## Executive Summary—Key Recommendations (IMF FSAP, Haiti)

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---

### Major findings: Role of the financial system and data
- Financial system constraints on growth:
  - significant weaknesses in legal and institutional frameworks;
  - fragile security situation;
  - limited competition between banks;
  - poor governance;
  - high reserve requirement ratios;
  - absence of a functioning credit registry;
  - crowding out by BRH bond holdings.
- Data and statistical operations:
  - Financial sector data are generally adequate, but unavailability of some statistics has weakened analysis.
  - Key concerns: underlying reporting and auditing infrastructure; data processing in the BRH; lack of clarity regarding which accounting standards are applied.
  - Recommendation: greater selectivity in banking sector data collection and upgraded IT infrastructure to free resources for a more risk-oriented supervisory approach and produce currently unavailable statistics.

### I. Risk Factors — Macroeconomic and business environment
- Macroeconomic context and growth drivers:
  - Since 2004, prudent fiscal and monetary policies helped reduce inflation from almost 40 to 8 percent.
  - Real per capita GDP grew by ¾ point in FY05/06.
  - Sustained growth requires: promote private sector investment, increase productivity, overcome structural bottlenecks (e.g., weak infrastructure), strengthen public financial management.
  - Security situation remains fragile; many basic government functions and public services need restoration.
- Banking governance and concentration:
  - Recent bank insolvencies revealed senior management fraud, deficient connected lending standards, and political interference risks in bank resolution.
  - Banking sector concentration: close to 80 percent of bank assets held by the three largest banks.
  - 10 percent of individual borrowers receive approximately 80 percent of total loans.
- Credit allocation and levels:
  - Distribution of credit in 2006: Commerce 27.9 percent; Services 21.9 percent; Manufacturing 21.8 percent; Construction/Real Estate 16.2 percent; Consumer credit 10.6 percent; Electricity, Gas & Water 0.9 percent; Transport 0.8 percent; Agriculture 0.0 percent.
  - Credit as share of GDP: 11 percent.
  - Credit growth averaged less than 10 percent over the past three years despite high bank liquidity and economic recovery.
- Impediments to credit growth:
  - Decline in ratio of bank credit to GDP from 13 to 10 percent between 2002 and 2006.
  - Crowding out by BRH bonds: Net credit / assets fell from 34.5 percent in 2002 to 28.2 percent in 2006; BRH bonds / assets rose from 9.0 percent in 2002 to 10.6 percent in 2006.
  - Weak competition among banks contributed to low deposit rates and wide intermediation margins.

### II. Financial sector vulnerabilities and soundness
- Reported indicators and stress tests:
  - Reported banking soundness indicators are currently favorable.
  - Stress tests suggest resilience to a range of single-risk factor shocks, but vulnerability to deterioration in credit quality.
- Key vulnerabilities:
  - High financial dollarization.
  - Concentrated lending portfolios.
  - In some cases relatively underdeveloped credit risk management practices and weak governance.
  - Failure of Socabank exposed these weaknesses; largest public bank’s management of Socabank’s largely nonperforming loan portfolio requires careful monitoring.

### III. Financial sector policy framework — banks and nonbanks
- Banking law and supervision:
  - New draft banking law (submitted June/July 2007) addresses major weaknesses in supervision; enactment is critically important.
  - Would strengthen licensing, prompt corrective action, and bank resolution.
  - Implementation requires upgrading prudential regulations and enhancing BRH independence.
  - Further improvements needed in bank risk management, internal controls, and enforcement of credit concentration limits.
- Nonbank financial institutions:
  - Credit unions: further expert review of draft law; review should cover prudential regulations prepared by BRH.
  - MFIs not organized as cooperatives: establish specific regulatory framework including basic transparency requirements and incentives for well performing MFIs to broaden services.
  - Insurance companies: adopt a simple shell law; supervisory responsibilities could initially be located at the BRH.
  - Pension plans: conduct actuarial evaluations of all defined-benefit schemes and introduce basic governance and transparency requirements.

### Monetary policy implementation and BRH financial position
- Constraints to effective monetary policy:
  - Dollarization, underdeveloped money markets, and uncompetitive BRH bond auctions.
- Recommended reforms:
  - Set BRH bond auction volumes directly in line with money supply targets.
  - Allow interest rate to be market-determined.
  - Open up auction participation to nonbank institutions.
  - Introduce a framework for forecasting autonomous factors that drive systemic liquidity.
- BRH capitalization and fiscal interactions:
  - BRH losses during 2000–06 summed to 3.1 percent of 2006 GDP, causing capital and reserves to fall to 1.2 percent of GDP at end-2006.
  - Projections under the PRGF-supported program: BRH’s capital position would turn negative by the end of FY2008.
  - Recapitalization necessary to allow effective monetary policy and preserve BRH financial independence.
  - Recapitalization element recommended: replace BRH’s credit claims on the central government with marketable debt bearing a market-related interest rate, allowing gradual retirement of BRH bonds.
  - Short-term: government should increase transfers to BRH to cover BRH bond costs.
  - Long-term: develop a comprehensive action plan including development of a treasury securities market.
- BRH accounting and audit issues:
  - BRH external auditor is the same firm that audits virtually all Haitian commercial banks and is under BRH supervisory powers—potential conflict of interest.
  - Move toward full application of IFRS requires addressing BRH balance sheet situation.
  - Technical assistance provided to define precise modalities of a recapitalization plan and design of new treasury securities.

### IV. Structural and development issues — priorities for reform
- Top priorities:
  - Insolvency and creditor rights:
    - Bankruptcy laws are never used; priorities: centralized public registry of security interests; comprehensive insolvency legislation; strengthen judiciary.
  - Accounting and auditing:
    - Introduce greater competition in audit sector; train local accountants; adopt a simple, enforceable accounting system.
  - Payment systems:
    - Modernize settlement, enhance oversight, reduce BRH risk exposures; implement RTGS and comprehensive payment system reform.
  - AML/CFT:
    - Adopt strategic approach and clarify roles and objectives of each AML actor (¶42-44).
- Short-term (2007–08) priorities:
  - Prepare BRH recapitalization and increase government transfers (¶9).
  - Enhance competition in BRH bond auctions (¶7).
  - Complete transition of BRH accounting toward IFRS and commission BRH audit by new audit firm (¶10).
  - Adopt and implement new banking law, and upgrade regulations (¶20-21).
  - Conduct special inspections of three largest banks; prepare BNC restructuring strategy (¶15, Box 3).
- Medium-term (2008–10) priorities:
  - Strengthen BRH independence via recapitalization and legal reform (¶8-10,22).
  - Develop treasury securities market (¶9).
  - Implement BNC restructuring strategy (¶15, Box 3).
- Other top priorities:
  - Centralized public registry of personal property collateral (¶32).
  - Reduce cost of establishing collateral (¶32).
  - Increase competition in audit sector (¶38).
  - Improve forecasting framework for systemic liquidity (¶6-7).
  - Upgrade IT infrastructure and increase risk focus of banking supervision (¶21-22).
  - Improve regulation and supervision of credit unions (¶27-28).
  - Support orderly expansion of microfinance sector (¶29).
  - Establish transparency requirements and regulation for other nonbank financial institutions (¶29-31).
  - Conduct actuarial assessments of all defined benefit pension schemes (¶19,31).
  - Set up working group to assess deposit insurance options (¶26).
  - Take stock of bank accounting practices against IFRS objective (¶37).
  - Modernize insolvency legislation (¶34).
  - Prepare comprehensive reform of National Payment System (¶39-41).
- Additional recommended actions:
  - Require full publication of banks’ annual accounts (¶37).
  - Develop transition strategy toward IFRS for banks (¶37).
  - Adopt a simple accounting system for private enterprises consistent with IFRS objective (¶36).
  - Clarify AML regime roles and adopt Law countering financing of terrorism (¶42-44).

---

### External position, dollarization, and monetary implementation

### External position and exchange regime
- Managed float exchange-rate regime; system free of current account restrictions.
- Current account relatively balanced, aided by large remittances and foreign aid:
  - Remittances: about 20 percent of GDP in 2006.
  - Foreign aid inflows: about 10 percent of GDP in 2006.
- Considerable real exchange rate appreciation has resulted from substantial capital inflows in form of private and public transfers.

### Dollarization and external currency exposures
- Banking system highly dollarized:
  - Share of foreign exchange deposits to total deposits exceeds 50 percent.
  - Dollar-denominated loans account for two-thirds of total loans.
- Gourde depreciation episode: between early 2002 and 2003, gourde depreciated by 70 percent against the U.S. dollar.
- Inflows of foreign currency (remittances, foreign aid, exports) total about 45 percent of GDP overall.

### Monetary policy implementation weaknesses and steps taken
- Monetary framework is eclectic (monetary and inflation targeting); BRH issues BRH bonds to achieve targets.
- Absence of well-functioning interbank market limits transmission.
- Initial steps taken by authorities:
  - Setting BRH bond volumes in line with base money targets.
  - Opening auction participation to nonbank institutions.
  - Letting interest rate be market-determined via multiple rate auctions.
- FSAP recommendation: improve BRH liquidity forecasting and communication with MOF on government financing needs.

### BRH balance sheet and recapitalization needs
- BRH losses 2000–06: 3.1 percent of 2006 GDP.
- BRH capital and reserves at end-2006: 1.2 percent of GDP.
- Projection: BRH capital would turn negative by end-FY2008 under PRGF-supported program.
- Recapitalization recommendation: replace BRH credit claims on central government with marketable debt bearing market-related interest to allow gradual BRH bond retirement.
- Conflict of interest issue: BRH external auditor audits virtually all banks and is under BRH supervisory powers.
- Move toward full IFRS application contingent on addressing BRH balance sheet.

### Prudential measures and FX regulations
- Prudential limits:
  - Banks cannot extend foreign currency loans beyond 50 percent of their foreign currency deposits.
  - Net open FX position cannot exceed 8 percent of equity and generally below this limit.
- Recommendation: reconsider requirement that 30 percent of reserve requirements on foreign currency deposits be held in gourdes.
- Concern: no specific regulation curbing foreign currency lending to unhedged borrowers; high dollarization and large private transfers mitigate some concerns.

---

### Bank soundness, credit quality, and Socabank/BNC developments

### Key system-level statistics (selected)
- As of June 2007:
  - Seven out of nine banks, accounting for 94 percent of bank assets, reported CARs well above the 12 percent regulatory minimum.
  - System average CAR: 19.1 percent.
  - Ratio of liquid assets to total assets: 45 percent (system average).
  - BRH bonds represent 11 percent of total bank assets, but 28 percent of overall bank revenues.
  - NPLs: about 12 percent of total bank assets by end-June 2007.
  - Credit/GDP: 10.2 percent (2006, per Table 3).

