## Financial System Stability Assessment—Update (Cameroon, March 14, 2008)

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### Overall assessment of stability, integration and development issues
- The FSSA updates the June 2007 joint IMF-World Bank FSAP mission and builds on the 2006 CEMAC regional FSAP and the 2000 Cameroon FSAP.
- Short-term risks to banking-sector stability are assessed as low, but exposure to credit risk is high in domestic banks.
- Key bank-sector observations:
  - Higher revenues and improved provisioning have been recorded, but nonperforming loans (NPLs) remain high.
  - Observance of regional prudential regulations has improved, but several banks still do not comply with capital adequacy and risk exposure ratios.
  - Foreign-owned banks are better capitalized than domestic banks; domestic banks are more vulnerable to credit risk, with profitability and solvency under pressure due to decreasing interest margins.
- Government-sponsored financial institutions face significant problems:
  - CAMPOST’s viability is uncertain; a freeze on deposits eroded its ability to attract new funds. Management was hired, but recapitalization and modernization of information systems are needed.
  - Crédit Foncier de Cameroun (CFC) is insolvent and has made a limited contribution to housing finance; the report recommends liquidation and better-targeted housing subsidies.
- Financial inclusion and sector development:
  - Financial intermediation is among the lowest in Sub-Saharan Africa; less than 5 percent of the population has access to banking services.
  - Microfinance is growing but requires strengthened supervision.
  - Access to finance for SMEs is constrained by limits on banks’ lending rates, lack of reliable borrower information, and weaknesses in the legal and judicial systems.
- Policy advice:
  - Authorities are advised to prioritize removing obstacles to access to financial services rather than creating new government-sponsored institutions.

### Main findings and priority recommendations (Box 1)
- Key findings:
  - Prudential requirements at the regional level may not adequately reflect risks.
  - The cap on lending rates is hampering credit access for SMEs and less creditworthy borrowers.
  - The national treasury and central bank need to reorient their liquidity management toward market-based techniques.
  - Reliable information on borrowers is limited.
  - Lack of training of judges and governance problems in the judicial system hamper loan recovery and execution (foreclosing) of guarantees.
- Key recommendations:
  - Enhance the supervision of microfinance institutions (MFIs).
  - Introduce treasury bills and develop the bond market.
  - Address problem banks, especially those under administrative order and government-sponsored financial institutions.
  - Raise minimum capital for domestic banks to increase resiliency to shocks.
  - Enhance the information base on debtor risk; build SMEs’ capacity to produce and disseminate financial information.
  - Cease utilizing statutory advances and start issuing government securities instead.
  - Improve commercial and land registries (constantly update the former and expand the cover of the latter).
  - Strengthen the judicial system (specialize some judges in commercial and financial law, and add commercial chambers within the largest court jurisdictions).
  - Move towards a comprehensive adoption of the International Financial Reporting Standards (IFRS).
- Implementation note:
  - The timeframe for implementing these recommendations will be set in the context of a financial sector strategy initiative currently being developed by the government.

### Macroeconomic risks affecting the financial sector
- Commodity dependence and volatility:
  - Despite a relatively diversified economy, Cameroon remains exposed to commodity-related shocks.
  - Oil remains important: "oil still contributes more than a third of government revenue and constitutes a half of the country’s exports, despite accounting for about 10 percent of GDP."
- Fiscal and debt developments:
  - External debt peaked at 90 percent of GDP in 1995–99 and subsequently declined; the stock of external debt fell to 6 percent of GDP in 2006.
  - Cameroon reached the completion point under the enhanced HIPC Initiative and qualified for additional debt relief under the Multilateral Debt Relief Initiative.
  - Domestic arrears have been partially cleared via the issuance of government securities.
- Monetary and credit trends:
  - Broad-money growth was contained in part by reduced government liabilities to the banking sector.
  - Private sector credit growth slowed in 2006, reflecting a lack of viable projects and improved cash-flow positions of firms and banks following clearance of public-sector arrears.

### Excess liquidity: causes, magnitude, policy actions and implications
- Causes of excess liquidity:
  - Oil revenue facilitating government repayments of arrears.
  - Public administration deposits with banks (about 11 percent of total deposits).
  - BEAC’s statutory advances to the government.
  - Disparity between domestic deposits growth of 6.4 percent and a decline of about 6 percent in credit to the economy.
  - BEAC’s inability to implement appropriate sterilization policies.
- Magnitude and definition:
  - Excess liquidity, defined as commercial banks’ deposits at BEAC in excess of the minimum required, reached about 25 percent of total banks’ deposits as of April 2007.
- Policy actions taken:
  - In March 2007 reserve requirements for Cameroon were raised from 7.75 percent to 10.25 percent for short term deposits and from 5.75 percent to 8.25 percent for savings deposits.
  - In May 2007 the BEAC established a deposit standing facility whereby banks can deposit excess liquidity.
- Adverse effects on banks:
  - Excess liquidity may be inducing banks to narrow margins to attract customers from a limited pool of bankable borrowers.
  - Narrower spreads and reduced profitability tilt domestic banks towards disintermediation and discourage branch expansion.
  - There is concern banks are lowering credit standards and providing credit to more risky activities, which—given high NPLs—may harm future financial soundness and stability.

