## Senegal’s Financial System: Structure, Performance, and Risks

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### Overview of the Structure of the Financial System
- Banking sector dominance:
  - 19 commercial banks and banks make up about 90 percent of the financial system.
  - The five largest banks account for 66 percent of assets and collect 79 percent of deposits.
- Financial access and size:
  - Only about 7 percent of the population holds a bank account; overall financial system access is about 20 percent of the population when microfinance is included.
  - Bank deposits amount to about 40 percent of GDP.
- Market and institutional features:
  - Interbank market is underdeveloped; no explicit deposit insurance scheme.
  - Microfinance institutions (MFIs): 234 establishments, about half of activity concentrated in greater Dakar.
  - Insurance sector: 25 companies; life insurance expanded by 20 percent in 2011.
  - Social security fund manages assets of CFAF 175 billion (2.6 percent of GDP) and invests predominantly in long-term deposits in banks and in real estate.
- Capital markets and sovereign issuance:
  - Regional capital markets are a marginal source of funding for private companies; sovereign issuance is the main activity.
  - Gross issuance likely to exceed CFAF 500 billion (about 7 percent of GDP) in 2012 (short maturities; average maturity was 1.2 years at end-2011).
  - Senegal issued a 5-year eurobond ($200 million) in 2009 and a 10-year eurobond ($500 million) in 2011.

### The Banking Sector: Expansion, Structure, and Risks
- Recent expansion and size:
  - 2011: bank credit to the economy increased by 19 percent (to 29 percent of GDP).
  - Number of bank branches increased by 11 percent.
  - Number of bank accounts increased by 44 percent.
  - Preliminary 2012: overall bank credit to the economy exceeded 30 percent of GDP.
- Credit composition and core activities:
  - Credit to the service sector particularly buoyant; credit to households, especially longer-term credit, also increased.
  - Most banks’ core business: collecting deposits, lending to bigger firms including subsidiaries of multinationals, and holding/dealing in government securities.
- Ownership and market structure:
  - Dominated by subsidiaries of French, Nigerian, Moroccan, and pan-African banks; government holds minority stakes (~10 to 25 percent in a number of banks).
  - One bank provides Islamic banking services.
- Main vulnerabilities and supervisory needs:
  - Concentration of lending and asset quality are main risks.
  - Stress tests applied shocks including:
    - (i) sectoral risk, including default by the largest individual exposure and a shock to the three largest borrowing industrial sectors;
    - (ii) overall credit risk comprising a downgrade of nonperforming loans (NPLs) by one category and an increase in total NPLs by 50 percent;
    - (iii) credit risk related to default of a public entity, or default on credit to the government and to public enterprises.
  - Stress test conclusions: liquidity risks and interest rate risks could be withstood due to high liquidity and small maturity mismatch; concentration of lending found to be a major source of vulnerability given loans concentrated in a few sectors and companies and large exposure to the public sector.
  - Financial soundness indicators (FSIs) suggest banks are on average adequately capitalized, profitable, and liquid, with asset quality being the main concern.
  - Microprudential regulation of banks needs enhancement and supervision should be strengthened; authorities encouraged to develop a holistic view of the financial system and systemic risk.

### Box 1 — Banking System Soundness: Key Findings
- Capitalization:
  - Capital adequacy ratio decreased to 16 percent at end-2011, and increased further through June 2012.
  - Regulatory minimum capital adequacy ratio is 8 percent.
  - Large holdings of sovereign paper carry zero risk-weighting and partly explain high capital ratios; an increase in risk-weighting of sovereign papers would reduce capital adequacy ratios significantly.
  - Only one bank is currently undercapitalized; due to small size and limited interconnectedness it does not raise a systemic risk and is being restructured.
- Asset quality:
  - Gross nonperforming loans (NPLs) to total loans was 16.2 percent at end-2011, and increased further in early 2012.
  - High NPLs largely reflect portfolios of three banks with NPLs in excess of 20 percent; most other banks have NPLs below 5 percent.
  - Relatively high provisioning for NPLs mitigates risks.
  - Accounting convention: a claim becomes nonperforming after six (not three) months of missed payments (not in line with best international practices).
- Profitability:
  - Return on assets was 1.8 percent as of mid-2012 for the sector.
  - Return on equity was above 17 percent.
  - Profitability boosted by access to ample and cheap household deposits used to purchase government paper; net interest margin on these nominally risk-free operations is substantial.
- Liquidity:
  - Liquidity risks are low for the banking sector as a whole, though three smaller banks do not meet the minimum liquidity requirements.
  - Structural factors supporting high liquidity include limited bankable projects, regulatory constraints on resource transformation, and limited interbank market activity.
- MFIs in the banking context:
  - In 2012 the asset holdings of the largest MFI make it as big as the seventh largest bank.
  - Four MFIs transformed into corporations and are capitalized; one MFI has set up its own bank.

