Guinea: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
29 Jul 2016
eISBN:
9781475520958
ISBN:
9781475520958
Language:
English
Keywords:
ISCR; CR; Guinea; financial service; indirect tax; direct tax; firm; Guinea's ratio; Guinea score; low income; commercial bank branch; FI issue; Commercial banks; Credit bureaus; Sub-Saharan Africa
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Guinea: Selected Issues

Abstract

Guinea: Selected Issues

Financial Development and Inclusion in Guinea

This paper provides an overview of financial access and inclusion indicators, related causal factors, and both current and possible reform priorities for Guinea.

A. Introduction

1. Recent research suggests strong positive linkages between financial sector development, access to financial services, and economic development. For example, evidence presented in the World Bank’s 2014 Global Financial Development Report found that financial inclusion (FI)—defined as the proportion of individuals and firms that use financial services—is important for development and poverty reduction, and that the poor benefit considerably from the use of basic payments, savings, and insurance services. Similarly, for firms, particularly small and newly-established enterprises, access to financial services is associated with stronger innovation, job creation, and growth performance. Other research also finds a strong positive relationship between financial inclusion and income equality. In this context, FI-supporting policies are becoming increasingly recognized as pillars of sound, effective, and comprehensive strategies aimed at accelerating inclusive growth.

2. This note provides an overview of financial access and inclusion indicators, related causal factors, and both current and possible reform priorities for Guinea. Section B presents indicators of financial market depth, development, and access for Guinea and compares its performance against that of other countries in the region, at similar levels of development, and beyond. Section C provides an overview of country-specific challenges facing Guinea related to FI that helps to explain its performance, as well as possible reform priorities in the near term. Section D presents the government’s current initiatives aimed at promoting financial sector development and inclusion and their preliminary results. Section E discusses potential new areas of focus.

B. Financial Sector Development and Access in Guinea

3. Guinea displays one of the shallowest financial sectors in the world in absolute terms, as well as relative to many other low income countries and others in the region. While any assessment of financial sector development depends on the selected metric, Guinea’s ratio of domestic private credit to GDP of 10 percent in 2013—a common indicator of financial sector depth—was well below the average for other low-income countries (19 percent), other Sub-Saharan African countries (48 percent), and many other comparable countries (see Figure 1). This ratio rose to 15 percent in 2015, though comparable cross-country data was not available for that year.

Figure 1.
Figure 1.

Guinea: Financial Sector Depth and Development, 2013

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A003

Note: Sample limited to countries and regional averages with GDP per capita of less than US$10,000.Source: World Bank, World Development Indicators Database and staff calculations

4. Other financial sector development and access indicators are also weak, including those related to the size and composition, breadth, and diversity of the financial services sector, as well as physical access to services. While the number of institutions has grown rapidly in recent years (commercial banks increased from 7 in 2005 to 15 in 2015), access to financial services for the poor remains limited, and microfinance institutions (MFIs) offer mostly micro-credit and relatively few other products or services.1 Notwithstanding the growing number of credit unions, cooperatives, and other depository corporations (Table 1), financial services remain only marginally-accessible for most of the population of 12 million. Furthermore, long-term financing is virtually unavailable, and represented less than 5 percent of total credit in 2015, with short- and medium-term loans representing 58 and 37 percent, respectively.

Table 1.

Guinea: Financial Sector Overview

article image
Source: IMF Financial Access Survey database.

5. MFIs are facing structural challenges and have been significantly affected by the Ebola crisis. The number of MFI branches in Guinea is large (204 just for deposit-taking MFIs versus 155 for commercial banks in 2015), making the microfinance sector a key channel to expand access to finance. Yet, the sector serves only a small fraction of the demand for services from the low-income population and shows low standards of governance and weak loan repayment performance, having led the Government to suspend a development program.2 The Ebola crisis has further affected MFIs’ capacity to extend credit due to increased NPLs and a disruption of services and transactions.

6. While cross-country comparisons are subject to a number of caveats, Guinea compares poorly with other African low-income countries on most indicators of financial access. For example, Guinea had less than 2 commercial bank branches and 1.6 ATMs per 100,000 adults at end-2014, versus 3.4 and 3.9 branches in other LIDCs, and 4.5 and 8.9 for African Frontier Markets, respectively (Table 2). Most banking activities are concentrated in the capital Conakry with very few branches located in other parts of the country. In 2015, about 62 percent of banks’ branches and 60 percent of ATMs were in the three largest cities of the country. Other measures related to usage of financial services are also weak. For example, less than 7 percent of adults held deposit accounts and less than 2 percent had outstanding credit at end-2014 (Table 2). This compares with about 13 percent of adults with deposit accounts and 3 percent with loan accounts at commercial banks in other LIDCs.

