## _cr14315 ## Source details **Canonical URL:** [_cr14315](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14315.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14315.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14315.pdf.json) --- ### Executive Summary - Overall assessment - The Congolese financial sector has recovered from the crisis of 2009 but "is at a crossroads." - The system remains shallow, highly dollarized, and characterized by balance sheet fragilities. - Although reforms have been initiated, "greater progress on reforms to strengthen the financial system is needed to support financial deepening and economic growth." - Key vulnerabilities and resilience - The financial system "remains vulnerable." - Resilience is undermined by: - "the lack of risk-based supervision, lax regulation and weak enforcement of existing regulations," - "low profitability," - "an excessive reliance on sight deposits." - Significant credit concentration; "the default of a large borrower would have systemic implications." - Weak supervisory data and information gaps impede assessments of bank-specific and systemic soundness. - "Significant weaknesses in accounting and auditing practices." - Even if indicators suggest high capitalization levels, "a more detailed analysis suggests banks are underprovisioned, partly owing to lax definitions of nonperforming loans and provisioning rules." - Selected macroeconomic and social statistics cited - "GDP growth is estimated to have been at 8.5 percent in 2013, and over 8 percent in 2014–16." - "Over 63 percent of the population living in poverty." - "Unemployment rates exceeding 45 percent." - Inflation "is now in the single digits." - International reserves "(at less than two months of imports)." ### Financial sector structure, funding, dollarization, and key indicators - Structure and size - 18 licensed banks; SONAs; INSS; 5 specialized institutions; 143 MFIs and cooperatives; 59 transfer institutions; 3 electronic money institutions; 16 forex exchange bureaus. - No stock market nor debt capital market. - Total bank assets estimated at US$3.6 billion (about 13 percent of end-2012 GDP), representing about 95 percent of the total assets in the financial system. - By end-2012, the five largest banks held close to 65 percent of bank deposits and over 60 percent of total bank assets. - Funding and currency composition - "About 90 percent of banking sector deposits and lending are in U.S. dollars." - Banks’ funding dominated by deposit collection—about 90 percent are in U.S. dollars and in sight deposit accounts. - About 94 percent of loans are in U.S. dollars as are 45 percent of overdrafts (less than one year). - Correspondent transactions with associated banks abroad represent over 25 percent of banks’ assets and over 98 percent of the interbank market activity. - Selected balance-sheet snapshot (as presented) - Total assets (CGF 3,691 bn); Total liabilities (CGF 3,275 bn); Equity (CGF 416 bn). - Composition highlights: Cash (16%); Interbank activity (25.4%); Loans gross of provisions (35.9%); Reserves (6.6%); Provisions (-0.8%); Government securities (3.2%); Deposits (66%); Other liabilities (22.7%); Equity (11.3%); Deposits at BCC (0.1%). - Financial Soundness Indicators, selected series (2010–2013) - Regulatory capital to risk-weighted assets: 2010 28.8; 2011 29.7; 2012 28.3; 2013 24.5 - Regulatory Tier I capital to risk-weighted assets: 2010 21.1; 2011 21.2; 2012 19.9; 2013 17.0 - NPLs to gross loans: 2010 6.6; 2011 6.7; 2012 6.3; 2013 7.2 - NPLs net of provision to capital: 2010 10.0; 2011 10.0; 2012 8.3; 2013 7.0 - Return on assets: 2010 0.7; 2011 0.6; 2012 0.2; 2013 0.9 - Return on equity: 2010 7.9; 2011 6.4; 2012 2.7; 2013 11.7 - Interest margin to gross income: 2010 26.0; 2011 32.0; 2012 31.0; 2013 33.0 - Non-interest expenses to gross income: 2010 73.7; 2011 73.5; 2012 73.1; 2013 73.9 - Liquid assets to short-term liabilities: 2010 123.0; 2011 119.2; 2012 121.3; 2013 122.0 - Net open in foreign exchange position to capital: 2010 -5.0; 2011 1.8; 2012 5.2; 2013 -16.0 ### Banking sector soundness, data quality, and supervisory gaps - Data and accounting weaknesses - Poor data quality and weak application of international best practices compromise solvency and financial soundness indicators. - Examples: end-2012 data for some banks show zero provisioning; balance sheet data reported to the central bank were inconsistent with audited statements; low risk weights applied to exposures. - NPL statistics appear unreliable; many banks record unpaid balances rather than full amount of nonperforming loans. - "Significant weaknesses in accounting and auditing practices." - Supervisory and AML/CFT findings - Assessment of AML/CFT systems (March 18–27, 2014) identified important money laundering risks and significant weaknesses in supervision and control. - The central bank lacks an adequate supervisory framework to assess AML/CFT quality; on-site inspections do not cover AML/CFT. - Large foreign exchange transactions, buoyant domestic real estate market, and active cash informal economy increase money laundering risks. - Microfinance and nonbank indicators - Microfinance balance sheet close to US$222 million by end-September 2013 with over a million accounts. - By end-June 2013 deposits and loans more than doubled to US$144 million in deposits and to US$113 million in loans. - Performance issues: by end-June 2013 only two institutions (accounting for 3 percent of assets) were operationally self-sufficient; institutions with negative profits or negative equity accounted for 18 percent and 9 percent of sector assets, respectively. - SONAS audit (2012) identified a capital shortfall of about US$211 million. ### Banking sector vulnerabilities, transmission channels, and historical episode - Main vulnerability sources - External shocks (surge in food prices, slump in raw material prices, slower global growth). - Fiscal risks (budgetary slippages, monetization). - Loss in confidence (security concerns, political instability, disruptive de-dollarization). - Dollarization-specific vulnerabilities - Required reserves set in domestic currency while deposits are largely dollar-denominated and short-term. - BCC has very limited capacity to provide dollar liquidity if funding pressures emerge. - Recent reserve coefficients (as of March 14, 2014): foreign exchange denominated sight deposits subject to 8 percent reserve requirement (7 percent for domestic currency); 7 percent for longer term FX deposits (3 percent for domestic currency). - Historical (2009) transmission - Commodity price shocks quickly affect bank balance sheets and macro outlook; monetization can reintroduce price volatility and inflationary pressures, reinforcing dollarization. - Selected comparative buffers (2009 vs. 2013, IMF staff estimates): - Capital adequacy ratio: 2009: 17.0%; June 2013: 24.4% - Liquid assets to short-term liabilities: 2009: 68%; June 2013: 122% - Reserves (weeks of imports): 2009: 6.7; 2013: 7.7 - Inflation (Percentage change, inverted scale): 2009: 46%; 2013: 1% - NPLs to gross loans (inverted scale): 2009: 7.0%; June 2013: 6.6% ### Stress testing: approach, scenarios, and key results - Approach and caveats - Bottom-up tests covered all active banks representing 95 percent of financial sector assets; used end-2012 audited balance sheet data. - Banks’ capital needs assessed against domestic regulatory requirement: 10 percent of risk-weighted assets. - Exchange rate shocks mimic the 2009 episode; tests also assessed fiscal slippage and sudden loss of confidence/deposit runs. - Results subject to caution given data quality concerns; specialized DSIF unit needed to enhance supervision data and periodic stress testing. - Solvency stress scenarios and outcomes - Scenarios included: - Commodity price plunge: copper prices drop by 40 percent; exchange rate depreciates by 55 percent. - Fiscal slippage: assumed a 50 percent default on loans granted to the public sector. - Defaults by top two obligors of each bank; 50 percent increase in NPLs; mining sector shock requiring full provisioning. - Key solvency findings: - Sudden steep depreciation would lower system-wide CAR to 3.6 percent and gross NPLs to about 15.4 percent. - Capital shortfall would be slightly above 0.6 percent of GDP under the first exercise and 1.2 percent of GDP under the second exercise (assuming full default). - Impact larger for large- and medium-sized banks; capital adequacy for large banks would fall to 1.8 percent. - Average CAR would decline to 2.3 percent for domestic banks and to 5.5 percent for foreign banks. - Default by the largest borrower would reduce CAR by 9.5 percentage points to 18.6 percent with three banks falling below the 10 percent minimum; estimated capital shortfall equivalent to 1/4 percent of GDP. - Liquidity stress scenarios and outcomes - Simulated dollar-denominated deposit runs calibrated to June 2008–June 2009 changes: - Assumed 10 percent daily deposit drop for banks with large mining exposure and 6 percent daily deposit decline for other banks for five business days. - Considered "cash and deposits at the BCC" as liquid assets, excluding correspondent accounts. - Key liquidity findings: - Foreign banks and medium-sized banks most exposed. - By day five, seven banks would become illiquid: two large local banks and five foreign banks. - Two foreign banks particularly affected if public sector deposits rapidly depleted. - National interbank market size limited; individual interbank exposures very small. ### Supervision, legal framework, and institutional capacity - Supervisory structure and coordination - DSIF’s principal functions—licensing, ongoing control, on-site supervision—lack sufficient cooperation at operational level. - Lack of well-documented procedures, guidelines, and risk assessment tools reduces supervisory effectiveness. - Off-site supervision should conduct in-depth reviews; on-site inspections need to be more systematic and cover all institutions including MFIs. - Powers, independence, and legal protection - BCC lacks financial autonomy and is not operationally independent from the Government. - BCC’s legal mandate does not include preserving financial stability explicitly. - No provisions on conflicts of interest, integrity, or legal protection for BCC staff acting in good faith. - BCC’s use of supervisory powers remains limited; application of existing regulatory framework not sufficiently stringent. - Resolution, liquidation, and crisis preparedness - No clear legal framework granting BCC unambiguous powers to decide orderly resolution; sanctioning powers are mostly monetary. - Since 1998, liquidation processes initiated for 11 banks; delays and interference have increased fiscal costs (e.g., only 3–4 percent of remaining BC assets liquidated in past two and a half years). - Liquidator’s limited powers cause long delays and asset value loss; proposed framework to require BCC to respond within deadlines or automatic approval. - BCC’s capacity as lender of last resort constrained by dollarization and very limited U.S. dollar reserves. - Deposit insurance not currently feasible; conditions must be in place before establishing limited deposit guarantee scheme for CGF-denominated deposits. - Observance of Basel Core Principles (summary) - Supervision largely compliance-based; regulatory framework lacks a number of Basel Committee standards needed for risk-based supervision. - Recommendations include harmonizing legal framework via draft Banking and BCC laws, strengthening BCC independence, resourcing DSIF with IT and training, formalizing cooperation with MOF, and enhancing consolidated and cross-border supervision. ### De-dollarization: preconditions, risks, and operational pillars - Current state - The economy is "highly dollarized." - "About 90 percent of banking sector deposits and lending are in U.S. dollars." - Authorities announced a de-dollarization program; success depends on bolstering public confidence in the CGF and in the BCC. - The central bank "will need to be recapitalized to enable it to exercise its monetary policy function credibly," supported by a legal mandate for operational independence and price stability. - Preconditions for success (international experience) - (i) a track record of stable and low inflation; - (ii) a well-developed financial and payment system; - (iii) a stable macroeconomic environment; - (iv) an effective financial regulatory framework. - Success enhanced by a well-designed communication strategy. - Risks and empirical observations - No example of countries with financial dollarization above 80 percent that reduced it to less than 20 percent. - Forced de-dollarization can lead to financial disintermediation. - Operational pillars and measures - (a) Sound institutional frameworks, fiscal consolidation, de facto BCC autonomy, strong monetary policy and supervision. - (b) Strengthen domestic currency via stable low inflation, payment systems, and market-oriented regulation. - (c) Coordinated actions to change behavior (e.g., compulsory listing of prices in CGF). - (d) Penalize U.S. dollar holdings relative to domestic currency (e.g., higher required reserves and provisions for USD operations). - Operational note: dollarization reversal likely to take decades; dual-monetary system with proper regulation is needed. ### Central Bank (BCC) recapitalization, monetary policy instruments, and constraints - Recapitalization needs and financial position - MOF issued recapitalization bonds amounting to CGF 1,249 billion in 2011 and 2012 to bring BCC’s net worth to zero. - Second phase: increase BCC capital to CGF 213 billion via additional recapitalization bonds amounting to CGF 104 billion and revaluation of fixed assets about CGF 109 billion. - Initial draft amendment estimated recapitalization at about CGF 1,353 billion (or 7 percent of GDP). - Current recapitalization bonds bear interest set annually by the MOF; absence of sovereign debt market suggests objective pre-defined interest mechanism desirable. - BCC is introducing IFRS for accounting which will lead to further capital needs. - BCC gross operating income (values as reported) - Proceeds from monetary operations: 2012 = 42.9; 2011 = 42.2 - Costs of monetary operations: 2012 = 39.1; 2011 = 75.9 - Margin on monetary operations: 2012 = 3.8; 2011 = -33.7 - Margin on banking operations: 2012 = 