## _cr05126 — Selected Economic Indicators and Financial Sector Assessment

## Source details

**Canonical URL:** [_cr05126 — Selected Economic Indicators and Financial Sector Assessment](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05126.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05126.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05126.pdf.json)

---

### Overall assessment of stability and development issues
- Since the 2001 FSAP (IMF Country Report 01/189), the stability of the financial sector has been safeguarded.
- Banking-sector financial soundness indicators are stronger than for the WAEMU as a whole.
- Main vulnerabilities and structural challenges:
  - Risk concentration remains the main source of vulnerability in the banking sector.
  - The microfinance sector contains a solid core of profitable institutions competing with banks for top-rated SMEs, but smaller MFIs show signs of fragility and supervision needs strengthening.
  - Financial sector components (regional capital market, banking system, MFIs) are not yet fully integrated; challenge is to create a continuum interlinking all components.
  - Weak market infrastructure, absence of mortgage refinancing mechanisms, tax distortions, and a narrow investor base contribute to low recourse to the capital market by large corporations.
  - Legal and institutional constraints hinder a continuum between banks and MFIs (regulation based on institutions rather than microfinance credit function).

### Key recommended actions (Immediate; Near to Medium Term)
- Immediate Measures — Macroeconomic and prudential frameworks:
  - Absorb excess liquidity in the system so as to allow a smooth development of financial markets and contain the potential for a buildup of balance sheet vulnerabilities in the corporate sector;
  - Bring risk weights on loans secured by mortgages in line with Basel Committee norms;
  - Increase BCEAO involvement in the supervision of the largest MFIs;
  - Eliminate the regulatory requirement for banks to maintain a minimum portfolio structure ratio.
- Immediate Measures — Legal and Judicial frameworks:
  - Enforce the legislation governing the accounting profession;
  - Simplify enforcement procedures for collection of claims, including execution of secured interests;
  - Train magistrates in commercial and financial matters; establish commercial divisions in courts.
- Immediate Measures — Initiatives in the microfinance sector:
  - Until a private investor takes over its management, limit the activities of the institution taking over Post Office financial services to deposit mobilization and placements in money/capital markets;
  - Given the dynamism of Senegal’s MFIs there is no need to set up a subsidiary of BRS-SA.
- Near to Medium Term Policies — Prudential framework and financial market infrastructure:
  - Strengthen human and financial resources of the MOF unit in charge of MFIs supervision;
  - Consider setting the minimum risk-weighted capital asset ratio above 8 percent;
  - Research on the structure of SMEs funding to better understand obstacles to SMEs’ finance;
  - Accelerate the pace of development of a corporate database to reduce information asymmetries;
  - Consider lowering or eliminating the tax on bank operations (TOB).
- Near to Medium Term Policies — Legal and Judicial frameworks:
  - Review procedures for surveying, parceling, registering and allocating real estate property;
  - Amend OHADA legislation to allow individuals not involved in commercial activities to register secured interests without loss of possession of the asset(s) in question;
  - Adopt legislation regulating the profession of receiver in insolvency proceedings;
  - Streamline the OHADA draft Uniform Act on cooperatives and mutual benefit companies;
  - Promote alternative methods for settling disputes (arbitration and mediation).
- Near to Medium Term Policies — Financial markets diversification and deepening:
  - Reassess the activity of Senegal’s Housing Bank with a view to stimulate its activity;
  - Move from issuing bonds based on guarantees to a system based on merit (rating agencies);
  - Harmonize taxation of financial products across the WAEMU;
  - Launch reforms to create a regional mortgage refinancing company;
  - Adopt a program of regular issuance of government debt and repay by anticipation BCEAO statutory advances and other government debt as feasible;
  - Allow public institutional investors to invest in financial markets once they have risk control tools.

### Macroeconomic environment and market infrastructure — key indicators and findings
- Growth and inflation environment:
  - The economy is on its way to achieving an annual average growth rate of approximately 4 percent and per capita GDP growth of 1.5 percent in real terms.
  - After drought slowed growth to 1.1 percent in 2002, GDP grew by 6.5 percent in real terms in 2003.
  - Consumer price inflation was almost nonexistent in 2003.
- 2003 fiscal and external account positions:
  - Fiscal deficit (including grants) stood at 1.4 percent of GDP in 2003.
  - External account deficit (including grants) stood at 6.3 percent of GDP in 2003.
- Selected annual changes (as reported):
  - GDP at constant prices: 2000: 3.0; 2001: 4.7; 2002: 1.1; 2003 (est.): 6.5.
  - Consumer price (end of period): 2000: 1.3; 2001: 3.9; 2002: 1.5; 2003 (est.): -1.4.
  - Nominal effective exchange rate: 2000: -5.1; 2001: 1.2; 2002: 2.4; 2003 (est.): 5.1.
  - Real effective exchange rate: 2000: -6.5; 2001: 1.8; 2002: 1.3; 2003 (est.): 2.8.
  - Net domestic assets (changes in percent of beginning-of-year broad money): 2000: 12.8; 2001: 4.3; 2002: -6.4; 2003 (est.): 5.4.
  - Domestic credit: 2000: 15.5; 2001: 6.6; 2002: -4.9; 2003 (est.): 5.7.
  - Credit to the government (net): 2000: -4.0; 2001: 2.7; 2002: -8.3; 2003 (est.): -4.3.
  - Credit to the economy (percent growth): 2000: 28.6; 2001: 4.9; 2002: 4.7; 2003 (est.): 14.2.
  - Broad money (M2): 2000: 10.7; 2001: 14.5; 2002: 7.6; 2003 (est.): 14.6.
  - Money market rate: 2000–2003: 4.95.
  - Overall fiscal surplus or deficit (commitment basis, excluding grants): 2000: -1.9; 2001: -3.9; 2002: -1.9; 2003 (est.): -3.5.
  - Commitment basis, including grants: 2000: 0.1; 2001: -2.1; 2002: -0.1; 2003 (est.): -1.4.
  - Basic fiscal balance (defined in table footnote): 2000: 1.2; 2001: -0.8; 2002: 1.9; 2003 (est.): 0.6.
  - External current account deficit (excluding current official transfers): 2000: -8.5; 2001: -6.5; 2002: -8.0; 2003 (est.): -8.5.
  - External current account deficit (including current official transfers): 2000: -6.1; 2001: -4.9; 2002: -6.0; 2003 (est.): -6.4.
  - External public debt: 2000: 67.6; 2001: 63.2; 2002: 62.8; 2003 (est.): 50.7.

### Financial sector size, composition, and liquidity implications
- End-2003 aggregates and structure:
  - Total assets: CFAF 1,568 billion (roughly US$3 billion), majority represented by the banking system.
  - State minority equity stakes in 7 banks (biggest stake 25.6 percent), and BCEAO in 2 banks.
  - Microfinance sector contributed about one-third of the increase in the ratio of total assets to GDP.
  - MFIs outstanding credit growth: MFIs expanded outstanding credit at a rate 3.3 times faster than bank credit in the last 4 years.
  - MFIs deposits growth: grew at a rate 2.7 times faster than M2.
  - Financial intermediation remains low: ratio of M2 to GDP about 30 percent (WAEMU average 25.7percent).
- Structure of the Financial System (selected figures):
  - Banking assets (billions CFAF): 2001: 1,087; 2003: 1,391; Percent of assets 2001: 89.5; 2003: 88.7; Percent of GDP 2001: 32.5; 2003: 37.3.
  - Insurance assets (billions CFAF): 2001: 114; 2003: 137; Percent of assets 2001: 9.4; 2003: 8.7; Percent of GDP 2001: 3.4; 2003: 3.7.
  - MFIs assets (billions CFAF): 2001: 14; 2003: 41; Percent of assets 2001: 1.1; 2003: 2.6; Percent of GDP 2001: 0.4; 2003: 1.1.
  - Total assets (billions CFAF): 2001: 1,215; 2003: 1,568; Percent of GDP 2001: 36.3; 2003: 42.1.
  - Memorandum: M2: 2001: 24.8; 2003: 30.0. Claims on private sector: 2001: 19.6; 2003: 21.1. Claims on central government: 2001: 5.1; 2003: 1.7.
- Excess liquidity and market implications:
  - Large excess reserves of banks have distorted development of financial markets, encouraging competition among banks to lend to large corporations at rates sometimes close to average cost of funds.
  - Excess liquidity has depressed mobilization of medium- and long-term resources and may contribute to high risk concentration and corporate balance-sheet imbalances.
  - Mopping up excess liquidity is recommended to strengthen regional monetary policy effectiveness and support long-term resource mobilization.

