Burkina Faso: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
22 Jan 2019
eISBN:
9781484394311
Language:
English
Keywords:
ISCR; CR; tax revenue; tax; VAT; income tax; GDP; net claim; asset concentration; banking system's vulnerability; assets consist; microfinance sector; Mobile banking; Macrofinancial linkages
Download PDF (1.1 MB)

Selected Issues

Abstract

Selected Issues

Banking Sector Soundness and Macro-Financial Linkages1

This paper examines Burkina Faso’s banking system and traces its macro-financial linkages. The available data indicates that the banking system remains well-capitalized and profitable. Systemic risks remain broadly contained, and new banks have come into operation, but there is significant scope to improve the banking system’s ability to support the real economy and financial inclusion. Deteriorating security conditions could undermine banks’ ability to expand into underserved remote areas.

A. Introduction

1. This paper examines Burkina Faso’s banking system and traces its macro-financial linkages. The analysis builds upon the macro-financial linkages work conducted in the context of the Article IV consultation with the West African Economic and Monetary Union (WAEMU).2 Overall, the banking system remains profitable and well-capitalized, but its ability to support the real economy needs to be improved if the authorities are to reach their development goals. Moreover, financial inclusion remains low, and despite recent progress on basic access to the financial system, significant barriers to accessing credit remain; particularly for women, rural inhabitants, and the agricultural sector.

B. Financial Sector Overview

2. The Burkina Faso financial system is dominated by banks and traditional insurance companies, but also possesses vibrant microfinance and mobile money activities that have significant potential to improve financial inclusion. The banking system comprised 14 banks at end-June 2018. It is shallow and highly concentrated, with the top three banks accounting for 78 percent of total assets in 2015 according to the IMF’s Financial Access Survey. Like in most WAEMU countries, Pan-African bank groups dominate the penetration of foreign ownership and have systemic importance (IMF 2015a). The banking system primarily serves established clients and is a large purchaser of government bonds on the WAEMU regional securities market. It continues to expand, with two new banks licensed in 2018, including a state-owned agricultural bank. Mobile money operations have also been expanding rapidly (Figure 1). The number of mobile money agent outlets increased by five-fold during 2014–2017, opening a new opportunity to bring the unbanked into the financial system.

Figure 1.
Figure 1.

Burkina Faso: Selected Financial System Indicators

Citation: IMF Staff Country Reports 2019, 016; 10.5089/9781484394311.002.A001

Sources: IMF Financial Access Survey; and IMF staff estimates.

3. Balance sheet analysis3 reveals strong exposure of the banking system to nonresidents. A partial balance sheet matrix was derived from IMF’s Standardized Reports Forms (SRF) for end-July 2018. It shows that the external sector plays a major role for the banking system as banks have built up large net claims on the central governments of the region. Banks’ exposure to non-residents (including mostly regional governments) reached 14.5 percent of GDP. While such exposure entails assets mostly denominated in the regional currency which eliminates the exchange rate risk, it makes banks potentially vulnerable to fiscal shocks in the region. Exposure to the domestic public sector is smaller, with banks’ net claims amounting to 3.5 percent of GDP. Banks have net liabilities to the private sector (nonfinancial corporations and households), amounting to 5.5 percent of GDP (Table 1).

Table 1.

Burkina Faso: Balance Sheet Matrix, end-July 2018

(in percent of 2017 nominal GDP)1

article image
Sources: BCEAO; and IMF staff calculations.

Each cell contains a net claim position (assets minus liabilities). Columns represent the creditor sector and rows the debtor sector.

4. The financial system and financial deepening have been growing steadily. Net domestic assets grew by 13 percent in 2017, with the ratio of private credit to GDP reaching 31.3 percent at end-2017, up from 30.4 percent at end-2016. Despite a cyclical build up in credit during 2014–15, credit imbalances remain contained. A credit gap analysis (that analyses the difference between the credit-to-GDP ratio and its long-term trend) suggests that credit growth is within levels that do not give rise to a buildup of financial vulnerabilities.4 The cyclical credit gap has consistently remained lower than the 2 percent of GDP threshold above which financial sector risks are deemed to start rising (Figure 2).

Figure 2.
Figure 2.

Burkina Faso: Credit-to-GDP Gap, 1998–2017

(in percent of GDP)

Citation: IMF Staff Country Reports 2019, 016; 10.5089/9781484394311.002.A001

Source: Burkinabe authorities; and IMF staff estimates.

5. Lending to the real economy by the banking system in part depends on banks’ ability to profitably deploy their liquidity on the regional market. Banks are a large purchaser of government bonds on the WAEMU regional securities market. The steady outflow of capital since the political transition of 2014, and associated increase in economic uncertainty, led to an increase in the net foreign assets (NFA) of domestic banks in 2015–17 as banks increased their holdings of bonds issued by other WAEMU countries. This coincided with a slowdown in private sector credit growth (Figure 3).

