## _cr11299

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### Executive summary — system structure, vulnerabilities, and macro-financial context
- Chadian financial system: among the least developed in the CEMAC region; little depth; segmented; exposed to significant risks.
- Bank exposures to government: around 70 percent of bank portfolios are direct and indirect exposures to the government.
- Ownership and governance:
  - Four of the eight banks have significant public ownership; as a group suffer major weaknesses including a negative net worth and state interference in management and staffing decisions.
  - Several banks do not comply with the single large borrower limit nor the risk concentration ratio set by the regional regulator.
- Recent macro performance and outlook:
  - Oil exports in 2010: about 45 million barrels, representing 62 percent of Chad’s nominal GDP and 90 percent of its exports.
  - Real GDP growth: 13 percent in 2010; projected to moderate to 3 percent in 2011.
  - Non-oil GDP growth: expected to moderate to 3.6 percent in 2011.
  - Growth expected to spike above 7 percent in 2012 reflecting the oil refinery’s first full year and new industrial projects.
  - Bongor began producing 20,000 barrels per day (bpd) in June to feed the new refinery.
  - Output from main Doba field expected to decline or stay at about 120,000 bpd, provided international oil prices remain close.
- Macro risks and fiscal sustainability:
  - Remaining proven reserves modest and expected to be mostly depleted over the next 20 years.
  - Non-oil primary deficit increased from 3 percent of non-oil GDP in 2003 to 30 percent in 2009–10.
  - Non-oil revenue effort about 12 percent (one fourth less than the average of other Sub-Saharan African oil exporters).
  - Short-term vulnerability high due to pro-cyclical fiscal policy and sensitivity to oil-price shocks.
- Banking sector exposure to oil-related risks:
  - Government is essentially the only significant banking client; remaining exposures mainly public enterprises, government suppliers, contract holders, or public servants.
  - Accumulation of payments arrears by the government treasury has increased risk of default by government-related bank clients.
- Liquidity and monetary aggregates:
  - Bank liquidity improved partly due to oil company deposits to cover local currency spending.
  - Broad money expanded by 26 percent in 2010 compared to the 17 percent growth rate of nominal GDP.

### Legal, judicial, and supervisory environment
- Judicial and legal constraints:
  - Chad scores poorly on World Bank Governance Indicators and is in the lowest decile in the rule of law indicator.
  - Reforms needed to restore confidence in the judicial system, especially commercial courts.
  - Recommendation: establish an effective office of the inspector general of the justice system to fight perceived pervasive corruption.
- Regional supervision and crisis management:
  - Chad is member of CEMAC monetary union with a fixed peg against the euro; banking regulation conducted regionally by COBAC.
  - Regional crisis management and resolution framework being strengthened but has not been effective in Chad.
  - COBAC needs expanded human resources and capacity to issue early warnings and prevent national crises.
  - Delays in implementing restructuring or resolution decisions for troubled banks result in considerable additional costs.
  - Reform of regional legal framework for dealing with problem banks needs completion.

### Public debt management and treasury cash flow
- Poor treasury cash management:
  - Despite high fiscal revenues from oil windfall, government significantly delays payment of invoices, causing deterioration in quality of bank loans to government suppliers.
  - Chad had to extend offering period of its bonds to investors despite high interest rates and modest levels of government indebtedness, driven by perceptions of weakening fiscal position due to pervasive delays in payments to domestic suppliers.
  - Implementation of ambitious investment program led to extended payment delays to government suppliers and increasing delinquencies on small business debt to banks, contributing to an increase in NPLs.
- Policy option:
  - Active participation of Chad’s Treasury in nascent regional public debt market through regular and preannounced issues of one-, three-, and nine-month treasury bills (t-bills) could help manage liquidity, reduce payment arrears, and have positive effects on CEMAC banking system.

### Financial intermediation — contractual savings, access to finance, housing, and microfinance
- Insurance sector:
  - Total assets CFAF 14 billion in 2010; turnover about CFAF 9 billion.
  - Penetration (premiums/GDP): 0.27 percent (median in CIMA zone: 0.89 percent).
  - Density (premiums/inhabitants): CFAF 837 (median in CIMA zone: CFAF 2,112).
  - Market concentration: main insurer market share about 70 percent.
  - Recommendation: implement CIMA prudential framework and strengthen National Insurance Authority (DNA) by setting up its own board, staff, and independent budget funded by fees paid by companies; reorganize audit activities and enforce sanctions; enforce CIMA legal and prudential framework ratified in early 2011.
- Pensions:
  - CNPS assets: estimated about CFAF 50 billion; claims on central government and other public sector institutions about 25 percent of total assets.
  - CNRT assets: estimated about CFAF 40 billion; claims on central government represent more than 90 percent of total assets.
  - CNPS investment portfolio (about CFAF 25 billion): CFAF 5 billion in rental property (some seized without compensation by government), CFAF 0.8 billion in equity, CFAF 5.4 billion in time deposits and CDs, CFAF 14.3 billion deposited in non-interest-bearing current accounts.
  - CNRT technically bankrupt since establishment in 1993 and had more than CFAF 25 billion in arrears on pension payments in 2009.
  - Recommendation: government should repay its debt to the two funds and remain current on future obligations; conduct an actuarial study to establish long-term viability.
- Access to finance for SMEs and housing:
  - At end 2010, 60 percent of credit to the economy concentrated on large enterprises, 22 percent to SMEs.
  - Average interest rates in 2010: large enterprises 11.85 percent; SMEs 12.19 percent; individuals 16.03 percent.
  - Financial products such as leasing, guarantee funds, and factoring are absent.
  - Absence of long-term resources limits banks’ ability to finance SME investment needs.
  - Recommendation: strengthen accounting profession; encourage SMEs to use accountants; BEAC develop an adequate credit reporting system; government promote accounting use by businesses.
- Housing finance:
  - Housing finance totaling CFAF 23 billion or 0.7 percent of GDP at end-2010.
  - Only four of eight banks offer housing loans; two banks hold 75 percent of such loans.
  - Loan terms: range of rates 12–17 percent; loans often medium-term and without mortgage or with flawed guarantees.
  - Housing deficit evaluated at 125,000 units in 1999; new needs estimated at 25,000 units per year.
  - Registration fees: 10 and 15 percent of value of developed and undeveloped property, respectively; less than 20 percent of properties properly registered; fewer than 4,000 property titles in the entire country.
  - Recommendation: develop incentives for savings accounts for down payments on mortgage loans; enforce new OHADA law allowing mortgaging future real property.
- Rural financing:
  - Bank with agriculture mandate has problems; only rural intervention is financing cotton.
  - MFIs provide bulk of lending to farmers; warrants (warrantage) introduced by some MFIs.
  - Postal network: 36 offices nationwide could distribute financial services; postal savings suspended previously; postal checking services resumed but savings products still not offered.
  - Options: develop separate postal financial institution; hosting by a bank or MFI; hosting by mobile payments supplier.
  - BEAC prepared draft CEMAC-UMAC regulations on e-money.
- Microfinance:
  - Sector: savings-and-loan associations organized into networks; six networks covering almost 95 percent of active MFIs as of December 31, 2010.
  - Client base: farmers close to 60 percent of customers.
  - Resources: mainly unremunerated demand deposits or time deposits remunerated at 4–6 percent.
  - Loan pricing: crop credits monthly ~2 percent; investment credits monthly ~1.5 percent.
  - Financial viability: only one MFI network out of six financially viable without external assistance; others rely heavily on donor subsidies (up to 70 percent of operating budget in some cases).
  - Supervision: COBAC responsible but lacks resources; prudential framework for MFIs needs updating.
  - Recommendation: COBAC should assess enforcement of supervisory framework for MFIs and enhance effectiveness through strengthened reporting and cooperation with institutions responsible for MFI networks.