162.3; 2011 = 159 - Added value: 2012 = 112.8; 2011 = 73.8 - Personnel costs: 2012 = 68.9; 2011 = 58.7 - Write backs on provisions due: 2012 = 20.2; 2011 = 31.6 - Allocations to provisions due: 2012 = 17.7; 2011 = 33.2 - Gross Operating Income: 2012 = 16.6; 2011 = -16.3 - Allocation to amortization and provisions not due: 2012 = 17.1; 2011 = 53.1 - Earnings from Period to be Allocated: 2012 = 5.3; 2011 = -59.8 - Monetary policy instruments and constraints - Instruments: - Treasury bill (BTR) auctions with maturities of 7 and 28 days; stock of BTRs CGF 95 billion end-2012; CGF 182 billion in October 2013. Since March 14, 2014, these are BCC bonds. - Exchange market interventions and sterilization when appropriate. - Required reserves: currently 8 percent for sight deposits (increased from 7 percent in October 2013); reserves set in domestic currency and do not earn interest. - Constraints on effectiveness: - High dollarization; lack of well-functioning money market; institutional weaknesses; fiscal dominance; limited capacity and credibility of monetary authorities. - Monetary transmission is very weak; real policy rate constructed as inflation plus premium of 2–10 percentage points (real rate always positive by construction). ### Nonbanking financial institutions and state development entities posing fiscal risks - Microfinance sector - By end-September 2013 balance sheet close to US$222 million with over a million accounts; COOPECS account for 60 percent of accounts. - Deposits and loans mostly in U.S. dollars; two MFIs account for 51 percent of deposits and 42 percent of credit. - National Microfinance Fund budget US$2.5 million but not operational. - Insurance and social security - SONAS: 2,165 employees; 2012 audit identified capital shortfall of about US$211 million; does not produce reliable financial statements. - INSS: covers less than 1.6 percent of active labor force; contributions absorb large share of costs (7 percent of wages for pensions); actuarial liability estimated at 28.3 percent of 2013 GDP; end-June 2013 shortfalls CGF 23.8 billion in 2015 (about 0.1 percent of 2013 GDP) and CGF 229 billion in 2060 (1.4 percent of 2013 GDP). - State development and financial institutions - CADECO: handles payment of CGF 146 billion in wages and CGF 47 billion in taxes (2012); operates 93 centers with 669 employees; financial statements unreliable; NPLs from government reached US$46 million in 2012. - SOFIDE: government injected US$22 million in 2012; funded about 63 SME projects for US$20 million by end-September 2013; oversight weak. - FPI: resources from import taxes about US$72 million per year; end-2012 outstanding loans US$233 million with estimates pointing to over 40 percent in arrears. ### Payments systems, credit information, legal framework, and AML/CFT - Payment systems and market infrastructure - Payments mainly in U.S. dollars and cash; checks rarely used and costly; RTGS and ACH unlikely operational before end-2015. - Five private banks launched a switch duplicating the forthcoming National Interbank Electronic Payment System; assessment to choose one system to be completed soon. - Legal framework for payment systems needs updates on irrevocability, finality, financial guarantees, multilateral clearing, and BCC supervisory powers. - Credit information systems - BCC credit registry established 2001 compiles data only from banks; modernization due end-2013 delayed. - A 2008 project to establish a credit bureau has made little headway; need to connect credit bureau and registry. - Recommendations: make BCC’s new credit registry operational (Short-term); set up modern legal framework (Medium-term); introduce supervisory function for credit information systems at BCC (Medium-term). - AML/CFT - Money laundering risks high; principal predicate crimes include corruption, illicit arms trafficking, smuggling of precious stones/metals, drug trafficking, customs violations. - Implementation gaps: CDD requirements generally ignored in vulnerable sectors; supervisory bodies have yet to develop adequate AML/CFT control procedures; law enforcement capacity limited. - Recommendations (selected): develop multi-sectoral AML/CFT national strategy (Short-term); reinforce structure and independence of national financial intelligence unit (Short-term); review AML/CFT law to include dealers in precious stones and metals (Medium-term); include AML/CFT in criminal justice strategies (Medium-term). ### Priority recommendations (selected, with timing) - Financial stability, supervision, and crisis management - Complete clean-up of BCC’s balance sheet and recapitalization. - Priority: Short-term. "A progress report on streamlining the BCC’s operating costs is due by end-May." - Adopt new banking law and central bank law to reinforce BCC’s independence, responsibilities, and transparency. - Priority: Short-term. "The drafts are already at the Ministry of Finance (MOF) level. The Banking Law is expected to be approved in the coming months." - Strengthen BCC’s validation and analysis of data. - Priority: Short-term. "Preparation is to start immediately with the reinforcement of the technical capacity, and progress will be achieved over time." - Establish legal framework and operational mechanism for crisis prevention, preparation, and management. - Priority: Medium-term. "Preparatory work could start in the coming months." - Strengthen legal and regulatory framework for bank intervention and liquidation. - Priority: Medium-term. "Preparatory work could start in the coming months." - Introduce effective risk-based supervision. - Priority: Medium-term. "Preparatory work could start soon, supported with IMF technical assistance (TA), but progress will require time." - Strengthen regulations on provisioning and classification of nonperforming loans. - Priority: Short-term. "There is some work ongoing but much more is needed to align current practices to best practices." - De-dollarization - Adopt a medium-term roadmap for de-dollarization with realistic timelines, medium-term targets, and prioritization. - Priority: Medium-term. "The pre-conditions for de-dollarization need to be in place. The current plan needs to be improved with realistic timelines, medium-term targets and prioritization." - Financial inclusion and nonbank supervision - Adopt revised law on leasing. - Priority: Medium-term. - Strengthen supervision of microfinance and provide for liquidation of nonviable institutions. - Priority: Medium-term. "The World Bank 6-year project on financial infrastructure and markets development signed on April 2014 covers this aspect." - Adopt restructuring (or liquidation) plan of the CADECO based on minimization of risks and fiscal costs. - Priority: Short-term. - Financial infrastructure - Review and adopt draft law on payment systems. - Priority: Short-term. - Make the new credit registry operational. - Priority: Short-term. - Amend law on commercial courts to adapt to OHADA. - Priority: Medium-term. - Nonbanking financial institutions - Promulgate upgraded insurance code to strengthen governance and supervisor powers. - Priority: Medium-term. "The liberalization of the sector is in process and should materialize in the coming weeks." *Source: Executive Summary and selected chapters/excerpts, IMF Financial Sector Assessment (Democratic Republic of the Congo).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Overall assessment - The Congolese financial sector has recovered from the crisis of 2009 but "is at a crossroads." - The system remains shallow, highly dollarized, and characterized by balance sheet fragilities. - Although reforms have been initiated, "greater progress on reforms to strengthen the financial system is needed to support financial deepening and economic growth." ### Key vulnerabilities and resilience - The financial system "remains vulnerable." - Resilience is undermined by: - "the lack of risk-based supervision, lax regulation and weak enforcement of existing regulations," - "low profitability," and - "an excessive reliance on sight deposits." - Significant credit concentration; "the default of a large borrower would have systemic implications." - Weak supervisory data and information gaps impede assessments of bank-specific and systemic soundness. - "Significant weaknesses in accounting and auditing practices." - Even if indicators suggest high capitalization levels, "a more detailed analysis suggests banks are underprovisioned, partly owing to lax definitions of nonperforming loans and provisioning rules." ### Central Bank (BCC) and regulatory framework - Urgent need to pass Central Bank of Congo (BCC) and Banking laws clarifying roles and functions. - Strengthening the BCC should include: - Recapitalization, with an estimated fiscal cost of "over 4 percent of the GDP," - Improvements in governance and accountability frameworks, - Rationalization of operating costs. - The BCC should "step up efforts to monitor and address banks’ compliance with laws and regulations, and to align the regulatory framework with international best practice." - Steps needed to improve capacity for micro- and macroprudential supervision. - A well-defined crisis management framework and upgraded resolution/liquidation framework are needed; the resolution framework should be streamlined, "including by reinforcing the liquidator’s powers" to reduce delays and fiscal costs. - Adoption of any (limited) deposit guarantee scheme on Congolese franc (CGF)-denominated deposits should be "conditioned on steps to limit moral hazard and the assurance of sufficient fiscal backstops." ### De-dollarization - The economy is "highly dollarized." - "About 90 percent of banking sector deposits and lending are in U.S. dollars." - Authorities announced a de-dollarization program; success depends on bolstering public confidence in the CGF and in the BCC. - The central bank "will need to be recapitalized to enable it to exercise its monetary policy function credibly," supported by a legal mandate for operational independence and price stability as the main objective. - Preconditions and measures for de-dollarization must be addressed (Appendix II). ### Financial inclusion, nonbank sector, and infrastructure - Financial inclusion is growing but further progress is needed in: - Developing payment systems, - Facilitating use of financial services, - Strengthening nonbank sector supervision. - Consolidation and strengthening of the microfinance sector and reform of insurance and pension sectors could facilitate expansion of financial services and attract long-term investors. - "A modern payments system and a credit registry need to be implemented urgently" to support financial sector strengthening and de-dollarization. - Action is critical for nonbanking institutions facing operational and financial difficulties. - Money laundering risks are important due to "the large cash-based informal economy, large foreign exchange transactions, and the buoyant real estate market." ### Selected macroeconomic and social statistics cited - "GDP growth is estimated to have been at 8.5 percent in 2013, and over 8 percent in 2014–16." - "Over 63 percent of the population living in poverty." - "Unemployment rates exceeding 45 percent." - Inflation "is now in the single digits." - International reserves have been increasing but remain insufficient "(at less than two months of imports)." ### Recommendations (selected, with priorities and implementation notes) - Financial stability, supervision, and crisis management - Complete the clean-up of the BCC’s balance sheet and its recapitalization. - Priority: Short-term. "A progress report on streamlining the BCC’s operating costs is due by end-May." - Adopt the new banking law and the central bank law to reinforce the BCC’s independence, responsibilities, and its transparency. - Priority: Short-term. "The drafts are already at the Ministry of Finance (MOF) level. The Banking Law is expected to be approved in the coming months." - Strengthen the BCC’s validation and analysis of data. - Priority: Short-term. "Preparation is to start immediately with the reinforcement of the technical capacity, and progress will be achieved over time." - Establish a legal framework and operational mechanism for crisis prevention, preparation, and management. - Priority: Medium-term. "Preparatory work could start in the coming months." - Strengthen the legal and regulatory framework for bank intervention and liquidation. - Priority: Medium-term. "Preparatory work could start in the coming months." - Introduce effective risk-based supervision. - Priority: Medium-term. "Preparatory work could start soon, supported with IMF technical assistance (TA), but progress will require time." - Strengthen regulations on provisioning and classification of nonperforming loans. - Priority: Short-term. "There is some work ongoing but much more is needed to align current practices to best practices." - De-dollarization - Adopt a medium-term roadmap for de-dollarization, with realistic timelines and prioritization, and that takes into account the risks of de-dollarization. - Priority: Medium-term. "The pre-conditions for de-dollarization need to be in place. The current plan needs to be improved with realistic timelines, medium-term targets and prioritization." - Financial inclusion - Adopt a revised law on leasing. - Priority: Medium-term. - Strengthen supervision of microfinance and provide for the liquidation of institutions that are not viable. - Priority: Medium-term. "The World Bank 6-year project on financial infrastructure and markets development signed on April 2014 covers this aspect." - Adoption of a restructuring (or liquidation) plan of the CADECO based on minimization of risks and fiscal costs. - Priority: Short-term. - Financial infrastructure - Review and adopt the draft law on payment systems. - Priority: Short-term. - Make the new credit registry operational. - Priority: Short-term. - Amend the law on commercial courts, adapting it to OHADA. - Priority: Medium-term. - Nonbanking financial institutions - Promulgate an upgraded insurance code to strengthen governance and the powers of the supervisor. - Priority: Medium-term. "The liberalization of the sector is in process and should materialize in the coming weeks." *Source: Executive Summary, IMF Financial Sector Assessment (Democratic Republic of the Congo).