## 1. Econometric Approach for Post-SIP Research

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---

### Introduction
- Mauritania's financial sector is heavily dominated by banking institutions and lags the performance of the country’s overall economic growth.
- Key observations:
  - GDP has been growing steadily, but gross loans have not followed.
  - Despite a relatively large number of banks, the number of depositors is low.
  - As of end-2020, the 18 active banks controlled more than 90 percent of the financial sector's total assets.
  - By August 2024, the number of banks had decreased to 17, with assets amounting to 45.2 percent of GDP during the same period.
- Supervision and institutional capacity challenges:
  - Human resource capacity at the Central Bank, reporting accuracy by banks and legal framework for effective supervision are key challenges.
  - Amendments to the Central Bank and banking laws, new supervisory methodologies, and training initiatives are underway to improve oversight.

*Prepared by Onur Ozlu (MCD) and Ahmed-Amine El Azdi (Universite Paris Dauphine)*

### Mauritania struggles to boost financial development and intermediation
- Structural profile:
  - The financial system is overwhelmingly bank-centric; banks remain the backbone while financial markets are underdeveloped.
  - The Financial Institutions Index shows modest but consistent upward trend; the Financial Markets Index is low between 2000 and 2021.
  - Nonbank actors: 31 microfinance institutions (MFIs), 13 insurance companies, and various social welfare and public financial institutions—collectively small relative to the banking sector.
- Recent reforms and measures (since 2022) expected to improve market development:
  - issuing more bonds and building a yield curve,
  - developing the FX interbank market,
  - encouraging mobile banking,
  - launching and implementing the national financial inclusion strategy.
- Financial inclusion and fintech adoption:
  - Financial Institution Access (FIA) Index score is among the lowest in the region.
  - Electronic wallets surged by approximately 445 percent from 2022 to 2024.
  - Number of bank accounts grew by 116 percent over the same period.
- Capital markets:
  - Capital markets are underdeveloped; absence of liquid government bond markets and secondary market trading impedes establishment of a risk-free benchmark rate.

### Efficiency-Access and Depth Gap (EADG): measure and findings
- Definition and formula:
  - EADG = FIE — (FIA + FID) / 2
- Interpretation:
  - High EADG indicates banks are highly profitable relative to the level of financial intermediation and inclusion they offer.
  - Low EADG indicates banks earn less relative to their efforts in promoting intermediation and inclusion.
- Empirical findings:
  - Mauritania’s EADG is high and relatively stable, indicating a significant imbalance between bank profitability and financial inclusion efforts.
  - Algeria exhibits an even higher EADG.
  - Morocco and Tunisia have shown a decreasing EADG over time.

### Financial intermediation proxies and trends
- Key indicators highlighting weak intermediation:
  - Private-sector credit to GDP:
    - 21.8 percent in June 2017,
    - 33 percent in December 2019,
    - sharp decline to 22.5 percent in March 2020,
    - hovered around 22.5 percent up to March 2024.
  - Gross NPL to gross loan ratio:
    - declined from 26.9 percent in March 2020 to 20.6 percent in March 2024,
    - nonetheless remains very elevated.
- Implications:
  - Low private-sector credit to GDP signals limited access to credit for the private sector.
  - Persistently high NPL ratio undermines stability and constrains banks’ ability to extend new credit.

### Key factors impacting financial intermediation in Mauritania
- Lack of trust:
  - Prevailing lack of trust in the economy and institutions leads large economic actors to prefer establishing their own banks.
  - Result: family-owned or conglomerate-owned banks, connected lending, and concentrated assets—hampering effective intermediation.
- Governance:
  - Weak governance biased toward family interests can produce directed loans to specific companies or sectors, crowding out credit to the broader economy.
- Structural weaknesses:
  - Lack of effective banking supervision enforcing prudential norms.
  - Absence or weakness of disciplinary institutions such as credit bureaus and registries, creditor rights, and robust information systems.
  - These weaknesses impede assessment of creditworthiness and risk management, reducing banks’ willingness to extend credit widely.

