Abstract
Selected Issues
Financial Inclusion and Development
While access to finance is improving, relatively to other sub-Saharan countries, a number of reforms could foster financial deepening and financial inclusion and complement efforts to promote the expansion of the private sector and employment creation.
A. Background
1. Benin’s financial sector is shallow, segmented, and with limited financial inclusion.
Benin has a small and segmented financial sector in which 3 categories operate: the banking sectors, the microfinance institutions and other nonbank financial institutions. As of end-2016, there were 15 commercial banks, with 4 banks holding about 80 percent of credits to the banking system (Table 1). Banks’ capital adequacy has increased from 8.8 percent (end-June 2015) to 10.6 percent, above the 8 percent minimum but still below the WAEMU and SSA averages.1 The ratio of non-performing loans (NPLs) remains high when compared against peer countries in the WAEMU region (Figure 2). Other indicators are also lagging behind WAEMU averages, including the provisioning ratio for NPLs (12 percent of risk-weighted assets in 2014–15), the liquidity ratio, and profitability indicators.
Benin: Structure of the Banking System, 2014-17
as of June
Benin: Structure of the Banking System, 2014-17
| 2014 | 2015 | 2017 1/ | ||
|---|---|---|---|---|
| (CFAF billions) | ||||
| Credits | 1,096 | 1,078 | 1,195 | |
| top 4 banks | 899 | 841 | 991 | |
| short term | 596 | 643 | 710 | |
| medium term | 463 | 392 | 420 | |
| long term | 37 | 43 | 65 | |
| Treasury Notes | 211 | 295 | 393 | |
| Deposits | 1,355 | 1,503 | 1,643 | |
| top 4 banks | 935 | 1,082 | 1,101 | |
| sight Deposits | 631 | 686 | 752 | |
| term Deposits | 724 | 817 | 891 | |
as of June
Benin: Structure of the Banking System, 2014-17
| 2014 | 2015 | 2017 1/ | ||
|---|---|---|---|---|
| (CFAF billions) | ||||
| Credits | 1,096 | 1,078 | 1,195 | |
| top 4 banks | 899 | 841 | 991 | |
| short term | 596 | 643 | 710 | |
| medium term | 463 | 392 | 420 | |
| long term | 37 | 43 | 65 | |
| Treasury Notes | 211 | 295 | 393 | |
| Deposits | 1,355 | 1,503 | 1,643 | |
| top 4 banks | 935 | 1,082 | 1,101 | |
| sight Deposits | 631 | 686 | 752 | |
| term Deposits | 724 | 817 | 891 | |
as of June
2. Although the banking system remains stable, its depth has not improved. The banking sector is broadly sound but plays a limited role in financial inclusion. According to the BCEAO estimations (2010), there is a low level of access to banking service. More precisely, the number of deposit accounts in commercial banks relative to the active population is around 5 percent. In Benin, the banking services are targeting the high income urban population, the low population density and the large size of the informal sector limited the access to the banking services. In addition, the interbank market is no existent. The depth of the Beninese banking system ranks just below the average of its peers the WAEMU region (with private credit and domestic deposits at 21 and 30 percent of GDP, respectively). Despite banks have developed branch networks in the country, only 17 percent of the population had a bank account in 2015. Access to finance is difficult for some vulnerable groups and for small and medium-sized enterprises. Overall, the ratio of broad money (M2) to GDP rose modestly from 34 percent in end-2012 to 40 percent at June 2017. Despite this significant growth, there is still considerable scope for financial deepening (Figure 1).
Benin: Financial Depth and GDP per Capita, 2015
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 2014, World Development Indicators, Sahay and others (2015)Benin: Financial Depth and GDP per Capita, 2015
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 2014, World Development Indicators, Sahay and others (2015)Benin: Financial Depth and GDP per Capita, 2015
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 2014, World Development Indicators, Sahay and others (2015)
Benin: Comparative Indicators of Banking System Soundness
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Sources: country authorities and IMF staff calculation.1/ Latest data in 2013–15.Benin: Comparative Indicators of Banking System Soundness
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Sources: country authorities and IMF staff calculation.1/ Latest data in 2013–15.Benin: Comparative Indicators of Banking System Soundness
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Sources: country authorities and IMF staff calculation.1/ Latest data in 2013–15.
