## _cr1012 (Executive Summary and Key Sections)

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### Progress since the 2003 FSAP
- Implemented measures:
  - Promulgated new laws strengthening bank supervisory powers.
  - Introduced International Financial Reporting Standards (IFRS) for banks.
  - Laid foundations for risk-based supervision.
  - Restructured problem banks and cleaned up balance sheets.
  - Enhanced communication and increased use of market instruments, improving monetary and exchange rate policy implementation.
- Assessment:
  - Most 2003 FSAP recommendations have now been implemented (see Box 1 in source).

### Financial deepening, outreach, and remaining gaps
- Findings:
  - Private credit to GDP increased rapidly from a very low base but remains low relative to similar countries.
  - Majority of population and businesses lack access to financial services; non-bank intermediaries and corporate debt/equity markets remain small.
- Causes:
  - Economy-wide structural impediments limiting creditworthy clients and increasing costs/risks of providing services.
  - Lack of competition in the banking system, reducing deposit mobilization and contributing to high borrowing costs.
- Medium- to long-term policy measures:
  - Improve debt recovery process.
  - Increase credit information coverage.
  - Enhance transparency on service charges.

### Impact of the global financial crisis and system resilience
- Transmission channels identified:
  - Financial sector linkages: market risk, liquidity risk, counterparty credit risk, contagion via parent banks.
  - Real sector linkages: loan portfolio credit risk via export, aid, and FDI shocks.
- Assessment for Mozambique:
  - No direct effect on the Mozambican financial sector to date.
  - Domestic deposits account for more than 90 percent of liabilities for most banks.
  - Liquid assets cover more than 50 percent of deposits.
  - Banks’ securities portfolios are concentrated in treasury bills and deposits with parent banks.
  - Net open position limits for banks are less than 20 percent of own funds.
  - High provisioning requirements on lending in foreign currency to non-exporters limit indirect foreign exchange risk.
  - Mitigants: capital controls, strength of parent banks, banks’ high liquidity, BM’s gross international reserves far exceed banking system foreign currency deposits.
- Main vulnerability:
  - Real-sector shock: lower exports and private capital inflows would slow growth and weigh on loan portfolios; credit risk is the most significant source of risk.
  - Weaknesses in loan classification scheme preclude definitive assessment of asset quality.

### Supervision, risk monitoring, and crisis management
- Shortcomings:
  - Loan classification and provisioning rules need improvement.
  - Assessment of risks other than credit (liquidity, operational, country, market, interest rate) is weak.
  - Remedial action framework needs strengthening; BM has adequate powers but has used them sparingly.
- Cross-border issues:
  - Predominance of foreign-owned banks requires enhanced home-host coordination to ensure adequacy of capital allocations to Mozambique operations and to monitor concentration of deposits in parent banks.
- Crisis management recommendations:
  - Review bank resolution and emergency liquidity assistance (ELA) framework.
  - Strengthen bank resolution and emergency liquidity assistance policies and instruments.
  - Introduce deposit insurance only after key preconditions are in place.

### Money and debt markets, and central bank liquidity management
- Rationale:
  - Deeper local money and debt markets would enhance monetary and financial stability and support intermediation.
- Key recommendations:
  - Improve trading liquidity to establish a market-based yield curve.
  - Ensure the overnight standing loan facility rate does not act as a ceiling for treasury bills rates.
  - Treasury should keep regular presence in domestic debt market and issue fixed-rate bonds to provide a basis for a yield curve beyond one year.
  - Central bank liquidity management improvements:
    - Adopt a longer-term perspective for achieving monetary targets.
    - Use open market operations on a daily basis to fine-tune liquidity.
    - Issue fungible treasury bonds to replace some outstanding treasury bills to facilitate central bank liquidity control.
    - Use overnight repos and reverse repos for Banco de Moçambique (BM) short-term liquidity intervention and collateralize standing overnight deposit facility (Box 2 recommendations).

### Payments system and RTGS
- Progress and priorities:
  - Commendable progress addressing national payment system shortcomings, but follow-through is needed.
  - Priority actions before RTGS completion:
    - Finalize outstanding regulations and operational manual.
    - Ensure participants fully understand rights and obligations in the system.
    - Align central bank policies and internal processes to support efficient utilization of liquidity and credit facilities in RTGS.
  - Additional recommendations:
    - Establish a payment system oversight framework.
    - Introduce interoperability of cards and promote infrastructure sharing in retail payments.
    - Establish rules for mobile financial services provision, especially payments.

### Insurance and pensions
- Status:
  - Insurance and pensions sectors are not systemically important at present due to small size and limited linkages with core banking sector.
  - Covered during FSAP mission; detailed discussion in World Bank FSA.

### Key recommendations (selected, from Box 2)
- Access to Finance (Short and Medium term):
  - Standardize bank fees, regularly consolidate and publish fee information (Short term).
  - Expand coverage and range of information collected by the credit registry; ensure legal framework allows private credit registries (Short term).
  - Computerize and improve efficiency of property registry (Short term).
  - Review and improve transparency of court fee structure (Short term).
  - Enact financial reporting legislation covering regulatory aspects of accounting and auditing (Medium term).
  - Rationalize regulatory framework for microfinance and develop capacity building strategy; discourage bundling of services by banks.
- Banking System Soundness and Supervision:
  - Monitor international exposures and encourage banks to develop a stress testing framework (Short term).
  - Improve loan classification and provisioning rules; review banks’ impaired loan models; introduce remedial action program; issue guidelines on integrated risk management (Medium term).
  - Strengthen crisis preparedness, ensure legal framework allows flexible resolution tools, including partial purchase and assumption or a bridge bank; introduce deposit insurance after preconditions in place; strengthen cross-border collaboration with home country supervisors.
- Money and Debt Markets and Liquidity Management:
  - Use overnight repos and reverse repos for BM short-term liquidity intervention; collateralize standing overnight deposit facility (Short term).
  - Extend horizon of liquidity forecast to one year (Medium term).
  - Increase stock of outstanding OTs through regular auctions; start issuing fixed rate OTs; issue fungible BTs and OTs and reduce number of outstanding maturities.
- Pensions and Insurance:
  - Improve INSS governance via IT system, publication of financial statements, assessment of investment portfolio value (Short term).
  - Publish outstanding regulations for all pension providers; test adequacy of financial resources and business plans of insurance companies; conduct actuarial study of INSS (Medium term).
  - Adopt explicit investment policy for INSS; subject INSS and other pension providers to independent supervision; improve IGS data collection.
- Payment System:
  - Complete RTGS implementation and monitor risks in the CEL (Short term).
  - Establish payment system oversight framework and interoperability of cards; strengthen staffing in Payment System Unit (Medium term).
  - Establish rules for mobile financial services provision, especially payments.

### Selected macroeconomic indicators (preserved exactly as in source)
- Real GDP Growth: 2002: 9.2; 2003: 6.5; 2004: 7.9; 2005: 8.4; 2006: 8.7; 2007: 7.0; 2008 (Est.): 6.8
- CPI end-of-period, percent change: 2002: 9.1; 2003: 13.8; 2004: 9.1; 2005: 11.2; 2006: 9.4; 2007: 10.3; 2008 (Est.): 6.2
- Current account balance, before grants, percent of GDP: 2002: -19.2; 2003: -20.4; 2004: -14.6; 2005: -16.8; 2006: -15.4; 2007: -15.9; 2008 (Est.): -20.4
- Total net aid, percent of GDP: 2002: 15.1; 2003: 13.9; 2004: 11.9; 2005: 8.2; 2006: 12.8; 2007: 13.0; 2008 (Est.): 14.0
- Private capital inflows, percent of GDP: 2002: 19.1; 2003: 7.7; 2004: 2.7; 2005: 2.6; 2006: 2.7; 2007: 5.7; 2008 (Est.): 4.0
  - of which: Foreign direct investment, percent of GDP: 2002: 9.0; 2003: 7.3; 2004: 4.3; 2005: 1.6; 2006: 2.1; 2007: 5.3; 2008 (Est.): 5.9
- Gross international reserves, US$ million: 2002: 825; 2003: 947; 2004: 1,160; 2005: 1,103; 2006: 1,241; 2007: 1,152; 2008 (Est.): 1,660
- Months of import coverage: 2002: 5.4; 2003: 5.4; 2004: 5.8; 2005: 4.6; 2006: 4.4; 2007: 5.0; 2008 (Est.): 4.7
- Percent of short-term liabilities: 2002: 39; 2003: 64; 2004: 01; 2005: 37; 2006: 54; 2007: 57; 2008 (Est.): 13; 2008 line appears in source table as "Percent of short-term liabilities39640137540557132364"
- Broad money (M3), percent of GDP: 2002: 27.3; 2003: 32.4; 2004: 26.6; 2005: 28.6; 2006: 29.7; 2007: 32.4; 2008 (Est.): 33.7
  - of which: Currency outside banks, percent of GDP: 2002: 3.5; 2003: 4.3; 2004: 4.1; 2005: 4.0; 2006: 4.0; 2007: 4.3; 2008 (Est.): 4.0
- Private sector credit, stock, percent of GDP: 2002: 12.9; 2003: 12.7; 2004: 9.4; 2005: 11.8; 2006: 13.1; 2007: 13.3; 2008 (Est.): 18.2
- Foreign currency deposits, percent of total deposits: 2002: 46.7; 2003: 45.0; 2004: 40.1; 2005: 42.1; 2006: 40.3; 2007: 41.8; 2008 (Est.): 37.7
- Foreign currency credit, percent of total private sector credit: 2002: 45.9; 2003: 56.3; 2004: 58.4; 2005: 46.7; 2006: 29.3; 2007: 24.4; 2008 (Est.): 31.6

---

### Macroeconomic strategy, performance, and stress tests

### Macroeconomic strategy and recent performance
- Fiscal policy: support priority social spending, maintain debt sustainability, limit domestic borrowing to avoid crowding out private sector.
- Monetary policy: price stability through reserve money targeting with a relatively flexible exchange rate regime.
- Improvements reduced high and volatile real interest rates identified as a major vulnerability in 2003 FSAP.
- Donor and investor support: policies have garnered substantial donor support and FDI.