### Policy implications and priorities (derived from analysis)
- Strengthen banking supervision and legal framework:
  - Continue implementing amendments to Central Bank and banking laws aligned with international best practice.
  - Improve reporting accuracy, supervisory methodologies, and human resource capacity at the Central Bank.
- Enhance financial infrastructure and discipline:
  - Develop credit registries and credit bureaus, strengthen creditor rights, and build robust information systems.
- Foster market development and inclusion:
  - Deepen government bond markets to build a yield curve and liquid secondary trading.
  - Support mobile banking and fintech to leverage the rapid growth in electronic wallets and expand financial inclusion.
- Address governance and ownership concentration:
  - Promote transparency and mechanisms to reduce connected lending and concentration driven by family-owned or conglomerate-owned banks.

### Cycle hindering financial intermediation
- Three key factors create a cycle that:
  - Hinders effective financial intermediation in Mauritania.
  - Leads to a lack of trust in universal banks and the prevalence of family-owned banks with connected lending practices.
  - Limits adequate and competitive financial services, resulting in poor financial intermediation and inclusion.
- Weakness or absence of essential institutions (e.g., credit bureaus, robust information systems) exacerbates these challenges and stifles competition as a few dominant players control a large share of the market.

### Empirical correlates and suggestive relationships
- Bank concentration and private-sector credit:
  - The share of assets held by the three largest banks in Mauritania and private-sector credit to GDP shows a positive relationship.
  - Interpretation: As the concentration of assets in the top banks increases, so does private-sector credit relative to GDP—suggesting fewer but larger and potentially more stable or universal banks are associated with better financial intermediation.
- Provisions for bad loans and private-sector credit:
  - Higher provisions for bad loans in the banking sector correlate with increased levels of private-sector credit to GDP.
  - Rationale: Higher provisions reflect a proactive approach to managing credit risk, enabling banks to absorb potential losses from non-performing loans and extend more credit confidently.
  - Two measures of provisions noted: Provisions relative to gross non-performing loans (NPLs) excluding accrued interest, and provisions relative to loans that are 360+ days in arrears. Both trends show a positive correlation.
- Capital Adequacy Ratio (CAR) and private-sector credit:
  - Positive correlation between CAR and credit to the private sector relative to GDP.
  - Emphasis: Well-capitalized and resilient banks are better positioned to channel savings into productive investments and extend credit, supporting economic growth.
- Lending and deposit rates heterogeneity:
  - Lending and deposit rates vary significantly across banks (as of December 2023).
  - Implication: Heterogeneous rates highlight the need for detailed bank-level analysis to understand varying bank behaviors and identify underperforming banks.

### Stylized facts
- Despite high efficiency, the financial sector fails to translate this into broader credit extension and financial inclusion.
- Credit to GDP is too low; the ratio of private-sector credit to GDP remains insufficient, hindering economic growth.
- Higher bank concentration seems to be associated with higher credit to the private sector.
- Higher provisions are positively correlated with higher private-sector credit: Banks with higher provisions for bad loans tend to extend more credit to the private sector.
- Higher Capital Adequacy Ratio is associated with higher credit to GDP.
- Domestic banks—likely proxies for family-owned banks—display a consistently higher lending-deposit spread than foreign-owned banks.
- Further research, including econometric analysis, will be undertaken once bank-level data are provided by the authorities.

### Econometric approach for follow-up research (Box 1)
- Data and method:
  - Utilize panel data of all Mauritanian banks.
  - Employ panel Local Projections (LP) methodology of Jordà (2005) with bank-specific and time-specific observations to estimate Impulse Response Functions (IRFs) to various shocks.
- Baseline LP specification:
  - 푦௜,௧ା௛ = 훼௜ + 휆௧ + β Shock௜,௧ + γ X௜,௧ + δ Z୲ + 휖௜,௧ା௛
  - Where:
    - 푦௜,௧ା௛ is the dependent variable representing measures of financial intermediation (e.g., NIM, lending-deposit spread, real lending) for bank i at time t+h.
    - 훼௜ are bank fixed effects.
    - 휆௧ are time fixed effects.
    - Shock௜,௧ represents different shocks (e.g., CAR, connected lending, asset concentration, provisions) at time t.
    - X௜,௧ are bank-specific control variables.
    - Z୲ are macro control variables.
    - 휖௜,௧ା௛ is the error term.
- Goals:
  - Analyze key factors limiting financial intermediation.
  - Assess the impact of shocks (CAR, connected lending, asset concentration, provisions) on measures of financial development.
  - Derive targeted policy recommendations.