Benin: Having an Account, 2015
(Percent)
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 2014Benin: Having an Account, 2015
(Percent)
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 2014Benin: Having an Account, 2015
(Percent)
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 20143. The fast-growing microfinance institutions (MFIs) is still showing rising risks.
Microfinance sector (MFIs) composed by 721 MFIs, where only 226 are licensed. The microfinance sector plays an important role in providing financing to both sectors of the economy and rural population (4.5 million) that are underserved by banks. Despite the fact, that microfinance sector plays an increasing in reducing poverty in Benin; it lacks to provide financing to small and medium enterprises, in particular, long term loans. The large number of unauthorized MFIs (deposit taken institutions) represent a high-risk exposure for the banking system, requiring a further tightening of licensing requirements, also contributed to the prevalence of unauthorized MFIs. Despite the size of the deposit collected by unauthorized MFIs is currently about ½ percent of GDP, suggesting a limited contingent fiscal liability, any potential shock affecting this fast-growing sector could hamper confidence and undermine financial deepening.2 Annual on-site supervisions will strengthen the risk-based approach being adopted by the authorities, including enhance data collection, and enable technological innovations in this subsector.
4. Other nonbank financial institutions. This sector is composed by insurance companies, pension funds and postal checking services. The pension funds include a public entity for permanent civil servants—Fonds national de retraite du Bénin and an autonomous entity for private sector employees and contractual civil servants—Caisse nationale de sécurité sociale, which manages resources from employees’ and employers’ contributions. Also, there are 15 insurance companies, including eight in damage-related insurance and six life insurers.
B. Financial Access and Development
5. The authorities are striving to enhance financial services delivery by addressing hindrances to financial inclusion and deepening, covering access, depth, and efficiency.
Access. Although the number of bank branches has been recently increasing, in particular in rural areas, there is room to further expand financial inclusion by strengthening the regulatory framework of agency banking. High documentation requirements to open, maintain, and close accounts and for loan applications could impede access to finance (participation costs).
Depth. To further enhance credit culture and cover all, the authorities could consider setting a credit reporting bill to unify the collateral registration system, avoiding any potential fragmentation across registries. It could also be useful to strengthen the insolvency/bankruptcy procedure, and improve land titling, which can ease collaterals demanded by lenders. Further, improving contract enforcement in the judiciary sector could contribute to relax collateral constraints and addressing gaps in financial market infrastructure.
Intermediation efficiency. Efficiency is generally associated with the state of competition and is reflected in interest spreads and banks’ overhead costs. Intermediation costs (i.e., high interest rates and fees) reflect asymmetries of information between borrowers and banks.
6. Access to an account in Benin compares poorly with averages from low income countries (Figure 5). Male reported higher access than females in Benin and the level of education is also a factor determining access to an account. Access is relatively low across all income groups and when compared by wages and employment.
7. Financial development has modestly improved in Benin over the past ten years. The composite index of financial development suggests that financial development in Benin has been lackluster over the past three decades. Figure 4 depicts the level of financial development for different country groups, including Benin. Relative to middle-income countries (Mauritius, Namibia, Seychelles, and South Africa), Benin shows a modest improvement in achieving higher rates of financial development and lacks behind the average for SSA countries and other regions.3
Benin: Financial Development Index, 1980-2013
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: REO 2016, SpringBenin: Financial Development Index, 1980-2013
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: REO 2016, SpringBenin: Financial Development Index, 1980-2013
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: REO 2016, Spring
Benin: Financial Inclusion, 2015
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 2015Benin: Financial Inclusion, 2015
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 2015Benin: Financial Inclusion, 2015
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Source: FINDEX 20158. Benin’s financial sector provides limited contribution to private investment: Firstly, the banking sector do not contribute in significant manner to finance private investment (table 2) because (i) the institutional framework discourages commercial banks from taking risks, they are actively involved in WAEMU sovereign borrowing due to their high yield (6 to 7%). (ii) Difficult to commercial banks to provide financing to some economic activities, due to the limited scope for guaranteeing loans to small and medium size enterprises. (iii) The small size of the formal sector and specially, the manufacturing sector, (iv) The cost of establishing bank branches in rural area is very high. Secondly, the microfinance sector is able to finance private due to the lack of long term funds.
