## _cr16377 ## Source details **Canonical URL:** [_cr16377](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16377.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16377.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16377.pdf.json) --- ### EXECUTIVE SUMMARY — Key findings and risks - Financial system must be developed while preserving financial stability; a move to a more dynamic and open regime could bring severe risks unless prudential regulations and practice are strengthened very substantially. - Banking sector exposed to significant risks, though it has buffers, including high profitability and a stable deposit base. - Madagascar macroeconomic context: relatively poor trend growth interspaced with adverse shocks from commodity prices and political instability; economy recovering with prospect of resumed inflows of foreign aid and investment; inflation is coming down and the balance of payments has strengthened, but the recovery is fragile. - Stability analysis identified plausible scenarios that would lead to sharply increased credit losses in a context of difficult loan recovery; vulnerabilities—especially in some smaller, less well-funded banks—might grow rapidly if a sustained lending boom emerged. - Certain banks display concentrated portfolios and large exposures to parent institutions. - Authorities’ initiation of macroprudential analyses is welcome. ### SUPERVISION, RESOLUTION, AND PUBLIC NBFIs - Supervision shortcomings - CSBF work often compliance oriented; onsite supervision not as frequent as needed and not prioritized according to risks. - Effective supervision requires: transition to a risk-based approach; significant increase in trained staff (especially for on-site supervision); reinforcement of supervisory independence. - Regulatory gaps to fill include related-party lending and loan classification. - Supervision of MFIs needs to become more risk based and pro-active. - Resolution and intervention - Current arrangements have led to drawn-out resolution costly to depositors, government, BCM, and legitimate borrowers. - A law establishing a special resolution mechanism for credit institutions is needed. - Preparations should ensure rapid decision making and a ladder of responses to infractions. - Once resolution mechanism and strengthened supervision are in place, exploring a deposit guarantee scheme aimed to protect small depositors may be worthwhile. - Public NBFIs governance and supervision - NBFIs (mostly insurance and pensions) largely government-controlled; governing bodies not sufficiently independent; asset valuation often unreliable; some display operational weaknesses. - Insurers are subject to prudential supervision by the Ministry of Finance and Budget (MFB)—which owns the largest undertakings—creating a conflict of interest; other NBFIs lack prudential oversight. - Early reform steps: independent audits (based on internationally accepted standards) of main public sector NBFIs and subjecting them to independent prudential supervision. ### FINANCIAL DEEPENING, INCLUSION, AND INFRASTRUCTURE - Low financial depth and structure - Ratios to GDP of deposit taking (19 percent) and lending (10 percent) have barely changed over the past decade. - Indicators of financial inclusion are well below comparable countries. - Constraints and reform opportunities - Judicial system and enforceability of property rights are major hindrances to financial deepening; improvements would facilitate bank lending, leasing, and factoring for SMEs. - Payments and credit reporting: authorities advancing a law on electronic money; adoption of a law on the national payment system recommended with BCM oversight. - Two existing credit risk registries do not provide reliable and up-to-date information; they should be unified, streamlined, and subject to careful quality control. - AML/CFT - Needs more human resources and more effective implementation; some legislative changes in train and a full assessment scheduled later this year. ### KEY FSAP POLICY RECOMMENDATIONS (SUMMARY) - Short-term (to 6 months) - Intensify on-site supervision of banks and MFIs. - Begin to implement risk-based supervision. - Regularly conduct stress tests and use results to inform banking supervision. - Give the BCM all needed powers to promote financial stability, in cooperation with the CSBF and MFB. - Expand the definition of related