### BNC acquisition of Socabank (selected indicators, Dec 2006 → Jun 2007)
- Asset volume (US$ millions): 212.1 → 333.8
- BRH Bonds to assets: 39.4 → 21.9
- Loans (net) to assets: 13.8 → 34.6
- NPLs to gross loans: 4.9 → 50.6
- Provisions to gross NPLs: 139.0 → 44.7
- Regulatory capital to risk-weighted assets: 57.8 → 26.3
- Capital (net worth) to assets: 12.6 → 9.3
- Liquid assets to deposits: 74.2 → 55.9
- ROA 1/: 5.4 → 2.1
  - 1/ For the period Oct-Dec 2006 and Apr-Jun 2007, respectively.
- Under absorption terms, BNC benefits from BRH guarantee on a portion of NPLs and waiver on meeting certain prudential requirements.
- Implication: full adherence to provisioning would reduce CAR to 16.9 percent.
- Stress tests indicate all three credit risk shocks would push BNC’s CAR (adjusted for under-provisioning) below the regulatory minimum.
- Authorities intend independent assessment of BNC recapitalization and restructuring needs by end-March 2008.

### Nonbank financial institutions, insurance, and pensions
- Microcredit:
  - 222 regulated credit unions and about 25 non-regulated non-cooperative MFIs in 2005.
  - In 2006, microcredit portfolios grew by 59 percent in U.S. dollars (39 percent in gourdes) and amounted to about 15 percent of total bank credit by end-2006.
  - Five out of nine domestic banks entered the microcredit sector since 1997.
  - Supervisor estimates at least 20 credit unions would not comply with forthcoming prudential regulations.
- Insurance and pensions:
  - Lack of information prevents assessment of importance to financial stability.
  - Audits and actuarial assessments of all defined benefit funds are urgent priorities.
  - ONA faces inadequate governance, weak oversight, and inappropriate asset management.

---

### Supervisory framework, laws, and recommended reforms

### Supervisory scope and institutional setting
- BRH is sole financial supervisor; supervisory mandate extends to commercial banks, business banks (none in operation), savings banks, and credit unions.
- Supervisory carried out by DBS (Direction de la Supervision) and Direction de l’Inspection Générale des Caisses Populaires for credit unions.
- Preconditions for effective supervision lacking: BRH undercapitalized; political interference; weak public infrastructure; creditor rights hard to enforce; only one audit firm credible; no deposit insurance.

### Main supervisory findings and gaps (CP1–CP25 highlights)
- Key deficiencies:
  - Limited BRH independence; insufficient DBS budget; staffing tight and needs upgrading in risk focus.
  - Licensing criteria and procedures not well defined.
  - No requirement of supervisory approval for transfer of significant ownership.
  - Lack of express authority to take steps when capital ratio falls below required minimum.
  - Exposure to related parties — aggregate limit (200 percent of capital) is excessively high.
  - Need better IT support, better focus, less unnecessary detail, statutory definition of reporting duties.
  - Lack of express power to rescind appointment of an external auditor.
  - Weak powers during intervention; need consolidated supervision improvements.
- Recommended regulatory/prudential enhancements:
  - Allow BRH to require higher CARs for individual banks depending on risk profile.
  - Strengthen regulations on connected lending and enforce credit concentration limits; reduce 200 percent related-party aggregate limit.
  - Require banks to have comprehensive risk management processes with Board and senior management oversight, commensurate with size and complexity.
  - Strengthen operational autonomy of supervisory function and increase DBS staffing and budget.
  - Upgrade supervisory staff skills; streamline and better target supervisory procedures.
  - Upgrade IT infrastructure for automated data collection and key risk-focused statistics (deposit concentration, loan collateralization, asset recovery rates, maturity mismatches).

### Consolidated supervision, crisis management, and deposit insurance
- Consolidated supervision:
  - Current regulations define groups narrowly; draft law gives BRH powers to determine consolidation perimeter.
- Crisis management:
  - Current legal powers very limited; draft law provides improved powers including independent assessments, provisional administrator appointments, conditional recapitalization powers, and liquidation management.
- Deposit insurance:
  - Evaluation of options is a priority; draft law deferred formal deposit insurance.
  - Recommendation: establish working group to identify resource and technical assistance needs; consider coverage, funding, treatment of credit cooperatives, governance.

### Regulatory approach for nonbank sectors
- Credit unions:
  - Supervision assigned to BRH; effective bank-like supervision of many credit unions is infeasible.
  - New legislation should limit supervisory responsibilities to systemic risk level; require stronger governance, transparency, self-regulation.
- Microfinance:
  - Need specific regulatory framework and minimum financial reporting standards; prudential supervision when adequate information available.
  - Recommendations: minimum reporting standards, government support to produce reliable information, MFI-specific prudential regime.
- Insurance:
  - Sector lacks minimum legal/regulatory framework; interim shell law recommended with BRH supervisory role initial.
- Pension funds:
  - Immediate steps: appoint governing body for ONA, increase transparency, administrative reforms, independent actuarial evaluations, publish audited financial statements.
  - For voluntary corporate schemes: allow only defined-contribution plans, provide tax exemptions for contributions/investment income, conservative investment rules, governance/auditing standards.

### Insolvency, accounting, payment systems, AML/CFT (structural issues)
- Insolvency and creditor rights:
  - Centralized registry of securities, broaden movable assets eligible as collateral, speed up mortgage authentication and reduce fees (currently up to 7.5 percent), modernize insolvency laws to enable rehabilitation.
- Accounting and auditing:
  - Overall low quality of financial reporting; 1980 national accounting law not implemented.
  - Suggest adopting adapted Francophone model (e.g., OHADA) consistent with IFRS objective.
  - Banks claim IFRS compliance, but significant departures found; medium-term strategy for IFRS transition recommended.
  - Require BRH-approved standard form for annual statements and management certification; require publication (including on websites).
  - Improve external audit competition; require banks to invite foreign firms to tender at least every four years; substantive accreditation process for bank auditors.
- Payment systems:
  - No explicit payment systems law; check clearinghouse is systemically important but does not meet core principles.
  - RTGS to be put into service shortly; design shortcomings identified (no queuing rules; case-by-case credit).
  - Recommendation: remove large-value items from check clearinghouse and process within RTGS.
- AML/CFT:
  - 2001 AML Law lacks terrorism financing framework.
  - Implementation weak: no completed money laundering prosecution; few suspicious transaction reports; weak supervision of AML compliance.
  - Recommendations: adopt strategic approach; strengthen institutions (notably financial intelligence unit); adopt Law countering financing of terrorism including asset freezing; extensive tailored training.
  - Note: AML/CFT ROSC to be finalized and circulated shortly after Caribbean FATF plenary (May 2008).

---

### Stress testing: methodology, scenarios, and key quantitative outcomes

### Data and single risk-factor tests
- Data limitations:
  - Balance sheet data as of September 2006; lack of maturity structures, collateralization, and recovery rates; limited time series.
- Single risk-factor credit tests:
  - Test 1: system-wide reclassification of performing loans (calibrated on 2003–2004 increase in NPLs).
  - Test 2: reclassification of sub-standard/doubtful loans to highest provisioning category.
  - Test 3: concentration risk assuming failure of each bank’s largest borrower.
- Migration from low to high risk weights:
  - Assumes BRH bonds substituted by highest risk assets; corresponding increase in loan portfolio is 28 percent.
- FX, interest rate, and operating cost calibrations:
  - FX shocks replicate 29.1 percent depreciation and 19.1 percent appreciation (historical).
  - Interest rate shock example: lending rates fell by more than 26 percent (from 16.5 to 12 percent) in March 2001–March 2002 episode.
  - BRH bond rates assumed to decrease from 14.5 to 5.1 percent (matching July 2004–July 2005 average BRH bond rate decrease of 9.3 percentage points).
  - Operating cost shock calibrated using occupancy cost elasticity to energy prices.

### Scenarios
- Scenario A (normalization with credit expansion):
  - Decrease in BRH auction rate for 91-day bonds by 9.4 percentage points.
  - Decrease in average lending rate by 3.1 percentage points.
  - Decrease in BRH bonds stock by 50 percent, replaced by credit increase of same magnitude.
  - Asset quality shock: NPLs to gross loans increase by 21 percent from current levels.
- Scenario B (drop in official transfers and depreciation):
  - Gourde depreciation shock based on single risk-factor shock.
  - Increase in NPLs via pooled panel regression: one percentage point increase in depreciation rate → increase in NPLs by 1.3 percent.
  - Funding cost shock calibrated with 2002–2003 episode (term deposit max rate rose from 4.5 percent in Oct 2002 to 6.75 percent in Oct 2003).
  - Includes funding liquidity risks from shift from gourde to dollar deposits.

### Stress-test results — key findings and quantitative outcomes
- System resilience:
  - System appears able to withstand most single risk-factor shocks.
  - Primary vulnerabilities: portfolio concentration and credit risk; indirect FX exposure and funding liquidity risks; possible resurgence in credit demand.
- Operational costs and interest-rate shifts:
  - Surge in operational costs reduces aggregate profitability; some smaller banks exposed; aggregate profitability could fall by 43 percent.
  - Interest rate decline would reduce profitability substantially: average ROE falling by about 60 percent; not necessarily raise systemic risk by itself given large banks' buffers.
- Asset quality deterioration and concentration:
  - Asset quality deterioration would severely affect most banks, causing substantial drops in aggregate capital ratios and undercapitalization for a group of smaller banks.
  - Concentration exposures are main concern; stress tests likely underestimate vulnerability as they assume no haircuts on collateral.
  - Worst-case complete collateral loss could produce capital loss >50 percent of system capital; in that scenario three banks would not meet minimum CAR.
- Selected quantitative outcomes (Banking System as of end-FY-2006; adjusted for BNC/Socabank):
  - Exchange rate risk:
    - Regulatory Capital to Risk-Weighted Assets — Weighted Average: 13.7 (In percent); Median: 15.2 (In percent); Number of Banks Pushed Below Statutory CAR: 0.
    - Adjusted for BNC/Socabank: Excluding Additional Provisioning for BNC (In percent): 17.0; Including Additional Provisioning for BNC (In percent): 15.7.
    - Change (in percentage points): -0.6; -0.2; ...; -0.6; -0.6.
  - Interest rate risk:
    - Weighted Average: 11.5; Median: 13.3; Number below CAR: 0.
    - Adjusted: Excluding Additional Provisioning for BNC: 15.0; Including Additional Provisioning for BNC: 13.6.
    - Change (in percentage points): -2.8; -2.1; ...; -2.6; -2.6.
  - Credit risk (increase in NPLs):
    - Weighted Average: 9.4; Median: 10.1; Number below CAR: 2.
    - Adjusted: Excluding Additional Provisioning for BNC: 12.7; Including Additional Provisioning for BNC: 10.0.
    - Change (in percentage points): -4.9; -5.3; ...; -4.9; -6.3.
  - Concentration related credit risk:
    - Weighted Average: 10.3; Median: 11.7; Number below CAR: 1.
    - Adjusted: Excluding Additional Provisioning for BNC: 14.9; Including Additional Provisioning for BNC: 13.6.
    - Change (in percentage points): -4.1; -3.8; ...; -2.7; -2.7.
  - Migration of assets:
    - Weighted Average: 11.6; Median: 13.1; Number below CAR: 0.
    - Adjusted: Excluding Additional Provisioning for BNC: 14.3; Including Additional Provisioning for BNC: 13.2.
    - Change (in percentage points): -2.8; -2.3; ...; -3.3; -3.1.
  - Scenario A (direct impact):
    - Weighted Average: 7.8; Median: 10.1; Number below CAR: 2.
    - Adjusted Excluding Additional Provisioning for BNC: 11.0; Including Additional Provisioning for BNC: 8.7.
    - Change (in percentage points): -6.5; -5.3; ...; -6.6; -7.6.
  - Scenario B (direct impact):
    - Weighted Average: 6.1; Median: 7.0; Number below CAR: 2.
    - Adjusted Excluding Additional Provisioning for BNC: 10.9; Including Additional Provisioning for BNC: 8.3.
    - Change (in percentage points): -8.3; -8.4; ...; -6.7; -8.0.
  - Impact taking into account buffer provided by current year profits:
    - Scenario A: Weighted Average: 11.2; Median: 12.3; Number below CAR: 1; Adjusted Including Additional Provisioning for BNC: 11.5; Change (in percentage points): -3.1; -3.1; ...; -3.4; -4.7.
    - Scenario B: Weighted Average: 11.1; Median: 8.5; Number below CAR: 2; Adjusted Including Additional Provisioning for BNC: 11.6; Change (in percentage points): -3.3; -6.9; ...; -3.0; -4.7.