Figure 3.
Figure 3.

Burkina Faso: Private Sector Credit and NFA, 2014–2018

Citation: IMF Staff Country Reports 2019, 016; 10.5089/9781484394311.002.A001

Sources: Burkinabe authorities; BCEAO; and IMF staff estimates.

C. Risks and Vulnerabilities

6. Systemic risks are broadly contained as the banking system is characterized as solvent, liquid, and conservative in its lending. Capital ratios remain overall above prudential norms amid BCEAO’s new regulatory capital requirements phased in from January 2018. The new requirements raise the minimum risk-weighted capital ratio to 8.6 by end-2018, moving banks closer to Basel II/III standards. The profitability of the sector, based on either ROA or ROE, is sufficient (Table 2). Consequently, the banking system appears to be sound and stable with potential to expand into underserved portions of the economy.

  • Credit risk is broadly contained as NPLs have consistently remained low, including during the political transition of 2014–2015. However, asset concentration is substantial, with the top five borrowers (including the state-owned enterprises SONABHY and SOFITEX) accounting for nearly 10 percent of total credit to the economy.

  • Exchange rate (currency mismatch) risk is prevented by the fact that lending in foreign currency is not permissible in the WAEMU. While banks have a large net creditor position to nonresidents (14.5 percent of GDP), the underlying assets consist mostly of regional governments’ bonds issued in CFAF thereby limiting the exchange rate risk.

  • Liquidity risk is broadly contained. While declining in recent years, the ratio of liquid assets to total assets remained at around 25 percent at end-2017.

  • Risks from tighter global financial conditions are limited. On the asset side, banks have limited international exposure outside the regional debt market and are not involved in complex derivatives or other risky financial instruments. On the other hand, the shareholding structure of most banks is dominated by Pan-African bank groups, potentially limiting the banking system’s vulnerability to tighter funding conditions in advanced economies.

Table 2.

Burkina Faso: Financial Sector Indicators, 2011–18

(in percent, unless otherwise indicated)

article image
Source: BCEAO, Burkinabe authorities; and IMF staff estimates.

7. However, security risks have risen. Recent terrorist attacks have somewhat increased banks’ operational risk in remote areas, leading a few banks to temporarily close their branches. The deterioration in security conditions, while it has not led to major disruptions in the banking system, could undermine banks’ ability to expand into underserved remote areas and hence hamper the authorities’ efforts to promote financial inclusion.

D. Financial Inclusion and Deepening

Starting from a low level, Burkina Faso has managed to make significant strides in catching up to its peers in terms of financial access. Some notable successes include the country’s ability to close the gap with some of its WAEMU peers in terms of the percentage of the population with a bank account and also the rapid increase in the percentage of the population that has used mobile money services, consistent with growing cell phone utilization rates (Figure 4). These results are encouraging and provide a base to build upon.

Figure 4.
Figure 4.

Burkina Faso: Mobile Cellular Subscriptions, 2008–2016

(per 1000 people)

Citation: IMF Staff Country Reports 2019, 016; 10.5089/9781484394311.002.A001

Source: World Development Indicators; and IMF staff estimates.

8. Nevertheless, the financial sector could play a stronger role in supporting economic growth (Figure 5). Low financial inclusion is a key challenge that can constrain the development of the private sector. In Burkina Faso, less than 25 percent of the population has an account at a financial institution (FI) and less than 10 percent have been able to borrow from FIs. According to the 2019 World Bank’s Doing Business report, access to credit in Burkina Faso is broadly comparable to its WAEMU peers. Access to finance is particularly constrained for those in rural areas, women, and lower-income individuals. There also exists significant informational, IT, and collateral barriers to affordable credit for SMEs, which again hamper private sector-led development and poverty reduction. There are many microfinance institutions and developing the sector is a government priority. Nevertheless, microfinance remains relatively underdeveloped due to IT barriers, lack of economies-of-scale, and weaknesses in business operations.

Figure 5.
Figure 5.

Burkina Faso: Financial Inclusion 2011–2017

Citation: IMF Staff Country Reports 2019, 016; 10.5089/9781484394311.002.A001

Source: FINDEX; and IMF staff estimates.

9. The overall level of credit also masks significant variation in the allocation of credit. Banks have strong preference for public enterprises, particularly the state-owned oil import monopoly SONAHBY, at the virtual complete exclusion of the agricultural sector with the exception of cotton. Agriculture, although it employs the vast majority (80 percent) of the population and accounts for around 25 percent of GDP, receives approximately 5 percent of the credit, leading to chronic underinvestment in the sector (Figures 6). By contrast, commerce (12 percent of GDP) and construction (7 percent of GDP) receive around 29 percent and 16 percent of credit, respectively. Uneven credit allocation is also evident with the top 5 creditors accounting for around 10 percent of the total credit to the economy.