### Microfinance: Growth, Structure, and Supervision
- Regulatory reform and consolidation:
  - 2008–09 reform: larger MFIs (assets and/or deposits above CFAF 2 billion) now supervised by the banking commission; smaller institutions supervised by the Ministry of Finance.
  - Following reform, 118 entities were closed down.
  - Sector credit and deposits rose from CFAF 81 billion in 2005 to CFAF 219 billion in July 2012 (about 3 percent of GDP).
  - Consolidation produced 18 larger entities representing 90 percent of the MFI market; one institution accounts for 60 percent of the market.
- Activity and linkages:
  - MFIs focus on savings accounts and microcredit, lending mostly to microbusinesses in trade, services (catering), agriculture, and transportation.
  - More people have accounts at MFIs than at banks, helping raise overall access to finance to about 20 percent of the population.
  - Larger MFIs cooperate with commercial institutions for money transfers and increasingly use banks to finance operations as they do not have access to BCEAO refinancing.
- MFI financial soundness and performance:
  - In 2011, the 18 larger entities generated cumulative profits of CFAF 4.5 billion; other institutions had cumulative losses of about CFAF 0.5 billion.
  - FSIs for larger MFIs suggest a relatively sound situation; as of June 2012 only one prudential norm—the cap on operations other than savings and credit—had not been met.
  - Performance vis-à-vis indicative profitability targets:
    - Return on equity: 5 percent vs. a target of 15 percent.
    - Return on assets: 2 percent vs. a target of 3 percent.
    - Profit margin: 13 percent vs. a target of 20 percent.
    - Cost income ratio: 81 percent vs. a target ranging between 40 and 60 percent.
  - Advantages: many MFIs structured as cooperatives benefit from tax exemptions; cap on interest charged for loans is 27 percent for MFIs but 18 percent for banks; MFIs often benefit from public and/or donor support.

### Insurance and Nonbank Financial Institutions
- Insurance sector:
  - Nonlife insurance supported by growth of credit markets and formal sector.
  - Insurers required to hold a minimum of cash deposits equal to 11 percent of their assets for liquidity purposes.
  - Insurance asset allocation: term deposits with commercial banks 47 percent; securities (in particular government paper) and equity 18 percent; real estate 12 percent.

### Markets, Public Debt, and External Financing
- Regional securities market (BRVM) has only one listed Senegalese company (Sonatel).
- Sovereign financing and investor base:
  - WAEMU sovereigns increased recourse to regional financing; Senegal tapped the regional market in large amounts at short maturities.
  - More than half of Senegalese government debt issued was purchased by WAEMU investors outside Senegal.
  - No private company has issued securities in international security markets as of the report.
- Debt composition and maturity:
  - Gross issuance likely to exceed CFAF 500 billion (about 7 percent of GDP) in 2012; average maturity was 1.2 years at end-2011.