---

### Appendix II — Selected statistical highlights (December 2006; June 2007)

### Financial system structure (December 2006)
- Commercial banks total: 9.
- Percent of system assets by size (Large / Medium / Small): 61.4 22.6 13.0.
- Percent of system assets by ownership (Public / Domestic / Foreign): 18.8 70.7 7.5.
- System total assets share: 100.0.

### Summary balance sheet (December 2005–2006; US$ millions)
- Cash and central bank bonds: 779.28 / 881.84 — Composition percent: 45.2 / 13.2 (format in source mixed).
- Loans, net: 567.25 / 582.72 — Composition percent: 29.9 / 2.7.
- Other assets: 467.24 / 486.42 — Composition percent: 24.9 / 4.1.
- Total: 1,813.6 / 1,950.9 — Composition percent: 100.0 / Growth: 7.6.
- Deposits: 1,528.9 / 1,617.8 — Composition percent: 82.9 / Growth: 5.8.
- Equity: 96.3 / 114.0 — Composition percent: 5.8 / Growth: 18.3.
- Nonperforming loans: 82.9 / 67.7 — Change: -18.3.
- Provisions: 43.1 / 60.1 — Provisions to NPLs: 39.5.

### Aggregate financial soundness indicators (2002–Apr–Jun 2007; selected)
- Asset volume (US$ millions, end period): 936.6 1347.8 1487.9 1750.7 1929.1 2005.3.
- Credit/GDP (percent): 12.9 13.5 12.2 12.3 10.2 ...
- Credit growth (net) from year before (percent): 15.1 33.7 5.1 5.6 13.7 7.0.
- Regulatory capital to risk-weighted assets (system average): ... ... ... 16.5 14.3 19.1 (Apr–Jun 2007).
- Loans (net) to assets: 34.5 31.9 30.5 31.5 28.2 28.7.
- NPLs to gross loans: 6.5 5.5 7.4 12.4 11.1 11.6.
- Provisions to gross loans: 5.5 5.4 6.2 6.1 9.9 7.6.
- Provisions to gross NPLs: 84.4 96.8 82.9 49.1 89.3 65.6.
- ROA (annualized): 1.0 1.9 0.8 0.7 1.8 1.8.
- Liquid assets to total assets: 47.4 45.0 46.5 43.6 45.3 46.1.
- Foreign currency loans to total loans (net) (2005–2007): 59.3 66.0 65.7.
- Foreign currency deposits to total deposits (2003–2007): 50.9 47.3 52.6 53.6 50.8.

### Individual banks (June 2007; selected system aggregates)
- System total asset volume (US$ millions): 2,005.3.
- System CAR (Regulatory capital to risk-weighted assets): 19.1.
- System NPLs to gross loans: 11.6.
- System liquid assets to total assets: 46.1.
- Example banks (asset volumes, US$ millions): Sogebank 636.7; Unibank 587.0; BNC 333.8; Citibank 105.7.

*Italic: IMF staff report content as provided in the source document.*

### Executive Summary—Key Recommendations..........................................................................5

### Executive Summary—Key Recommendations

### Major findings: Role of the financial system and data
- Haiti’s financial system plays a limited role in supporting economic growth due to:
  - significant weaknesses in legal and institutional frameworks;
  - fragile security situation;
  - limited competition between banks;
  - poor governance;
  - high reserve requirement ratios;
  - absence of a functioning credit registry;
  - crowding out by BRH bond holdings.
- Data and statistical operations:
  - Financial sector data are generally adequate, but unavailability of some statistics has weakened analysis.
  - Key concerns: underlying reporting and auditing infrastructure; data processing in the BRH; lack of clarity regarding which accounting standards are applied.
  - Recommendation: greater selectivity in banking sector data collection and upgraded IT infrastructure to free resources for a more risk-oriented supervisory approach and produce currently unavailable statistics.

### I. Risk Factors — Macroeconomic and business environment
- Political and macroeconomic context:
  - Since 2004, prudent fiscal and monetary policies helped reduce inflation from almost 40 to 8 percent.
  - Real per capita GDP grew by ¾ point in FY05/06.
  - Sustained growth requires promotion of private sector investment, increased productivity, overcoming structural bottlenecks (e.g., weak infrastructure), and strengthening public financial management.
  - Security situation remains fragile; many basic government functions and public services need restoration.
- Banking governance and concentration:
  - Recent bank insolvencies revealed involvement of senior management in fraud, deficient connected lending standards, and political interference risks in bank resolution.
  - Banking sector highly concentrated: close to 80 percent of bank assets held by the three largest banks (Appendix Tables 1 and 4).
  - 10 percent of individual borrowers receive approximately 80 percent of total loans.
- Credit allocation and levels:
  - Distribution of credit in 2006: Commerce 27.9 percent; Services 21.9 percent; Manufacturing 21.8 percent; Construction/Real Estate 16.2 percent; Consumer credit 10.6 percent; Electricity, Gas & Water 0.9 percent; Transport 0.8 percent; Agriculture 0.0 percent (Figure 1).
  - Credit as share of GDP: 11 percent.
  - Credit growth averaged less than 10 percent over the past three years despite high bank liquidity and economic recovery.
- Impediments to credit growth (Box 2):
  - Decline in ratio of bank credit to GDP from 13 to 10 percent between 2002 and 2006.
  - Crowding out by BRH bonds: Net credit / assets fell from 34.5 percent in 2002 to 28.2 percent in 2006; BRH bonds / assets rose from 9.0 percent in 2002 to 10.6 percent in 2006 (Table 1).
  - Weak competition among banks contributed to low deposit rates and wide intermediation margins.

### II. Financial sector vulnerabilities and soundness
- Reported indicators and stress tests:
  - Reported banking soundness indicators are currently favorable.
  - Stress tests suggest the banking system is resilient to a range of single-risk factor shocks, but would be vulnerable to a deterioration in credit quality.
- Key vulnerabilities:
  - High financial dollarization.
  - Concentrated lending portfolios.
  - In some cases relatively underdeveloped credit risk management practices and weak governance.
  - Failure of Socabank highlighted these weaknesses; the largest public bank’s management of Socabank’s largely nonperforming loan portfolio requires careful monitoring.

### III. Financial sector policy framework — banks and nonbanks
- Banking law and supervision:
  - New draft banking law submitted to Parliament in June 2007 addresses major weaknesses in banking supervision.
  - Enactment is critically important; would strengthen framework for bank licensing, prompt corrective action, and bank resolution.
  - Implementation will require upgrading prudential regulations and enhancing the BRH’s independence.
  - Further improvements needed in bank risk management, internal controls, and enforcement of credit concentration limits.
- Nonbank financial institutions:
  - Basic regulatory and supervisory frameworks need introduction:
    - Credit unions: further expert review of specific draft law may be needed before submission to parliament; review should cover prudential regulations recently prepared by the BRH.
    - MFIs not organized as cooperatives: establish specific regulatory framework including basic transparency requirements and incentives for well performing MFIs to broaden services.
    - Insurance companies: adopt a simple shell law providing a basic legal framework; supervisory responsibilities could initially be located at the BRH.
    - Pension plans: conduct actuarial evaluations of all defined-benefit schemes and introduce basic governance and transparency requirements.

### Monetary policy implementation and BRH financial position
- Constraints and recommendations:
  - Monetary policy hampered by dollarization, underdeveloped money markets, and uncompetitive BRH bond auctions.
  - Recommended reforms:
    - Set BRH bond auction volumes more directly in line with money supply targets.
    - Allow interest rate to be determined by the market.
    - Open up auction participation to nonbank institutions.
    - Introduce a framework for forecasting autonomous factors that drive systemic liquidity.
- BRH capitalization and fiscal interactions:
  - Past fiscal dominance and stabilization efforts eroded BRH’s capital, weakening its capacity to exercise monetary policy and respond to macroeconomic shocks.
  - Short-term: government should increase transfers to the BRH to cover BRH bond costs.
  - Long-term: develop a comprehensive action plan to safeguard BRH’s financial independence; key elements include developing a treasury securities market.

