## _cr16106 ## Source details **Canonical URL:** [_cr16106](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16106.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16106.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16106.pdf.json) --- ### Executive summary: main findings - Short-term risk of a financial crisis appears low, but pockets of vulnerabilities were identified. - Financial sector not well positioned to contribute effectively to financing of the CEMAC economies; faces intensification of risk factors related to geopolitical tensions and fall in commodity prices. - Reform progress slow and uneven despite extensive IMF and World Bank technical assistance (TA); considerable reform agenda remains. - Requires greater operational autonomy for regional financial agencies and capacity boosts to carry out reforms. - Prudential regulations need upgrading; regulatory forbearance should be avoided through effective enforcement. - Considerable scope to enhance business climate (one of the weakest worldwide) and financial inclusion (lagging behind). ### Stress tests and financial vulnerabilities - Stress-test headline results: - Under an extreme macroeconomic shock scenario: - Capital shortfalls over a horizon of 12 months would be contained (less than 0.50 percent of regional GDP). - Only 58 percent of the banks would comply with the minimum solvency ratio (compared with 80 percent before the shock). - Only 24 percent of the banks would comply with the minimum liquidity ratio (compared with 80 percent before the shock). - Stress-test distribution (aggregate; preserve exact figures): - Total (45 banks): Before shock % of banks complying with solvency ratio 80; % complying with liquidity ratio 80. After shock: % complying with solvency ratio 58; Capital shortfalls (% of GDP) 0.37; % complying with liquidity ratio 24. - By country (selected exact figures): - Cameroon (13 banks): before shock solvency 69, liquidity 85; after shock solvency 46, capital shortfalls 0.45, liquidity 8. - Congo (10): before 90/90; after 70, 0.15, 40. - Gabon (9): before 78/67; after 44, 0.70, 22. - Eq. Guinea (5): before 80/100; after 80, 0.13, 60. - Chad (8): before 88/63; after 63, 0.27, 13. - Additional unit shocks: - Deposit withdrawals: 25 percent decline in deposits → weighted average regulatory liquidity ratio falls to 66 percent (against 138 percent before shock). Ratios by country after shock: Cameroon 49 percent, Gabon 50 percent, Chad 65 percent. - Direct FX and interest-rate exposures: limited; low borrower foreign-currency indebtedness. - Largest MFIs: would no longer comply with the solvency ratio following a 15 percent transition of performing loans to NPLs; drop of up to 30 percent in deposit base would not threaten liquidity-ratio compliance. - Recalibration of risk weights (selected exact figures): - Total (45 banks): Net weighted risks in effect solvency ratio 16.8%; % of banks observing the ratio 80; Net adjusted weighted risks solvency ratio 13.2%; % observing ratio 69; Difference 3.6 percentage points. - CEMAC group (11 banks): in effect 12.7% (% observing 36); adjusted 11.0% (% observing 27); difference 1.7 percentage points. - By country (examples): Cameroon in effect 13.6%; adjusted 11.1%; difference 2.5. Eq. Guinea in effect 29.5%; adjusted 19.8%; difference 9.6. - Stress-test caveats: - Results may underestimate vulnerabilities due to weaknesses in quality and availability of data, especially transactions with connected parties. ### Financial intermediation and sector structure - Financial depth and access (exact figures): - Ratio of bank credit to GDP rose from 9 percent to 15 percent in 2013 (since 2006) but remains weak relative to comparable SSA countries. - Banking assets represented 26.3 percent of CEMAC GDP (end-2013). - Ratio of private credit to GDP: 10 percent. - Credit-to-deposits ratio increased from 57 percent in 2010 to 67 percent in 2013. - Less than 15 percent of adults are bank account holders. - Less than 3 percent of the population obtained a bank loan over the past 12 months. - Only 7.5 percent of adults have a savings account. - Large enterprises receive 80 percent of bank loans. - Structure of financial sector (Table 3 highlights; preserve exact figures): - Banks: No. of institutions 50; Assets (EUR bn) 18.0; % of Assets 90; % CEMAC GDP 24. - Private banks: 39; 16.1; 81; 22. - Public banks: 11; 1.9; 10; 2. - Domestic banks: 18; 8.2; 41; 11. - Foreign banks: 32; 9.8; 49; 13. - Cameroon: 13; 6.0; 30; 8. - CAR: 4; 0.3; 1; 0. - Chad: 8; 1.4; 7; 2. - Congo: 10; 3.1; 15; 4. - Eq. Guinea: 5; 3.1; 16; 4. - Gabon: 10; 4.2; 21; 6. - NBFIs: 8; 0.8; 4; 1. - MFIs (Sep 2103): 777; 1.2; 6; 2. - Total: 835; 19.9; 100; 27. - Business model and market features: - Loans to connected parties remain a significant risk. - Ample liquidity and absent regular publication of banks’ financial statements limit money market development. - Electronic banking services embryonic; high cost of electronic funds transfers. - Microfinance relatively well developed in Cameroon, Congo, and Chad, but suffers high outstanding payment rates (22 percent average). ### Macroeconomic context and systemic issues - Oil shock and macro impact: - Oil prices fell by about 60 percent between June 2014 and January 2015. - Oil revenue represents over 50 percent of the Union’s fiscal outlays and more than 80 percent of exports. - BEAC baseline scenario (Box 1) key projections and figures: - Real sector: CEMAC expected to record a 1.8 percent growth decline in 2015; growth projected to recover to average about 7 percent for 2016–17. Inflation expected around 2.3 percent for 2015–17. - External sector: current account deficit would deteriorate to 14.1 percent of GDP on average over 2015–17. International reserves coverage projected to fall to an average of 3½ months of imports of goods and services. - Public sector and debt: Fiscal balance would decline to -6.7 percent of GDP in 2015, -4.9 percent in 2016, and -3.4 percent in 2017. - Monetary/banking: External coverage ratio would fall to 87.4 percent for 2015–17; would plummet to 52 percent if states’ financing requirements were only met on the domestic market. - Longer-run indicators (selected from Annex Table 1; preserve exact figures): - GDP at constant prices (annual percent change): 2013 2.4; 2014 4.7; 2015 2.8; 2016 4.7; 2017 5.1; 2018 4.1; 2019 3.5; 2020 3.5. - Overall fiscal balance, excluding grants (percent of GDP): 2015 -5.7; 2016 -3.7; 2017 -2.4. - Gross official reserves (end of period, Millions of U.S. dollars): 2015 13,242; 2016 11,621; 2017 9,731. - Months of imports of goods and services: 2016 4.2; 2017 3.4. - Oil prices (US dollars per barrel): 2013 104; 2014 96; 2015 95; 2016 96; 2017 67. ### Institutional capacity and governance - Post-2006 FSAP progress: - BEAC initiated wide-ranging reforms; progress slow and uneven despite extensive TA. - SG-COBAC has necessary technical competence but needs upgraded regulatory framework and stronger supervision and enforcement, particularly for timely preventive intervention. - Key institutional recommendations: - Continue strengthening SG-COBAC staffing. - Fully implement risk-based supervision. - Continue upgrading prudential regulations (connected lending, licensing, bank governance, concentration risk, liquidity management, capital adequacy, risk management, financial transparency and reporting). - Undertake an asset quality review of banking assets, starting with the most vulnerable banks. - Clarify criteria for assessing systemically important banks and for cross-sectoral and cross-border coordination, including with FOGADAC. - Governance and human capital: - Replace involvement of national authorities in selection of senior staff of BEAC and SG-COBAC with transparent procedures based on qualifications. - BEAC should better use national directorates (DNs) and adopt a “pilot project” approach for replication. - Introduce a result-based approach to reforms with defined objectives and outcomes. ### Role and reform of the BEAC and regional agencies; monetary policy framework - BEAC governance and liquidity management issues: - Monetary programming framework "not as flexible as it should be." - Imperfect pooling of cash balances (notably export receipts and oil sector flows) complicates systemic liquidity management. - Recommended BEAC actions (selected): - Strengthen internal controls and accounting system; once satisfactory, return chairmanship of BEAC board of directors to the governor. - Adopt governance combining independence, transparency, and accountability. - Revisit top-official selection/appointment rules to base on qualifications while maintaining national balance. - Strengthen systemic liquidity forecasting and coordination with national cash-flow authorities. - Streamline monetary policy instruments and develop government securities market via a regional committee. - Put in place a lender of last resort framework distinct from the monetary policy operating framework. - Reserve management (decision items for Ministerial Committee): - Validate methodology to assess optimal level/structure of international reserves. - Validate structure of reserves portfolio and methodology for determining remuneration of deposits by CEMAC member states. - Possible shift toward assets-liabilities approach with differentiated remuneration tiers (liquidity account; yield account; reserves above optimal). ### Regulation, prudential supervision, and microfinance - Prudential priorities and gaps: - Urgently review regulatory framework for loans to connected parties. - Revise large exposure limits: current CEMAC limit 45 percent vs. 25 percent recommended by Basel Committee. - Require timely publication of annual reports and accounting consistent with international standards. - Operationalize consolidated and cross-border supervision; implement MC regulation and joint missions/supervisory colleges. - Draft regulations on general risk management and specific risks (liquidity, interest rate, market). - SG-COBAC internal functioning: - Assess optimal staffing given regional responsibilities; shift from compliance-oriented to risk-based supervision; undertake periodic systemic-risk analyses. - Microfinance sector: - Regional MFI framework needs strengthening; staff shortage (MFI unit comprised only 5 staff; 5 added in early 2015). - Recommendations: delegate some supervision of non-systemic MFIs to national authorities; review governance/internal control/resolution provisions; include MFIs in credit reporting system. ### Financial stability framework, crisis management and resolution, and FOGADAC - Financial stability framework: - Make recently established framework fully operational; priority to strengthen microprudential supervision, clarify BEAC’s role (including lender of last resort), adopt mechanism for identifying systemic banks/MFIs, and strengthen stress-testing and contagion analysis. - Crisis management and resolution: - 2014 regulation on crisis management significant but needs supporting measures: specify criteria for initiating special restructuring; protect interests of funding entities (FOGADAC and states); require legal action against culpable shareholders/executives. - Recommend entrusting COBAC a prominent/exclusive role to ensure speed and consistency in decision making. - Ordinary resolution arrangements: review for non-systemic institutions; require at least systemic banks to prepare Recovery and Resolution Plans. - Deposit insurance (FOGADAC) findings and recommendations (preserve exact figures): - Coverage amount set theoretically at FCAF 5 million per depositor per bank (i.e., about USD 9,100). - Gaps: lack of operating procedures for repayment; data on insured deposits inadequate; options if funds insufficient: (i) increase bank contributions; (ii) seek advance from fiscal authorities; (iii) reduce disbursements to amount of funds. - Recommendations: - Ensure operating capacity via staff enhancement. - Require banks to submit monthly reports on amount of deposits eligible for FOGADAC coverage. - Establish calibrated coverage objective accounting for potential fiscal support and eliminate option of lowering coverage to available FOGADAC resources. - Specify intervention criteria, priority for least costly options, and preferred ranking of FOGADAC claims. - Establish conditions for FOGADAC participation in selection and coordination of resolution options. - FOGADAC Managing Committee comprises BEAC Governor (chairs) and presidents of six banking associations. ### Developing the financial sector: financing, infrastructures, and AML/CFT - Financing of economies — key constraints and recommendations: - Financial inclusion low: World Bank 2011 Findex survey: only 12 percent of adults had a bank account. - SME credit negligible; banks focus on large/high-grade borrowers; interest