### Box 2 — Leverage in Senegal: Key Findings
- Leverage levels:
  - Leverage levels in Senegal are low to moderate.
  - Government domestic debt is about 10 percent of GDP.
- Sectoral leverage:
  - Corporate, banking, and household leverage levels are low or nonexistent.
  - Households: only asset-rich households borrow formally; rural pockets may be overleveraged via MFIs (no data available).
  - Corporate: few large companies with strong balance sheets borrow short-term for working capital; SMEs are largely credit-constrained.
- Cross-sectional systemic risk and interconnections:
  - Interconnection among banks is limited due to underdeveloped money market.
  - Lending concentration is high in most banks, but top borrowers tend to differ across banks, mitigating common-exposure risk to private-sector borrowers.
  - Main common exposure: government debt holdings by many banks.
  - Interconnection between banks and other financial institutions (insurers, MFIs) is significant and warrants monitoring; lack of detailed data prevents full risk mapping.
  - None of the Senegalese banks fits the definition of being too big to fail.
- Market benchmarks and peer comparison:
  - Banking intermediation measured by the credit to deposit ratio is in line with structural benchmarks; credit and deposits to GDP ratios are now significantly above their benchmarks.
  - Kenya’s deposits and credit to GDP ratios are about 10 percentage points higher than Senegal’s; Morocco’s ratios are more than twice as high as Senegal’s.
- Fiscal and market risks:
  - Large share of domestic debt issued at relatively short maturities creates significant rollover and interest rate risk; yields for three- to five-year bonds were in the 7–9 percent range in the first half of 2012 while average inflation was around 2 percent.
  - Investor base is homogeneous and narrow; debt market liquidity highly dependent on banks.
- Obstacles to financial development:
  - Informational asymmetries: limited audited statements, absence of credit bureaus, limited use of central bank databases.
  - Business and judicial environment: lack of formalized property rights, costly and slow judicial recovery.
  - Tax regime: taxes and fees on banking and stock exchange operations are relatively high.
  - Regulatory and supervision issues: some prudential ratios perceived as excessively constraining; several ratios not observed by many banks.
  - Skills shortages in human capital and financial culture.

### Prudential Compliance, Supervision, and Institutional Arrangements
- Prudential compliance:
  - The transformation ratio is met by only 11 Senegalese banks.
  - No bank meets the portfolio structure ratio (requires at least 60 percent of a bank’s credit portfolio be composed of rated assets).
  - Figure data note: 21 institutions in scope, of which nineteen banks and two nonbank financial institutions.
- Supervision and macroprudential governance:
  - Need to strengthen bank supervision, enforcement of corrective measures, and monitoring of expanding banking groups and regional developments.
  - The region’s Financial Stability Council monitors systemic risk; Senegal lacks a single national entity with a holistic view of the financial system and systemic risk — such a unit should be developed, preferably within the Ministry of Finance and in close collaboration with the Central Bank of West African States.

### Box 3 — Bank Supervision and Resolution: Division of Labor
- Supervisory architecture:
  - Banks and large deposit-taking institutions supervised regionally by the Central Bank of West African States (BCEAO) and the West African Economic and Monetary Union Banking Commission.
  - Smaller microfinance operators supervised nationally by the Ministry of Finance.
  - Capital market activity supervised regionally by the Regional Council for Public Savings and Financial Markets (CREPMF).
  - Insurance supervised by the Ministry of Finance with CIMA.
  - 2010 central bank reform created the Financial Stability Council for macro-prudential supervision at the regional level.
- Resolution framework and procedures:
  - BCEAO national directorate collects data, carries out off-site supervision, and typically first detects difficulties.
  - Banking commission responsible for on-site supervision; joint inspections intensify when concerns arise.
  - Banking commission can recommend closing an institution; the Ministry of Finance formally rescinds the banking license and can appeal to the council of ministers.
- Ongoing developments:
  - Creation of a regional financial stability fund and establishment of a deposit insurance scheme are in progress; these require close cooperation between national and regional authorities.

### Systemic Risk Assessment and Policy Implications
- Key systemic risk drivers:
  - Lending concentration (loans concentrated in a few sectors and large borrowers).
  - Asset quality concerns reflected in FSIs and stress test outcomes.
  - Large exposure to the public sector and to a few large borrowers.
- Systemic risk characterization:
  - Systemic risk likely limited as no sector seems highly leveraged; banks finance mostly prime borrowers with short-term credit such as trade finance.
  - Time-series systemic risk has been low; correlation between credit growth and GDP growth has been about 0.1.
- Policy and supervisory priorities:
  - Enhance microprudential regulation of banks and strengthen supervision.
  - Develop a holistic (macroprudential) view of the financial system and systemic risk (create a unit in the Ministry of Finance with this mandate).
  - Support development of the interbank market and the public debt market at the regional level to improve market liquidity and broaden funding sources.
  - Development recommendations include increasing availability of borrower information, facilitating use of guarantees, reducing legal costs and delays, developing interbank and government debt markets, leveling the playing field between banks and larger MFIs, and reviewing financial activity taxation.
  - Stability and institutional recommendations include strengthening bank supervision, enhancing national/regional coordination, and reviewing and strengthening the financial crisis prevention and resolution framework.