### SMEs finance and information constraints
- SMEs finance working capital largely from own funds: 75.1 percent own funds; commercial banks 12.5 percent.
- For investments, commercial bank financing at only 17.7 percent.
- Insufficient collateral cited as main reason for rejected bank credit applications: 80 percent.
- Other obstacles: lack of transparency in enterprises, poor quality of accounting, limited practice of auditing, loopholes in creditor rights and guarantee enforcement.
- World Bank survey reasons enterprises do not borrow:
  - Lack of collateral: 21 percent
  - Refusal to incur debt: 31 percent
  - No financing needs: 22 percent
  - Interest rate too high: 12 percent

### Regional monetary policy assessment (Box 2)
- Historical context:
  - High level of excess liquidity in the WAEMU banking system due to lack of attractive investment opportunities and conservative bank credit-risk policies (banks’ reserves grew from 16 percent of deposits to 21 percent between end-December 2002 and end-September 2003).
  - Absence of investment opportunities incentivized banks to hold funds in correspondent accounts abroad and reduced pressure for repatriation of export proceeds.
- Policy options and positions:
  - Fund staff recommended sale of central bank bills to reduce excess liquidity.
  - BCEAO authorities prefer reduction of excess reserves via governments selling treasury bills to repay BCEAO statutory advances and ruled out selling central bank bills due to BCEAO costs.
  - Authorities believe changes in central bank interest rates can signal borrowers to seek lower bank rates; Fund staff cautioned that lowering BCEAO rates could lead banks to reduce deposit rates and potentially engender capital outflows, requiring maintenance of a substantial differential with euro interest rates.

### Banking sector stability, exposures, and profitability
- Capitalization and asset quality:
  - At end-March 2004, ten banks with risk-weighted capital asset ratios (CAR) above prudential norm of 8 percent accounted for approximately 80 percent of total assets.
  - Two other banks had CAR slightly below the norm.
  - Slight decrease in aggregate CAR mainly due to increased provisioning and strong credit growth of certain banks that previously had extremely high CAR; assessed as not threatening system stability.
  - Gross nonperforming loans (NPLs) have decreased, and provisioning rates have been maintained above 70 percent throughout the period.
- Banking sector exposures and credit concentration:
  - Exposure to SONACOS decreased from 68 percent of capital in 2001 to 4 percent in 2003 due to a budget transfer and a ceiling on SONACOS debt under the PRGF-supported program.
  - Total credit to 5 largest borrowers increased from 108 to 144 percent of total capital of the banking system.
  - Five largest borrowers in 2001: SONACOS, SENELEC, SAR, ICS, and SODIFITEX; in 2003: ICS, SAR, CSS, SENELEC, and SOCOSIM.
  - Credit concentration identified as largest source of vulnerability; close monitoring required to avoid drops in capitalization.
- Financial margins and cost structure:
  - Credit operations represent approximately 75 percent of net bank earnings.
  - Average cost of resources is slightly above 2 percent.
  - The average cost to the borrower (including the 17 percent tax on bank operations—TOB) is slightly above 11 percent.
  - Senegal’s TOB (17 percent) is the highest in the WAEMU (5 percent in Côte d’Ivoire).
  - Overhead costs absorb more than half of the financial margin.
  - Loan loss provisions represent 20 percent of the financial margin in Senegal versus 11 percent for comparable African banks.
  - Net returns on assets (ROA) are slightly below comparable African banks, while net returns on equity (ROE) are slightly above, implying relatively lower capitalization.

### Key financial soundness indicators (selected figures)
- CAR: Dec. 2001 = 13.5; Dec. 2003 = 11.5; Mar. 2004 = 12.7; WAEMU Dec. 2003 = 11.0
- Gross NPLs/total loans: Dec. 2001 = 17.8; Dec. 2003 = 13.3; Mar. 2004 = 14.7; WAEMU Dec. 2003 = 19.2
- Provisioning rate: Dec. 2001 = 70.2; Dec. 2003 = 75.3; Mar. 2004 = 70.4; WAEMU Dec. 2003 = 67.0
- Net NPLs to total loans: Dec. 2001 = 5.6; Dec. 2003 = 3.6; Mar. 2004 = 4.4; WAEMU Dec. 2003 = 7.3
- Net NPLs to capital: Dec. 2001 = 34.3; Dec. 2003 = 28.4; Mar. 2004 = 34.4; WAEMU Dec. 2003 = 44.5
- Loans concentration (loans to five largest borrowers to bank’s capital): Dec. 2001 = 107.7; Dec. 2003 = 144.2
- Liquid assets/deposits: Dec. 2003 = 81.0; Mar. 2004 = 82.0; WAEMU Dec. 2003 = 66.6
- Return on equity (ROE): Dec. 2001 = 18.6; Dec. 2003 = 22.1; Mar. 2004 = 22.1; WAEMU Dec. 2003 = 10.0

### Decomposition of interest rate spreads (selected figures)
- Average lending rate (Senegal 2002) = 11.3
- Average cost of resources = 2.2
- Financial margin = 9.2 (Africa)
- Financial margin by bank-size groups: Small Banks = 10.7; Medium Banks = 5.0; Large Banks = 4.4; All Banks = 4.9
- Tax on financial operations (TOB) = 1.6 (Senegal)
- Overhead costs examples: Africa = 3.4; Small Banks = 5.0; Medium Banks = 6.1; Large Banks = 3.1; All Banks = 2.8; Senegal listed as 3.0
- Loan loss provisions: Senegal = 1.8; Small Banks = 1.2; Medium Banks = 0.7; Large Banks = 0.6; All Banks = 0.7
- Tax on profits: Senegal = 0.5; Small Banks = 0.9; Medium Banks = 0.2; Large Banks = 0.3; All Banks = 0.4
- Return on assets (ROA): Senegal = 1.9; Small Banks = 2.5; Medium Banks = 1.0; Large Banks = 0.7; All Banks = 0.8
- Return on equity (ROE): Senegal = 22.1; Africa small banks average = 18.3; medium = 5.6; large = 12.9; all banks = 11.7
- All banks in Senegal are classified as small (assets of less than US$1 billion).

### Stress testing results and scenarios (key outcomes)
- Main finding: concentration of banks’ credit in a few large enterprises remains the main source of vulnerability.
- Provisioning shock:
  - Increase in provisioning rates to 75 percent (for those banks not already above 75 percent) would result in 5 banks having CAR below 8 percent; 4 of these banks are relatively small, and only one would have a CAR below 6 percent.
- Default scenarios (25 percent loss of outstanding loans to large borrowers):
  - Loss of 25 percent of the outstanding loans to one single large borrower would result in a drop of the CAR of 7 banks (79 percent of total system assets) below 8 percent.
  - Default by 4 large borrowers: 8 banks (80 percent of total system assets) would have CAR below 8 percent, and one bank would have negative capital.
- NPL increase scenarios:
  - Banking system would cope fairly well with a 25 percent increase in NPLs. At end-March 2004, three banks accounting for 24 percent of banking system assets would have CAR below 8 percent; two of them had CARs below 8 percent even before the shock; none would see CAR fall under 4 percent due to the shock.
- Interest rate shock:
  - System resilient to a 2 percent increase in short-term interest rates; most interest-bearing liabilities are three months or less; 65 percent of credits are short term (less than 2 years) and 30 percent medium term (2 to 10 years). None of the banks would see CAR fall under 8 percent as a result of the 2 percent shock.
- Foreign exchange / CFA franc parity risk:
  - Risks are low due to restricted bank holdings of foreign currencies and positive working balances abroad.