rate ranges: banks 9–18 percent; MFIs 15–25 percent. - Term financing limited; housing credit marginal. - Recommendations include streamlining property registration, strengthening creditor rights, modernizing credit information systems, monitoring financial inclusion, reducing costs of financial services, strengthening consumer protection, and enforcing governance for connected-party transactions. - Financial infrastructures: - Capital market embryonic and fragmented: end-2014 nine bond issues listed; secondary-market liquidity extremely low. - Coexistence of two stock-market mechanisms (BVMAC and DSX) should be unified starting with a unique CSD. - Payment systems: BEAC established RTGS and automated clearinghouse since 2006 FSAP; retail payments market development delayed; electronic money has significant potential and needs BEAC monitoring and oversight. - Credit reporting: need for coherent regional credit reporting system; coordinate to avoid duplication. - AML/CFT: - Significant ML/TF risks due to informality, cash use, low banking-system penetration, unreliable IDs, porous borders, and sector vulnerabilities (real estate, banking, transfers, manual FX, microfinance). - GABAC efforts ongoing but not yet recognized as FATF-style regional body; process frozen due to delays in transparent financial management procedures. - Priority actions: recognize GABAC as FSRB with transparent procedures; operationalize FIUs in Congo and Equatorial Guinea; set up national inter-ministerial AML/CFT committees and criminal-justice policies; subject funds-transfer companies to licensing/supervision; increase resources of supervisors for risk-based AML/CFT supervision. ### Annex: selected indicators and prudential metrics (selected exact figures) - CEMAC fact-sheet (selected indicators): - Population (millions): 2011 42.8; 2012 43.3; 2013 44.1. - Regional GDP (US$ billions): 2011 20.1; 2012 23.0; 2013 28.8. - GDP growth (%): 2011 3.9; 2012 5.2; 2013 2.6. - Poverty (% of total population): 2013 31. - Financial Soundness Indicators (selected country figures, percentages): - Capital/risk-weighted assets (2013/2014): Cameroon 7.9 / 10.6; Chad 22.0 / 13.4; Congo 11.9 / 16.1; Equatorial Guinea 22.3 / 25.5; Gabon 12.3 / 9.4. - Non-performing loans/total loans (2013/2014): Cameroon 10.3 / 9.7; Chad 9.8 / 11.7; Congo 1.2 / 2.5; Eq. Guinea 20.1 / 19.7; Gabon 2.7 / 4.1. - Return on Equity (ROE) (2013/2014): Cameroon 42.7 / 21.8; Chad 21.1 / 19.4; Congo 28.4 / 23.4; Eq. Guinea 14.1 / 16.9; Gabon 19.6 / 21.5. - Liquid assets/Short-term liabilities (2013/2014): Cameroon 127.6 / 139.5; Chad 139.3 / 152.9; Congo 142.7 / 182.9; Eq. Guinea 220.2 / 194.0; Gabon 125.2 / 112.9. - Compliance landscape: - Minimum capital requirement (risk hedge ratio) remains 8 percent; task force on amendment disrupted by relocation to Libreville. - Limit on single large exposure: 45 percent of capital under current regulation (noted as lax compared with international standards). *Source: EXECUTIVE SUMMARY and chapter material, _cr16106* ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### _cr16106 - EXECUTIVE SUMMARY ### Executive summary: main findings - The short-term risk of a financial crisis appears low, but pockets of vulnerabilities were identified. - The financial sector is not well positioned to contribute effectively to the financing of the CEMAC economies and faces an intensification of risk factors related to geopolitical tensions and the fall in commodity prices. - Reform progress has been slow and uneven despite extensive technical assistance (TA) from the IMF and World Bank; a considerable reform agenda remains to be implemented. - Firm action is required to foster financial-sector development while ensuring adequate oversight of risk factors, including granting greater operational autonomy to regional financial agencies and boosting their capacity to carry out reform projects successfully. - Prudential regulations need to be upgraded, and regulatory forbearance should be avoided through effective enforcement. - Considerable scope exists to enhance the business climate (one of the weakest worldwide) and financial inclusion (which has been lagging behind). ### Stress tests and financial vulnerabilities - Stress tests highlight wide disparities among categories of banks and the vulnerability of a number of them to a fall in commodity prices. - CEMAC banks (i.e., whose activity is mainly in the CEMAC) are the most vulnerable. - Concentration of assets in the public and hydrocarbons sectors is a key risk factor for the financial sector and a vulnerability for the CEMAC economies. - In an extreme macroeconomic shock scenario: - Capital shortfalls over a horizon of 12 months would be contained (less than 0.50 percent of regional GDP). - Only 58 percent of the banks would comply with the minimum solvency ratio (compared with 80 percent before the shock). - Only 24 percent of the banks would comply with the minimum liquidity ratio (compared with 80 percent before the shock). - The stress-test results may underestimate actual vulnerabilities because of weaknesses in the quality and availability of data, in particular regarding vulnerabilities related to transactions with connected parties. ### Financial intermediation and sector structure - Since the 2006 FSAP, and boosted by a promising economic climate, the ratio of bank credit to GDP rose from 9 percent to 15 percent in 2013 but remains extremely weak and below levels observed in comparable sub-Saharan Africa (SSA) countries. - Most bank credit is channeled to large enterprises; small and medium-sized enterprises (SMEs) remain underserved. - Electronic money has large potential for financial inclusion and requires specific structured actions by the BEAC. - The two competing stock markets should be rationalized to promote nonbank financing to the private and public sectors. - The anti-money laundering and countering the financing of terrorism (AML/CFT) framework needs rapid strengthening at both national and regional levels. ### Macroeconomic context and systemic issues - Over the past decade, primarily due to high oil prices, the CEMAC achieved robust economic growth—although lower than the SSA average—and insufficient to significantly reduce poverty. - Large fiscal expansion to support public infrastructure programs reduced fiscal buffers for coping with the negative oil price shocks. - Economies are poorly diversified; non-oil GDP growth is largely sustained by public expenditure and the services sector. - Poverty and unemployment remain high, particularly among young people. - Poor business climate and weak governance hamper financial-sector development and its contribution to financing investments. - Intraregional trade accounts for only 2 percent of all trade; intraregional financial transactions are also limited compared with international transactions. - An increase is noted in intraregional payments and an expansion in government securities issued at the regional level. ### Institutional capacity and governance - Following the 2006 FSAP, the BEAC initiated a program of wide-ranging reforms; progress has been slow and uneven despite extensive TA. - The regional bank and microfinance supervisor (SG-COBAC) has necessary technical competence but needs an upgraded regulatory framework and strengthened supervision and enforcement, particularly for timely preventive intervention. - Important actions for SG-COBAC and regional authorities include: - Continue strengthening SG-COBAC staffing. - Fully implement risk-based supervision. - Continue upgrading prudential regulations (connected lending, licensing, bank governance, concentration risk, liquidity management, capital adequacy, risk management, and financial transparency and reporting). - Undertake an asset quality review of banking assets, starting with the most vulnerable banks. - Clarify criteria for assessing systemically important banks and for initiating cross-sectoral and cross-border coordination between relevant authorities, including the Central African Deposit Insurance Fund (FOGADAC). - The emergence of pan-African banking groups underlines the urgency of upgrading regulatory and supervisory frameworks; consolidated supervision regulations have been approved but the mechanism is not yet fully operational. - Recent crisis cases of banks operating in several jurisdictions highlight the need for faster and more decisive interventions by COBAC and reduced delays in crisis management and resolution related to national authorities’ actions. ### Role and reform of the BEAC and regional agencies - The BEAC should accelerate the pace of financial sector reforms and better articulate roles between regional and national authorities. - Strengthening the powers and operational autonomy of regional financial institutions is needed to support the monetary union’s foundations and effectiveness; this is also called for under the IMF safeguards assessment. - The current macroeconomic context heightens the urgency to strengthen the BEAC’s capacity to manage liquidity proactively and to introduce greater flexibility in its monetary programming (MP) framework. - Partial repatriation of export receipts by some states at the BEAC (in particular financial flows related to the oil sector) complicates systemic liquidity management. - The BEAC’s oversight of systemically important payment systems and its Securities Settlement and Depository Unit (CRCT) should be upgraded to ensure better control of operational risks. - National authorities should increase delegation of powers to regional financial agencies through a review of CAMU laws to grant greater operational autonomy, increased transparency, and accountability to CEMAC decision-making bodies. - As a first step, national authorities should identify and monitor prior actions needed for returning the chairmanship of the BEAC board of directors to the governor. - Better use of current human capital is necessary: - Replace involvement of national authorities in the selection of senior staff of the BEAC and SG-COBAC with transparent procedures based on qualifications. - The BEAC should take better advantage of its national directorates (DNs) to play a unifying role for reform projects and adopt a “pilot project” approach for replication. - Introduce a result-based approach to reforms guided by well-defined project objectives and outcomes. ### Policy recommendations (selected key recommendations by decision-making body) - Conference of Heads of State and/or the Ministerial Committee (MC): - MC to validate the methodology to assess the optimal level/structure of international reserves. - Streamline the procedure for the approval of CEMAC regulations on the financial sector. - Formalize cooperation procedures among all authorities to be involved in a financial crisis. - Identify actions to return chairmanship of the BEAC board to the governor. - Complete the streamlining of the two competing stock markets. - Strengthen the institutional autonomy and accountability of the BEAC and COBAC. - Review rules and practices for appointing senior staff of the regional financial agencies. - Regional Financial Agencies: BEAC and COBAC: - Increase the BEAC’s transparency by adopting an appropriate accounting framework. - Adopt a regional approach to credit reporting systems, keeping duplications to a minimum. - Accelerate implementation of the monetary policy reform. - Initiate an asset quality review, at least of the systemic and the most vulnerable banks. - Put in place an appropriate lender of last resort framework. - Strengthen and formalize the role of the BEAC’s national branches in financial sector reforms. - Strengthen the FOGADAC’s pay box function. - Continuously strengthen the SG-COBAC’s staffing. - Strengthen the prudential framework of lending to connected parties. - Review tools available to the supervisor for implementing risk-based supervision. - Establish a mechanism for monitoring financial inclusion. - Implement coordinated actions to promote the use of electronic money. - National authorities: - Ensure that governance of the state-owned banks is consistent with best practices. - Streamline mortgage foreclosure procedures within the framework of the OHADA. - Secure land rights and strengthen registration systems. - Give preference to official support mechanisms open to all credit institutions. - Adopt an AML/CFT prosecution policy (including for predicate offenses). - Improve the training/specialization of magistrates and the governance of judicial bodies. - Put the national FIUs in Congo and Equatorial Guinea into operation. *Source: EXECUTIVE SUMMARY, _cr16106* ### 4. The drop in oil prices by about ### 4. The drop in oil prices by about ### Oil shock impact and transmission - Oil prices fell by about 60 percent between June 2014 and January 2015. - Oil revenue