* ### 5. Weaknesses in data and information gaps pose significant constraints on the team’s ### 5. Weaknesses in data and information gaps pose significant constraints on the team’s ### Data and supervisory weaknesses; AML/CFT findings - Efforts needed to ensure the reliability of supervisory data, and to tighten the rules applying to re-classification and provisioning of loans, which mask at-risk loans’ valuation and other latent risks. - Auditing practices in the banking sector need to be strengthened: access to qualified auditors would help enhance the quality of the financial institutions’ balance sheets and facilitate banking supervision. - An assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) systems took place on March 18–27, 2014, against FATF recommendations and: - Identified important money laundering risks, with significant weaknesses in the area of supervision and control. - Found that the central bank does not have an adequate supervisory framework to assess the quality of the AML/CFT systems of banks and other financial institutions, and on-site inspections do not cover this AML/CFT. - Noted that large foreign exchange-related transactions, a buoyant domestic real estate market, and a very active informal economy operating in cash increase the risks. ### Financial sector structure and aggregate indicators - The Congolese financial system is shallow and underdeveloped. - Composition of the financial sector: - 18 licensed banks; a state insurance company (SONAs) and the National Social Security Institute (INSS); 5 specialized institutions; 143 MFIs and cooperatives; 59 transfer institutions; 3 electronic money institutions; and 16 forex exchange bureaus. - There is neither a stock market nor a debt capital market. - Banks account for the bulk of the financial sector: - Total bank assets estimated at US$3.6 billion (about 13 percent of end-2012 GDP), representing about 95 percent of the total assets in the financial system. - Bank deposits account for the bulk of total deposits (95 percent of the financial sector’s deposits); the balance is held in the MFIs. - By end-2012, the five largest banks held close to 65 percent of bank deposits and over 60 percent of total bank assets. ### Banking sector funding, dollarization, and correspondent banking - Banks’ funding and currency composition: - Banks’ funding is dominated by deposit collection—about 90 percent are in U.S. dollars and in sight deposit accounts. - About 94 percent of loans are in U.S. dollars as are 45 percent of overdrafts (less than one year). - Clients are primarily companies with working capital deposits; loans target mainly daily operations and export/import activities. - Correspondent banking: - Correspondent transactions with associated banks abroad represent over 25 percent of banks’ assets and over 98 percent of the interbank market activity. - Correspondent accounts allow USD-denominated settlement and reflect efforts to hedge domestic political and settlement risks; holdings of dollars in correspondent accounts are expensive for depositors (zero remuneration and subject to high transactions costs). ### Credit, access, and concentration - Credit dynamics and inclusion: - Between 2006 and 2013, domestic credit more than tripled but rose only to around 11 percent of GDP. - In 2011, only 2 percent of adults had obtained a bank loan (World Bank’s 2011 Findex survey SSA average 5 percent). - In 2011, only 4 percent of adults held an account at a formal financial institution (World Bank’s 2011 Findex survey SSA average 24 percent). - Short-term credit (overdrafts and loans of less than two-year maturity) was about 68 percent of all credit at end-2012; medium-term credit represented about 21 percent (an increase from 16 percent in 2008). - The five biggest borrowers of each bank received close to 30 percent of the credit extended at end-2012. ### Banking sector soundness, data quality, and financial performance - Key weaknesses undermining apparent capital strength: - The reliability of solvency and other financial soundness indicators is compromised by poor data quality and weak application of international best practices for accounting definitions and methods. - Examples: end-2012 data for some banks show zero provisioning; balance sheet data reported to the central bank were inconsistent with audited statements; low risk weights are applied on exposures to foreign correspondents’ assets, claims on the state and central government agencies, and collateralized claims. - Nonperforming loans (NPLs) statistics appear unreliable; under the BCC’s regulatory framework, many banks are only recording unpaid balances rather than the full amount of the nonperforming loan. - Analysis of banking trends is challenging given changes in reporting requirements and prudential norms, as well as the entry and exit of banks. - Banks’ profitability and earnings are weak and deteriorating, reflecting high operational and foreign exchange costs. Fees are a main source of banks’ revenue. Operating in U.S. dollars is highly costly, especially for some banks, given foreign currency settlements are done via correspondents. - Selected balance-sheet and prudential snapshots (as presented in the source): - Total assets (CGF 3,691 bn); Total liabilities (CGF 3,275 bn); Equity (CGF 416 bn). - Composition highlights: Cash (16%); Interbank activity (25.4%); Loans gross of provisions (35.9%); Reserves (6.6%); Provisions (-0.8%); Government securities (3.2%); Deposits (66%); Other liabilities (22.7%); Equity (11.3%); Deposits at BCC (0.1%). - Financial Soundness Indicators, selected series (2010–2013): - Regulatory capital to risk-weighted assets: 2010 28.8; 2011 29.7; 2012 28.3; 2013 24.5 - Regulatory Tier I capital to risk-weighted assets: 2010 21.1; 2011 21.2; 2012 19.9; 2013 17.0 - NPLs to gross loans: 2010 6.6; 2011 6.7; 2012 6.3; 2013 7.2 - NPLs net of provision to capital: 2010 10.0; 2011 10.0; 2012 8.3; 2013 7.0 - Return on assets: 2010 0.7; 2011 0.6; 2012 0.2; 2013 0.9 - Return on equity: 2010 7.9; 2011 6.4; 2012 2.7; 2013 11.7 - Interest margin to gross income: 2010 26.0; 2011 32.0; 2012 31.0; 2013 33.0 - Non-interest expenses to gross income: 2010 73.7; 2011 73.5; 2012 73.1; 2013 73.9 - Liquid assets to short-term liabilities: 2010 123.0; 2011 119.2; 2012 121.3; 2013 122.0 - Net open in foreign exchange position to capital: 2010 -5.0; 2011 1.8; 2012 5.2; 2013 -16.0 - Memorandum items included comparator figures for SSA and fragile countries but noted prudential norms were altered throughout the observation period. ### Nonbanking sector: microfinance, insurance, social security, and public development institutions - Microfinance sector: - Growing since 2001 but remains undeveloped. - By end-September 2013, the microfinance sector’s balance sheet was close to US$222 million with over a million accounts opened; savings and loan cooperatives (COOPECS) account for 60 percent of the accounts and MFIs for the remaining 40 percent. - Between end-2009 and June 2013 deposits and loans more than doubled to US$144 million in deposits and to US$113 million in loans. - Deposits and loans are mostly in U.S. dollars, and activity remains highly concentrated: two MFIs specialized in loans to MSMEs account for 51 percent of deposits and 42 percent of the credit of the entire microfinance sector. - Performance and solvency issues: - By end-June 2013 only two institutions (accounting for 3 percent of assets) were operationally self-sufficient. - Institutions with negative profits or negative equity accounted for 18 percent and 9 percent of sector assets, respectively. - By end-March 2013, 37 largely inactive institutions were put under involuntary liquidation (34 COOPECS and 3 MFIs); by end-August 2013 63 licenses had been withdrawn. - By end-December 2013, eight out of the 23 MFIs faced difficulties in raising capital levels to the minimum required levels. - The National Microfinance Fund has a US$2.5 million budget but has not yet started operations. - Insurance and social security: - SONAS (sole public non-life insurance company): - Public non-life insurance monopoly with 2,165 employees and a broad network. - Not currently able to meet government’s mandatory insurance obligations (automobile liability, sea, river, and air transportation, and fires for certain buildings). - Does not produce reliable financial statements; a 2012 audit identified a capital shortfall of about US$211 million and numerous operational weaknesses. - Legislation is planned to open the insurance market to foreign entrants; the future of SONAS and the fiscal cost of liquidation or restructuring needs evaluation. - INSS (National Social Security Institute): - Offers very limited coverage (less than 1.6 percent of the active labor force). - Management costs absorb the bulk of social security contributions, which are one of the highest in Africa (7 percent of wages for pensions). - Operates through a decentralized model of 45 centers with important weaknesses in organization, computerization, and supervision capacity. - End-June 2013 estimates indicate shortfalls in contributions to obligations of CGF 23.8 billion in 2015 (about 0.1 percent of 2013 GDP) and CGF 229 billion in 2060 (1.4 percent of 2013 GDP). - The actuarial liability of the social security system is estimated at 28.3 percent of 2013 GDP. - Strengthening requires prompt action to streamline costs and significantly increase contributions. - State development and financial institutions posing fiscal risks: - CADECO: - State-owned enterprise providing financial services in rural areas; handles payment of CGF 146 billion in wages and CGF 47 billion in taxes of public enterprises’ employees (2012 figures). - Operates through 93 operating centers with 669 employees. - CADECO is undergoing restructuring but risks persist; financial statements unreliable; deposits remain non-accessible; no access to the BCC clearing house since 1996. - Provides salary advances (CGF 4.8 billion by end-2012) at monthly rates of 5–10 percent interest for up to 6 months. - In 2012, NPLs from the government reached US$46 million and year results improved only because of a questionable reversal of US$29 million in provisions. - SOFIDE: - Financial development company with large state ownership and mandate to promote medium- and long-term financing of SMEs. - Government injected US$22 million in capital in 2012; some additional US$40 million is expected in the near future. - By end-September 2013, SOFIDE had funded about 63 SME projects for US$20 million with three-month to three and a half-year collateralized loans at 15 percent interest. - Oversight mechanisms are weak and SOFIDE lacks proper risk management controls; an independent review of its financial situation is needed. - FPI (Fonds de Promotion Industrielle): - Established in 1989 to promote and finance industrial projects; resources draw from import taxes (about US$72 million per year from a 3 percent tax on imports). - Grants loans to agro-industry mainly with three to five year maturity at 8–10 percent interest, and a 12-month grace period. - Fund is not under BCC supervision; financial statements unreliable and lacks risk management and auditing tools. - A 2010 internal portfolio restructuring commission has not completed the task; first estimates point to over 40 percent of the end-2012 outstanding loans (US$233 million) being in arrears. *Source: Excerpts from IMF staff report text (as provided in the source content).* ### 18. The Congolese banking system remains fragile even though, to date, it has proved ### 18. The Congolese banking system remains fragile even though, to date, it has proved ### Banking sector vulnerabilities and risk sources - Three main sources of vulnerabilities: external (a surge in food prices/slump in raw material prices and/or slower global growth); fiscal (budgetary slippages); and/or a loss in confidence (because of security concerns, political instability, disruptive de-dollarization process). - A sharp drop in commodity prices could significantly affect economic growth, public finances, the exchange rate, and inflation, as occurred during the crisis in 2009. Monetization of the deficit would re-introduce price volatility and inflationary pressures, reinforcing dollarization. - Dollarization is an important vulnerability: - Required reserves and other regulatory requirements are defined in domestic currency terms, while deposits are largely dollar denominated and short-term. - The BCC has only very limited capacity to provide dollar liquidity if funding pressures emerge. - The authorities’ planned de-dollarization will need careful sequencing and communication to minimize market disruption and avoid triggering a flight of dollar deposits; dollar buffers should be adequate. - Recent change in reserve coefficients (as of March 14, 2014): foreign exchange denominated deposits are subject to an 8 percent reserve requirement if held in sight deposit accounts (7 percent for those held in domestic currency) and 7 percent if held in longer term deposit accounts (3 percent for those held in domestic currency). ### Historical episode and transmission channels (2009 episode) - Commodity price shocks quickly affect bank balance sheets and the macroeconomic outlook: a decline in world commodity prices lowers mining production and investment, reduces other sectors’ ability to service bank debt, affects fiscal revenues, and can push the government to monetize deficits, fueling depreciation of the CGF. - Selected comparative microfinancial buffers (2009 vs. 2013) — IMF staff estimates: - Capital adequacy ratio: 2009: 17.0%; June 2013: 24.4% - Liquid assets to short-term liabilities: 2009: 68%; June 2013: 122% - Reserves (weeks of imports): 2009: 6.7; 2013: 7.7 - Inflation (Percentage change, inverted scale): 2009: 46%; 2013: 1% - NPLs to gross loans (inverted scale): 2009: 7.0%; June 2013: 6.6% ### Risk Assessment Matrix (Table 6) — principal pathways and impacts - Protracted period of slower growth in Europe and emerging markets (China in particular), with intensification of crisis in the euro zone. - Relative Probability: Medium - Impact if Risk Materializes: - The DRC’s exposure to Europe is limited; impact would be indirect through trading partners’ growth and commodity prices. - Higher current account deficit and slower accumulation of international reserves. - Deterioration in portfolio quality of commercial banks and