### IV. Structural and development issues — priorities for reform
- Top priorities identified:
  - Insolvency and creditor rights:
    - Bankruptcy laws are never used in practice, hampering access to credit and increasing cost.
    - Key priorities: implement a centralized public registry of security interests; enact comprehensive insolvency legislation; strengthen the judicial system.
  - Accounting and auditing:
    - Regulatory framework incomplete and loosely enforced.
    - Critical needs: introduce greater competition in the audit sector; train local accountants; adopt a simple, easily enforceable accounting system.
  - Payment systems:
    - Underdeveloped; need comprehensive reform strategy to modernize settlement, enhance oversight, and reduce BRH risk exposures.
  - AML/CFT:
    - Adopt strategic approach and clarify roles and objectives of each actor of the AML regime (¶42-44).
- Additional reforms and sequencing:
  - Short-term (2007–08) priorities include:
    - BRH’s financial sustainability: prepare for recapitalization and increase government transfers (¶9).
    - Enhance competition in BRH bond auction system (¶7).
    - Complete transition of BRH accounting toward IFRS and commission BRH audit by new audit firm (¶10).
    - Adopt and implement new banking law, and upgrade regulations (¶20-21).
    - Conduct special inspections of three largest banks, and prepare BNC restructuring strategy (¶15, Box 3).
  - Medium-term (2008–10) priorities include:
    - Strengthen BRH’s independence through recapitalization and legal reform (¶8-10,22).
    - Develop treasury securities market (¶9).
    - Implement BNC restructuring strategy (¶15, Box 3).
  - Top priorities highlighted separately:
    - Broaden scope and set up centralized public registry of personal property collateral (¶32).
    - Reduce cost of establishing collateral (¶32).
    - Increase competition in audit sector (¶38).
    - Improve framework for systemic liquidity forecasting (¶6-7).
    - Upgrade IT infrastructure and increase risk focus of banking supervision (¶21-22).
    - Improve regulation and supervision of credit unions (¶27-28).
    - Support orderly expansion of microfinance sector (¶29).
    - Establish basic transparency requirements and regulation for other nonbank financial institutions (¶29-31).
    - Conduct actuarial assessments of all defined benefit pension schemes (¶19,31).
    - Set up working group to assess options for deposit insurance scheme (¶26).
    - Take stock of bank accounting practices against medium-term objective of IFRS compliance (¶37).
    - Facilitate establishment of a private credit bureau (Box 2).
    - Modernize insolvency legislation (¶34).
    - Prepare comprehensive reform of National Payment System (¶39-41).
- Additional recommended actions:
  - Require full publication of banks’ annual accounts (¶37).
  - Develop strategy for the transition of bank accounting toward IFRS (¶37).
  - Adopt simple and easily enforceable accounting system for private enterprises, consistent with long-term objective of IFRS compliance (¶36).
  - Adopt strategic approach and clarify roles and objectives of each actor of the AML regime (¶42-44).

*Source: Executive Summary—Key Recommendations, IMF Financial Sector Assessment Program (FSAP) material.*

### 4.      On the external front, considerable real exchange rate appreciation has resulted

### 4. On the external front, considerable real exchange rate appreciation has resulted

### External position and exchange regime
- Haiti’s exchange rate regime is a managed float with no predetermined path; the exchange system has been free of restrictions for current account transactions.
- The current account has remained relatively balanced, including due to very large remittances and foreign aid inflows—which reached about 20 percent and 10 percent of GDP, respectively, in 2006.
- Considerable real exchange rate appreciation has resulted from substantial capital inflows in the form of private and public transfers.

### Dollarization and external currency exposures
- The banking system is highly dollarized: the share of foreign exchange deposits to total deposits in the banking system exceeds 50 percent.
- Dollar-denominated loans currently account for two-thirds of total loans in the system.
- Episodes of gourde depreciation have been severe: between early 2002 and 2003, the gourde depreciated by 70 percent against the U.S. dollar.
- Inflows of foreign currency in the form of remittances, foreign aid, and export revenues total about 45 percent of GDP overall.

### Monetary policy implementation weaknesses
- The current monetary policy framework is eclectic, combining monetary and inflation targeting; the BRH seeks to achieve its monetary targets by issuing BRH bonds.
- The absence of a well-functioning interbank money market means conventional monetary transmission mechanisms do not operate effectively.
- Until recently, the quantity of issued BRH bonds had not been set in line with money supply targets, partly owing to weaknesses in liquidity forecasting.
- Initial steps taken by authorities:
  - Setting volumes of auctioned BRH bonds in line with base money supply targets.
  - Opening auction participation to nonbank financial institutions.
  - Letting the interest rate be market-determined through multiple rate auctions.
- FSAP recommendation: improve the framework for BRH’s liquidity forecasting, including effective communication between the BRH and the MOF with respect to the financing needs of the government.

### BRH balance sheet and recapitalization needs
- BRH losses during 2000–06 summed to 3.1 percent of 2006 GDP, causing the BRH’s capital and reserves to fall to 1.2 percent of GDP at end-2006.
- Based on projections under the PRGF-supported program, the BRH’s capital position would turn negative by the end of FY2008.
- A recapitalization of the BRH is necessary to allow for more effective monetary policy and preserve the BRH’s long-term financial independence.
- Recapitalization plan element recommended:
  - Replace the BRH’s credit claims on the central government with marketable debt bearing a market-related interest rate, allowing the gradual retirement of BRH bonds.
- Timetable for recapitalization should take account of the impact on both the financial and public sectors.
- BRH accounting and audit issues:
  - The BRH’s external auditor is the same firm that audits virtually all Haitian commercial banks and is placed under BRH supervisory powers; this arrangement may create conflicts of interest.
  - Move toward full application of IFRS is an objective that will require progress in addressing the BRH’s balance sheet situation.
- Technical assistance note: technical assistance was recently provided by the Fund to define precise modalities of a recapitalization plan, including the design of new treasury securities and related market development.

### Prudential measures and FX regulations
- Prudential regulations in place:
  - Banks cannot extend foreign currency loans beyond 50 percent of their foreign currency deposits.
  - Net open FX position cannot exceed 8 percent of equity and are generally below this limit.
- Recommendation: reconsider the requirement that 30 percent of reserve requirements on foreign currency deposits be held in gourdes, since it unnecessarily complicates FX risk management.
- Concern: no specific regulations curb foreign currency lending to unhedged borrowers; lack of information and oversight on such lending practices remains a matter of concern.
- Mitigating factor: the high level of dollarization and exceptionally large levels of private transfer inflows (remittances) tend to mitigate such concerns.

### Bank soundness — key statistics and findings
- Most banks report high solvency positions, improving profitability, and strong liquidity.
- Seven out of nine banks, accounting for 94 percent of bank assets, reported CARs well above the 12 percent regulatory minimum, with a system average of 19.1 percent as of June 2007.
- Aggregate returns on assets and on equity have strengthened over the past few years.
- Ratio of liquid assets to total assets averaged 45 percent for the system as a whole.
- BRH bonds represent 11 percent of total bank assets, but 28 percent of overall bank revenues.

### Credit quality and concentration risks
- NPLs represented about 12 percent of total bank assets by end-June 2007.
- The increase in NPLs in recent years largely reflects the effect of Socabank, whose NPLs rose from single digits in 2004 to over 50 percent in 2005.
- Provisioning levels:
  - High in most large banks, but low for the BNC (following the recent acquisition of Socabank) and some smaller banks.
- High concentration of bank portfolios; established limits on concentration exposures to individual (or groups of) borrowers are frequently breached, especially by smaller banks.
- System vulnerability to a decline in interest rates given the large share of low risk assets (including BRH bonds) in bank portfolios.
- Need for significant upgrades in credit risk management capacity to support private sector investment without deterioration in credit quality.

### BNC and Socabank acquisition (Box 3)
- In March 2007 BNC acquired assets and liabilities of Socabank; Socabank had experienced a prolonged period of financial distress and a significant run on deposits.
- BRH actions: took majority control of Socabank in May 2006 and injected about US$50 million in capital prior to acquisition.
- Selected effect of merger on BNC (Dec 2006 → Jun 2007):
  - Asset volume (in US$ millions): 212.1 → 333.8
  - BRH Bonds to assets: 39.4 → 21.9
  - Loans (net) to assets: 13.8 → 34.6
  - NPLs to gross loans: 4.9 → 50.6
  - Provisions to gross NPLs: 139.0 → 44.7
  - Regulatory capital to risk-weighted assets: 57.8 → 26.3
  - Capital (net worth) to assets: 12.6 → 9.3
  - Liquid assets to deposits: 74.2 → 55.9
  - ROA 1/: 5.4 → 2.1
  - Source: Based on statistics published by the Banque de la Republique d'Haiti.
  - 1/ For the period Oct-Dec 2006 and Apr-Jun 2007, respectively.
- Under terms of the absorption, BNC will benefit from:
  - A BRH guarantee on a portion of the NPLs received from Socabank, such that the resulting reversion of provisions amounts to 50 percent of Socabank’s negative equity as of end-September 2006.
  - A waiver on meeting prudential requirements pertaining to credit and foreign exchange risks.
- Implication: adherence to prudential requirements on loan loss provisioning would entail a further reduction in the CAR to 16.9 percent.
- Stress tests indicate that all three credit risk shocks would push BNC’s CAR (adjusted for under-provisioning) below the regulatory minimum.
- Authorities intend to conclude an independent assessment of BNC’s recapitalization and restructuring needs by end-March 2008.

### Stress testing and resilience
- Several stress tests assessed resilience to individual macro-shocks and broader macro scenarios (credit, interest rate, exchange rate, concentration risk, shift from BRH bonds to loans).
- Stress test calibration referenced observed parameters during past episodes of distress.
- Results:
  - The system appears able to withstand most single risk factor shocks.
  - Significant vulnerabilities arise from credit risks associated with portfolio concentration and indirect FX exposure.
  - More comprehensive scenarios identified vulnerabilities stemming from:
    - (i) financial dollarization and funding liquidity risks, and
    - (ii) a possible resurgence in credit demand associated with a “normalization” of financial conditions.
- Policy implication: banks need to ramp up credit risk management capacities and capital buffers.

### Nonbank financial institutions, insurance, and pensions
- Microcredit:
  - There were 222 regulated credit unions and about 25 non-regulated non-cooperative microfinance institutions in 2005.
  - In 2006, microcredit portfolios grew by 59 percent in U.S. dollars (39 percent in gourdes) and amounted to about 15 percent of total bank credit by the end of the year.
  - Five out of nine domestic banks have entered the microcredit sector since 1997.
  - Many credit unions are poorly managed; supervisor estimates at least 20 institutions would not be able to comply with forthcoming prudential regulations.
- Insurance and pensions:
  - Lack of information on the insurance and pension sectors prevents proper assessment of their importance to financial stability.
  - Audits and actuarial assessments of all defined benefit funds are urgent priorities.
  - Haiti’s social security program (ONA) faces inadequate governance, weak oversight, and inappropriate asset management.

### Financial sector policy framework — supervisory and regulatory recommendations
- Banking legislation:
  - New banking legislation submitted to parliament in June 2007 reflects extensive IMF technical assistance; once implemented it would strengthen the supervisory framework.
- Prudential regulation enhancements recommended:
  - Adopt regulations requiring higher CARs for individual banks depending on risk profile and specific capital charges for particular risks appropriate to Haiti’s context.
  - Strengthen regulations on connected lending and enforce credit concentration limits.
  - Reduce the excessively high aggregate limit on exposures to related parties (currently 200 percent of capital).
  - Require banks to have comprehensive risk management processes (Board and senior management oversight) to:
    - (i) identify, evaluate, monitor, and control or mitigate all material risks (including concentration risks), and
    - (ii) assess overall capital adequacy in relation to risk profile.
  - Require processes commensurate with banks’ size and complexity.
- Supervision capacity building:
  - Strengthen the operational autonomy of the supervisory function in the context of greater central bank independence.
  - Increase DBS staffing and budget in a sustained manner.
  - Upgrade supervisory staff skills through training focused on banking and risk management.
  - Streamline and better target supervisory procedures, focusing on key risks.
  - Upgrade IT infrastructure for automated data collection and production of key risk-focused statistics (currently unavailable data include deposit concentration, loan collateralization, asset recovery rates, or maturity mismatches).