represents over 50 percent of the Union’s fiscal outlays and more than 80 percent of exports. - Sharp decline in oil revenue is expected to force some countries to reduce budgetary spending, including public investment programs. - Pressures on treasuries could lead states to use a portion of their deposits at the BEAC and in the banking sector, which could weaken banks’ liquidity positions and increase nonperforming loans (NPLs) through problems in paying suppliers. ### BEAC baseline scenario (Box 1) - Real sector: - CEMAC expected to record a 1.8 percent growth decline in 2015 owing to falling oil sector activity and retrenchment in capital expenditures. - For 2016-17, growth is projected to recover to average about 7 percent. - Inflation is expected to remain subdued at around 2.3 percent for the period 2015–17. - External sector: - Over 2015–17, the current account deficit would deteriorate to 14.1 percent of GDP on average. - International reserves coverage projected to fall to an average of 3½ months of imports of goods and services. - Public sector and debt: - Fiscal balance would decline to -6.7 percent of GDP in 2015, -4.9 percent in 2016, and -3.4 percent in 2017; financing needs should lead to a significant increase in debt. - Monetary aggregates and banking sector: - External coverage ratio would fall to 87.4 percent for the period 2015–17. - External coverage would plummet to 52 percent if states’ financing requirements were only met on the domestic market. - Banks’ liquidity levels should remain at comfortable levels. - Source: BEAC. ### Security risks and economic activity - Worsening security related to the crisis in Central African Republic (CAR) and Boko Haram’s activities in northern Cameroon could affect economic activity. - Higher perceived risks could reduce investment in new projects and commercial activity, adversely affecting financial sector stability and profitability. ### Structure and performance of the financial sector - The financial sector is dominated by commercial banks and, in some countries, large MFIs; foreign banks manage about 50 percent of total assets. - Sector concentration: on average, the three main banks in each country hold more than 70 percent of assets. - Financial depth (end-2013): - Banking assets represented 26.3 percent of CEMAC GDP (compared with 15.7 percent in 2004). - Ratio of private credit to GDP: 10 percent. - Credit-to-deposits ratio increased from 57 percent in 2010 to 67 percent in 2013. - Access and inclusion: - Less than 15 percent of adults are bank account holders (lower than the SSA average). - Less than 3 percent of the population obtained a bank loan over the past 12 months. - Only 7.5 percent of adults have a savings account. - Large enterprises receive most of bank loans (80 percent). - Table 3 (Structure of the Financial Sector, June 2014) highlights (preserve exact figures): - Banks: No. of institutions 50; Assets (EUR bn) 18.0; % of Assets 90; % CEMAC GDP 24. - Private banks: 39; 16.1; 81; 22. - Public banks: 11; 1.9; 10; 2. - Domestic banks: 18; 8.2; 41; 11. - Foreign banks: 32; 9.8; 49; 13. - Cameroon: 13; 6.0; 30; 8. - CAR: 4; 0.3; 1; 0. - Chad: 8; 1.4; 7; 2. - Congo: 10; 3.1; 15; 4. - Eq. Guinea: 5; 3.1; 16; 4. - Gabon: 10; 4.2; 21; 6. - NBFIs: 8; 0.8; 4; 1. - MFIs (Sep 2103): 777; 1.2; 6; 2. - Total: 835; 19.9; 100; 27. - Sources: COBAC and IMF. - Bank business model and markets: - Loans to connected parties remain a significant risk. - Ample liquidity and absent regular publication of banks’ financial statements limit money market development. - Electronic banking services are embryonic; cost of electronic funds transfers is high. - Microfinance sector relatively well developed in Cameroon, Congo, and Chad. ### Structural constraints to intermediation - Key barriers: inadequate functioning of the judiciary, absence of appropriate guarantee instruments, lack of credit reporting. - BEAC envisages developing a payment problem information center at the regional level; authorities should pursue wider-ranging reforms. ### Profitability and revenue structure - Banking sector profitability recovered after 2009; ROE in 2013 averaged 19.3 percent (compared with 16.9 percent in 2005). - Divergence across countries and by bank size: smaller banks less profitable; five of eleven state-owned banks recorded losses in 2013. - Interest and fees account for nearly the same share of revenues overall; interest rate margins stood at 7.1 percent in 2013 (lower than in 2011). ### Structural trends since 2006 FSAP - Increase in number of state-owned banks from 2 to 11; state-owned banks accounted for nearly 11 percent of banking sector assets in 2014 (compared with 3.6 percent in 2005). - Sector concentration: three main banks manage 50-90 percent of assets depending on country. - New players from SSA and the Maghreb account for 13 percent and 9 percent of sector assets respectively. ### Follow-up to 2006 FSAP and technical assistance - 2006 FSAP identified deficiencies: legal and judicial framework, poor quality of financial data, weak market infrastructure, limited COBAC autonomy and staffing, poor conformity with international standards, weak systemic liquidity frameworks at BEAC. - IMF and World Bank TA (2007–14) supported banking supervision, BEAC accounting and internal control, BEAC systemic liquidity and reserves management, and public debt management. - Table 4 (IMF Technical Assistance, 2007–14) total FTEs: 9.90 (breakdown includes COBAC 2.25; BEAC 6.16; country-level small totals). ### Stress tests and financial vulnerabilities - Stress tests show high vulnerability to credit risks specific to CEMAC (fiscal imbalances from oil shock and security degradation), especially for banks with main activity within the CEMAC. - Limitations: weak quality and reliability of financial data; supervisory returns poorly verified; possible overstated capital positions; risk weights may not reflect underlying risks. - Key stress-test findings: - Under an extreme macroeconomic scenario with 15 percent of performing loans becoming non-performing: - Only 58 percent of all banks would comply with the solvency ratio (currently, 80 percent comply with the minimum level of 8 percent). - Immediate capital shortfalls would be contained (less than 0.50 percent of regional GDP). - For banks concentrated in the CEMAC, only 18 percent would comply with the solvency ratio after the shock, compared with 65 percent for banks operating in SSA and 76 percent for banks operating internationally. - Aggregated stress test table highlights (preserve exact figures): - Total (45 banks): Before shock % of banks complying with solvency ratio 80; % complying with liquidity ratio 80. After shock: % complying with solvency ratio 58; Capital shortfalls (% of GDP) 0.37; % complying with liquidity ratio 24. - By country: Cameroon (13 banks) before shock solvency 69, liquidity 85; after shock solvency 46, capital shortfalls 0.45, liquidity 8. Congo (10) before 90/90; after 70, 0.15, 40. Gabon (9) before 78/67; after 44, 0.70, 22. Eq. Guinea (5) before 80/100; after 80, 0.13, 60. Chad (8) before 88/63; after 63, 0.27, 13. - Additional unitary shocks results: - Deposit withdrawals: heavy reliance on volatile sight deposits (close to 80 percent of liabilities). Following a 25 percent decline in deposits, weighted average regulatory liquidity ratio would fall to 66 percent (against 138 percent before shock). Ratios by country after shock: Cameroon 49 percent, Gabon 50 percent, Chad 65 percent. Banks have large current account amounts at the central bank that could mitigate liquidity risk. - Direct foreign exchange and interest rate exposures are limited; immediate balance sheet impact of CFA franc devaluation against the euro or changes versus the U.S. dollar would be small. Low borrower foreign currency indebtedness suggests limited direct vulnerability. - Largest MFIs mostly exposed to credit risk: would no longer comply with solvency ratio following a 15 percent transition of performing loans to NPLs; a drop of up to 30 percent in deposit base would not threaten compliance with liquidity ratio. - Recalibration of risk weights to better reflect asset risks would negatively affect bank solvency. - Recalibration exercise (Table 6): - Total (45 banks): Net weighted risks in effect solvency ratio 16.8%; % of banks observing the ratio 80; Net adjusted weighted risks solvency ratio 13.2%; % observing ratio 69; Difference in percentage points 3.6. - By group: CEMAC (11 banks) solvency in effect 12.7% (% observing 36); adjusted 11.0% (% observing 27); difference 1.7 percentage points. - By country: Cameroon (13) solvency in effect 13.6%; capital shortfall 0.35; % observing 69; adjusted 11.1%; 0.40; % observing 54; difference 2.5. Congo (10) in effect 15.7%; adjusted 12.9%; difference 2.8. Gabon (9) in effect 13.6%; adjusted 10.9%; difference 2.6. Eq. Guinea (5) in effect 29.5%; adjusted 19.8%; difference 9.6. Chad (8) in effect 18.6%; adjusted 16.8%; difference 1.7. - Note on recalibration: trade credit items weighted at 100 percent (compared to 50 percent currently). Guarantees deductible from commitments and deductions for loans eligible as collateral for BEAC refinancing weighted at 0 percent (compared respectively to 100 and 50 percent currently). ### Policy implications and recommendations from stress-test analysis - Implement Basel pillar II approach to allow COBAC to adjust capital requirements based on banks’ risk profiles. - Operationalize framework for consolidated and cross-border supervision given growing role of banking groups. - Revise reduced weights applied to some assets in solvency calculations so they better reflect risk profiles. - Subject large MFIs to an enhanced supervisory framework closer to that for banks. - Improve quality and reliability of financial data and supervisory verification to enhance stress-test usefulness and supervision. *Source: IMF staff and BEAC material as presented in the chapter.* ### 21. The pressure on countries’ public finances and on the CEMAC’s external position as a ### _cr16106 - 21. The pressure on countries’ public finances and on the CEMAC’s external position as a ### Monetary policy framework and BEAC governance - Current situation: - The monetary programming framework in place at the BEAC is "not as flexible as it should be." - Imperfect pooling of cash balances by some states at the BEAC (in particular of the financial flows related to the oil sector) complicates systemic liquidity management by the BEAC. - Key recommended actions: - Strengthen the internal functioning of the BEAC: - Strengthen the BEAC’s internal controls and its accounting system; once completed to the satisfaction of the oversight bodies, return the chairmanship of the BEAC board of directors to the governor. - Adopt a governance structure combining independence, transparency, and accountability. - Revisit rules and practices for selection and appointment of BEAC top officials to ensure appointments are based on professional qualifications and experience while maintaining balanced national representation. - Strengthen systemic liquidity forecasting and management: - Complete the work already started at the BEAC as a matter of priority. - Ensure close coordination with national authorities in charge of government cash flow management. - Initiate reform of the monetary policy operating framework: - Streamline the multiplicity of monetary policy instruments to improve readability and transparency, along lines of past Fund technical assistance recommendations. - Develop the government securities market; establish a regional committee under the aegis of the BEAC for this purpose. - Put in place a lender of last resort framework distinct from the monetary policy operating framework. ### Reserve management - Imperative: - Current pressures on the external position of the CEMAC reinforce the need to strengthen the BEAC’s reserve management framework. - Components to be validated by the Ministerial Committee: - (i) the methodology for assessing the optimal level of international reserves; - (ii) the structure of the reserves portfolio; - (iii) the methodology for determining the remuneration of the deposits by CEMAC member states. - Possible amendment: - Move toward an assets-liabilities approach where the remuneration of deposits would reflect the return on the assets in which they are invested. - Implementation responsibilities: - The Monetary Policy Committee-MPC should remain responsible for actual calculation of the optimal level of reserves, of the structure of the reserves, of the remuneration of deposits, and for setting the strategic allocation of reserves. - Note on portfolio structure (as in source footnote): - A possible structure could involve the following levels: - (i) Level 1. Liquidity account, which should include the share that