Selected Issues


Selected Issues

Assessment of Macrofinancial Linkages1

A. Background

1. Macrofinancial analysis aims to shed light on vulnerabilities in the financial sector and its linkages to other sectors of the economy. This is a two-way relationship, with weak macroeconomic fundamentals weighing on the financial sector and vulnerabilities in the latter affecting the real sector. Embedding macrofinancial linkages in the macroeconomic framework is a prerequisite for an integrated approach to risk analysis, as financial sector vulnerabilities may undermine macroeconomic stability. Shocks emanating in other sectors may lead to financial instability, which can have feedback effects, often through multiple rounds magnifying the initial impact. Knowledge of macrofinancial linkages permits a forward-looking holistic analysis of the entire economy that may inform policies ahead of distress to mitigate deleterious impacts across sectors. Ideally, an integrated macrofinancial analysis is based on a two-way assessment of macrofinancial risk and macroeconomic stability, with both macro-to-financial and financial-to-macro feedback loops. 2 We analyze the economy’s balance sheet and systemic risks in the financial sector to assess the latter’s resilience to macro shocks. Equally crucial is an analysis of how the financial sector may magnify or dampen shocks to the economy (IMF, 2017a).

2. Owing to the diverse nature of the Fund membership, methodologies applied for macrofinancial analysis vary. In many advanced countries and some emerging economies with relatively complex financial sectors and good data coverage it is possible to apply quantitative methodologies for assessing systemic risk in the financial sector and its linkages to the other sectors of the economy, for example measures of interconnectedness and cross sectoral balance sheet analysis (BSA). In other countries with meaningful data gaps, more qualitative analysis based on basic data and, in some cases, anecdotal evidence and judgment will have to be utilized. Still, such analysis helps highlight vulnerabilities in the financial sector and its counterpart sectors, including by sensitivity checks whose adverse assumptions may go beyond the assumptions already imbedded in the baseline.

3. In the case of The Gambia, good coverage of relevant banking sector data allows for sensitivity checks but not for a comprehensive cross-sectoral balance sheet analysis. Bank information dates back to the early 2000s, permitting to establish a credit cycle and a long-run relationship between bank exposures to government and credit to the corporate sector. Also, information on payment arrears based on authorities’ definition between the sectors of the economy is comprehensive, though verification may be challenging at times. By contrast, the matrix of net claims (which go beyond arrears) that sectors have between one another is currently incomplete as the claims between state owned enterprises (SOEs) and government and other sectors will only be fully known after the forthcoming special audits of the SOEs is concluded. In the meantime, the inter-sectorial matrix of assets and liabilities yielding the net claims and forming the basis for the balance sheet approach to assessing macrofinancial linkages only includes positions of the banks and the central bank.

4. The analysis proceeds as follows. It presents the macrofinancial linkages in The Gambia, sheds light on vulnerabilities in the banking sector, and shows via a sensitivity analysis how banks’ stability may be affected by some key macrofinancial linkages playing out. It furthermore argues that financial frictions are likely to prevent a rapid rebound in private sector credit, and finally points to remedial action that banks, the private sector and the government may take to promote financial deepening.

B. Overview of Macrofinancial linkages

5. Significant macrofinancial linkages persist in The Gambia, first and foremost between the public sector and the banks. As elaborated below, banks are highly exposed to the government through large holdings of short-term government debt, which is a legacy of the large financing needs of the previous administration. In addition, large claims have built up between government and state-owned enterprises (SOEs) on the one hand, and banks and the corporate sector including SOEs on the other. The largest part of non-performing SOE debt that the National Water and Electricity Company (NAWEC) had owed to banks was consolidated into a government-guaranteed bond in 2014 and rescheduled in mid-2017. The central government has assumed debt servicing of that bond, reflecting a realization of contingent liabilities. The bond represents the largest obligation owed by SOEs to banks and is thus a significant macrofinancial linkage for the banks holding it.