### Stress tests: methodology and results (Box 4)
- Scenarios and assumptions:
  - Credit risk I (macro-financial scenario analysis): two deviations from staff baseline for 2009:
    - Drop in total export receipts by 25 percent.
    - Simultaneous drop in exports, foreign aid, and FDI by 25 percent.
  - Impact on real GDP growth: first shock = drop by 3.4 percentage points; second shock = drop by 5.6 percentage points.
  - Elasticity of change in NPLs to real GDP growth used: -3.0.
  - Credit risk II (concentration risk): default of each bank’s largest, 3 largest, and energy sector obligors analyzed.
  - Liquidity risk: estimate deposit reduction magnitude that would deplete banks’ liquid assets.
  - Exchange rate risk: assume depreciations of 25 percent and 50 percent and evaluate impact on capital adequacy.
- Aggregate conclusions:
  - System-level resilience: current capitalization sufficient to withstand most plausible macroeconomic shocks; system-wide CARs under stand-alone and combined aid, export, and FDI scenarios drop to 13.1 percent and 12.6 percent respectively.
  - Bank-level vulnerabilities:
    - Under combined shock: one medium-size bank would have entire capital depleted; two other banks’ CARs would fall below required 8 percent.
    - Under single export shock: two banks would fall below 8 percent.
  - Concentration risk:
    - Default of single largest borrower of each bank reduces system-wide CAR to 7.8 percent, with three small and medium-size banks under minimum.
    - Default of three largest obligors would deplete capital of affected banks (extremely low probability).
    - Failure of energy companies among three largest obligors reduces system-wide CAR to 9 percent.
  - Exchange rate risk (summary):
    - 25 percent depreciation: system CAR 14.3; capital loss/gain (in % of Capital): 6.0 (system).
    - 50 percent depreciation: system CAR 15.1; capital loss/gain (in % of Capital): 12.0 (system).
  - Liquidity risk (summary):
    - Liquid assets (mln MT): system 27,971.
    - Liquid liabilities (mln MT): system 35,304.
    - Liquidity ratio: system 79.2.
    - Size of general deposit decrease that would deplete liquid assets: system 42.3 percent.
    - Size of decrease of private sector deposits that would deplete liquid assets: system 77.5 percent.
- Data limitations:
  - Interest rate risk stress tests could not be conducted due to lack of data.

---

### Financial sector structure, depth, impediments, and policy actions

### Financial sector structure and depth
- System concentration and ownership:
  - The financial sector is dominated by a few large, foreign banks.
  - Banks account for almost all the financial sector’s assets; the 3 largest account for 85 percent of total assets.
  - Almost all major banks are majority-foreign owned; government maintains participations in some.
- Microfinance, pension, insurance, and stock market:
  - MFIs: 87 MFIs in 2008, up from 19 in 2003; four MFIs control more than 60 percent of loan portfolio.
  - Pension sector: dominated by obligatory, state-run PAYGO system; a few small private corporate pension funds.
  - Insurance sector: claims less than 1 percent of GDP; consists of 5 private and one majority state-owned company.
  - Stock market: 13 listed securities, of which only one is a company equity share.
- System asset composition (Latest 2008):
  - Commercial Banks total assets: 90,592,850 (Mln. Mt.) representing 96.0 percent of total assets.
  - Total depository: 93,677,281 (Mln. Mt.) representing 99.2 percent of total assets.
  - Total financial system: 94,409,775 (Mln. Mt.) representing 100.0 percent of total assets.
- Depth and outreach metrics:
  - Deposits-to-GDP: 25 percent.
  - Private sector credit-to-GDP: 12.8 percent.
  - Percentage of firms accessing lines of credit: 13 percent (declined from 29 percent in 2002 and 26 percent in 2005).
  - Less than 6 percent of the adult population has credit from a registered financial institution.
  - Just over 10 percent has a savings account.
  - Rural and peri-urban branches held roughly 20 percent of the number of savings accounts while these areas account for over 60 percent of the country’s inhabitants.

### What holds back financial intermediation?
- Economy-wide impediments:
  - Poor physical access and infrastructure; unstable electricity; poor roads; distance from central bank offices; scarcity of skilled human resources.
  - Weak legal and regulatory framework: enforcement of contracts costly and slow; draft bankruptcy law submitted but not enacted.
  - Weak financial reporting and shortage of qualified accountants; arbitration center in Maputo processes less than 25 cases per year and fees are high.
  - Problems with credit and property information infrastructure:
    - BM’s credit risk bureau collects information from 21 regulated financial institutions but scope is limited and designed primarily for prudential monitoring.
    - Property registry limited: estimated that less than 30 percent of properties are registered; paper-based and not electronically linked between major cities.
- Financial-sector impediments:
  - Lack of competition:
    - Industry concentration high; Mozambique’s H-statistic (Rosse-Panzar) is around 0.3.
    - Net interest margin declining but much higher than comparable countries.
    - Bank profitability among the highest in the world and increasing since 2004.
    - BM study: lending rates of bigger banks tend to be responsive only to a market leader.
  - High overhead costs:
    - Overhead costs account for over half of net interest margin.
    - Overhead costs to total assets: 6.5, 6.3, 6.1, 6.1 for 2004, 2005, 2006, 2007 respectively.
  - High bank commissions and fees:
    - Examples (In MT): Cost of issuing 1 normal check 12.5; Cost of bouncing check 1500.0; ATM cash withdrawal 8.0; Interbank money transfer commission 500.0; Annual credit card fee 1820.0.
    - Price dispersion examples (In MT): Close account: market minimum 50, market maximum 1000; Consult balance at branch: 7–25; Dormant account penalty: 5–8615.
  - Effects:
    - High costs and mandatory bundling inhibit savings mobilization and deter credit expansion.

### Policy actions to remove impediments (Section 20)
- Legal and regulatory:
  - Encourage alternative dispute-resolution mechanisms and out-of-court settlements; expand arbitration services; establish a small claims court.
  - Strengthen and modernize the judiciary, including review of the court fee structure.
  - BM should clarify its requirements on mobile banking.
- Institutional infrastructure and information:
  - Expand the scope of credit information to cover a greater range of information and potential borrowers.
  - Implement plans to modernize the property registries.
- Financial reporting and accounting:
  - Enact new financial reporting legislation covering regulatory aspects of accounting and auditing; amend the Commercial Code accordingly.
  - Until number of qualified accountants reaches satisfactory level, relax restrictions on foreign workers in this area.
- Market structure and competition:
  - Promote competition through greater transparency on commissions and fees and unbundling of financial services.
  - Enhance trading liquidity in the interbank market.

### Timing, constraints, and interim guidance
- Many measures yield gradual results; impediments reflect long-run economic realities.
- Interim best policy for BM:
  - Maintain macroeconomic stability.
  - Continue to strengthen supervision.
  - Ensure transparency and a level-playing field.
- Recommendation: Government should refrain from interfering in credit allocation (e.g., recently-introduced direct lending scheme by districts).

---

### Banking sector soundness, loan classification, and supervisory framework

### Banking sector soundness — summary findings
- Asset quality and profitability:
  - System-wide reported NPLs fell from 17.1 percent of total loans in 2003 to 2.8 percent at end-September 2008 (and an estimated 1.8 percent at year-end).
  - Average CAR as of September 2008: 13.8 percent of risk-weighted assets; all banks fulfilled minimum required CAR of 8 percent.
- Dollarization and FX credit risk:
  - FX credit risk declined following Notice no. 05/GBM/2005 requiring an initial 50 percent provisioning of foreign currency loans to non-exporters.
- Liquidity and funding:
  - Metical liquid assets cover 79 percent of short-term domestic currency liabilities.
  - Foreign assets (mostly deposits at correspondent banks) cover 69 percent of foreign currency deposits.
  - Borrowed foreign funds limited (less than 1 percent of total assets as of September 2008).

### Key Financial Soundness Indicators (preserved exactly as in source)
- Capital adequacy:
  - Regulatory capital to risk-weighted assets: 17.0 (2003), 13.8 (Sep-08).
  - Regulatory Tier I capital to risk-weighted assets: 14.7 (2003), 11.3 (Sep-08).
  - Capital (net worth) to assets: 8.0 (2003), 10.9 (Sep-08).
- Asset composition and quality:
  - FX loans to total loans: 69.3 (2003), 33.8 (Sep-08).
  - NPLs to gross loans*: 17.1 (2003), 2.8 (Sep-08).
  - NPLs net of provisions to capital*: 7.9 (2003), 4.6 (Sep-08).
- Earnings and profitability:
  - ROA*: 1.2 (2003), 3.6 (Sep-08, annualized).
  - ROE*: 16.3 (2003), 44.3 (Sep-08, annualized).
  - Spread between reference loan and deposit rates (90 days local currency): 17.4 (2003), 10.8 (Sep-08).
- Funding and liquidity:
  - Liquid assets to total assets (DAT-C): 57.7 (2003), 55.9 (Sep-08).
  - Customer deposits to total (non-interbank) loans: 251.9 (2003), 183.6 (Sep-08).
  - FX liabilities to total liabilities: 46.4 (2003), 43.6 (Sep-08).
- Additional spread decomposition 2007 (In percent): Profit margin 2.52; Provisions 2.20; Reserve requirements 0.37; Overhead 8.29; Tax 0.50; Interest spread 13.88.