### Financial sector structure, asset quality and market concentration
- System composition and access:
  - Cameroon’s financial system accounts for about half of regional financial assets in the CEMAC.
  - Eleven commercial banks (of which the six largest are foreign owned, with three holding more than 50 percent of the sector’s assets and accounting for more than 55 percent of deposits).
  - Two government-owned specialized financial institutions: CAMPOST and CFC.
  - Nonbank financial institutions include insurance companies (including a government-owned reinsurance company), two pension funds, a social security fund, and over 700 MFIs.
  - Banks mainly serve large companies and other reliable counterparts; lending to SMEs is limited and largely short term.
- Asset quality and profitability:
  - NPLs declined from an average of 40 percent of total credit in 1995 to around 12 percent at the end of 2006 following restructuring and transfer of impaired loans to a loan recovery agency.
  - NPLs for small banks have reached more than 15 percent of gross loans (11 percent for the other banks).
  - Return on equity for small domestic banks plummeted to 1.7 percent compared to more than 20 percent for the other banks.
  - Excess liquidity has reduced interest margins and profits, especially for domestic banks competing with larger, better-capitalized foreign banks.
- Concentration risk:
  - Narrow lending base and increasing concentration to a few large creditworthy customers heighten risk; default by the three largest borrowers could absorb almost all regulatory capital and create capital shortfalls amounting to five times the required minimum capital for affected banks.

### Supervision, compliance and MFI sector issues
- Compliance and enforcement:
  - Observance of regional prudential regulations has improved, but several banks still do not comply with capital adequacy and risk exposure ratios.
  - Two domestic banks were placed under administrative order; another domestic bank is being closely monitored by the COBAC.
  - COBAC has suspended profit distributions to shareholders as a remedy until compliance is restored.
  - Foreign-owned banks appear well-capitalized with solvency ratios above the required 8 percent.
  - Four out of the 11 banks do not comply with solvency requirements due to large NPLs and delays in recapitalization.
  - The two banks recently intervened by the COBAC represent about 5 percent of the sector.
  - Another domestic bank represents 10 percent of the assets of the banking sector and is in a very weak position.
  - Overall sector capitalization is lower than in other CEMAC countries because of low capitalization of domestic banks.
- MFI sector:
  - MFIs account for a significant and increasing share of deposits and credits.
  - Corporate governance remains weak; the sector’s regulatory framework, which came into effect in 2005, is yet to be implemented.
  - Partial supervision of MFIs, given the limited resources of COBAC, is a matter of concern.
- Ministry of Finance role:
  - Issues and withdraws bank licenses after consultation with COBAC and generally follows COBAC recommendations.
  - Tends to avoid license withdrawal (liquidation) because of social costs; timely license withdrawal would reinforce the credibility of banking supervision.

### Stress tests and short-term vulnerabilities (high-level)
- Tested risks included credit, exchange rate, and liquidity.
- Foreign-owned banks:
  - Appear resilient to most simulated shocks (capital adequacy ratio remains above 8 percent) except for extreme credit-risk scenarios.
  - Exposed to loan concentration risk; common exposure to same large borrowers implies default could have systemic implications.
- Domestic banks:
  - Most vulnerable due to low capital, high loan concentration, and large stock of NPLs.
  - Policy implication from stress tests: minimum capital for domestic banks should be raised and risk concentration limits fully enforced to increase resiliency.

### Specialized financial institutions and housing finance
- CAMPOST:
  - Financial activities technically insolvent for many years due to cumbersome operational and personnel structure and lack of basic management tools and information systems.
  - Reliable financial statements were lacking until recently; the 2004–06 financial accounts have just been produced.
  - In February 2007, authorities entered into a management contract for restructuring with a Canadian company.
- Crédit Foncier du Cameroon (CFC):
  - Leading real estate lender in the CEMAC with assets hovering around francs of the African Financial Community (CFAF) 100 billion; had been insolvent for many years.
  - Financed primarily by a 3.5 percent withholding tax on wages split between employers and employees directly allocated to CFC; recapitalized by the government in 2006.
  - Operating losses and lax credit policies resulted in a ratio of NPLs to gross loan over 80 percent; proceeds from the withholding tax are used mainly to cover operating losses.
  - Attempts to diversify into commercial banking led to even higher losses.
- Housing finance:
  - Mortgages by CFC and other financial institutions represent less than 0.6 percent of GDP in Cameroon.
  - Constraints include unaffordable formal-sector housing prices, land ownership and construction bottlenecks, limited land registry coverage (land registries cover less than 1 percent of the country’s territory and their integrity cannot be assured), restricted credit registries, and lack of long-term resources.