6. There has been persistent financial distress within the SOE cluster. Payment difficulties emerged first at NAWEC and the telecom operators (GAMTEL and GAMCEL) owing to operational deficits and cash flow problems (IMF, 2015) but have since spread to more than half of the SOEs.3 Fraud and embezzlement of funds reportedly contributed to substantial leakages, and unbudgeted fiscal spending on behalf of NAWEC and GAMTEL/GAMCEL worsened the fiscal performance in 2016 (IMF, 2017b). 4

7. Weak SOE performance has led to arrears both to central government and within the SOE cluster. The largest arrears of SOEs to central government are, as of November 2017, by GAMCEL and the National Food Security Processing and Marketing Corporation (the former groundnut corporation) of around GMD 250mn each. Total SOE arrears to central government amount to at least GDM 708mn, but as government itself has overdue claims on two SOEs totaling GMD 495mn, the total net arrears claim by SOEs is lower (GMD 213mn). SOEs are also in arrears to one another: four SOEs have accumulated arrears with other SOEs of at least GMD 556 mn as of November 2017. Figure 1 displays the net arrears that sectors have against one another, with the direction of the arrow indicating that a particular sector has a net claim on another.5 These arrears have to be distinguished from total net claims that sectors have against one another, including non-impaired debt.

Figure 1.
Figure 1.

Overview of Net Arrears Between Sectors of the Economy

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A001

8. There are also arrears to the Social Security & Housing Finance Corporation (SSHFC) that provides financial services to the real sector and government alike. Apart from its mandate to provide housing loans, SSHFC has extended loans to SOEs and holds real estate investments (e.g. two hotels). According to the SSHFC, non-performing exposures (loans to SOEs) account for GMD 1.7 billion of its GMD 5.7 billion balance sheet, with the largest non-compliant debtor being NAWEC (total of GMD 1 billion in arrears). This number has been growing due to late-payment charges. 6 SSHFC claims to have no arrears itself. If the arrears to SSHFC are not cleared, the existing resource gap will ultimately have to be closed by either an ad-hoc payment from government or, alternatively, a hike in the contribution rate which would impact households (indicated in Figure 1 as a contingent claim in either case).

9. Although difficult to quantify, SOE arrears have indirectly also caused non-performing loans (NPLs) at banks. Anecdotal evidence from banks points to NPLs caused by cash flow problems of the bank debtor associated with non-payment by an SOE. In any case, at end-September 2017 total NPLs at banks amounted to GMD 419 million, of which GMD 73 million on account of SOEs. Indeed, direct defaults by SOEs to the banks, are quite rare, with almost all arrears owed by a single SOE (GMD 71mn). It is likely, though, that some SOE exposures are misclassified and under-provisioned.

C. Banking Sector Characteristics and Risks

10. In view of arrears and a strong multi-faceted sovereign-bank nexus,7 it is essential to assess banks’ resilience to possible adverse macrofinancial linkages. While banks’ financial soundness indicators point to ample buffers they are masked by zero-risk weighted sovereign assets, which could be compromised by negative macrofinancial linkages playing out. In particular, it is possible that financial disarray at SOEs impinges on the performance of the private sector and, indirectly, the banks. Also, while not imminent, a hypothetical haircut to the large domestic government debt would impair bank capitalization and liquidity. Lastly, in the case of a gradual shift from investment in government paper to lending to the private sector, banks’ capital adequacy ratios would be affected by the concomitant increase in risk-weighted assets and thus potentially call into question their ability to support a rebound of private sector credit. While private sector credit would likely carry higher interest rates than on sovereign assets, thus contributing to banks’ interest income and organic capital build-up through retained profits, loan loss provisions would likely also have to be increased offsetting in part the organic capital buildup.

11. The Gambian banking sector is characterized by sizeable investment in government securities and consequently low financial intermediation. Dubbed “armchair banking” by some interlocutors, most banks opt to invest more than half of their financial assets in low-risk, high-yielding government securities, primarily treasury bills. The high opportunity cost of not holding treasuries has come at the detriment of bank credit to the private sector that has been crowded out by the huge government financing needs. Real private sector credit has not grown in real terms since 2010 and even fallen for the past three years (Figure 2).8 Banks instead have so far resorted to three principal activites: apart from investment in government paper they provide short-term trade financing and engage in the foreign exchange market to generate fee and commission income.

Figure 2.
Figure 2.

Real Credit to the Private Sector

(GMD, millions)

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A001

Source: CBG data, staff calculations

12. The risk-return profile of Gambian government securities has led to an unusually high share of low-risk liquid assets. Compared to the early 2000s, the share of liquid assets (cash, treasuries, claims on other banks) with zero or low-risk weights has gradually risen from about 40 percent to two-thirds of total assets. By contrast, exposures to the real sector account for only about 15 percent, with the share of claims on SOEs falling to 1 percent of assets excluding the NAWEC bond which after a restructuring in August 2017 is now serviced by the central government and therefore categorized under “other government securities.”