### Loan classification, provisioning, and recommended reforms
- Current departures from international best practice:
  - Mozambique classifies as NPL only amounts of principal and interest past due, not the entire loan outstanding (underestimates NPLs).
  - Banks must classify as nonperforming all amounts past due for any length (even one day) rather than 90 days (overstates NPLs).
- Tentative staff estimate: “true” level of NPL in system around 2.4 percent (broadly equivalent net effect of the two departures).
- Specific provisions stood at 125 percent of minimum regulatory requirement overall, but five banks failed to meet minimum levels and two banks were substantially underprovisioned.
- Required general provisions: additional 2 percent of loans (not risk-based).
- Recommendations:
  - Bring loan classification and provisioning rules in line with international best practice and risk-based principles.
  - Increase differentiation in provisioning timebands (current first band covers payments overdue between 1–180 days).
  - Relate classification and provisioning to debtor repayment capacity.

### Risk management, microfinance, and supervisory capacity
- Banks’ risk management is uneven:
  - Most large banks conduct some stress testing or risk sensitivity analysis for liquidity or interest rate risk; no bank reported stress testing their loan portfolio.
  - Some banks rely on parent banks’ models, which may not reflect Mozambique-specific risks.
- Microfinance and cooperatives:
  - Some MFIs and cooperatives have high levels of NPLs; some non-deposit taking MFIs are not reporting to BM as required.
  - Minimum capital requirement for rural microbanks reduced to MTN 750,000 (about US$50,000).
- Recommendations:
  - BM should encourage better stress testing methodologies and build capacity to collect and analyze sectoral exposures, probability of default, exposure at default, and loss given default.
  - BM should rationalize regulatory framework for MFIs and develop capacity building strategy.

---

### Supervisory framework, payment systems oversight, and remedial action program

### Supervisory framework and capacity (achievements)
- Reforms implemented:
  - Introduction of rules for consolidated supervision.
  - A new inspection manual.
  - Promulgation of the AML law.
  - Implementation of IFRS for banks.
- Home-host supervisory relationships strengthened through MOUs or informally.
- BSD staff increased substantially; emphasis on training.
- BM has good overview of sector supported by regular reports and yearly on-site inspections.

### Remaining supervisory shortcomings (BCP/ROSC findings)
- Weaknesses:
  - Loan classification and provisioning.
  - Risk monitoring and management for interest rate, country, liquidity, market, operational risks.
  - Remedial action not used effectively; occasional slowness to act.
  - AML supervision: no specific inspections since 2006; lack of onsite inspections and offsite monitoring.
  - Cross-border supervision: need continued development of relationships with home country regulators and review of parent-company systems.
- Recommended actions:
  - Develop guidance/regulations for non-credit risks and incorporate into inspectors’ manuals.
  - Strengthen remedial action framework with clear graduated measures.
  - Ensure capacity to review IFRS compliance and reconcile IFRS with prudential requirements.

### Financial safety nets and crisis management
- Deposit insurance:
  - Draft DIS (pay-box) proposal under government review; key elements appear to conform to best practice.
  - Recommendation: Do not introduce DIS before preconditions in place; conduct assessment against International Association of Deposit Insurers core principles.
  - Preconditions: no pre-existing problem institutions; effective supervision; strong remedial action and resolution frameworks.
- Legal and operational gaps:
  - Bank liquidation timeframes and criteria unclear.
  - Uncertainty whether legal framework allows bridge bank or partial purchase and assumption, or differential treatment of creditors.
  - BM should consider a comprehensive and explicit ELA framework; law grants BM power to provide liquidity assistance for up to 180 days and to discount short-term securities.
  - Authorities should develop crisis management plan for systemic banks, review legal framework for failure of large banks, and coordinate with foreign supervisors and treasury.

### Payments systems and securities settlement (priority actions)
- Oversight and capacity:
  - BM should design and adopt framework for oversight of payment systems and build capacity in payments unit.
- Securities settlement:
  - Accelerate electronic link between BVM and BM to reduce settlement cycle and facilitate DVP.
  - Clarify BM position on interoperability of bank cards, consider national switch, and address high ATM withdrawal fees.
  - Clarify views on participation by mobile phone providers and other third parties in payments.

### Remedial Action Program (Appendix II, paragraphs 80–84)
- Program features:
  - Well-defined enforcement tools adaptable to gravity of situation.
  - Transparency: publish situations under which supervisory action will be taken and describe subsequent response.
  - Detailed internal operating procedures with responsibilities, process steps, review process, and timeframes.
  - Link initiation of remedial action to capital, reporting delinquency, adequacy of bank policies and risk management, violations of law, and bank performance (CAMEL).
  - Published guidelines should state ultimate actions (intervention, liquidation, forced sale/merger) if banks do not comply.
  - BM internal audit/internal control should review Remedial Action Program implementation.

---

*Italicized source attribution line.*

### Executive Summary ......................................................................................................

### Executive Summary

### Progress since the 2003 FSAP
- Since the 2003 FSAP, Mozambique has made significant progress toward developing and strengthening the financial sector and improving central bank operations.
- Implemented measures:
  - Promulgated new laws strengthening bank supervisory powers.
  - Introduced International Financial Reporting Standards (IFRS) for banks.
  - Laid foundations for risk-based supervision.
  - Restructured problem banks and cleaned up balance sheets.
  - Enhanced communication and increased use of market instruments, improving monetary and exchange rate policy implementation.
- Most 2003 FSAP recommendations have now been implemented (see Box 1 in source).

### Financial deepening, outreach, and remaining gaps
- Financial deepening has been less satisfactory:
  - The ratio of private credit to GDP has increased rapidly from a very low base but remains low relative to similar countries.
  - Majority of population and businesses lack access to financial services.
  - Non-bank financial intermediaries and corporate debt and equity markets remain small and underdeveloped.
- Causes of limited progress:
  - Economy-wide structural impediments limiting creditworthy clients and increasing costs/risks of providing services.
  - Lack of competition in the banking system, reducing deposit mobilization and contributing to high borrowing costs.
- Policy measures to address impediments (medium- to long-term impact):
  - Improve debt recovery process.
  - Increase credit information coverage.
  - Enhance transparency on service charges.

### Impact of the global financial crisis and system resilience
- The global crisis raised new challenges, but associated financial sector risks for Mozambique appear manageable:
  - No direct effect on the Mozambican financial sector to date.
  - Direct linkages between domestic and foreign financial institutions are limited; however, sizable foreign assets of Mozambican bank subsidiaries in correspondent accounts with parent banks could be a potential contagion channel.
  - Strength of parent banking groups, limited market and liquidity risk exposures, and capital controls mitigate spillover risks.
- Main vulnerability:
  - Lower exports and private capital inflows would slow growth and weigh on loan portfolios, especially given high concentration—making credit risk the most significant source of risk.
  - High levels of capital and apparent strength of current loan portfolio imply relative resilience to credit risk, but weaknesses in loan classification scheme preclude a definitive assessment.

### Supervision, risk monitoring, and crisis management
- Progress noted in banking supervision, but key shortcomings remain:
  - Loan classification and provisioning rules need improvement.
  - Assessment of risks other than credit (liquidity, operational, country risk) remains weak.
  - Remedial action framework needs strengthening.
- Given predominance of foreign-owned banks:
  - Supervisors should enhance home-host coordination to ensure adequacy of capital allocations to Mozambique operations.
  - Monitor concentration of deposits in parent banks requiring host-home cooperation.
- Crisis management recommendations:
  - Review bank resolution and emergency liquidity assistance framework.
  - Strengthen bank resolution and emergency liquidity assistance policies and instruments.
  - Introduce deposit insurance only after key preconditions are in place.

### Money and debt markets, and central bank liquidity management
- Deeper local money and debt markets would enhance monetary and financial stability and support intermediation.
- Key policy challenges and recommendations:
  - Improve trading liquidity to establish a market-based yield curve.
  - Enhance price discovery at treasury bill auctions by ensuring the overnight standing loan facility rate does not act as a ceiling for treasury bills rates.
  - Treasury should keep regular presence in domestic debt market and issue fixed-rate bonds to provide basis for a yield curve beyond one year.
  - Central bank liquidity management improvements:
    - Adopt a longer-term perspective for achieving monetary targets.
    - Use open market operations on a daily basis to fine-tune liquidity.
    - Issue fungible treasury bonds to replace some outstanding treasury bills to facilitate central bank liquidity control.
  - Use overnight repos and reverse repos for Banco de Moçambique (BM) short-term liquidity intervention and collateralize standing overnight deposit facility (Box 2 recommendations).

### Payments system and RTGS
- Commendable progress addressing national payment system shortcomings, but follow-through is needed.
- Priority actions before RTGS completion:
  - Finalize outstanding regulations and operational manual.
  - Ensure participants fully understand rights and obligations in the system.
  - Align central bank policies and internal processes to support efficient utilization of liquidity and credit facilities in RTGS.
- Additional recommendations:
  - Establish a payment system oversight framework.
  - Introduce interoperability of cards and promote infrastructure sharing in retail payments.
  - Establish rules for mobile financial services provision, especially payments (Box 2).

### Insurance and pensions
- Insurance and pensions sectors are not systemically important at present due to small size and limited linkages with core banking sector.
- These sectors are important for development and were covered during the FSAP mission; detailed discussion is in the World Bank FSA.