### Financial system development — access, SMEs, market infrastructure and taxation
- Access to financial services:
  - Less than 5 percent of Cameroon’s total population held a bank account or used bank credit services at the end of 2006.
  - Banks provide a narrow range of products: predominantly short-term loans, growing medium-term loans, and basic savings products (demand and term deposits and passbook savings accounts).
- SME finance:
  - Three of the eleven commercial banks and three nonbank financial institutions specifically target SMEs; two other banks have special SME units.
  - Loan accounts for SMEs in these institutions estimated at only 11 percent; outstanding loans to SMEs accounted for only 14 percent of the banking system’s total outstanding loans at the end of 2006.
  - Alliances between banks and MFIs are emerging to deepen SME penetration but require strengthened MFI supervision capacity.
- Legal and informational constraints:
  - Weak legal and regulatory frameworks impede leasing, factoring, venture capital, and private equity development.
  - Lack of financial and accounting information: small borrowers often do not keep accurate accounts; Cameroon has enacted a chart of accounts to consider small companies’ constraints.
  - Limited credit information: BEAC’s Credit Registry (from the 1970s) needs efficiency improvements; plans exist for a Central Balance Sheet Database and a Central Payment Incident Database.
- Interest rate ceiling and pricing transparency:
  - Ceiling on lending rates is 15 percent, perceived by banks as insufficient to cover SME lending risk.
  - Recommended options regarding the ceiling and transparency:
    - (i) Abolish the ceiling;
    - (ii) Conduct an in-depth analysis of banks’ rates and fees to develop a formula identifying direct, implied, and indirect costs of banking services;
    - (iii) Require banks to notify each borrower of the true cost of their loan using a uniform indicator before signing the loan contract;
    - (iv) Require banks to report their prime lending rates and their minimum and maximum lending and deposit rates to COBAC on a regular basis, along with any increases or decreases in these rates;
    - (v) Post the rates reported by the banks on the COBAC Web site.
- Physical access and branch regulations:
  - Branch outreach declined since sector restructuring in the 1990s and is concentrated in major cities.
  - Opening a branch requires authorization from the Ministry of Finance in consultation with the National Credit Council; requirements for closing branches are not clearly spelled out.
- Taxation:
  - VAT on leasing contracts and SMEs' difficulties managing VAT increase financing costs; authorities should develop a clear policy on taxation of financial products to reduce distortions.

### Policy guidance on development finance institutions and government securities
- Proposed new DFIs:
  - Government plans to establish two new public development finance institutions to promote SMEs and agricultural finance; plans for an SME financing institution appear well advanced.
  - Assessment: prior government-sponsored specialized financial institutions have failed; creating specialized state-sponsored institutions is unlikely to resolve underlying market failures unless complemented by institutional reforms and designed to be limited in time and scope.
- Government securities market:
  - Cameroon plans to issue government securities in the domestic market as a substitute to statutory advances from BEAC.
  - Project expected to be completed by the first quarter of 2008; issuance in book-entry form to facilitate secondary market activity.
  - Need to establish regional auction mechanism and primary dealer-type system, strengthen Treasury cash-flow projections and coordination with BEAC liquidity management, and develop an effective medium-term debt management strategy.

### Legal, judicial and accounting framework weaknesses (OHADA and Cameroon)
- Pending legal and institutional issues:
  - The poor technical quality of translations hinders reconciliation of OHADA concepts (civil law) with equivalent common law concepts.
  - Harmonization work completed in Cameroon has not been followed by updates to civil proceedings and commercial registries.
  - Secured transactions and enforcement:
    - Problems of legal enforcement of guarantees.
    - Weaknesses of the judicial system.
    - Poor oversight over the creation and formalization of guarantees by the legal units of financial institutions.
  - Land tenure and real property collateral:
    - The land tenure system is not conducive to the constitution of real property collateral or access to loans based on mortgages.
    - Land-related procedures are extremely lengthy, tedious, and costly.
    - Procedures for formal land ownership are complex and restrictive.
  - Debt collection and enforcement:
    - Enforcement of mortgages and other collateral remains problematic.
    - The OHADA Uniform Act on simplified recovery procedures and measures of execution is considered complex and excessively formal, encouraging dilatory tactics by debtors and lengthening judicial proceedings.
  - Judicial capacity:
    - Commercial and financial disputes are heard by magistrates with no specialization in financial matters.
    - Magistrates are generally unfamiliar with business and financial law.
    - Lack of true specialization of magistrates leads to ambiguities and inconsistencies in rulings and is viewed as a major obstacle to the effectiveness of the judicial system.
- Accounting and auditing framework:
  - The legal framework is a superposition of regional (OHADA Uniform Acts), CEMAC Regulations and Decisions, and national laws and regulations, making the system cumbersome and requiring major coordination efforts.
  - OHADA chart of accounts:
    - There is room for updating the OHADA chart of accounts according to international standards.
    - The level of information provided is considerably lower than that expected by international investors and lenders.
    - A move to adopt IFRS would be desirable.
    - The OHADA chart of accounts imposes excessive constraints on SMEs, while IFRS includes reporting standards for SMEs.
  - Auditor standards and quality control:
    - Lack of comprehensive professional standards for auditors.
    - Lack of quality control for accounting and auditing practices, raising serious concerns about the reliability of auditing.
  - Banking-specific disclosures and charts:
    - Current regulations do not require banks to make their audited financial statements public, though some do.
    - COBAC chart of accounts has not been updated in more than a decade and differs from IFRS in many areas, including recognition, valuation, presentation, and disclosures.