parties, and intensify supervision of concentration risks. - Improve asset classification and provisioning rules. - Medium-term (6 to 24 months) - Increase the quantity and quality of the CSBF’s human resources. - Enhance the powers and independence of financial supervisors. - Increase minimum capital requirements for credit institutions and MFIs. - Enhance banks’ internal control regulation and introduce detailed corporate governance requirements. - Strengthen the legal framework for the resolution of credit institutions and MFIs. - Intensify and enhance supervision of insurers and reinforce supervisory independence. - Institute independent, well-resourced prudential supervision of pension, savings and investment funds. - Conduct independent financial audits of the National Savings Fund (CEM) and the savings network of the postal service, then define restructuring/resolution strategies. - Establish the legal framework for issuing and using electronic money, and implement a supervision and oversight mechanism. - Adopt a draft law governing the national payment system. - Longer-term (over 24 months) - Implement a graduated intervention system for problem institutions. - Explore setting up a deposit guarantee mechanism once banking supervision and the resolution framework are strengthened. - Unify and enhance credit risk registries. - Modernize the security registers. - Improve mechanisms to freeze assets in cases of suspected money laundering and recover goods acquired illegally. - Footnote: Short-term: to 6 months; Medium-term: 6 to 24 months; Longer-term: over 24 months. ### INSTITUTIONAL AND STRUCTURAL SNAPSHOTS - Market structure and inclusion - Four banks predominate; the top four banks hold over four fifths of deposits and loans. - Government retains a minority stake in three of these banks. - Other licensed banks majority foreign owned except one small bank recently converted from an MFI. - Financial sector composition (selected 2015 items) - Deposit collecting institutions: 38 licenses; Billion MGA 8,091; Percent of GDP 28.3. - Banks: 11 licenses; Billion MGA 7,010; Percent of GDP 24.5. - Microfinance institutions: 25 licenses; Billion MGA 401; Percent of GDP 1.4. - Insurance: 5 licenses; Billion MGA 705; Percent of GDP 2.5. - Pension funds: 1 license; Billion MGA 728; Percent of GDP 2.5. - Total (2015): 54 licenses; Billion MGA 9,891; Percent of GDP 34.8. - Financial intermediation metrics (end-2015) - Total financial assets represented 35 percent of GDP. - Three-quarters of total financial assets consist of banking system assets. - Deposit accounts: 19 percent of GDP. - Credit operations: 10 percent of GDP. - Banking assets in absolute terms slightly exceed US$2 billion. ### MICROFINANCE (MFIs) - Structure and performance - Activity concentrated in five MFIs which account for three fourths of the credit portfolio and half of the sector’s deposits. - Much of the sector operates on a cooperative basis and is organized into networks. - Two MFIs are currently being resolved. - Aggregate indicators (2010–2015) - Number of MFIs: 26, 28, 31, 31, 29, 25 (2010–2015) - Total assets (MGA billions): 184, 252, 315, 363, 417, 401 (2010–2015) - MFI financial soundness indicators (2010–2015) - NPLs/total loans: 7.7, 3.8, 3.9, 4.4, 5.9, 7.1 - Loan loss reserve/NPLs: 81.6, 74.5, 78.5, 74.6, 80.7, 85.3 - Annualized loan growth: 10.0, 45.1, 29.2, 20.8, 8.6, -6.3 - Net interest margin: 17.3, 15.9, 17.5, 18.4, 17.3, 17.1 - Efficiency (cost/income): 83.7, 83.8, 88.1, 88.4, 86.6, 82.5 - Return on assets: 2.8, 1.8, 2.0, 2.0, 1.8, 1.7 - Return on capital: 11.6, 7.8, 8.6, 9.0, 8.4, 8.4 - Loan to deposit ratio: 128.3, 131.4, 133.7, 125.6, 115.0, 92.5 - Liquid assets/total assets: 26.1, 21.5, 20.8, 19.7, 23.1, 27.3 - Liquid assets/short term liabilities: 77.8, 64.0, 65.3, 56.3, 67.4, 63.0 - Capital to risk-weighted assets: 15.5, 14.6, 9.3, 6.3, 4.2, 31.6 - Summary assessment - MFI sector in aggregate is liquid and adequately capitalized and provisioned, despite presence of some weaker institutions. - Situation of several MFIs has deteriorated but does not present systemic risk due to small size and limited deposit base. - Profitability modest despite high interest spreads because of high operating costs and need for provisioning. ### RISK FACTORS FOR FINANCIAL SECTOR STABILITY - Historical and external vulnerabilities - History of sharp contractions