- Selected stress test figures (snapshots):
  - December 2003 actual situation CAR = 11.5; Four Largest = 9.2; Five Largest = 9.5; All Other Banks = 17.6; No. of Banks with CAR < 8% = 2; Market Share = 23.5
  - Dec. 2003 provisioning rate increase to 75 percent CAR = 10.5; No. of Banks = 4; Market Share = 28.4
  - Dec. 2003 25 percent increase in NPLs CAR = 10.1; No. of Banks = 5; Market Share = 53.8
  - Dec. 2003 default 25 percent of loans to A+B+C+D CAR = 7.7; No. of Banks = 8; Market Share = 80.2
  - March 2004 actual situation CAR = 12.7; Four Largest = 9.7; Five Largest = 10.3; All Other Banks = 18.5; No. of Banks = 2; Market Share = 20.3
  - Mar. 2004 provisioning rate increase to 75 percent CAR = 11.1; No. of Banks = 5; Market Share = 35.8
  - Mar. 2004 25 percent increase in NPLs CAR = 11.0; No. of Banks = 3; Market Share = 23.8

### Prudential norms, regulatory issues, and recommendations
- Exposure limits and compliance:
  - As of end-March 2004, 5 banks (accounting for 35 percent of sector assets) did not comply with prudential norms limiting exposure of a bank to a single borrower. Senegal’s limit is 75 percent of total capital versus the Basel-recommended 25 percent limit.
- Risk weighting of mortgage loans:
  - Current 50 percent preferential weight allowed to all types of bank loans collateralized by a mortgage is not consistent with Basel Committee recommendations.
  - Two-year grace period for constituting provisions on such NPLs (provisions to be constituted over a four-year period) seems excessive given judicial delays.
- Portfolio structure ratio (Box 3):
  - Banks must maintain a minimum ratio of 60 percent between loans having received an accord de classement and total loans to customers. Senegal’s average ratio is about 12 percent (minimum required ratio is 60 percent).
  - WAEMU Council of Ministers (September 2002) requires banks, subject to financial penalties, to submit accord de classement requests for their 50 largest credit users.
  - Recommendation: drop the regulatory requirement for banks to maintain a minimum portfolio structure ratio; instead monitor percentage of assets covered by an accord de classement together with financial soundness indicators.
- Liquidity and transformation:
  - Senegalese banks are liquid and transformation of short-term resources into medium- and long-term loans is limited. Only one bank does not comply with the liquidity ratio, and another with the transformation ratio due to high share of medium- and long-term mortgage loans.
- Recommendation: prevent a drop in capitalization of Senegalese banks; set a minimum CAR above 8 percent in line with Basel Committee recommendations and country-specific factors including:
  - (i) potential systemic risk due to market distortions induced by chronic excess liquidity;
  - (ii) persistent difficulties complying with limits on loans concentration;
  - (iii) lenient treatment reserved to mortgage loans;
  - (iv) dysfunction of the judicial system.

### Microfinance sector: structure, risks, and supervisory needs
- Penetration and growth:
  - Penetration rate of MFIs rose from 16 percent of all households in 2000 to 25 percent in 2003 (i.e., from 3.2 to 5 percent of the population).
  - Outstanding credit from MFIs expanded 3.3 times faster than bank credit in the same period.
- Market structure and vulnerabilities:
  - Six largest networks represent 87 percent of customers and 90 percent of deposits and credit, with NPLs to total loans below 4 percent for these networks.
  - The three largest networks (about 70 percent of total loans) have an NPLs ratio of 3 percent; the next four largest networks (about 14 percent of the market) have an NPLs ratio of 4.3 percent.
  - Approximately 10 percent of the market consists of numerous small, independent institutions which are structurally weaker: they rarely comply with reporting requirements, largely escape supervisory attention, and often have weak financial structures.
- Supervision capacity and recommendations:
  - Surveillance unit under the Ministry of Finance lacks necessary human and financial resources to supervise all MFIs.
  - BCEAO involvement in supervision of large networks is planned as part of its 2004–08 strategy; this is appropriate given systemic risks.
  - Once a threshold for BCEAO involvement is decided, MOF needs to assess human and physical resources for supervising remaining MFIs and develop priorities plus a simplified reporting approach for the smallest MFIs.
- Market developments:
  - Some MFI networks are contemplating establishing commercial banks; large MFIs are well positioned to compete with commercial banks in financing SMEs.

### Judicial system status, constraints, and reform priorities
- No major changes in the judicial system since the 2001 FSAP.
- Persistent lack of personnel and material resources undermines justice in Senegal.
- Training of judges in commercial and financial matters:
  - Some training sessions organized since 2001, but neither the quality nor the number have been sufficient.
- Reported poor ethical behavior and partisan court-appointed expert reports create uncertainty in dispute outcomes.
- Local banks view the judicial system as inefficient, nontransparent, and unreliable, contributing to additional costs for banks reflected in their margins.
- Recommended judicial reforms:
  - Strengthen training of magistrates in commercial and financial matters.
  - Reform the promotion system.
  - Regulate procedures of court-appointed experts.
  - Establish commercial/banking divisions in the courts.
- Budgetary note:
  - Share of the budget allocated to the judicial area fell from 2 percent in 2000 to 1.41 percent in 2003 and was projected to decrease further to 1 percent in 2004.
  - Timely implementation of the recruitment strategy for the Civil Service during the years 2003–05, including a more than doubling of the size of the staff of the Justice Department, should help to reverse this trend.
- Justice Sector Program:
  - A recently designed Justice Sector Program proposes a ten-year action plan; priority recommendation is to establish efficient functioning of the justice system in the capital where most commercial, banking, and financial cases are handled.
- Donor engagement priority areas:
  - Increase the budget of the justice system to implement the Justice Sector Program;
  - Combat favoritism and corruption on the basis of jointly agreed indicators;
  - Ensure competent Senegalese management and coordination of the program.

### Mortgage financing, Housing Bank (BHS), and refinancing options
- BHS status and challenges:
  - BHS in strong financial position due to prudent lending but about half its assets are invested in financial instruments outside the housing sector.
  - Exposed to mismatch between abundant short-term resources and long-term mortgage credits and noncompliance with related prudential norms.
  - Competition from commercial banks in housing finance is growing and may reduce BHS’s traditional activity.
- Strategic options for BHS:
  - Expand activities to other banking products (consumer credit, automobile loans) requiring amendment of original status.
  - Expand housing activities geographically in the WAEMU and to residential rental investors.
  - Redeploy social housing credit operations halted due to outdated eligibility thresholds for housing subsidies (not updated since 1994) and ineffective land allocation and titling policies.
- Mortgage refinancing and near-term recommendations:
  - Creation of a specialized mortgage refinancing company to issue simple, secure, and liquid bonds to refinance commercial banks via an oversized portfolio of eligible mortgages.
  - Issue of mortgage or cover bonds by commercial banks to raise long-term resources on the regional market.
  - Securitization of mortgages by encouraging banks to sell blocks of mortgages converted to marketable securities to institutional investors.
  - Immediate recommendation: facilitate creation of a regional private mortgage refinancing company while developing legal and regulatory framework for mortgage bonds and securitization. Regional authorities (CREMPF, BRVM, and the BCEAO) and national authorities could study approaches and organize a regional conference.