*Italic: IMF staff report content as provided in the source document.*

### 23.      Rules for consolidated supervision should be improved. The current regulations on

### 23. Rules for consolidated supervision should be improved.

### Consolidated supervision
- Current regulations define banking groups too narrowly and mainly focus on consolidated financial statements.
- The new draft banking law gives the BRH ample powers to determine the consolidation perimeter and to apply prudential standards to a group as a whole.
- Cross-border issues currently of little relevance:
  - No Haitian bank has cross-border branches or subsidiaries (except for remittance services).
  - Only one small bank has significant foreign ownership.
  - Local branches of foreign banks are supervised by the home supervisors of their parent banks.
  - Recommendation: sign memorandums of understanding with home supervisory authorities for banks with foreign ownership to expedite information exchange when needed.

### Crisis management
- Current legal powers of the supervisory authority during a bank’s intervention are very limited.
- The new draft banking law provides substantial improvements, including:
  - definition of supervisory actions according to different degrees of capital deficiency;
  - mandatory shareholders’ meeting if a capital shortfall cannot be corrected within a defined time frame;
  - BRH power to order an independent assessment of a bank’s financial situation;
  - BRH power to appoint a provisional administrator to replace the bank’s board of directors and management;
  - conditional BRH power to recapitalize a bank or change its management without closing it or making the intervention public;
  - conditional BRH power, under stricter circumstances, to take over and close a bank, with full powers to restructure or sell the bank or some or all of its assets;
  - BRH power to order and manage the liquidation of the bank’s residual balance sheet.

### Deposit insurance
- Evaluating options with respect to deposit insurance should be a priority.
- The new draft banking legislation left formal deposit insurance to a later stage.
- Deposit insurance could complement insolvency procedures to resolve weak banks quickly and orderly, minimizing systemic risk.
- Issues to consider: coverage, funding, treatment of credit cooperatives, and governance arrangements.
- Recommendation: establish a working group quickly to identify resource and technical assistance needs; outside expertise may be required.

### Other regulatory/supervisory issues — Credit unions
- Supervision of credit unions is currently assigned to the BRH; restructuring of the sector and its legal environment is being considered.
- Effective supervision of a large number of credit unions at bank-like intensity is impossible.
- Accounting and auditing standards are very low; substantial weaknesses in asset quality and solvency may be latent.
- Recommended new legislation should:
  - limit supervisory responsibilities to a level commensurate with systemic risk;
  - require strengthened governance, transparency and self-regulation;
  - uphold members’ responsibility to monitor and, where necessary, change their management;
  - avoid undue responsibility for the supervisor to directly assume control of troubled credit unions.
- Specialized technical assistance may be needed to improve prudential regulations and supervisory practices.

### Other regulatory/supervisory issues — Microfinance institutions (MFIs)
- A specific regulatory framework for the microfinance sector is critical to support orderly expansion.
- Prudential supervision should be envisaged once sufficient financial information on MFIs is available.
- Currently, non-cooperative MFIs are not subject to supervision and not obliged to register officially and produce financial statements.
  - Footnote: some reportedly collect savings from the public, and the BRH has informally allowed at least one non-cooperative MFI to take deposits.
- MFIs generally lack technical capacity to produce reliable and timely financial information, limiting external financing and growth.
- Recommendations:
  - introduce minimum standards for MFI financial reporting;
  - government support to assist MFIs in producing reliable financial information;
  - establish an MFI-specific prudential regime covering capital adequacy requirements, unsecured lending, loan-loss provision, and loan documentation and collateral.
- Strong and appropriate supervision will improve stability and encourage greater access by the poor to deposit, credit, and other MFI services.

### Other regulatory/supervisory issues — Insurance companies
- Insurance sector lacks a minimum legal and regulatory framework; BRH could have supervisory responsibility at least initially.
- Ministry of Commerce has supervisory responsibility and Ministry of Finance is involved in licensing, but sector is largely self-regulated in practice.
- Interim step: a simple shell law to provide an initial legal basis and allow minimum supervision; expand through secondary regulation as needed.
- BRH resources could help build supervisory capacity and exploit synergies with banking groups involved in insurance activities.
- A separate supervisor could be established later.

### Other regulatory/supervisory issues — Pension funds
- Immediate steps to improve governance and regulation of public pension plans; basic legal framework needed for voluntary corporate pension plans.
- For the ONA:
  - appoint a governing body (as provided for in the law);
  - impose increased transparency in fund management;
  - administrative reforms;
  - independent actuarial evaluations;
  - publication of audited financial statements.
- Actuarial evaluations of defined-benefit plans of all public enterprises should be conducted, including where privatizations are envisaged.
- Voluntary corporate pension schemes currently cannot be registered as separate entities from sponsor companies and are not adequately protected (e.g., in case of bankruptcy of the sponsor).
- Specific legislation should:
  - provide tax exemption for contribution and investment income;
  - allow only defined-contribution plans without guarantees;
  - establish conservative investment rules;
  - determine minimum governance, auditing, and transparency standards.
- Supervisory interventions should be limited to cases of fraud or abuse, and possibly conducted by the banking supervision unit.

### Structural and development issues — Insolvency and creditor rights
- Legal framework for establishment and enforcement of securities available to creditors needs improvement; set up a centralized registry for publication of securities.
- Limitations on categories of movable assets that firms can offer as security constrain access to credit; recommendation to broaden scope of movable assets eligible for security interests.
- Enforcement and realization of securities:
  - Creditors with security interests in movable assets must pursue judicial proceedings to enforce them, increasing costs.
  - Mortgages must be authenticated and published through a process that can take up to six months.
  - Associated fees can be up to 7.5 percent of the mortgage value and should be reduced.
  - For movable assets, publication is ineffective due to absence of an administering institution.
  - Recommendation: establish a centralized registry to confirm asset freedom from other security interests.
- Unsecured creditor protection is insufficient:
  - Legal proceedings to recover unpaid debts often take more than a year.
  - During this period, only partial seizure of the debtor’s assets is allowed; assets in debtor’s possession cannot be seized even if property is in jeopardy.
  - Unpredictability and inconsistency of the legal system make debt recovery uncertain.
- Corporate rehabilitation is almost impossible under Haitian insolvency laws, except for financial institutions:
  - Laws are never used in practice due to lack of knowledge, judicial inefficiency, and focus on punishing fraud rather than optimal creditor outcomes.
  - Upon cessation of payments, assets are seized and seals affixed; legislation does not distinguish viable from non-viable businesses.
  - Insolvency laws should be modernized to better balance liquidation and restructuring objectives.
  - For financial institutions, a specific Décret governs insolvency; it could be improved but has allowed BRH intervention in two important Haitian banks in recent years.
- Deficiencies in judicial, quasi-judicial and administrative systems raise creditor risk and cost of credit; reform and resources for these systems are essential.

### Structural and development issues — Accounting and auditing
- Overall quality of financial reporting is low; adopt an accounting system that is simple and easily enforceable.
- The 1980 law establishing a national accounting system has not been implemented; very few Haitian companies issue financial statements and qualified accountants are limited.
- Substantial training for local accountants is required; an adapted accounting system consistent with long-term IFRS compliance is necessary.
  - Suggestion: adopt, with amendments, a model used in other Francophone countries (e.g., the OHADA system used in 16 countries).
- A 2005 tax decree required many companies to have audited financial statements starting in FY07; compliance will be difficult for many companies.
- Banks’ accounting practices need improvement toward full IFRS compliance:
  - Banks’ financial statements claim IFRS compliance, but evidence shows insufficient capacity to apply IFRS.
  - Review of banks’ financial statements and audit reports for FY2005-06 evidenced significant departures from IFRS in presentation, valuation of loan loss provisioning and securities, and disclosure of related-party transactions.
  - Recommendation: BRH develop a medium-term strategy for transition to IFRS.
  - During transition, require a standard BRH-approved form for annual financial statements and management certification of compliance and absence of false information.
  - Modernize publication of financial statements: rather than only hard copy at head office, have BRH or banks post statements on their websites.
- External auditing:
  - Current audit practices compare favorably to peers, but capacity improvements are needed; few local firms can audit to international standards.
  - One local firm is virtually the only supplier of audit services for large entities, including almost all banks; evidence that auditors largely prepare financial statements, undermining auditor independence.
  - Improvements in external audit requirements are provided in the new draft banking law.
  - The three largest banks (including BNC) are scheduled to be examined with assistance of independent foreign experts in 2007–08.
  - Recommendations:
    - BRH could require banks to invite foreign firms to tender for audits at least every four years;
    - multi-year (e.g., four-year) audit engagements could be granted to attract foreign firms;
    - BRH should introduce a substantive accreditation process for bank auditors.

### Structural and development issues — Payment systems
- No explicit law governing payment systems; legal framework for specific settlement issues has important shortfalls.
- Payment mix: obligations discharged mainly in cash (gourdes and U.S. dollars); checks and card-based transfers exist.
- Systemically important payment system: check clearinghouse; other large-value payments settled manually end-of-day via BRH account transfers.
- Comprehensive reform of the National Payment System is essential to achieve:
  - a sound and reliable legal framework for settlement;
  - modern payment and securities settlement systems;
  - safe foreign exchange transaction mechanisms;
  - a stronger foundation for payment system oversight functions.
- A new Real-Time Gross-Settlement (RTGS) system to be put into service shortly:
  - Aims to reduce risk, lessen cash use, and speed up settlement.
  - Design shortcomings: no explicit rules for queuing of transactions; granting of credit determined case-by-case.
  - Stated pricing policies would not necessarily cover operating and infrastructure investment costs.
  - Reduction in central bank risk and enhanced stability may justify partial recovery, at least short term.
- Check clearinghouse shortcomings:
  - Does not fully observe most core principles for systemically important payment systems.
  - Operational rules not expected to change with RTGS introduction.
  - Net positions will be entered into RTGS system manually.
  - If a bank cannot cover its debit balance at clearing, BRH will advance a credit equal to the required amount with no collateral; the bank will have 48 hours to repay before fines; interest will be charged and determined case-by-case.
  - These arrangements impose significant risk on the BRH.
  - Recommendation: BRH should proactively remove all large-value items from the check clearinghouse and process them within the RTGS system.