### Key recommendations (selected, from Box 2)
- Access to Finance (Short and Medium term):
  - Standardize bank fees, regularly consolidate and publish fee information (Short term).
  - Expand coverage and range of information collected by the credit registry; ensure legal framework allows private credit registries (Short term).
  - Computerize and improve efficiency of property registry (Short term).
  - Review and improve transparency of court fee structure (Short term).
  - Enact financial reporting legislation covering regulatory aspects of accounting and auditing (Medium term).
  - Rationalize regulatory framework for microfinance and develop capacity building strategy; discourage bundling of services by banks.
- Banking System Soundness and Supervision:
  - Monitor international exposures and encourage banks to develop a stress testing framework (Short term).
  - Improve loan classification and provisioning rules; review banks’ impaired loan models; introduce remedial action program; issue guidelines on integrated risk management (Medium term).
  - Strengthen crisis preparedness, ensure legal framework allows flexible resolution tools, including partial purchase and assumption or a bridge bank; introduce deposit insurance after preconditions in place; strengthen cross-border collaboration with home country supervisors.
- Money and Debt Markets and Liquidity Management:
  - Use overnight repos and reverse repos for BM short-term liquidity intervention; collateralize standing overnight deposit facility (Short term).
  - Extend horizon of liquidity forecast to one year (Medium term).
  - Increase stock of outstanding OTs through regular auctions; start issuing fixed rate OTs; issue fungible BTs and OTs and reduce number of outstanding maturities.
- Pensions and Insurance:
  - Improve INSS governance via IT system, publication of financial statements, assessment of investment portfolio value (Short term).
  - Publish outstanding regulations for all pension providers; test adequacy of financial resources and business plans of insurance companies; conduct actuarial study of INSS (Medium term).
  - Adopt explicit investment policy for INSS; subject INSS and other pension providers to independent supervision; improve IGS data collection.
- Payment System:
  - Complete RTGS implementation and monitor risks in the CEL (Short term).
  - Establish payment system oversight framework and interoperability of cards; strengthen staffing in Payment System Unit (Medium term).
  - Establish rules for mobile financial services provision, especially payments.

### Selected macroeconomic indicators (Table 1: Mozambique: Selected Macroeconomic Indicators, 2002–08)
- Real GDP Growth: 2002: 9.2; 2003: 6.5; 2004: 7.9; 2005: 8.4; 2006: 8.7; 2007: 7.0; 2008 (Est.): 6.8
- CPI end-of-period, percent change: 2002: 9.1; 2003: 13.8; 2004: 9.1; 2005: 11.2; 2006: 9.4; 2007: 10.3; 2008 (Est.): 6.2
- Current account balance, before grants, percent of GDP: 2002: -19.2; 2003: -20.4; 2004: -14.6; 2005: -16.8; 2006: -15.4; 2007: -15.9; 2008 (Est.): -20.4
- Total net aid, percent of GDP: 2002: 15.1; 2003: 13.9; 2004: 11.9; 2005: 8.2; 2006: 12.8; 2007: 13.0; 2008 (Est.): 14.0
- Private capital inflows, percent of GDP: 2002: 19.1; 2003: 7.7; 2004: 2.7; 2005: 2.6; 2006: 2.7; 2007: 5.7; 2008 (Est.): 4.0
  - of which: Foreign direct investment, percent of GDP: 2002: 9.0; 2003: 7.3; 2004: 4.3; 2005: 1.6; 2006: 2.1; 2007: 5.3; 2008 (Est.): 5.9
- Gross international reserves, US$ million: 2002: 825; 2003: 947; 2004: 1,160; 2005: 1,103; 2006: 1,241; 2007: 1,152; 2008 (Est.): 1,660
- Months of import coverage: 2002: 5.4; 2003: 5.4; 2004: 5.8; 2005: 4.6; 2006: 4.4; 2007: 5.0; 2008 (Est.): 4.7
- Percent of short-term liabilities: 2002: 39; 2003: 64; 2004: 01; 2005: 37; 2006: 54; 2007: 57; 2008 (Est.): 13; 2008 line appears in source table as "Percent of short-term liabilities39640137540557132364" — refer to source table for exact formatting.
- Broad money (M3), percent of GDP: 2002: 27.3; 2003: 32.4; 2004: 26.6; 2005: 28.6; 2006: 29.7; 2007: 32.4; 2008 (Est.): 33.7
  - of which: Currency outside banks, percent of GDP: 2002: 3.5; 2003: 4.3; 2004: 4.1; 2005: 4.0; 2006: 4.0; 2007: 4.3; 2008 (Est.): 4.0
- Private sector credit, stock, percent of GDP: 2002: 12.9; 2003: 12.7; 2004: 9.4; 2005: 11.8; 2006: 13.1; 2007: 13.3; 2008 (Est.): 18.2
- Foreign currency deposits, percent of total deposits: 2002: 46.7; 2003: 45.0; 2004: 40.1; 2005: 42.1; 2006: 40.3; 2007: 41.8; 2008 (Est.): 37.7
- Foreign currency credit, percent of total private sector credit: 2002: 45.9; 2003: 56.3; 2004: 58.4; 2005: 46.7; 2006: 29.3; 2007: 24.4; 2008 (Est.): 31.6

*Italicized source attribution line.*
*Source: IMF staff summary of “Executive Summary” (Mozambique FSAP update) as provided in the source content.*

### 12. This performance largely reflects a prudent and successful macroeconomic

### _cr1012 - 12. This performance largely reflects a prudent and successful macroeconomic

### Macroeconomic strategy and recent performance
- Fiscal policy: focused on supporting priority social spending, maintaining debt sustainability, and limiting domestic borrowing in order to avoid crowding out the private sector.
- Monetary policy: oriented toward price stability through reserve money targeting in the context of a relatively flexible exchange rate regime.
- Improvements in monetary management: helped reduce high and volatile real interest rates (identified as a major vulnerability in the 2003 FSAP).
- Financial sector development: advanced in line with a comprehensive financial sector strategy largely based on the 2003 FSAP recommendations.
- Donor and investor support: These policies have garnered substantial donor support and FDI.

### Global financial turmoil: transmission channels and risk assessment (Box 3)
- Two major transmission channels to Mozambique:
  - Financial sector linkages (market risk, liquidity risk, counterparty credit risk).
  - Real sector linkages (loan portfolio credit risk).
- Financial sector linkage channels described:
  - Direct exposure of local banks to securities losses or to illiquid asset and funding markets.
  - Exposure to counterparties with severe losses or illiquidity.
  - Sudden stop of capital inflows, with repercussions for bank liquidity and market risk exposures.
  - Contagion through parent banks' balance sheets (e.g., impairment of assets held with parents).
  - Confidence shock to domestic depositors following bad news about a parent bank or of financial protectionism abroad (e.g., blanket guarantee of deposits in the developed markets).
- Real sector linkage channels described:
  - Domestic borrowers default due to a decline in income caused by a drop in external demand and/or in export commodity prices.
  - Domestic borrowers default due to a sudden stop of capital flows and its impact on income, liquidity, interest rates, and exchange rates.
- Assessment for Mozambique:
  - Exposure via direct financial linkages is low:
    - Domestic deposits account for more than 90 percent of liabilities for most banks.
    - Liquid assets cover more than 50 percent of deposits.
    - Banks’ securities portfolios are concentrated in treasury bills and deposits with their parent banks.
    - Net open position limits for banks are less than 20 percent of own funds.
    - High provisioning requirements on lending in foreign currency to non-exporters limit indirect foreign exchange risk.
    - Interest rate risk is limited by the preponderance of short-term and floating rate exposures.
  - Possible exception: low but non-zero risk of financial contagion from banks’ exposure to parents (foreign-bank subsidiaries have substantial foreign assets invested with their parent or related correspondent banks). Contagion could take the form of direct pressures to transfer liquidity or a rumor sparking a loss of confidence.
  - Mitigating factors:
    - Capital controls and the current financial strength of parent banks.
    - Banks’ high level of liquidity.
    - BM’s gross international reserves far exceed banking system foreign currency deposits.
  - Exposure via real sector linkages is significant:
    - Exports are highly concentrated and the economy is heavily reliant on aid and FDI.
    - A sharp decline in export receipts and/or aid and FDI flows would translate into lower growth and increased credit risk.
    - Mitigant: shocks propagated through this channel would take time to affect the banking system, providing borrowers, banks, and policy-makers leeway to adjust.

### Financial sector structure, depth, and outreach
- System concentration and ownership:
  - The financial sector is dominated by a few large, foreign banks.
  - Banks account for almost all the financial sector’s assets, and the 3 largest account for 85 percent of total assets.
  - Almost all major banks are majority-foreign owned, either by Portuguese or other African banks, although the government maintains participations in some.
- Microfinance and pension/insurance/stock market:
  - Microfinance institutions (MFIs) and micro-banks are small and not systemically important, although they have expanded rapidly: 87 MFIs in 2008, up from 19 in 2003.
  - MFI sector concentration: four MFIs control more than 60 percent of the loan portfolio.
  - Pension sector: dominated by the obligatory, state-run PAYGO system, with a few small private corporate pension funds.
  - Insurance sector: claims less than 1 percent of GDP; consists of 5 private and one majority state-owned company.
  - Stock market: in its infancy, with just 13 listed securities, of which only one is a company equity share.
- System asset composition (selected figures from Table 2):
  - Commercial Banks total assets: 90,592,850 (Mln. Mt.) and represent 96.0 percent of total assets (Latest 2008).
  - Total depository (Latest 2008): 93,677,281 (Mln. Mt.) and represent 99.2 percent of total assets.
  - Total financial system (Latest 2008): 94,409,775 (Mln. Mt.) and represent 100.0 percent of total assets.
- Depth and outreach metrics:
  - Deposits-to-GDP: 25 percent.
  - Private sector credit-to-GDP: 12.8 percent.
  - Compared to regional peers: private credit-to-GDP ratio is below average and the loan-to-deposit ratio is particularly low, and up only marginally since the 2003 FSAP.
  - Access indicators:
    - Percentage of firms accessing lines of credit: 13 percent (declined from 29 percent in 2002 and 26 percent in 2005).
    - Less than 6 percent of the adult population has credit from a registered financial institution.
    - Just over 10 percent has a savings account.
    - In 2008, branches in rural and peri-urban areas held roughly 20 percent of the number of savings accounts, even though these areas account for over 60 percent of the country’s inhabitants.

