Front Matter Page

INTERNATIONAL MONETARY FUND

IMF Country Report No. 20/42

GUINEA

FINANCIAL SECTOR STABILITY REVIEW

February 2020

This paper on Guinea was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in October 2019.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund Washington, D.C.

Front Matter Page

International Monetary Fund

Monetary and Capital Markets Department

Guinea

Financial Sector Stability Review

Dirk Jan Grolleman (Mission Chief, MCM);

David Blache (MCM); and Amel Ben Rahal, Jean-Michel Godeffroy, Ahmad el Radi, and Alain Vandepeute (Short-Term Experts)

October 2019

The contents of this report constitute technical advice provided by the staff of the International Monetary Fund (IMF) to the authorities of Guinea (the “TA recipient”) in response to their request for technical assistance. This report (in whole or in part) or summaries thereof may be disclosed by the IMF to IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the TA recipient, and upon their request, to World Bank staff and other technical assistance providers and donors with legitimate interest, unless the TA recipient specifically objects to such disclosure (see Operational Guidelines for the Dissemination of Technical Assistance Information— http://www.imf.org/external/np/pp/eng/2013/061013.pdf). Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than agencies or instrumentalities of the TA recipient, World Bank staff, other technical assistance providers and donors with legitimate interest shall require the explicit consent of the TA recipient and the IMF’s Monetary and Capital Markets Department.

Contents

• Glossary

• Preface

• Executive Summary

• I. Introduction

• II. Economic, Regional, and Financial System Context

• A. Economic and Regional Developments

• B. Overview Financial System

• C. Potential Financial Stability Vulnerabilities

• D. Institutional Framework

• III. Diagnostic Review of Financial Sector Stability

• A. Financial Stability Oversight

• B. Systemic Liquidity

• C. Oversight of Financial Market Infrastructures

• D. Banking Regulation and Supervision

• E. Crisis Management, Bank Resolution, and the Safety Net

• IV. TA Road Map

• Boxes

• 1. Correspondent Banks

• 2. Legal Basis for Mobile Telephone Payments

• Tables

• 1. FSSR Recommendations

• 2. Structure of the Financial System, December 2018

• 3. Structure of the Banking Sector, June 2018

• 4. Development of Mobile Money

• Annexes

• I. Statistics

• II. Status of Previous TA Recommendations

• III. FSSR TA Road Map

Glossary

Preface

In response to a request from the Central Bank of the Republic of Guinea (BCRG), a mission from the Monetary and Capital Markets Department (MCM) of the International Monetary Fund (IMF) conducted a Financial Sector Stability Review (FSSR) from June 12-24, 2019. The mission was led by Dirk Jan Grolleman (MCM) and consisted of David Blache (MCM), Amel Ben Rahal, Alain Vandepeute, Jean-Michel Godeffroy, and Ahmad el Radi (external experts).

The mission team presented its main observations and recommendations and the technical assistance (TA) road map at the closing meeting on June 24. The closing meeting was chaired by the Governor, Lounceny Nabé, and attended by the First Deputy Governor, Nianga Komata Goumou; BCRG senior management; MCM Deputy Director, Fabio Natalucci; AFRITAC West Banking Supervision Advisor, Eric Lemarchand; and IMF resident representative, Jose Sulemane.

The mission team would like to extend its thanks to the staff of the BCRG for their hospitality and the logistical support provided to the mission. The mission would like to express its special appreciation to the Director Banking Supervision, Mohamed Lamine Conté, for his dedication and excellent coordination and facilitation of the work of the mission.

Executive Summary

In response to a request from the BCRG, the IMF conducted an FSSR mission from June 12-24, 2019. A scoping mission had been undertaken in January 2019, and on the basis of that mission it was agreed with the authorities that the FSSR would cover the following topics: (i) financial stability oversight; (ii) systemic liquidity; (iii) payments systems; (iv) banking supervision; and (v) crisis management, bank resolution, and safety nets.

While the current economic situation is benign, the financial soundness indicators (FSIs) point to increasing vulnerabilities (see Annex I). The economic outlook is currently positive. Moreover, financial inclusion is growing rapidly as mobile money services are quickly adopted. However, the FSIs suggest growing vulnerabilities and possibly some idiosyncratic stress in the banking sector. For example, nonperforming loans (NPLs), large exposures, and the net-open position are on a negative trend. Given data quality and availability issues, it is however difficult to draw firm conclusions. For example, while the net-open position according to the reported FSIs is larger than 100 percent, prudential reporting points to a ratio of on average below 20 percent. This discrepancy needs further analysis and explanation. In addition, the BCRG does not prepare an adequate analysis and explanation of the drivers of the observed trends.

As a result of data quality and availability issues, it is difficult to make a more in-depth assessment of financial stability and potential vulnerabilities. The mission found that (i) data on the financial sector (and also on the real sector) are insufficient; (ii) more data quality assurance is needed on the prudential reporting by banks; (iii) anomalies identified by the mission in the calculation of the FSIs could not be explained by the BCRG and require a more thorough analysis; and (iv) negative trends observed in the FSIs require further analysis to better understand developments and the scope of potential vulnerabilities.