MFIs. - Reduction in direct investments in natural resources and increased pressure on public finances. - Budgetary slippages - Relative Probability: High - Impact if Risk Materializes: - If revenue projections do not materialize, increased deficits; in the absence of public debt instruments, deficits would require central bank financing, fueling inflation and pressuring the value of the CGF. - Depreciation of the nominal exchange rate would adversely affect banks’ balance sheets. - A loss of confidence could reduce bank deposits; in a dollarized economy the central bank has limited options for responding to liquidity pressures. - An increase in NPLs. - Sustained decline in commodity prices, triggered by a deceleration of global demand - Relative Probability: Medium - Impact if Risk Materializes: - A slump in mineral (copper) export prices would reduce mining production, growth, fiscal revenues, international reserves, and cause foreign exchange pressures. - A 2 standard deviation decline in copper prices compared to the historical average could lead to a 4 percent reduction of real GDP during the first post-shock year 2014, to a deterioration of the current account deficit of 16 percent of GDP, and currency depreciation of about 38 percent. - With bank balances highly dollarized, depreciation of the domestic currency could precipitate deposit flight. - Loss of confidence due to security concerns, political instability and/or disorderly de-dollarization process - Relative Probability: Medium/Low - Impact if Risk Materializes: - Changed sentiments could reduce capital inflows and worsen budgetary accounts. - A deposit run in the absence of a credible backstopping facility could lead to systemic crisis; insufficient international reserves at the BCC could exacerbate a run on deposits. ### Banking sector balance-sheet vulnerabilities - Direct currency-related risks: heavily dollar-denominated balance sheets are not backed by dollar-denominated reserves and other prudential requirements. - Indirect currency risks: borrowers are inadequately hedged (loans in U.S. dollars with revenues in local currency). - Funding and loan concentration is high and short-term. - Several banks have large exposures to the same industrial companies, creating common-exposure risk; limited interbank exposures mitigated contagion in the BC failure (2009/2010). ### Stress testing approach and caveats - Tests covered all active banks, representing 95 percent of financial sector assets; solvency and liquidity tests used a bottom-up approach with end-2012 audited balance sheet data. - Banks’ capital needs assessed against the domestic regulatory requirement: 10 percent of risk-weighted assets. - Exchange rate shocks were designed to mimic the 2009 episode; tests also assessed fiscal slippage and sudden loss of confidence/deposit runs. - Results should be interpreted with caution given data quality concerns. A specialized unit in the DSIF is urgently needed to enhance supervision data, analysis, and periodic stress testing. ### Solvency stress-test scenarios and key results - Baseline and shock scenarios used end-2012 data; scenarios included: - Commodity price plunge: copper prices drop by 40 percent; exchange rate depreciates by 55 percent in domestic currency terms (as in 2009). - Fiscal slippage: assumed a 50 percent default on loans granted to the public sector. - Other tests: defaults by top two obligors of each bank; a 50 percent increase in NPLs; shock in the mining sector requiring full provisioning of additional NPLs. - Key solvency findings: - A sudden steep depreciation of the exchange rate would harm borrowers’ repayment capacity, increase provisions, and raise capital needs. - System-wide CAR would decline to 3.6 percent and gross NPLs increase to about 15.4 percent. - Capital shortfall (minimum capital needed to bring each bank to regulatory minima) would be slightly above 0.6 percent of GDP under the first exercise and 1.2 percent of GDP under the second exercise (assuming full default as in the second exercise). - The amounts are relatively small largely due to the small size of the sector relative to the economy. - Impact by bank size: - More significant for large- and medium-sized banks than for small banks; capital adequacy for large banks would fall to 1.8 percent. Small banks are insulated due to limited lending activity. - Domestic vs. foreign banks: - Average CAR would decline to 2.3 percent for domestic banks and to 5.5 percent for foreign banks. - Credit concentration vulnerabilities: - BCC regulation limits simple individual loan exposures to 25 percent of regulatory capital, but some banks appear to violate this requirement. - Default by the largest borrower would reduce the CAR by 9.5 percentage points to 18.6 percent with three banks falling below the 10 percent minimum. - Foreign banks and medium-sized banks are most exposed; estimated capital shortfall equivalent to 1/4 percent of GDP. - Most banks share the same five major borrowers, raising systemic risk from concentrated defaults. - Fiscal deterioration implications: - Monetization and exchange rate weakening would affect banks; one domestic bank and one foreign bank with large government exposures would see their CAR fall below the minimum requirement. ### Liquidity stress-test scenarios and key results - Simulated dollar-denominated deposit runs calibrated to deposit changes between June 2008 and June 2009: - Assumed a 10 percent daily deposit drop for banks with large mining exposure and 6 percent daily deposit decline for other banks for five business days. - Considered “cash and deposits at the BCC” as liquid assets, excluding correspondent accounts. - Key liquidity findings: - Foreign banks and medium-sized banks are most exposed to liquidity shocks. - By day five, seven banks would become illiquid: two large local banks and five foreign banks. - Assuming rapid depletion of public sector deposits, two foreign banks would be particularly affected due to large public sector deposit balances. - Interbank market: national interbank market size is limited; individual bank exposures in interbank market are very small, suggesting limited direct systemic risk from interbank contagion. ### Financial sector supervision and regulatory framework - BCC has improved the prudential framework and supervisory work in recent years but faces major challenges: - Application of a compliance- rather than a risk-based supervision approach. - Lack of coordination within the DSIF. - Lack of clarity in legislative and regulatory mechanisms. - BCC lacks a financial stability function with corresponding powers. - Insufficient technical capacity. - Legislative and mandate issues: - The law (often referred to as the banking law) applies to all credit institutions but some institutional categories operate under separate legislation. - BCC’s legal mandate does not include preserving financial stability, contributing to limited BCC focus on financial stability analysis. - Priority reforms: - Passing the proposed BCC law and the banking law is an urgent priority. - The new banking law is expected to strengthen tools to enforce prudential norms and powers to liquidate failed banks. - The BCC law is expected to clarify responsibilities and mandates on banking supervision, financial stability, and resolution, and provide enforcement tools to improve BCC independence and avoid political interference. - Both pieces of legislation are key measures to address financial stability risks. *IMF staff summary based on the Democratic Republic of the Congo FSAP chapter text.* ### 34. Despite a recent reorganization, there is not enough cooperation among the DSIF’s ### Despite a recent reorganization, there is not enough cooperation among the DSIF’s ### Supervisory structure and operational coordination - The DSIF’s three principal functions—licensing, ongoing control, and on-site supervision—lack sufficient cooperation at the operational level, impeding the BCC from effectively fulfilling its tasks. - The DSIF organizational chart (Supervisory Structure in DRC) shows multiple deputy directors and off-site/on-site supervision units with staff allocations (examples in text: Staff 10; Staff 9; Staff 6; Staff 2; Staff 7; Staff 6; Staff 6; Staff 8). - Lack of synergy among units, combined with the lack of well-documented procedures, guidelines, and risk assessment tools in each sector, reduces supervisory effectiveness. - Improving the reliability of data received from institutions and their processing by the central bank are necessary preconditions to strengthen supervision. ### Data, prudential monitoring, and supervisory coverage - Supervisors need an in-depth review of prudential information received by the central bank, especially requirements related to risks monitoring: concentration, liquidity, and interest rate. - Off-site supervision should conduct an in-depth review of prudential/regulatory information; on-site inspections should be more systematic, regular, and cover all institutions, including MFIs. - The DSIF intends to focus on umbrella organizations of savings and loan cooperatives and, under law 002/2002 and Directive 11 of January 18, 2013, apply the principle of delegated supervision. - Current microfinance supervision resources are limited; the DSIF needs further resources to focus not only on the largest institutions (i.e., 36 main institutions). - Microfinance supervision organization note: the Microfinance Off-Site Supervision Division includes the unit supervising savings and loan cooperatives (with 12 inspectors) and a unit supervising MFIs. ### Application of regulatory framework and supervisory powers - The Central Bank’s use of its supervisory powers remains limited; application of the existing regulatory framework is not sufficiently stringent. - A number of banks have systematically breached minimum regulatory requirements with only financial penalties applied. - Licensing requirements have been relaxed to facilitate financial inclusion. - The BCC appears not to be fully aware of the identity of the principal shareholders of several banks (notably of holding companies), limiting its ability to restrict connected lending. - The BCC lacks financial autonomy, leaving it dependent on the treasury; divergence between state interests and BCC supervisory responsibilities has led the BCC to refrain from mandated actions (examples cited: licensing of La Cruche Bank and the liquidation of the Banque Congolaise). - The supervisory approach focuses on compliance checks; updating banking regulations in line with international standards has been slow. - The regulatory mechanism does not incorporate a number of Basel Committee standards and good practices necessary for risk-based supervision, including: - classification and provisioning of loans, - monitoring of loans to related parties, - principles of risk (interest, liquidity and operational), - business continuity plans, - lack of powers to reject non-endorsed central bank transfers of control in banks. - Ongoing revisions of the banking law and of the central bank’s statutes are opportunities to harmonize the accumulated legal framework. ### Preventive mechanisms, resolution, and sanctioning powers - There are no provisions requiring systemically important credit institutions to submit preventive restructuring plans identifying corrective measures to cope with sharp deterioration and restore viability. - In the absence of any other resolution authority, the law does not give the BCC clear powers to decide if a bank should be subjected to orderly resolution. - The DSIF has not set up internal mechanisms to identify credit institutions’ risk profiles and systemic institutions or to adopt preventive resolution plans. - Current sanctioning powers are exclusively monetary, undermining supervisor authority. - In practice, the BCC is not using the entire range of sanctions; instead of sending injunctions (or warnings) the BCC attaches disciplinary sanctions to injunctions, generating income but counter to injunction purpose. - Some critical institutions received successive injunctions over long periods without further actions. - Suggested extensions to BCC sanctioning powers include allowing stricter prudential limits (or requirements), prohibiting new activities or acquisitions, restricting or suspend payments to shareholders, restricting asset transfers, replacing directors or controlling shareholders or limiting their prerogatives. ### Technical capacity, governance, and legal protection - Significant shortfall in expertise and skills needed for the DSIF to implement its supervisory mandate. - Current working methods, organization of supervision, and incentive mechanisms need significant revision. - The current framework does not include provisions to deal with: - conflict of interest prevention, - integrity issues, - legal protection of the BCC and its staff against potential legal action for acts and omissions in good faith, - adequate coverage for legal costs potentially incurred for their defense. ### Crisis preparedness and crisis management - The prudential framework needs to be redirected toward a risk-based approach that identifies and analyzes emerging risks to preserve financial stability (examples of risks: changes in commercial development strategy, operations with parent companies or affiliated foreign companies, exposures to related parties, overly rapid growth of loans). - Coordination between the BCC, the MOF, and other supervisors should be strengthened with clear definition of roles, functions, and responsibilities in crisis management. - Authorities should consider “war games” simulating plausible crisis scenarios, building on identification of systemically important institutions, to prepare crisis management action plans, operational procedures, and to test adequacy of backstop liquidity facilities and access to public funds. - A proactive and regular consultative approach with country-of-origin supervisors of foreign banks is recommended. ### Lender of last resort and resolution framework - The BCC’s capacity to act as lender of last resort is very constrained due to dollarization and very limited U.S. dollar reserves; scope for direct official financial support to respond to U.S. dollar funding pressures is very limited. - Legislative and regulatory framework needs updating to allow limited use of official