must be deposited to the Operations Account, and make it possible to meet immediate needs; - (ii) Level 2. Yield account, to meet less probable needs and provide higher returns; - (iii) Level 3. Reserves above the optimal level could be managed with a more aggressive investment objective and a lower level of liquidity. - Note on remuneration principle (as in source footnote): - This principle would lead to several levels of remuneration. Up to the optimum level of reserves, the remuneration would be relatively low because of the liquidity requirement applicable to the underlying assets. The remuneration of deposits backing the reserves beyond the optimum level should be more attractive because of lower liquidity requirements. Such an approach should improve transparency in the distribution of the BEAC’s profits to the states and also provide a positive incentive as regards the states’ obligation to pool all their external assets at the BEAC. ### Regulation and prudential supervision of banks and MFIs - General assessment: - Current banking oversight framework contains important regulatory gaps and supervisory weaknesses that need timely and adequate addressing (see Annex I in source). - The evolution of the financial landscape calls for an acceleration of reform and an evolution of roles between regional and national authorities. - Allocation of roles and responsibilities (recommendations): - Mission and coordination: - Clarify and strengthen sharing of responsibilities and information between the SG-COBAC and the BEAC; the COBAC Secretary General is a member of the Financial Stability Committee (CSF). - Institutional independence: - Strengthen institutional independence of the Board of the COBAC through greater diversification of its members. - Recruit Board members on the basis of financial expertise, with due consideration given to potential conflicts of interest. - Enhance COBAC’s transparency and accountability. - Regulation: - Streamline processes for adopting prudential regulations through greater delegation to the COBAC to reduce delays in enacting new regulations. - Penalties: - Consider establishing a dedicated sanction committee within the COBAC to facilitate independent management of issues involving state-owned entities. - Disseminate explanations on sanctions (while preserving confidentiality) to strengthen COBAC’s credibility and provide market players with greater legal transparency. - Prudential requirements to strengthen: - Capital and loans to connected parties: - Urgently review regulatory framework for loans to connected parties. - Revise regulation on large exposure risks: current CEMAC limit is "45 percent" compared with "25 percent" recommended by the Basel Committee. - Transparency: - Require CIs to publish timely annual reports on financial position, governance and risk management frameworks, and present financial statements based on an accounting framework consistent with international standards. - Consolidated and cross-border supervision: - Implement the recently adopted MC regulation on consolidated supervision. - SG-COBAC should undertake more frequent joint missions with foreign supervisors, organize supervisory colleges, and sign pending draft cooperation agreements. - Risk management: - Draft regulations covering risk management in general and management of specific risks (liquidity, interest rate, and market risks). - Improve enforcement of current regulations on bank governance. - Strengthening SG-COBAC internal functioning: - Staffing: - Conduct assessment of optimal staffing level given regional responsibilities, increasing number and complexity of CIs, evolution of supervisory standards, and emergence of pan African banking groups. - Supervisory approach: - Shift from primarily compliance-oriented process toward risk-based supervision. - Undertake periodic analysis of the banking sector to assess systemic risks and their effects on the banking sector. ### Microfinance sector supervision - Current issues: - The regional regulatory and supervisory framework for the microfinance sector, designed a decade ago, needs strengthening. - Shortage of human resources relative to the large number of financial institutions to be supervised has led to governance, transparency, capacity, and information system weaknesses threatening viability of a number of MFIs. - At the time of the BCP assessment the MFIs unit comprised only 5 staff; 5 additional staff was added in early 2015. - Recommended actions: - Finalize delegation to national authorities of some aspects of supervision of non-systemically important MFIs. - Continue COBAC’s ongoing review of regulatory and supervisory framework for MFIs, including in-depth assessment of provisions on governance, internal control, and resolution of problems faced by MFIs (in light of recent MFIs bankruptcies), as well as consumer protection. - Support reforms by establishing a credit reporting system that includes the MFIs. ### Financial stability framework - Priorities: - Make the recently established financial stability framework fully operational. - While a fully developed macroprudential institutional framework will be useful over time, the current priority is to: - Strengthen microprudential supervision framework. - Clarify BEAC’s role (including establishing a lender of last resort function). - Adopt mechanism for identifying banks and MFIs of systemic importance. - Strengthen framework for monitoring financial stability through conduct of stress tests in coordination with the SG-COBAC. - Undertake analysis of channels of contagion between macroeconomic and financial sectors. ### Crisis management and resolution - Status of regulation: - A new regulation for crisis management and resolution was adopted in 2014 by the MC; it is significant progress but needs supporting measures. - Issues identified: - Special restructuring provisions create far-reaching powers for resolution authorities (CEMAC, COBAC, UMAC, and MC Regulations) that have not yet been tested and could be challenged in court. - Implementation requires supporting measures to: - (i) specify criteria for initiating special restructuring operations, especially regarding assessment of whether a bank is of systemic importance; - (ii) specify provisions aimed at safeguarding interests of parties that believe they have incurred losses greater than those they would have suffered in liquidation under ordinary law; - (iii) protect interests of funding entities (FOGADAC and the states) by recognizing their preferential rights over other creditors; - (iv) clearly establish obligation for FOGADAC and COBAC to take legal action against shareholders and executives responsible for bank failures caused by anomalous or fraudulent management actions. - Additional legal and procedural needs: - Supplement legal framework with mechanisms for consultation and coordination among authorities potentially concerned by failure of complex cross-border financial groups. - Entrust COBAC a prominent or exclusive role to ensure speed in decision making and consistency of options implemented by national authorities. - Formulate clear procedures assigning each pertinent authority, including FOGADAC, a specific role in selection of options, decision-making and implementation. - Ordinary resolution arrangements: - Review ordinary resolution arrangements for institutions not of systemic importance; specify criteria for disciplinary and restructuring powers to ensure interventions are gradual and proportionate. - Key recommended measures: - Explicitly establish COBAC’s mandate as the resolution authority. - Require financial groups operating in the CEMAC to be structured around a holding company subject to consolidated supervision and the resolution framework. - More explicitly establish objectives and priorities governing special restructuring. - Require at least the systemic banks to elaborate Recovery and Resolution Plans. - COBAC should immediately analyze legal resolution frameworks governing foreign groups carrying out systemic activity within the CEMAC. ### Cross-border and cross-sectoral cooperation for crisis management - Rationale: - Banking sector structure with groups operating in several CEMAC jurisdictions and holding companies often headquartered outside the region makes cooperation among authorities indispensable. - Growing presence of insurance companies operating in the CEMAC increases complexity. - Recommendations: - Put into place supervision and coordinated crisis management on a consolidated basis encompassing holding companies. - Consider asking financial groups to restructure (for example, by creating an intermediate holding company as parent entity for entities operating in the CEMAC) to enable effective supervision and resolution in the CEMAC. - Organize cooperation within the region and between CEMAC authorities and foreign counterparts. - Cooperation within the CEMAC: - Improve function and link between COBAC and national authorities and cooperation among national authorities. - Improve relationships among CEMAC supervisors responsible for various financial sectors. - Address weaknesses in cooperation and coordination that delayed initiation of resolution procedures and increased cost of resolution financing. - Financial Stability Committee (FSC): - The FSC was assigned the function of crisis management committee and is slowly being put into place. - To prevent neutralization by centrifugal forces within the COBAC Board, the FSC should impose operating rules clearly allocating roles and responsibilities of each member. *Source: _cr16106 - 21. The pressure on countries’ public finances and on the CEMAC’s external position as a (IMF PDF chapter).* ### 38. The existence of a Regional Supervision and Resolution Authority should provide ### The existence of a Regional Supervision and Resolution Authority should provide assurances of coordination among the national authorities. ### Regional supervision and resolution: objectives and operational design - Consolidated supervision (including holding companies) should give all authorities a full understanding of a possible crisis faced by a group operating in several CEMAC jurisdictions. - Knowledge of intra-group flows can: - Help optimize burden sharing for a group of systemic importance. - Help avoid artificial optimization organized by a shareholder on the basis of regulatory and/or relational arbitration. - Where an ailing foreign group operates in various CEMAC jurisdictions through subsidiaries (sister companies not supervised on a consolidated basis within the CEMAC), coordinated approaches by pertinent authorities are necessary in the absence of regional sub-consolidation of the accounts to: - Build a common overview. - Formulate a coordinated strategy with respect to shareholders and foreign authorities. - Recommendation: Establish a code of procedures to: - Define the prerogatives of the resolution authority. - Introduce operating procedures beyond consultations among heads of institutions. - Prepare professional staff in each institution for likely cooperation. - Organize the resolution process from alert, study, and selection of options to obligations for information sharing, communication, and coordinated action. - Clearly define relationships between COBAC and national authorities, and cover relationships with other supervisors of other financial sectors and include the FOGADAC. - Recommendation: Set up, for each case, a crisis unit bringing together professionals appointed by each authority to allow short decision-making processes and facilitate ownership by relevant professionals. - Recommendation: Organize crisis coordinating measures around COBAC as the regional resolution authority and put in place an effective crisis preparedness framework, including regional crisis simulation exercises. ### Cross-border cooperation outside the CEMAC - Interactive cooperation between home and host authorities is indispensable for effective banking crisis management. - COBAC is rarely the home-country supervisor for a financial group operating outside CEMAC; it often acts as host-country supervisor and thus plays a crucial role in cooperation with home-country authorities. - Current agreements do not yet allow information sharing on the basis of reciprocity and similarity in protecting confidentiality of shared data. - Recommendation: Conclude agreements with all home-country authorities of groups operating in the CEMAC to: - Encourage information sharing among supervisors. - Encourage adoption and implementation of decisions for resolving banking and financial crises. - Recommendation: For groups of systemic importance with significant subregional business, authorities should immediately undertake a comparative study of laws and regulations in their jurisdictions to identify differences that may represent