*Source: IMF chapter “Senegal’s Financial System: Structure, Performance, and Risks.”*

### 1. Banks and banking—Senegal. 2. Monetary policy—Senegal. 3. Financial

### Senegal’s Financial System: Structure, Performance, and Risks

### Overview of the Structure of the Financial System
- The financial system in Senegal is dominated by the banking sector: 19 commercial banks and banks make up about 90 percent of the financial system.
- The five largest banks account for 66 percent of assets and collect 79 percent of deposits.
- Only about 7 percent of the population holds a bank account; overall financial system access is about 20 percent of the population when microfinance is included.
- Bank deposits amount to about 40 percent of GDP.
- The interbank market is underdeveloped; there is no explicit deposit insurance scheme.
- Microfinance institutions (MFIs): 234 establishments, about half of activity concentrated in greater Dakar.
- Insurance sector: 25 companies; life insurance expanded by 20 percent in 2011.
- Social security fund: manages assets of CFAF 175 billion (2.6 percent of GDP) and invests predominantly in long-term deposits in banks and in real estate.
- Regional capital markets are a marginal source of funding for private companies; sovereign issuance is the main activity:
  - Gross issuance likely to exceed CFAF 500 billion (about 7 percent of GDP) in 2012 (short maturities; average maturity was 1.2 years at end-2011).
  - Senegal issued a 5-year eurobond ($200 million) in 2009 and a 10-year eurobond ($500 million) in 2011.

### The Banking Sector: Expansion, Structure, and Risks
- Recent expansion (2011):
  - Bank credit to the economy increased by 19 percent (to 29 percent of GDP).
  - Number of bank branches increased by 11 percent.
  - Number of bank accounts increased by 44 percent.
- Preliminary 2012: overall bank credit to the economy exceeded 30 percent of GDP.
- Credit composition:
  - Credit to the service sector was particularly buoyant; credit to households, especially longer-term credit, also increased.
  - Most banks’ core business: collecting deposits, lending to bigger firms including subsidiaries of multinationals, and holding/dealing in government securities.
- Ownership and market structure:
  - Banking sector dominated by subsidiaries of French, Nigerian, Moroccan, and pan-African banks; government holds minority stakes (~10 to 25 percent in a number of banks).
  - One bank provides Islamic banking services.
- Main vulnerabilities and supervisory needs:
  - Concentration of lending and asset quality are identified as the main risks.
  - Stress tests (authorities and Fund staff) applied shocks including:
    - (i) sectoral risk, including default by the largest individual exposure and a shock to the three largest borrowing industrial sectors;
    - (ii) overall credit risk comprising a downgrade of nonperforming loans (NPLs) by one category and an increase in total NPLs by 50 percent;
    - (iii) credit risk related to default of a public entity, or default on credit to the government and to public enterprises.
  - Stress test conclusions: liquidity risks and interest rate risks could be withstood due to high liquidity and small maturity mismatch; concentration of lending found to be a major source of vulnerability given loans concentrated in a few sectors and companies and large exposure to the public sector.
  - Financial soundness indicators (FSIs) suggest banks are on average adequately capitalized, profitable, and liquid, with asset quality being the main concern.
  - Microprudential regulation of banks needs to be enhanced and supervision strengthened further; authorities are encouraged to develop a holistic view of the financial system and systemic risk.

### Microfinance: Growth, Structure, and Supervision
- Sector evolution:
  - Regulatory reform in 2008–09 reorganized supervisory responsibilities: larger MFIs (assets and/or deposits above CFAF 2 billion) now supervised by the banking commission; smaller institutions supervised by the Ministry of Finance.
  - Following reform, 118 entities were closed down; sector credit and deposits continued to rise from CFAF 81 billion in 2005 to CFAF 219 billion in July 2012 (about 3 percent of GDP).
  - Consolidation produced 18 larger entities representing 90 percent of the MFI market; one institution accounts for 60 percent of the market.
- Activity and linkages:
  - MFIs focus on savings accounts and microcredit, lending mostly to microbusinesses in trade, services (catering), agriculture, and transportation.
  - More people have accounts at MFIs than at banks, helping raise overall access to finance to about 20 percent of the population.
  - Larger MFIs cooperate with commercial institutions for money transfers and increasingly use banks to finance operations as they do not have access to BCEAO refinancing.