financial support to protect CGF-denominated depositors only if certain conditions are met (examples of conditions: burden-sharing mechanisms assigning losses to former shareholders, mechanisms for the government to exercise its voting rights, mechanisms for informing the public and parliament). - The framework for orderly and effective resolution requires strengthening to allow swift responses that maximize recovery value and minimize fiscal costs. - Since 1998, the BCC has initiated liquidation processes on 11 banks: 9 on a mandatory basis (ATB, BANCOR, BCA, BCCE, BCD, COBAC, FBCC, and Banque Congolaise) and 3 on a voluntary basis (BANCOC, UBC, and Mining Bank). - Weaknesses and interference have introduced significant delays and increased fiscal costs—for example, in the past two and a half years, only 3–4 percent of the remaining BC assets have been liquidated. - Liquidation powers and procedures need strengthening: - The legislative framework should better define respective roles of the Central Bank and the liquidator during liquidation. - Currently, the liquidator’s terms of reference do not provide decision authority; the liquidator submits actions for prior approval by the central bank, causing long delays, significant loss in asset value, and higher costs to the state. - Under a proposed new framework, the BCC would be required to respond within pre-determined deadlines with the understanding that no reply would mean automatic approval; the BCC would then conduct an in-depth a posteriori control of supervisors’ actions in the liquidation process. - The new mechanism could facilitate liquidators adjusting the bank’s balance sheet to cover mark-to-market valuation, up-to-date account balances, and prompt recognition of losses. ### Deposit insurance considerations - A number of conditions need to be in place before a limited deposit guarantee scheme for CGF-denominated deposits could be established. - An explicit deposit insurance scheme would not appear feasible presently given limited state resources and insufficient supervision and regulation to limit moral hazard, governance and transparency gaps, and weaknesses in financial and accounting data. - Important design issues to consider include coverage of dollar deposits, coverage of MFIs, and the size of the guarantee. ### Development, market structure, and access to finance - Credit is constrained by the business/legal environment, banks’ funding models, and the cost of credit. - Small and medium-sized companies with access to credit are less than 50 percent of the average in the Sub-Saharan region according to the 2010 World Bank Enterprise Survey. - Key constraints: - difficult business environment and uncertain rule of law, - lack of diversification of the economy, - perceived riskiness of SME borrowers, - weaknesses in commercial law and security interests (especially prior to OHADA), - absence of a credit reporting agency, - weak accounting and auditing framework. - Savings are mostly kept outside the banking system due to lack of confidence and fears of loss of access; regulation allows blocking bank deposits of a counterpart with an outstanding tax liability when a third party debtor notification is issued. - Credit costs are very high due to high operating costs (network costs, cash management, and electricity), liquidity costs, non-remunerated reserves, and lack of competition. ### Financial inclusion and public payroll ("bankarization") - A 2011 policy pays civil servants via bank accounts to foster inclusion and enhance public finance management. - Fifteen banks participate in the gradual “bankarization” of 987,000 civil servants employees. - By August 2013, 60 percent of all civil servants were paid through banks (representing 64 percent of the wage bill). - In rural areas, bank penetration is limited; technical problems and limited bank penetration have led to temporary reversion to former payment channels (the Caritas network). ### Payment systems and market infrastructure - Payments are mainly done in U.S. dollars and in cash; weak payment systems, lack of confidence, fear of hyperinflation/depreciation, informal economy, and limited banking use explain cash prevalence. - The gradual introduction of higher denomination notes up to CGF 20,000 (the equivalent of US$21) aims to ease constraints, but the exchange process is proceeding very slowly. - Checks are rarely used, costly, and weaknesses in the automated clearing system create constraints. - E-payment solutions are recent, costly, and limited. - The regulatory environment governing the use of e-money should be reviewed to increase competitiveness and enhance consumer protection. - The 2004 National Payment System program is suffering important delays; five private banks launched a switch duplicating the forthcoming National Interbank Electronic Payment System. - An assessment of both systems’ technical soundness, governance, access by other institutions, implementation timeframes, and flexibility is to be completed soon and result in selection of just one system. - The RTGS for large payments and the ACH for retail payments are unlikely to be operational before end-2015. - A challenge is ensuring payment systems’ compatibility with the highly dollarized nature of the DRC system. - Private individuals use domestic money transfer services mostly in U.S. dollars provided by 61 BCC-licensed money transfer agents (only half are active); there is little information about volumes and weak supervision. - The legal framework for payment systems must be reviewed and updated to include provisions on: - irrevocability and finality of payments (dispensation from the zero-hour rule), - the financial guarantees system, - multilateral clearing operations and related e-proof, - supervisory and regulatory powers conferred on the BCC. - Except for very limited cases, credit balances with mobile phone operators should remain available to creditors’ attachments. *Source: BCC; and IMF staff estimates.* ### 52. The legal framework on credit information systems should clarify the BCC’s ### The legal framework on credit information systems should clarify the BCC’s ### Credit information systems: findings and issues - The BCC’s credit registry was established in 2001 and compiles data only from banks. - The registry suffers from technical difficulties; its modernization was due by end-2013 but the process has suffered delays due to banks’ concerns about the legal framework allowing them to share information about individuals. - A 2008 BCC project to establish a credit bureau that provides detailed and reliable information on individuals, ratings, portfolio monitoring, and others has made little headway. - The credit bureau and the credit registry need to be connected. - Recommendation emphasis: Make the BCC’s new credit registry operational through greater involvement of financial institutions (Short-term). - Recommendation emphasis: Set up a modern legal framework for credit information systems (Medium-term). - Recommendation emphasis: Introduce a supervisory function for credit information systems at the BCC (Medium-term). - Recommendation emphasis: Identify, in collaboration with all stakeholders, the priorities for increasing the availability of credit information (Medium-term). ### Legal and judicial framework constraining financial intermediation - The unpredictability of the legal and judicial systems, weak capacity in commercial tribunals, and unregulated critical professions (e.g., notaries, clerks) hinder effective financial intermediation. - Only a few types of collateral are accepted: cash deposits, bank guarantees, and letters of comfort. Debt restructurings are preferred to commercial enforcement mechanisms. - Joining OHADA in September 2012 strengthened critical areas of business law, credit, and insolvency law, but domestic laws need to be made compatible with the OHADA Uniform Acts. - Laws identified for modernization: contract law; banking and financial contracts law (including loan contracts); law on negotiable instruments (bills of exchange, checks, commercial papers); property law (land activities falling under national jurisdiction, such as some mortgage-related aspects). ### Anti‑money laundering (AML/CFT): risks and implementation gaps - Money laundering risks in the Democratic Republic of the Congo are considered high. Principal proceeds-generating crimes: corruption and bribery, illicit arms trafficking, smuggling in precious stones and metals and other natural resources (oil, timber, wildlife, etc.), drug trafficking, and customs violations. - Vulnerable sectors: banks, money remitters, currency exchange bureaus, dealers in precious stones and metals, and professionals involved in the purchase and sale of real estate. Risks are accentuated by: cash-based economy, high rate of informality, permeability of borders, and weakness of government institutions. - The AML/CFT Law: No 04/016 of July 19, 2004 criminalizes money laundering, sets forth customer due diligence (CDD) measures applicable to financial institutions, and imposes an obligation to report suspicious transactions to the domestic financial intelligence unit (Cellule Nationale de Traitement des Renseignements Financiers–CENAREF). - Implementation gaps: - CDD requirements are generally ignored by the most vulnerable sectors. - Regulatory and supervisory bodies, including the BCC, have yet to develop and implement adequate AML/CFT control procedures. - Law enforcement authorities lack capacity to investigate and prosecute money laundering cases: out of the 5 files provided by the CENAREF to the Prosecutor’s Office (Parquet General), only one case resulted in a conviction for money laundering. - Recommendations (selected from extended list): - Develop a multi-sectoral AML/CFT national strategy that would prioritize implementation in the most vulnerable sectors (Short-term). - Reinforce the structure and the independence of the national financial intelligence unit (Short-term). - Review the domestic AML/CFT law to ensure preventive measures are applicable to all reporting entities, in particular dealers in precious stones and metals (Medium-term). - Include AML/CFT as part of criminal justice strategies and build capacity within the law enforcement community on financial investigations (Medium-term). ### Central Bank (BCC): autonomy, recapitalization, and monetary policy - Legislative reforms: New BCC Law and Banking Laws are pending approval. The new BCC Law will grant the BCC an explicit financial stability function with corresponding powers, enhance personal, functional, and financial autonomy, and strengthen governance, transparency, and accountability. Drafts benefited from IMF Legal Department technical assistance. - Banking Law draft: would provide the BCC powers for supervision and resolution of troubled banks, including early intervention powers and, if needed, full intervention and resolution with some bail-in features affecting shareholders and unsecured creditors but protecting small depositors. - BCC financial position and recapitalization needs: - In 2011 and 2012, the MOF issued recapitalization bonds amounting to CGF 1,249 billion to bring the BCC’s net worth to zero. - In a second phase, the BCC’s capital was to be increased to CGF 213 billion through additional recapitalization bonds amounting to CGF 104 billion and the revaluation of the BCC’s fixed assets (equivalent to about CGF 109 billion). - The cost of the recapitalization has been estimated in an initial draft amendment of the BCC law submitted to parliament at about CGF 1,353 billion (or 7 percent of GDP). - Current recapitalization bonds bear interest set annually by the MOF and independently of market conditions; absence of a sovereign debt market makes an objective pre-defined interest-rate mechanism desirable. - Structural reforms pending: injection of fresh capital; BCC withdrawal from non-essential operations (the hospital and the mint). - The BCC is in the process of introducing IFRS for its accounting to revalue assets which will lead to further capital needs. - BCC gross operating income (Table I.1; values as reported): - Proceeds from monetary operations: 2012 = 42.9; 2011 = 42.2 - Costs of monetary operations: 2012 = 39.1; 2011 = 75.9 - Margin on monetary operations: 2012 = 3.8; 2011 = -33.7 - Margin on banking operations: 2012 = 162.3; 2011 = 159 - Added value: 2012 = 112.8; 2011 = 73.8 - Personnel costs: 2012 = 68.9; 2011 = 58.7 - Write backs on provisions due: 2012 = 20.2; 2011 = 31.6 - Allocations to provisions due: 2012 = 17.7; 2011 = 33.2 - Gross Operating Income: 2012 = 16.6; 2011 = -16.3 - Allocation to amortization and provisions not due: 2012 = 17.1; 2011 = 53.1 - Earnings from Period to be Allocated: 2012 = 5.3; 2011 = -59.8 - Monetary policy instrument and transmission: - The BCC’s monetary policy instrument, the interest policy rate, is defined by the inflation rate plus a premium of 2–10 percentage points. The real rate is always positive by construction. - Monetary policy transmission is very weak due to high dollarization and limited access to financial services for most of the population. - Operational framework: nature of monetary interventions is determined by the source and duration of deviations from the monetary programming exercise, and the BCC’s projected balance sheet. - The system is experiencing excess liquidity mainly due to large government deposits earmarking investments and weak credit supply that is parked at the Central Bank as remunerated reserves. - Figure described: Policy Rate Evolution over time and Positive Real Policy Rate (2010–2013; source: BCC). ### Key implementation timelines (definitions) - Short-term: ＜ 12 months. - Medium-term: 12–36 months. *Source: IMF staff report excerpt (selected paragraphs and tables) on the Democratic Republic of the Congo.