lasting or temporary barriers to implementing comprehensive resolution plans. ### Deposit insurance (FOGADAC): status, gaps, and recommended reforms Findings - The creation of the FOGADAC makes the CEMAC one of the rare jurisdictions in Africa with deposit insurance arrangements. - FOGADAC designed for remedial and preventive interventions to compensate depositors after any bank failure and to help finance resolution of banks in distress; to date, it has never been called upon to take action. - Coverage amount set theoretically at FCAF 5 million per depositor per bank (i.e., about USD 9,100). Gaps and operational constraints - Operating procedures to enable FOGADAC to repay insured deposits are lacking: - Quick repayment would be difficult because the task would currently fall to a single staff member of the SG-COBAC. - Absence in the CEMAC of a single code of procedures for identification of persons will hinder validation of repayment applications. - Collection of data on insured deposits is inadequate; absence of usable data hampers assessment of amount of deposits eligible for repayment. - Clarification of actual scope of coverage is needed; if funds are insufficient to repay all eligible deposits, FOGADAC would have three options: - (i) increase the contributions for which the banks are responsible; - (ii) seek an advance from the fiscal authorities; or - (iii) further reduce its disbursements to the amount of funds in its possession. - Likely constraints: - Action on option (i) seems hardly likely given the composition of the FOGADAC Managing Committee and predictable reluctance of banking associations in CEMAC countries. - Action on option (ii) depends on resources available to pertinent fiscal authorities. - Action on option (iii) would generate depositor uncertainty about insured amounts and could diminish FOGADAC’s credibility and aptitude to prevent a run. - Preventive-function prerequisites are unspecified: - Criteria warranting FOGADAC financing of special restructuring should be specified (e.g., priority given to least costly intervention option). - No specification tying such intervention to withdrawal of licensing from failed bank and its executives. - Coordination and participation gaps: - FOGADAC’s participation in the CSF (officially established but still being set up) should be made room for. - Inclusion of FOGADAC in coordination mechanisms among pertinent authorities for implementation of solutions is indispensable. Recommendations - Ensure operating capacity for intervention through staff enhancement measures for successful depositor repayment operations. - Issue a rule requiring banks to submit monthly reports showing the amount of their deposits actually eligible for FOGADAC coverage. - Establish an objective of properly calibrated coverage taking account of potential support from fiscal authorities, and eliminate the option of lowering the amount of deposits covered to the amount of resources available from the FOGADAC. - Manage conditions for FOGADAC intervention to help finance restructuring of banks in distress through procedures specifying: - (i) intervention criteria; - (ii) priority given to least costly options; - (iii) preferred ranking of claims held by the FOGADAC. - Establish conditions for FOGADAC participation in selection of resolution options and coordination of their implementation with other authorities. - Note: The FOGADAC Managing Committee comprises the BEAC Governor (who chairs it) and the presidents of the six banking associations. ### Developing the financial sector — A. Financing of the Economies Findings and challenges - Financial inclusion is a major challenge: - World Bank’s 2011 Findex survey: only 12 percent of adults had a bank account, one half of the average noted in SSA, with great disparity within the region. - Recommendation: BEAC and COBAC should put in place a management chart to measure and monitor financial inclusion in all its dimensions and undertake surveys through interviews and polls to better understand household financial capacity and demand-side barriers. - Customer relations and services to individuals: - Individuals in the formal sector are a major source of deposits. - Share of credit going to individuals in the formal sector is steady at 15 percent. - Financing for individuals takes the form of overdrafts and consumer loans consistently backed by wages with maturity often 3-4 years. - Use of payment cards is limited; remote banking is only now being developed. - Rapid growth of household-targeted financial services has revealed shortcomings in consumer protection. - Microfinance: - Plays a significant role; most MFIs are authorized to take deposits. - Microfinance sector remains weak, with an extremely high average rate of outstanding payments at 22 percent. - Excessive exposure to connected parties, barely or poorly identified, is common. - Ongoing liquidation of some MFIs due to severe governance problems affecting thousands of low-income savers highlights need to strengthen supervision and crisis management for MFIs. - SMEs and credit: - Credit to SMEs is negligible and growing only slowly. - Bank financing to SMEs seems stagnant; MFIs are increasing financing to a different SME population. - Interest rate ranges: banks 9-18 percent; MFIs 15-25 percent. - Leasing is a key source for financing capital goods where legal and institutional frameworks exist (Cameroon and Gabon). - Term financing constraints: - Low level of term financing from domestic banks reflects concerns about risks, size of bank balance sheets, and lack of long-term resources. - Moderate progress since 2006 in medium- and long-term domestic bank financing. - Banks focus on high-grade borrowers due to business climate problems and sociopolitical uncertainties. - Bank resources largely composed of demand deposits; absence of a reference interest rate index exposes lenders to interest-rate risk on fixed-rate loans. - Development institutions created or planned should adhere strictly to best international practices. - Housing credit: - Still marginally developed and far short of needs. - Barriers include limited banking system use, lack of affordable housing, large informal labor force share, poor credit climate, and lack of long-term resources. - Microfinance does not match housing credit needs despite sporadic progress. - Recent progress in legal and operating aspects of land management. Recommendations (selected) - Streamline registration, transfer, and notarization of property deeds and reduce costs/delays to facilitate use of real estate as collateral. - Strengthen creditor rights (in particular when they have assets) and establish/modernize unified collateral registries. - Modernize credit information systems. - BEAC and COBAC should monitor financial inclusion and pricing of financial services. - Regulatory measures to reduce cost of financial services could be complemented by review of value-added tax regime. - Strengthen transparency, redress mechanisms, and financial education to improve consumer protection. - Strengthen and enforce governance and internal control rules for banks and MFIs regarding connected-party transactions. - Public interventions should encourage, not replace, interventions by financial institutions. ### Developing the financial sector — B. Financial infrastructures Findings and needs - Capital market remains embryonic and fragmented. - At end-2014: nine bond issues (primarily by the states) were listed. - Shares were listed on four occasions: three in Douala and one in Libreville. - Liquidity on the secondary market is extremely low. - Market structure: - Regional stock exchange (BVMAC) supervised by regional body (COSUMAF). - Parallel mechanism in Cameroon: Douala Stock Exchange (DSX) and supervisor (CMF). - Coexistence of two mechanisms depends on public sector financial support; long-ongoing actions to unify mechanisms should be completed quickly, starting with establishing a unique central securities depository (CSD). - Payment systems progress: - Since 2006 FSAP, BEAC has established a Real Time Gross Settlement (RTGS) system and an automated clearinghouse. - Delays in establishing an efficient retail payments market hinder economic development and financial inclusion; proactive BEAC approach needed. - Electronic money potential is extremely significant; BEAC should improve monitoring of its development in the CEMAC. - BEAC should strengthen oversight to supervise systems of systemic importance and fulfill mission of supervision, monitoring, and strategic encouragement of retail payments. - Credit reporting: - More reliable, detailed credit reporting is key to proper risk control and financial inclusion. - Coordination among multiple uncoordinated regional and national initiatives is needed to avoid redundancies. - Establishment of an efficient, coherent regional credit reporting system will require consensus, participation of public and private players, and commitment from public authorities, particularly BEAC. ### Developing the financial sector — C. Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Findings and risks - CEMAC faces significant money laundering and terrorism financing risks due to: - Predominance of informality and use of cash. - Small portion of population using banking system. - Unreliability of identification documents and lack of register computerization. - Highly porous borders. - Money laundering risks in real estate, banking, funds transfers, manual foreign exchange operations, and microfinance. - GABAC (Central African Anti-Money Laundering Task Force) efforts: - Despite serious efforts, GABAC has not yet been recognized as a Financial Action Task Force (FATF)-style regional body (FSRB). - GABAC launched mutual assessments program, organized regular task force meetings, and prepared typology exercises. - GABAC began close cooperation with FATF aimed at FSRB status, but process is currently frozen due to delays in adopting procedures for transparent financial management. Recommendations (priority actions) - Complete promptly the process of recognizing GABAC as an FSRB, providing procedures for transparent financial management. - Put the FIUs in Congo and Equatorial Guinea into operation. - Set up, within each state, an effective inter-ministerial committee responsible for drafting a national AML/CFT policy with priorities, short- and medium-term quantitative objectives, and means of action. - Draft in each member state a comprehensive and structured criminal justice policy for AML/CFT and principal offenses, including corruption and embezzlement of public funds, to include combating money laundering in criminal proceedings. - Make funds transfer companies subject to licensing/registration and supervision mechanisms. - Increase financial, technical, and human resources of regional and national supervisors of financial and nonfinancial sectors for gradual and effective implementation of AML/CFT risk-based supervision, ensuring supervisors have and use a broad range of powers to enforce AML/CFT requirements. ### Appendix I — CEMAC fact sheet (selected indicators and institutional notes) - The CEMAC is an economic and monetary union with six member states (Cameroon, Central African Republic (CAR), Chad, Republic of Congo, Equatorial Guinea, and Gabon). Equatorial Guinea joined in 1983. - Shared currency: African Financial Community franc (CFAF or XAF), pegged to the euro; free, unlimited convertibility guaranteed by a treaty with France; French treasury guarantees the peg. - Principal financial agencies: - Bank of Central African States (BEAC): regional central bank, head office in Yaoundé (Cameroon). - Central African Banking Commission (COBAC): regional banking supervisor; since July 2014, SG-COBAC located in Libreville (Gabon). - Supervision of AML/CFT falls within COBAC competence, assisted by BEAC. - CEMAC: selection of economic and social indicators (2011, 2012, 2013) - Population (in millions): 42.8; 43.3; 44.1 - Regional GDP (in US$ billions): 20.1; 23.0; 28.8 - GDP growth (%): 3.9; 5.2; 2.6 - Fiscal surplus/GDP (%): 4.9; 0.7; 0.5 - Inflation (IPC, %): 2.5; 2.7; 1.8 - Life expectancy at birth (in years): 54; 54; 54 - Infant mortality (per 1,000 births): 72; 72; 72 - Literacy rate (% of adult population): n.d.; n.d.; 75 - Poverty (% of total population): n.d.; n.d.; 31 *Source: Compilation by IMF staff.