mainly informal self-help groups or rotating savings and credit associations, commonly known as tontines. In 1998, a law was passed to recognize MFIs as unique entities in the financial sector. Under this law, MFIs were placed under the control of the Ministry of Finance, but the regional bank supervisor (COBAC) was also entrusted with supervisory role. The distribution of MFI branches is disparate, with three of the ten regions—the North-West, Littoral and Centre regions—accounting for 60 percent. MFIs are also concentrated in the largest cities.

43. MFIs are regulated by the 2002 “master framework.” It is known as Standard n° 01/02/CEMAC/UMAC/COBAC Organization and Supervision of Microfinance Activities in the CEMAC. The framework defines microfinance as “activities undertaken by authorized entities that are neither banks nor financial institutions, but take savings or deposits, give out credit or loans and offer specific financial products to those generally excluded from banking networks.” There are three categories of microfinance institutions (Figure 21).

  • Category I MFIs collect savings and deposits from their members and lend them on exclusively to their members. This category includes credit associations, cooperatives, and unions, and is further subdivided into independent and network MFIs.

  • Category II MFIs collect savings and deposits and lend them on to third parties. This category comprises limited liability companies that function more like quasi-banks.

Category III MFIs do not collect savings and deposits. They include micro-credit and project finance institutions.

Figure 21.
Figure 21.

Cameroon: Microfinance Institutions by Category, 2012

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Cameroonian authorities.

44. MFIs are also regulated by three legal provisions: (i) national law; (ii) CEMAC law established through COBAC; and (iii) OHADA. A MFI is supposed to follow the COBAC guidelines, especially with regards to basic prudential norms. However, these guidelines have been hardly enforced until lately, when COBAC rolled out a reporting framework for Category II MFIs. The Cameroonian authorities have set up a unit within the Ministry of Finance to monitor the activities of MFIs, which they hope will help professionalize the sector; develop and monitor products and services to be offered by MFIs; and propose a pricing policy for services. The framework for analyzing the performance of this sector is based on five criteria: (i) asset quality; (ii) efficiency and productivity; (iii) financial management; (iv) profitability; and (v) management. The multiple challenges faced by the microfinance sector also prompted the authorities to adopt a national strategy for the microfinance sector in 2013 (Box 2).

45. The microfinance sector experienced strong growth, with concomitant consolidation in 2012. The number of agencies, clients, deposits, and loans all grew, while the number of MFIs decreased. This drop illustrates the fragility in the sector, but also efforts in closing out non-viable MFIs. There were 371 Category I MFIs; 32 Category II MFIs and 4 Category III MFIs. Category II MFIs accounted for nearly half of market share with respect to deposits mobilized and loans extended (Table 4). Twelve MFIs, irrespective of their categories, account for over 77 percent of MFI total assets, thereby showing concentration in this sector. CAMCCUL, which is the MFI of a network of affiliated Category I institutions, accounts for about 29 percent of total MFI assets. MC2, which can be considered as a rural development micro-bank, is the next largest MFI; six Category II MFIs make up nearly 29 percent of total assets (Figures 22–23).

Table 4.

Cameroon: Microfinance Institutions Selected Data, 2006–12

(Units as indicated)

article image
Source: Cameroonian authorities.
Figure 22.
Figure 22.

Cameroon: Main Microfinance Institutions, 2012

(In percent of total assets)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: Cameroonian authorities and IMF staff estimates.
Figure 23.
Figure 23.

Cameroon: Number of Microfinance Institutions and Members/Clients, 2002–12

(Units)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Cameroonian authorities.

National Strategy for Financial Inclusion

A national strategy for financial inclusion was launched in 2013 to consolidate and develop the microfinance sector in Cameroon. The strategy aims to: (i) reinforce training of promoters, officers, and employees of MFIs; (ii) establish a first level of supervision and control of MFIs by COBAC, consistent with CEMAC regulations; and (iii) further strengthen the monetization of the economy, including the expansion of automated payment systems to MFIs.

The strategy notes the need to improve the regulation and taxation of the microfinance sector, in the face of constraints, such as (i) insufficient and ineffective monitoring; (ii) low capacity to mobilize long-term resources; (iii) inadequacy between traditional collateral guaranties and the realities of MFIs; (iv) the absence of standardized prudential ratios for MFIs thereby rendering assessment difficult; (v) the vagueness of the tax system applied to MFIs; (vi) administrative rigidities confronting the sector; and (vii) the lack of consideration in the regulation of the use of technology in microfinance. In light of these findings, the strategy recommended to: (i) establish a fund for security deposits for the microfinance sector to ensure coverage of risks; (ii) strengthen the monitoring by involving key stakeholders, including the COBAC, the Ministry of Finance, the Professional Association of Microfinance Institutions; (iii) facilitate the mobilization of long-term resources to meet the coverage ratios; and (iv) revisit the prudential ratios to adapt them to different types of MFIs.