### Key findings and prioritized recommendations (excerpt)
- Banking sector stability:
  - Finding: Two public banks have negative equity.
  - Recommendation: Recapitalize the banks and prepare a viable business plan.
  - Priority/Timeframe: High/Immediate. Responsibility: Government.
  - Finding: Banks do not comply with limits on individual exposure despite generous threshold.
  - Recommendation: Increase capital to enhance resilience to shocks.
  - Priority/Timeframe: High/by 2014. Responsibility: CEMAC.
- Cash flow and public debt management:
  - Finding: Poor government cash flow management leads to financial vulnerabilities.
  - Recommendation: Establish, under leadership of Ministry of Finance with active participation of the BEAC and line ministries, a treasury committee to monitor the government’s cash position.
  - Priority/Timeframe: High/Immediate. Responsibility: Government, BEAC.
- Access to financial services:
  - Finding: Access is constrained by lack of adequate information on borrowers.
  - Recommendation: BEAC should develop an adequate credit reporting system and the government should encourage accounting use by businesses.
  - Priority/Timeframe: High/Medium term. Responsibility: BEAC/Government.
- Microfinance:
  - Finding: The government plays the role of a direct operator by extending credit.
  - Recommendation: Limit direct government intervention in the sector and support existing institutions based on performance contracts.
  - Priority/Timeframe: Medium/Medium term. Responsibility: Government.
- Housing financing:
  - Finding: No long-term resources are available.
  - Recommendation: Develop incentives for savings accounts for down payments on mortgage loans, including explicit budgeting of direct assistance to borrowers.
  - Priority/Timeframe: Medium/Medium term. Responsibility: Government.
  - Finding: Demand for housing finance is unmet because security of operations is weak.
  - Recommendation: Take measures to enforce the new OHADA law, which allows mortgaging future real property.
  - Priority/Timeframe: Medium/Immediate. Responsibility: Government.
- Legal and judicial framework:
  - Finding: Legal registration of guarantees and companies is unreliable.
  - Recommendation: Modernize the OHADA RCCM with support of Committee experts and based on the Guide produced by OHADA.
  - Priority/Timeframe: Medium/Medium Term.
  - Finding: Business community has no confidence in judicial system.
  - Recommendation: Establish a credible inspector general’s office to investigate and prosecute corruption in the justice system and introduce arbitration and mediation for dispute settlement outside courts.
  - Priority/Timeframe: High/Near Term.
- Insurance sector:
  - Finding: National supervision does not comply with CIMA requirements as applied in other regional countries.
  - Recommendation: Reform the National Insurance Directorate (DNA) by providing it with its own board, staff, and independent budget funded through direct allocations of supervision levies paid by companies.
  - Priority/Timeframe: Medium/Near Term. Responsibility: Ministry of Finance.
- Pension sector:
  - Finding: The CNRT has been technically bankrupt for 20 years; the CNPS has an overall surplus that could be used to preserve purchasing power of pensioners and maintain system viability.
  - Recommendation: Government should repay debts to the two funds, remain current on obligations, and conduct an actuarial study to establish long-term financial viability.
  - Priority/Timeframe: High/Immediate. Responsibility: Ministry of Finance/Ministry of Labor.

### Treasury and payments-system recommendations
- Treasury should rapidly modernize operations and take active role in regional money market by issuing short-term treasury bills and gradually building a full yield curve by extending maturities at least up to five years.
- Expected outcome: improved cash management and significantly reduced payment delays.
- Context: BEAC has established framework for regional government debt market and is ready to assist, free of fees, member countries with auctions of treasury bills.

### Structure of the financial sector — size, concentration, and vulnerabilities
- Institutions: eight commercial banks, two insurance companies, two pension funds, and over 200 microfinance institutions (MFIs).
- Indicators and comparative facts:
  - Total banking assets: only about 12 percent of GDP (below 19 percent average for CEMAC).
  - Less than one branch per 1000 km2 — least dense banking network in CEMAC.
  - 13 bank accounts per 1,000 inhabitants compared with 52 in Cameroon.
  - Short-term loans account for about 55 percent of total assets; medium-term loans 44 percent; long-term loans less than 2 percent.
  - Some banks require a minimum of CFAF 200,000 to open a bank account.
- Ownership:
  - 65 percent of bank assets held by foreign banks.
  - 35 percent held by government-controlled banks.
- Financial-soundness developments:
  - Minimum capital raised to CFAF 5 billion at end June 2010; two state banks have negative equity.
  - NPLs increased from 10.4 percent in 2009 to 12.1 percent in 2010.
  - Rate of provisioning of NPLs was 73.5 percent in 2010.
  - Close to 80 percent of all bank deposits are on demand or at terms of less than one year.
  - About 70 percent of loans are short-term.
  - Government and public entities hold roughly a third of banking system deposits, and up to three fourths in some banks.
  - Almost half of all loans go to fewer than 30 companies (data at end-March 2011); largest state company alone accounts for almost 8 percent of gross lending.
  - About 70 percent of gross loans were extended to the public sector and related activities in Chad.
  - COBAC single large exposure limit: 45 percent of capital; actual exposure exceeds 100 percent of capital.
- External events:
  - Libya holds a 50 percent share in one bank; another bank is controlled by a bank owned by thirteen member states of CEN-SAD. These banks suffered massive withdrawals due partly to Libyan crisis, leaving liquidity fragile and recapitalization difficult.

### Supervision, crisis management, and regional arrangements
- Supervisory constraints:
  - COBAC is resource-constrained; onsite supervision aims for each bank every other year but may take up to four years for comprehensive or thematic inspection.
  - Offsite supervision weak and focused on detecting data inconsistencies; COBAC should have access to raw monthly bank credit data rather than processed reports.
- Regional legal and resolution framework:
  - New region-wide regulation on resolution of banking crises to be adopted by year-end expected to strengthen COBAC’s powers, allow early intervention measures, clarify responsibilities of regional and national bodies, and prevent questionable shareholders from participating in restructurings.
- Regional deposit insurance:
  - FOGADAC established in 2009; accepted its first contributions in March 2011.
  - Deposits insured up to CFAF 5 million per customer.
  - FOGADAC can grant loans for preventive intervention and guarantee deposits in any bank established in CEMAC; no consolidated approach for group-wide cross-border crises.
- Recommended actions to strengthen supervision and crisis preparedness:
  - Reestablish role of COBAC local correspondent with necessary human resources.
  - Systematic use of data collected in all areas related to banking activity.
  - Establish periodic survey at least quarterly submitted to COBAC General Secretariat.
  - Define early warning indicators to be quickly reported to COBAC General Secretariat.
  - Ensure participation of local COBAC correspondent in onsite inspections.
  - Define operational responsibilities for BEAC national branch when a bank is under close supervision.