### Stress-test results and numeric highlights (selected figures preserved exactly as in source)
- Main vulnerabilities:
  - Loan concentration (credit risk).
  - Possible failure of some domestic banks (crisis scenario).
- Credit-concentration scenarios and CAR impacts:
  - Scenario (i): largest borrower defaults
    - CAR drops by 4 percent.
    - Capital need: corresponds to half of the minimum capital to reach the 8 percent CAR.
  - Scenario (ii): three largest borrowers default
    - Default would absorb the capital of the whole system.
    - Required capital injection: equal to eight times the minimum capital to bring CAR to 8 percent.
    - Foreign banks require less effort due to high regulatory capital.
  - Default of the two borrowers that have large loans with several banks:
    - Leads to a drop of the CAR by 3 percentage points.
    - Foreign banks do not need to increase capital because of high initial CAR.
  - Default of the oil company (loans in several banks):
    - Results in a slight deterioration of the CAR (2.1 percentage points).
    - Only domestic banks would need to increase capital to maintain initial solvency ratio.
  - Default of banks’ foreign correspondent (banks keeping important deposits in their correspondent account):
    - Would lead to a fall of 1 percent in the CAR of the system.
    - Capital increase need would be low.
- Stress test numeric highlights (preserved exactly):
  - CAR baseline: 11.8 ... 16.9 1.5
  - Credit risk shocks:
    - Default of the largest borrowers: solvency ratio after shock 7.4; capital needed/minimum capital 2.6
    - Default of the three largest borrowers: solvency ratio after shock -1.1; capital needed/minimum capital 6.7; system-wide capital injection equal to eight times the minimum capital noted in narrative
    - Default of shared risks: solvency ratio after shock 8.0; capital needed/minimum capital 0.0
    - Default on oil financing: solvency ratio after shock 9.7; capital needed/minimum capital 1.5
    - Default on correspondent accounts: solvency ratio after shock 9.3; capital needed/minimum capital 0.3
    - Degradation of nonperforming loans: solvency ratio after shock 10.9; capital needed/minimum capital 1.1
    - Increase of nonperforming loans by 50 percent: solvency ratio after shock 6.7; capital needed/minimum capital 3.5
  - Foreign exchange risk shocks:
    - 40 percent depreciation against the euro: solvency ratio after shock 18.51; capital needed/minimum capital 0.0
    - 40 percent appreciation against the euro: solvency ratio after shock 8.45; capital needed/minimum capital 1.4
    - 40 percent depreciation against the dollar: solvency ratio after shock 13.14; capital needed/minimum capital 0.5
    - 40 percent appreciation against the dollar: solvency ratio after shock 10.46; capital needed/minimum capital 0.0
  - Liquidity risk:
    - Liquidity ratio 3/: 58.4
    - Liquidity ratio after 25 percent withdrawal of total deposits: 33.4
    - Liquidity ratio after 50 percent withdrawal of central government and public enterprise deposits: 40.7
  - Crisis scenarios (percent of foreign-owned bank capital):
    - Closure of the two intervene banks: 6.9; 9.0 ...
    - Closure of the three banks in difficulties: -3.3; 100.0 ...
    - Recapitalization of four bank with a CAR < 8 percent: 14.6; 19.0 ...
    - Recapitalization of all bank to a CAR of 12 percent: 15.4; 32.0

*Source: International Monetary Fund, Financial System Stability Assessment—Update: Cameroon, Monetary and Capital Markets and African Departments, approved March 14, 2008.*

### 2008. The views expressed in this document are those of the staff team and do not necessarily reflect

### Financial System Stability Assessment—Update (Cameroon, March 14, 2008)

### Overall assessment of stability, integration and development issues
- The FSSA updates the June 2007 joint IMF-World Bank FSAP mission and builds on the 2006 CEMAC regional FSAP and the 2000 Cameroon FSAP.  
- Short-term risks to banking-sector stability are assessed as low, but exposure to credit risk is high in domestic banks.  
- Key bank-sector observations:
  - Higher revenues and improved provisioning have been recorded, but nonperforming loans (NPLs) remain high.  
  - Observance of regional prudential regulations has improved, but several banks still do not comply with capital adequacy and risk exposure ratios.  
  - Foreign-owned banks are better capitalized than domestic banks; domestic banks are more vulnerable to credit risk, with profitability and solvency under pressure due to decreasing interest margins.  
- Government-sponsored financial institutions face significant problems:
  - CAMPOST’s viability is uncertain; a freeze on deposits eroded its ability to attract new funds. Management was hired, but recapitalization and modernization of information systems are needed.  
  - Crédit Foncier de Cameroun (CFC) is insolvent and has made a limited contribution to housing finance; the report recommends liquidation and better-targeted housing subsidies.  
- Financial inclusion and sector development:
  - Financial intermediation is among the lowest in Sub-Saharan Africa; less than 5 percent of the population has access to banking services.  
  - Microfinance is growing but requires strengthened supervision.  
  - Access to finance for SMEs is constrained by limits on banks’ lending rates, lack of reliable borrower information, and weaknesses in the legal and judicial systems.  
- The authorities are advised to prioritize removing obstacles to access to financial services rather than creating new government-sponsored institutions.