in output and real GDP affecting tradable goods sector. - External events (slow growth in advanced economies, commodity price fluctuations) affected export earnings and import costs. - Political turmoil and concerns about persistent corruption disrupted activity, discouraged capital formation, and reduced foreign aid and concessional financing. - Government arrears and expenditure cuts on infrastructure affected suppliers and purchasing capacity of public-sector workers. - Quantitative rationing of foreign exchange has sometimes intensified economic dislocation. - Concentration risks - Economy, banking sector, and corporate sector concentrated; a few large corporates borrowed substantially from several banks. - Individual banks’ loan portfolios often lack diversification. - Natural catastrophes could affect a large part of the formal sector and destroy banks’ fixed assets and equipment. - Funding, liquidity, and interest-rate risks - Despite a comfortable deposit base, shocks may be amplified through higher funding costs and liquidity effects. - If policy rates rise sharply or confidence falls, banks may have to increase deposit rates; higher costs could not be passed to borrowers without incurring substantial credit risk. - Possibility of deposit “runs” or system-wide liquidity loss through the balance of payments. - Foreign ownership considerations - Foreign ownership usually a strength but could expose local banks to exceptional losses if the parent bank were to be intervened. - Many Malagasy banks place excess resources with parents; not vulnerable to sudden withdrawal of external funding in normal circumstances. - Prudential and structural weaknesses - Prudential supervision uneven. - Governance problems in judicial system make enforcement and loan recovery difficult. - Some banks and MFIs may be under-estimating problem loans; accounting practices in some major NBFIs and nonfinancial corporates questionable; external audit standards reportedly weak. - Potential macroprudential issues - Rapid economic and financial acceleration could lead to excessively rapid credit and real estate growth, translating into higher NPLs. - Relaxation of the foreign exchange constraint could intensify dollarization of bank lending, increasing borrower exchange rate risk. ### BANK SOUNDNESS — INDICATORS AND STRESS TESTING - Key FSIs (selected 2008–2015 series) - Tier 1 capital adequacy ratio: 12.7, 14.5, 15.4, 16.2, 16.3, 15.0, 13.2, 13.1 (2008–2015) - NPLs/total loans: 8.9, 11.3, 12.5, 13.3, 13.4, 13.0, 11.6, 10.5 (2008–2015) - Loan loss reserve/NPLs: 55.7, 55.1, 59.9, 63.0, 66.6, 62.1, 62.2, 61.3 (2008–2015) - Annualized loan growth: 25.6, 3.1, 9.7, 2.9, 8.7, 17.9, 20.7, 18.5 (2008–2015) - Net interest margin: 5.5, 4.9, 5.0, 5.2, 5.1, 5.5, 5.9, 6.0 (2008–2015) - Return on average assets: 2.9, 1.6, 1.7, 1.9, 1.8, 2.4, 3.3, 3.7 (2008–2015) - Loan to deposit ratio: 55.9, 54.8, 57.0, 52.8, 52.9, 63.0, 68.0, 70.3 (2008–2015) - Liquid assets/total assets: 45.5, 46.8, 46.0, 49.8, 50.5, 43.4, 39.9, 37.8 (2008–2015) - Foreign currency deposits/total deposits: 21.0, 19.4, 21.5, 19.5, 19.2, 16.6, 18.1, 17.7 (2008–2015) - Claims on other credit institutions/total assets: 15.9, 16.9, 17.9, 14.5, 14.3, 12.1, 13.7, 12.6 (2008–2015) - Stress testing framework - Tests covered all 11 commercial banks. - Two top-down scenarios: - Scenario I (severe): another episode of output contraction similar to 2008–10, higher NPLs and provisioning. - Scenario II (external crisis - extreme): constrained foreign currency availability and government operations, output collapse, sectoral loan deterioration, rise in funding costs, falling fee income. - Additional sensitivity tests: loan quality migration; provisioning of performing loans; provisioning of non-performing loans; provisioning of non-resident claims; exchange rate appreciation; natural catastrophe; increase of financing costs; increases in long-term and all rates; drop in commission revenues. - Banks conducted bottom-up tests on non-performance of loans to their two largest borrowers. - Key stress test findings - Under the severe scenario, several banks would become under-capitalized, but all banks would remain solvent; retaining all earnings for a year would restore capitalization. - Under the extreme scenario, much of the banking system (including some large banks) would become under-capitalized, in some