Table 2.

Guinea: Financial Access Indicators

article image
Source: IMF Financial Access Survey database.

7. Guinea is also near the bottom of the list for sub-Saharan African countries in terms of mobile financial services. In 2014, only 1.5 percent of the adult population (defined as people aged 15 and above) had a registered mobile financial services account. This compares poorly with the Sub-Saharan African average of 11.5 percent and the low-income country average of 10 percent in the same year (Figure 2). This rate should, however, continue to grow in the future owing to the entry of two international operators.

Figure 2.
Figure 2.

Guinea: Mobile Banking, 2014

(Percent of adults with accounts)

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A003

Source: World Bank Financial Inclusion Database.

C. Country Specific Barriers to Financial Inclusion

8. The World Bank’s 2014 Financial Development Report provided an extensive analysis of financial development, access, and inclusion issues. This analysis identified seven major reasons why people from both developed and developing countries do nott own formal bank accounts, based on a cross-country survey of 70,000 unbanked individuals across regions. The survey found that a lack of financial resources, high costs of opening and maintaining accounts, a lack of accessibility of financial service providers, and a lack of required documentation, were among the most common reasons for remaining outside of the formal financial system (Figure 3). Many of these impediments to inclusion identified from the cross-country survey are relevant to Guinea.

Figure 3.
Figure 3.

Guinea: Reasons for Not Having a Bank Account

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A003

Source: World Bank Financial Development Report 2014. Note: Respondents could choose more than one reason.

9. While Guinea fares poorly with respect to many of the key the factors influencing financial inclusion, the high poverty and low per capita income levels is among the most important factors. Guinea was the 10th poorest country by per capita income (US$530) out of 162 countries for which comparable data were available in 2013 (Figure 4). While low income can only be addressed by broad economic and development policies over long horizons, other commonly-reported barriers to FI are areas where reforms have the potential to improve outcomes over shorter horizons.

Figure 4.
Figure 4.

Guinea: GDP per Capita, 2013

(USD)

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A003

Source: WDI.

10. Increasing competition and lowering the costs of services should be a high priority. Despite the many financial intermediaries in Guinea (e.g., 15 full-service commercial banks), the sector is highly concentrated—3 commercial banks hold about 75 percent of total assets—and retail services display high costs. In this context, a useful indicator of the level of competition is banks’ return on equity (ROE). By this measure, Guinea hosts one of the most profitable banking sectors in the world, with an average ROE of 35 percent in 20113 (the latest year for which comparable cross-country data was available), placing the country in the 99th percentile of the 177 countries for which cross-country data were available, or the 2nd highest across all income groups and regions (Figure 5).

Figure 5.
Figure 5.

Guinea: Return on Equity, 2011

(Percent)

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A003

Source: World Bank Financial Development and Structure Data.
Figure 6.
Figure 6.

Guinea: Interest Rate Spreads 2014

(Percentage Points)

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A003

Source: WDI.

11. Another indicator of both the cost of accessing credit and savings incentives is the spread between deposit and lending rates. In 2014, banks in Guinea operated with an average interest rate spread of 21 percentage points, placing it in the 97th percentile of countries assessed, with higher spreads found only in Madagascar, Malawi, and Brazil. Spreads are 7 percentage points higher in Guinea than the average in low- and middle-income countries. While a number of factors can influence outcomes in these areas including sector depth, bank funding and business models, or risk-related considerations, the profitability and costs associated with basic banking services are very high in Guinea. More broadly, developing countries tend to show high bank profitability, as the less profitable segment of the population tends to be excluded from financial services. In this context, promoting greater competition is critical to improve financial access and inclusion (Center for Global Development, 2016).

12. Another challenge reported by respondents to the World Bank financial access survey that is relevant to Guinea relates to the accessibility of financial centers. Guinea is a relatively rural country, with only about 37 percent of the population living in or near an urban center—placing it in the 22nd percentile of the 168 countries surveyed (Figure 7). As bank branches and service points (e.g., automated tellers) are concentrated in urban areas, a lack of physical access to banking services may represent a significant barrier to financial inclusion. Furthermore, Guinea’s dismal transport infrastructure exacerbates the problem of rural access to cities and banking outlets.