Figure 6.
Figure 6.

Burkina Faso: Credit by Sector and Top Creditors

Citation: IMF Staff Country Reports 2019, 016; 10.5089/9781484394311.002.A001

Sources: Burkinabe authorities; and IMF staff estimates.

10. Policies to promote further financial inclusion should focus both on supply- and demand-side considerations. The authorities have recently launched their 2018–2022 roadmap for financial inclusion which is in line with the regional financial inclusion strategy adopted by BCEAO. The roadmap builds on an extensive financial inclusion diagnostic exercise (UNCDF and FinMark Trust 2017; and Jefferis and Abdulai, 2017). On the supply side, the financial inclusion strategy hopes to expand microfinance, improve digital and mobile financial services, risk analysis, and promote financial institutions dedicated to the agricultural sector. The envisaged expansion of the microfinance sector could help narrow gender imbalances in financial inclusion, given women’s higher reliance on informal micro businesses. On the other hand, the creation of a state-owned agricultural bank in March 2018, while motivated by a legitimate concern to revert the financial exclusion of the agriculture sector, could be a source of contingent liabilities. Further supply-side policy actions could aim at fully operationalizing the existing private credit bureau. Like in some African countries, an effective private credit bureau could contribute to scaling up access to credit by narrowing information gaps between banks and potential borrowers (Triki and Gajigo, 2012). On the demand side, the authorities’ roadmap envisages the intensification of financial literacy programs, especially in rural areas. It could also explore reforms to modernize the legal framework on bank collateral to better align it with the specific reality of local households and businesses. Finally, given the cross-cutting nature of financial inclusion, it will be important that policy actions are framed within the broader context of the PNDES.

References

  • Bank for International Settlements, 2010, “Guidance for National Authorities Operating the Countercyclical Capital Buffer”, Basel Committee on Banking Supervision.

    • Search Google Scholar
    • Export Citation

  • Drehmann, Mathias and Kostas Tsatsaronis, 2014, “The credit-to-GDP gap and countercyclical capital buffers: questions and answers”, Bank for International Settlements, BIS Quarterly Review, March 2014.

    • Search Google Scholar
    • Export Citation

  • International Monetary Fund, 2018, “WAEMU Banking System Soundness and Macro-Financial Linkages. Selected Issues”, IMF Country Report No. 18/107.

    • Search Google Scholar
    • Export Citation

  • International Monetary Fund, 2015a, “Pan-African Banks: Opportunities and challenges for cross-border oversight”, Washington, DC.

  • International Monetary Fund, 2015b, “Balance Sheet Analysis in Fund Surveillance”, IMF Policy Paper, Washington, DC.

  • International Monetary Fund, 2017, “Approaches to Macrofinancial Surveillance in Article IV Reports”, IMF Policy Paper, Washington, DC.

    • Search Google Scholar
    • Export Citation

  • Jefferis, Keith and Jemila Abdulai, 2017, “Rendre L’Accès Possible. Burkina Faso. Rapport de Diagnostic de L’Inclusion Financière”, ECONSULT Botswana.

    • Search Google Scholar
    • Export Citation

  • Triki, Thouraya and Gajigo, Ousman, 2012, “Credit Bureaus and Registries and Access to Finance: New Evidence from 42 African Countries”, Working Paper Series No 154, African Development Bank, Tunis, Tunisia.

    • Search Google Scholar
    • Export Citation

  • UNCDF and FinMark Trust, 2017, “Burkina Faso. Feuille de Route de L’Inclusion Financière 2018–2022”.

Data Sources

  • Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. World Bank: Washington, DC. World Development Indicators

    • Search Google Scholar
    • Export Citation

  • International Monetary Fund. 2018. 2018 Financial Access Survey. Washington, DC. http://data.imf.org/fas

  • The World Bank. 2018. Doing Business 2019: Training for Reform. Washington, DC: World Bank.

  • The World Bank. 2018. World Development Indicators. Washington, D.C.: The World Bank. https://data.worldbank.org/indicator/IT.CEL.SETS.P2

    • Search Google Scholar
    • Export Citation
1

Prepared by Trevor Lessard and Felix Simione.

3

Balance sheet analysis provides a starting point to diagnose risks and potential transmission channels of shocks and sets the stage for deeper analysis (IMF 2015b).

4

The credit gap is calculated as the difference between the private sector credit-to-GDP ratio and its long-term trend derived using the Hodrick-Prescott filter. If the credit-to-GDP ratio is significantly above its trend (i.e. there is a large positive gap), this could be an indication that credit may have grown excessively relative to GDP.

References

  • Baunsgaard, T. and Keen, M., 2010, “Tax revenue and (or?) trade liberalization,” Journal of Public Economics, 94, pp. 563–77.