### Financial market development and public debt management
- Move from bond issuance based on guarantees to a merit-based system (rating of issuers); entry of international or national rating firms recommended.
- Eliminate tax distortions preventing placements of private securities caused by lack of tax harmonization among WAEMU members and the tax exemption on securities issued by the government of Senegal.
- Encourage retirement funds to invest in the financial market, provided they have portfolio management tools.
- Strengthening public debt management:
  - MOF has begun issuing treasury bills in the WAEMU market.
  - Regular treasury bill and bond issues would ensure presence of a top-rated issuer and increase WAEMU fixed income market activity.
  - Without increasing domestic debt, MOF could issue debt to repay BCEAO statutory advances, absorbing excess liquidity in the system, and repay by anticipation other types of domestic debt held by banks.

### Official initiatives in microfinance, Post Office, and BRS-SA assessment
- Postal financial services:
  - Deposit balances managed by the Post Office are about 2 percent of bank deposits, with 510,000 clients.
  - Post Office plans a subsidiary to take over financial services, privatize 75 percent of its capital, offer retail lending and refinancing of MFIs.
  - Short-run investor interest limited: investors can be found for at most 45 percent of the capital; no private strategic investor identified to date.
  - Recommendation: initial activities of the new institution should be limited (savings mobilization and placement of funds in interbank and capital markets) until a strategic private investor assumes control and internal controls and credit analysis capacities are developed.
- Regional Bank of Solidarity (BRS-SA):
  - BRS-SA created as a financial holding; general assembly took place in May 2004; BRS-SA has a capital of CFAF 24 billion fully subscribed and paid-up.
  - Capital structure and shareholders:
    - Regional Action Fund (FAC): 45.7 percent of capital (shares to be sold to the public).
    - Strategic shareholders: 40 percent of capital (WAEMU States, BOAD, WAEMU Commission with FAC financing, and FAC directly).
    - Banks and MFIs: 3.5 percent.
    - Post office and savings institutions: 4.5 percent.
    - Other investors: 6.3 percent.
  - Business plan envisages rapid lending expansion: each banking subsidiary to extend about 200 loans per month in the first year of full activity.
  - Assessment: no proven need for a BRS-SA subsidiary in Senegal given large MFI outreach and willingness of commercial banks to provide refinancing to large MFIs; unclear fit with strategy for reform of Post Office financial services.

### Appendix — Status of main observations and recommendations of the 2001 FSAP (selected items)
- Banking Sector:
  - Monitor growth of NPLs: Ratio of NPLs has decreased; provisioning remains high.
  - High concentration of loans: Unchanged.
  - Divestiture of BCEAO equity participation in BHS and CNCA: Not implemented.
  - Introduce law on bank insolvency: Not implemented.
  - Simplify single license procedures for operating in another WAEMU state: Not implemented.
  - Establish efficient, quick, and secure payment system: Significant progress; RTGS system became operational on June 25, 2004 and electronic clearing is expected to become operational by year’s end.
- Microfinance Sector:
  - Proliferation of small MFIs with weak financial position: Unchanged.
  - Slowdown in granting of new licenses: Not implemented.
  - Strengthen microfinance unit within Ministry of Finance: Limited progress; BCEAO involvement for supervision of large MFIs.
  - Weak financial position of some MFIs: Improvement for large MFIs; smaller ones remain vulnerable.
- Legal and Judicial Framework:
  - Improve efficiency of judicial system: A Justice Sector Program proposes a ten-year action plan.
  - Conduct study on adopting regional legislation on contracts and evidence: Study conducted and an OHADA uniform act is being drafted.
  - Create commercial courts or special court divisions with specialized magistrates: Not implemented.
  - Promote arbitration and mediation in the banking sector: Arbitration center set up; arbitration gradually accepted but enforcement of awards is difficult due to judicial weaknesses.
  - Intensify training of judges: Some training sessions organized, but neither quality nor number sufficient.
  - Improve judicial system infrastructures and resources: Not implemented. Share of budget allocated to judicial area fell from 2 percent in 2000 to 1.41 percent in 2003. Size of Justice Department scheduled to be doubled as part of recruitment strategy for the Civil Service during 2003–05.

*Source: _cr05126 - Selected Economic Indicators; IMF chapter content provided.*

### 1.   Selected Economic Indicators.......................................................................................

### _cr05126 - 1.   Selected Economic Indicators

### Overall assessment of stability and development issues
- Since the 2001 FSAP (IMF Country Report 01/189), the stability of the financial sector has been safeguarded.
- Banking-sector financial soundness indicators are stronger than for the WAEMU as a whole.
- Main vulnerabilities and structural challenges:
  - Risk concentration remains the main source of vulnerability in the banking sector.
  - The microfinance sector contains a solid core of profitable institutions competing with banks for top-rated SMEs, but smaller MFIs show signs of fragility and supervision needs strengthening.
  - Financial sector components (regional capital market, banking system, MFIs) are not yet fully integrated; challenge is to create a continuum interlinking all components.
  - Weak market infrastructure, absence of mortgage refinancing mechanisms, tax distortions, and a narrow investor base contribute to low recourse to the capital market by large corporations.
  - Legal and institutional constraints hinder a continuum between banks and MFIs (regulation based on institutions rather than microfinance credit function).

### Key recommended actions (Immediate; Near to Medium Term)
- Immediate Measures — Macroeconomic and prudential frameworks:
  - Absorb excess liquidity in the system so as to allow a smooth development of financial markets and contain the potential for a buildup of balance sheet vulnerabilities in the corporate sector;
  - Bring risk weights on loans secured by mortgages in line with Basel Committee norms;
  - Increase BCEAO involvement in the supervision of the largest MFIs;
  - Eliminate the regulatory requirement for banks to maintain a minimum portfolio structure ratio.
- Immediate Measures — Legal and Judicial frameworks:
  - Enforce the legislation governing the accounting profession;
  - Simplify enforcement procedures for collection of claims, including execution of secured interests;
  - Train magistrates in commercial and financial matters; establish commercial divisions in courts.
- Immediate Measures — Initiatives in the microfinance sector:
  - Until a private investor takes over its management, limit the activities of the institution taking over Post Office financial services to deposit mobilization and placements in money/capital markets;
  - Given the dynamism of Senegal’s MFIs there is no need to set up a subsidiary of BRS-SA.
- Near to Medium Term Policies — Prudential framework and financial market infrastructure:
  - Strengthen human and financial resources of the MOF unit in charge of MFIs supervision;
  - Consider setting the minimum risk-weighted capital asset ratio above 8 percent;
  - Research on the structure of SMEs funding to better understand obstacles to SMEs’ finance;
  - Accelerate the pace of development of a corporate database to reduce information asymmetries;
  - Consider lowering or eliminating the tax on bank operations (TOB).
- Near to Medium Term Policies — Legal and Judicial frameworks:
  - Review procedures for surveying, parceling, registering and allocating real estate property;
  - Amend OHADA legislation to allow individuals not involved in commercial activities to register secured interests without loss of possession of the asset(s) in question;
  - Adopt legislation regulating the profession of receiver in insolvency proceedings;
  - Streamline the OHADA draft Uniform Act on cooperatives and mutual benefit companies;
  - Promote alternative methods for settling disputes (arbitration and mediation).
- Near to Medium Term Policies — Financial markets diversification and deepening:
  - Reassess the activity of Senegal’s Housing Bank with a view to stimulate its activity;
  - Move from issuing bonds based on guarantees to a system based on merit (rating agencies);
  - Harmonize taxation of financial products across the WAEMU;
  - Launch reforms to create a regional mortgage refinancing company;
  - Adopt a program of regular issuance of government debt and repay by anticipation BCEAO statutory advances and other government debt as feasible;
  - Allow public institutional investors to invest in financial markets once they have risk control tools.