### What holds back financial intermediation?
- Economy-wide structural impediments:
  - Poor physical access and infrastructure: unstable electricity supply, poor road conditions, distance from central bank offices deter rural branch expansion, and difficulty finding skilled human resources.
  - Weaknesses in the legal and regulatory framework: enforcing a contract is costly and slow.
  - Weak financial reporting: credit officers have difficulty obtaining basic cash flow information from SME customers; shortage of qualified accountants; the arbitration center in Maputo processes less than 25 cases per year and fees are high; a draft bankruptcy law was submitted to Parliament but has yet to be enacted.
  - Problems with credit and property information infrastructure:
    - BM’s credit risk bureau collects information from 21 regulated financial institutions but its scope is limited and designed primarily as a prudential monitoring tool.
    - A private registry is under consideration, but legal framework uncertainty remains.
    - Property registry is limited (estimated that less than 30 percent of properties are registered), antiquated, paper-based, and not linked electronically between major cities.
- Financial-sector structural impediments:
  - Lack of competition:
    - Industry concentration is high.
    - Net interest margin, while declining steadily, is much higher than in comparable countries.
    - Bank profitability is among the highest in the world and has been steadily increasing since 2004.
    - Empirical evidence: Mozambique’s H-statistic (Rosse-Panzar) is around 0.3, indicating limited competition.
    - BM study: lending rates of bigger banks tend to be responsive only to a market leader.
  - High overhead costs:
    - Overhead costs account for over half of the net interest margin.
    - Overhead costs are higher than in other similar countries.
    - Overhead costs to total assets: 6.5, 6.3, 6.1, 6.1 for 2004–2007 respectively.
  - High bank commissions and fees:
    - Commissions are pervasive, not transparent, and high compared to peer countries; some have more than doubled since 2003.
    - Examples from Table 4 (In MT): Cost of issuing 1 normal check: 12.5 (Mozambique) vs. 1.4 (South Africa); ATM cash withdrawal: 8.0 (Mozambique) vs. 10.2 (South Africa); Annual credit card fee: 1820.0 (Mozambique) vs. 394.0 (South Africa).
    - Price dispersion examples from Table 5 (In MT): Close account: market minimum 50, market maximum 1000; Consult balance at branch: 7–25; Dormant account penalty: 5–8615.
  - Effects of high costs and bundling:
    - High costs imposed for account maintenance and mandatory bundling of services inhibit savings mobilization.
    - Since savings are typically required as a precondition for credit, high fees also deter credit expansion.

### Key numeric indicators (preserved exactly as in source)
- Deposits-to-GDP: 25 percent.
- Private sector credit-to-GDP: 12.8 percent.
- MFIs: 87 MFIs in 2008, up from 19 in 2003.
- Three largest banks: account for 85 percent of total assets.
- Domestic deposits account for more than 90 percent of liabilities for most banks.
- Liquid assets cover more than 50 percent of deposits.
- Net open position limits for banks: less than 20 percent of own funds.
- Rural and peri-urban branches held roughly 20 percent of the number of savings accounts while these areas account for over 60 percent of the country’s inhabitants.
- Overhead costs to total assets: 6.5, 6.3, 6.1, 6.1 for 2004, 2005, 2006, 2007 respectively.
- Spread decomposition 2007 (In percent): Profit margin 2.52, Provisions 2.20, Reserve requirements 0.37, Overhead 8.29, Tax 0.50, Interest spread 13.88.
- Mozambique’s H-statistic (Rosse-Panzar): around 0.3.
- Selected commission examples (In MT): Cost of issuing 1 normal check 12.5; Cost of bouncing check 1500.0; ATM cash withdrawal 8.0; Interbank money transfer commission 500.0; Annual credit card fee 1820.0.

*Italic: Source document: _cr1012 - 12. This performance largely reflects a prudent and successful macroeconomic (PDF chapter/section).*

### 20. Removing these impediments to financial intermediation requires policy action

### 20. Removing these impediments to financial intermediation requires policy action

### Policy actions to remove impediments
- Legal and regulatory
  - Continue to encourage alternative dispute-resolution mechanisms and out-of-court settlements, expand arbitration services, and establish a small claims court.
  - Strengthen and modernize the judiciary, including a review of the court fee structure.
  - The BM should clarify its requirements on mobile banking.
- Institutional infrastructure and information
  - Expand the scope of the credit information to cover a greater range of information and potential borrowers.
  - Implement plans to modernize the property registries.
- Financial reporting and accounting
  - Enact new financing reporting legislation covering all regulatory aspects of accounting and auditing, and amend the Commercial Code accordingly.
  - Until the number of qualified accountants in Mozambique has reached a satisfactory level, relax restrictions on foreign workers in this area.
- Market structure and competition
  - Promote competition chiefly through greater transparency on commissions and fees and unbundling of financial services offered by banks.
  - Enhance trading liquidity in the interbank market (see Section IV) to contribute to lower interest rates for customers.

### Timing, constraints, and interim policy guidance
- Many measures will yield results only gradually; impediments reflect long-run economic realities in a developing country.
- Weaknesses in the property registry, accounting standards, or the judicial system are being addressed but require time for tangible improvements.
- Lack of competition is partly due to the small size of the market; as the market grows, competitive pressures should intensify.
- Interim best policy for the BM:
  - Maintain macroeconomic stability.
  - Continue to strengthen supervision of the banking system.
  - Ensure transparency and a level-playing field.
- Recommendation: The government should refrain from interfering in credit allocation (e.g., through the recently-introduced direct lending scheme by districts).

### Banking sector soundness — summary findings
- Asset quality and profitability improvements since the 2003 FSAP:
  - System-wide reported NPLs fell from 17.1 percent of total loans in 2003 to 2.8 percent at end-September 2008 (and an estimated 1.8 percent at year-end).
  - Average CAR as of September 2008: 13.8 percent of risk-weighted assets; all banks fulfilled the minimum required CAR of 8 percent.
- Dollarization and foreign-currency credit risk declined following Notice no. 05/GBM/2005 requiring an initial 50 percent provisioning of foreign currency loans to non-exporters.
- Some small and medium-size banks exhibit weaker asset quality: NPL ratios twice as high as large banks; one case of significant underprovisioning.
- System liquidity and funding composition:
  - Metical liquid assets cover 79 percent of short-term domestic currency liabilities.
  - Foreign assets (mostly deposits at correspondent banks) cover 69 percent of foreign currency deposits.
  - Borrowed foreign funds are limited (less than 1 percent of total assets as of September 2008).
  - Domestic interbank market funds are limited.

### Key Financial Soundness Indicators (selected figures from Table 6)
- Capital adequacy
  - Regulatory capital to risk-weighted assets: 17.0 (2003), 13.8 (Sep-08).
  - Regulatory Tier I capital to risk-weighted assets: 14.7 (2003), 11.3 (Sep-08).
  - Capital (net worth) to assets: 8.0 (2003), 10.9 (Sep-08).
- Asset composition and quality
  - FX loans to total loans: 69.3 (2003), 33.8 (Sep-08).
  - NPLs to gross loans*: 17.1 (2003), 2.8 (Sep-08).
  - NPLs net of provisions to capital*: 7.9 (2003), 4.6 (Sep-08).
- Earnings and profitability
  - ROA*: 1.2 (2003), 3.6 (Sep-08, annualized).
  - ROE*: 16.3 (2003), 44.3 (Sep-08, annualized).
  - Spread between reference loan and deposit rates (90 days local currency): 17.4 (2003), 10.8 (Sep-08).
- Funding and liquidity
  - Liquid assets to total assets (DAT-C): 57.7 (2003), 55.9 (Sep-08).
  - Customer deposits to total (non-interbank) loans: 251.9 (2003), 183.6 (Sep-08).
  - FX liabilities to total liabilities: 46.4 (2003), 43.6 (Sep-08).

  Notes: *Included in the "core set" of FSIs. NPLs defined according to Mozambican regulatory standards.

### Loan classification, provisioning, and recommended reforms
- Current deviations from international best practice:
  - Mozambique classifies as NPL only amounts of principal and interest past due, not the entire loan outstanding (tends to underestimate NPLs).
  - Banks must classify as nonperforming all amounts past due for any length of time, even one day, rather than the 90 days typically used internationally (tends to exaggerate NPLs).
- Tentative staff estimate: the “true” level of NPL in the system is around 2.4 percent (broadly equivalent net effect of the two departures).
- Specific provisions stood at 125 percent of the minimum regulatory requirement overall, but five banks failed to meet minimum levels and two banks were substantially underprovisioned.
- Required general provisions are an additional 2 percent of loans (not risk-based).
- Recommendations:
  - Bring loan classification and provisioning rules in line with international best practice and risk-based principles.
  - Increase differentiation in provisioning timebands (current first band covers payments overdue between 1–180 days).
  - Relate classification and provisioning to debtor repayment capacity (e.g., credit risk assessments).

### Risk management, microfinance, and supervisory capacity
- Banks’ risk management is uneven:
  - Most large banks conduct some stress testing or risk sensitivity analysis for liquidity or interest rate risk; no bank reported stress testing their loan portfolio.
  - Some banks rely on parent banks’ models, which may not reflect Mozambique-specific risks.
  - Recommendation: BM should encourage better stress testing methodologies and build its own capacity to collect and analyze sectoral exposures, probability of default, exposure at default, and loss given default, and review impaired loan models ahead of plans to move to Basel II.
- Microfinance institutions (MFIs) and cooperatives:
  - Some MFIs and cooperatives have high levels of NPLs; some MFIs (mostly non-deposit taking) are not reporting to the BM as required.
  - Minimum capital requirement for rural microbanks reduced to MTN 750,000 (about US$50,000), extremely low by international standards and possibly encouraging unviable institutions.
  - Recommendation: BM should rationalize the regulatory framework for MFIs and develop a capacity building strategy to promote sound development.