  • Bird, R., J. Martinez-Vazquez and B. Torgler, 2004, “Societal Institutions and Tax Effort in Developing Countries,” Working Paper 2004–21, Center for Research in Economics, Management, and the Arts.

    • Search Google Scholar
    • Export Citation

  • Dridi, J. and E. Mensah, 2018, “Tax Revenue Mobilization in Mali”, in IMF Country Report No. 18/142, International Monetary Fund.

  • Drummond, P., W. Daal, N. Srivastava and L. E. Oliveira, 2012, “Mobilizing Revenue in Sub-Saharan Africa: Empirical Norms and Key Determinants,” IMF Working Papers 12/108, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Fenochietto, R. and C. Pessino, 2013, “Understanding Countries’ Tax Effort,” IMF Working Paper 13/244, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Fossat P., R. Bazahica, S. Vera, G. Chambas, G. Claustres, and P. Koidou, 2018, “Strengthening Tax and Customs Operations”, TA Report, May 2017, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Fossat P., S. Vera, P. Vandenberghe and J. Carré, 2018, “Strengthening the Mobilization of Tax and Customs Revenue”, TA Report, May 2018, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Geourjon A. M., M. B. Brahim, B. Laporte and J. F. Wen, 2018, “Guidelines for rationalizing tax policy” TA Report, April 2018, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Ghura, D., 1998, “Tax Revenue in Sub-Saharan Africa: Effects of Economic Policies and Corruption,” IMF Working Papers 98/135, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Gupta, S., 2007, “Determinants of Tax Revenue Efforts in Developing Countries,” IMF Working Paper 07/184, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Keen, Michael, (2013), The Anatomy of the Vat, National Tax Journal, 66, issue 2, p. 423–446.

  • Rota-Graziosi G., and M. B. Brahim, 2017, “The Transfer Pricing Policy and its implementation”, TA Report, January 2017, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Tanzi, V. and H. Davoodi, 1997, “Corruption, Public Investment, and Growth,” IMF Working Paper No.97/139, International Monetary Fund.

    • Search Google Scholar
    • Export Citation

  • Tanzi, V., 1987, “Quantitative Characteristics of the Tax Systems of Developing Countries,” In The Theory of Taxation for Developing Countries, edited by David New and Nicholas Stern. New York: Oxford University.

    • Search Google Scholar
    • Export Citation

Appendix I. Regression Results

article image
Robust standard errors in brackets *** p<0.01, ** p<0.05, * p<0.1
article image
Robust standard errors in brackets *** p<0.01, ** p<0.05, * p<0.1
article image
Robust standard errors in brackets *** p<0.01, ** p<0.05, * p<0.1
article image
Robust standard errors in brackets *** p<0.01, ** p<0.05, * p<0.1

Appendix II. Evolution of Revenue Potential and Gap Burkina Faso: Evolution of Revenue Potential and Gap, 1995–2015

uA02fig01

Burkina Faso: Evolution of Revenue Potential and Gap, 1995–2015

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 016; 10.5089/9781484394311.002.A001

Sources: IMF staff estimates.
1

Prepared by William Gbohoui (FAD). The policy recommendations draw on earlier notes prepared by Yves Noel De-Santis and Jean-François Wen. We are grateful to Jemma Dridi of the Mali team for sharing the material for the peer analysis.

2

In theory, a low tax effort does not necessarily mean that the country is inefficient in collecting taxes or that it must increase its revenue collection (see Pessino and Fenochietto 2010). For instance, some countries can be efficient and have a lower level of collection and be far from their tax capacity because they simply choose to levy lower taxes and to provide a low level of public goods and services, that is, to have a small government. However, in the case of Burkina Faso where the authorities are striving to mobilize more revenue to improve the supply of public goods like education, health and infrastructure, a low tax effort is a sign of a lack of capacity to raise tax collection towards its potential.

4

The predicted trade tax capacity needs to be taken with caution as the explanatory power of the model is weak when considering trade tax revenue. For instance, the R-square is less than 15 percent compared to R-squares ranging from 25 to 75 percent for the other categories of taxes.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Burkina Faso: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2019: Issue 016
Publisher:
International Monetary Fund
ISBN:
9781484394311
ISSN:
1934-7685
Pages:
27
DOI:
https://doi.org/10.5089/9781484394311.002

Burkina Faso: Selected Financial System Indicators

Burkina Faso: Credit-to-GDP Gap, 1998–2017

(in percent of GDP)

Burkina Faso: Private Sector Credit and NFA, 2014–2018

Burkina Faso: Mobile Cellular Subscriptions, 2008–2016

(per 1000 people)

Burkina Faso: Financial Inclusion 2011–2017

Burkina Faso: Credit by Sector and Top Creditors

Burkina Faso: Evolution of Revenue Potential and Gap, 1995–2015

(percent of GDP)