Figure 7.
Figure 7.

Guinea: Urban Population, 2014

(Percent of total

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A003

13. Other barriers to financial services are also pervasive in Guinea. First, the lack of financial awareness and basic education are closely associated with low levels of financial access and inclusion. In this regard, Guinea scores poorly on most comparable indicators of educational achievement. In 2012, the total adult literacy rate was only 25.3 percent.4 Other related structural factors create hurdles for those who may wish to establish formal bank accounts and access credit from financial institutions, including the lack of enforceable legal collateral because of the high proportion of rural residents without land title or with informal land rights. It is also likely that a lack of official personal documentation (e.g. required to establish accounts) and religious considerations prevent use and access to certain types of banking services.

14. In summary, Guinea faces a number of barriers to improving FI that are common to countries at comparable levels of development, as well as others that are more country specific. While the level of economic and financial sector development and per capita income are among the most important challenges, these can only be addressed by implementing a comprehensive development program and growth over long horizons. Other country-specific factors, policies, and market failures also constitute important barriers to financial inclusion, many of which can be addressed via focused policies and initiatives with the potential to produce appreciable results over shorter horizons. In line with the challenges outlined above, such initiatives could include:

  • Increasing Competition and Reducing Costs: Very high costs of financial services—as indicated by high ROE and interest rate spreads—and limited competition should be addressed by a combination of policy and regulatory measures. For example, incentivizing banks to raise the remuneration of saving accounts (which is currently negative in real terms and well below policy rates) would increase the number of depositors and promote financial inclusion.13

  • Facilitating Mobile Financial Services: A growing number of countries—particularly in SSA—have had notable success leveraging wireless and mobile technology to overcome challenges related to limited competition from established providers, diversify services (e.g., insurance products), limited physical access and low population densities, as well as cost-of-service related disincentives. Given the limited penetration of these services to date, this is an area where Guinea may be able to leverage the successful experience of neighbors.

  • Simplifying Regulations: As is the case in many other developing countries, the authorities may consider ways of modifying ‘know your customer’ and/or other regulatory hurdles that increase the costs of providing services, particularly to low-profit customers. This would also help reduce costs to consumers, encourage service provision, and overcome documentation challenges.

  • Financial Education: Initiatives aimed at improving financial education, particularly for rural or undereducated populations and small enterprises, would encourage unbanked individuals and companies to seek out financial services and to diversify the services that they wish to take advantage of from banks.

D. Current Initiatives

15. During the 2011 Alliance for Financial Inclusion world forum in Mexico, Guinea committed to implementing a National Strategy for Financial Inclusion (NSFI). The NSFI was adopted by the government in 2014 with time-bound and verifiable objectives, but to date its implementation has been slow. A recent World Bank mission stressed the need to revise the strategy to take into account the impact of recent developments (e.g., Ebola), to extend the plan beyond microfinance, to broaden the scope of service providers to include mobile insurance companies, and to enhance consumer protection. Authorities also established the National Agency for Microfinance (ANAMIF) in 2011, with a mandate to design, implement, and evaluate government policies for microfinance. This agency has, however, not made much progress. No other agency is mandated to coordinate FI issues centrally.

16. Authorities are currently establishing a credit reporting system with the support of the World Bank to improve credit risk management and enhance access to credit. A USD10 million World Bank’s MSME (Micro, Small and Medium Enterprises) Development Project was launched in June 2013, to improve financial infrastructure to promote access to finance. Initiatives include the implementation of a comprehensive credit registry system at the BCRG, though progress has been slow due to administrative challenges. Another World Bank project intends to extend this credit reporting system to MFIs, which should allow small borrowers to access credit on more equitable terms (e.g., average interest rates on short-term micro-loans are between 36 to 48 percent), and MFIs to extend micro-credits to new clients and sectors. Activity of MFIs is currently concentrated in the trade, catering, and agriculture sectors, and it would be beneficial to expand loans to other social needs, such as housing, and for connection to running water and electricity.