### Stress tests: methodology and results
- Scenarios and assumptions (Box 4):
  - Credit risk I (macro-financial scenario analysis): two scenarios as deviations from staff baseline projections for 2009:
    - Drop in total export receipts by 25 percent (major external demand shock).
    - Simultaneous drop in exports, foreign aid, and FDI by 25 percent (extreme-but-plausible worst-case).
  - Impact on real GDP growth: first shock = drop by 3.4 percentage points; second shock = drop by 5.6 percentage points.
  - Elasticity of change in NPLs to real GDP growth used: -3.0 (estimated from 2003–08).
  - Credit risk II (concentration risk): default of each bank’s largest, 3 largest, and energy sector obligors analyzed.
  - Liquidity risk: estimate magnitude of deposit reduction that would deplete banks’ liquid assets.
  - Exchange rate risk: assume depreciations of 25 percent and 50 percent and evaluate impact on capital adequacy.
- Aggregate stress test conclusions:
  - Current level of capitalization sufficient to withstand most plausible macroeconomic shocks; system-wide CARs under stand-alone and combined aid, export, and FDI scenarios drop to 13.1 percent and 12.6 percent respectively.
  - Some medium-size and small banks would experience significant difficulties:
    - Under the combined shock, one medium-size bank would have entire capital depleted; two other banks’ CARs would fall below required 8 percent.
    - Under the single export shock, two banks would fall below the 8 percent threshold.
- Concentration risk results:
  - Default and complete write-down of the single largest borrower of each bank reduces system-wide CAR to 7.8 percent, with three small and medium-size banks under the minimum capital requirement.
  - Default of the three largest obligors would deplete capital of these banks (extremely low probability).
  - Failure of energy companies among the three largest obligors reduces system-wide CAR to 9 percent.
- Exchange rate and liquidity risk results (Table 7 summary):
  - Exchange rate risk:
    - 25 percent depreciation: system CAR 14.3; top 3 banks CAR 13.5; medium-sized banks CAR 19.2; small banks CAR 20.2. Capital loss/gain (in % of Capital): 6.0 (system), 6.4 (top 3), 7.6 (medium-sized), -0.2 (small).
    - 50 percent depreciation: system CAR 15.1; top 3 banks CAR 14.3; medium-sized banks CAR 20.6; small banks CAR 20.2. Capital loss/gain (in % of Capital): 12.0 (system), 12.7 (top 3), 15.3 (medium-sized), -0.4 (small).
  - Liquidity risk:
    - Liquid assets (mln MT): system 27,971; top 3 banks 22,530; medium-sized banks 5,210; small banks 231.
    - Liquid liabilities (mln MT): system 35,304; top 3 banks 29,428; medium-sized banks 5,365; small banks 511.
    - Liquidity ratio: system 79.2; top 3 banks 76.6; medium-sized banks 97.1; small banks 45.2.
    - Size of general deposit decrease that would deplete liquid assets: system 42.3 percent; top 3 banks 40.7 percent; medium-sized banks 54.2 percent; small banks 20.3 percent.
    - Size of decrease of private sector deposits that would deplete liquid assets: system 77.5 percent; top 3 banks 76.9 percent; medium-sized banks 81.8 percent; small banks 55.5 percent.
- Overall assessment:
  - The system is resilient to liquidity and exchange rate shocks, though small banks are more sensitive.
  - Data deficiencies constrained some tests (e.g., interest rate risk stress tests could not be conducted due to lack of data).

*Source: _cr1012 - 20. Removing these impediments to financial intermediation requires policy action*

### introduction of rules for consolidated supervision; a new inspection manual; promulgation of

### introduction of rules for consolidated supervision; a new inspection manual; promulgation of the AML law; and the implementation of IFRS for banks

### Supervisory framework and capacity
- Recent reforms implemented:
  - introduction of rules for consolidated supervision;
  - a new inspection manual;
  - promulgation of the AML law;
  - implementation of IFRS for banks.
- Home-host supervisory relationships strengthened through Memoranda of Understanding (MOU) or informally.
- Bank Supervision Department, BM (BSD) staff has increased substantially and great emphasis has been placed in training programs.
- Today, the BM seems to have a good overview of the Mozambican banking sector as a whole and of individual institutions, supported by:
  - regular reports and analysis of the financial situation;
  - yearly on-site inspections for more detailed insights.

### Structural and cross-border supervisory challenges
- System structure and concentration:
  - Banking system assets are highly concentrated in the four largest banks, all of which are foreign-owned.
  - This concentration implies:
    - need for strong cross-border collaboration with home country supervisors; and
    - need, in collaboration with home supervisors, to review parent-company systems and determine applicability and adequacy for Mozambican branches or subsidiaries.
- Information gaps:
  - Lack of information on banks’ off-balance sheet exposures hampers analysis of overall net open position (note: given Mozambique’s relatively low level of financial sector development, these exposures are likely small).

### Remaining shortcomings identified in the BCP (ROSC) assessment
- Overview:
  - The BCP Report on Standards and Codes (ROSC) documents significant progress since 2003 but identifies important shortcomings.
- Specific weaknesses:
  - Loan classification and provisioning.
    - Recommendation: loan classification and provisioning rules should be brought in line with international best practice and be made more risk-based.
  - Risk monitoring and management.
    - Interest rate, country, liquidity, and market risks are either not regulated or regulations do not always include guidance for supervisors in monitoring compliance or provide banks with minimum requirements for risk management systems.
    - Although these risks are currently low, these weaknesses should be addressed.
  - Prudential regulations.
    - BM is developing guidance to enhance supervisory process, AML monitoring procedures, and guidelines on internal audit, integrated risk management and risk-based supervision; these efforts need to be completed as soon as possible.
  - Remedial action.
    - BM has adequate legal powers but these powers are not always used effectively, undermining credibility.
    - Minor remedial actions are always taken; BM is occasionally slow to act when important problems occur (e.g., insufficient capital or inadequate provisioning).
    - An effective remedial action program, along the lines presented in Annex II, can instill discipline and make remedial steps more systematic and credible.
  - Foreign supervisory coordination.
    - BSD should be familiar with the home country supervisor, the strength of parent-company support, home country bankruptcy rules, and economic conditions in the home country.
    - With planned global implementation of Basel II, BM will need to ensure familiarity with capital allocations to Mozambique operations.
  - Monitoring concentration of correspondent deposits in parent banks requires coordination and familiarity with country risk.

### Capacity, IFRS compliance, and supervisory coverage
- The BM should:
  - ensure adequate resources are dedicated to reviewing compliance with IFRS and completing supervisory guidance;
  - continue up-to-date training and adequate human resources in the BSD;
  - ensure supervisory capacity is adequate to supervise the expansion of credit institutions to remote geographical areas.
- Given a weak accounting and auditing environment, BM should ensure capacity exists to monitor and enforce IFRS requirements and to reconcile IFRS and prudential requirements (as recommended by the 2008 Accounting and Auditing ROSC).

### Financial safety nets and crisis management
- Deposit insurance scheme (DIS):
  - BM has drafted a deposit insurance fund (pay-box) proposal, currently being reviewed by the government, with a view to having it approved by year-end.
  - In broad terms, key elements of the proposal appear to conform to best practice.
  - Recommendation: The planned deposit insurance scheme should not be introduced before the key preconditions are in place.
  - Before approval, authorities should conduct a thorough assessment of the proposed scheme against the International Association of Deposit Insurers core principles.
  - Preconditions to be ensured before introducing DIS include:
    - no pre-existing problem institutions;
    - effective supervision; and
    - strong remedial action and resolution frameworks.
- Legal and operational gaps in crisis management and resolution:
  - Framework for supervisory administration and bank liquidation may need clarification:
    - banking law allows BM to designate an administrator (and remove management) to restructure a problem bank; bank liquidation law allows initiation of administrative liquidation to sell off assets.
    - Neither the timeframe nor the criteria for initiating liquidation are sufficiently clear.
  - Authorities’ ability to create a bridge bank or execute a timely partial purchase and assumption is questionable:
    - it would take a long time to verify liabilities;
    - it is not clear whether the current legal framework allows differential treatment of creditors, which may be needed for a successful resolution.
  - BM should consider a comprehensive and explicit emergency liquidity assistance (ELA) framework:
    - the law grants the central bank the power to provide liquidity assistance for up to 180 days; discount short-term securities (e.g., trade credits); and give credit against a limited range of collateral, e.g., mostly government securities.
  - Authorities should develop a crisis management plan, in particular for systemic banks:
    - review legal framework to ensure effective powers and procedures for failure of a large, systemically important bank, including addressing public funds and coordination with foreign supervisors, central banks, and treasury authorities;
    - in cooperation with the Finance Ministry, BM should develop contingency planning and testing.
  - Current practice:
    - BM has only established an overnight standing facility (FPC).
    - An explicit ELA policy would specify principles and procedures for acute liquidity problems in normal times (assistance only to illiquid but solvent banks, against adequate collateral, and as a last resort) and for critically undercapitalized but systemically important banks or in a crisis.