* ### 61. Monetary policy instruments available to the BCC are: ### 61. Monetary policy instruments available to the BCC are: ### Monetary policy instruments - Treasury bill (BTR) auction: - Weekly and monthly BTR auctions. - Currently with maturities of 7 and 28 days. - Principal market-based instrument to respond to temporary monetary shocks. - By end-2012 the stock of BTRs was CGF 95 billion. - Almost doubled in 2013 to reach CGF 182 billion in October. - Note: Since March 14, 2014, these are now known as BCC bonds. - Exchange market interventions: - Aimed at smoothing out exchange rate fluctuations and achieve the BCC’s international reserves target. - Monetary sterilization is used, when appropriate, to offset any effect on the money supply. - The exchange rate has remained remarkably stable in recent years, prompting the IMF to reclassify the de facto exchange rate regime under “other management arrangements.” - Changes in required reserves conditions for commercial banks: - Currently 8 percent for sight deposits. - Instrument is rarely used. - In October 2013, the rate was increased from 7 percent to 8 percent for sight deposits only to encourage longer-maturity deposits. - Required reserves do not earn interest and are set in domestic currency. ### Constraints on effectiveness of monetary policy - High-level summary of constraints: - High level of dollarization. - Lack of a well-functioning money market. - Institutional and administrative weaknesses. - Fiscal dominance. - Lack of capacity and credibility of the monetary authorities. - Functional role of the BCC given constraints: - Given the highly dollarized economy, the BCC’s role is mainly to provide U.S. dollar liquidity insurer and act as the government’s fiscal agent. ### Monetary transmission mechanism - Key limitations: - Monetary transmission mechanism is weak. - Monetary interventions to the interbank and credit markets are hindered by the lack of a well-functioning money market and by the financial exclusion of the bulk of the population. - The limited depth and liquidity of the interbank money market prevents the banking system from effectively transmitting monetary impulses to the financial markets. - There is currently no stock market in the Democratic Republic of the Congo. ### Effects of dollarization and structure of the economy - Implications of dollarization: - High level of dollarization limits the reach of the BCC policy. - Dominant sectors (export industries, with extractive industries representing 98 percent of total exports) and financial services are largely immune to exchange rate fluctuations. - The BCC’s policy interest rate has very little influence on borrowing decisions, which are mostly in U.S. dollars. - Monetary policy tools cannot be used as shock absorbers and to support growth and employment. - Structure of local-currency economy: - The formal local-currency economy is relatively small and is dominated by the public sector. - As a result, the fiscal policy stance has a vastly disproportionate influence on monetary developments. - Financial fragmentation: - Impairs the ability to influence the money supply through market-based instruments—i.e., the banks’ money creation through their lending activity. - Three-fourths of the money supply (M1) is in the form of cash held by the population without access to the formal banking system. --- ### Appendix II. De-dollarization: Preconditions, Operational Aspects, and Risks ### Preconditions for successful de-dollarization (international experience) - Conditions that increase likelihood of success: - (i) a track record of stable and low inflation; - (ii) a well-developed financial and payment system; - (iii) a stable macroeconomic environment; - (iv) an effective financial regulatory framework. - Success enhanced by a well-designed communication strategy aimed at building confidence in the domestic currency. ### Experience and challenges in highly dollarized economies - Empirical observations: - No examples of countries with high levels of financial dollarization (higher than 80 percent) that have succeeded in reducing it to less than 20 percent. - In highly dollarized economies (e.g., Bolivia, Peru, Uruguay), financial dollarization has been reduced significantly but remains above 40 percent. - Poland achieved faster progress but had relatively low levels of dollarization and for a short period of time. ### Risks of de-dollarization - Major risks: - Forced de-dollarization can lead to financial disintermediation (example: Democratic Republic of the Congo in the 1990s; similar to Bolivia in the 1980s). - Authorities may be forced to reverse measures and allow deposits in foreign currency to prevent economic collapse. - Risk mitigation: - A voluntary, gradual process led by the central bank in collaboration with the MOF. - Reinforcement of regulatory and legal frameworks to reduce risks of deposit runs. ### Operational pillars for gradual de-dollarization - Recommended pillars and actions: - (a) Sound institutional frameworks, including fiscal consolidation, de facto autonomy of the Central Bank, and strong monetary policy and banking supervision. - (b) Strengthening the domestic currency: achieve stable and low inflation, a stable financial and an efficient payment systems through a sound macroeconomic framework and an appropriate market-oriented regulatory framework to deal with FD. - (c) Coordinated actions to change people’s behavior (e.g., compulsory listing of prices in CGF); microeconomic actions to facilitate coordinated de-dollarization by economic agents. - (d) Penalizing holdings of U.S. dollar deposits and loans relative to those in domestic currency—for instance, requiring higher required reserves and provisions in U.S. dollar operations. - Operational note: - Given dollarization will likely take decades to be reversed, a financial system under a dual-monetary system, with proper regulation, is needed to provide necessary buffers. - Today there is a local payment system in domestic currency but not in foreign currency; major transactions conducted in U.S. dollars must be made through correspondent banks abroad and not through the local settlement system. --- ### Appendix III. The Resolution of the Banque Congolaise ### Background and key balance-sheet facts - Banque Congolaise (BC) status: - One of the two largest banks in the Democratic Republic of the Congo in 2008. - Held 16 percent of total deposits and issued 25 percent of total credits. - In 2007 acquired from the government the good part [« potentiel utile »] of Union de Banques Congolaises under liquidation. - Solvency and leverage: - Solvency ratio was 5.9 percent at end-2007 and 7.7 percent by end-2008 (well below the 10 percent statutory minimum). - By January 2009, the BC’s loan-to-deposit ratio was 116 percent (and 166 percent if including the restructured claims on the government), well above the 74 percent sector average. - In March 2009, the bank held about US$65 million (or 20 percent of its balance sheet) in government loans restructured in November 2008. - NPL portfolio was provisioned at only 4 percent. - Connected exposures and governance: - By the time of central bank’s intervention, 38 percent of loans were to connected obligors (mainly politically-connected individuals, bank shareholders, and board members) and were nonperforming. - Poor management practices, weak corporate governance, and government interference compromised financial performance. - Balance-sheet opacity: - Doubtful positions at liquidation: “Other creditors and regularization of liabilities” amounted to US$95.7 million and “other debtor and regularization of assets” to US$44.3 million—together accounting for more than 50 percent of the total balance sheet. - Unreconciled assets in the balance sheet declined to 17 percent of total assets only after a year. ### Resolution process and fiscal cost - Conservatorship and exposure: - BC was put into conservatorship in October 2010 and remains unresolved. - When liquidation was decided in October 2010, the BCC’s exposure to the BC amounted to some US$120 million. - Regulatory forbearance led to accumulation of losses and increased capital needs, increasing the burden to the economy over time. - The BCC’s guarantees of the BC’s interbank liabilities limited contagion spreading through the system. --- ### Appendix IV. Observance of the Basel Core Principles ### Assessment context and scope - Assessment details: - Financial sector assessment of compliance with the Basel Core Principles (BCP) undertaken in the context of the 2014 FSAP of the Democratic Republic of the Congo. - Assessment conducted by a team of experts from the IMF and the World Bank. - Assessors met with the Governor and Vice Governor of the BCC, representatives of the private financial and nonfinancial sector, and auditors. - The team collaborated with the BCC’s Directorate for the Supervision of Financial Intermediaries (DSIF). - Coverage: - Assessment covered framework and practice of banking supervision at the BCC. - Covered all credit institutions subject to the law on credit institutions and to BCC supervision. ### Legal mandate and capacity constraints - Legal authority: - BCC is the sole authority responsible for supervision of the financial system. - BCC has legal power to license, supervise, verify compliance, and take corrective measures. - Under current legislation, BCC’s mandate covers banks and all other nonbank credit institutions (savings and loan cooperatives, specialized financial institutions, finance companies, MFIs) and exercises control over moneychangers and financial messaging services. - Limitations: - Current legal, regulatory and prudential framework does not explicitly give the BCC the function of exercising risk-based supervision. - Independence of the central bank in exercising banking supervision is not specifically mentioned in the laws and is restricted due to its financial situation. - Important capacity constraints and insufficient expertise strain BCC’s supervision capacity. - Self-assessment produced by the central bank often lacked depth and was sometimes approximate. - Several years of armed conflict and macroeconomic imbalances hindered progress in institutional strengthening and capacity building. ### Key findings and recommendations - Supervisory approach: - Supervision largely relies on checks on compliance with laws and regulations rather than a risk assessment approach. - Regulatory framework lacks a number of Basel Committee standards and good practices forming the basis of risk-based supervision. - Affected areas include classification and provisioning of loans; monitoring loans to related parties; management and supervision of interest rate, liquidity, and operational risks; business continuity plans; powers to reject transfers of bank control without BCC endorsement. - Risk management within institutions: - Credit institutions have not yet developed an internal risk management framework. - Prudential framework needs provisions promoting a risk management function covering all significant risks and crisis scenarios, with sufficient resources, autonomy, authority, and board access. - On-site inspectors need a methodological framework for analyzing supervised institutions’ risk management systems, evaluating performance, and verifying exceptions. - On-site inspections should be more systematic and regular and should cover all institutions, including MFIs. - Implementation and enforcement: - Central bank’s implementation of the regulatory framework is not sufficiently stringent. - Revision of the BCC law and the law on credit institutions should clarify mandates, functions and the prudential, resolution and backstopping toolkit. - Accountability and transparency: - Strengthen BCC’s accountability framework on supervision activities, including annual publication of a report on supervisory activity with publication in the Official Journal of the Democratic Republic of the Congo. - Legislative and regulatory texts relating to supervision would benefit from free on-line access. - Provisioning and accounting: - Provisioning rules need revision; current framework on loan classification and provisioning understates banks’ risks. - Ongoing IFRS-related work provides inputs for early detection of doubtful claims, clearer notion of classified claims, differentiated treatment of rescheduled and restructured claims, and strengthened provisioning of NPLs based on in-depth analysis of eligible guarantees. - Corporate governance: - BCC’s powers in corporate governance need strengthening in line with best international practices. - Current framework lacks specific criteria defining “good” corporate governance and operational monitoring/evaluation provisions. - Need to define criteria for competence and propriety of directors, appoint experienced independent directors, assess the board’s role in strategy and risk acceptance, and prevent/manage conflicts of interest. - Monitoring of second-order risks: - Effective monitoring should cover BCC and banks’ internal practices for risks such as risk concentration and liquidity risks. - Credit institutions should monitor exposures to counterparties whose solvency often hinges on a single commodity’s price fluctuations and liabilities and assets other than loans. - Credit institutions need an internal liquidity risk management framework; on-site supervision should monitor this work and banks’ internal control systems. ### Summary observation (Table IV.1 excerpt) - Core Principle 1: - Responsibility for banking supervision is clearly assigned to the Central Bank. - The mission assigned does not correspond to the definition of risk-based supervision and the objectives are not clearly defined. - The Central Bank has legal power to exercise different functions of supervision but implementation of this power is not asserted sufficiently. - The regulatory framework is not regularly updated and implementation is not sufficiently stringent. *Source: IMF staff report content provided in the input.