* ### Appendix II. Action Taken to Implement the Key ### Appendix II. Action Taken to Implement the Key Recommendations of the 2006 FSAP ### Independence of the supervisor - Recommendation: Increase the sources from which COBAC members can be appointed, to include persons other than senior officials of national ministries. - Status: Partly implemented. - Findings: - Among the 12 members of the COBAC Board, seven of the representatives of member states hold senior positions in their country’s ministry of finance. - Recommendation: Further limit the powers of the national ministries in the issuance and withdrawal of banking licenses. - Status: Partly implemented. - Findings: - The licensing regulations are under review. - Based on the current drafts, the powers of the ministries of finance in this area will not be fundamentally changed. ### Supervision of the financial sector - Recommendation: Strengthen the staffing of the SG-COBAC. - Status: Partly implemented. - Findings: - Despite a few recruitments, staffing has declined because of numerous departures, especially since the secretariat’s relocation to Gabon. - At end-November 2014, the SG-COBAC had 45 staff members, compared with 62 in January 2012. - At end 2014, the staffing of the SG-COBAC was increased by 16-20 persons following the assignment of senior managerial staff (AES) from the BEAC’s 20th class. - Recommendation: Fully enforce the applicable rules, including on AML/CFT matters; ensure that the COBAC’s disciplinary powers are actually used in cases of serious offenses; consider the benefits of adopting a more “automatic” license withdrawal procedure whenever the situation of a credit institution remains critical for too long. - Status: Partly implemented. - Findings: - The COBAC has appreciable means of enforcement, but these are not yet being used effectively, which considerably delays the treatment of banking problems. - New draft regulations on the restructuring of banks in difficulty were adopted at the March 2014 meeting of the CAMU’s CM. - This new framework will enhance the enforcement resources available to the COBAC, but other measures should be taken to facilitate the implementation of enforcement procedures. ### Security of the banking system - Recommendation: Increase the minimum capital-debt ratio that the banks must observe, so that they can be better equipped to absorb shocks. - Status: Not implemented. - Findings: - The risk hedge ratio is still 8 percent and takes into account only credit risks. - A task force was created in February 2014 to consider possible steps to amend these regulations. Its work was disrupted by the relocation to Libreville. - Recommendation: Make the prudential framework more consistent with international standards. - Status: Partly implemented. - Findings: - Although efforts have been made to make the rules more consistent with international standards, the time taken to adopt them is long: new rules have been adopted by the COBAC but are not in effect (restructuring of banks in difficulty, classification of loans, and provisioning). - The assessment of compliance with the BCPs shows that many elements of the prudential framework still do not comply with international standards, in particular as regards consolidated supervision, the capital-debt ratio, risk bunching, loans to connected parties, and the rules on liquidity. - Recommendation: Broaden the definition of connected parties. - Status: Not implemented. - Findings: - The regulations have not been amended and are at variance with international standards. ### Management of systemic liquidity and the rechanneling of fiscal surpluses - Recommendation: Manage the cash flows of member states centrally at the BEAC. - Status: Partly implemented. - Findings: - Major efforts by all the states to reduce the number of accounts maintained by central government departments in the banks have been made. - Several central government bodies still maintain accounts with huge balances at the banks; this is observed in all the CEMAC countries, to varying degrees. - Recommendation: Develop the use of market-based instruments in monetary policy and public debt management. - Status: Partly implemented. - Findings: - The BEAC has put into place a regulatory framework for a regional government securities market. - The countries have started the practice of auctioning treasury bills on this market. - Monetary policy continues to be based primarily on instruments that are not market-based. - Recommendation: Establish a framework whereby a desirable international reserves target can be set. - Status: Partly implemented. - Findings: - In 2008 the BEAC formulated a framework for assessing the optimal amount of reserves, distinguishing between liquid reserves for balance-of-payments needs and reserves invested for the longer term. - However, their risk/yield profile was not optimized, and the investment tranche profile seems not to meet the member countries’ expectations. - At end-2013, the CEMAC countries’ international reserves totaled US$17.5 billion, or five months’ coverage of imports for the subsequent year, compared with six months’ coverage at end-2012. ### Access to financial services - Recommendation: Encourage financial intermediation by matching the ceilings on lending and borrowing interest rates with basic market data. Ultimately, remove all controls on interest rates. - Status: Implemented. - Findings: - The regulatory setting of ceilings on lending and borrowing rates has been eliminated. - Recommendation: Improve the business climate through more efficient functioning of the legal and judicial framework and by developing the financial infrastructures. - Status: Not implemented. - Findings: - The business climate, the rule of law, and the protection of property rights in the CEMAC subregion are among the most unhelpful in the world. - Note: These recommendations were made in the 2006 FSAP. www.imf.org/external/pubs/ft/scr/2006/cr06321.pdf *Source: Appendix II. Action Taken to Implement the Key Recommendations of the 2006 FSAP.* ### Annex Table 1. CEMAC: Selected Economic and Financial ### Annex Table 1. CEMAC: Selected Economic and Financial Indicators, 2013-20 ### National income and prices - GDP at constant prices (annual percent change): - 2013: 2.4 - 2014: 4.7 - 2015: 2.8 - 2016: 4.7 - 2017: 5.1 - 2018: 4.1 - 2019: 3.5 - 2020: 3.5 - Oil GDP (annual percent change): - 2013: -8.0 - 2014: 2.7 - 2015: 0.5 - 2016: 7.2 - 2017: 9.9 - 2018: 2.1 - 2019: -4.7 - 2020: -4.2 - Non-oil GDP (annual percent change): - 2013: 4.6 - 2014: 4.7 - 2015: 3.6 - 2016: 4.3 - 2017: 4.4 - 2018: 4.5 - 2019: 4.6 - 2020: 4.7 - Consumer prices (period average)1: - 2013: 2.0 - 2014: 2.5 - 2015: 1.9 - 2016: 1.9 - 2017: 2.1 - 2018: 2.1 - 2019: 2.0 - 2020: 2.0 - Consumer prices (end of period)1: - 2013: 2.4 - 2014: 2.6 - 2015: 2.5 - 2016: 2.4 - 2017: 2.5 - 2018: 2.5 - 2019: 2.5 - 2020: 2.5 - Nominal effective exchange rate1: - 2013: 3.2 - 2014: 1.3 - Real effective exchange rate1: - 2013: 3.6 - 2014: 2.1 ### Money and credit - Net foreign assets (annual change in percent of beginning-of-period broad money): - 2013: -0.4 - 2014: -7.4 - 2015: -1.8 - 2016: -1.5 - 2017: 2.5 - 2018: 5.7 - 2019: 1.5 - 2020: -0.3 - Net domestic assets (annual change in percent of beginning-of-period broad money): - 2013: 9.0 - 2014: 17.0 - 2015: 5.8 - 2016: 5.4 - 2017: 2.9 - 2018: 0.2 - 2019: 5.9 - 2020: 6.7 - Broad money (annual percent change): - 2013: 9.3 - 2014: 9.6 - 2015: 4.0 - 2016: 4.0 - 2017: 5.5 - 2018: 5.9 - 2019: 7.5 - 2020: 6.4 - Gross national savings (percent of GDP): - 2013: 25.1 - 2014: 24.4 - 2015: 21.7 - 2016: 22.2 - 2017: 22.7 - 2018: 22.8 - 2019: 21.8 - 2020: 21.7 - Gross domestic investment (percent of GDP): - 2013: 30.6 - 2014: 31.3 - 2015: 31.2 - 2016: 29.2 - 2017: 27.1 - 2018: 26.4 - 2019: 26.1 - 2020: 26.2 - Of which: public investment (percent of GDP): - 2013: 14.5 - 2014: 13.2 - 2015: 11.9 - 2016: 10.4 - 2017: 9.5 - 2018: 9.1 - 2019: 9.3 - 2020: 8.9 ### Government financial operations - Total revenue, excluding grants (percent of GDP): - 2013: 26.8 - 2014: 24.8 - 2015: 21.7 - 2016: 22.4 - 2017: 22.5 - 2018: 23.4 - 2019: 23.2 - 2020: 22.8 - Government expenditure (percent of GDP): - 2013: 30.3 - 2014: 29.7 - 2015: 27.4 - 2016: 26.1 - 2017: 24.8 - 2018: 24.6 - 2019: 24.9 - 2020: 24.7 - Primary fiscal basic balance2 (percent of GDP, excluding grants and foreign-financed investment and interest payments): - 2013: 0.3 - 2014: -1.2 - 2015: -0.8 - 2016: 1.3 - 2017: 1.9 - 2018: 2.6 - 2019: 2.1 - 2020: 1.9 - Basic fiscal balance3 (percent of GDP, excluding grants and foreign-financed investment): - 2013: -0.3 - 2014: -1.8 - 2015: -1.7 - 2016: 0.4 - 2017: 0.9 - 2018: 1.6 - 2019: 1.0 - 2020: 0.8 - Overall fiscal balance, excluding grants (percent of GDP): - 2013: -3.5 - 2014: -5.0 - 2015: -5.7 - 2016: -3.7 - 2017: -2.4 - 2018: -1.2 - 2019: -1.8 - 2020: -1.9 - Primary fiscal balance (percent of GDP): - 2013: -2.3 - 2014: -3.6 - 2015: -3.9 - 2016: -2.0 - 2017: -0.8 - 2018: 0.3 - 2019: -0.2 - 2020: -0.3 - Non-oil overall fiscal balance, excluding grants (percent of non-oil GDP): - 2013: -29.1 - 2014: -26.3 - 2015: -19.0 - 2016: -17.8 - 2017: -16.7 - 2018: -15.8 - 2019: -15.4 - 2020: -14.2 - Non-oil primary fiscal balance (percent of non-oil GDP): - 2013: -27.3 - 2014: -24.3 - 2015: -16.8 - 2016: -15.6 - 2017: -14.6 - 2018: -13.8 - 2019: -13.4 - 2020: -12.1 - Total Public Debt (percent of GDP): - 2013: 23.1 - 2014: 27.7 - 2015: 33.2 - 2016: 33.6 - 2017: 32.9 - 2018: 33.1 - 2019: 33.3 - 2020: 33.3 ### External sector - Exports of goods and nonfactor services (percent of GDP): - 2013: 53.8 - 2014: 50.5 - 2015: 45.4 - 2016: 47.3 - 2017: 47.3 - 2018: 46.3 - 2019: 44.1 - 2020: 41.5 - Imports of goods and nonfactor services (percent of GDP): - 2013: 40.4 - 2014: 40.8 - 2015: 40.5 - 2016: 39.7 - 2017: 37.8 - 2018: 37.0 - 2019: 36.2 - 2020: 34.7 - Balance on goods and nonfactor services (percent of GDP): - 2013: 13.4 - 2014: 9.8 - 2015: 4.9 - 2016: 7.7 - 2017: 9.6 - 2018: 9.3 - 2019: 7.8 - 2020: 6.8 - Current account, including grants (percent of GDP): - 2013: -1.6 - 2014: -3.8 - 2015: -5.8 - 2016: -3.9 - 2017: -1.9 - 2018: -1.5 - 2019: -2.3 - 2020: -2.5 - External public debt (percent of GDP): - 2013: 15.4 - 2014: 17.5 - 2015: 22.0 - 2016: 22.0 - 2017: 21.6 - 2018: 21.5 - 2019: 21.3 - 2020: 20.9 - Gross official reserves (end of period, Millions of U.S. dollars): - 2013: 18,222 - 2014: 17,162 - 2015: 13,242 - 2016: 11,621 - 2017: 9,731 - 2018: 11,823 - 2019: 13,098 - 2020: 14,646 - Months of imports of goods and services (less intra regional imports): - 2013: 5.8 - 2014: 7.0 - 2015: 5.0 - 2016: 4.2 - 2017: 3.4 - 2018: 3.9 - 2019: 4.3 - 2020: 4.8 - Gross official reserves (end of period, percent of broad money): - 2013: 81.6 - 2014: 70.2 - 2015: 62.0 - 2016: 52.0 - 2017: 40.8 - 2018: 46.3 - 2019: 47.2 - 2020: 48.8 ### Memorandum items - Nominal GDP (billions of CFA francs): - 2013: 45,576 - 2014: 46,717 - 2015: 44,294 - 2016: 48,044 - 2017: 52,496 - 2018: 55,381 - 2019: 57,905 - 2020: 60,325 - CFA francs per U.S. dollar, average: - 2013: 494 - 2014: 494 - 2015: 588 - 2016: 585 - 2017: 578 - 2018: 571 - 2019: 565 - 2020: 557 - Oil production (thousands of barrels per day): - 2013: 893 - 2014: 915 - 2015: 924 - 2016: 981 - 2017: 1,066 - 2018: 1,081 - 2019: 1,028 - 2020: 988 - Oil prices (US dollars per barrel): - 2013: 104 - 2014: 96 - 2015: 95 - 2016: 96 - 2017: 67 - 2018: 70 - 2019: 71 - 2020: 71 *Source: IMF staff compilations.* --- ### Annex Table 2. Financial Soundness Indicators, 2012-14 (in percentages) ### Capital adequacy (selected country figures) - Capital/risk-weighted assets: - Cameroon 2013: 7.9, 2014: 10.6 - Chad 2013: 22.0, 2014: 13.4 - Congo 2013: 11.9, 2014: 16.1 - Equatorial Guinea 2013: 22.3, 2014: 25.5 - Gabon 2013: 12.3, 2014: 9.4 - Note: Some country entries are listed as n.a. - Base Capital/ risk-weighted assets: - Cameroon 2013: 6.3, 2014: 9.1 - Chad 2013: 20.0, 2014: 12.0 - Congo 2013: 10.3, 2014: 13.7 - Equatorial Guinea 2013: 22.5, 2014: 26.2 - Gabon 2013: 11.6, 2014: 8.8 ### Asset quality, profitability and liquidity (selected country figures) - Non-performing loans less provisions/Equity: - Cameroon 2013: 18.6, 2014: 10.3 - Chad 2013: 15.6, 2014: 23.9 - Congo 2013: 0.3, 2014: 4.7 - Equatorial Guinea 2013: 42.9, 2014: 40.5 - Gabon 2013: -0.3, 2014: 0.2 - Non-performing loans/total loans: - Cameroon 2013: 10.3, 2014: 9.7 - Chad 2013: 9.8, 2014: 11.7 - Congo 2013: 1.2, 2014: 2.5 - Equatorial Guinea 2013: 20.1, 2014: 19.7 - Gabon 2013: 2.7, 2014: 4.1 - Large exposures/equity: - Cameroon 2013: 354.3, 2014: 258.4 - Chad 2013: 97.6, 2014: 176.5 - Congo 2013: 201.7, 2014: 200.8 - Equatorial Guinea 2013: 165.8, 2014: 176.6 - Gabon 2013: 151.6, 2014: 198.6 ### Results and profitability - Return on Assets (ROA): - Cameroon 2013: 1.5, 2014: 0.8 - Chad 2013: 2.3, 2014: 1.8 - Congo 2013: 2.0, 2014: 1.0 - Equatorial Guinea 2013: 0.6, 2014: 0.7 - Gabon 2013: 1.6, 2014: 1.7 - Return on Equity (ROE): - Cameroon 2013: 42.7, 2014: 21.8 - Chad 2013: 21.1, 2014: 19.4 - Congo 2013: 28.4, 2014: 23.4 - Equatorial Guinea 2013: 14.1, 2014: 16.9 - Gabon 2013: 19.6, 2014: 21.5 ### Liquidity - Liquid assets/Total assets: - Cameroon 2013: 9.4, 2014: 9.0 - Chad 2013: 24.0, 2014: 25.7 - Congo 2013: 25.2, 2014: 17.1 - Equatorial Guinea 2013: 17.7, 2014: 15.6 - Gabon 2013: 20.0, 2014: 19.0 - Liquid assets/Short-term liabilities: - Cameroon 2013: 127.6, 2014: 139.5 - Chad 2013: 139.3, 2014: 152.9 - Congo 2013: 142.7, 2014: 182.9 - Equatorial Guinea 2013: 220.2, 2014: 194.0 - Gabon 2013: 125.2, 2014: 112.9 - Total deposits/Total loans (non interbank): - Cameroon 2013: 114.6, 2014: 112.2 - Chad 2013: 112.9, 2014: 107.8 - Congo 2013: 159.3, 2014: 173.5 - Equatorial Guinea 2013: 202.8, 2014: 177.7 - Gabon 2013: 108.6, 2014: 105.5 - Sources: Banking Commission of Central Africa (COBAC). - Note: Consolidated data for CEMAC has not been checked for methodological consistency by IMF’s statistics department and authorities prefer not to release it. *Source: Banking Commission of Central Africa (COBAC).