(Note on responsibilities in Box 1: 1/ Responsibility of authorities of regional governing bodies. 2/ Responsibility of the Senegalese authorities. 3/ Joint responsibility of the Senegalese and regional authorities.)

### Macroeconomic environment and market infrastructure — key indicators and findings
- Growth and inflation environment:
  - The economy is on its way to achieving an annual average growth rate of approximately 4 percent and per capita GDP growth of 1.5 percent in real terms.
  - After drought slowed growth to 1.1 percent in 2002, GDP grew by 6.5 percent in real terms in 2003.
  - Consumer price inflation was almost nonexistent in 2003.
- 2003 fiscal and external account positions:
  - Fiscal deficit (including grants) stood at 1.4 percent of GDP in 2003.
  - External account deficit (including grants) stood at 6.3 percent of GDP in 2003 (Table 1 summary in text).
- Table 1 selected annual changes (as reported):
  - GDP at constant prices: 2000: 3.0; 2001: 4.7; 2002: 1.1; 2003 (est.): 6.5.
  - Consumer price (end of period): 2000: 1.3; 2001: 3.9; 2002: 1.5; 2003 (est.): -1.4.
  - Nominal effective exchange rate: 2000: -5.1; 2001: 1.2; 2002: 2.4; 2003 (est.): 5.1.
  - Real effective exchange rate: 2000: -6.5; 2001: 1.8; 2002: 1.3; 2003 (est.): 2.8.
  - Net domestic assets (changes in percent of beginning-of-year broad money): 2000: 12.8; 2001: 4.3; 2002: -6.4; 2003 (est.): 5.4.
  - Domestic credit: 2000: 15.5; 2001: 6.6; 2002: -4.9; 2003 (est.): 5.7.
  - Credit to the government (net): 2000: -4.0; 2001: 2.7; 2002: -8.3; 2003 (est.): -4.3.
  - Credit to the economy (percent growth): 2000: 28.6; 2001: 4.9; 2002: 4.7; 2003 (est.): 14.2.
  - Broad money (M2): 2000: 10.7; 2001: 14.5; 2002: 7.6; 2003 (est.): 14.6.
  - Money market rate: 2000–2003: 4.95.
  - Overall fiscal surplus or deficit (commitment basis, excluding grants): 2000: -1.9; 2001: -3.9; 2002: -1.9; 2003 (est.): -3.5.
  - Commitment basis, including grants: 2000: 0.1; 2001: -2.1; 2002: -0.1; 2003 (est.): -1.4.
  - Basic fiscal balance (defined in table footnote): 2000: 1.2; 2001: -0.8; 2002: 1.9; 2003 (est.): 0.6.
  - External current account deficit (excluding current official transfers): 2000: -8.5; 2001: -6.5; 2002: -8.0; 2003 (est.): -8.5.
  - External current account deficit (including current official transfers): 2000: -6.1; 2001: -4.9; 2002: -6.0; 2003 (est.): -6.4.
  - External public debt: 2000: 67.6; 2001: 63.2; 2002: 62.8; 2003 (est.): 50.7.
- Financial sector size and composition (end-2003):
  - Total assets: CFAF 1,568 billion (roughly US$3 billion), majority represented by the banking system.
  - State minority equity stakes in 7 banks (biggest stake 25.6 percent), and BCEAO in 2 banks.
  - Microfinance sector contributed about one-third of the increase in the ratio of total assets to GDP.
  - MFIs outstanding credit growth: MFIs expanded outstanding credit at a rate 3.3 times faster than bank credit in the last 4 years.
  - MFIs deposits growth: grew at a rate 2.7 times faster than M2.
  - Financial intermediation remains low: ratio of M2 to GDP about 30 percent (WAEMU average 25.7percent).
- Table 2 Structure of the Financial System (selected figures):
  - Banking assets (billions CFAF): 2001: 1,087; 2003: 1,391; Percent of assets 2001: 89.5; 2003: 88.7; Percent of GDP 2001: 32.5; 2003: 37.3.
  - Insurance assets (billions CFAF): 2001: 114; 2003: 137; Percent of assets 2001: 9.4; 2003: 8.7; Percent of GDP 2001: 3.4; 2003: 3.7.
  - MFIs assets (billions CFAF): 2001: 14; 2003: 41; Percent of assets 2001: 1.1; 2003: 2.6; Percent of GDP 2001: 0.4; 2003: 1.1.
  - Total assets (billions CFAF): 2001: 1,215; 2003: 1,568; Percent of assets 2001: 100.0; 2003: 100.0; Percent of GDP 2001: 36.3; 2003: 42.1.
  - Memorandum: M2: 2001: 24.8; 2003: 30.0. Claims on private sector: 2001: 19.6; 2003: 21.1. Claims on central government: 2001: 5.1; 2003: 1.7.
- Excess liquidity and market implications:
  - Large excess reserves of banks have distorted development of financial markets, encouraging competition among banks to lend to large corporations at rates sometimes close to average cost of funds.
  - Excess liquidity has depressed mobilization of medium- and long-term resources and may contribute to high risk concentration and corporate balance-sheet imbalances.
  - Mopping up excess liquidity is recommended to strengthen regional monetary policy effectiveness and support long-term resource mobilization.
- SMEs finance and constraints:
  - SMEs finance working capital largely from own funds: 75.1 percent own funds; commercial banks 12.5 percent.
  - For investments, commercial bank financing at only 17.7 percent.
  - Insufficient collateral cited as main reason for rejected bank credit applications: 80 percent.
  - Other obstacles: lack of transparency in enterprises, poor quality of accounting, limited practice of auditing, loopholes in creditor rights and guarantee enforcement.

### Assessment of regional monetary policy (Box 2)
- Historical context:
  - High level of excess liquidity in the WAEMU banking system due to lack of attractive investment opportunities and conservative bank credit-risk policies (banks’ reserves grew from 16 percent of deposits to 21 percent between end-December 2002 and end-September 2003).
  - Absence of investment opportunities incentivized banks to hold funds in correspondent accounts abroad and reduced pressure for repatriation of export proceeds.
- Policy options and positions:
  - Fund staff recommended sale of central bank bills to reduce excess liquidity.
  - BCEAO authorities prefer reduction of excess reserves via governments selling treasury bills to repay BCEAO statutory advances and ruled out selling central bank bills due to BCEAO costs.
  - Authorities believe changes in central bank interest rates can signal borrowers to seek lower bank rates; Fund staff cautioned that lowering BCEAO rates could lead banks to reduce deposit rates and potentially engender capital outflows, requiring maintenance of a substantial differential with euro interest rates.
- Source for Box 2: SM/04/202.

### Stability and supervisory issues — banking sector
- Capitalization and asset quality:
  - At end-March 2004, ten banks with risk-weighted capital asset ratios (CAR) above prudential norm of 8 percent accounted for approximately 80 percent of total assets.
  - Two other banks had CAR slightly below the norm.
  - Slight decrease in aggregate CAR mainly due to increased provisioning and strong credit growth of certain banks that previously had extremely high CAR; assessed as not threatening system stability.
  - Gross nonperforming loans (NPLs) have decreased, and provisioning rates have been maintained above 70 percent throughout the period.