### Main findings and priority recommendations (Box 1)
Key findings:
- Prudential requirements at the regional level may not adequately reflect risks.  
- The cap on lending rates is hampering credit access for SMEs and less creditworthy borrowers.  
- The national treasury and central bank need to reorient their liquidity management toward market-based techniques.  
- Reliable information on borrowers is limited.  
- Lack of training of judges and governance problems in the judicial system hamper loan recovery and execution (foreclosing) of guarantees.

Key recommendations:
- Enhance the supervision of microfinance institutions (MFIs).  
- Introduce treasury bills and develop the bond market.  
- Address problem banks, especially those under administrative order and government-sponsored financial institutions.  
- Raise minimum capital for domestic banks to increase resiliency to shocks.  
- Enhance the information base on debtor risk; build SMEs’ capacity to produce and disseminate financial information.  
- Cease utilizing statutory advances and start issuing government securities instead.  
- Improve commercial and land registries (constantly update the former and expand the cover of the latter).  
- Strengthen the judicial system (specialize some judges in commercial and financial law, and add commercial chambers within the largest court jurisdictions).  
- Move towards a comprehensive adoption of the International Financial Reporting Standards (IFRS).

Note: The timeframe for implementing these recommendations will be set in the context of a financial sector strategy initiative currently being developed by the government.

### Macroeconomic risks affecting the financial sector
- Commodity dependence and volatility:
  - Despite a relatively diversified economy, Cameroon remains exposed to commodity-related shocks.  
  - Oil remains important: "oil still contributes more than a third of government revenue and constitutes a half of the country’s exports, despite accounting for about 10 percent of GDP."
- Fiscal and debt developments:
  - External debt peaked at 90 percent of GDP in 1995–99 and subsequently declined; the stock of external debt fell to 6 percent of GDP in 2006.  
  - Cameroon reached the completion point under the enhanced HIPC Initiative and qualified for additional debt relief under the Multilateral Debt Relief Initiative.  
  - Domestic arrears have been partially cleared via the issuance of government securities.  
- Monetary and credit trends:
  - Broad-money growth was contained in part by reduced government liabilities to the banking sector.  
  - Private sector credit growth slowed in 2006, reflecting a lack of viable projects and improved cash-flow positions of firms and banks following clearance of public-sector arrears.

### Excess liquidity: causes and implications
- Causes of excess liquidity:
  - Oil revenue facilitating government repayments of arrears.  
  - Public administration deposits with banks (about 11 percent of total deposits).  
  - BEAC’s statutory advances to the government.  
  - Disparity between domestic deposits growth of 6.4 percent and a decline of about 6 percent in credit to the economy.  
  - BEAC’s inability to implement appropriate sterilization policies.
- Magnitude and definition:
  - Excess liquidity, defined as commercial banks’ deposits at BEAC in excess of the minimum required, reached about 25 percent of total banks’ deposits as of April 2007.
- Policy actions taken:
  - In March 2007 reserve requirements for Cameroon were raised from 7.75 percent to 10.25 percent for short term deposits and from 5.75 percent to 8.25 percent for savings deposits.  
  - In May 2007 the BEAC established a deposit standing facility whereby banks can deposit excess liquidity.
- Adverse effects on banks:
  - Excess liquidity may be inducing banks to narrow margins to attract customers from a limited pool of bankable borrowers.  
  - Narrower spreads and reduced profitability tilt domestic banks towards disintermediation and discourage branch expansion.  
  - There is concern banks are lowering credit standards and providing credit to more risky activities, which—given high NPLs—may harm future financial soundness and stability.

### Financial sector structure and regional findings (high-level)
- CEMAC regional FSAP main conclusions (Box 2):
  - Regional integration of the CEMAC banking sector is held back by limited intra-regional trade and deficiencies in market infrastructure.  
  - The banking sector is vulnerable to concentration of lending to a few sectors and clients; under a worst-case scenario banks’ capital shortfalls would be limited due to the small size of the sector.  
  - Efficiency of the supervisory framework is weakened by limited institutional independence of the Central African Banking Commission (COBAC); insufficient alignment of prudential norms with best practices; and inadequate COBAC resources.  
  - Financial intermediation is among the lowest in Africa. Competition is hampered by limits on deposit and lending rates that are out of line with market fundamentals; severe deficiencies in the legal and judicial framework; poor-quality financial data; and weak payment systems.  
  - Insufficient centralization of government deposits at the BEAC, together with weaknesses in monetary policy frameworks, limits the BEAC’s ability to tackle excess liquidity and exacerbates financial sector vulnerabilities.

*Source: International Monetary Fund, Financial System Stability Assessment—Update: Cameroon, Monetary and Capital Markets and African Departments, approved March 14, 2008.*

### 10. The financial sector is dominated by (largely foreign-owned) commercial banks.

### 10. The financial sector is dominated by (largely foreign-owned) commercial banks.

### Overview of the financial system
- Cameroon’s financial system accounts for about half of regional financial assets in the CEMAC.
- Banking system composition:
  - Eleven commercial banks (of which the six largest are foreign owned, with three holding more than 50 percent of the sector’s assets and accounting for more than 55 percent of deposits).
  - Two government-owned specialized financial institutions: CAMPOST and CFC.
  - Nonbank financial institutions include insurance companies (including a government-owned reinsurance company), two pension funds, a social security fund, and over 700 MFIs.
- Banks mainly serve large companies and other reliable counterparts; lending to SMEs is limited and largely short term. Except for one large bank, lending to agriculture and housing is limited.