### Conclusions and policy recommendations
- Consolidation and stronger banks:
  - Mauritania would be better off with a consolidated banking sector comprising fewer, stronger, and more resilient institutions.
  - Fewer universal banks with robust provisioning frameworks can better manage credit risks and increase capacity to lend to a broader range of private-sector actors, improving financial intermediation and inclusion.
- Strengthen financial infrastructure:
  - Existing financial infrastructure institutions need to be strengthened and new ones established.
  - Forceful banking supervision with strong information systems can monitor and mitigate connected lending among family-owned banks.
  - A new credit registry can provide objective risk profiles and credit information to all financial institutions, helping address lack of trust and improving allocation of new credit and competitive financial services.
- Enhance provisioning and capital adequacy:
  - Enhancing provisioning practices and improving capital adequacy can mitigate risks associated with connected lending and concentrated assets, demanding higher standards for loss-absorbing buffers.
  - Strengthening banks' capital bases via regulatory measures is essential to bolster lending capabilities and provide a firmer foundation against financial shocks.

*Source: ISLAMIC REPUBLIC OF MAURITANIA — ANALYSIS OF FINANCIAL DEVELOPMENT IN MAURITANIA (excerpt).*

### 1. Econometric Approach for Post-SIP Research ________________________________________ 15

### 1. Econometric Approach for Post-SIP Research

### Introduction
- Mauritania's financial sector is heavily dominated by banking institutions and lags the performance of the country’s overall economic growth.
- Key observations:
  - GDP has been growing steadily, but gross loans have not followed (Figure 1).
  - Despite a relatively large number of banks, the number of depositors is low (Figure 2).
  - As of end-2020, the 18 active banks controlled more than 90 percent of the financial sector's total assets.
  - By August 2024, the number of banks had decreased to 17, with assets amounting to 45.2 percent of GDP during the same period.
- Supervision and institutional capacity:
  - Human resource capacity at the Central Bank, reporting accuracy by banks and legal framework for effective supervision are key challenges.
  - Amendments to the Central Bank and banking laws, new supervisory methodologies, and training initiatives are underway to improve oversight.

*Prepared by Onur Ozlu (MCD) and Ahmed-Amine El Azdi (Universite Paris Dauphine)*

### Mauritania struggles to boost financial development and intermediation
- Structural profile:
  - The financial system is overwhelmingly bank-centric; banks remain the backbone while financial markets are underdeveloped.
  - The Financial Institutions Index shows modest but consistent upward trend; the Financial Markets Index is low between 2000 and 2021 (Figures 3–5).
  - Nonbank actors: 31 microfinance institutions (MFIs), 13 insurance companies, and various social welfare and public financial institutions—collectively small relative to the banking sector.
- Recent reforms and measures (since 2022) expected to improve market development:
  - issuing more bonds and building a yield curve,
  - developing the FX interbank market,
  - encouraging mobile banking,
  - launching and implementing the national financial inclusion strategy.
- Financial inclusion and fintech adoption:
  - Financial Institution Access (FIA) Index score is among the lowest in the region.
  - Electronic wallets surged by approximately 445 percent from 2022 to 2024.
  - Number of bank accounts grew by 116 percent over the same period.
- Capital markets:
  - Capital markets are underdeveloped; absence of liquid government bond markets and secondary market trading impedes establishment of a risk-free benchmark rate.