*Source: _cr05126 - 1.   Selected Economic Indicators*

### 10.      Since the 2001 FSAP, exposure of the banking sector to some large public

### _cr05126 - 10.      Since the 2001 FSAP, exposure of the banking sector to some large public

### Banking sector exposures and credit concentration
- Exposure of the banking sector to SONACOS decreased from 68 percent of capital in 2001 to 4 percent in 2003 as a result of a budget transfer to SONACOS to pay back its bank debt, and a ceiling on total debt of SONACOS set under the PRGF-supported program.
- Total credit to 5 largest borrowers increased from 108 to 144 percent of total capital of the banking system.
- Five largest borrowers in 2001 were SONACOS, SENELEC, SAR, ICS, and SODIFITEX; in 2003, ICS, SAR, CSS, SENELEC, and SOCOSIM.
- Credit concentration is identified as the largest source of vulnerability for banks operating in Senegal and calls for close monitoring to ensure that capitalization of banks does not drop.

### Financial margins, profitability, and cost structure
- Credit operations represent approximately 75 percent of net bank earnings.
- Average cost of resources is slightly above 2 percent.
- The average cost to the borrower (including the 17 percent tax on bank operations—TOB) is slightly above 11 percent.
- Senegal’s TOB (17 percent) is the highest in the WAEMU (5 percent in Côte d’Ivoire).
- Overhead costs absorb more than half of the financial margin.
- Loan loss provisions represent 20 percent of the financial margin in Senegal versus 11 percent for comparable African banks.
- Net returns on assets (ROA) are slightly below those observed in African banks of comparable size, while net returns on equity (ROE) are slightly above, suggesting Senegalese banks are relatively less well capitalized than African counterparts.

Key financial soundness indicators (selected figures from Table 3)
- CAR: Dec. 2001 = 13.5; Dec. 2003 = 11.5; Mar. 2004 = 12.7; WAEMU Dec. 2003 = 11.0
- Gross NPLs/total loans: Dec. 2001 = 17.8; Dec. 2003 = 13.3; Mar. 2004 = 14.7; WAEMU Dec. 2003 = 19.2
- Provisioning rate: Dec. 2001 = 70.2; Dec. 2003 = 75.3; Mar. 2004 = 70.4; WAEMU Dec. 2003 = 67.0
- Net NPLs to total loans: Dec. 2001 = 5.6; Dec. 2003 = 3.6; Mar. 2004 = 4.4; WAEMU Dec. 2003 = 7.3
- Net NPLs to capital: Dec. 2001 = 34.3; Dec. 2003 = 28.4; Mar. 2004 = 34.4; WAEMU Dec. 2003 = 44.5
- Loans concentration (loans to five largest borrowers to bank’s capital): Dec. 2001 = 107.7; Dec. 2003 = 144.2
- Liquid assets/deposits: Dec. 2003 = 81.0; Mar. 2004 = 82.0; WAEMU Dec. 2003 = 66.6
- Return on equity (ROE): Dec. 2001 = 18.6; Dec. 2003 = 22.1; Mar. 2004 = 22.1; WAEMU Dec. 2003 = 10.0

Decomposition of interest rate spreads (Table 4, selected figures)
- Average lending rate (Senegal 2002) = 11.3
- Average cost of resources = 2.2
- Financial margin = 9.2 (Africa), and breakdowns for bank-size groups: Small Banks = 10.7; Medium Banks = 5.0; Large Banks = 4.4; All Banks = 4.9
- Tax on financial operations (TOB) = 1.6 (Senegal)
- Overhead costs examples: Africa = 3.4; Small Banks = 5.0; Medium Banks = 6.1; Large Banks = 3.1; All Banks = 2.8; Senegal listed as 3.0
- Loan loss provisions: Senegal = 1.8; Small Banks = 1.2; Medium Banks = 0.7; Large Banks = 0.6; All Banks = 0.7
- Tax on profits: Senegal = 0.5; Small Banks = 0.9; Medium Banks = 0.2; Large Banks = 0.3; All Banks = 0.4
- Return on assets (ROA): Senegal = 1.9; Small Banks = 2.5; Medium Banks = 1.0; Large Banks = 0.7; All Banks = 0.8
- Return on equity (ROE): Senegal = 22.1; Africa small banks average = 18.3; medium = 5.6; large = 12.9; all banks = 11.7
- All banks in Senegal are classified as small (assets of less than US$1 billion).

### Stress testing results and scenarios (summary of Table 5 and narrative)
- Main finding: concentration of banks’ credit in a few large enterprises remains the main source of vulnerability.
- Provisioning shock:
  - An increase in provisioning rates to 75 percent (for those banks not already above 75 percent) would result in 5 banks having CAR below 8 percent; 4 of these banks are relatively small, and only one would have a CAR below 6 percent.
- Default scenarios (25 percent loss of outstanding loans to large borrowers):
  - A loss of 25 percent of the outstanding loans to one single large borrower would result in a drop of the CAR of 7 banks (79 percent of total system assets) below 8 percent.
  - In the event of a default by 4 large borrowers, 8 banks (80 percent of total system assets) would have capital adequacy ratios below 8 percent, and one bank would have negative capital.
- NPL increase scenarios:
  - The banking system would cope fairly well with a 25 percent increase in NPLs. At end-March 2004, three banks accounting for 24 percent of the banking system assets would end up with a capital adequacy ratio below 8 percent. Two of them had CARs below 8 percent even before the 25 percent increase, and none would see CAR fall under 4 percent as a result of the shock.
- Interest rate shock:
  - The banking system appears resilient to changes in short-term interest rates. For the system as a whole, most interest-bearing liabilities are three months or less; 65 percent of credits are short term (less than 2 years), and a further 30 percent is medium term (2 to 10 years).
  - None of the banks would see its CAR fall under 8 percent as a result of a 2 percent increase in short-term interest rates; banks with CAR already under 8 percent (accounting for about 20 percent of total assets of the system) would experience only a marginal deterioration of the ratio.
- Foreign exchange / CFA franc parity risk:
  - Risks to the banking system of an adjustment of the CFA franc parity are low. Bank holdings of foreign currencies are restricted to working balances at overseas affiliates and correspondent banks. Most institutions appear to maintain positive working balances with affiliates and correspondents abroad.

Selected stress test figures (December 2003 and March 2004 snapshots from Table 5)
- December 2003 actual situation CAR = 11.5; Four Largest = 9.2; Five Largest = 9.5; All Other Banks = 17.6; No. of Banks with CAR < 8% = 2; Market Share = 23.5
- Dec. 2003 provisioning rate increase to 75 percent CAR = 10.5; No. of Banks = 4; Market Share = 28.4
- Dec. 2003 25 percent increase in NPLs CAR = 10.1; No. of Banks = 5; Market Share = 53.8
- Dec. 2003 default 25 percent of loans to A+B+C+D CAR = 7.7; No. of Banks = 8; Market Share = 80.2
- March 2004 actual situation CAR = 12.7; Four Largest = 9.7; Five Largest = 10.3; All Other Banks = 18.5; No. of Banks = 2; Market Share = 20.3
- Mar. 2004 provisioning rate increase to 75 percent CAR = 11.1; No. of Banks = 5; Market Share = 35.8
- Mar. 2004 25 percent increase in NPLs CAR = 11.0; No. of Banks = 3; Market Share = 23.8