The financial sector structure is, to some extent, a mitigant to the potential financial stability vulnerabilities. All banks are part of foreign financial groups that they can fall back on during periods of stress (to a certain extent at least). Although the data on the insurance and microfinance sectors are limited, these sectors are small and are not yet of systemic importance. The financial market infrastructures are new and although improvements are needed, no immediate financial stability problems are evident. While there is considerable room for improvement in liquidity management, the banking system as a whole is liquid in GNF, and, for the main banks at least, access to liquidity in foreign currency is guaranteed by facilities arranged with their parent companies. In addition, the Guinean banks are largely domestically funded and, in that respect, not dependent on their parents.

While the current economic situation is benign, it is an opportune moment to develop the necessary capacity to handle potential financial stability vulnerabilities. As a first priority, on and offsite supervision and the availability and quality of data on the banking sector, and in a later stage also for the other financial sectors, should be significantly improved, and the regulatory framework for banks should be modernized. This will provide a good basis for developing BCRG’s financial stability function and establishing a framework for financial stability surveillance. In parallel to the work on banking regulation and supervision, the BCRG should strengthen its resolution tools, finalize the implementation of the deposit insurance fund, and create an institutional framework for cooperation with the Ministry of Finance on macroprudential policy and crisis management. As a separate stream of work, the legal framework and regulatory framework for financial market infrastructures should be enhanced and an appropriate organizational structure for payments operations and oversight should be setup. Finally, BCRG’s liquidity management and collateral framework should be improved. Implementation of its emergency liquidity assistance (ELA) framework is also necessary.

Noteworthy in the area of financial stability are the development of correspondent banking relations (CBR) and the recent creation of a development bank. Although the CBR of commercial banks were relatively stable over the period 2011-2018, the BCRG was subject to CBR pressures that may have originated in certain of its activities that are not directly related to its core mandate (cash money services for commercial banks, commercial bank activities for current and past politically exposed persons, and gold exports). The BCRG is continuing to introduce compliance frameworks to mitigate the risks of these activities. However, the BCRG should closely monitor the situation and periodically review whether the advantages of the services it provides are still important and still balance out the risk of potential resulting pressures from the correspondent banks.

In accordance with best practices in other countries, the BCRG should limit the activities authorized for the recently created development bank. The development bank was recently licensed as a conventional commercial bank, even though the strategy and business model of this bank are much narrower. The mandate of the development bank is to finance its activities via the government, the commercial banks, international development institutions and any other domestic institutional or professional investor. To avoid any business model drift and in line with best practices in other countries, the BCRG should identify the tools it needs (potentially requiring an amendment of the banking law) or already has (perhaps through the intermediary of the Licensing Committee) to prevent the bank from taking public deposits. Recent Guinean experience with the failure of a domestic (publicly owned) development bank should focus the attention of the supervisory authorities on the need for close supervision of the governance arrangements of the development bank. Moreover, the fact that the BCRG is currently one of the main shareholders of this bank creates a conflict of interest with its role as supervisory authority, which could become even more sensitive if the BCRG would have to contemplate its resolution.

Authorities have been fairly responsive to past TA recommendations, however, BCRG’s absorptive capacity has been limited due to resource constraints. To realize the FSSR recommendations, additional resources will be needed to improve bank supervision, setting up a payment systems oversight and a financial stability surveillance unit.

The five areas described briefly in this aide-mémoire are explained in greater detail in five background notes. It is also important to note that the recommendations proposed in this FSSR will supplement and support the implementation of the financial inclusion strategy published by the BCRG (with the help of the World Bank) in November 2018.

Table 1.

Guinea: FSSR Recommendations

^(*)Con, continuously;

ST, short-term, less than six months; MT, medium-term, with results around 18 months; LT, long-term, with results around 30 months

Table 1.