Figure 3.
Figure 3.

Decomposition of Bank Assets

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A001

Source: CBG data, staff calculations

13. For years, banks lived comfortably off the high yields on treasury bills, masking an evolving adverse cost structure and thus low efficiency. The efficiency ratio measured as non-interest expense to net interest income has worsened since the mid-2000s, reaching 80 percent at times and thus leaving little space to cover an occasional spike in provisioning. In 2014, efficiency temporarily improved on the back of normalizing energy costs and a hike in T-bill rates.9 Although these drivers remained favorable until recently, efficiency started worsening again in 2015, likely because of having to run expensive back-up power systems due to frequent power outages. General expenses, driven by energy costs, now exceed salary costs at most banks. The recent drop in T-bill rates that banks unequivocally denounce as too rapid and not in line with fundamentals will soon put further pressure on profitability. Already now, one-third of the banks register a return on average assets (RoA) of near or below zero. Absent rationalization measures, low operational efficiency is likely to cause some weaker banks to merge or possibly exit the market.

Figure 4.
Figure 4.

Bank (In-)Efficiency, T-Bill Rates, and Energy Prices

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A001

Source: CBG data, staff calculations

14. Banks’ regulatory capital ratios are boosted by very low risk-weighted assets, raising questions about the effective size of buffers to absorb shocks. The high share of domestic sovereign exposures with zero risk weights and corresponding extraordinarily low ratio of risk-weighted assets (RWA) to total assets (“RWA density”) at most banks boosts the system’s capital adequacy ratio (CAR) to 40 percent (Figure 5). This is depicted in Figure 5 by the ratio of corporate exposures (including SOEs) to central and local government exposures (vertical axis), plotted against the RWA density (horizontal axis). The one outlier with corporate loans three times as high as government exposures and an RWA density ratio of 66 percent would be a representative bank in many other banking sectors with greater financial deepening.

Figure 5.
Figure 5.

Corporate-to-Government Ratio vs. RWA Density

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A001

Source: CBG data, staff calculations

15. Gambian banks’ loan exposure is low also in regional comparison (Figure 6). The share of bank loans in total bank assets is unusually low in The Gambia compared to the WAEMU countries where credit typically accounts for roughly half of total assets. With private sector credit in The Gambia expected to rebound over the medium-term, capital buffers would likely become less ample as they currently appear to be. The CBG’s transition to risk-based supervision will have to ensure such capital and liquidity buffers reflect such business model and other forward-looking risks to ensure safety and soundness of banks.

Figure 6.
Figure 6.

Bank Loans-to-Total Assets Ratio in Regional Comparison, end-2015

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A001

Sources: CBG and BCEAO data, staff calculations

16. Traditionally, Gambian banks had a more balanced portfolio structure, to which they should strive to return in the medium run. Before the secular decline in private sector lending relative to investment in government securities, banks used to have a fairly balanced portfolio structure. Leaving aside a short-lived credit boom in 2003–04, the long-run average corporate-to-government exposure ratio stood at 100 percent during 2000–10. CBG staff contends that the decline in the ratio was delayed by foreign banks entering the local market with an aggressive lending strategy to capture market share. With market saturation setting in, corporate lending then started declining in relative terms from 2011. Banks and policymakers alike would like to see the exposure ratio return to the long-run average over time, provided that the emergence of lending opportunities, both large-scale investment projects and retail credit, can be supported by the banks without compromising their financial soundness and overall financial stability.

Figure 7.
Figure 7.

Ratio of Loans to Non-Financial Corporations (Including SOEs) to Government Exposures

Citation: IMF Staff Country Reports 2018, 100; 10.5089/9781484350218.002.A001

Source: CBG data, staff calculations

D. Testing Banks’ Resilience to Adverse Linkages

17. The mission performed a sensitivity analysis to assess banks’ capacity to sustain unfolding adverse macrofinancial linkages and still support private sector credit. The sensitivity tests centered on three salient macrofinancial linkages, one each separately in relation to the real sector, the SOEs, and government at large:

  • (i) a rebound of corporate loans to be at par with government exposures (i.e. reaching the long-run 1:1 ratio);10

  • (ii) a provision of 5 percent on the carrying value of the restructured NAWEC bond (lowering capital one-to-one) as for any restructured loan; and