17. In March 2015, authorities adopted new regulations for electronic money and are currently revising the 2005 law on microfinance. In the past, Electronic Money Institutions (EMIs) could only operate via a partner bank. Regulation now requires EMIs to be registered by the central bank, while it specifies the conditions for granting licenses or the authorization to issue electronic money, the conditions to exercise issuance and management of electronic money, and the protection of customers. Authorities are also revising the 2005 law on microfinance to include new elements like depositor’ protection, new financial products, transparency of conditions, and competition and taxation issues. In particular, microfinance institutions must offer financial products and services in line with clients’ repayment capacity to limit the risk of over-indebtedness and implement an efficient mechanism to quickly address clients’ plains and complaints.

E. Potential New Areas of Focus

18. In addition to the initiatives mentioned above, the authorities should take further measures to consolidate progress to date, and set the stage for faster improvements. First, the authorities should designate a central agency (e.g., the ministry of finance) as the main agency responsible for coordinating financial access and inclusion efforts across agencies. Second, one overarching strategy should be developed at the highest level, with components of the strategy delegated to appropriate implementing agencies. This strategy should take full advantage of advice and input from partner government and agencies with experience in the field. Its objectives should be specific and time-bound, with assessments undertaken regarding implementation. Third, regulatory amendments may be required to support the development of mobile and other financial services, which can also leverage the experience and advice of other experienced entities, both to facilitate implementation and avoid undue risks to the system and consumers. Fourth, competition and consumer protection should be considered as parallel objectives involving the regulatory agencies, as well as other agencies of government responsible for related policies. Finally, issues such as property rights and registration, and centrally-available ownership documentation, and other related factors also have important roles to play in enabling and improving the efficiency of consumer financial services, and these should be formally included in any FI strategy.

References

  • Andrianaivo, M. and K. Kpodar (2011), “ICT, Financial Inclusion, and Growth: Evidence from African Countries,” IMF Working Paper, WP/11/73, International Monetary Fund, Washington D.C.

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  • Center for Global Development (2016), Financial Regulation for Improving Financial Inclusion, CGD Task Force Report, S. Claessens and L. Rojas-Suarez (chairs), March, Washington D.C.

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  • García-Herrero, A. and D. Martínez Turégano (2015), “Financial inclusion, rather than size, is the key to tackling income inequality,” Working Paper no. 15/05, BBVA Research.

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  • International Monetary Fund (2008), “Financial Sector Assessment: A Handbook,” International Monetary Fund, Washington D.C.

  • IsDB (2013), “Microfinance Makes Businesses Successful in Guinea,” IsDB Success Story Series No.13, May, Jeddah.

  • Mooney, H. (2015), “Papua New Guinea: Financial Inclusion and Access—Supporting Inclusive Growth”, Selected Issues Paper for 2015 Article IV Consultation.

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  • World Bank (2012), “The Foundations of Financial Inclusion—Understanding Ownership and Use of Formal Accounts,” World Bank, Washington D.C.

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  • World Bank (2014), “Global Financial Development Report—Financial Inclusion,” World Bank, Washington D.C.

  • World Bank (2015), “The Global FINDEX Database—Measuring Financial Inclusion Around the World,” World Bank, Washington D.C.

1

As the population of Guinea is mainly Muslim, many micro-entrepreneurs may also refuse conventional microfinance loans due to religious considerations (IsDB, 2013).

2

A microfinance fund of USD18.6 million was established in 2011 under the National Agency for Microfinance (ANAMIF) for lending to youth and women’s groups. The fund initially made available USD3.4 million to the three largest MFIs, but canceled this facility after 60 percent was disbursed due to performance concerns. ANAMIF subsequently lent USD1.3 million to 36 women’s groups/cooperatives at a zero-interest, but repayments were not taking place on a regularly. ANAMIF has now suspended activities with around USD13 million still available in the Fund until a new strategy is developed.

3

ROE was 27.4 percent in 2015 for Guinea.

13

The central bank does not regulate the remuneration of deposits but the elimination of large excess reserves in the banking system may incite commercial banks to be more competitive in their policy to attract deposits.

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Cover IMF Staff Country Reports
Guinea: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2016: Issue 262
Publisher:
International Monetary Fund
ISBN:
9781475520958
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781475520958.002

Guinea: Financial Sector Depth and Development, 2013

Guinea: Mobile Banking, 2014

(Percent of adults with accounts)

Guinea: Reasons for Not Having a Bank Account

Guinea: GDP per Capita, 2013

(USD)

Guinea: Return on Equity, 2011

(Percent)

Guinea: Interest Rate Spreads 2014

(Percentage Points)

Guinea: Urban Population, 2014

(Percent of total