Guinea: FSSR Recommendations

Recommendation	Timeline*	Priority
Financial stability oversight
1. Periodically evaluate to what extent the advantages of providing services not directly related to BCRG’s core mandate outweigh the risk of potential resulting pressures from correspondent banks (¶21 and Box 1)	Con	High
2. Reconcile data discrepancies, increase data coverage and ensure data quality (¶20)	ST	High
3. Create and operationalize a financial stability surveillance unit (FSSU), which should play a key role in addressing recommendation 2 (¶31 and 32)	ST	High
4. a) Clarify BCRG’s macroprudential mandate in the BCRG Statute (¶31.1) b) Establish an institutional framework for macroprudential policy (¶31.1)	MT	Medium
Systemic liquidity assessment
5. Implement the past recommendations on liquidity management (¶45-46)	ST	High
6. Establish a structured and ranked collateral framework (¶47-48)	MT	High
7. Establish an operational framework for the ELA (¶49)	MT	High
Financial market infrastructures
8. a) Adopt a payments law guaranteeing: (i) the legal validity of clearing; (ii) payment finality; and (iii) the protection of holders of collateral (¶51) b) Adopt a regulation guaranteeing the end-of-day settlement operations of the clearing system (¶50)	ST	High
9. a) Support the introduction of a “switch” (¶54) b) Establish a national payments committee (¶55)	MT	High
10. Establish an organizational structure for payment systems oversight (¶56)	MT	Medium
11. a) Discourage the use of high-value checks (¶52) b) Enhance the check clearing mechanism (¶52)	MT	Medium
Banking regulation and supervision
12. a) Increase the resources assigned to banking supervision (¶65) b) Enhance risk-based supervision (RBS) and the reporting system (¶64-65)	ST/MT	High
13. a) Precise BCRG’s banking supervision mandate in the Banking Law (¶60) b) Include in the Law specific provisions for development banks (¶60) c) Divest BCRG’s stake in the development bank (¶60) d) Optional: include provisions to allow for Islamic banking (¶61)	MT	High
14. a) Implement the relevant parts of the Basel II/III capital framework (¶63) b) Revise the regulations on large exposures and related parties (¶63) c) Complete the cross-border cooperation agreements for all banks (¶69)	MT	Medium
15. a) Implement the relevant parts of the Basel II/III liquidity framework (¶63) b) Enhance the regulations on governance and risk management (¶63) c) Introduce requirements for Interest Rate Risk in the Banking Book (IRRBB) and country and transfer risks (¶63)
Crisis management, bank resolution, and the financial safety net
16. Enhance the legal and regulatory framework for deposit insurance (¶76)	ST	High
17. Strengthen in the law BCRG’s early intervention powers and tools, including requirements for and capacity to review recovery plans (¶73-74)	MT	High
18. Enhance the resolution related provisions in the Banking Law (1J75)	MT	High
19. Increase capacity on resolution and deposit insurance (¶79)	MT	High
20. Establish a body for the coordination of crisis measures (¶77-78)	MT	High

^(*)Con, continuously;

ST, short-term, less than six months; MT, medium-term, with results around 18 months; LT, long-term, with results around 30 months

View Table

Table 1.

Guinea: FSSR Recommendations

Recommendation	Timeline*	Priority
Financial stability oversight
1. Periodically evaluate to what extent the advantages of providing services not directly related to BCRG’s core mandate outweigh the risk of potential resulting pressures from correspondent banks (¶21 and Box 1)	Con	High
2. Reconcile data discrepancies, increase data coverage and ensure data quality (¶20)	ST	High
3. Create and operationalize a financial stability surveillance unit (FSSU), which should play a key role in addressing recommendation 2 (¶31 and 32)	ST	High
4. a) Clarify BCRG’s macroprudential mandate in the BCRG Statute (¶31.1) b) Establish an institutional framework for macroprudential policy (¶31.1)	MT	Medium
Systemic liquidity assessment
5. Implement the past recommendations on liquidity management (¶45-46)	ST	High
6. Establish a structured and ranked collateral framework (¶47-48)	MT	High
7. Establish an operational framework for the ELA (¶49)	MT	High
Financial market infrastructures
8. a) Adopt a payments law guaranteeing: (i) the legal validity of clearing; (ii) payment finality; and (iii) the protection of holders of collateral (¶51) b) Adopt a regulation guaranteeing the end-of-day settlement operations of the clearing system (¶50)	ST	High
9. a) Support the introduction of a “switch” (¶54) b) Establish a national payments committee (¶55)	MT	High
10. Establish an organizational structure for payment systems oversight (¶56)	MT	Medium
11. a) Discourage the use of high-value checks (¶52) b) Enhance the check clearing mechanism (¶52)	MT	Medium
Banking regulation and supervision
12. a) Increase the resources assigned to banking supervision (¶65) b) Enhance risk-based supervision (RBS) and the reporting system (¶64-65)	ST/MT	High
13. a) Precise BCRG’s banking supervision mandate in the Banking Law (¶60) b) Include in the Law specific provisions for development banks (¶60) c) Divest BCRG’s stake in the development bank (¶60) d) Optional: include provisions to allow for Islamic banking (¶61)	MT	High
14. a) Implement the relevant parts of the Basel II/III capital framework (¶63) b) Revise the regulations on large exposures and related parties (¶63) c) Complete the cross-border cooperation agreements for all banks (¶69)	MT	Medium
15. a) Implement the relevant parts of the Basel II/III liquidity framework (¶63) b) Enhance the regulations on governance and risk management (¶63) c) Introduce requirements for Interest Rate Risk in the Banking Book (IRRBB) and country and transfer risks (¶63)
Crisis management, bank resolution, and the financial safety net
16. Enhance the legal and regulatory framework for deposit insurance (¶76)	ST	High
17. Strengthen in the law BCRG’s early intervention powers and tools, including requirements for and capacity to review recovery plans (¶73-74)	MT	High
18. Enhance the resolution related provisions in the Banking Law (1J75)	MT	High
19. Increase capacity on resolution and deposit insurance (¶79)	MT	High
20. Establish a body for the coordination of crisis measures (¶77-78)	MT	High

^(*)Con, continuously;

ST, short-term, less than six months; MT, medium-term, with results around 18 months; LT, long-term, with results around 30 months