  • (iii) the imposition of a non-zero risk weight (arbitrarily set at 20 percent) on all government exposures against which banks currently hold no capital; this is in recognition of the risky sovereign-bank nexus. While there are discussions in train by the Basel Committee (BIS 2017) to look at the international regulatory treatment of sovereign risk, the current status quo at an international level is no change.11

  • In addition, a composite scenario (iv) appropriately combines the three impacts into a single analysis.12

To be sure, this ad-hoc, static analysis of a rebound in corporate credit would take several years to materialize as the economy’s absorption capacity is currently still low, the government’s domestic financing need is only gradually declining, and banks’ risk management frameworks are not yet sufficiently well-established to support a credit expansion. Moreover, banks’ lack the long-term funding required to support infrastructure lending, without incurring a sizable maturity mismatch. Similarly, the hypothetical non-zero risk weight on government exposures is not grounded in current domestic or international regulation but nonetheless provides a useful thought experiment about the impact of a potential, specific form of restructuring of domestic public debt on bank capitalization.

18. The three sensitivity tests and the combined scenario suggest resilience to macrofinancial shocks at the system level but also vulnerabilities at a few banks. The system’s CAR remains well above the minimum required level of 10 percent of RWA despite the significant impact of some of the measures, dropping by between 0.5 and 14 percentage points under the individual tests and by 16.7 percent under the combined scenario (Table 1). However, one larger bank would not be able to support the credit rebound under the first test without violating the minimum capital requirement and thus needing to raise additional capital, and another one would fall below the 14 percent mark under the third test (risk-weighting government exposures). Consequently, these two banks also face capitalization issues under the combined scenario.

Table 1.

The Gambia: Capital Adequacy Ratio Under Sensitivity Tests

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Source: CBG data, and staff calculations.

19. While these checks show that even under adverse circumstances Gambian banks could foster private sector credit, they do not appear prepared for this. In principle, most banks have ample resources at their disposal both in terms of capital and liquidity.13 However, caught by surprise by the pace of the T-bill rate decline, they have not had the time to develop the proper financial instruments like longer-term loan contracts and their equivalent on the liability side, term deposits exceeding a one-year maturity. In practice, many lending relationships are effectively long-term, but instead of originating multi-year loans, banks prefer to roll over shorter-term exposures. They may do so out of necessity to avoid incurring large maturity mismatches. In effect, long-term lending is carried out using banks’ capital that is currently the only source of long-term funding.

20. Banks also point at the scarcity of bankable real sector projects, particularly in infrastructure financing. While banks identify select lending opportunities in dynamic sectors such as hospitality and construction, these may not suffice to bring about a swift acceleration in private sector credit. After negative experiences in the past with lending to difficult sectors like agribusiness, banks are only gradually becoming more comfortable with taking on more credit risk, and some prefer to cater only to the most creditworthy firms in each sector for the time being. Gambian banks could participate in financing some of the priority infrastructure investment identified in the National Development Plan—including in financing downstream suppliers to such infrastructure projects. Yet, banks’ local currency liquidity may not be sufficient to finance larger projects. In the absence of more loan syndication, banks are also likely to run into difficulties with their large exposure and concentration limits.

E. Financial Frictions and Remedial Measures

21. A swift rebound in private sector credit is being hampered by a number of financial frictions. Even if banks were determined on expanding credit to the private sector, shortcomings in the financial infrastructure, regulatory constraints, and market frictions are likely to keep lending at bay in the short run. In particular, banks and their clients grapple with:

  • Data gaps at the Credit Reference Bureau: Banks posit that the debtor information at the credit registry run by the CBG is incomplete and therefore not trustworthy. In addition, they are hesitant to share information on clients with each other given the risk of losing some of the few good clients to competitors. The situation was compounded by a temporary system failure in 2016. Timely transmission of credit information to the bureau is not mandatory, and failure to comply is not sufficiently sanctioned. Thus, when making lending decisions, banks cannot be fully certain about a potential client’s creditworthiness and may fail to make well-informed lending decisions.14

  • Regulatory exposure limits: When trying to finance larger projects, banks are constrained by their single obligor limits (25 percent of regulatory capital), not least because of the low level of capital at some banks—notwithstanding satisfactory capital adequacy ratios. To circumvent this restriction, banks have sought exemptions from the CBG, but the general constraint persists.