### Access to borrower information, housing, rural financing, and microfinance (details)
- Credit information:
  - BEAC operates a credit risk bureau (Centrale des Risques—CR) but delays in updating information hamper effectiveness.
  - Project to establish a balance sheet center (Centrale des Bilans) and a payment delinquency center (Centrale des Incidents de Paiement) experiencing setbacks.
  - SMEs seldom use professionals to prepare financial statements; many do not file financial statements with courts as required by law.
  - Recommendation: strengthen the accounting profession and encourage SMEs to use accountants.
- Housing finance specifics:
  - Housing finance CFAF 23 billion or 0.7 percent of GDP at end-2010.
  - Ratio of housing loans to total loan balance: 7.8 percent.
  - Registration fees: 10 percent developed, 15 percent undeveloped property.
  - Observation: administrative property valuations used as references, distorting prices.
- Rural financing specifics:
  - MFIs provide bulk of lending to farmers; limited technical capacity and financial resources constrain rural development.
  - Postal offices: 36 nationwide could distribute services.
  - Options: create independent postal financial institution; host with a bank or MFI; host via mobile payments supplier.
- Microfinance specifics:
  - Sector composition: six networks cover almost 95 percent of active MFIs as of December 31, 2010.
  - Only one MFI network out of six financially viable without external assistance; donor subsidies crucial for others.
  - Recommendation: COBAC assess and enforce supervisory framework for MFIs; strengthen reporting and cooperation.

### Legal, judicial, and collateral registration reforms
- Regulatory framework: OHADA, CEMAC, and national legislation apply; OHADA governs contract, foreclosure, and bankruptcy.
- Perception: limited impartiality and effectiveness of commercial justice; example: four hearings in N’Djamena commercial court during first half of 2011.
- Recommendations:
  - Reform judicial apparatus including commercial courts; review Code of Civil Procedure and Penal Code; adopt code of ethics; develop training for judges handling commercial matters; encourage arbitration and mediation.
  - Increase OHADA awareness through seminars and OHADA National Commission dissemination.
  - Implement OHADA December 2010 revisions to uniform acts on securities and general trade law to facilitate collateral.
  - Modernize RCCM (computerization) to allow online searches and reliable information; assign national-level RCCM exclusive authority to register and publicize collateral securities; enable banks and notaries to register securities online via RCCM subscriptions.
- Registration statistics 2010 (N’Djamena RCCM):
  - 1065 individual businesses and 533 corporations registered in 2010 compared with 917 and 477 in 2009.
  - No more than 10 requests for registration of a pledge in N’Djamena in 2010.
- Insolvency law: urgent need for law on treatment of troubled enterprises; recommend active participation in OHADA Uniform Act on bankruptcy and settlement of liabilities (AUPC) reform process.

### Risk Assessment Matrix (selected risks and impacts)
- Poorly anticipated increases in NPLs will require sharp increases in bank provisions, eroding liquidity and solvency.
  - Likelihood: High
  - Risk drivers: Weak accounting and reporting framework limit capacity to properly classify NPLs.
  - Expected impact: Moderate/High — Provisioning adjustments will further strain fragile baseline solvency; problem banks will require recapitalization, possibly disrupting bank industry performance.
- Sharp drop in oil prices reducing bank business and increasing NPLs through government arrears to suppliers.
  - Likelihood: Moderate/High
  - Expected impact: Moderate/High — Absence of creditworthy corporate borrowers and lack of judicial enforcement force banks to rely on government-related lending; mitigated by lack of systemically important financial institutions and shallow intermediation.
- Loss of political stability.
  - Likelihood: Moderate
  - Expected impact: Moderate/High — Investment in oil sector and donor flows could be disrupted; possible collapse of public confidence in banking system.
- Financial consequences of sanctions against Libya.
  - Likelihood: High
  - Expected impact: Moderate — Freeze of assets of Libyan-owned BCC and BSIC may increase number of problem banks; overall effects manageable.

### Banking sector soundness indicators (selected values)
- Regulatory capital / Risk-weighted assets: 11.1 (2007), 13.3 (2008), 12.1 (2009), 6.7 (2010), 9.8 (Mar. 2011)
- Tier 1 capital/ Risk-weighted assets 1/: 10.0 (2007), 13.1 (2008), 13.5 (2009), 11.3 (2010), 9.1 (Mar. 2011)
- Gross nonperforming loans/Gross banking loans: 11.2 (2007), 8.0 (2008), 10.4 (2009), 12.1 (2010), 9.6 (Mar. 2011)
- Provisions / Nonperforming loans: 84.4 (2007), 70.2 (2008), 64.6 (2009), 73.5 (2010), 67.3 (Mar. 2011)
- Net nonperforming loans/Gross banking loans: 1.7 (2007), 2.4 (2008), 3.7 (2009), 3.2 (2010), 3.1 (Mar. 2011)
- Return on assets: 2.7 (2007), 3.9 (2008), 1.3 (2009), 3.7 (2010)
- Return on equity: 26.3 (2007), 36.4 (2008), 11.4 (2009), 39.4 (2010)
- Liquid assets / Total assets: 28.3 (2007), 23.9 (2008), 19.9 (2009), 24.5 (2010), 25.0 (Mar. 2011)
- Liquid assets / Demand deposits: 66.3 (2007), 82.4 (2008), 85.2 (2009), 73.8 (2010), 82.7 (Mar. 2011)
- Note: Data reflect 8 banks in Chad. Due to supervisory charges on some banks, tier 1 capital is larger than regulatory capital for 2009 and 2010.

### Stress test methodologies, scenarios, and selected results
- Methodology and scope:
  - Stress tests applied shocks to end-December 2010 data of six individual banks.
  - Two subgroups: (i) foreign banks (65 percent of assets); (ii) state-owned banks (35 percent of assets).
  - Two banks under provisional administration or restructuring excluded.
  - Baseline solvency ratios adjusted to better reflect under-provisioning of NPLs.
- Credit risk shocks tested (eight shocks):
  - Default by the largest individual exposure: 100%
  - Non-extractive industry sector: 100%
  - Trade sector: 100%
  - Construction and public work sector: 100%
  - Downgrade NPLs by one category: Current average rate
  - 50 percent increase in total NPLs: Current average rate
  - Default on bank credit to the government and to public enterprises: 100%
  - Default by the largest individual public sector: 100%
- Key credit risk findings:
  - Strong concentration of individual loans and widespread breach of prudential rules: largest individual exposure represents, on average, 100 percent of bank capital.
  - Default of largest individual borrower: only one bank would have enough equity to meet statutory minimum (versus five before shock).
- Public finance shock results:
  - Default by Chadian government on 50 percent of public debt service would cause average solvency ratio to drop from 8.2 percent to -7.3 percent.
  - A shock of 50 percent increase in government’s NPLs would bring banking system’s solvency ratio down from 8.2 to 7 percent, below minimum requirement.
- Overall credit quality shocks:
  - Downgrade overdue debts by one category: impact limited (less than 1 percentage point on average).
  - Increase of 50 percent in NPLs: average solvency ratio moves to 2.3 percent.
- Sectoral and oil considerations:
  - Low level of bank credit relative to economic activity mitigates direct bank vulnerability to sectoral shocks.
  - Adverse developments in oil sector would have largely indirect effects via public finance.
- Exchange rate and interest rate risk:
  - Exchange rate shocks tested include 40-percent depreciation/appreciation scenarios.
  - Banks sensitive to appreciation of CFA franc relative to euro due to sizable net external positions vis-à-vis the euro.
  - Interest rate shock: simulated increase in loan rates by 500 basis points would reduce average return on assets from 2 percent to 1 percent.
- Liquidity stress tests:
  - Simulated run on banks for 10 consecutive business days with no emergency funds.
  - Results: all banks except one would be able to contain effects of liquidity drain.
  - Daily rates of deposit flight calibrated on historical data since Libyan political events in early-2011.
  - Critical liquidity situation defined as liquid assets become less-than-liquid liabilities.
- Summary of stress test figures:
  - Average solvency ratio before shocks (adjusted baseline): 8.2 percent.
  - Impact examples:
    - Default of 50% of public sector loans: 8.2 percent to -7.3 percent.
    - Increase of 50% of all nonperforming loans: average solvency ratio to 2.3 percent.
  - Average return on assets: before shock 2 percent; after interest-rate shock 1 percent.
- Cost of recapitalization — default of largest individual borrower (selected):
  - Capital Needed to Meet the Regulatory Minimum Requirement (In millions of CFAF):
    - Bank1: 11,144
    - Bank2: 1,280
    - Bank3: 5,592
    - Bank4: 6,883
    - Bank5: 1,789
    - Total banks: 26,688
  - Capital Requirement (In percent of GDP): Total banks: 0.70
  - Deposit of Negative Capital Banks (In percent of GDP): Total banks: 4.8
- Combination scenarios produced large negative impacts for some banks (sample outcomes cited in source) including results such as -17.1, 17.4, 5.5, -0.2, 6.6, 50.4, -2.9, 9.1, 5.2.