* --- ### Annex Table 3. Compliance with the Prudential Norms, 2012-14 ### Compliance overview (by country and prudential norm categories) - Table reports compliance counts across 2012–2014 for: - Capital Adequacy - Liquidity - Fixed Assets - Maturity - Limit on Single large exposure - Percent of deposits - Country coverage (number of banks in 2012): 48 total (Cameroon 13; Central African Republic 4; Chad 8; Republic of Congo 9; Equatorial Guinea 4; Gabon 10). - Reported country-level counts indicate numerous instances of non-compliance across prudential norms for 2012, 2013, and 2014 (detailed per-country counts reported in source table). ### Notes and regulatory minima - Short-term assets of up to one month (remaining maturity) over short-term liabilities of up to one month (remaining maturity). - Net capital and other permanent resources over fixed assets. - Long-term assets of more than five years over long term liabilities of more than five years. - Minimum capital varied by country until May 2010 (CFA millions): Cameroon 1000; Central African Republic 200; Chad 150; Republic of Congo 150; Equatorial Guinea 300; Gabon 1000. From June 2010, minimum capital is 5 (transformation unclear in table). - Limit on single large exposure: 45 percent of capital. - Percent of deposits represented by the number of banks in violation in the country. *Source: Banking Commission of Central Africa (COBAC).* --- ### Annex I. Report on the Observance of Standards and Codes—Basel Core Principles for Effective Banking Supervision ### Introduction and methodology - Assessment context: - Performed as part of the update of the FSAP of the CEMAC jointly by the IMF and the World Bank in 2015. - Reflects supervisory and regulatory framework in place as of the date of completion of the assessment. - Not intended to represent analysis of the state of the financial sector or crisis management framework (addressed in broader FSAP). - Methodology: - Assessment carried out according to the Revised Core Principles Methodology issued by the Basel Committee of Banking Supervision (BCBS) in September 2012. - CEMAC authorities chose to be assessed against both Essential and Additional BCP criteria but were rated against Essential Criteria only. - Assessment is qualitative, based on laws, rules, supervisory documents, files, meetings with SG-COBAC, senior management of some CIs, professional associations, external auditors, and a self-assessment provided by authorities. - Proportionality approach adopted consistent with BCP methodology. ### Institutional setting and market structure - Supervisory architecture: - COBAC is the main body responsible for supervision of CI and MFI; some attributions are shared with other regional or national institutions. - Ministerial Committee of the Monetary Union of Central Africa (UMAC) adopts regulations and directives proposed by the BEAC governor and published in the Official Bulletin of the Community. - Licensing and license withdrawal pronounced by the monetary authority of each country, with COBAC powers in disciplinary proceedings after informing the monetary authority. - COBAC chaired by the governor of the BEAC; SG-COBAC headed by a secretary-general. COBAC board comprised of eleven members (six represent CEMAC member countries, one rotating member, three BEAC censors, one ACPR representative). - Market structure: - Financial system dominated by commercial banks; foreign banks control approximately 50 percent of total banking sector assets. - Total of 50 banks, eight financial institutions, and more than 700 MFIs. - Banking system concentrated: largest three banks in each country hold more than 70 percent of total banking assets. - Cross-border banks gaining importance. - Banks’ activities not well diversified and not sufficiently adapted to developmental needs. ### Financial sector metrics and prudential compliance - Banks’ assets and credit: - By end-2013, banks’ assets ~26.3 percent of zone GDP (compared to 15.7 percent in 2004). - Loan-to-deposit ratio rose from 57 percent in 2010 to 67 percent in 2013. - Most bank credits are short and medium term; financing mainly from customer deposits. - Prudential ratios: - Banking sector capital adequacy reached 13.8 percent at end September 2014 (minimum requirement: 8 percent). - Gross NPLs reached 9.1 percent of gross total loans. - Net NPLs amounted to 57.9 percent of banks’ regulatory capital. - Significant number of banks violating prudential norms, particularly capital adequacy, concentration limits, and connected parties lending. ### Preconditions for effective supervision and systemic arrangements - Economic and structural vulnerabilities: - High reliance on hydrocarbon products and importance of public sector entities cause risks and volatility with fluctuating oil prices; manifested in public finance shocks and payment arrears to companies and banks. - Increasing issuance of treasury bonds, mostly subscribed by banks. - CFA Franc pegged to the euro under monetary cooperation with France. - Financial safety net and crisis management: - BEAC is in charge of financial stability, but framework development is work in progress. - A Financial Stability Committee (FSC) exists; COBAC member, but operational cooperation mechanisms among FSC members are lacking. - No clear strategies for crisis management framework and systemic risk oversight processes. - Legal and accounting frameworks: - OHADA adoption addressed some legal weaknesses, but enforcement remains deficient; delays in enforcing collaterals and guarantees persist. - Accounting framework for non-financial firms established by OHADA (not in line with IFRS). COBAC mandates accounting rules for CI and MFI: COBAC R-98/01 for banks and COBAC EMF-2010/01 for MFI. - External auditors required for firms with total assets exceeding 50 billion FCFA; external audit profession not well organized or overseen. - Deposit insurance and resolution: - Regional deposit guarantee fund (FOGADAC) created in 2009; operational from February 2011. - Two interventions: compensation of depositors (up to five million FCFA per depositor per bank) and financing resolution of banks in distress. - The fund has not been called upon to date. - Limitations: absence of COBAC operational procedures for deposit compensation, lack of data on insured deposits, uncertainty on effective coverage, absence of consultation and coordination procedures in the financial safety net. - Crisis management and resolution frameworks are weak; COBAC’s prerogatives not exerted timely and consistently. - Presence of systemic banks with cross-border activities without an adequate cross-border resolution framework. - 2014 regulation on dealing with problem banks adopted but implementation depends on coordination between COBAC and monetary authorities; resolution of banking groups across CEMAC needs further development. ### Market discipline and financial market development - Market discipline is weak: - Major banks mainly deposit-financed with limited access to financial markets. - No external credit rating agencies or well-developed profession of financial analysts. - Publication requirements for financial information are limited and often not well respected. ### Key findings - Overall supervisory and regulatory framework displays a poor level of compliance with the Basel Core Principles (BCPs). - Weaknesses identified: - Powers and responsibilities of COBAC. - Functions and processes employed by SG-COBAC. - Limitations in the prudential framework and its enforcement. - The assessment’s qualitative judgments underpin the conclusion of poor compliance and highlight areas for institutional strengthening and improved enforcement. *Source: IMF staff compilations.* ### 23. The allocation of roles and responsibilities among the supervisory institutions is less ### _cr16106 - 23. The allocation of roles and responsibilities among the supervisory institutions is less ### Allocation of roles and responsibilities - The allocation of roles and responsibilities among the supervisory institutions is less than optimal and is not conducive to an efficient interplay of national and regional interests. - Areas where reconfiguration should be considered: - Missions: - Ensuring banking system stability is not included among COBAC objectives, an issue that should be revisited in current legislation. - Despite that the COBAC Secretary General is a member of the FSC, the sharing of responsibilities and of associated data between the COBAC/SG-COBAC, on one hand, and the BEAC, on the other hand, warrants further clarification. - Independence: - The institutional independence of the COBAC, particularly its Board, warrants further strengthening. - Suggested measures: a more structured and competitive nomination process for board members to ensure a certain level of financial sector expertise and minimum criteria for competence and avoidance of conflict of interest. - Consider introducing modalities that could increase the COBAC’s transparency and accountability. - Processes for adopting new regulation: - The rules and practices governing the development and approval of prudential regulations are too complicated. - Multiple intervention layers (COBAC → BEAC Board → ministerial committee → CEMAC Commission) cause delays that could be shortened without necessarily diluting respective powers. - Sanctions: - Enforcement of prudential regulation and corrective action framework is still lacking. - The new regulation on problem banks addresses weaknesses in the regulatory framework, but effective enforcement requires adoption of more objective and transparent processes. - Authorities should consider establishing a sanctions committee, a more focused body, whose specific composition would reflect the needed skills and competencies (e.g., greater representation of persons possessing adequate legal experience). ### Regulatory alignment with international standards - While some improvement has been achieved, much more needs to be done to better align regulations with international standards. - Key priority areas for review: - Capital Adequacy: - The capital adequacy regulation should be revised to provide a more clear definition of capital components and more accurate and sensitive risk weights to assets and exposures. - Connected party lending and concentration risk: - The definition of connected parties in current regulations is not sufficiently comprehensive and precise, and is not also well enforced. - This issue, underlined since the 2006 FSAP, remains a high priority since it was a source of recent banking and MFI crises in the region. - Limits on large exposure, particularly lax compared to international standards, need to be tightened. - Consolidated and cross-border supervision: - Recent adoption of a regulation on consolidated supervision is significant progress. - Authorities should move quickly on adoption of accompanying texts and processes and procedures to implement this regulation. - SG-COBAC should undertake more joint inspection missions with host supervisors of subsidiaries of cross-border banking groups incorporated in the CEMAC, organize supervisory colleges for these groups, and sign the pending draft cooperation agreements with foreign supervisory authorities. - Risk management: - COBAC regulations on management of banking risks are generic and not well adapted to main risks inherent in banks’ activities. - Banks have generally weaknesses in their risk management frameworks and systems. - COBAC should draft regulations on risk management in general, and management of specific risks (liquidity, interest rate in the banking book, and market risks). - SG-COBAC should better enforce these rules. - Transparency: - CIs should be required to (i) publish annual reports within reasonable time spans, presenting their financial position as well as their governance and risk management framework; and (ii) apply an accounting framework consistent with international standards. ### Operational and procedural challenges at SG-COBAC - Main challenges: availability of a constantly adequate level