### Insurance and Nonbank Financial Institutions
- Insurance industry characteristics:
  - Nonlife insurance development supported by growth of credit markets and formal sector.
  - Insurers required to hold a minimum of cash deposits equal to 11 percent of their assets for liquidity purposes.
  - Insurance assets allocation: term deposits with commercial banks 47 percent; securities (in particular government paper) and equity 18 percent; real estate 12 percent.

### Markets, Public Debt, and External Financing
- Regional securities market (BRVM) has only one listed Senegalese company (Sonatel).
- Sovereign financing:
  - WAEMU sovereigns increased recourse to regional financing; Senegal tapped the regional market in large amounts at short maturities.
  - More than half of Senegalese government debt issued was purchased by WAEMU investors outside Senegal.
- No private company has issued securities in international security markets as of the report.

### Systemic Risk and Policy Implications
- Key systemic risk drivers:
  - Lending concentration (loans concentrated in a few sectors and large borrowers).
  - Asset quality concerns reflected in FSIs and stress test outcomes.
  - Large exposure to the public sector and to a few large borrowers.
- Policy and supervisory priorities (as discussed in the chapter):
  - Enhance microprudential regulation of banks and strengthen supervision.
  - Develop a holistic (macroprudential) view of the financial system and systemic risk.
  - Support development of the interbank market and the public debt market at the regional level to improve market liquidity and broaden funding sources.

*Source: IMF chapter “Senegal’s Financial System: Structure, Performance, and Risks.”*

### Box 1 . Banking System Soundness

### Box 1 . Banking System Soundness

### Capitalization
- Financial soundness indicators show that the banking sector is overall at an adequate level of capitalization.
- Capital adequacy ratio decreased to 16 percent at end-2011, and increased further through June 2012.
- Regulatory minimum capital adequacy ratio is 8 percent.
- Large holdings of sovereign paper, which carries zero risk-weighting, explain part of the high capital ratios.
- Risk noted: treatment of sovereign risk as zero may be problematic; crises in the euro area and recent crises in the West African Economic and Monetary Union (Côte d’Ivoire and Mali) suggest sovereign risk is not nil.
- An increase in the risk-weighting of sovereign papers would reduce capital adequacy ratios significantly.
- Only one bank is currently undercapitalized; because of small size and limited interconnectedness it does not raise a systemic risk and is being restructured.

### Asset Quality
- Gross nonperforming loans (NPLs) to total loans was 16.2 percent at end-2011, and increased further in early 2012.
- High NPLs largely reflect portfolios of three banks with NPLs in excess of 20 percent; most other banks have NPLs below 5 percent.
- Relatively high provisioning for NPLs mitigates risks.
- NPLs tend to be kept on banks’ books longer than in other countries because of the long time needed to exercise guarantees through the judicial system.
- Legacy NPLs do not fully explain current levels; new NPLs remain relatively high, suggesting limited risk-management capabilities, particularly in some smaller banks.
- A relatively high concentration risk implies asset quality can deteriorate rapidly if only a few debtors get into trouble.
- Accounting convention: a claim becomes nonperforming after six (not three) months of missed payments (not in line with best international practices).

### Profitability
- Return on assets was 1.8 percent as of mid-2012 for the sector.
- Return on equity was above 17 percent.
- Profitability is boosted by access to ample and cheap household deposits used to purchase government paper; net interest margin on these nominally risk-free operations is substantial.