The strategy identified four strategic axes for 2013-18: (i) improving the legal, regulatory and institutional environment for the microfinance sector to make it more inclusive; supporting a viable and sustainable supply of diversified and innovative products adapted to the needs of all segments of the population; (iii) developing partnerships for the efficient mobilization of financial and technical resources adapted to the specific needs of the sector; and (iv) evaluating the social impact of MFIs.

46. The distribution of the twelve largest MFIs by asset size and as a share of GDP is shown in Figure 24. Total MFI assets have been hovering around 4 percent of GDP for the past few years and the total assets of the largest MFI represented 1.1 percent of GDP at end-2012.

Figure 24.
Figure 24.

Cameroon: Microfinance Institutions Assets, 2012

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Source: Cameroonian authorities.

47. A stylized balance sheet for the MFI sector was prepared for end 2012 using the extrapolation method (Table 5). This was done using selected data made available by the authorities and using balance sheet information for the twelve largest MFIs. The balance sheet shows that deposits of concerned MFIs accounted for 81 percent of their total liabilities. Loans as a share of total assets were estimated at 43 percent, while liquid assets, defined as cash in hand and balances with banks, stood at 35.5 percent. The high liquidity ratio is not surprising given that MFIs are to meet cash withdrawals at very short notice.

Table 5.

Cameroon: Microfinance Institutions Stylized Balance Sheet, 2012

(CFAF millions)

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Sources: Cameroon Ministry of Finance; and IMF staff estimates.

48. Relations between banks and the largest MFIs are increasingly complex. On the one hand, the largest MFIs compete with banks. The assets of the biggest MFI is at par with those of the ninth largest bank (Figure 25). MFIs enjoy certain advantages that may improve their competitive position relative to commercial banks (i) they are structured as cooperatives, benefitting from tax exemptions not applicable to banks, that were originally justified by their social mandate and not-for-profit motive; (ii) there is no cap on interest charged by MFIs for loans, unlike for banks; and (iii) some MFIs receive public or donor support via cheap funds, guaranties, or training of staff. On the other hand, several banks are operating in the microfinance sector—six banks have created MFIs that they partially finance.

Figure 25.
Figure 25.

Cameroon: Banks and Microfinance Institutions Credit and Deposits, 2010–12

(Percent)

Citation: IMF Staff Country Reports 2014, 213; 10.5089/9781498396011.002.A005

Sources: Cameroonian authorities; and IMF staff estimates.

49. The regulation and supervision of MFIs should be an integral part of a strategy to develop a market-based financial system. Microfinance is not limited to borrowing, but also includes other financial services such as savings, insurance, transfer facilities, etc. A clear and transparent regulatory framework is necessary because MFIs’ traditional fund sources cannot keep pace with their lending growth, and thus MFIs need to have access to external finance to complement their own resources. The systemic importance of about 1.5 million depositors requires adequate measures to preserve the stability of the microfinance sector. There have been calls from the MFIs’ professional association (APECCAM) to extend the bank deposit insurance scheme to deposits mobilized by MFIs.

50. Cameroon’s microfinance services are inadequately diversified to satisfy the financing needs of the economy. Only the largest MFIs are able to offer a wider range of savings products (e.g., current and savings accounts and term deposits at different maturities) and of loan products. Other basic products, like micro-insurance and mobile money transfer, are not common.

51. Some MFIs are in financial distress, mostly because of governance problems, lack of proper internal controls, and inadequate management information systems. 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.

C. Recommendations

Banking sector

52. The cost of financial services should be reduced through stronger competition. A more competitive environment is needed to incite financial institutions to improve services and lower prices. It is necessary to enhance the quality, coverage, and dissemination of information on banks’ operating fees. Customers are 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. State participation in banks should be phased out gradually.

53. Habit formation in consumption of financial services must be enhanced to broaden the use of banking services. The authorities could use public awareness campaigns to promote the concepts of saving and credit, and the role of financial institutions. Promoting financial literacy is a prerequisite.

54. Better infrastructure would broaden access to financial services. Better infrastructure, involving financial technologies (e.g., ATMs, point-of-sale machines, electronic bank cards) would reduce transaction costs. Ensuring reliable power supply is vital to the functioning of the payments system. Improved transportation would make financial institutions more willing to open branches in rural areas.