and number of staff, and adoption of a risk-based approach to supervision relying on coordinated onsite and offsite activities based on formalized procedures. - Key findings: - Staffing: - The significant increase in staffing that occurred soon after the BCP compliance assessment mission constitutes remarkable progress toward addressing an endemic shortage that endured since at least 2001. - An assessment of the adequacy of supervisory resources should be now performed in light of the current responsibilities in a region comprising six countries, the number and complexity of CI and MFI to be supervised, and the challenges posed by the continuing evolution in international supervisory standards. - At the time of the mission, many posts of division heads were vacant and assumed by acting people. This hinders the routine functioning of SG-COBAC given the importance of these middle management positions. - It is critical to ensure that adequacy of SG-COBAC staffing, at all levels (including middle management level), does not continue to pose constraints on its ability to perform its duties. - Supervisory approach: - The supervisory process is primarily compliance-oriented. - Prudential tools used by SG-COBAC need to be overhauled to introduce risk-based supervision (forward-looking assessment of institutions’ risk profile depending on their systemic importance and according to a balanced interaction and effective cooperation between offsite supervision and on-site inspection). - These requirements are still not being addressed by existing tools and processes. - Assessments of banking system risks are not systematically done and not thorough enough to enable a good assessment of systemic risks and their impact on the sector. ### Summary of Compliance with the BCPs — key points (Core Principles 1–28) - 1. Responsibilities, objectives, and powers: - COBAC mandate does not expressly include safeguarding the stability of the banking system. - Delays in development and adoption of regulations and decision making at the COBAC Board weaken the supervisory framework. - Some regulations are not updated or published on the website of the BEAC or COBAC. - 2. Independence, accountability, resourcing and legal protection for supervisors: - Shortage in supervisory staff at SG-COBAC persists since at least 2001. - Recent staffing reinforcement at end 2014 is a significant improvement; need to assess adequacy of current staffing levels. - Some middle management positions were vacant at the time of the mission and assumed by acting people. - COBAC independence merits further enhancement through a more diversified mix of members; the role of the vice-governor merits further delineation. - Greater autonomy of COBAC in managing its resources and needs is needed. - 3. Cooperation and collaboration: - Relations between COBAC and national ministries of finance should be formalized. - Formalize relations between COBAC and other financial supervisory authorities in the region to facilitate exchange of information and cooperation. - 4. Permissible activities: - The list of licensed institutions should be maintained up-to-date and published on COBAC website. - 5. Licensing criteria: - Current licensing framework is weak: no fixed time limit for transmission of licensing applications by national monetary authorities to COBAC, inability of COBAC to receive directly these applications, and no explicit indication that COBAC opinion binds monetary authority. - Licensing criteria need completion and supplementation by more detailed regulatory requirements. - A new draft licensing regulation has been adopted by COBAC and waits to be approved. - 6. Transfer of significant ownership: - COBAC does not have powers to prohibit use of voting rights acquired in infringements of applicable regulations. - 7. Major acquisitions: - Except acquisition of certain participations in CI, regulations do not subject banks’ major acquisitions or investments to the prior authorization of COBAC. - 8. Supervisory approach: - COBAC supervisory approach is still compliance based and does not rely on a fully risk-based methodology. - SYSCO 1, a system utilized to rate the risk of banks, contains many weaknesses and is not sufficiently risk-sensitive. - 9. Supervisory techniques and tools: - Deficiencies include staff shortages (partially addressed by allocation of around 20 new recruits to SG-COBAC at end 2014), compliance-based approach, offsite function focused on monitoring regulatory infringements, inspection approach focused mainly on compliance, insufficient interaction with banks’ senior management, and absence of uniform methodologies for supervision of CI and MFI. - 10. Supervisory reporting: - CI supervisory reporting fills to a large extent COBAC needs but can be improved; MFI reporting system needs further strengthening. - 11. Corrective and sanctioning powers of supervisors: - COBAC resorts to corrective action very late, often after failure of many restructuring plans; many institutions showed negative equity for long periods before being addressed. - New regulation on dealing with problem banks enhances framework but it is premature to conclude full implementation. - 12. Consolidated supervision: - Framework remains applied on standalone basis without prudential consolidated requirements. - New regulation on consolidated supervision seems to have been formally adopted recently but needs additional application guidance and enforcement. - 13. Home-host relationships: - COBAC has signed cooperation agreements with some foreign supervisory authorities but actions are not in full compliance with principle requirements. - COBAC has not performed adequate joint inspection missions over foreign subsidiaries; no college of supervisors had been conceived for these groups (planned during 2015). - 14. Corporate governance: - Implementation deficient: lack of corporate governance charter, absence or inaction of board-level committees, inexistence of independent board members. - Regulations lack minimum level of independent non-executive board members, additional board-level committees for systemic institutions, guidelines for remuneration policy, and linking remuneration with risk-taking practices. - 15. Risk management process: - Framework and practices lacking: adequacy of risk management policies relative to risk profile and systemic importance, adequacy of risk management reports, internal framework to assess capital and liquidity, existence of independent and resourced risk management function. - 16. Capital adequacy: - Existing capital adequacy requirements are not aligned with international standards. - Main insufficiencies: loose requirements in definition of regulatory capital components (tier 1 and 2) and sensitivity of some risk-weights. - 17. Credit risk: - Framework and practices generally in line but improvements possible: require board approval for exposures above thresholds, higher quality assessment in inspection notes, require CI to perform credit risk stress tests. - 18. Problem assets, provisions, and reserves: - New regulation on loan classification and provisioning entered into effect at the beginning of 2015; prior provisioning requirements were relatively lax. - New regulation brings higher and more adequate provisioning levels, general provisions for performing loans and specific criteria for restructured debt; needs full application and revisiting. - 19. Concentration risk and large exposure limits: - Regulatory framework unsuited; excessively high limits on large exposure much laxer than international standards. - 20. Transactions with related parties: - Existing regulatory framework is still deficient in many aspects, mainly the definition of related parties. - 21. Country and transfer risks: - Risk management policies and systems do not adequately address country and transfer risks; no regulatory requirements or guidance; supervisory practices do not address such risks. - 22. Market risk: - Market risks mainly confined to foreign exchange risk at this stage; authorities should adopt a more proactive approach. - Foreign exchange prudential limits are considered high and need more adequate and regular monitoring by COBAC. - 23. Interest rate risk in the banking book: - Existing prudential norms are largely insufficient; reports do not include adequate information on this risk. - 24. Liquidity risk: - Prudential norms and regulatory framework for liquidity risk are not well aligned with principle’s criteria. - Existing minimum regulatory liquidity ratio does not precisely depict liquidity risk profile; regulations do not include refinancing strategies, funding contingency plans, stress tests; inspection procedures insufficiently cover liquidity risk management. - 25. Operational risk: - Current regulatory framework seems outdated and does not adequately cover existing operational risks; operational risk is not usually assessed by inspectors. - 26. Internal control and audit: - Regulatory requirement and existing practices are generally satisfactory but should be further refined to align with principle criteria and international standards. - 27. Financial reporting and external audit: - Financial statements of CI are prepared according to COBAC chart of accounts which significantly diverges from IFRS. - COBAC does not have a clear operational framework to assess external auditors’ work or take measures in case of deficiencies; rotation of external auditors is not envisaged. - 28. Disclosure and transparency: - Publication and transparency of financial information is still deficient. - COBAC has not defined required templates for CI accounts; COBAC periodic reports are published with excessive delays. *INTERNATIONAL MONETARY FUND.* ### 29. Abuse of financial ### 29. Abuse of financial services ### Summary - COBAC needs to follow more closely the application of existing regulations by CI and take adequate corrective actions in case of infringements. ### Key Recommended Actions - Better implement and enforce the existing AML/CFT regulations. - Reactivate the working groups with the national financial intelligence units (ANIF). - Periodically perform sectoral surveys, studies and analyses on the implementation of AML/CFT regulation in the CI and MFI sectors and take any needed actions to address identified deficiencies and weaknesses. ### Context within Table 2 (selected related supervisory recommendations) - The recommendations on "Abuse of financial services" are part of a broader set of supervisory reforms summarized in Table 2, including actions on responsibilities, independence, licensing, supervisory approach, reporting, corrective powers, consolidated supervision, corporate governance, risk management, capital adequacy, asset classification and provisioning, concentration risk, connected-party transactions, interest rate risk in the banking book, liquidity risk, operational risk, financial reporting and external audit, and disclosure and transparency. - Specific related items in Table 2 that interact with AML/CFT objectives include: - 2. Independence, accountability, resourcing and legal protection for supervisors: assess and reinforce SG-COBAC staffing levels; enhance COBAC budgetary autonomy; diversify COBAC board composition; consider establishment of a dedicated sanctions committee. - 8. Supervisory approach: continue testing SYSCO2 risk assessment tool; perform more thorough analysis on banking sector risks and activities to analyze risk tendencies and vulnerabilities and take preventive or remedial actions. - 9. Supervisory techniques and tools: improve compliance-focused supervisory techniques to be more risk-oriented and formalized; organize regular meetings with senior management; prepare regular offsite analytical notes on each bank and on banking sector risks and performance. - 10. Supervisory reporting: develop E-CERBER for CI reporting; require consolidated prudential reports; review content and periodicity for MFI (SESAME) reports and ensure better validation and control. - 11. Corrective and sanctioning powers of supervisors: implement new regulation on problem banks; adopt more rigorous process for license withdrawals; enable COBAC to proactively intervene in regulatory violations (for example, restricting dividend payments). - 27. Financial reporting and external audit and 28. Disclosure and transparency: better frame and assess work of external auditors and require rotation; set templates for published financial statements; require banks to publish annual reports with adequate financial and qualitative information; publish COBAC annual reports and semi-annual bulletins on a timely basis. ### Authorities' Response - No response was provided by the authorities. *International Monetary Fund — _cr16106 - 29. Abuse of financial* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16106.pdf_