### Structural and development issues — AML/CFT
- In 2001, Haiti enacted an AML Law covering fundamental elements of anti-money laundering, but has not adopted a legal framework to counter financing of terrorism.
- AML law covers money laundering offense, seizure and confiscation, prevention and detection requirements, and basis for international cooperation (limited to mutual legal assistance and the Financial Intelligence Unit).
- Significant weaknesses relative to international standard: scope of predicate offenses, coverage of designated non-financial businesses and professions, transparency of legal entities and non-profit organizations, restrictions to lifting banking secrecy.
- Implementation is insufficient, ineffective and weakly coordinated, not commensurate with money laundering and terrorism financing risks.
  - Key institutions are in place but have not used the tools of the 2001 AML Law sufficiently.
  - No completed money laundering prosecution to date.
  - Number of suspicious transaction reports, filed only by the banking sector, remains very small.
  - Compliance by financial sector with AML obligations is not properly supervised.
- Recommendations:
  - adopt a more strategic approach and clarify roles and objectives of AML actors;
  - focus first on implementing existing AML regime;
  - strengthen capacity of institutions and refocus them on core missions (notably the financial intelligence unit);
  - deepen cooperation and coordination among institutions;
  - adopt a Law on countering the financing of terrorism defining a terrorism financing offense and setting up a terrorist asset freezing regime;
  - launch substantial training tailored to the specific mandates of each AML institution.
- Note: The AML/CFT ROSC for Haiti will be finalized and circulated to the Board for information shortly after being adopted at the Caribbean Financial Action Task Force plenary meeting, in May 2008.

*IMF country report text (excerpt).*

### Introduction

### Introduction

### Assessment basis and methodology
- Assessment based on the Essential Criteria contained in the Core Principles Methodology of October 2006.
- The DBS conducted its first BCP self-assessment ahead of the mission and provided detailed questionnaire responses covering, for each essential criterion under each BCP, (i) existing legal and regulatory provisions that implement the criterion, and (ii) evidence of practices and procedures that effectively implement or seek to implement such legal or regulatory provisions.
- The team reviewed the legal and regulatory framework (Law on Banking, Law on the Banque de la République d’Haïti, Law on Prevention of Money Laundering and Terrorism Financing) and prudential regulations issued by the BRH.
- Further evidence obtained from: on-site examination handbook, other supervisory guidelines, sample on-site and off-site reports, discussions with senior DBS staff, commercial banks, the Bankers Association of Haiti, and a leading bank audit firm.
- A new draft banking law was extensively discussed and commented on as part of the assessment, but all ratings are based on current legislation and practices.
- Assessment team: conducted in May and September 2007 by Keith Bell (formerly with the Office of the Superintendent of Financial Institutions, Canada) and Noel Sacasa (IMF, former head of Nicaragua’s Superintendency of Banks and Other Financial Institutions).

### Supervisory scope and institutional setting
- The BRH is the sole financial supervisor in Haiti; supervisory mandate extends to:
  - commercial banks,
  - business banks (banques d’affaires, with deposit taking restricted to medium- and long-term deposits; none is in operation as of this date),
  - savings banks,
  - credit unions (caisses populaires).
- Supervisory function carried out by:
  - DBS (Direction de la Supervision) for commercial, business, and savings banks,
  - Direction de l’Inspection Générale des Caisses Populaires for credit unions.

### Preconditions for effective banking supervision
- Soundness and sustainability of macroeconomic policies:
  - Inflation is currently single digit; growth remains slow.
  - Economic stability is subject to political uncertainty; fiscal and external vulnerabilities are significant.
  - The BRH is seriously and increasingly undercapitalized; its operations have been until recently subject to political interference.
- Public infrastructure:
  - Institutional development very weak; corruption widespread in public sector including the judiciary.
  - Creditor rights difficult to enforce.
  - Only one audit firm appears credible enough to audit banks; unclear which accounting standards are applied.
  - Insurance sector little developed and non-transparent; no stock exchange or active securities market.
- Market discipline:
  - Limited competition among banks and other financing sources.
  - Two existing foreign bank branches play only a small role and exert little competitive pressure.
- Mechanisms providing systemic protection:
  - No formal deposit insurance or guarantee scheme.
  - Insufficient powers to resolve weak banks quickly and in an orderly way.
  - New draft banking law substantially improves bank insolvency procedures; deposit insurance deferred to a later stage.

### Main findings — Objectives, independence, powers, transparency, and cooperation (CP1)
- Current legal and institutional framework does not support strong, transparent supervision; a significantly improved banking law was submitted to Parliament in July.
- Broad but unspecific supervisory powers, combined with political interference and a corruptible judicial system, have encouraged forbearance and weakened transparency.
- New draft law provides:
  - more precise rules for supervisory intervention,
  - strong framework for prompt corrective action and bank insolvency procedures,
  - improved specific provisions for legal protection of the BRH and its agents.
- Draft law leaves most minimum prudential standards to BRH regulation — continued efforts needed to ensure adequate regulatory framework.
- Operational autonomy of supervisory function can be improved through greater central bank independence; BRH and DBS should have operational independence, transparent processes, sound governance, adequate resources, and accountability.
- DBS budget and staffing:
  - DBS operating significantly below authorized staffing level.
  - Supervisory staff insufficient in quantity and skills; immediate priority to fill vacant positions.

### Licensing and ownership structure (CPs 2–5)
- Current licensing criteria and procedures not well defined.
- No provision for supervisory approval of significant transfers of bank ownership.
- Draft law improves framework for bank licensing and fit-and-proper testing of initial and new shareholders but leaves determination of fit-and-proper criteria to BRH regulation.
- Provisions regulating bank acquisitions and investments in current law being eliminated; must be replaced by BRH regulations when new law takes effect.

### Prudential regulation and requirements (CPs 6–18)
- Capital adequacy:
  - Capital adequacy requirements are largely Basel I compliant.
  - Current minimum CAR of 12 percent seems adequate for Haiti’s circumstances.
  - Draft law allows BRH to require higher CARs from individual banks depending on risk profile and to impose specific capital charges.
- Connected lending and credit concentration:
  - Existing aggregate limit on exposures to related parties is 200 percent of capital — assessed as excessively high.
  - Regulatory limits on individual large exposures are adequate, but enforcement and responsibility of senior management not clearly defined.
  - Violations of limits appear frequent, especially among smaller banks.
  - Recommendation: new banking law should expressly give BRH authority to exercise discretionary judgment when determining a bank’s related parties and enforcing related lending limits.
- Risk management:
  - Except for credit risk, no specific regulations on minimum standards for risk management beyond traditional internal control principles.
  - Current regulations on asset classification and provisioning are adequate.
  - No evidence that on-site examinations verify adequate credit risk management systems or Board/senior management active involvement; same or worse for other risks.
  - Recommendation: new banking law should expressly determine Boards’ basic responsibilities for adequate risk management.
  - BRH regulations should require banks to:
    - have a comprehensive risk management process (including Board and senior management oversight);
    - assess overall capital adequacy in relation to risk profile, commensurate with size and complexity; some minimum standards should be set.
- Anti–money laundering / abuse of financial services:
  - Preliminary assessment suggests need to strengthen BRH’s role.
  - Recommendation: new banking law should clarify BRH’s authority to issue regulations in this area; a more in-depth assessment to be finalized by a specific expert team later in 2007.

### Methods of ongoing banking supervision (CPs 19–21)
- Supervisory staff skills need upgrading with strengthened risk-focused training.
  - Current staff mostly auditing/accounting background with little hands-on banking or risk management experience.
  - Staff tend to focus on detailed compliance verification rather than key risks.
- On-site and off-site procedures:
  - Largely adequate but could be streamlined and better targeted.
  - Supervisory staff appears overloaded due in part to excessively detailed reporting.
  - On-site reports could be briefer and more focused on key risks, especially in planning phase.
  - Off-site supervision would benefit from production of key statistics currently not available (e.g., deposit concentration, loan collateralization, asset recovery rates, maturity mismatches).
- IT and automation:
  - Shortage of specialized software.
  - Off-site control partially automated and inefficient: data transmission in paper or diskette format, manual checking, and transposition into Excel.
  - Immediate priority: acquire and implement specialized software and complementary hardware.
  - Medium-term objective: automated data collection from banks.

### Accounting and disclosure (CP22)
- Accounting and external auditing practices and standards applied to most banks appear relatively strong compared to peer countries.
- One firm audits all but one of the banks (including the three largest) and reports audits according to IFRS and ISA; accredited and subject to staff quality control on IFRS by one of the big four international auditing firms.
- Significant departures from IFRS exist in banks’ financial statements; banks lack capacity to apply IFRS independently.
- External auditors become directly involved in preparing accounting reports, conflicting with auditor independence.
- New draft banking law addresses improvements in external audit requirements.
- Desirable: greater availability of top-level foreign auditing firms to increase audit options.

### Corrective and remedial powers of supervisors (CP23)
- Present regime lacks flexibility and breadth:
  - Circumstances under which BRH may issue orders largely unspecified; types of permitted orders extremely restricted.
  - No prompt corrective action triggered by breach of quantifiable thresholds (e.g., capital ratios).
  - No express capacity to bar individuals from banking or effect their replacement.
- Legal powers during intervention are very limited:
  - Intervention must be made public.
  - Decisions to liquidate or reorganize require court approval, which can take a long time.
  - During intervention, BRH lacks power to: (i) act in place of shareholders’ meeting; (ii) reduce shareholders’ capital value; (iii) carry out purchase-and-assumption (P&A) transactions; (iv) sell all or part of bank’s shares; (v) negotiate a merger.
- Draft law improvements include BRH powers for:
  - defining supervisory actions by degrees of capital deficiency;
  - mandatory shareholders’ meeting if capital shortfall not corrected in defined time frame;
  - ordering independent assessment of a bank’s financial situation;
  - appointing a provisional administrator to replace board and management;
  - conditional power to recapitalize a bank or change management without closing it or making intervention public;
  - under stricter circumstances, power to take over and close a bank with full powers to restructure or sell assets;
  - power to order and manage liquidation of the bank’s residual balance sheet.

### Consolidated and cross-border banking supervision (CPs 24–25)
- Consolidated supervision:
  - Current regulations define banking groups too narrowly and mainly focus on consolidated financial statements.
  - Draft law gives BRH ample powers to determine consolidation perimeter and apply prudential standards to the group as a whole.
- Cross-border issues:
  - Currently of little relevance: no Haitian bank has cross-border branches or subsidiaries (except for money remittance services); only one small bank has significant foreign ownership.
  - Local branches of foreign banks supervised by home supervisors of parent banks.
  - Recommendation: sign memorandums of understanding with home supervisory authorities for banks with foreign parentage to expedite exchange of information.

### Summary compliance highlights (from Table 1)
- Notable specific entries:
  - 1.2: Limited BRH independence; insufficient DBS budget; staffing tight and needs upgrading in risk focus.
  - 3: Licensing criteria and procedures not well defined.
  - 4: No requirement of supervisory approval for transfer of significant ownership.
  - 6: Lack of express authority to take steps when capital ratio falls below required minimum.
  - 11: Exposure to related parties — too large aggregate limit and major deficiencies.
  - 19–21: Need better IT support, better focus, less unnecessary detail, and statutory definition of reporting duties.
  - 22: Lack of express power to rescind appointment of an external auditor.
  - 23: Lacks flexibility and breadth; weak powers during intervention.
  - 24: Major deficiencies with respect to several essential criteria.