cases substantially, but not insolvent. - Deterioration in loans currently classified as performing, or tighter classification rules, may have a larger effect than increased provisioning on loans already nonperforming. - Possible losses on exposures to parent banks abroad constitute a substantial risk for individual banks. - Large rise in funding costs or direct costs of natural disasters significant but not necessarily systemic in isolation. - Bottom-up test on two largest exposures (Number of banks, percent) - Excluding collateral: less than 10 percent: 4; 10 to 30 percent: 3; more than 30 percent: 2; average: 3 - Including collateral: less than 10 percent: 5; 10 to 30 percent: 5; more than 30 percent: 0; average: 1 - Liquidity stress testing - Short-term liquidity risk not a major vulnerability systemwide but results vary greatly across banks; a few banks have above-average exposure to both credit and liquidity risk and would have few buffers absent help from a foreign parent. - Representative liquidity measures (baseline and stressed percentiles) - Liquid Assets / Total assets: 38, 32, 23, 23, 33, 32, 25 - Liquid Assets / Short term liabilities: 55, 49, 37, 50, 40 - Liquid assets less mandatory reserves / Total assets: 28, 21, 12, 22, 21, 14 - Liquid assets less mandatory reserves / Short term liabilities: 40, 32, 19, 33, 22 - Data and risk-mitigation gaps - Some data gaps raise concerns that risk factors may be overlooked or under-estimated. - Limitations: weak supervision and loan classification rules, questionable accounting practices in some major NBFIs and nonfinancial corporates, weak external audit standards. - Recommendations on stress testing and supervisory practice - Continue regular stress testing and refine scenarios. - Undertake quantitative evaluation of common exposures to large borrowers, including SOEs. - Develop liquidity measures that better reflect true ability of banks to dispose of assets quickly and differentiate by currency. ### INSURANCE, SAVINGS INSTITUTIONS, AND INVESTMENT FUNDS - Insurance sector findings - Accounts show high solvency margins but valuation of some investments questionable; many investments in real property seem over-valued. - Some claims on the public sector (notably SOEs) may be questionable; provisioning on assets appears inadequate. - Profitability weak and operational efficiency low; difficulty collecting premiums and paying claims despite substantial operating expenses. - Investment choices of dominant state-owned insurers suggest pressures from special interests. - Recommendation: external audits of main companies and change in governance leading to privatization. - Insurance sector indicators (2012–2014) - Non-life premiums/GDP: 0.5, 0.5, 0.5 - Life premiums/GDP: 0.1, 0.2, 0.2 - Non-life premiums/total premiums: 77.0, 76.1, 78.0 - Claims/premiums: 45.0, 41.4, 41.4 - Operating expenses/premiums: 30.2, 28.5, 25.4 - Net revenue/premiums: 11.8, 10.4, 10.5 - Provisions on claims due/claims paid out: 104.3, 96.0, 105.7 - Investments/technical provisions: 118.0, 139.9, 142.1 - Own funds/technical provisions: 86.9, 80.8, 84.4 - Profits/own funds: 5.7, 5.7, 6.0 - Savings institutions (CNAPS, CEM, post office saving) - Unsound investment decisions, under-provisioning, operational weaknesses; disproportionate investment in troubled SOEs and questionable asset valuations. - Hold savings amounting to almost five percent of GDP and thus represent a contingent government liability. - Recommendations: urgent independent financial and operational audits to international standards; substantial financial resources, improved and independent governance, effective risk management; consider narrow mandates; bring under prudential supervision by CSBF as resources permit. - Investment funds - Need to be subject to regulation and supervision, starting with an investigation of their business and governance. ### MACRO- AND MICROPRUDENTIAL FRAMEWORK — CROSS-CUTTING ISSUES - Institutional responsibilities and gaps - CSBF: prudential regulation and supervision of banks and MFIs; closely linked to BCM. - BCM: macroprudential surveillance and lead role in payment system functioning. - SCA in MFB: prudential supervision of insurance undertakings and brokers. - CEM and post office: under financial oversight of MFB but not subject to prudential regulations; CNAPS not subject to prudential regulations. - No