### Asset quality, profitability, and market concentration
- Nonperforming loans (NPLs) and trends:
  - NPLs declined from an average of 40 percent of total credit in 1995 to around 12 percent at the end of 2006 following restructuring and transfer of impaired loans to a loan recovery agency.
  - NPLs for small banks have reached more than 15 percent of gross loans (11 percent for the other banks).
- Profitability:
  - Return on equity for small domestic banks plummeted to 1.7 percent compared to more than 20 percent for the other banks.
  - Excess liquidity has reduced interest margins and profits, especially for domestic banks competing with larger, better-capitalized foreign banks.
- Concentration risk:
  - Narrow lending base and increasing concentration to a few large creditworthy customers heighten risk; default by the three largest borrowers could absorb almost all regulatory capital and create capital shortfalls amounting to five times the required minimum capital for affected banks.

### Supervision, compliance, and regulatory issues
- Observance of regional prudential regulations has improved, but several banks still do not comply with capital adequacy and risk exposure ratios.
- Enforcement actions:
  - Two domestic banks were placed under administrative order; another domestic bank is being closely monitored by the COBAC.
  - COBAC has suspended profit distributions to shareholders as a remedy until compliance is restored.
- Compliance by ownership:
  - Foreign-owned banks appear well-capitalized with solvency ratios above the required 8 percent.
  - Four out of the 11 banks do not comply with solvency requirements due to large NPLs and delays in recapitalization.
  - The two banks recently intervened by the COBAC represent about 5 percent of the sector.
  - Another domestic bank represents 10 percent of the assets of the banking sector and is in a very weak position.
  - Overall sector capitalization is lower than in other CEMAC countries because of low capitalization of domestic banks.
- MFI sector:
  - MFIs account for a significant and increasing share of deposits and credits.
  - Corporate governance remains weak; the sector’s regulatory framework, which came into effect in 2005, is yet to be implemented.
  - Partial supervision of MFIs, given the limited resources of COBAC, is a matter of concern.
- Ministry of Finance role:
  - Issues and withdraws bank licenses after consultation with COBAC and generally follows COBAC recommendations.
  - Tends to avoid license withdrawal (liquidation) because of social costs; timely license withdrawal would reinforce the credibility of banking supervision.

### Stress tests and short-term vulnerabilities
- Tested risks included credit, exchange rate, and liquidity.
- Foreign-owned banks:
  - Appear resilient to most simulated shocks (capital adequacy ratio remains above 8 percent) except for extreme credit-risk scenarios.
  - Exposed to loan concentration risk; common exposure to same large borrowers implies default could have systemic implications.
- Domestic banks:
  - Most vulnerable due to low capital, high loan concentration, and large stock of NPLs.
  - Policy implication from stress tests: minimum capital for domestic banks should be raised and risk concentration limits fully enforced to increase resiliency.

### Specialized financial institutions (CAMPOST, CFC, others)
- CAMPOST:
  - Financial activities technically insolvent for many years due to cumbersome operational and personnel structure and lack of basic management tools and information systems.
  - Reliable financial statements were lacking until recently; the 2004–06 financial accounts have just been produced.
  - In February 2007, authorities entered into a management contract for restructuring with a Canadian company.
- Crédit Foncier du Cameroon (CFC):
  - Leading real estate lender in the CEMAC with assets hovering around francs of the African Financial Community (CFAF) 100 billion; had been insolvent for many years.
  - Financed primarily by a 3.5 percent withholding tax on wages split between employers and employees directly allocated to CFC; recapitalized by the government in 2006.
  - Operating losses and lax credit policies resulted in a ratio of NPLs to gross loan over 80 percent; proceeds from the withholding tax are used mainly to cover operating losses.
  - Attempts to diversify into commercial banking led to even higher losses.
- Housing finance:
  - Mortgages by CFC and other financial institutions represent less than 0.6 percent of GDP in Cameroon.
  - Constraints include unaffordable formal-sector housing prices, land ownership and construction bottlenecks, limited land registry coverage (land registries cover less than 1 percent of the country’s territory and their integrity cannot be assured), restricted credit registries, and lack of long-term resources.