*Source: Executive summary and staff report content of IMF assessment document as provided in the source PDF.*

### Executive summary ......................................................................................................

### Executive summary

### System structure, vulnerabilities, and macro-financial context
- The Chadian financial system is among the least developed in the CEMAC region, has little depth, is segmented, and is exposed to significant risks.
- Bank exposures to the government are massive: around 70 percent of bank portfolios are direct and indirect exposures to the government.
- Ownership and governance weaknesses:
  - Four of the eight banks have significant public ownership and, as a group, suffer major weaknesses including a negative net worth and state interference in management and staffing decisions.
  - Several banks do not comply with the single large borrower limit nor the risk concentration ratio set by the regional regulator.
- Recent macroeconomic performance and outlook:
  - Oil exports in 2010 totaled about 45 million barrels, representing 62 percent of Chad’s nominal GDP and 90 percent of its exports.
  - Real GDP growth reached 13 percent in 2010.
  - Overall real GDP growth is projected to moderate to 3 percent in 2011.
  - Non-oil GDP growth is expected to moderate to 3.6 percent in 2011.
  - Growth is expected to spike above 7 percent in 2012, reflecting the oil refinery’s first full year in operation and new industrial projects.
  - Bongor began producing 20,000 barrels per day (bpd) in June to feed the new refinery.
  - Output from the main oil field at Doba is expected to decline or, at best, stay at the current level of about 120,000 bpd, provided international oil prices remain close.
- Macro risks and fiscal sustainability:
  - Remaining proven reserves are modest and expected to be mostly depleted over the next 20 years.
  - The non-oil primary deficit increased from 3 percent of non-oil GDP in 2003 to 30 percent in 2009–10.
  - Non-oil revenue effort is about 12 percent (one fourth less than the average of other Sub-Saharan African oil exporters).
  - Short-term vulnerability is high due to pro-cyclical fiscal policy and sensitivity to oil-price shocks.
- Banking sector exposure to oil-related risks:
  - The government is essentially the only significant banking client; remaining exposures are mainly public enterprises, government suppliers, contract holders, or public servants.
  - Accumulation of payments arrears by the government treasury has increased the risk of default by government-related bank clients.
- Liquidity and monetary aggregates:
  - Bank liquidity has improved partly due to oil company deposits to cover local currency spending.
  - Broad money expanded by 26 percent in 2010 compared to the 17 percent growth rate of nominal GDP.

### Legal, judicial, and supervisory environment
- The weak legal and judicial environment is a major constraint:
  - Chad scores poorly on World Bank Governance Indicators and is in the lowest decile in the rule of law indicator.
  - Reforms are needed to restore confidence in the judicial system, especially commercial courts.
  - An effective office of the inspector general of the justice system is recommended to fight perceived pervasive corruption.
- Regional supervision and crisis management:
  - Chad is a member of the CEMAC monetary union with a fixed peg against the euro; banking regulation is conducted at the regional level by COBAC.
  - The regional crisis management and resolution framework is being strengthened but has not been effective in Chad.
  - COBAC needs to expand human resources and capacity to issue early warnings and prevent national crises.
  - Delays in implementing restructuring or resolution decisions for troubled banks result in considerable additional costs.
  - The reform of the regional legal framework for dealing with problem banks needs completion.

### Public debt management and treasury cash flow
- Poor treasury cash management contributes to financial vulnerabilities:
  - Despite high fiscal revenues from the oil windfall, the government significantly delays payment of invoices, causing deterioration in the quality of bank loans to government suppliers.
  - Chad has had to extend the offering period of its bonds to investors despite high interest rates and modest levels of government indebtedness, driven by perceptions of a weakening fiscal position due to pervasive delays in payments to domestic suppliers.
  - Implementation of an ambitious investment program has led to extended payment delays to government suppliers and increasing delinquencies on small business debt to banks, contributing to an increase in NPLs.
- Policy option:
  - Active participation of Chad’s Treasury in the nascent regional public debt market through regular and preannounced issues of one-, three-, and nine-month treasury bills (t-bills) could help the Treasury manage liquidity, reduce payment arrears, and have positive effects on the CEMAC banking system.

### Financial intermediation—contractual savings, access to finance, housing, and microfinance
- Contractual savings and insurance:
  - The insurance sector is small compared with peer countries and poorly managed.
  - The National Insurance Authority (DNA) needs strengthening to better comply with the legal and prudential framework of CIMA ratified in early 2011.
- Pension funds:
  - The two pension funds, Caisse Nationale de Prévoyance Sociale (CNPS) and Caisse Nationale de Retraite du Tchad (CNRT), have large claims on the government relative to their asset base.
  - The CNPS has an outdated legal framework and is poorly managed.
  - The CNRT lacks financial autonomy, is burdened with government arrears, and is insolvent.
  - Recommendation: the government should repay its debt to the two funds and remain current on its future obligations.
- Access to finance for SMEs and housing:
  - Access to finance is limited and lending is concentrated on a few large enterprises and some SMEs with business relationships to large corporations.
  - Financial products and services are limited and not adapted to SMEs’ needs; absence of long-term resources limits banks’ ability to finance SME investment needs.
  - Banks lack access to reliable financial information on potential borrowers.
  - Recommendations include strengthening the accounting profession, encouraging SMEs to use accountants, BEAC developing an adequate credit reporting system, and government promotion of accounting use by businesses.
  - Housing finance is underdeveloped: only a narrow segment (large enterprise employees, banks, senior public officials) have access to housing finance despite significant housing needs.
  - The real estate registration system’s complexity and cost limit the mortgage market; the government could develop incentives for savings accounts used for down payments for mortgage loans.
  - Rural financing is limited and mainly concentrated on cotton; mobile phone payments have potential to expand financial services to remote areas. BEAC has prepared draft CEMAC-UMAC regulations on the issue of e-money.
- Microfinance:
  - Savings-and-loan associations organized into networks are the most widespread microfinance structure; farmers represent close to 60 percent of the customer base.
  - Financial viability of MFIs is mixed; only one MFI network out of six is financially viable without external assistance.
  - The government should refrain from further direct intervention in MFI operations.
  - Effectiveness of MFI supervision is weak; COBAC is responsible but has inadequate resources for effective supervision.