### Liquidity
- Liquidity risks are low for the banking sector as a whole, though three smaller banks do not meet the minimum liquidity requirements.
- Structural factors supporting high liquidity:
  - Limited number of bankable projects.
  - Regulatory rules require banks to finance medium- and long-term assets to a large extent with medium- and long-term resources; as these resources are scarce banks tend to keep funds in liquid assets.
  - Subsidiaries of international banking groups treat debt issued by West African Economic and Monetary Union sovereigns as risky and limit their exposure, restricting banks’ investment universe and lending activity and keeping liquidity levels higher.
  - Lack of a developed interbank market increases accumulation of liquidity by the banking system as liquidity is not significantly traded.

### Microfinance Institutions (MFIs)
- Larger MFIs are increasingly competing with banks; in 2012 the asset holdings of the largest MFI make it as big as the seventh largest bank.
- Four MFIs have been transformed into corporations (“sociétés anonymes”) and are capitalized, often with donor support; one MFI has set up its own bank.
- Advantages enjoyed by many MFIs:
  - Most MFIs are structured as cooperatives, benefiting from tax exemptions originally justified by social mandate and not-for-profit motive.
  - Cap on interest charged for loans is 27 percent for MFIs but 18 percent for banks.
  - MFIs often benefit from public and/or donor support via (i) direct or indirect funds that constitute cheap financing, (ii) guarantees, and (iii) training of staff.
- Profitability in the MFI sector varies by size:
  - In 2011, the 18 larger entities generated cumulative profits of CFAF 4.5 billion.
  - Other institutions had cumulative losses of about CFAF 0.5 billion.
- Reasons for poorer profitability among smaller MFIs include rapid sector expansion shrinking the pool of “lower-risk” clients, entry into new areas or products without expertise, and operations in remote areas with a high share of credit to agriculture which is highly volatile.
- Financial soundness indicators (FSIs) for larger MFIs suggest a relatively sound situation; as of June 2012 only one prudential norm—the cap on operations other than savings and credit—had not been met.
- Performance vis-à-vis profitability benchmarks (note indicative targets):
  - Return on equity: 5 percent vs. a target of 15 percent.
  - Return on assets: 2 percent vs. a target of 3 percent.
  - Profit margin: 13 percent vs. a target of 20 percent.
  - Cost income ratio: 81 percent vs. a target ranging between 40 and 60 percent.
- Mutual/cooperative structure may raise collective action problems, potentially increasing governance and accountability issues; governance problems were experienced by the largest MFI but were addressed forcefully by the authorities.

### Systemic Risk
- Systemic risk defined as any threat of disruption to financial services caused by impairment of all or parts of the financial system with potential serious negative consequences for the real economy.
- Systemic risk decomposed into:
  - Time-series risk: buildup of risk over time interacting with the macroeconomic cycle (leverage in upswing, risk aversion in downswing).
  - Cross-sectional risk: size, complexity, interconnectedness, and common exposures increasing contagion.
- Current assessment for Senegal:
  - Systemic risk is likely to be limited in Senegal as no sector seems highly leveraged.
  - Banks finance mostly prime borrowers with short-term credit such as trade finance; apart from exogenous shocks, risks to the financial system are likely to be low.
  - Time-series systemic risk has been low.
  - Correlation between credit growth and GDP growth has been about 0.1.
  - Senegal has not been subject to large capital in- and outflows that often constitute sources of time-series volatility in emerging markets.

*Source: Box 1 . Banking System Soundness (excerpt).*

### Box 2 . Leverage in Senegal

### Box 2 . Leverage in Senegal

### Leverage overview and sectoral findings
- Leverage levels in Senegal are low to moderate.
- Government debt is rising but remains manageable; domestic debt is about 10 percent of GDP.
- Corporate, banking, and household leverage levels are low to nonexistent.
- Key sectoral observations:
  - Government: accessed international capital markets in recent years, but borrows abroad largely from donors on concessional terms; domestically borrows largely through the regional bond market.
  - Banks: finance themselves largely out of deposits, with limited debt issuance; banks generally are highly liquid and leverage is kept in check.
  - Households: lending takes place against guarantees rather than future cash flows; only households with significant assets borrow and they tend to have low gearing ratios; most households are credit-constrained in the formal market. In rural areas, there may be pockets of households overleveraged from borrowing from microfinance institutions, though no data is available.
  - Corporate sector: dual nature — a few large companies with strong balance sheets that largely borrow short-term to finance working capital and have low leverage; the SME sector is largely credit-constrained and hence “unable to leverage.”