### Prudential norms, regulatory issues, and policy recommendations
- As of end-March 2004, 5 banks (accounting for 35 percent of sector assets) did not comply with prudential norms limiting exposure of a bank to a single borrower. Senegal’s limit is 75 percent of total capital versus the Basel-recommended 25 percent limit.
- Noncompliance largely reflects the structure of the economy; time is needed for practices to align with best practices.
- The prudential norms do not adequately differentiate real estate financing risks:
  - Current 50 percent preferential weight allowed to all types of bank loans collateralized by a mortgage (loans to home buyers, developers and investors) is not consistent with Basel Committee recommendations.
  - Two-year grace period for constituting provisions on such NPLs (provisions to be constituted over a four-year period) seems excessive given judicial delays.
- Recommendation: prevent a drop in capitalization of Senegalese banks; set a minimum CAR above 8 percent in line with Basel Committee recommendations and recognizing country-specific factors. Supporting factors for higher minimum CAR include:
  - (i) potential systemic risk due to market distortions induced by chronic excess liquidity;
  - (ii) persistent difficulties complying with limits on loans concentration;
  - (iii) lenient treatment reserved to mortgage loans;
  - (iv) dysfunction of the judicial system.
- Portfolio structure ratio (Box 3):
  - Banks must maintain a minimum ratio of 60 percent between loans having received an accord de classement and total loans to customers. Senegal’s average ratio is about 12 percent (minimum required ratio is 60 percent).
  - The WAEMU Council of Ministers in September 2002 eased conditions governing accords de classement and now requires banks, subject to financial penalties, to submit accord de classement requests for their 50 largest credit users.
  - Recommendation: drop the regulatory requirement for banks to maintain a minimum portfolio structure ratio; instead monitor the percentage of assets covered by an accord de classement together with relevant financial soundness indicators.
- Liquidity and transformation:
  - Senegalese banks are liquid and transformation of short-term resources into medium- and long-term loans is limited.
  - Only one bank does not comply with the liquidity ratio, and another with the transformation ratio due to high share of medium- and long-term mortgage loans in its portfolio.
- Mortgage and secured interests:
  - The Basel Accord allows a 50 percent risk weight only for “loans fully collateralized by a mortgage on residential property that is or will be occupied by the borrower or that is rented.”
  - The two-year grace period for provisions on mortgage NPLs and the broad application of the 50 percent weight are identified as inconsistent with Basel recommendations and risky given judicial delays.

### Microfinance sector: structure, risks, and supervisory needs
- Penetration rate of MFIs rose from 16 percent of all households in 2000 to 25 percent in 2003 (i.e., from 3.2 to 5 percent of the population).
- Outstanding credit from MFIs expanded 3.3 times faster than bank credit in the same period.
- Six largest networks represent 87 percent of customers and 90 percent of deposits and credit, with NPLs to total loans below 4 percent for these networks.
  - The three largest networks (about 70 percent of total loans) have an NPLs ratio of 3 percent; the next four largest networks (about 14 percent of the market) have an NPLs ratio of 4.3 percent.
- Approximately 10 percent of the market consists of numerous small, independent institutions which are structurally weaker: they rarely comply with reporting requirements, largely escape supervisory attention, and often have weak financial structures.
- Supervision capacity:
  - The surveillance unit under the Ministry of Finance lacks necessary human and financial resources to supervise all MFIs.
  - BCEAO involvement in supervision of large networks is planned as part of its 2004–08 strategy; this is appropriate given systemic risks posed by large and medium-scale MFIs.
  - Once a threshold for BCEAO involvement is decided, the MOF needs to assess human and physical resources for supervising remaining MFIs and develop priorities plus a simplified reporting approach for the smallest MFIs.
- Market developments:
  - Some MFI networks are contemplating establishing commercial banks; large MFIs are well positioned to compete with commercial banks in financing SMEs.

### Increasing outreach of the financial sector and legal framework constraints
- Positive elements:
  - Banking sector serves large enterprises and seeks to expand outreach to SMEs.
  - MFIs show maturity and dynamism, serving more households outside large urban centers.
  - Establishment of a regional securities regulator and regional exchange has allowed the regional capital market to take hold.
- Negative elements limiting outreach:
  - SMEs’ access to credit suffers from structural weaknesses in the credit environment and relatively high cost of financial intermediation.
  - Inefficiencies in the regional financial market have limited financing of large enterprises and contributed to unhealthy concentration of risks in banks.
  - Weak integration between banking sector, capital market, and MFIs impedes a continuum of financial services.
- Legal and institutional recommendations to improve access to credit:
  - Enforce legislation governing the accounting profession to improve confidence in financial data; failure to prepare financial statements is not effectively sanctioned.
  - Amend OHADA legislation to allow registration of secured interests without loss of possession for movables by individuals not involved in commercial activities; review procedures for surveying, parceling, registering and allocating real property.
  - Simplify enforcement procedures and improve judicial system to reduce delays in collection of claims and enforcement of secured interests; this would help reduce loan loss provisions and cost of credit.
  - Adopt legislation regulating the profession of receiver (syndic) and impose sanctions in cases of fraud; insolvency proceedings are lengthy and suspended claim collections harm creditors’ rights.

*Source: _cr05126 - 10.      Since the 2001 FSAP, exposure of the banking sector to some large public (IMF chapter content provided). *

### 23.      There have been no major changes in the judicial system since the 2001 FSAP.

### _cr05126 - 23.      There have been no major changes in the judicial system since the 2001 FSAP.

### Judicial system: current status and constraints
- No major changes in the judicial system since the 2001 FSAP.
- Persistent lack of personnel and material resources undermines justice in Senegal.
- Training of judges in commercial and financial matters:
  - Some training sessions organized since 2001, but neither the quality nor the number have been sufficient.
- Reported poor ethical behavior and partisan court-appointed expert reports create uncertainty in dispute outcomes because judges attach great importance to experts’ conclusions.
- Local banks view the judicial system as inefficient, nontransparent, and unreliable, contributing to additional costs for banks reflected in their margins.
- Recommended judicial reforms:
  - Strengthen training of magistrates in commercial and financial matters.
  - Reform the promotion system.
  - Regulate procedures of court-appointed experts.
  - Establish commercial/banking divisions in the courts.
- Budgetary note:
  - Share of the budget allocated to the judicial area fell from 2 percent in 2000 to 1.41 percent in 2003 and was projected to decrease further to 1 percent in 2004.
  - Timely implementation of the recruitment strategy for the Civil Service during the years 2003–05, including a more than doubling of the size of the staff of the Justice Department, should help to reverse this trend.

### Justice Sector Program
- A recently designed Justice Sector Program proposes a ten-year action plan to reform the judicial apparatus.
- The report provides an analysis and inventory of existing resources and proposes priority measures.
- Priority recommendation: give precedence to establishing efficient functioning of the justice system in the capital, where most commercial, banking, and financial cases are handled.

### Donor engagement and priorities
- Donors should focus on how the authorities’ agenda evolves regarding the judicial sector.
- Three priority areas for donor focus:
  - Increase the budget of the justice system to implement and successfully complete the Justice Sector Program.
  - Combat favoritism and corruption on the basis of jointly agreed indicators.
  - Ensure competent Senegalese management and coordination of the program.
- Once appropriate targets and objectives are set, donor participation would be desirable to assist in detailed design and delivery.

### Arbitration, mediation, and enforcement
- Arbitration Center established in the Dakar Chamber of Commerce, Industry, and Agriculture; arbitration is gradually becoming accepted.
- Enforcing arbitral awards still requires recourse to the justice system; judicial weaknesses hinder enforcement.

### Legal framework and microfinance concerns
- OHADA Uniform Act on cooperatives and mutual benefit companies (draft) criticized for length and complexity: 607 articles and 125 pages.
- Draft provisions on secured interests are vague; unclear applicability to banks and all microfinance institutions.
- Registration and enforcement of secured interests remain overly complex and not suited to microfinance, potentially affecting Senegal’s microcredit environment.