### Recommended action plan (high-priority items)
- Preconditions:
  - Assess options for an adequate deposit insurance or guarantee scheme in the short term, to be implemented in 2008-2010.
  - Strengthen legal and judicial framework for enforcing creditor rights (including well-functioning property registries).
  - Upgrade accounting and auditing standards for business firms; improve availability of qualified accountants and auditors.
- Legal and regulatory framework:
  - New draft banking law will introduce major improvements if passed as drafted; additional implementing regulations will be required.
- Independence, accountability, and transparency (1(2)):
  - Improve independence, accountability, and transparency of banking supervisory authority through central bank law reform and/or issuing a bank supervision law.
  - Increase DBS budget sustainably to recruit needed staff with required quality.
  - Adopt staffing and training strategy to improve supervisory capacities for bank risk analysis and management.
- Risk management (7–17):
  - Raise aggregate limit on exposures to related parties to the level of the limit applicable to a single counterparty or group of connected counterparties not related to the bank.
  - Strengthen enforcement of limits on credit exposures to single counterparties or groups of connected counterparties.
  - Substantially review and upgrade regulations establishing minimum risk management and internal control standards and related supervisory practices.
- Abuse of financial services (18):
  - New banking law should clarify BRH’s authority to issue regulations for institutions under its supervision.
- Supervisory approach, techniques, and reporting (19–21):
  - Upgrade IT support platform, especially for data capture from banks and off-site supervision.
  - Improve focus of data production, internal reports, and review activities on key risks; use staff more efficiently.
- Accounting and disclosure (22):
  - Build capacity in banks on IFRS and internal controls.
  - Require banks to publish audited financial statements in full (including endnotes).
  - Require a standard form for banks’ annual financial statement presentation.
  - Require Board and management to certify to BRH that financial statements contain no false information and are prepared in accordance with applicable standards.
  - Develop competition in bank auditing sector over medium term (e.g., require banks to invite foreign firms to tender for audits at least every four years).
  - Establish a substantive accreditation process for bank auditors under BRH.

*Source: _cr08112 - Introduction (IMF staff assessment).*

### 27.      Overall, the authorities welcome the assessment and find its conclusions helpful for

### 27.      Overall, the authorities welcome the assessment and find its conclusions helpful for

### Authorities’ response and planned legal/regulatory changes
- The adoption of the new draft banking law should allow compliance with the requirements of principles 1 to 7, 10, 11, 17, and 21 to 25.
- The amendment of prudential regulations and the revision of on-site inspection procedures with emphasis on risk management should allow compliance with principles 8, 13, 14, 15, and 16.
- The amendment of the central bank law could allow the BRH to issue regulations on the abuse of financial services by institutions under its supervision.

### Authorities’ comments on specific principle assessments
- Principle 2
  - The authorities argue that essential criterion 3 was applied with excessive rigor concerning the risk that the use of the word “bank” in the case of so-called “Bank de Borlette” may mislead the public; they consider that the risk was virtually nil.
- Principle 6
  - Article 45 of the current banking law establishes that the BRH can fine any bank that contravenes BRH instructions or regulations with respect to capital adequacy or other prudential standards, and take any other remedial action deemed appropriate.
  - Existing capital adequacy regulations establish a 90-day deadline for bringing back capital adequacy ratios in compliance.

### Appendix I. Stress Tests — A. Data Issues
- Data used for stress testing:
  - Balance sheet information as of September 2006; data generally adequate.
  - Lack of information on maturity structures, asset collateralization, and recovery rates prevented use of certain standard techniques and models relying on maturity mismatch and deposit concentration data.
  - Liquidity stress tests carried out in an indirect fashion (see Scenario B).
  - Interest rate stress tests mainly based on a model of banks’ net interest income.
  - Information on collaterals and guarantees for the largest credit exposures was received, but assumptions were required about expected haircuts.
  - Limited time series information made it difficult to estimate reliable econometric relationships.
- Impact of Socabank resolution:
  - Balance sheet, income statement, and prudential information for BNC as of June 2007 used to reassess exposures and systemic stability.
  - Stress tests performed on published BNC accounts (which include central bank guarantees amounting to 50 percent of Socabank’s negative capital) and on accounts adjusted for partial under-provisioning of some ex-Socabank assets.
  - New BNC data integrated and stress tests repeated.

### Appendix I. Stress Tests — B. Single Risk Factor Stress Tests
- Credit risk tests (three calibrations):
  - Test 1: system-wide reclassification of performing loans (calibrated using increase in NPLs between 2003 and 2004).
  - Test 2: reclassification of existing non-performing loans into categories with higher degree of impairment (assumes all loans classified as sub-standard or doubtful will be re-classified to the highest provisioning category).
  - Test 3: concentration risk assuming failure of each bank’s largest borrower.
- Migration from low to high risk weights:
  - Implemented by assuming assets corresponding to all currently outstanding BRH bonds are substituted with assets from the highest risk category.
  - The corresponding increase in the loan portfolio is 28 percent.
- FX risk test:
  - Shock applied to net open position in U.S. dollars.
  - Historical approach replicating movements toward end-2002 and in May 2004: evaluating impact of a 29.1 percent depreciation and of a 19.1 percent appreciation.
- Interest rate shocks:
  - Calibrated as a simultaneous fall of the return on BRH bonds and a decrease in bank lending rates.
  - Lending rates example: March 2001-March 2002 episode when lending rates fell by more than 26 percent, from 16.5 to 12 percent.
  - BRH bond rates assumed to decrease gradually from 14.5 to 5.1 percent; magnitude matches July 2004-July 2005 period when average BRH bond rates decreased by 9.3 percentage points.
- Operating cost shock:
  - Occupancy cost shock simulated in an income/expense model, calibrated using econometric estimates of elasticity of occupancy costs to energy prices.

### Appendix I. Stress Tests — C. Scenarios
- Scenario A (normalization with credit expansion)
  - Macroeconomic background: increase in economic activity, lower inflation, decreasing need for BRH liquidity absorption; stronger demand for bank credit; potential relaxation of lending restrictions; decline in attractiveness of risk-free bonds leading to strong credit expansion and transitional decline in credit quality.
  - Calibration adjustments and shocks:
    - Gradual decrease in the BRH auction rate for 91-day bonds by 9.4 percentage points.
    - Gradual decrease in the average lending rate charged by banks by 3.1 percentage points.
    - Decrease in the stock of BRH bonds by 50 percent, replaced by an increase in credit of the same magnitude.
    - Shock to asset quality: increase in the ratio of NPLs to gross loans to the 2005 level, corresponding to a 21 percent increase from current levels.
- Scenario B (drop in official transfers and depreciation)
  - Implemented as combination of:
    - Depreciation of the gourde against the U.S. dollar based on single risk factor shock.
    - Decrease in credit quality resulting from defaults of companies dependent on dollar receipts; pooled panel regression suggests a one percentage point increase in the depreciation rate leads to an increase in NPLs by 1.3 percent.
    - Shock in funding cost calibrated with reference to 2002–2003 depreciation episode when maximum rate on term deposits rose from 4.5 percent in October 2002 to 6.75 percent in October 2003.
  - Includes funding liquidity risks associated with a shift from gourde to dollar deposits.

### Appendix I. Stress Tests — D. Results (key findings)
- System resilience and vulnerabilities:
  - The system appears able to withstand most single risk factor shocks, although portfolio concentration and related credit risk constitute a major source of vulnerability for most banks.
  - Exchange rate shocks:
    - Neither a depreciation nor an appreciation of the gourde would lead to a substantial deterioration in capitalization; banks seem to manage market risks from asset and liability dollarization.
  - Operational costs:
    - A surge in banks’ operational costs would have a small but palpable effect in aggregate.
    - Some smaller banks seem exposed to a pronounced increase in such costs; aggregate profitability would fall by 43 percent.
  - Migration to risky assets:
    - Most banks appear able to manage a migration from low-risk to risky assets.
    - Impact may affect primarily the larger banks, raising need for close supervisory monitoring.
  - Interest rate decline:
    - A decline in interest rates would probably not raise systemic risks on its own; large banks’ capital buffers likely sufficient.
    - Reduction in profitability would be substantial, with average ROE falling by about 60 percent.
  - Asset quality deterioration:
    - Would severely affect most banks, leading to substantial drop in aggregate capital ratios and undercapitalization for a group of smaller banks.
  - Concentration risk and collateral assumptions:
    - Exposures due to loan portfolio concentrations are main concern.
    - Results likely underestimate vulnerabilities as they assume no haircuts on collateral for largest borrowers.
    - If haircuts taken into account, capital loss would increase and may reach more than 50 percent of the system’s capital in a worst-case scenario of complete collateral loss.
    - In that worst-case, three banks would not meet the minimum requirement for capital adequacy.
- Scenario analysis implications:
  - Scenario A:
    - Reflects episodes of normalization of financial conditions, decline in interest rates, and subsequent credit boom experienced in other emerging market and developing countries.
    - Results indicate banks would need to ramp up credit risk management capacities and capital buffers substantially to safely maneuver through such a transition.
  - Scenario B:
    - Captures vulnerabilities from asset/liability dollarization, concentrated lending to firms sensitive to exchange rate pressures, and depositor sensitivity to depreciation expectations.
    - Takes into account funding liquidity risks associated with shift from gourde to dollar deposits.
    - While direct effects of depreciation itself would be minor, likely impact on asset quality and depositor confidence would seriously affect banks’ capital positions.