### Key findings and prioritized recommendations (excerpt from Box 1)
- Banking sector stability:
  - Finding: Two public banks have negative equity.
  - Recommendation: Recapitalize the banks and prepare a viable business plan.
  - Priority/Timeframe: High/Immediate. Responsibility: Government.
  - Finding: Banks do not comply with limits on individual exposure despite generous threshold.
  - Recommendation: Increase capital to enhance resilience to shocks.
  - Priority/Timeframe: High/by 2014. Responsibility: CEMAC.
- Cash flow and public debt management:
  - Finding: Poor government cash flow management leads to financial vulnerabilities.
  - Recommendation: Establish, under the leadership of the Ministry of Finance with active participation of the BEAC and line ministries, a treasury committee to monitor the government’s cash position.
  - Priority/Timeframe: High/Immediate. Responsibility: Government, BEAC.
- Access to financial services:
  - Finding: Access is constrained by lack of adequate information on borrowers.
  - Recommendation: BEAC should develop an adequate credit reporting system and the government should encourage the use of the accounting system by businesses.
  - Priority/Timeframe: High/Medium term. Responsibility: BEAC/Government.
- Microfinance:
  - Finding: The government plays the role of a direct operator by extending credit.
  - Recommendation: Limit direct government intervention in the sector and support existing institutions based on performance contracts.
  - Priority/Timeframe: Medium/Medium term. Responsibility: Government.
- Housing financing:
  - Finding: No long-term resources are available.
  - Recommendation: Develop incentives for savings accounts for down payments on mortgage loans, including explicit budgeting of direct assistance to borrowers.
  - Priority/Timeframe: Medium/Medium term. Responsibility: Government.
  - Finding: Demand for housing finance is unmet because security of operations is weak.
  - Recommendation: Take measures to enforce the new OHADA law, which allows mortgaging future real property.
  - Priority/Timeframe: Medium/Immediate. Responsibility: Government.
- Legal and judicial framework:
  - Finding: Legal registration of guarantees and companies is unreliable.
  - Recommendation: Modernize the OHADA RCCM with support of Committee experts and on the basis of the Guide produced by OHADA.
  - Priority/Timeframe: Medium/Medium Term.
  - Finding: The business community has no confidence in the judicial system.
  - Recommendation: Establish a credible inspector general’s office to investigate and prosecute corruption in the justice system and introduce arbitration and mediation for dispute settlement outside courts.
  - Priority/Timeframe: High/Near Term.
- Insurance sector:
  - Finding: National supervision does not comply with CIMA requirements as applied in other regional countries.
  - Recommendation: Reform the National Insurance Directorate (DNA) by providing it with its own board, staff, and independent budget funded through direct allocations of supervision levies paid by companies.
  - Priority/Timeframe: Medium/Near Term. Responsibility: Ministry of Finance.
- Pension sector:
  - Findings: The CNRT has been technically bankrupt for 20 years; the CNPS has an overall surplus that could be used to preserve purchasing power of pensioners and maintain system viability.
  - Recommendations: Government should repay debts to the two funds, remain current on obligations, and conduct an actuarial study to establish long-term financial viability.
  - Priority/Timeframe: High/Immediate. Responsibility: Ministry of Finance/Ministry of Labor.

*Source: Executive summary of IMF assessment document.*

### 19.      The treasury needs to fully participate in a modern payments system and

### 19.      The treasury needs to fully participate in a modern payments system and 

### Treasury and payments-system recommendations
- The treasury needs to rapidly modernize its operations and take an active role in the regional money market by issuing short-term treasury bills and gradually building a full yield curve by extending maturities, at least up to five years.
- This would improve cash management and reduce significantly payment delays.
- Context: The regional central bank, the BEAC, has established a framework for a regional government debt market and is now ready to assist, free of fees, member countries with auctions of treasury bills in the market.

### Structure of the financial sector — size and concentration
- The financial system has a narrow base, little depth, and is under-developed.
- Institutions: eight commercial banks, two insurance companies, two pension funds, and over 200 microfinance institutions (MFIs).
- Indicators and comparative facts:
  - Total banking assets are only about 12 percent of GDP, below the 19 percent average for the CEMAC.
  - Less than one branch per 1000 km2 — the least dense banking network in CEMAC.
  - 13 bank accounts per 1,000 inhabitants compared with 52 in Cameroon.
  - Short-term loans account for about 55 percent of total assets; medium-term loans 44 percent; long-term loans less than 2 percent.
  - Time deposits dominate liabilities, followed by demand deposits and passbook savings accounts.
  - Some banks require a minimum of CFAF 200,000 to open a bank account.
- Ownership:
  - 65 percent of bank assets are held by foreign banks.
  - 35 percent are held by government-controlled banks.

### Financial-soundness developments and vulnerabilities
- Capital and asset quality:
  - Minimum capital was raised to CFAF 5 billion at end June 2010; two state banks have negative equity.
  - NPLs increased from 10.4 percent in 2009 to 12.1 percent in 2010.
  - Rate of provisioning of NPLs was 73.5 percent in 2010.
- Funding and maturity transformation:
  - Close to 80 percent of all bank deposits are on demand or at terms of less than one year.
  - About 70 percent of loans are short-term.
- Concentration and exposure:
  - The government and public entities hold roughly a third of banking system deposits, and up to three fourths of deposits in some banks.
  - Almost half of all loans go to fewer than 30 companies (data at end-March 2011); the largest state company alone accounts for almost 8 percent of gross lending.
  - About 70 percent of gross loans were extended to the public sector and related activities in Chad.
  - COBAC single large exposure limit: 45 percent of capital; actual exposure exceeds 100 percent of capital.
  - Stress-test results: default of the largest public borrower would leave only one foreign-owned bank meeting the regulatory CAR; all state banks would have negative capital.
- Impact of external events:
  - Libya holds a 50 percent share in one bank; another bank is controlled by a bank owned by the thirteen member states of the CEN-SAD. These banks suffered massive withdrawals due partly to the Libyan crisis, leaving liquidity fragile and recapitalization difficult.

### Short-term solvency and stress-test findings
- Reported and adjusted capital positions:
  - All foreign-owned banks complied with the required increase in the minimum capital and (based on March 2011 data) have a weighted capital adequacy ratio (CAR) of 12.6 percent.
  - State-owned banks had an aggregate CAR of -0.6 percent compared to a required minimum of 8 percent.
- System NPLs excluding a public bank (whose NPLs were equivalent to 63.5 percent) were estimated at 10.2 percent of gross loans.
- Stress tests:
  - Foreign-owned private banks would remain adequately capitalized even with a 50 percent increase in NPLs.
  - Government-controlled banks examined would need substantial recapitalization; overall banking system CAR would fall to around 8 percent.
- Table excerpted indicators (selected figures as presented):
  - Regulatory capital / Risk-weighted assets: System 2010 -12.3; 2011 2.1; State-Owned banks 17.2; Foreign Private Banks 12.7
  - Gross nonperforming loans/Gross banking loans: System 2010 17.6; 2011 12.8; State-Owned banks 8.9; Foreign Private Banks 7.9
  - Provisions / Nonperforming loans: System 66.7; 59.5; State-Owned banks 81.3; Foreign Private Banks 74.5
  - Liquid assets / Total assets: System 26.4; 20.5; State-Owned banks 23.5; Foreign Private Banks 27.3
  - Note: Data reflect 8 banks in Chad.

### Supervision, crisis management, and regional arrangements
- Supervisory constraints:
  - The regional supervisor (COBAC) is resource-constrained; onsite supervision aims for each bank every other year but may take up to four years for a comprehensive or thematic inspection.
  - Offsite supervision is weak and focused on detecting data inconsistencies; COBAC should have access to raw monthly bank credit data rather than processed reports.
- Regional legal and resolution framework:
  - A new region-wide regulation on the resolution of banking crises to be adopted by year-end is expected to strengthen COBAC’s powers, allow early intervention measures, clarify responsibilities of regional and national bodies, and prevent questionable shareholders from participating in restructurings.
- Regional deposit insurance:
  - Fonds de Garantie des Dépots en Afrique Centrale (FOGADAC) was formally established in 2009 and accepted its first contributions in March 2011.
  - Deposits are insured up to CFAF 5 million per customer.
  - FOGADAC can grant loans for preventive intervention and its resources can be used to guarantee deposits in any bank established in the CEMAC, but there is no consolidated approach for group-wide cross-border crises.