institution has a legal mandate specifically for consumer protection in the financial sector. - Governance and independence issues - Supervisory agencies lack full independence and satisfactory governance; government can intervene in supervisory decisions and control budgets. - Conflict of interest as owner or part-owner of financial institutions that it supervises and from which it borrows substantially. - Recommendation: place supervisory responsibility with a strong and independent agency while major NBFIs remain public; adopt a code of ethics; grant budgetary autonomy; agencies accountable to parliament and the public. - Human resources and communication - Shortage of well-trained staff; existing staff engaged in data entry or localized crises. - Need for a pro-active communication strategy; consider establishing a communications division at the BCM, possibly jointly with the CSBF. - Macroprudential institutional development - BCM has established a financial stability unit and published a Financial Stability Report. - Given limited current macroprudential concerns, authorities should develop institutional framework to track and react to systemic risks; amend legislation to give BCM mandate and right to obtain relevant information and use instruments in coordination with CSBF; identify and fill data gaps and upgrade capacity. ### BANKS: SUPERVISION, REGULATIONS, AND PRUDENTIAL REQUIREMENTS - Supervisory functions and tools - Supervision and on-site supervision must become more pro-active and intrusive; mobilize resources for regular on-site supervision by institution and theme. - Short-term: on-site inspection of large loan portfolios of the four major banks (process already started). - CSBF must adopt risk-based tools and procedures; modernize and extend rating system; introduce automated prudential reporting. - Strengthen cross-border cooperation; sign cooperation agreements particularly in Europe. - Corrective measures and prudential tightening - Establish framework specifying triggers, responsibilities, and time limits for effective response. - Broaden related party definition; review large exposures regulation; apply conservative assessment of guarantees and tighten treatment of restructured loans. - Update internal controls; reinforce compliance and governance provisions. - Capital requirements should consider exchange rate and operational risk; raise the 8-percent minimum to reflect macroeconomic volatility. - Implement guidelines on liquidity risk management (including separate foreign currency liquidity) and a prudential liquidity ratio. ### MICROFINANCE REGULATION AND SUPERVISION - Regulatory amendments - Stricter rules for loan classification and provisioning. - Support supervision of networks of mutual institutions. - Set minimum liquidity levels and higher capital requirements for MFIs with more extensive operations. - Supervision and intervention - Onsite inspections need prioritization by risk; improve offsite supervision with at least larger MFIs and networks reporting half yearly through an automated process. - Decision-making on problem MFIs has been slow due to legal/practical constraints and lack of willingness to act. - Relaxing constraints contingent on stronger prudential system - A stronger prudential system would allow lifting constraints related to credit ceilings (low and unchanged since 2007), portfolio composition, and provision of certain services (e.g., electronic money and debit cards) for non-bank microfinance providers. ### PAYMENT SYSTEMS, ELECTRONIC MONEY, AND OTHER INFRASTRUCTURE - Payment systems - RTGS and ACH implemented. - RTGS processed 75,510 operations in 2014, totaling MGA 38,507 billion (equivalent to the country’s GDP). - Remote clearing system processed 8.9 million transactions, totaling MGA 13,342 billion (about 1/3 of GDP). - Legal framework incomplete; draft law on payment systems should be expanded to securities settlement systems and retail payments; include netting, protection against bankruptcy proceedings, dematerialization of securities, and direct debits. - BCM oversight should extend over entire national payment system. - Retail payments issues - Underdeveloped; high cash predominance; checks not crossed and can be endorsed multiple times then paid in cash; payment cards lack interoperability. - Policy levers to discourage cash: pay higher-level government salaries