55. Innovative forms of banking could be contemplated. 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.

56. Contract enforcement is needed to expand bank lending. Banks need reliable credit information, suitable collateral, efficient property registry system, and a strong judicial system that enforces contracts. Financial institutions find it difficult to assess creditworthiness, in particular because information from the payments incidents data base run by the central bank (Centrale des Risques) is limited and out of date.

57. An effective credit bureau would also help to promote lending. Credit information should include not only default history but also standardized ratings of creditworthiness for individuals and companies, based on a basic rating system.

58. Consolidated supervision needs to be developed. A few banks in Cameroon are controlled by holding companies incorporated in other CEMAC countries and one bank operates as a branch of a bank incorporated in another union country. Cross-border information sharing and supervision remains generally limited. It is noted that the COBAC is in the process of drafting new regulations on this issue and the authorities are encouraged to cooperate with the COBAC and support it in its mission of implementing consolidated supervision.

59. The development of capital markets can widen access to financial services. Capital markets provide savers with a variety of investment choices with long maturities. Companies can raise long-term funds from capital markets at a lower cost than from banks. Pension funds and insurance companies can invest part of their portfolios in capital markets. Developing capital markets requires appropriate sequencing and a sound macroeconomic environment, transparent institutions, and good governance. A first step could be the merging of the Douala, Cameroun, and Libreville, Gabon, stock exchanges; and the respective authorities are invited to work together to achieve this for the benefit of the whole region.

60. Nonbank finance has not been tapped in Cameroon, but has potential. Bond finance is an interesting substitute to bank finance, but the necessary legislative and business frameworks need to be adopted. The emergence of a large market in equity requires strong investor rights.

Microfinance sector

61. Ensuring an adequate balance of prudential supervision and financial inclusion will require increased supervisory resources. Given the importance of this sector in terms of exposure to the low-income population, and the needs to minimize risks to financial stability and sustain public confidence, it is important to put in place an effective supervisory mechanism which includes both prudential and market conduct supervision. This applies to all MFIs, not just the largest ones, as small players with a poor reputation can lead low-income consumers to abandon the industry entirely, harming financial inclusion. As a complement to the regulatory framework, efforts should be made to disseminate basic principles guiding specific aspects of microfinance activities, accompanied by financial literacy, complaint handling, and consumer protection initiatives. Properly designed standards and guidelines may also provide a set of basic principles facilitating good practices, but attention has to be paid to avoid the risk of limiting product innovation, which is a key characteristic of the microfinance industry.

62. Long-run goals for supervision should include improving the quality of licensing and training, and stepping up information sharing. Improvements will have to be undertaken given limited resources, but 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, and also keep pace with innovations relating to other stakeholders, such as mobile phone companies and post offices. Supervisors also need to set up proportionate approaches for licensing MFI personnel to ensure that they have the necessary skills sets for microfinance operations. MFI personnel should have basic banking knowledge, and fit and proper requirements, augmented by specific skills tuned to the peculiarities of microfinance operations. Supervisory oversight, including comprehension of the controls mechanisms of MFIs, are important for consumer protection and to maintain trust in the system.

63. To improve financial inclusion objectives, governments often collaborate with public-private partnerships to offer appropriate incentives to MFIs to reach out to underserved rural areas. These incentives sometimes have taken the form of participation in (i) the lease or construction of the necessary infrastructure; and (ii) the lease/purchase of equipment (computers, safe deposit boxes, motor bikes, etc.) together with effective supervisory controls.

Appendix I.: Stress Testing

Appendix Table 1.

Cameroon: Solvency Stress Test

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Appendix Table 2.

Cameroon: Liquidity Stress Test

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Appendix Table 3.

Cameroon: Solvency Stress Test

(End-December 2013)

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CAR: Capital Adequacy Ratio.

10 percent daily withdrawal on demand deposits for banks .

Sources: COBAC; and IMF staff estimates.

References

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1

Prepared by Jitendra Bissessur.

2

See Box II.1, Financial Sector Review, Cameroon Country Report 13/279, 2013.

3

Derived using a simple aggregation measure.

4

This is a broad ratio which includes past due receivables, over three months, whose final recovery cannot be ascertained yet.

5

Liquid assets are defined as a broad measure to comprise cash in hand, deposits at the central bank, and holding of government papers.

6

A forthcoming FSAP mission for the CEMAC will review this sector and offer more specific recommendations.