### Recommended actions to strengthen supervision and crisis preparedness
- Strengthen BEAC national-branch involvement and COBAC local presence by:
  - (i) reestablishment of the role of COBAC local correspondent, providing necessary human resources;
  - (ii) systematic use of data collected in all areas related to banking activity;
  - (iii) establishment of a periodic survey, on at least a quarterly basis, submitted to the COBAC General Secretariat;
  - (iv) definition of early warning indicators, to be quickly reported to the COBAC General Secretariat;
  - (v) participation of the local COBAC correspondent in onsite inspections conducted by COBAC;
  - (vi) determination of operational responsibilities to be entrusted to the BEAC national branch when a bank is subject to close supervision.

### Contractual savings, insurance, and pensions
- Insurance sector:
  - Total assets of the sector: CFAF 14 billion in 2010; turnover about CFAF 9 billion.
  - Penetration (premiums/GDP): 0.27 percent (median in CIMA zone: 0.89 percent).
  - Density (premiums/inhabitants): CFAF 837 (median in CIMA zone: CFAF 2,112).
  - Market structure: main insurance company market share about 70 percent; second operator holds the remainder.
  - Management fees and commissions: about 28 percent and 8 percent of premiums, respectively; about half of net reinsurance premiums absorbed.
  - Recommendation: Implement the CIMA prudential framework and strengthen the National Insurance Authority (DNA) by: (i) setting up its own board, staff, and an independent budget (funded by fees paid by companies); (ii) reorganizing and improving the quality of audit activities and enforcing sanctions; (iii) enforcing the legal and prudential framework of the CIMA, ratified in early 2011, including monitoring of brokers.
- Pensions:
  - CNPS (private sector and some government employees): assets estimated at about CFAF 50 billion; claims on central government and other public sector institutions about 25 percent of total assets.
  - CNRT (civil servants and military): assets estimated at about CFAF 40 billion; claims on central government represent more than 90 percent of total assets.
  - CNPS investment portfolio (about CFAF 25 billion) composition:
    - CFAF 5 billion in rental property (some seized without compensation by government),
    - CFAF 0.8 billion in equity,
    - CFAF 5.4 billion in time deposits and CDs,
    - CFAF 14.3 billion deposited in non-interest-bearing current accounts.
  - CNRT is technically bankrupt since establishment in 1993 and had more than CFAF 25 billion in arrears on pension payments in 2009.
  - Recommended CNRT actions: (i) clearance of government debt; (ii) payment of arrears to pensioners; (iii) an actuarial study of new income and expenditure with an overall financing plan and rehabilitation of balance sheet; (iv) institutional reform to give operational and managerial autonomy.

### Access to finance and SME lending
- Lending patterns:
  - At end 2010, 60 percent of credit to the economy was concentrated on large enterprises, 22 percent to SMEs.
  - Average interest rates in 2010: large enterprises 11.85 percent; SMEs 12.19 percent; individuals 16.03 percent.
  - The small rate premium for SMEs reflects that SME lending is mostly to subcontractors of large enterprises and linked to the large firms’ credit risk.
- Product and market gaps:
  - Financial products such as leasing, guarantee funds, and factoring adapted to the Chadian private sector are absent.
  - Absence of long-term resources limits banks’ ability to finance SME investment needs.
- Recommendation: Develop long-term instruments and specialized financial institutions/products (leasing, guarantee funds, factoring) to expand SME access to finance.

*Source: COBAC.*

### 40. Furthermore, banks do not have access to reliable financial information on

### _cr11299 - 40. Furthermore, banks do not have access to reliable financial information on

### Access to borrower information
- BEAC operates a credit risk bureau (Centrale des Risques—CR), but its effectiveness is hampered by the considerable delay in updating the information collected from the banks.
- Project to establish a balance sheet center (Centrale des Bilans) and a payment delinquency center (Centrale des Incidents de Paiement) is experiencing setbacks.
- SMEs seldom use professionals to prepare financial statements and business plans; a large number do not file financial statements with the courts as required by law.
- Policy recommendation: Strengthen the accounting profession and encourage SME recourse to accountants to enhance financial transparency and expand the range of bank-financeable activities, thereby helping boost growth.

### Housing finance
- Housing finance amounting to only CFAF 23 billion or 0.7 percent of GDP at end-2010.
- Only four of eight banks offer housing loans; two banks hold 75 percent of such loans.
- Majority of loans are medium-term, often without a mortgage guarantee or with flawed guarantees (e.g., promised mortgages on unregistered property).
- Loan pricing: high fixed rates adjustable under contracts based on lender resource cost; range of terms offered is 12–17 percent and trending downwards.
- Market access: Only a slim segment of large enterprise employees, banks, or senior public officials have access.
- Housing needs: housing deficit evaluated at 125,000 units in 1999; new needs estimated at 25,000 units per year.
- Footnote: Housing loans are VAT exempt.
- Observation: ratio of housing loans to total loan balance is 7.8 percent, reflecting limited banking penetration and importance of cash circuits.
- Policy constraint: complexity and cost of securing property rights; registration fees of 10 and 15 percent of the value of developed and undeveloped property, respectively.
- Outcome: less than 20 percent of properties are properly registered; fewer than 4,000 property titles in the entire country, including government properties.
- Administrative property valuations are used as references for market transactions rather than for tax purposes, distorting prices.

### Rural financing
- A bank originally mandated to finance agriculture has experienced problems; its only rural intervention is participation in financing cotton.
- MFIs provide the bulk of lending to farmers; several financial products developed for rural/agricultural sector such as warrants (warrantage).
- Major constraints: very limited technical capacity of MFIs and lack of financial resources hinder rural support development.
- Postal system: 36 offices nationwide could distribute financial services in remote areas. Postal financial services were suspended several years ago after problems; postal checking services resumed but savings products still not offered.
- Options for postal service:
  - develop a full-fledged financial institution separate from postal services with its own products;
  - agree a hosting understanding with a bank or an MFI;
  - agree with a mobile payments supplier to provide hosting services.
- Mobile phone payments: potential to reach remote populations; several banks in Chad are discussing mobile payment arrangements with telephone companies. BEAC has prepared draft CEMAC-UMAC regulations on e-money.

### Microfinance
- Institutional structure: savings-and-loan associations organized into networks are most widespread.
- As of December 31, 2010, the sector had six networks covering almost 95 percent of active MFIs; except one, all networks operate in rural areas.
- Of 13 independent MFIs, nine operate in rural areas; the two largest operate only in N'Djamena.
- Client base: farmers represent close to 60 percent of customers; stockbreeders and fishermen are distant second.
- Resources: mainly unremunerated demand deposits or time deposits remunerated at an average annual interest rate of 4–6 percent.
- Loan products and pricing:
  - Crop credits: maturities of one year or less; monthly interest rates of about 2 percent, reimbursed after harvest.
  - Investment credits: typically for more than one year; applicable monthly interest rates in the range of 1.5 percent.
  - Warrants introduced by some MFIs, but storage capacity and high transportation costs slowed growth.
- Financial viability:
  - Only one MFI network out of six is financially viable without external assistance.
  - Others rely heavily on donor subsidies; in some cases subsidies account for up to 70 percent of operating budget of beneficiary MFI.
  - Two of the three largest networks account for 73 percent of the total balance sheet of the sector and benefit from donor subsidies.
- Supervision: COBAC is responsible for MFI supervision but lacks resources; prudential framework for MFIs needs updating.
- Policy recommendation: COBAC should assess enforcement of supervisory framework for microfinance and enhance effectiveness through strengthened use of reporting system and cooperation with financial institutions responsible for MFI networks.