### Efficiency-Access and Depth Gap (EADG): measure and findings
- EADG definition and formula:
  - EADG = FIE — (FIA + FID) / 2
- Interpretation:
  - High EADG indicates banks are highly profitable relative to the level of financial intermediation and inclusion they offer.
  - Low EADG indicates banks earn less relative to their efforts in promoting intermediation and inclusion.
- Empirical findings:
  - Mauritania’s EADG is high and relatively stable, indicating a significant imbalance between bank profitability and financial inclusion efforts (Figure 6).
  - Algeria exhibits an even higher EADG.
  - Morocco and Tunisia have shown a decreasing EADG over time.

### Financial intermediation proxies and trends
- Key indicators highlighting weak intermediation (Figure 7):
  - Private-sector credit to GDP:
    - 21.8 percent in June 2017,
    - 33 percent in December 2019,
    - sharp decline to 22.5 percent in March 2020,
    - hovered around 22.5 percent up to March 2024.
  - Gross NPL to gross loan ratio:
    - declined from 26.9 percent in March 2020 to 20.6 percent in March 2024,
    - nonetheless remains very elevated.
- Implications:
  - Low private-sector credit to GDP signals limited access to credit for the private sector.
  - Persistently high NPL ratio undermines stability and constrains banks’ ability to extend new credit.

### Key factors impacting financial intermediation in Mauritania
- Lack of trust:
  - Prevailing lack of trust in the economy and institutions leads large economic actors to prefer establishing their own banks.
  - Result: family-owned or conglomerate-owned banks, connected lending, and concentrated assets—hampering effective intermediation.
- Governance:
  - Weak governance biased toward family interests can produce directed loans to specific companies or sectors, crowding out credit to the broader economy.
- Structural weaknesses:
  - Lack of effective banking supervision enforcing prudential norms.
  - Absence or weakness of disciplinary institutions such as credit bureaus and registries, creditor rights, and robust information systems.
  - These weaknesses impede assessment of creditworthiness and risk management, reducing banks’ willingness to extend credit widely.

### Policy implications and priorities (derived from analysis)
- Strengthen banking supervision and legal framework:
  - Continue implementing amendments to Central Bank and banking laws aligned with international best practice.
  - Improve reporting accuracy, supervisory methodologies, and human resource capacity at the Central Bank.
- Enhance financial infrastructure and discipline:
  - Develop credit registries and credit bureaus, strengthen creditor rights, and build robust information systems.
- Foster market development and inclusion:
  - Deepen government bond markets to build a yield curve and liquid secondary trading.
  - Support mobile banking and fintech to leverage the rapid growth in electronic wallets and expand financial inclusion.
- Address governance and ownership concentration:
  - Promote transparency and mechanisms to reduce connected lending and concentration driven by family-owned or conglomerate-owned banks.

*Source: ISLAMIC REPUBLIC OF MAURITANIA — ANALYSIS OF FINANCIAL DEVELOPMENT IN MAURITANIA (excerpt).*

### 15.      Together, these three key factors create a cycle that hinders effective financial

### 15.      Together, these three key factors create a cycle that hinders effective financial 

### Cycle hindering financial intermediation
- Three key factors create a cycle that:
  - Hinders effective financial intermediation in Mauritania.
  - Leads to a lack of trust in universal banks and the prevalence of family-owned banks with connected lending practices.
  - Limits adequate and competitive financial services, resulting in poor financial intermediation and inclusion.
- Weakness or absence of essential institutions (e.g., credit bureaus, robust information systems) exacerbates these challenges and stifles competition as a few dominant players control a large share of the market.