Financial Soundness Indicators 2011–17
Tier 1 Capital.
Identified sectors represent at least 80 percent of credit
The improvement of NPLs since 2014 includes the reduced exposure by several banks to a business group that encountered difficulties in 2012-14.
Some account elements available semi-annually.
Excluding taxes on banking operations.
Including savings accounts.
Financial Soundness Indicators 2011–17
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||
|---|---|---|---|---|---|---|---|---|---|
| June | |||||||||
| (Percent unless otherwise indicated) | |||||||||
| Regulatory capital to risk-weighted assets | 12.5 | 12.8 | 12.9 | 12.7 | 12.6 | 9.5 | 10.0 | ||
| Core capital to risk-weighted assets1 | 11.7 | 11.9 | 11.8 | 11.2 | 10.5 | 7.6 | 8.6 | ||
| Provisions to risk-weighted assets | 10.7 | 10.8 | 10.3 | 10.7 | 11.7 | 15.6 | 19.8 | ||
| Capital to total assets | 7.3 | 7.3 | 7.2 | 6.7 | 5.7 | 3.8 | 4.4 | ||
| Composition and quality of assets | |||||||||
| Total loans to total assets | 55.2 | 55.0 | 55.9 | 54.6 | 53.1 | 39.3 | 56.1 | ||
| Concentration: Credit to the 5 largest borrowers (in terms of total capital) | 92.9 | 92.3 | 75.1 | 88.6 | 113.1 | … | 487.0 | ||
| Credit by sector2 | |||||||||
| Agriculture, Forestry, and Fishing | 2.9 | 2.6 | 2.9 | 3.1 | 3.2 | … | … | ||
| Extractive Industries | 2.2 | 1.6 | 1.8 | 2.0 | 2.0 | … | … | ||
| Manufacturing | 18.8 | 18.2 | 17.0 | 17.9 | 17.2 | … | … | ||
| Electricity, Water, and Gas | 3.2 | 3.2 | 3.7 | 3.9 | 4.2 | … | … | ||
| Buildings and Public Works | 6.7 | 6.7 | 7.8 | 8.7 | 9.4 | … | … | ||
| Commerce, Restaurants, and Hotels | 32.3 | 34.7 | 33.5 | 31.1 | 31.5 | … | … | ||
| Transportation and Communication | 11.2 | 10.0 | 11.2 | 9.3 | 9.5 | … | … | ||
| Financial and Business Services | 5.5 | 6.1 | 6.0 | 6.5 | 6.6 | … | … | ||
| Other Services | 17.2 | 16.8 | 16.2 | 17.0 | 16.4 | … | … | ||
| Non-Performing Loans (NPLs) | |||||||||
| Gross NPLs to Total loans3 | 15.9 | 16.0 | 15.5 | 14.4 | 14.4 | 21.4 | 20.3 | ||
| Provisioning rate | 64.2 | 63.4 | 61.0 | 62.8 | 62.8 | 63.2 | 66.3 | ||
| Net NPLs to total loans | 6.4 | 6.5 | 6.6 | 6.1 | 5.9 | 9.1 | 7.9 | ||
| Net NPLs to capital | 47.8 | 48.8 | 51.1 | 50.0 | 54.9 | 95.2 | 100.8 | ||
| Earnings and profitability4 | |||||||||
| Average cost of borrowed funds | 2.4 | 2.5 | 2.8 | 2.4 | 2.4 | … | … | ||
| Average interest rate on loans | 9.7 | 9.8 | 10.7 | 9.1 | 2.4 | … | … | ||
| Average interest margin5 | 7.3 | 7.3 | 7.9 | 6.7 | 6.4 | … | … | ||
| After-tax return on average assets (ROA) | 1.2 | 0.9 | 0.9 | 1.1 | 1.2 | … | … | ||
| After-tax return on average equity (ROE) | 13.7 | 10.1 | 11.5 | 15.5 | 16.4 | … | … | ||
| Noninterest expenses/net banking income | 61.6 | 61.0 | 60.7 | 58.6 | 58.6 | … | … | ||