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Cameroon: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2014: Issue 213
Publisher:
International Monetary Fund
ISBN:
9781498396011
ISSN:
1934-7685
Pages:
91
DOI:
https://doi.org/10.5089/9781498396011.002
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    Cameroon: Financial Sector Profile, 2010–13

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    Cameroon: Insurance Companies’ Total Assets, 2011–13

    (CFAF billions)

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    Sub-Saharan Africa: Automated Teller Machines Network, 2012

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    Sub-Saharan Africa: Credit and Debit Cards in Circulation, 2011

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    Sub-Saharan Africa: Electronic Payments Used to Make Payments, 2011

    (Percent of population of age 15+)

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    Sub-Saharan Africa: Mobile Phone Usage, 2011

    (Percent of population of age 15 +)

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    Cameroon: Selected Doing Business Indicators, 2005–14

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    Sub-Saharan Africa: Selected Indicators on Financial Sector Depth, 1996–2012

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    Sub-Saharan Africa: Selected Indicators on Financial Sector Breadth and Efficiency, 1996–2012

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    Sub-Saharan Africa: Selected Profitability Indicators, 2002–12

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    Cameroon: Selected Indicators on Financial Sector Inclusiveness, 2004–12

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    Sub-Saharan Africa: Use of Various Sources to Finance Investment, 2011

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    Sub-Saharan Africa: Use of Financial Markets by Firms, 2007-13

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    Sub-Saharan Africa: Financial Access and Deepening, 2012

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    Cameroon: Banks’ Total Assets Distribution, December 2013

  • View in gallery

    Cameroon: Capital Adequacy Ratios, 2011–13

    (In percent)

  • View in gallery

    Cameroon: Non-Performing Loans, 2008–13

    (In percent of gross loans)

  • View in gallery

    Cameroon: Sectorwise Distribution of Bank Loans and Deposits, 2010–13

    (In CFAF billions)

  • View in gallery

    Cameroon: Borrowings of Three Largest Public Enterprises, 2011–13

    (In CFAF billions, unless otherwise indicated)

  • View in gallery

    Cameroon: Microfinance Institutions by Category, 2012

  • View in gallery

    Cameroon: Main Microfinance Institutions, 2012

    (In percent of total assets)

  • View in gallery

    Cameroon: Number of Microfinance Institutions and Members/Clients, 2002–12

    (Units)

  • View in gallery

    Cameroon: Microfinance Institutions Assets, 2012

  • View in gallery

    Cameroon: Banks and Microfinance Institutions Credit and Deposits, 2010–12

    (Percent)

Cameroon: Financial Sector Profile, 2010–13

Cameroon: Insurance Companies’ Total Assets, 2011–13

(CFAF billions)

Sub-Saharan Africa: Automated Teller Machines Network, 2012

Sub-Saharan Africa: Credit and Debit Cards in Circulation, 2011

Sub-Saharan Africa: Electronic Payments Used to Make Payments, 2011

(Percent of population of age 15+)

Sub-Saharan Africa: Mobile Phone Usage, 2011

(Percent of population of age 15 +)

Cameroon: Selected Doing Business Indicators, 2005–14

Sub-Saharan Africa: Selected Indicators on Financial Sector Depth, 1996–2012

Sub-Saharan Africa: Selected Indicators on Financial Sector Breadth and Efficiency, 1996–2012

Sub-Saharan Africa: Selected Profitability Indicators, 2002–12

Cameroon: Selected Indicators on Financial Sector Inclusiveness, 2004–12

Sub-Saharan Africa: Relative Use of Various Sources to Finance Investment, 2011

Sub-Saharan Africa: Use of Various Sources to Finance Investment, 2011

Sub-Saharan Africa: Use of Financial Markets by Firms, 2007-13

Sub-Saharan Africa: Financial Access and Deepening, 2012

Cameroon: Banks’ Total Assets Distribution, December 2013

Cameroon: Capital Adequacy Ratios, 2011–13

(In percent)

Cameroon: Non-Performing Loans, 2008–13

(In percent of gross loans)

Cameroon: Sectorwise Distribution of Bank Loans and Deposits, 2010–13

(In CFAF billions)

Cameroon: Borrowings of Three Largest Public Enterprises, 2011–13

(In CFAF billions, unless otherwise indicated)

Cameroon: Microfinance Institutions by Category, 2012

Cameroon: Main Microfinance Institutions, 2012

(In percent of total assets)

Cameroon: Number of Microfinance Institutions and Members/Clients, 2002–12

(Units)

Cameroon: Microfinance Institutions Assets, 2012

Cameroon: Banks and Microfinance Institutions Credit and Deposits, 2010–12

(Percent)