### Regional Financial Integration
- Progress mixed: freedom of movement of capital in the CEMAC and uniform BEAC interest rates across region.
- Financial flows generally follow trade flows; banknote exports to Chad mainly from Cameroon (60 percent) and Central African Republic (24 percent).
- Government launched its first treasury bonds issue on financial markets; securities purchasable on Douala Stock Market and Libreville Regional Stock Market. Chad is not represented on either exchange.
- Brokerage agencies could raise awareness, mobilize long-term savings, make long-term financing available to Chad, and facilitate regional integration.
- Bank syndication: increase in CEMAC; Chadian banks participated in syndicates and CEMAC banks participated in Chad. COBAC prudential rules encourage syndication for risk diversification.
- Single license in CEMAC intended to promote integration has not been effective; no bank has used it. Constraints: minimum capital requirements for each subsidiary and COBAC authorization for managing directors.
- Policy suggestion: allow banks to operate by branch/agency across countries without minimum capital or managing director requirements; COBAC would exercise general supervision at CEMAC level.

### Legal and judicial environment for lending
- Regulatory landscape: financial activities subject to OHADA, CEMAC, and national legislation; banking and microfinance regulated by CEMAC; capital markets by COSUMAF; contract, foreclosure, bankruptcy under OHADA; property law and real estate legislation at national level.
- Perception: strong perception of limited impartiality, effectiveness, and expeditiousness in commercial justice functioning. Specialized courts reported unable to hold regular hearings and rule effectively; example: only four hearings in N’Djamena commercial court during first half of 2011.
- Policy recommendations to restore confidence in judicial system:
  - encourage impartiality, independence, and effectiveness through judicial apparatus reform, including commercial courts;
  - review Code of Civil Procedure and Penal Code to enhance effectiveness;
  - adopt a code of ethics for magistrates, commercial court judges, and court clerks;
  - develop training program for judges with jurisdiction over commercial matters, particularly juges consulaires;
  - strongly encourage arbitration and mediation as alternative dispute settlement.
- OHADA awareness: domestic players do not know OHADA business law, hampering effectiveness. Recommend government and market players organize seminars and activities to raise awareness; OHADA National Commission should disseminate content of OHADA regulations and guidelines.
- OHADA revisions: recent revisions to general trade law and law on guarantees adopted by OHADA Council of Ministers; December 2010 revisions to uniform acts on securities and general trade law constitute major development for loan guarantees.
- Collateral and land administration:
  - Lending institutions prefer mortgages despite difficulties obtaining land titles and foreclosing.
  - Cadastre not properly organized, causing delays and unreliability.
  - Need to improve land tenure system and land administration, including establishing mortgages on future buildings and facilitating title acquisition post-loan.
  - December 2010 OHADA revisions aim to facilitate constitution of collateral, expand eligible property as security, provide national and regional advertising accessible to public, and establish more flexible foreclosure modalities; discontinued double formality in favor of single registration in Registre de Commerce et de Crédit Immobilier-RCCM.
  - RCCM registration is unreliable due to mainly manual data management and filing.
  - OHADA with expert committee initiated program to modernize RCCM, including computerization; rapid implementation should allow paperless procedures, online searches of collateral, and more reliable information on economic operators.
- Registration statistics:
  - In 2010, 1065 individual businesses and 533 corporations registered in N’Djamena RCCM compared with 917 and 477 in 2009.
  - There were no more than 10 requests for registration of a pledge in N’Djamena in 2010.
- Policy recommendation: assign a national-level RCCM with exclusive authority to register and publicize collateral securities as permitted under OHADA; enable banks and notaries public to register securities online via RCCM subscriptions.
- Insolvency law: urgent need for law on treatment of troubled enterprises to improve market security and promote stability and growth in OHADA zone; recommend Chadian government effectively participate in OHADA Uniform Act on bankruptcy and settlement of liabilities (AUPC) reform process.
- CEMAC is developing crisis resolution framework for financial institutions and seeking exceptions to the AUPC.

### Risk Assessment Matrix (selected risks and impacts)
- Risk: Poorly anticipated increases in NPLs will require sharp increases in bank provisions, eroding liquidity and solvency.
  - Likelihood: High
  - Risk drivers: Weaknesses in accounting and reporting framework limit capacity to properly classify NPLs.
  - Expected impact: Moderate/High — Provisioning adjustments will further strain fragile baseline solvency; problem banks will require recapitalization, possibly disrupting bank industry performance.
- Risk: A sharp drop in oil prices will reduce business for banks and increase NPLs through government arrears to suppliers.
  - Likelihood: Moderate/High — volatility in oil prices and size of known oil reserves in Chad makes it more likely.
  - Expected impact: Moderate/High — Absence of creditworthy corporate borrowers and lack of judicial enforcement force banks to rely on government-related lending; mitigated by lack of systemically important financial institutions and shallow financial intermediation.
- Risk: Loss of political stability.
  - Likelihood: Moderate — Elections in February 2011 (parliament) and April 2011 (president) were relatively peaceful; underlying domestic and external tensions persist.
  - Expected impact: Moderate/High — Investment in oil sector and donor flows could be disrupted; possible collapse of public confidence in banking system.
- Risk: Financial consequences of sanctions against Libya.
  - Likelihood: High — UN, EU and U.S. sanctions name Libyan entities significant shareholders in Chadian banking and real estate.
  - Expected impact: Moderate — Freeze of assets of Libyan-owned BCC and BSIC may increase number of problem banks; overall effects on banking stability would be manageable.

### Banking sector soundness indicators (selected values)
- Regulatory capital / Risk-weighted assets: 11.1 (2007), 13.3 (2008), 12.1 (2009), 6.7 (2010), 9.8 (Mar. 2011)
- Tier 1 capital/ Risk-weighted assets 1/10.0 (2007), 13.1 (2008), 13.5 (2009), 11.3 (2010), 9.1 (Mar. 2011)
- Gross nonperforming loans/Gross banking loans: 11.2 (2007), 8.0 (2008), 10.4 (2009), 12.1 (2010), 9.6 (Mar. 2011)
- Provisions / Nonperforming loans: 84.4 (2007), 70.2 (2008), 64.6 (2009), 73.5 (2010), 67.3 (Mar. 2011)
- Net nonperforming loans/Gross banking loans: 1.7 (2007), 2.4 (2008), 3.7 (2009), 3.2 (2010), 3.1 (Mar. 2011)
- Return on assets: 2.7 (2007), 3.9 (2008), 1.3 (2009), 3.7 (2010)
- Return on equity: 26.3 (2007), 36.4 (2008), 11.4 (2009), 39.4 (2010)
- Liquid assets / Total assets: 28.3 (2007), 23.9 (2008), 19.9 (2009), 24.5 (2010), 25.0 (Mar. 2011)
- Liquid assets / Demand deposits: 66.3 (2007), 82.4 (2008), 85.2 (2009), 73.8 (2010), 82.7 (Mar. 2011)
- Note: Data reflect 8 banks in Chad. Due to supervisory charges on some banks, tier 1 capital is larger than regulatory capital for 2009 and 2010.