### Encouraging financing of SMEs
- Need for better understanding of SMEs’ financial structures; no consensus on whether limited recourse to bank credit is driven by cost of credit or other factors.
- Suggested actions to enrich public debate:
  - Conduct surveys on the cost of credit.
  - Analyze SMEs’ financial structures to measure relative weights of equity, self-financing, supplier’s credit, foreign remittances, and bank credit.
  - Analyze supplier credit chains functioning in some sectors.
- World Bank survey findings on reasons enterprises do not borrow:
  - Lack of collateral: 21 percent
  - Refusal to incur debt: 31 percent
  - No financing needs: 22 percent
  - Interest rate too high: 12 percent

### Reducing information asymmetries
- 80 percent of bank credit applications are reported to be denied because of insufficient guarantees (World Bank survey).
- Reliance on collateral reflects underdevelopment of professional credit risk management and absence of reliable financial information.
- Authorities’ roles to reduce asymmetries:
  - Participate in accounting standardization to meet needs for credit risk analysis and creditor protection.
  - Disseminate knowledge of accounting standards and broaden professional development of accounting personnel.
  - Upgrade BCEAO-managed financial databases and expedite establishment of a corporate balance sheet database (Centrale des Bilans) to supplement the credit register (Centrale des risques) and the delinquencies register (Centrale des incidents de paiements).

### Modernizing real estate financing and the Housing Bank (BHS)
- BHS in strong financial position due to prudent lending but about half its assets are invested in financial instruments outside the housing sector.
- Exposed to a growing mismatch between abundant short-term resources and long-term mortgage credits and noncompliance with related prudential norms.
- Competition from commercial banks in housing finance is growing and may reduce BHS’s traditional activity.
- Strategic options for BHS:
  - Expand activities to other banking products (consumer credit, automobile loans), requiring amendment of original status.
  - Expand housing activities geographically in the WAEMU and to residential rental investors.
  - Redeploy social housing credit operations halted due to outdated eligibility thresholds for housing subsidies (not updated since 1994) and ineffective land allocation and titling policies.
- Prudential suggestion: privileges associated to short-term CEL saving products (Compte Epargne Logement) would be better transferred to longer-term savings through the PEL (Plan d’Epargne Logement).

### Mortgage refinancing and near-term recommendations
- Financial sector involvement in real estate financing has reached a point where a mortgage refinancing mechanism would be useful.
- Commercial banks use short-term funds for real estate lending and express need for refinancing tools.
- Possible approaches:
  - Creation of a specialized mortgage refinancing company to issue simple, secure, and liquid bonds to refinance commercial banks via an oversized portfolio of eligible mortgages.
  - Issue of mortgage or cover bonds by commercial banks to raise long-term resources on the regional market.
  - Securitization of mortgages by encouraging banks to sell blocks of mortgages converted to marketable securities to institutional investors.
- Immediate recommendation: facilitate creation of a regional private mortgage refinancing company while developing legal and regulatory framework for mortgage bonds and securitization.
- Regional authorities (CREMPF, BRVM, and the BCEAO) and national authorities could study approaches and organize a regional conference to identify preferences, obstacles, and develop a work plan.

### Supporting financial market development
- Financial market deepening contingent on forceful implementation of identified corrective measures.
- Key recommendations:
  - Move from a bond issuance system based on guarantees from specialized agencies to a merit-based system (rating of issuers), requiring entry of international or national rating firms. Current system of third-party guarantees is excessively strict, creates distortions, and raises cost of capital.
  - Eliminate tax distortions preventing placements of private securities caused by lack of tax harmonization among WAEMU members and the tax exemption on securities issued by the government of Senegal.
  - Encourage retirement funds to invest in the financial market, provided they have the tools to manage a portfolio of financial assets.
- Strengthening public debt management would support market deepening:
  - MOF has begun issuing treasury bills in the WAEMU market.
  - Regular treasury bill and bond issues would ensure presence of a top-rated issuer and increase WAEMU fixed income market activity.
  - Without increasing domestic debt, MOF could issue debt to repay BCEAO statutory advances, absorbing excess liquidity in the system.
  - MOF could also repay by anticipation other types of domestic debt held by banks.

### Official initiatives in the microfinance sector: risks and cautions
- Microfinance sector dynamic and showing maturity; main challenge is avoiding erosion of credit culture among clients.
- Distortions/threats include intended government credit lines, special funds for microfinance and SMEs; concessionality unlikely to solve structural problems and may obstruct sound development if not properly managed.
- Caution regarding projects promoted by authorities:
  - Postal financial services:
    - Postal services deepen financial access; deposit balances managed by the Post Office are about 2 percent of bank deposits, with 510,000 clients.
    - Post Office plans a subsidiary to take over financial services, action plan includes creating a bank, privatizing 75 percent of its capital, offering retail lending and refinancing of MFIs.
    - Short-run investor interest limited: investors can be found for at most 45 percent of the capital; no private strategic investor identified to date.
    - Recommendation: initial activities of the new institution should be limited (savings mobilization and placement of funds in interbank and capital markets) until a strategic private investor assumes control and internal controls and credit analysis capacities are developed.
  - Regional Bank of Solidarity (BRS):
    - BRS-SA created as a financial holding to establish banking subsidiaries in WAEMU countries to provide uncollateralized micro credits.
    - General assembly establishing BRS-SA took place in May 2004; BRS-SA has a capital of CFAF 24 billion fully subscribed and paid-up.
    - Capital structure and shareholders:
      - Regional Action Fund (FAC) carries shares to be sold to the public (45.7 percent of capital).
      - Strategic shareholders: 40 percent of capital (WAEMU States, BOAD, WAEMU Commission with FAC financing, and FAC directly).
      - Banks and MFIs: 3.5 percent.
      - Post office and savings institutions: 4.5 percent.
      - Other investors: 6.3 percent.
    - Business plan envisages rapid lending expansion: each banking subsidiary to extend about 200 loans per month in the first year of full activity.
    - Assessment: no proven need for a BRS-SA subsidiary in Senegal given large MFI outreach and willingness of commercial banks to provide refinancing to large MFIs; unclear fit with strategy for reform of Post Office financial services.

### Appendix — Status of main observations and recommendations of the 2001 FSAP (selected items)
- Banking Sector
  - Monitor growth of nonperforming loans (NPLs): Ratio of NPLs has decreased; provisioning remains high.
  - High concentration of loans: Unchanged.
  - Divestiture of BCEAO equity participation in BHS and CNCA: Not implemented.
  - Introduce law on bank insolvency: Not implemented.
  - Simplify single license procedures for operating in another WAEMU state: Not implemented.
  - Establish efficient, quick, and secure payment system conforming to international standards: Significant progress; RTGS system became operational on June 25, 2004 and electronic clearing is expected to become operational by year’s end.
- Microfinance Sector
  - Proliferation of small MFIs with weak financial position: Unchanged.
  - Slowdown in granting of new licenses: Not implemented.
  - Strengthen microfinance unit within Ministry of Finance: Limited progress; progress made in involving BCEAO for supervision of large MFIs.
  - Weak financial position of some MFIs: Improvement for large MFIs; smaller ones remain vulnerable.
- Legal and Judicial Framework
  - Improve efficiency of judicial system: A Justice Sector Program proposes a ten-year action plan.
  - Conduct study on adopting regional legislation on contracts and evidence: Study conducted and an OHADA uniform act is being drafted.
  - Create commercial courts or special court divisions with specialized magistrates: Not implemented.
  - Promote arbitration and mediation in the banking sector: Arbitration center set up; arbitration gradually accepted but enforcement of awards is difficult due to judicial weaknesses.
  - Intensify training of judges: Some training sessions organized, but neither quality nor number sufficient.
  - Improve judicial system infrastructures and resources: Not implemented. Share of budget allocated to judicial area fell from 2 percent in 2000 to 1.41 percent in 2003. Size of Justice Department scheduled to be doubled as part of recruitment strategy for the Civil Service during 2003–05.

*Source: _cr05126 - 23.      There have been no major changes in the judicial system since the 2001 FSAP.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05126.pdf_