### Central bank operations and financial market development
- Progress since 2003:
  - Successful introduction of a monetary targeting framework and market-based instruments;
  - growth of the interbank market;
  - gradual liberalization of the foreign exchange market, new regulations, and Code of Conduct for participants;
  - advances in de-dollarization; and
  - reduction in inflation, interest rates, and interest spreads.
  - Positive signs in public debt management (successful bond issuance in 2008; preparation, for the first time, of an Annual Report on Public Debt).
- Market structure and constraints:
  - Financial markets remain thin and operate under constraints implied by system structure and monetary policy implementation framework.
  - The interbank money market (MMI) and the treasury bills (BT) secondary market are the only markets showing some activity.
  - Market depth data (2008):
    - BT secondary market had 147 transactions in 2008, totaling MT 4.5 billion.
    - Interbank money market was more active, with MT 52 billion traded.
    - Market for government OT is small and illiquid: only sixteen trades were recorded in 2008, totaling MT 300 million.
  - Custody and settlement issues:
    - Custody of OTs is provided by the stock exchange (BVM) in dematerialized form, but BVM’s computers are not connected to those of the BM (where the RTGS system and the custody system for BTs run).
    - This prevents delivery-versus-payment (DVP) in OT transactions and makes it harder to use these bonds for repos.
- Central bank liquidity instruments and behavior:
  - The only instrument the BM uses for liquidity injection is the FPC, which is seen by the market as a ceiling for BT auctions.
  - In a very concentrated market and in the absence of a deep secondary market, such a ceiling leads to distortions in the behavior of primary auction rates.
  - Absence of a liquidity provision instrument at market rates induces banks to hoard liquidity, reducing chances that complementary positions appear in the money market.
  - Banks spread out holdings of BT so that almost every week there are bills coming due; temporary excesses are placed in the standing deposit facility (FPD), in amounts equivalent to 20 percent of bank reserves and have been growing recently.
- Liquidity forecasting:
  - Forecasting is excessively focused on the short term.
  - Two ongoing forecasting exercises:
    - Markets Department (DEM): daily, focused on one maintenance period of required reserves.
    - Economic Studies Department (DEE): 3-month horizon, provides guidance for structural liquidity management through sales of BT and foreign exchange.
  - There is no regular longer-term liquidity forecasting exercise.
- Key policy challenge: improve trading liquidity. Benefits identified:
  - greater facility changing assets for cash or financing those assets through repos;
  - reduction of interest rates via decrease of liquidity premium;
  - provision of a market-based yield curve, key for capital markets and monetary policy transmission.
- Recommended central bank liquidity management measures:
  - Extend the medium-term liquidity exercise to one year; coordinate forecasts of government flows with monthly or quarterly Treasury plans; base BT issuance on this exercise and consistency with BM’s balance sheet.
  - Publish a BT auction schedule with dates, maturities, and amounts as confidence in medium-term forecasting builds; space out auctions for the same term.
  - Remove the implicit ceiling for BT auction rates (FPC should remain a ceiling for very short-term rates; longer-term rates should reflect market expectations). BM may reject bids to counter oligopolistic behavior but should avoid opening a second auction when demand exceeds the amount offered.
  - Use overnight repo and reverse repo auctions for intervention, guided by short-term liquidity forecast; one-day term with cut-off rate close to interbank overnight rate to encourage banks to reduce liquidity cushions.
- Recommended market development measures:
  - To encourage repos, BM could collateralize the FPD.
  - BM and MOF should start to issue fungible securities to create larger benchmarks and reduce number of outstanding maturities.
  - Improve public debt information via a consolidated BT/OT issuance calendar, information on outstanding debt, and data on primary and secondary market trading.
  - Increase stock of outstanding OTs to stimulate market development without increasing net public debt if proceeds are not spent; reduce amounts issued at BT auctions; issue fixed rather than floating rate bonds to lengthen the yield curve beyond one year.
  - Strengthen custody, settlement, and trading arrangements:
    - create conditions for trades between a bank and a client of another bank;
    - ensure DVP settlement of transactions originated at the Stock Exchange;
    - unify BT and OT custody.

### Payments system progress and transition risks
- Progress since 2003:
  - Introduction of government electronic funds transfer system (EFTS) in 2004;
  - upgraded CEL system to allow electronic clearing by its 17 participants;
  - promulgation of the National Payment System (NPS) Act in October 2007;
  - strengthened regulations for interbank clearing and settlement;
  - introduced the Sistema de Transferencia de Fundos do Estado (STF) — a real-time system used by Government for payments, including salaries for the civil service;
  - Payment Systems Division staff increased to six (from two in 2003).
  - 2007 NPS law strengthened legal basis for the payment system and paved the way for the introduction of RTGS.
- Current arrangements:
  - Pending full implementation of RTGS, CEL remains the main settlement system, with BM providing settlement arrangements for participants.
  - CEL is used to settle obligations from cheque payment stream, government EFTS, ATM and POS networks, and the stock exchange (BVM).
  - BM uses seven branches and the head office in Maputo to facilitate cheque clearing and cash distribution nationwide.
  - Cheques and electronic fund transfers are the main means of payment, but cash still accounts for a significant proportion of payment transactions and banking costs.
- Transition risks and priorities:
  - CEL operates on a deferred net settlement (DNS) basis; settlement occurs a day after transactions are processed, creating liquidity and credit risk.
  - Requirement for participants to lodge collateral as a condition for participating in CEL has never been enforced.
  - Introduction of RTGS will reduce DNS-related risks, but BM should remain vigilant and monitor risks within CEL while it remains systemically important.
  - Regulations needed to complete the transition to RTGS should be issued as soon as possible.

*Source: _cr1012 - introduction of rules for consolidated supervision; a new inspection manual; promulgation of the AML law; and the implementation of IFRS for banks*

### 45. In addition, priority should be given to the following areas.

### _cr1012 - 45. In addition, priority should be given to the following areas.

### Payment systems and securities settlement (paragraph 45)
- The BM should design and adopt a framework for the oversight of payment systems and build further capacity in the payments system unit.
- Securities settlement should be accelerated. Although the BVM has electronic systems that support its operations, the current settlement arrangements are slow because of the manual intervention that requires the BM to re-capture net obligations onto the CEL system.
- The BM, in cooperation with the BVM and its brokers, should establish the electronic link that would reduce the settlement cycle and facilitate the achievement of DVP.
- The BM should clarify its position on the interoperability of bank cards and consider the sharing of retail payments infrastructure.
  - While some debit cards are interoperable at the moment, the fees charged for ATM cash withdrawals across banks are high.
  - A national switch would facilitate the removal of this rigidity.
  - The BM should consider encouraging this and using moral suasion to get banks to cooperate through the Payment Systems Forum.
- The BM should clarify its views on participation by mobile phone providers and other third parties in the payments area.

### Summary assessment of Basel Core Principles (APPENDIX I, paragraphs 46–59)
- Since the 2003 BCP assessment, compliance has been significantly improved, although some important areas require strengthening.
- Key enhancements include:
  - a major revision to the Banking Law;
  - promulgation of the AML law;
  - a new inspection manual;
  - implementation of IFRS for banks;
  - strengthened home-host supervisory relationships;
  - substantial increase in the number of supervisory staff and emphasis on training.
- Overall, an adequate regulatory framework for bank supervision has been adopted and the supervisory authority has a good overview of individual institutions and the sector as a whole.
- Important shortcomings remain in:
  - loan classification and provisioning;
  - assessments for risks other than credit (interest rate, country, liquidity, market, operational);
  - effective use of remedial action powers;
  - level of home-host coordination given systemic importance of foreign-owned banks.

### Institutional and market structure (paragraphs 50–56, 53–55)
- BM is responsible for supervision of credit institutions and financial companies; banking supervision is operationally conducted through BM’s BSD.
- Supervisory framework includes:
  - minimum CAR of 8 percent;
  - requirements on capital adequacy;
  - generic requirements on internal controls;
  - minimum levels of provisions;
  - restrictions on connected lending;
  - large exposures and concentration limits;
  - limits on foreign exchange exposures;
  - minimum reserve requirements;
  - limits on fixed assets;
  - powers to conduct off-site inspections and demand accurate information regularly;
  - powers to impose sanctions and remedial actions.
- Regulatory developments since the 2003 FSAP include:
  - revision of the Banking Law that enhanced BM’s supervisory, enforcement and remedial powers;
  - revision of the provisioning system;
  - introduction of rules for consolidated supervision;
  - regulation of the AML law;
  - introduction of IFRS.
- Market structure and institutions:
  - Only banks, credit cooperatives or micro-banks can currently take deposits.
  - Currently, there are 21 deposit-taking institutions, 22 exchange bureaus and 5 other financial companies.
  - The largest bank represents around 40 percent of the market and the four largest banks together represent over 90 percent of the banking system.
  - The state maintains a minority participation of 23 percent (including worker participation) in the largest bank.

### Preconditions and supervisory capacity (paragraphs 55–57, 62–63, 75)
- Preconditions limiting effective supervision:
  - Investments abroad require authorization from BM and local financial assets are limited to public debt instruments, creating incentives to place claims in parent companies outside the country.
  - Judicial, legal and information constraints hinder creditor rights enforcement; commercial courts do not always work well in practice; corporate bankruptcy and liquidation laws need updating.
  - Commercial companies are not required to have annual accounts certified by an external auditor.
- Supervisory capacity and practice:
  - BM has moved toward risk-based supervision and plans to implement Basel II.
  - BM has issued regulations on internal controls and credit risk management but has not issued best practice guidelines; inspectors’ manuals should incorporate best practices.
  - An inspections manual has been implemented and on-site teams now include information technology experts.
  - Coverage of risks outside credit (liquidity, interest rate) should be improved.