| Salaries and wages/net banking income | 26.4 | 25.7 | 26.5 | 25.4 | 25.4 | … | … | ||
| Liquidity | |||||||||
| Liquid assets to total assets | 33.6 | 32.5 | 32.2 | 30.9 | 29.4 | … | … | ||
| Liquid assets to total deposits | 46.1 | 45.8 | 46.1 | 45.9 | 43.8 | … | … | ||
| Total loans to total deposits | 84.3 | 86.2 | 90.0 | 89.5 | 87.0 | 68.4 | 71.8 | ||
| Total deposits to total liabilities | 72.9 | 71.1 | 68.5 | 63.4 | 67.1 | 57.4 | 78.0 | ||
| Demand deposits to total liabilities6 | 37.8 | 36.5 | 35.5 | 34.5 | 35.4 | 24.3 | 34.2 | ||
| Term deposits to total liabilities | 35.1 | 34.6 | 33.0 | 32.8 | 31.7 | 33.1 | 43.8 | ||
Tier 1 Capital.
Identified sectors represent at least 80 percent of credit
The improvement of NPLs since 2014 includes the reduced exposure by several banks to a business group that encountered difficulties in 2012-14.
Some account elements available semi-annually.
Excluding taxes on banking operations.
Including savings accounts.
Financial Soundness Indicators 2011–17
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||
|---|---|---|---|---|---|---|---|---|---|
| June | |||||||||
| (Percent unless otherwise indicated) | |||||||||
| Regulatory capital to risk-weighted assets | 12.5 | 12.8 | 12.9 | 12.7 | 12.6 | 9.5 | 10.0 | ||
| Core capital to risk-weighted assets1 | 11.7 | 11.9 | 11.8 | 11.2 | 10.5 | 7.6 | 8.6 | ||
| Provisions to risk-weighted assets | 10.7 | 10.8 | 10.3 | 10.7 | 11.7 | 15.6 | 19.8 | ||
| Capital to total assets | 7.3 | 7.3 | 7.2 | 6.7 | 5.7 | 3.8 | 4.4 | ||
| Composition and quality of assets | |||||||||
| Total loans to total assets | 55.2 | 55.0 | 55.9 | 54.6 | 53.1 | 39.3 | 56.1 | ||
| Concentration: Credit to the 5 largest borrowers (in terms of total capital) | 92.9 | 92.3 | 75.1 | 88.6 | 113.1 | … | 487.0 | ||
| Credit by sector2 | |||||||||
| Agriculture, Forestry, and Fishing | 2.9 | 2.6 | 2.9 | 3.1 | 3.2 | … | … | ||
| Extractive Industries | 2.2 | 1.6 | 1.8 | 2.0 | 2.0 | … | … | ||
| Manufacturing | 18.8 | 18.2 | 17.0 | 17.9 | 17.2 | … | … | ||
| Electricity, Water, and Gas | 3.2 | 3.2 | 3.7 | 3.9 | 4.2 | … | … | ||
| Buildings and Public Works | 6.7 | 6.7 | 7.8 | 8.7 | 9.4 | … | … | ||
| Commerce, Restaurants, and Hotels | 32.3 | 34.7 | 33.5 | 31.1 | 31.5 | … | … | ||
| Transportation and Communication | 11.2 | 10.0 | 11.2 | 9.3 | 9.5 | … | … | ||
| Financial and Business Services | 5.5 | 6.1 | 6.0 | 6.5 | 6.6 | … | … | ||
| Other Services | 17.2 | 16.8 | 16.2 | 17.0 | 16.4 | … | … | ||
| Non-Performing Loans (NPLs) | |||||||||
| Gross NPLs to Total loans3 | 15.9 | 16.0 | 15.5 | 14.4 | 14.4 | 21.4 | 20.3 | ||
| Provisioning rate | 64.2 | 63.4 | 61.0 | 62.8 | 62.8 | 63.2 | 66.3 | ||
| Net NPLs to total loans | 6.4 | 6.5 | 6.6 | 6.1 | 5.9 | 9.1 | 7.9 | ||
| Net NPLs to capital | 47.8 | 48.8 | 51.1 | 50.0 | 54.9 | 95.2 | 100.8 | ||