### Financial system development — access, SMEs, and market infrastructure
- Access to financial services:
  - Less than 5 percent of Cameroon’s total population held a bank account or used bank credit services at the end of 2006.
  - Banks provide a narrow range of products: predominantly short-term loans, growing medium-term loans, and basic savings products (demand and term deposits and passbook savings accounts).
- SME finance:
  - Three of the eleven commercial banks and three nonbank financial institutions specifically target SMEs; two other banks have special SME units.
  - Loan accounts for SMEs in these institutions estimated at only 11 percent; outstanding loans to SMEs accounted for only 14 percent of the banking system’s total outstanding loans at the end of 2006.
  - Alliances between banks and MFIs are emerging to deepen SME penetration but require strengthened MFI supervision capacity.
- Legal and informational constraints:
  - Weak legal and regulatory frameworks impede leasing, factoring, venture capital, and private equity development.
  - Lack of financial and accounting information: small borrowers often do not keep accurate accounts; Cameroon has enacted a chart of accounts to consider small companies’ constraints.
  - Limited credit information: BEAC’s Credit Registry (from the 1970s) needs efficiency improvements; plans exist for a Central Balance Sheet Database and a Central Payment Incident Database.
- Interest rate ceiling and pricing transparency:
  - Ceiling on lending rates is 15 percent, perceived by banks as insufficient to cover SME lending risk.
  - Recommended options regarding the ceiling and transparency (as stated in the source):
    - (i) Abolish the ceiling;
    - (ii) Conduct an in-depth analysis of banks’ rates and fees to develop a formula identifying direct, implied, and indirect costs of banking services;
    - (iii) Require banks to notify each borrower of the true cost of their loan using a uniform indicator before signing the loan contract;
    - (iv) Require banks to report their prime lending rates and their minimum and maximum lending and deposit rates to COBAC on a regular basis, along with any increases or decreases in these rates;
    - (v) Post the rates reported by the banks on the COBAC Web site.
- Physical access and branch regulations:
  - Branch outreach declined since sector restructuring in the 1990s and is concentrated in major cities.
  - Opening a branch requires authorization from the Ministry of Finance in consultation with the National Credit Council; requirements for closing branches are not clearly spelled out.
- Taxation:
  - VAT on leasing contracts and SMEs' difficulties managing VAT increase financing costs; authorities should develop a clear policy on taxation of financial products to reduce distortions.

### Policy guidance on development finance institutions and government securities
- Proposed new DFIs:
  - Government plans to establish two new public development finance institutions to promote SMEs and agricultural finance; plans for an SME financing institution appear well advanced.
  - Assessment: prior government-sponsored specialized financial institutions have failed; creating specialized state-sponsored institutions is unlikely to resolve underlying market failures unless complemented by institutional reforms and designed to be limited in time and scope.
- Government securities market:
  - Cameroon plans to issue government securities in the domestic market as a substitute to statutory advances from BEAC.
  - Project expected to be completed by the first quarter of 2008; issuance in book-entry form to facilitate secondary market activity.
  - Need to establish regional auction mechanism and primary dealer-type system, strengthen Treasury cash-flow projections and coordination with BEAC liquidity management, and develop an effective medium-term debt management strategy.

### Strengthening the business environment — legal and judicial issues
- OHADA implementation and legal harmonization:
  - Applicability of the OHADA framework in Anglophone provinces has been resolved, but implementation difficulties remain.
  - Cameroon’s bilingual legal system (civil law and common law) and incomplete harmonization with OHADA leave civil proceedings and commercial registries outdated.
  - Bankruptcy receivers’ expanded OHADA responsibilities are not always regulated or effectively supervised.
- Enforcement of guarantees:
  - Problems related to loan recovery and execution (foreclosing) of guarantees reduce the “realization” rate of mortgages and weaken the banking sector’s position.

*Source: _cr0951 - 10. The financial sector is dominated by (largely foreign-owned) commercial banks.*

### 33. The poor technical quality of translations makes it very difficult to reconcile a

### 33. The poor technical quality of translations makes it very difficult to reconcile a

### Pending legal and institutional issues (OHADA, Cameroon)
- The poor technical quality of translations hinders reconciliation of OHADA concepts (civil law) with equivalent common law concepts.
- Harmonization work completed in Cameroon has not been followed by updates to civil proceedings and commercial registries.
- Secured transactions:
  - Problems of legal enforcement of guarantees.
  - Weaknesses of the judicial system.
  - Poor oversight over the creation and formalization of guarantees by the legal units of financial institutions.
- Land tenure and real property collateral:
  - The land tenure system is not conducive to the constitution of real property collateral or access to loans based on mortgages.
  - Land-related procedures are extremely lengthy, tedious, and costly.
  - Procedures for formal land ownership are complex and restrictive.
- Debt collection and enforcement:
  - Enforcement of mortgages and other collateral remains problematic.
  - The OHADA Uniform Act on simplified recovery procedures and measures of execution is considered complex and excessively formal, encouraging dilatory tactics by debtors and lengthening judicial proceedings.
- Judicial capacity:
  - Commercial and financial disputes are heard by magistrates with no specialization in financial matters.
  - Magistrates are generally unfamiliar with business and financial law.
  - Lack of true specialization of magistrates leads to ambiguities and inconsistencies in rulings and is viewed as a major obstacle to the effectiveness of the judicial system.