directly into bank accounts; allow MFI networks to issue debit cards. - Securities settlement - Securities leg processing manual with no delivery versus payment mechanism; recommend introducing DvP via RTGS. - Electronic money - Since 2010, three banks authorized to issue electronic money in partnership with mobile operators; active subscribers reached about 10 percent of the adult population. - A law on electronic money at an advanced stage; should create statutes for EMIs and provide for effective supervision. - BCM role: structure and develop electronic money and supervise interoperability. ### FINANCIAL DEVELOPMENT — JUDICIAL SYSTEM, CREDIT AND BANKRUPTCY LAW, CREDIT REPORTING - Judicial and insolvency environment - Credit and bankruptcy legislation broadly acceptable but enforcement slow and erratic. - Doing Business 2015 simple scenario: 871 days for a debt to be paid (650 days on average in Sub-Saharan Africa), at a cost of 42 percent of the debt (including 20 percent in attorneys’ fees and 16 percent in court costs). - Guarantees and collateral less used due to enforcement difficulties, high recording costs, lack of marketable securities, and difficulties in realizing guarantees. - No provision for forfeiture if debtor fails to perform. - Personal and real security registers incomplete, difficult to access, and need modernization. - Fees for entering and removing mortgages: 2 percent of the amount of the loan for each recording, with no ceiling — recommendation to bring fees in line with marginal costs. - Credit reporting - CRB (BCM) and CRM (CSBF) interconnected but data not harmonized; uploading difficult; limited and possibly inaccurate information. - Priority actions: unify management; harmonize and integrate data; improve observance of deadlines and accuracy; introduce possible sanctions for non-compliance; make consulting the credit information system a possible prerequisite for credit distribution; complete legal framework (draft law on BCM’s Integrated Information System). ### RISK ASSESSMENT MATRIX — SELECTED SYSTEM RISKS (HIGHLIGHTS) - Sharp contraction in output / foreign exchange crisis — Staff assessment: medium - Sources: dependence on commodity and energy prices; political turbulence; corruption reducing donor aid and investment; vulnerability to cyclones, floods, droughts. - Impacts: restricted foreign exchange availability; government arrears and expenditure cuts; loss of output and infrastructure. - Systems for impaired loans and problem banks underdeveloped — Staff assessment: medium - Impacts: high loss given default for tradables sector and suppliers to government; possible government arrears on treasury bills; decline in bank fee income and higher funding costs; banking system appears adequately capitalized and profitable with limited systemic linkages. - Failure of a major borrower — Staff assessment: medium - Many banks have large exposures to one or two nonfinancial groups; prudential limits sometimes breached; loan classification and provisioning questionable, especially in NBFIs. - Impacts: large effect for the bank or NBFI; protracted loan recovery; potential concentration risk if multiple banks exposed to same borrower. - Failure of a parent institution — Staff assessment: low (scenario discussion notes medium operational impact) - Most banks are foreign owned and keep substantial balances with parent; parent difficulties may demand financing; Malagasy operations may be small relative to group. - Impacts: net loss to individual bank could be substantial; reduced liquidity of foreign currency assets; potential increase in funding costs and deposit runs; limited immediate liquidity outflow as banks do not receive substantial funding from parents. ### BASEL CORE PRINCIPLES (BCP) ASSESSMENT — SUMMARY - Context and methodology - Update of Madagascar FSAP jointly by IMF and World Bank in 2015; assessment reflects framework and practices as of completion date (October 2015). - Performed according to Revised Core Principles Methodology (BCBS, September 2012); proportionality principle applied. - Authorities chose assessment against both Essential and Additional BCP criteria but rated against Essential Criteria only. - Main conclusions - Low level of compliance with BCPs due to weaknesses in CSBF powers and responsibilities, SG-CSBF functions and processes, and limitations in prudential framework