### Cross-sectional systemic risk and interconnections
- Most common forms of cross-sectional systemic risk are not a major concern at the moment, although some developments require close monitoring.
- Interconnection among banks is limited, reflecting underdevelopment of the money market; both the number of connections and the size of exposures matter for interconnection risk.
- Lending concentration is high in most banks, but top borrowers tend to differ across banks, mitigating common-exposure risk to private-sector borrowers.
- Main exception: common exposure to the government is sizable because many banks hold government debt.
- Interconnection between banks and other financial institutions is significant and warrants monitoring:
  - Insurance companies use bank deposits as an investment vehicle, buy regional bank bonds, and hold equity in some banks.
  - MFIs place funds in banks and at least one MFI owns a bank.
  - Lack of detailed data prevents full risk mapping; authorities should investigate these linkages further.
- None of the Senegalese banks fits the definition of being too big to fail, indicating that size-related cross-sectional systemic risk is contained.

### Market and benchmarking context
- Banking intermediation measured by the credit to deposit ratio is in line with structural benchmarks.
- Credit and deposits to GDP ratios are now significantly above their benchmarks.
- Insurance sector ratios (assets and premiums to GDP) are above benchmarks though low in absolute terms.
- Debt and equity markets remain underdeveloped relative to potential as sources of private sector financing.
- Equity market: only one Senegalese company listed on the regional stock market versus a predicted value of 30 companies.
- Comparison with peers:
  - Kenya’s deposits and credit to GDP ratios are about 10 percentage points higher than Senegal’s.
  - Morocco’s ratios are more than twice as high as Senegal’s.
  - Kenya and Morocco show substantially larger insurers’ assets to GDP; Kenya has expanded stock market capitalization since 2002.
  - Kenya reduced bank asset concentration since 2003; Morocco has dramatically increased access (e.g., branches per population).

### Risks to fiscal policy and public finances
- Liquidity and interest rate risk: large share of domestic debt issued at relatively short maturities creates significant rollover and interest rate risk; if regional liquidity dries up, the government may face roll-over difficulties and resort to arrears (experienced to some extent in early 2012).
- Fiscal cost: yields at issuance for bonds with maturities of three to five years were in the 7–9 percent range in the first half of 2012, whereas average inflation was around 2 percent.
- Scope for countercyclical policy: a deeper financial system would provide more fiscal flexibility given regional monetary policy constraints.
- Diversified investor base: current investor base is homogeneous and narrow, with debt market liquidity highly dependent on banks.
- Financing public investment: shallow financial markets limit government ability to finance long-term infrastructure investments.

### Obstacles to further financial development
- Informational asymmetries: limited information on borrowers, limited audited company statements, absence of credit bureaus (and limited use of existing central bank databases) increase adverse selection and moral hazard, leading to credit rationing; also affects interbank market development.
- Business and judicial environment: absence of formalized property rights in large parts of the country complicates use of land as collateral; judicial process is costly and slow, discouraging lending and recovery.
- Tax regime: taxes and fees on banking and stock exchange operations are relatively high, raising costs and reducing demand for financial services.
- Regulatory and supervision issues: some prudential ratios (e.g., the transformation ratio) are perceived as excessively constraining; some ratios are not observed by a number of banks, affecting credibility; regional prudential responsibility can slow national-level reforms.
- Skills: shortage of appropriate human capital and financial culture limits risk management, product design/sales, and stock market participation.

### Prudential compliance and supervisory issues
- Compliance with prudential rules is weak for several ratios:
  - The transformation ratio is met by only 11 Senegalese banks.
  - No bank meets the portfolio structure ratio, which requires that at least 60 percent of a bank’s credit portfolio be composed of rated assets.
- Figure data note: 21 institutions in scope, of which nineteen banks and two nonbank financial institutions.
- Need to strengthen bank supervision, enforcement of corrective measures, and monitoring of expanding banking groups and regional developments.
- Macroprudential approach: the region’s Financial Stability Council monitors systemic risk; Senegal lacks a single national entity with a holistic view of the financial system and systemic risk — such a unit should be developed, preferably within the Ministry of Finance and in close collaboration with the Central Bank of West African States.