* ### 2. Independence, accountability, ### 2. Independence, accountability, resourcing, and legal protection for supervisors ### Key findings (supervisory independence, powers, and resourcing) - The Central Bank is not operationally independent from the Government which has severely influenced several bank cases. - The Central Bank is given power to take prudential measures and decisions under its supervisory jurisdiction, but in several cases where the interests of the State and the responsibilities of the Central Bank in that capacity diverged, the latter did not take the actions that its mandate would have prescribed. - No financial autonomy for the Central Bank, which is dependent on the Treasury. - No provision on conflicts of interest and no provisions ensuring legal protection for Central Bank staff in their banking supervision functions. ### Key findings (cooperation and confidentiality) - No provisions expressly authorizing sharing of confidential information. ### Key findings (permissible activities and licensing) - Banks are one of the credit institution categories engaged in banking operations along with savings and loan cooperatives, savings funds, specialized financial institutions, and finance companies. - Licensing criteria are limited and several cases raises question on the examination of licensing cases. - Licensing is based more on a compliance approach than a risk-based assessment. - No definition of criteria enabling the Central Bank to assess the competence and integrity of directors and members of general management proposed during the licensing process. - Unsystematic evaluation of how much Board members know about each of the categories of activities contemplated by the bank and the associated risks. - Need to improve knowledge of beneficial owners who ultimately control the institution and bank holding structures that could represent an obstacle to effective banking supervision. ### Key findings (ownership transfers, acquisitions, and group oversight) - The Central Bank is authorized to examine and reject any proposal seeking to transfer to third parties significant direct or indirect investments or controlling interests in existing banks. - Insufficient knowledge of beneficial owners with controlling interests. - Limited powers to challenge an operation that would be in violation of legal and regulatory provisions. - Other than the prescribed thresholds, there are no explicit criteria for judging individual proposals on acquisitions. - No prior authorization for an operation when it is within the authorized limits. - No reporting of acquisition operations to ensure that banks do not take undue risks. - The Central Bank has particularly limited knowledge of the bank groups, especially those to which subsidiaries located in the DRC belong. - Absence of regulations related to prudential supervision on a consolidated and cross-border basis, which could be conducted if required. ### Key findings (supervisory approach, tools, and reporting) - In the absence of a supervisory approach based on a risk analysis, both at the individual level and for the entire system, the Central Bank is not meeting the required conditions: a forward-looking assessment of risk profiles, a preventive detection process, an early intervention framework, and plans in place for orderly resolution. - In the absence, save for a few exceptions, of procedures and tools for the structured evaluation of the risk areas of each institution, and for analyses of the overall sector vulnerabilities, neither the methods nor the tools implemented fully comply with the recommendations issued by the Basel Committee for effective supervision. - Absence of accounting reconstitution, preventing verification of the accuracy of the data submitted to the Central Bank. - Need to supplement the Central Bank’s knowledge of the risks posed by the credit institutions, in particular with regard to concentration or interest rate risk. ### Key findings (corrective powers, consolidated supervision, and home-host) - Although the Central Bank has a range of sanctioning powers, these powers must be strengthened with respect to essential criterion 4. - In addition, its decisions should be more clearly explained. - There is a need, as part of the upcoming discussions on the procedures for the introduction of Basel II, in particular Pillars 2 and 3, to develop cross-border relationships with a view to strengthening mutual understanding of the application of standards, in particular with respect to minimum capital and capital adequacy. - The efficient and effective exchange of information and a mutual understanding of the activities and risks faced by institutions are likely to improve the prudential surveillance process and thus save resources. ### Key findings (governance, risk management, capital, and credit risk) - In the absence of legislative provisions on corporate governance, Central Bank Directive No. 21 establishes the corporate governance framework for credit institutions. - This directive is quite general and does not consider the new requirements that international best practices impose on the boards of directors in the area of corporate governance. - The Central Bank has not established any specific criterion or mechanism enabling it to ensure the establishment and implementation of good corporate governance in banks. - The Central Bank’s supervision method still generally corresponds to checking compliance. - The establishment of a framework specifying the risk management system for credit institutions is still embryonic and the Central Bank has not established a specific framework or reporting to ensure the implementation of its requirements in the area of risk management. - The Central Bank does not require lending institutions to set capital levels in anticipation of market events that could have an adverse effect, or to have in place contingency arrangements to be able to strengthen them in times of stress. - There is a need to strengthen the regulatory framework on monitoring of the total indebtedness of entities to which credit has been extended. - Following the 2009–2009 crisis, the DSIF promptly conducted several on-site supervision missions to assess the quality of the credit portfolios of the major banks and the level of support from their shareholders. Supervision missions were carried out in 2010 and 2011; however, since that time, these missions have been conducted far less frequently, in anticipation of technical assistance. ### Key findings (problem assets, concentration, related parties, country risk) - The laws and regulations on the classification and provisioning of credit risks are largely inadequate and obsolete. - The Central Bank does not conduct sufficiently regular supervision of concentration risks in the financial system, which is particularly regrettable as information from the credit reporting agency is not reliable. - Related parties in the law on credit institutions are too narrowly defined. - The regulations do not specify that the loans or guarantees granted to related parties can be granted only under the same conditions, for the same amounts, and for the same collateral and guarantees as those applicable to the other clients of the lending institution. - Poor reporting on loans granted to shareholders, Board members, directors etc., in the absence of routine processing of BSA reporting statements (DEC 1411), for all institutions subject to supervision. - While banks operating in the DRC are exposed due to assets held with foreign correspondents and syndication within some groups, there is no legislative or regulatory provision on monitoring country or transfer risk. ### Key findings (market, interest rate, liquidity, operational, internal control, reporting, AML) - A market risks monitoring framework was established but the Central Bank has not established a specific mechanism or reporting system enabling it to ensure the implementation of its requirements in the area of market risk management systems. - A framework specifying the system for managing banks’ interest rate risk has been defined by the Central Bank. The Central Bank has not established a specific mechanism or reporting system enabling it to ensure the implementation of its requirements in the area of market risk management systems. - Liquidity risk is one of the principal risks facing the banking system in the DRC. - The established regulatory framework seems sufficient but the Central Bank has not established a specific mechanism or reporting system enabling it to ensure the establishment of an adequate liquidity risk management system in each credit institution based on its risk profile. - The Central Bank should be sure to understand banks’ liquidity risks on a forward-looking basis. - A framework specifying the system for managing banks’ operational risk has been defined by the Central Bank, which has not established a specific mechanism or reporting system enabling it to ensure the implementation of its requirements in the area of operational risk management systems. - The Central Bank, through regulations implemented and the on-site reviews it conducts, has an appropriate framework in place [for internal control and audit], although harmonization of the legislation (internal control, governance, risk management) is essential. - The plethora of letters addressed to the banks does not reflect a routine and in-depth analysis of the strengths and weaknesses of the supervision systems put in place in the banks. Furthermore, it appears that there was no critical analysis of certain governance memoranda. - Regular meetings with the auditors should be organized. In addition, the expected content of the detailed report that the Central Bank requires from external auditors, pursuant to Article 12 of Instruction No. 19, should be defined. - Rules governing disclosure and transparency, apart from the publication of annual accounts, are not included in the regulations. - A regulatory framework specifying banks’ anti-money laundering system is in place. However it is flawed, since, inter alia, the Central Bank has not established a specific mechanism or reporting system enabling it to ensure the implementation of its requirements in the area of combating money laundering and has not conducted any on-site supervisory mission on this subject. ### Program of recommended actions for improving compliance (summary from Table IV.2) - Responsibilities, objectives, and powers - Take advantage of draft revisions of the Banking law and the law establishing the Central Bank statutes to harmonize the entire current legal framework, which is the result of the accumulation of successive texts. This is all the more necessary since, in the OHADA context, certain legislative and regulatory provisions will have to be adapted. - When granting additional powers to the Central Bank, also include measures that strengthen the reporting requirements regarding its supervision activities. - Supplementing their publication in the Official Journal, guarantee free on-line access to legislative and regulatory texts in effect in the area of the activities of credit institutions and their supervision. - Independence, accountability, resourcing, and legal protection for supervisors - Strive to preserve the independence of the Central Bank in its capacity as banking supervisor. - Set up a genuine training plan for all staff assigned to supervision and break it down into individualized itineraries, which will allow the DSIF to better express its needs to Central Bank authorities. - Give the DSIF adequate IT resources to make its work more effective. - Considering the time needed to train supervisors, set up career plans. - Cooperation and collaboration - Formally organize cooperation with the Ministry of Finance (also ultimately responsible for financial stability), which could facilitate joint work and prevent conflicts of interest. - Introduce in the law on the organization and operations of Central Bank provisions allowing it to lift professional secrecy and authorizing the sharing of confidential information. - Licensing criteria - Adopt a risk-based analysis approach when examining licensing applications. - Define criteria allowing the Central Bank to assess during the licensing process the competence and integrity of directors and members of senior management suggested by the institution. - Establish criteria for evaluating how much Board members know about each of the activity categories contemplated by the bank and understand about the associated risks. - Strengthen the Central Bank’s powers and capacities in terms of knowledge of controlling beneficial owners and voting rights in credit institutions. - Transfer of significant ownership - Supplement the legislative framework to give the Central Bank the ability to invalidate an operation that would be a violation of legal and regulatory provisions. - Set up a mechanism allowing the Central Bank to ensure that it always has full knowledge of beneficial owners with controlling interests. - Introduce a requirement that banks must inform the Central Bank, as soon as they become aware of it, of any significant information that could have a negative impact on the acceptability of a major shareholder or someone with controlling interests. - Major acquisitions - Define explicit criteria for judging individual proposals on acquisitions. - Establish reporting of acquisition operations in order to ensure that banks do not take undue risks. - Supervisory approach - Develop a framework for placing troubled credit institutions under special surveillance. - Promote forward-looking analyses, using, in particular, performance charts being implemented. - Continue to prepare a set of methodologies and instruments to detect financial developments that are likely to undermine the stability of the banking system. - Resume the project to rank credit institutions and to develop a system for banks evaluation based on a risk approach. - Fine-tune the definition of peer groups and link individual analyses to the situation prevailing in the system. - Supervisory techniques and tools - Establish a structured set of methodological procedures and guides covering all supervision activities, with emphasis being placed on risk monitoring and assessment of the soundness of the institutions supervised and the financial sector as a whole. - Step up the pace and expand the scope of on-site supervision. - Conduct regular stress tests. - Ensure the effective supervision (reporting, on-site supervision) of specialized financial institutions. - Supervisory reporting - Define and identify the checks to be carried out before the dispatch of regulatory returns by the credit institutions, in order to enhance their quality. - Verify, during on-site supervision, the accuracy of the data submitted to the Central Bank, in particular with respect to accounting or statements provided to the credit reporting agency. - Conduct a general review of the prudential information received by the Central Bank in order to harmonize it and strengthen the supervisors’ knowledge of risk concentrations. - Corrective and sanctioning powers of supervisors - Make provisions in the legal framework, as a preventive measure, for the Central Bank to intervene prior to regulatory violations. - Give