| Earnings and profitability4 | |||||||||
| Average cost of borrowed funds | 2.4 | 2.5 | 2.8 | 2.4 | 2.4 | … | … | ||
| Average interest rate on loans | 9.7 | 9.8 | 10.7 | 9.1 | 2.4 | … | … | ||
| Average interest margin5 | 7.3 | 7.3 | 7.9 | 6.7 | 6.4 | … | … | ||
| After-tax return on average assets (ROA) | 1.2 | 0.9 | 0.9 | 1.1 | 1.2 | … | … | ||
| After-tax return on average equity (ROE) | 13.7 | 10.1 | 11.5 | 15.5 | 16.4 | … | … | ||
| Noninterest expenses/net banking income | 61.6 | 61.0 | 60.7 | 58.6 | 58.6 | … | … | ||
| Salaries and wages/net banking income | 26.4 | 25.7 | 26.5 | 25.4 | 25.4 | … | … | ||
| Liquidity | |||||||||
| Liquid assets to total assets | 33.6 | 32.5 | 32.2 | 30.9 | 29.4 | … | … | ||
| Liquid assets to total deposits | 46.1 | 45.8 | 46.1 | 45.9 | 43.8 | … | … | ||
| Total loans to total deposits | 84.3 | 86.2 | 90.0 | 89.5 | 87.0 | 68.4 | 71.8 | ||
| Total deposits to total liabilities | 72.9 | 71.1 | 68.5 | 63.4 | 67.1 | 57.4 | 78.0 | ||
| Demand deposits to total liabilities6 | 37.8 | 36.5 | 35.5 | 34.5 | 35.4 | 24.3 | 34.2 | ||
| Term deposits to total liabilities | 35.1 | 34.6 | 33.0 | 32.8 | 31.7 | 33.1 | 43.8 | ||
Tier 1 Capital.
Identified sectors represent at least 80 percent of credit
The improvement of NPLs since 2014 includes the reduced exposure by several banks to a business group that encountered difficulties in 2012-14.
Some account elements available semi-annually.
Excluding taxes on banking operations.
Including savings accounts.
9. Lastly, Benin is performing relatively well regarding access to finance and use of mobile banking but there is scope for further progress (Figure 6). Benin holds around 5 percent of the total volume of mobile transactions in the WAEMU region with a total number of subscription of 12 percent.
Benin: Mobile Phone Activity, 2016
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Benin: Mobile Phone Activity, 2016
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
Benin: Mobile Phone Activity, 2016
Citation: IMF Staff Country Reports 2018, 002; 10.5089/9781484336540.002.A002
10. Improving access to credit is a multifaceted problem. The benefits from developing financial institutions in Benin are large. Thus, an appropriate sequencing would emphasize developing institutions at early stages, with increasing attention to developing markets as income per capita rises. Benin could adapt regulation and infrastructure to make investment by private sector participants easier while allowing them to hedge risks and enabling capital to be efficiently channeled into investment projects. Finally, continuing the development of insurance and the pension system can help broaden the investor base and, as a result, improve the depth and breadth of the capital market.