  • Elevated lending rates: Credit origination has, so far, also been hampered by high risk-adjusted lending rates that shut out some borrowers unable or unwilling to sustain the corresponding debt service burden. Others, like traders and exporters, tend to obtain credit in foreign currency at lower rates abroad or, in the case of hotel operators, rely on cash advances. Private sector representatives nevertheless signaled interest in local currency bank loans, if lending rates fell sufficiently.

  • Stringent collateral requirements: Banks generally insist on collateral such as real estate despite long delays in execution and so tend to crowd out small and medium-sized enterprises (SMEs) unable to pledge such collateral. Although a public registry for movable collateral was established with SMEs in mind, banks’ usage of the system is only gradually picking up.

  • Obstacles to mortgage credit: The share of housing loans in private sector credit remains low, in part because of low national income and, hence, an insufficient domestic savings rate (though home purchases by foreign pensioners and the Gambian diaspora have recently risen). There are also provisions in the Mortgage Act that are seen as favoring debtors and allowing them to opportunistically delay the execution of collateral in the court system.

22. In dealing with these frictions, the banking system, the private sector, and government should take action to promote financial deepening. Specific measures are needed to overcome the obstacles to bank credit which would also help propel private sector development. Such steps include adjustments to banks’ policies and organization, the private sector’s diversification of operations, and legal and regulatory changes to be undertaken by government and the central bank.

23. Specifically, banks could adopt measures to accommodate the budding credit demand. With opportunity cost dropping as T-Bill rates decline, banks could cautiously lower lending rates to equilibrate loan supply and demand, with a view to moving from recurring short-term investment in government paper and trade financing towards multi-year lending, including to primary and secondary sectors which currently do not receive much credit. At the same time, banks should seek to increase the share of longer-term funding by making depositors aware of the benefits of longer-term savings instruments. As the demand for large-scale infrastructure financing increases, banks should increasingly resort to loan syndication to overcome single obligor, concentration and internal risk limits, although for very large projects even syndication may not suffice. At the same time, they should be prepared to foster SME credit by setting up specialized SME units aimed at accommodating those clients’ characteristics and making more use of the movable collateral registry like some microfinance institutions already do.

24. There are several reforms that the private sector could pursue to diversify operations and improve creditworthiness. To address the issue of some firms’ volatile revenue throughout the year, industry reforms include gradually moving from a single-crop, single-season harvest towards irrigation-based agriculture as well as measures to stabilize hotel occupancy rates at a high level (e.g., more conference activity during the off-season) and pursuing reforms in the hospitality industry based on a needs assessment report currently being finalized. Furthermore, more could be done to develop downstream industries such as building a refinery for peanut oil. More generally, a sectoral development strategy should be rolled out as part of the forthcoming National Development Plan (NDP).

25. Lastly, legal and regulatory changes should be pursued by the government and the CBG. Such reforms should address deficiencies in the financial infrastructure and regulatory framework. In particular, it would be important to:

  • Ensure timely and complete information at the Credit Reference Bureau: clarifying with banks and possibly reinforcing the mandatory provision of debtor information to the CRB in a timely manner, including by establishing sanctions for non-compliance. At the same time, with the recent award of a license, the establishment and use of a private credit bureau could be promoted, along with better use of the movable collateral registry.

  • Modify the Mortgage Act and loan contracts, and promote the use of arbitration: legal changes should be introduced to facilitate banks’ foreclosure on delinquent debtors more easily and curtail the latter’s leeway to opportunistically challenge court decisions. Concurrently, the terms of loan and mortgage contracts could be revisited with a view to clarifying the roles and responsibilities of contract parties. In addition, use of the alternative dispute resolution mechanism should be encouraged, particularly for disputes in banking matters where this avenue is not used much at present.

  • Devise a mechanism to subsidize SME credit: In the absence of a national development bank tasked with fostering SME credit, a mechanism for subsidizing SME credit could be established, for example by setting up a fund or obtaining grants that would be passed on to banks for them to grant credit to SME at subsidized rates. Additionally, the authorities could consider establishing and supporting credit guarantee schemes with a view to enhancing commercial agriculture.

  • Study the implications of low bank efficiency and impact of possible bank mergers/market exit: As the low operational efficiency may cause bank mergers or exits, the authorities should seek to undertake risk-based thematic reviews of the financial stability and macrofinancial implications of such possible mergers or exits.