and enforcement. - Key supervisory governance and resourcing findings - CSBF governance: chaired by BCM governor; board composition includes members nominated by government and ministry of finance—leading to insufficient independence. - CSBF board meetings averaged two meetings a year; last meeting dated more than a year ago (at time of assessment). - Staffing shortages, especially for onsite inspection; DIE overwhelmed. - Bank rating system not sufficiently risk-sensitive; need overhaul and automated reporting. - Core Principle highlights (selected) - CP1: CSBF regulations not updated regularly; escalation of corrective actions inadequate. - CP2: CSBF lacks sufficient independence; budgetary constraints; absence of legal protection for members and staff. - CP3: Cooperation and information sharing with other domestic supervisors neither regular nor formalized; MOUs with Mauritius and Morocco only. - CP8/9: Inspections insufficient and irregular; most recent inspection of largest four banks dates to more than 10 years ago. - CP11: No clear prompt action framework; range of corrective measures limited. - CP12: Supervision based on stand-alone positions without consolidated consideration. ### CRISIS MANAGEMENT, LENDER OF LAST RESORT, AND RESOLUTION FRAMEWORK - Lender of last resort (BCM) - Current BCM law provisions lack flexibility and efficiency; not used in recent years. - Draft revisions list conditions for exceptional assistance: beneficiary solvent and provide adequate collateral; recovery plan accepted by CSBF; liquidity provision to preserve financial system stability. - Recommendation: complement provisions with explicit requirement that no alternative financing be available including from shareholders; develop and test operational procedures (penal interest rate determination; valuation and securing of collateral). - Bank recovery and resolution - Amend banking law to introduce a comprehensive and legally robust bank recovery and resolution system. - Give CSBF specific mandate for resolution with broad powers related to capital transactions; transfers to third party; limiting or temporarily prohibiting certain operations; temporarily suspending creditors’ rights to take legal action. - Resolution legislation should supersede ordinary commercial law; some shareholders’ or creditors’ rights may be overridden; CSBF resolution decisions may not be suspended. - Operational rollout: establish and test procedures for identification of vulnerable institutions; trigger thresholds and criteria for recovery or resolution options; communications policy; preparations for securing assets. - Formalize coordination among BCM, CSBF, MFB, including dedicated decision-making process for crisis prevention and management. - Amend agreements with foreign home-country authorities to enable cooperation centered on resolution as well as supervision. - Protecting depositors - Apply principle of “depositor preference” to assign preferential status to depositors. - Explore deposit guarantee scheme once prudential supervision and resolution mechanisms strengthened; design: explicit guarantee limited in amounts and scope (small depositors); could be funded largely or entirely by banks; possible mandate to finance resolution where in interest of insured depositors. ### HOME–HOST SUPERVISORY COOPERATION - Progress and gaps - MOUs signed with Mauritian and Moroccan supervisory authorities; participation in supervisory colleges. - Absence of cooperation framework with home supervisor of French banking subsidiaries and lack of provisions governing information sharing when no formal cooperation agreement. - Recommended actions - Continue to enhance information sharing with foreign supervisory authorities under existing agreements. - Reinitiate calls for cooperation and information sharing agreements with home supervisors of French and Gabonese banking groups. *Italic: IMF staff report content as provided in the source document.