*Organization for the Harmonization of Business Law in Africa (Organisation pour l’Harmonisation en Afrique du Droit des Affaires).*

### Accounting and auditing framework
- The legal framework is a superposition of regional (OHADA Uniform Acts), CEMAC Regulations and Decisions, and national laws and regulations, making the system cumbersome and requiring major coordination efforts.
- OHADA chart of accounts:
  - There is room for updating the OHADA chart of accounts according to international standards.
  - The level of information provided is considerably lower than that expected by international investors and lenders.
  - A move to adopt IFRS would be desirable.
  - The OHADA chart of accounts imposes excessive constraints on SMEs, while IFRS includes reporting standards for SMEs.
- Auditor standards and quality control:
  - Lack of comprehensive professional standards for auditors.
  - Lack of quality control for accounting and auditing practices, raising serious concerns about the reliability of auditing.
- Banking-specific disclosures and charts:
  - Current regulations do not require banks to make their audited financial statements public, though some do.
  - COBAC chart of accounts has not been updated in more than a decade and differs from IFRS in many areas, including recognition, valuation, presentation, and disclosures.

### Banking sector vulnerabilities and stress-test overview (Appendix I)
- Main vulnerabilities:
  - Loan concentration (credit risk).
  - Possible failure of some domestic banks (crisis scenario).
- Tests focused on credit, exchange, and liquidity risks.
- Results presented as changes in capital adequacy ratio (CAR) separately for six foreign banks and five domestic banks.

### Credit-concentration scenarios and CAR impacts
- Scenario (i): largest borrower defaults
  - CAR drops by 4 percent.
  - Capital need: corresponds to half of the minimum capital to reach the 8 percent CAR.
- Scenario (ii): three largest borrowers default
  - Default would absorb the capital of the whole system.
  - Required capital injection: equal to eight times the minimum capital to bring CAR to 8 percent.
  - Foreign banks require less effort due to high regulatory capital.
- Specifics:
  - Default of the two borrowers that have large loans with several banks:
    - Leads to a drop of the CAR by 3 percentage points.
    - Foreign banks do not need to increase capital because of high initial CAR.
  - Default of the oil company (loans in several banks):
    - Results in a slight deterioration of the CAR (2.1 percentage points).
    - Only domestic banks would need to increase capital to maintain initial solvency ratio.
  - Default of banks’ foreign correspondent (banks keeping important deposits in their correspondent account):
    - Would lead to a fall of 1 percent in the CAR of the system.
    - Capital increase need would be low.

### Foreign exchange and liquidity risks
- Foreign exchange:
  - Banks have long foreign exchange positions and are vulnerable to an appreciation of the CFAF vis-à-vis the Euro, though appreciation is unlikely given the peg.
  - Only some domestic banks would be vulnerable to a large depreciation of CFAF with respect to the dollar.
- Liquidity:
  - Banks have high liquidity ratios.
  - A massive run on deposits (25 percent of deposits) or the withdrawal of government deposits would make no bank of the system illiquid.
  - The public sector continues to have a significant influence on system liquidity.
  - Two domestic intervened banks under intensive supervision are liquid, but redeeming deposits not covered by their capital and liquid assets would require a one-time injection of the minimum capital of the system.
  - If the crisis spreads and another fragile bank needs liquidation, the cost increases to 100 percent of the regulatory capital of sound (foreign-owned) banks, necessitating monetary authority intervention to bail out the system.

### Stress test numeric highlights (selected figures preserved exactly as in source)
- CAR baseline: 11.8 ... 16.9 1.5
- Credit risk shocks:
  - Default of the largest borrowers: solvency ratio after shock 7.4; capital needed/minimum capital 2.6
  - Default of the three largest borrowers: solvency ratio after shock -1.1; capital needed/minimum capital 6.7; system-wide capital injection equal to eight times the minimum capital noted in narrative
  - Default of shared risks: solvency ratio after shock 8.0; capital needed/minimum capital 0.0
  - Default on oil financing: solvency ratio after shock 9.7; capital needed/minimum capital 1.5
  - Default on correspondent accounts: solvency ratio after shock 9.3; capital needed/minimum capital 0.3
  - Degradation of nonperforming loans: solvency ratio after shock 10.9; capital needed/minimum capital 1.1
  - Increase of nonperforming loans by 50 percent: solvency ratio after shock 6.7; capital needed/minimum capital 3.5
- Foreign exchange risk shocks:
  - 40 percent depreciation against the euro: solvency ratio after shock 18.51; capital needed/minimum capital 0.0
  - 40 percent appreciation against the euro: solvency ratio after shock 8.45; capital needed/minimum capital 1.4
  - 40 percent depreciation against the dollar: solvency ratio after shock 13.14; capital needed/minimum capital 0.5
  - 40 percent appreciation against the dollar: solvency ratio after shock 10.46; capital needed/minimum capital 0.0
- Liquidity risk:
  - Liquidity ratio 3/: 58.4
  - Liquidity ratio after 25 percent withdrawal of total deposits: 33.4
  - Liquidity ratio after 50 percent withdrawal of central government and public enterprise deposits: 40.7
- Crisis scenarios (percent of foreign-owned bank capital):
  - Closure of the two intervene banks: 6.9; 9.0 ...
  - Closure of the three banks in difficulties: -3.3; 100.0 ...
  - Recapitalization of four bank with a CAR < 8 percent: 14.6; 19.0 ...
  - Recapitalization of all bank to a CAR of 12 percent: 15.4; 32.0

*Source: IMF staff estimates and projections, tables and Appendix I stress-test results as presented in the source content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0951.pdf_