*IMF staff report content as provided in the source PDF.*

### Appendix III. Stress Test Methodologies and Results

### Appendix III. Stress Test Methodologies and Results

### Methodology and Scope
- Stress tests applied shocks to end-December 2010 data of six individual banks.
- Two subgroups of banks were identified:
  - (i) foreign banks (owned by banks or individuals outside Chad represents 65 percent of assets);
  - (ii) state-owned banks (35 percent of assets).
- Two banks under provisional administration or in the process of restructuring in connection with a change in shareholders were excluded.
- The mission simulated extreme but plausible shocks in line with the economic structure of Chad.
- The mission modified the baseline value of the bank solvency ratio to better adjust for the under-provisioning of NPLs as result of the poor quality of the bank data submitted to the BEAC.
- A large proportion of NPLs will likely not be recovered and should have higher weighted provisions in principle and in accordance with COBAC’s regulations.

### Credit Risk: Scenarios and Shock Design
- Eight shocks tested based on three broad categories of credit risk:
  - Credit risk related to public finance.
  - Sectoral and exposure risk (sectoral risk concentration).
  - Overall credit risk (overall credit risks).
- Shocks and provisioning assumptions (as presented in the source):
  - Default by the largest individual exposure: 100%
  - Non-extractive industry sector: 100%
  - Trade sector: 100%
  - Construction and public work sector: 100%
  - Downgrade NPLs by one category: Current average rate
  - 50 percent increase in total NPLs: Current average rate
  - Default on bank credit to the government and to public enterprises: 100%
  - Default by the largest individual public sector: 100%

### Key Findings on Credit Risk Vulnerabilities
- The Chadian banking system is generally vulnerable to a wide range of risks, particularly to credit risk.
- Even with the simulated shocks, capital requirements remained under 1 percent of GDP, reflecting the low significance of financial intermediation in Chad.
- Major risk factor: strong concentration of individual loans and widespread breach of numerous prudential rules.
  - Regulations require that risk be limited to 45 percent of capital.
  - The largest individual exposure represents, on average, 100 percent of bank capital.
- Consequence of largest individual borrower default:
  - Default by the largest individual borrower of each bank would have a serious impact on the banking system (only one bank would have enough equity to meet the statutory minimum, as opposed to five before the shock).
  - Main sources of individual borrower risk: government or public enterprises with government-backed liabilities, large private or foreign companies and often their shareholders, or companies of questionable origin.

### Public Finance Shock Results
- Default by the Chadian government on 50 percent of public debt service:
  - Would cause the average solvency ratio of banks to drop from 8.2 percent to -7.3 percent.
  - Marked impact on the banks with significant public sector ownership.
- A shock of 50 percent increase in government’s NPLs:
  - Would bring banking system’s solvency ratio down from 8.2 to 7 percent, below the minimum requirement.
- If government default were compounded by salary arrears, there would be further portfolio and solvency problems.

### Overall Credit Quality Shocks
- Downgrade overdue debts by one category:
  - Impact on solvency ratios limited (less than 1 percentage point on average).
- Increase of 50 percent in NPLs:
  - Significant deterioration in bank solvency, with the average solvency ratio moving to 2.3 percent.

### Sectoral Risk and Oil Sector Considerations
- Although economic activity is concentrated in a few sectors, low level of bank credit relative to real economic activity mitigates direct bank vulnerability to sectoral shocks.
- Adverse developments in the oil sector (untested shock) would have largely indirect effects via public finance and knock-on effects on enterprises or households receiving bank loans.
- Enterprises engaged in petroleum mining and other areas generally have relatively limited financial relations with Chadian banks.

### Exchange Rate and Interest Rate Risk
- Exchange rate shocks tested:
  - (i) a 40-percent depreciation of the CFAF relative to the euro;
  - (ii) a 40-percent appreciation of the CFAF relative to the euro;
  - (iii) a 40-percent depreciation of the euro vis-à-vis the dollar;
  - (iv) a 40-percent appreciation of the euro relative to the dollar.
- Vulnerability:
  - Chadian banks are sensitive to an appreciation in the CFA franc relative to the euro given sizable net external positions of the banks vis-à-vis the euro.
- Interest rate shock:
  - Simulated increase in interest rates of loans by 500 basis points.
  - Because of a sizable cumulative maturity mismatch (dominant share of short-term liabilities), the impact on portfolio valuation would be significant.
  - Impact on average profitability: average return on assets would drop from 2 percent to 1 percent.
  - Difficulty in gauging which BEAC rates would have greatest impact due to lack of effective monetary policy transmission instruments.

### Liquidity Stress Tests
- Liquidity shocks: simulated run on banks for 10 consecutive business days with no recourse to emergency funds (from other banks or from the BEAC).
- Results: all banks except one would be able to contain the effects of the liquidity drain.
- Daily rates of deposit flight calibrated based on historical data observed since the start of the political events in Libya in early-2011.
- It is very likely that deterioration in the political situation would have a heightened impact on liquidity.
- Definition: A critical liquidity situation is defined as a situation in which liquid assets become less-than-liquid liabilities.
- Note: The results would be comparable with an intensified run on deposits in Libyan banks.

### Summary of Stress Test Results (Selected Figures)
- Average solvency ratio before shocks (adjusted baseline): 8.2 percent.
- Impact of major shocks on solvency (examples cited):
  - Default of 50% of public sector loans: banking system solvency from 8.2 percent to -7.3 percent.
  - Increase of 50% of all nonperforming loans: average solvency ratio to 2.3 percent.
- Average return on assets:
  - Before shock: 2 percent (text: "the average return on assets would drop from 2 percent to 1 percent").
  - Table values (selected banks, before shock): Average return on assets (before shock) listed as -0.3, 3.1, 4.4, 1.8, 2.4, -10.4, 0.7, 2.4, 1.9.
  - Average return on assets (after shock) listed as -0.6, 1.9, 2.5, 1.0, 1.4, -9.2, 0.1, 1.2, 0.9.
- Liquidity: Number of banks in critical liquidity situation across Day 1–Day 6 in table shows state banks entering critical situations while foreign banks do not (table entries: State banks 0 1 1 1 1 1; Foreign Banks 0 0 0 0 0 0).

### Cost of Recapitalization — Default of the Largest Individual Borrower (Table 7)
- Capital Needed to Meet the Regulatory Minimum Requirement (In millions of CFAF) and Capital Requirement (In percent of GDP):
  - Bank1: 11,144; 0.29
  - Bank2: 1,280; 0.03
  - Bank3: 5,592; 0.15
  - Bank4: 6,883; 0.18
  - Bank5: 1,789; 0.05
  - Bank6: ......
  - Total banks: 26,688; 0.70
- Deposit of Negative Capital Banks (In percent of GDP) (table entries):
  - Bank1: 1.8
  - Bank2: ...
  - Bank3: 2.1
  - Bank4: 1.0
  - Bank5: ...
  - Bank6: .
  - Total banks: 4.8
- Note: 1/ Private sector deposits.

### Combination Scenarios (Selected Results from Table)
- Shock interest rate + Credit Default State: sample bank outcomes include -17.1, 17.4, 5.5, -0.2, 6.6, 50.4, -2.9, 9.1, 5.2
- Appreciation against the euro + credit default + state: sample outcomes include -17.7, 23.7, 0.5, -3.7, 8.8, 32.6, -0.6, 5.6, 3.6
- Shock interest rate + increase in all doubtful: sample outcomes include -26.6, 16.1, 3.3, -11.8, 2.0, 50.4, -8.3, 4.8, 0.5
- Increase in total nonperforming loans + credit default state: sample outcomes include -31.3, 17.8, 9.7, -10.2, 3.0, 38.0, -10.2, 6.6, 1.1

*Source: IMF staff estimates.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11299.pdf_