### Recommendations (development, stability, and institutional)
- Development recommendations:
  - Accelerate implementation of the action plan following the National Consultation on Access to Credit, particularly:
    - Increasing the availability of information on borrowers (covering banks and larger MFIs).
    - Facilitating the use of guarantees.
    - Reducing cost of using the legal system, including by increasing resources.
  - Develop the interbank market (Regional/National responsibility).
  - Develop the government debt market by broadening the range of investors and fostering the development of a secondary market (Regional/National).
  - Level the playing field between banks and larger microfinance institutions, for instance by facilitating transformation of MFIs into banks (National/Regional).
  - Review financial activity taxation after the new tax code has been implemented and revenue concerns have decreased (National).
- Development and stability:
  - Review bank regulations to facilitate further deepening while preserving stability; priority to address regulatory ratios systematically breached by most banks; ultimately, bring regulations to international standards (Regional/National).
- Stability and institutional recommendations:
  - Strengthen bank supervision (Regional).
  - Create a unit in the Ministry of Finance with a holistic view of the financial system and systemic risks in Senegal (National).
  - Enhance national/regional coordination to ensure high responsiveness of the prudential framework to new needs (National/Regional).
  - Review and strengthen the financial crisis prevention and resolution framework to ensure adequacy for new risks (e.g., cross-country banking) (Regional/National).

*Source: IMF staff.*

### Box 3 . Bank Supervision and Resolution in Senegal: Division of Labor

### Box 3 . Bank Supervision and Resolution in Senegal: Division of Labor

### Supervisory architecture and responsibilities
- The supervisory system is based on a clear division of labor between the national and regional level.
- Banks and other large deposit-taking institutions (including microfinance institutions) are supervised at the regional level by:
  - the Central Bank of West African States (BCEAO), and
  - the West African Economic and Monetary Union Banking Commission.
- Smaller microfinance operators are supervised at the national level by the Ministry of Finance.
- Capital market activity is supervised regionally under the supervision of the Regional Council for Public Savings and Financial Markets (CREPMF).
- The Ministry of Finance, in conjunction with the supraregional insurance sector regulator CIMA (“Conférence Interafricaine des Marchés d’ Assurances”), supervises insurance companies.
- The 2010 central bank reform created the Financial Stability Council, charged with macro-prudential supervision and guaranteeing the stability of the overall financial system at the regional level.
- Figure 11 (organigram) indicates entities including: Conference of Heads of States and Governments; Council of Ministers; CREPMF; BRVM; SICAV; SGI; SGP and others; Banking Commission; BCEAO; Ministry of Economy and Finance; DMC (Banks, Financial institutions); DRS-SFD (Microfinance institutions); Department of Insurance; CIMA; Financial Stability Committee.
- The organigram text specifies microfinance institutions "with assets/deposits above CFAF2" are linked to regional supervision lines.

### Resolution framework and operational procedures
- The resolution framework depends on a sharing of responsibilities between national and regional bodies.
- The national directorate of the BCEAO:
  - regularly collects data on various financial indicators,
  - carries out off-site supervision,
  - is typically the first body to detect difficulties at a financial institution.
- The BCEAO national directorate flags potential operational and stability concerns to the banking commission, with the concerned national authority kept informed.
- The banking commission is responsible for on-site supervision.
- When concerns arise:
  - joint inspections comprising members of both the banking commission and the BCEAO national directorate intensify supervision of the institution.
  - Evidence from on-site and off-site inspections guides the banking commission’s decision on possible prompt corrective actions or possible sanctions.
- In case of solvency concerns:
  - the banking commission can recommend the closing of an institution.
  - the banking commission informs the Ministry of Finance, which is the body that has to formally rescind the banking license.
  - the Minister of Finance has the possibility of appealing to the council of ministers, where a simple majority could overrule the banking commission’s decision.

### Ongoing developments and policy priorities
- With deepening of the financial system and further regional integration, having a good framework in place will be increasingly important.
- Developing the financial crisis prevention system is an important task.
- Ongoing work includes:
  - the creation of a regional financial stability fund, and
  - the establishment of a deposit insurance scheme.
- These areas will require close cooperation between the national and the regional authorities.

*Source: Ministry of Finance.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1305.pdf_