- Selected stress-test quantitative outcomes (Banking System as of end-FY-2006; Banking System Adjusted for BNC/Socabank):
  - Exchange rate risk:
    - Regulatory Capital to Risk-Weighted Assets — Weighted Average for Banking System: 13.7 (In percent); Median: 15.2 (In percent); Number of Banks Pushed Below Statutory CAR: 0.
    - Adjusted for BNC/Socabank: Excluding Additional Provisioning for BNC (In percent): 17.0; Including Additional Provisioning for BNC (In percent): 15.7.
    - Change (in percentage points): -0.6; -0.2; ...; -0.6; -0.6 (as shown in table).
  - Interest rate risk:
    - Regulatory Capital to Risk-Weighted Assets — Weighted Average: 11.5; Median: 13.3; Number of Banks Pushed Below Statutory CAR: 0.
    - Adjusted: Excluding Additional Provisioning for BNC (In percent): 15.0; Including Additional Provisioning for BNC (In percent): 13.6.
    - Change (in percentage points): -2.8; -2.1; ...; -2.6; -2.6.
  - Credit risk: Increase in NPLs:
    - Regulatory Capital to Risk-Weighted Assets — Weighted Average: 9.4; Median: 10.1; Number of Banks Pushed Below Statutory CAR: 2.
    - Adjusted: Excluding Additional Provisioning for BNC (In percent): 12.7; Including Additional Provisioning for BNC (In percent): 10.0.
    - Change (in percentage points): -4.9; -5.3; ...; -4.9; -6.3.
  - Concentration related credit risk:
    - Regulatory Capital to Risk-Weighted Assets — Weighted Average: 10.3; Median: 11.7; Number of Banks Pushed Below Statutory CAR: 1.
    - Adjusted: Excluding Additional Provisioning for BNC (In percent): 14.9; Including Additional Provisioning for BNC (In percent): 13.6.
    - Change (in percentage points): -4.1; -3.8; ...; -2.7; -2.7.
  - Migration of assets:
    - Regulatory Capital to Risk-Weighted Assets — Weighted Average: 11.6; Median: 13.1; Number of Banks Pushed Below Statutory CAR: 0.
    - Adjusted: Excluding Additional Provisioning for BNC (In percent): 14.3; Including Additional Provisioning for BNC (In percent): 13.2.
    - Change (in percentage points): -2.8; -2.3; ...; -3.3; -3.1.
  - Scenario A (direct impact of shocks on regulatory capital):
    - Weighted Average: 7.8; Median: 10.1; Number of Banks Pushed Below Statutory CAR: 2.
    - Adjusted: Excluding Additional Provisioning for BNC (In percent): 11.0; Including Additional Provisioning for BNC (In percent): 8.7.
    - Change (in percentage points): -6.5; -5.3; ...; -6.6; -7.6.
  - Scenario B (direct impact of shocks on regulatory capital):
    - Weighted Average: 6.1; Median: 7.0; Number of Banks Pushed Below Statutory CAR: 2.
    - Adjusted: Excluding Additional Provisioning for BNC (In percent): 10.9; Including Additional Provisioning for BNC (In percent): 8.3.
    - Change (in percentage points): -8.3; -8.4; ...; -6.7; -8.0.
  - Impact taking into account buffer provided by current year profits:
    - Scenario A: Weighted Average: 11.2; Median: 12.3; Number of Banks Pushed Below Statutory CAR: 1; Adjusted Including Additional Provisioning for BNC: 11.5; Change (in percentage points): -3.1; -3.1; ...; -3.4; -4.7.
    - Scenario B: Weighted Average: 11.1; Median: 8.5; Number of Banks Pushed Below Statutory CAR: 2; Adjusted Including Additional Provisioning for BNC: 11.6; Change (in percentage points): -3.3; -6.9; ...; -3.0; -4.7.

*Source: Staff estimates using data provided by the central bank.*

### APPENDIX II. STATISTICAL APPENDIX

### APPENDIX II. STATISTICAL APPENDIX

### Table 1. Haiti: Financial System Structure, December 2006
- Number of institutions (by size / by ownership)
  - Commercial banks (Large / Medium / Small): 2 3 4
  - Commercial banks (Public / Domestic / Foreign): 2 5 2
  - Commercial banks Total: 9
  - Savings and housing credit institutions (Large / Medium / Small): 0 0 1
  - Savings and housing credit institutions (Public / Domestic / Foreign): 0 1 0
  - Savings and housing credit institutions Total: 1
  - Total (size): 2 6 2 10
- Percent of system assets (by size / by ownership / total)
  - Commercial banks (Large / Medium / Small): 61.4 22.6 13.0
  - Commercial banks (Public / Domestic / Foreign): 18.8 70.7 7.5
  - Commercial banks Total: 96.9
  - Savings and housing credit institutions (Large / Medium / Small): 0.0 0.0 3.1
  - Savings and housing credit institutions (Public / Domestic / Foreign): 0.0 3.1 0.0
  - Savings and housing credit institutions Total: 3.1
  - Total (size): 61.4 22.6 16.1
  - Total (ownership): 18.8 73.8 7.5
  - System Total: 100.0
- Source note:
  - Based on statistics published by the Banque de la République d’Haïti.
  - 1/ Defined by assets size: Large ≡ > US$400 million; Medium ≡ US$100 million to US$400 million; Small ≡ < US$100 million.
  - 2/ Defined by majority control of shares.

### Table 2. Haiti: Summary Balance Sheet of the Banking System, December 2005-2006
- Assets (In millions of US$) 1/ — Composition (2005 / 2006 / percent) / Growth (In percent)
  - Cash and central bank bonds: 779.2881.845.213.2
  - Loans, net: 567.2582.729.92.7
  - Other assets: 467.2486.424.94.1
  - Total: 1,813.61,950.9100.07.6
- Liabilities and Equity
  - Deposits: 1,528.91,617.882.95.8
  - Other liabilities: 188.4219.211.216.4
  - Equity: 96.3114.05.818.3
  - Total: 1,813.61,950.9100.07.6
- Nonperforming loans: 82.967.7-18.3
- Provisions: 43.160.1 39.5
- Source note:
  - Based on statistics published by the Banque de la République d’Haïti.
  - 1/ The figures for both years were converted from gourdes at the same end-2006 exchange rate of 37.5914 gourdes/US dollar.

### Table 3. Haiti: Aggregate Financial Soundness Indicators of the Banking System, 2002-June 2007 (In percent)
- Period columns: 2002 / 2003 / 2004 / 2005 / 2006 / Apr-Jun 2007
- Size and growth
  - Asset volume (in US$ millions, end of period) 1/: 936.6 1347.8 1487.9 1750.7 1929.1 2005.3
  - Credit/GDP (percent): 12.9 13.5 12.2 12.3 10.2 ...
  - Deposits/GDP (percent): 32.1 35.8 34.2 33.8 30.6 ...
  - Credit growth (net) from year before (percent): 15.1 33.7 5.1 5.6 13.7 7.0
- Capital adequacy
  - Regulatory capital to risk-weighted assets: ... ... ... 16.5 14.3 19.1
  - Capital (net worth) to assets: 5.4 5.4 5.3 5.0 5.3 7.2
- Asset quality and composition
  - Loans (net) to assets: 34.5 31.9 30.5 31.5 28.2 28.7
  - NPLs to gross loans: 6.5 5.5 7.4 12.4 11.1 11.6
  - Provisions to gross loans: 5.5 5.4 6.2 6.1 9.9 7.6
  - Provisions to gross NPLs: 84.4 96.8 82.9 49.1 89.3 65.6
  - NPL less provisions to net worth: 6.8 1.1 7.8 42.2 7.0 17.3
- Earnings and profitability (annualized)
  - ROA: 1.0 1.9 0.8 0.7 1.8 1.8
  - ROE: 16.9 35.0 15.1 12.8 34.2 25.6
  - Net interest income to gross interest income: 67.2 65.7 55.1 71.8 72.2 69.3
  - Operating expenses to net profits: 79.3 69.4 79.9 80.5 70.7 69.3
  - Operating expenses to total expenses: 69.4 63.5 58.7 75.5 70.5 66.7
  - Spread between lending and deposit rates: 14.9 17.0 14.9 11.9 11.7 ...
- Liquidity
  - Liquid assets to total assets 2/: 47.4 45.0 46.5 43.6 45.3 46.1
  - Liquid assets to deposits 2/: 55.3 53.0 54.1 50.5 54.5 56.0
- Market risk
  - Foreign currency loans to total loans (net): ... ... ... 59.3 66.0 65.7
  - Foreign currency deposits to total deposits: ... 50.9 47.3 52.6 53.6 50.8
- Source note:
  - Based on statistics published by the Banque de la République d’Haïti.
  - 1/ The figures for all years were converted from gourdes at the same 12/31/06 exchange rate of 37.5914 gourdes/US dollar.
  - 2/ Liquid assets comprise cash and central bank bonds.

### Table 4. Haiti: Financial Soundness Indicators of Individual Banks, June 2007 (In percent; unless otherwise stated)
- Banks listed: Sogebank, Unibank, BNC 1/ 2/, Citibank, Capitalbank, BUH, Sogebel 3/, Scotia, BPH 1/, System
- Size and growth
  - Asset volume (in US$ millions): 636.7 587.0 333.8 105.7 100.7 81.4 65.5 64.3 30.3 2,005.3
  - Deposit volume (in US$ millions): 557.3 498.6 247.1 67.4 84.6 72.6 50.4 48.2 23.2 1,649.5
  - Market share (in percent of asset volume): 31.8 29.3 16.6 5.3 5.0 4.1 3.3 3.2 1.5 100.0
  - Asset growth since year before: 16.0 6.7 67.9 19.8 6.3 5.7 8.9 17.5 -6.7 7.5
  - Credit growth (net) since year before: 16.8 1.5 186.1 20.3 -1.7 12.7 14.7 35.4 3.6 7.0
- Capital adequacy
  - Regulatory capital to risk-weighted assets: 14.5 22.4 26.3 15.7 15.9 11.3 26.4 17.7 2.7 19.1
  - Capital (net worth) to assets: 5.6 8.5 9.3 5.8 6.7 1.8 10.9 6.7 7.6 7.2
- Asset quality and composition
  - Loans (net) to assets: 25.1 26.2 34.6 53.1 34.5 29.7 42.2 56.7 34.6 28.7
  - NPLs to gross loans: 5.4 0.6 50.6 0.0 2.8 12.4 7.2 9.9 30.0 11.6
  - Provisions to gross loans: 6.3 1.5 22.6 3.2 2.8 8.5 4.9 5.0 30.0 7.6
  - Provisions to gross NPLs: 116.8 257.5 44.7 N.A. 100.2 68.7 68.2 51.0 99.9 65.6
  - NPLs less provisions to net worth: -4.4 -3.1 84.8 -29.9 0.0 71.1 10.6 42.8 0.2 17.3
- Earnings and profitability (cumulative Apr. 07–Jun. 2007)
  - ROA: 1.4 1.8 2.1 1.4 1.0 -0.4 1.8 8.0 4.8 1.8
  - ROE: 25.6 21.3 23.4 25.0 15.2 -21.7 17.0 128.8 65.2 25.6
  - Net interest income to gross interest income: 63.5 65.7 71.9 66.2 81.6 82.0 58.7 89.1 70.9 69.3
  - Operating expenses to net profits: 71.1 65.8 69.4 52.8 84.6 94.8 50.1 59.9 60.2 69.3
  - Operating expenses to total expenses: 64.8 64.9 69.3 43.7 84.6 88.6 40.0 74.4 77.9 66.7
- Liquidity
  - Liquid assets to total assets 4/: 44.9 42.0 55.9 44.5 46.1 46.0 50.0 38.5 56.7 46.1
  - Liquid assets to deposits 4/: 51.3 49.4 75.5 69.8 54.9 51.5 64.8 51.2 74.0 56.0
- Market risk
  - Foreign currency loans to total loans (net): 63.7 78.2 56.1 86.3 58.4 45.2 72.7 31.8 37.7 65.7
  - Foreign currency deposits to total deposits: 53.2 57.0 29.7 73.5 56.9 37.0 73.5 29.1 36.5 50.8
- Source notes:
  - Based on statistics published by the Banque de la République d’Haïti.
  - 1/ State-owned bank. 2/ BNC absorbed Socabank in March 2007. 3/ Savings and housing credit institution affiliated to Sogebank. 4/ Liquid assets comprise cash and central bank bonds.

*Source: APPENDIX II. STATISTICAL APPENDIX (Based on statistics published by the Banque de la République d’Haïti).*

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