  • Introduce differentiated regulatory requirements for microfinance institutions: As the microfinance industry is still in the early stage of development with limited resources, liquidity and reserve requirements that currently weigh on those institutions’ revenues could be lowered somewhat, acknowledging their more stable funding base. Moreover, supervision could be enhanced to ensure lower liquidity requirements do not result in a build-up of liquidity risks over time. In general, more attention could also be paid to further developing the microfinance industry that is ready to work with those that are hitherto unbanked and have no financial track record nor collateral.

  • Further improve financial literacy: To promote financial inclusion, a collaborative effort should be made to raise the population’s awareness of the benefits of using financial institutions and instruments, thereby increasing the bankarization rate and promoting access to finance. In doing so, priority should be given to fostering traditional low-tech financial products until connectivity issues are overcome that currently impede widespread use of mobile banking technologies, and the needed extensions to the regulatory and supervisory perimeter have been put in place.


  • BIS (2017): “The regulatory treatment of sovereign exposures”—Discussion Paper Basel Committee on Banking Supervision, Bank for International Settlements, December.

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  • IMF (2015): “The Gambia 2015 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for The Gambia,” IMF Country Report No. 15/272.

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  • IMF (2017a): “Approaches to Macrofinancial Surveillance in Article IV Reports,” IMF Policy Paper, March.

  • IMF (2017b): “Request for Disbursement under the Rapid Credit Facility, and Proposal for a Staff-Monitored Program—Press Release; Staff Report; and Statement by the Executive Director for The Gambia,” IMF Country Report No. 17/179.

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Prepared by Torsten Wezel (AFR).


The focus here is on vulnerabilities to and from the financial and other sectors as re-enforcing adverse (vicious) loops. However, theses feedback effects can also be virtuous and re-enforcing if they reflect strength in sectors or a beneficial shock.


SOEs competing with private sector providers, notably GAMTEL/GAMCEL, complain about a lack of investment that has led to an erosion of their market share and thus to the operational deficits.


A first assessment of embezzlement by the old regime pointed to annual amounts of 4 percent of GDP during mid-2014 to end-2016.


The amount of net arrears between private firms and government/SOEs is not available. All data are as of November 2017 except data on NPLs which are as of end-September 2017.


Total SOE debt in arrears with SSHFC may be as high as GMD 2.03bn according to the latest numbers.


The sovereign-bank nexus can serve both as an amplifier or absorber of shocks at times of stress.


There was a lack of supervisory data for the third quarter of 2016. Missing observations were dealt with by interpolation.


The time series of T-bills is available at a weekly frequency only from 2013.


Keeping the combined value of corporate and government exposures the same, additional loans are assumed to be funded by reducing holdings of government securities so that the two amounts are equal. RWA were increased by the amount of the new loans, since under the Basel I framework applied in The Gambia loans to the private sector carry a 100 percent risk weight at all time. As it is evident that the additional loans carry credit risk, a provision of 5.3 percent on those loans was assumed (the 18-year average of provisions to total loans is 7.8 percent less a tax shield provided by the statutory corporate income tax of 30 percent) and the resulting provisioning amount subtracted from regulatory capital.


Most notably, the risk-weighted framework includes a national discretion that allows jurisdictions to apply a zero percent risk weight for sovereign exposures denominated and funded in domestic currency, regardless of their inherent risk. This discretion is currently exercised by all members of the Basel Committee. Sovereign exposures are also currently exempted from the large exposures framework. Moreover, no limits or haircuts are applied to domestic sovereign exposures that are eligible as high-quality liquid assets in meeting the liquidity standards. In contrast, sovereign exposures are included as part of the leverage ratio framework.


For this scenario to be consistent, the first two individual impacts on RWA and capital were summed up and then combined with the third one where the additional RWA are calculated only on the reduced stock of government securities resulting from the first sensitivity test.


Even after decreasing liquid assets in favor of bank loans under the first test, all banks’ liquidity ratios remain well above the required minimum. However, this does not necessarily mean that they would comply with more risk-based liquidity measures such as the Basel III Liquidity Coverage Ratio.


Faced with asymmetric information banks may prefer to reject applicants, including creditworthy ones. On the other hand, low-efficiency banks may lend to risky clients at high rates to prop up results in the short run while incurring credit risk in the longer run. In either case, suboptimal credit allocation ensues.

The Gambia: Selected Issues
Author: International Monetary Fund. African Dept.