### Main findings and deficiencies (paragraphs 59–61, 67–74, 77–79)
- Improvements:
  - Development of regulation and supervisory guidelines significantly advanced since 2003.
  - BM has a good overview of institutions and the sector via regular reports and yearly on-site inspections.
- Remaining deficiencies:
  - Loan classification and provisioning:
    - Current time-based classification and provisioning buckets are too wide and do not provide early warning of deterioration.
    - Loan payment classified substandard after one day past due and remains so until the 180th day of past due status.
    - Recommendation: amend regulation to make provisioning more risk-sensitive, classify loans based on credit analysis, reduce days in each time band, subject entire principal to classification and provisioning when payment is past due, and require NPLs to be put on non-accrual.
  - Risk coverage:
    - BM practices in supervising interest rate, country, liquidity, market, and operational risk and AML are weak; some areas unregulated and some regulations lack guidance.
    - BM does not require institutions to self-assess capital against risk profile, nor to hold capital for market risk or excess capital for high risk profiles.
    - Lack of comprehensive process to monitor, measure and set standards for liquidity, interest rate, country and market risk.
  - Remedial and enforcement powers:
    - BM has not effectively used powers to induce substantive remedial and corrective actions; supervisors have allowed a small bank to continue operating while in long-term financial distress.
    - Lack of detailed guidance on application of graduated remedial action; need for well-defined range of tools and guidance on applying them according to gravity of situation.
  - AML supervision:
    - AML regulations establish KYC and suspicious transaction reporting, but since 2006 no specific inspections have been conducted; lack of onsite inspections and offsite monitoring makes it impossible for BM to ensure compliance.
  - Cross-border supervision:
    - Almost all banks operate on a solo basis; BM has completed MOUs with some countries and has frequent communications with Portugal and South Africa.
    - Given foreign ownership concentration, BM should continue to develop relationships with key home country regulators and review parent company systems for applicability to Mozambican branches/subsidiaries.

### Key recommendations (derived from assessed deficiencies)
- Strengthen payment systems oversight:
  - Design and adopt a payments oversight framework; build capacity in the payments unit.
  - Establish electronic link between BVM and BM/CEL to reduce settlement cycle and facilitate DVP.
  - Clarify and promote interoperability of bank cards, consider a national switch, and address high ATM withdrawal fees across banks.
  - Clarify BM stance on participation by mobile phone providers and third parties.
- Improve loan classification and provisioning:
  - Amend time-based classification; adopt more risk-sensitive provisioning; require entire principal to be classified on past due status; require NPLs on non-accrual.
- Expand risk coverage and guidance:
  - Develop supervisory guidance and standards for liquidity, interest rate, country, market and operational risk.
  - Require institutions to self-assess capital vs risk profile and consider capital for market risk and excess for high risk profiles.
  - Issue best practice guidelines for internal controls, liquidity risk management, and incorporate into inspectors’ manuals.
- Enhance remedial actions and enforcement:
  - Provide detailed guidance on graduated remedial actions; use full range of sanctioning powers decisively when warranted.
- Strengthen AML supervision:
  - Resume targeted onsite inspections and offsite monitoring for AML compliance; implement training projects to build inspection capacity.
- Deepen home-host cooperation:
  - Continue to develop MOUs and relationships with home country regulators, especially with Portugal and South Africa; assess parent company systems for local adequacy.

*Source: IMF staff report excerpt (APPENDIX I: OBSERVANCE OF FINANCIAL SECTOR STANDARDS AND CODES—SUMMARY ASSESSMENT OF BASEL CORE PRINCIPLES).*

### 1. Objectives, independence, powers, transparency,

### _cr1012 - 1. Objectives, independence, powers, transparency,

### Regulatory objectives, independence, powers, and cooperation
- Licensing is now independently done by BM.
- The revisions to the BL in 2004 provided the BM with operational independence.
- The BL provides adequate powers to the BM.
- BM has adequate sanction and remedial powers.
- BSD staff is protected from legal liability in the performance of its duties.
- MOUs and informal arrangements are now in place.

### Scope of supervision and permissibility
- Permissible activities: Fully defined in legislation.
- Licensing criteria: Amendments to BL addressed deficiencies noted in 2003 FSAP.
- Transfer of significant ownership: Adequate legal framework.
- Major acquisitions: All criteria are addressed.

### Capital, risk management, and specific risk areas
- Capital adequacy: Does not cover market risk, nor the requirement of an internal capital adequacy assessment.
- Risk management process: Inadequate guidance provided to banks and inspectors.
- Credit risk: Guidance should be provided on evaluating credit risk management.
- Problem assets, provisions, and reserves: Guidance needed for inspectors to evaluate credit risk management.
- Large exposure limits: Limits established, but in practice do not consider exposures other than credit or guarantees.
- Exposure to related parties: Regulation in place.
- Country and transfer risks: BM does not monitor and has not issued guidance on country risk.
- Market risks: Supervisory guidance or monitoring does not yet exist.
- Liquidity risk: BM does not have sound procedures to estimate the level of liquidity risk.
- Operational risk: Limited guidance has been issued.
- Interest rate risk in the banking book: There has not been sufficient guidance issued on measuring this risk.
- Internal control and audit: Existing guidance should be updated to include other risks, namely omitted types of operational risks.
- Abuse of financial services: Onsite procedures and inspections have not been implemented.
- Supervisory approach: The existing process does not cover the full spectrum of banking risks.
- Supervisory techniques: Significant improvements since 2003: technical requirements of CP are met.
- Supervisory reporting: BM has the authority to collect all needed information and this is indeed collected.
- Accounting and disclosure: IFRS has been implemented.
- Corrective and remedial powers of supervisors: More effective use of available of available powers is needed.
- Consolidated supervision: Implemented since 2003 FSAP.
- Home-host relationships: MOUs signed and increased communications take place.

### Key regulatory deficiencies highlighted
- Lack of regulations and/or guidelines for monitoring and inspecting risks other than credit.
- Need for more risk-sensitive classification and provisioning approaches.
- Insufficient supervisory guidance on market, liquidity, operational, and interest-rate-in-banking-book risks.
- Remedial actions have been used sparingly despite legal authority to act.

### Recommended Action Plan (extracts from Table 9)
- CP 9 – Problem assets, provisioning and reserves:
  - Classification and provisioning needs to be made more risk-sensitive: for example, in its inspections and monitoring, additional provisions should be required not only for compliance lapses but for deterioration in the borrower’s financial condition.
  - It is also recommended that a non-accrual requirement be instituted for loans 90 days or more delinquent.
- CP 7, 12–16 and 18 – Risk monitoring and management:
  - Guidance/regulations to aid BM staff in monitoring compliance or to provide banks with the minimum requirements they are expected to meet when developing risk management systems or internal policies and procedures need to be developed.
- CP 23 – Corrective and remedial powers of supervisors:
  - An effective remedial action program with defined remedial steps is needed to have more systematic process to identify and penalize poor management, and remove ineffective or unsound managers from the system.
- CP 25 – Home-host relationships:
  - Increase the level of coordination to: establish contingency planning for crises, and determine the strength of support that may be available from the parent company or government, the home country rules in a bankruptcy situation and economic conditions in the home country.

### Authorities’ response to the assessment
- The BM agreed with most of the recommendations, noting that many are starting to be implemented.
- To facilitate the implementation of the remedial action recommendation, the BM requested further elaboration on country practices.
- On regulating risks other than credit, the BM indicated that the need will be determined based on BM’s assessment of banks’ risk management practices and of systemically important risks.
- The BM observed that the current regulations on loan classification and provisioning were changed in 2005 in line with what it believed was the recommendation of the 2003 FSAP.

### Appendix II — A Remedial Action Program for Mozambique (paragraphs 80–84)
- Paragraph 80:
  - The 2003 FSAP noted that although the BM had the legal authority to take remedial actions, it had used this authority sparingly. This situation remains the same today, with a dearth of remedial actions even when patently warranted.
  - An explicit Remedial Action Program would help address this shortcoming, although it would also be ineffective if the will to take action is lacking.
- Paragraph 81:
  - An appropriate Remedial Action Program must have well defined enforcement tools that enable the regulator to apply a wide range of penalties or restrictions that can be adapted to the gravity of the situation.
  - The program must be transparent: the BM should publish the situations under which it would take supervisory action, and describe the supervisory action and the subsequent response should the institution fail to act.
  - Internal operating procedures at the BM should be detailed and prescriptive, describing the officials responsible for initiating the action, the process to be followed starting at the field inspector level, the review process, and establishing processing timeframes.
  - In its annual report, the BM should publish the remedial actions taken even if the name of the institution is withheld.
  - Having a transparent, well-defined process with benchmarks and reporting will enhance supervisory accountability.
- Paragraph 82:
  - The initiation of remedial action should be specifically linked to capital, reporting, adequacy of bank policies and risk management, violations of law, and bank performance (CAMEL).
  - The published guidelines should establish that banks can expect an action when:
    - Capital falls below a certain level. The action can vary depending on the trigger points and management response.
    - A regulatory report is over 30 days delinquent or contains inaccuracies. A daily fine can be imposed until situation is corrected.
    - Bank operating policies and processes are inadequate and lead to a deteriorating financial condition. The action can initially be an order from the BM requiring the bank to fix the problem, and providing a listing of the BM concerns. The order should provide a timeframe for the corrective action and a stepped-up penalty in case of non-compliance.
    - Violations of law are identified. Depending on their gravity, some violations, such as connected lending, should have automatic fines on the bank and the individual.
    - Bank soundness falls below acceptable levels established by the BM. The BM should communicate to the bank its concerns, provide a timeframe to implement its recommendations, and instruct the bank to cease and desist practices that the BM considers unsafe and unsound.
- Paragraph 83:
  - The published guidelines should make it clear that the ultimate action, if the bank does not comply with BM remedial actions, will be intervention, liquidation, or forced sale/merger.
  - It is important that the remedial actions be initiated with an early identification of the problem to allow for early correction, avoid asset dissipation, and arrest deterioration at an early stage.
- Paragraph 84:
  - A detailed Remedial Action Program will enhance accountability, as those involved will need to document why action was not taken in the presence of the situations described above.
  - The BM internal audit or internal control system should review the Remedial Action Program and its implementation.

*Source: _cr1012 - 1. Objectives, independence, powers, transparency,*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1012.pdf_