### Empirical correlates and suggestive relationships
- Bank concentration and private-sector credit:
  - The share of assets held by the three largest banks in Mauritania and private-sector credit to GDP (Figure 8) shows a positive relationship.
  - Interpretation: As the concentration of assets in the top banks increases, so does private-sector credit relative to GDP—suggesting fewer but larger and potentially more stable or universal banks are associated with better financial intermediation.
- Provisions for bad loans and private-sector credit:
  - Higher provisions for bad loans in the banking sector correlate with increased levels of private-sector credit to GDP (Figure 9).
  - Rationale: Higher provisions reflect a proactive approach to managing credit risk, enabling banks to absorb potential losses from non-performing loans and extend more credit confidently.
  - Two measures of provisions noted: Provisions relative to gross non-performing loans (NPLs) excluding accrued interest, and provisions relative to loans that are 360+ days in arrears. Both trends show a positive correlation.
- Capital Adequacy Ratio (CAR) and private-sector credit:
  - Positive correlation between CAR and credit to the private sector relative to GDP (Figure 10).
  - Emphasis: Well-capitalized and resilient banks are better positioned to channel savings into productive investments and extend credit, supporting economic growth.
  - CAR described as a key measure reflecting a bank's ability to absorb potential losses and continue operating effectively; higher CAR values indicate a larger buffer of capital relative to risk-weighted assets.
- Lending and deposit rates heterogeneity:
  - Lending and deposit rates vary significantly across banks (Figure 11, as of December 2023).
  - Implication: Heterogeneous rates highlight the need for detailed bank-level analysis to understand varying bank behaviors and identify underperforming banks.

### Stylized facts (paragraph 17)
- Despite high efficiency, the financial sector fails to translate this into broader credit extension and financial inclusion.
- Credit to GDP is too low; the ratio of private-sector credit to GDP remains insufficient, hindering economic growth.
- Higher bank concentration seems to be associated with higher credit to the private sector.
- Higher provisions are positively correlated with higher private-sector credit: Banks with higher provisions for bad loans tend to extend more credit to the private sector.
- Higher Capital Adequacy Ratio is associated with higher credit to GDP.
- Domestic banks—likely proxies for family-owned banks—display a consistently higher lending-deposit spread than foreign-owned banks.
- Further research, including econometric analysis, will be undertaken once bank-level data are provided by the authorities.

### Econometric approach for follow-up research (Box 1)
- Data and method:
  - Utilize panel data of all Mauritanian banks.
  - Employ panel Local Projections (LP) methodology of Jordà (2005) with bank-specific and time-specific observations to estimate Impulse Response Functions (IRFs) to various shocks.
- Baseline LP specification (as provided):
  - 푦௜,௧ା௛ൌα௜൅λ௧൅β푆ℎ표푐푘௜,௧൅γ푋௜,௧൅δ푍୲൅ε௜,௧ା௛
  - Where:
    - 푦௜,௧ା௛ is the dependent variable representing measures of financial intermediation (e.g., NIM, lending-deposit spread, real lending) for bank i at time t+h.
    - 훼௜ are bank fixed effects.
    - 휆௧ are time fixed effects.
    - 푆ℎ표푐푘௜,௧ represents different shocks (e.g., CAR, connected lending, asset concentration, provisions) at time t.
    - 푋௜,௧ are bank-specific control variables.
    - 푍୲ are macro control variables.
    - 휖௜,௧ା௛ is the error term.
- Goals:
  - Analyze key factors limiting financial intermediation.
  - Assess the impact of shocks (CAR, connected lending, asset concentration, provisions) on measures of financial development.
  - Derive targeted policy recommendations.

### Conclusions and policy recommendations (paragraphs 18–20)
- Consolidation and stronger banks:
  - Mauritania would be better off with a consolidated banking sector comprising fewer, stronger, and more resilient institutions.
  - Fewer universal banks with robust provisioning frameworks can better manage credit risks and increase capacity to lend to a broader range of private-sector actors, improving financial intermediation and inclusion.
- Strengthen financial infrastructure:
  - Existing financial infrastructure institutions need to be strengthened and new ones established.
  - Forceful banking supervision with strong information systems can monitor and mitigate connected lending among family-owned banks.
  - A new credit registry can provide objective risk profiles and credit information to all financial institutions, helping address lack of trust and improving allocation of new credit and competitive financial services.
- Enhance provisioning and capital adequacy:
  - Enhancing provisioning practices and improving capital adequacy can mitigate risks associated with connected lending and concentrated assets, demanding higher standards for loss-absorbing buffers.
  - Strengthening banks' capital bases via regulatory measures is essential to bolster lending capabilities and provide a firmer foundation against financial shocks.

*Source: IMF staff analysis and Mauritanian authorities (excerpts from the supplied content).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1mrtea2024004-print-pdf.pdf_