consideration to adopting a more stringent procedure for revoking the license of a lending institution, when, over a prolonged period, the situation of a lending institution is extremely degraded (e.g., negative capital levels). - Strengthen, by law, the corrective and sanctioning powers of the Central Bank to correct practices or activities that could create risks for the institution or the entire sector. - Provide a detailed account in the Central Bank annual report of the sanctions imposed and violations identified. - Initiate discussions at the Central Bank in order to clarify in what situation, when, and how its various powers can be used and formalize the results in a procedure. - Consolidated supervision - Establish a database on the structure of the banking groups headquartered in the DRC and outside of the DRC. - Strengthen the authority of the Central Bank to limit the types of activities conducted by banking groups as well as the places in which such activities may be conducted, in the absence of a competent authority to supervise parent companies and/or if the security of the institutions so warrants. - Direct institutions to establish a pilot program on the risk profile of activities conducted abroad and assess compliance with the internal controls related the local supervision of operations. - Draft regulations related to prudential supervision on a consolidated and cross-border basis, as well as the accounting regulations and schematic representations necessary for the establishment of consolidated accounts. - Home-host relationships - Solve the issue of confidentiality before developing home/host cooperation. - Ensure that the home supervisors provide the Central Bank with the necessary information, in particular on: - The general prudential framework applicable to the banking group; - The bank or banking group, so as to allow the BCC to properly understand the activities conducted in the DRC; - The different activities carried out in the DRC; - The major problems encountered at the headquarters or at other offices of the group (where possible and appropriate), if these problems are likely to have a significant impact on the security and soundness of the subsidiaries operating in the DRC. - Corporate governance - Establish specific criteria or a mechanism allowing the BCC to ensure effective implementation of good corporate governance in banks. - Revise Directive No. 21 on the corporate governance of credit institutions to incorporate the new international best practices requirements. - Risk management process - Provide on-site supervision with a methodological framework for analyzing supervised institutions’ risk management systems. - Establish specific criteria or a mechanism allowing the Central Bank to ensure the effective implementation of risk management frameworks. - Revise Directive No. 22 on the risk management process in order to incorporate the new international best practices requirements, particularly a risks management function and the establishment of stress scenarios. *Source: _cr14315 - 2. Independence, accountability,* ### 16. Capital adequacy ### 16. Capital adequacy ### Capital adequacy recommendations - Revisit the issue of whether a bank’s capital must be held in local currency while the bulk of the exposures are in foreign currency. - Make risk weighting of assets held with foreign correspondents more restrictive. - Conduct an impact assessment with a view to assessing the possibility of requiring higher risk weighting rates for counterparties that have not received an AAA, AA, or an equivalent rating. - For claims on the Government and central administrations give consideration to a weighting of at least 75 percent, or even 100 percent, for claims on all territorial administrations. - Use a weighting of 100 percent for accrual accounts, including all pending accounts. - Based on the results of on-site supervision, it appears that mortgages only marginally reduce the risks posed: the level of weighting for debt that includes mortgages should be reviewed. - Make provisions in the regulatory framework for the possibility of the BCC to require a weighting of 100 percent for risks for which no prudential regulations have been defined, instead of giving credit institutions a margin to maneuver. - Make provisions as well to strengthen current regulations by including a capital charge for market operations. ### Credit risk (CP 17) - Base the procedures implemented to supervise credit risk developments in the financial sector on a structured analysis of risk profiles. - Strengthen the prudential mechanisms with regulations on monitoring of the total indebtedness of parties to which credit has been extended. - Strengthen the prudential mechanisms on the intervention of the Board or management in the process of granting loans where there is a risk of conflict of interest. ### Problem assets, provisions, and reserves (CP 18) - Review the loan classification and provisioning rules, emphasizing early detection of doubtful claims, granularity of questionable overdrafts, provisioning of nonperforming loans, and weighting of guarantees. - Ensure banks’ effective implementation of ongoing monitoring of loan portfolios. - Raise their awareness of the need to set up rigorous and diligent collection procedures. ### Concentration risk and large exposure limits (CP 19) - Implement, while awaiting enhancement of the credit reporting agency’s reliability, an internal unit to handle large exposures. - Adjust the common weightings with the risk coverage mechanism, as stipulated in the recommendations set forth in CP 16 (e.g., weighting at 100 percent of exposures for which no prudential regulations have been established). - Implement, when appropriate, requirements for large exposures on a consolidated basis. - Require credit institutions to monitor certain less significant concentrations of risk (e.g., in the DRC, exposures to counterparties whose solvency is contingent upon price trends for a particular commodity). ### Transactions with related parties (CP 20) - Broaden the definition of related parties in the law on credit institutions and grant power to the Central Bank to further broaden the list in specific cases. - Stipulate in the regulations that loans or guarantees granted to associated parties can only be granted under the same terms, for the same amounts and using the same collateral and guarantees as those applicable to the other clients. - Specify that these transactions must be approved by the Board, and that Board members with a direct or indirect interest be excluded from the approval process. - Implement a system that allows the Central Bank to provide a realistic assessment of the procedures of the credit institutions in order to identify associated party risk. - Ensure the routine treatment of reporting statements on loans granted to shareholders, Board members, managers, etc. (DEC 1411), for all entities subject to supervision, and routinely submit the results of the analyses to management and the Governor. ### Country and transfer risks (CP 21) - Incorporate into the prudential regulations provisions on monitoring country and transfer risks. ### Market risks (CP 22) - Establish a framework or reporting on market risks monitoring implemented by credit institutions. ### Interest rate risk in the banking book (CP 23) - Establish a framework or reporting on interest rate risk monitoring implemented by credit institutions. ### Liquidity risk (CP 24) - Verify that each institution has established a liquidity risk management framework suited to its risk profile. - Pay greater attention to the monitoring of this risk during on-site supervision. - Consider the possibility of the Central Bank’s conducting stress tests in this area. ### Operational risk (CP 25) - Verify that each institution has established an appropriate operational risk management framework based on its risk profile. ### Internal control and audit (CP 26) - Harmonize regulatory provisions on internal control, internal audit, governance, and risk management. - Initiate routine and in-depth analyses of the strengths and weaknesses of the internal control systems put in place by each lending institution, including analyses of governance memoranda received by the Central Bank. ### Financial reporting and external audit (CP 27) - Provide the credit institutions with the content of the detailed report that the Central Bank requires of auditors, in accordance with Article 12 of Instruction No. 19. - Organize regular meetings between the Central Bank and external auditors of credit institutions. - Incorporate into the legislative framework provisions protecting external auditors against a liability action whenever they make reports to the Central Bank on matters of material significance relating to the failure to comply with regulations. ### Disclosure and transparency (CP 28) - Incorporate into the law provisions that strengthen requirements relating to disclosure of financial information and transparency, including risk exposures, risk management strategies, and the governance policies of credit institutions. ### Abuse of financial services (CP 29) - Undertake on-site inspections of credit institutions to check compliance with AML/CFT requirements. - Implement frameworks for monitoring the implementation of anti-money laundering systems and conduct on-site supervisory missions on this subject. ### Authorities’ Response (selected points) - The Central Bank of the Congo (BCC) welcomes the detailed review of the regulatory and supervisory framework of the Congolese banking system carried out by the joint evaluation team of the IMF and the World Bank as part of the first Financial Sector Assessment Program (FSAP). - The assessments have been a guiding tool for the Central Bank in the design of our action plan and its implementation timetable. - To implement the recommendations, the Central Bank will require IMF and WB technical assistance and proposes that the program make provision for this TA between the central bank and its partners. - BCC comments on specific Core Principles: - CP 15 (Risk management process): The existence of a regulatory framework for risk management should justify a rating of grade of "materially non-compliant". - CP 24 (Liquidity risk): The existence of a regulatory framework (Instruction No. 22) gives some indication on the management of liquidity risk and justifies a rating of "materially non-compliant." - CP 29 (Abuse of financial services): The existence of a regulatory framework (Instruction No. 15) and the requirement of an annual reporting for banks justify a rating of "materially non-compliant." ### Stress Test Matrix — scope and key outcomes - Solvency Stress Tests (Table V.1) - Scope: Bottom-up by banks. - Institutions included: 18 commercial banks. - Market share: 100 percent. - Data and baseline date: Supervisory, December 2012. - Methodology: Balance sheet sensitivity analysis and reverse stress tests. - Stress test horizon: Static (point in time). - Shocks — Sensitivity Analysis. Credit Risk: - Deterioration of asset quality/ NPL increase (25/50/100 percent) - Deterioration of asset quality in mining sector due to commodity price changes (50 percent) - Concentration risk (default of largest borrowers and of second largest borrowers) - Exposure to public sector finance/Role of state (50 percent increase in NPLs) - Reverse stress: loss to breach 10 percent CAR - Market Risk: - Exchange rate risk—shock to net open position - Interest rate risk: shift to local currency yield curve - Multi-factor Assessment: - Simultaneous multiple credit risk shocks. - Risks/factors assessed: - Higher provisioning expense as a result of credit losses - Earning losses from cost of funding increase - Solvency of banks, system - Calibration of risk parameters: - Based on actual point in time (historical highs) and proxies in the region (commodity price shock). - Expert judgment due to data limitation for a macro modeling. - Regulatory standards: Basel II (accompanied by local regulatory standards) - Results: - Capital deterioration is observed - Interest and Exchange Rate Risk Stress Tests (Table V.2) - Scope: Bottom-up by banks. - Institutions included: All 18 commercial banks. - Market share: 100 percent. - Data and baseline date: Supervisory, December 2012. - Methodology: Sensitivity analysis and reverse stress tests. - Risks/factors assessed: - Increase in interest rate; shifts in yield curve (500 basis points) - Depreciation of local currency (55 percent) - Calibration of risk parameters: Change in interest rate; Exchange rate depreciation - Regulatory standards: Basel II and local regulatory standards - Results: - Decline in profitability and capital position - Network Analysis and Contagion Risk (Table V.3) - Scope: Bottom-Up by Banks. - Institutions included: All 18 commercial banks. - Market share: 100 percent. - Data and baseline date: Supervisory, December 2012. - Methodology: Internal IMF models (Espinoza and Sole, 2010)/Credit and funding channel analysis. - Risks/factors assessed: - Domino effects along the credit chain in case of a bank’s default (systemic failure) - Short-term funding risk - Calibration of risk parameters: 2008/2009 experience/current exposure to other banks/ad hoc shocks - Regulatory standards: Basel II and local regulatory standards - Results: - Found small fraction of interbank loans is domestically held. 98 percent of interbank loans are held abroad and data is limited for holdings of banks abroad. - Liquidity Risk Stress Tests (Table V.4) - Scope: Bottom-Up by Banks. - Institutions included: All 18 commercial banks. - Market share: 100 percent. - Data and baseline date: Supervisory, December 2012. - Stress Test horizon: 5-day horizon. - Methodology: Bank-run test and funding risks. - Risks/factors assessed: - Deposit run; (6/10 percent daily withdrawal for 5 days) - Capital flight regarding anxiety over de-dollarization efforts - Short term funding risk - Funding liquidity and market liquidity - Maturity mismatch/rollover risk - Concentration of funding (mining sector/commodity price shock) - Calibration of risk parameters: Historical experience/ad hoc shocks - Regulatory standards: Basel II and local regulatory standards - Results: - Deterioration of liquidity condition *Source: _cr14315 - 16. Capital adequacy* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14315.pdf_