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### _cr16377 - EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY — Key findings and risks - The financial system must be developed while preserving financial stability; a move to a more dynamic and open regime could bring severe risks unless prudential regulations and practice are strengthened very substantially. - The banking sector is exposed to significant risks, though it has buffers, including high profitability and a stable deposit base. - Madagascar’s macroeconomic performance: relatively poor trend growth interspaced with adverse shocks from commodity prices and political instability; the economy is recovering with prospect of resumed inflows of foreign aid and investment; inflation is coming down and the balance of payments has strengthened, but the recovery is fragile. - Stability analysis identified plausible scenarios that would lead to sharply increased credit losses in a context of difficult loan recovery; vulnerabilities—especially in some smaller, less well-funded banks—might grow rapidly if a sustained lending boom emerged. - Certain banks display disconcertingly concentrated portfolios and large exposures to parent institutions. - The authorities’ initiation of macroprudential analyses is welcome. ### SUPERVISION, RESOLUTION, AND PUBLIC NBFIs - Banking supervision is not yet able to proactively detect and address emerging risks: - The Commission for the Supervision of Banks and Finance (CSBF) work was often compliance oriented. - Onsite supervision is not as frequent as needed and is not prioritized according to risks. - Effective supervision requires: transition to a risk-based approach; significant increase in trained staff (especially for on-site supervision); and reinforcement of supervisory independence. - Regulatory gaps to be filled include related-party lending and loan classification. - Supervision of microfinance institutions (MFIs) needs to become more risk based and pro-active. - Addressing problem banks and MFIs requires more decisive, early intervention and an orderly recovery and resolution framework: - Current arrangements have led to drawn-out resolution that is costly to depositors, government, BCM, and legitimate borrowers. - A law establishing a special resolution mechanism for credit institutions is needed. - Preparations should start to ensure rapid decision making and a ladder of responses to infractions. - Once a resolution mechanism and strengthened supervision are in place, exploring a deposit guarantee scheme aimed to protect small depositors may be worthwhile. - Public nonbank financial institutions (NBFIs) are frequently used to finance government policies without sufficient attention to investment security: - NBFIs (mostly in insurance and pensions) are largely government-controlled; governing bodies are not sufficiently independent; asset valuation is often unreliable; some display operational weaknesses. - Insurers are subject to prudential supervision by the Ministry of Finance and Budget (MFB)—which owns the largest undertakings—creating a conflict of interest; other NBFIs lack prudential oversight. - Early reform steps: independent audits (based on internationally accepted standards) of main public sector NBFIs and subjecting them to independent prudential supervision. ### FINANCIAL DEEPENING, INCLUSION, AND INFRASTRUCTURE - Financial intermediation is dominated by banking; financial depth remains low: - Ratios to GDP of deposit taking (19 percent) and lending (10 percent) have barely changed over the past decade. - Indicators of financial inclusion are well below comparable countries. - Opportunities and needed reforms: - Judicial system and enforceability of property rights are major hindrances to financial deepening; improvements would facilitate bank lending, leasing, and factoring for SMEs. - Considerable and rapid progress possible in payment infrastructure and credit reporting: - Authorities are advancing with a law on electronic money. - Adoption of a law on the national payment system would lay legal foundation for developing the payment system; BCM should be given oversight powers. - The two existing credit risk registries do not provide reliable and up-to-date information; they should be unified, streamlined, and subject to careful quality control. - Anti-money laundering/combating the financing of terrorism (AML/CFT) needs more human resources and more effective implementation; some legislative changes are in train and a full assessment is scheduled for later this year. ### Key FSAP policy recommendations (as summarized) - Increase the quantity and quality of the CSBF’s human resources. — Medium-term - Intensify on-site supervision of banks and MFIs. — Short-term - Begin to implement risk-based supervision. — Short-term - Regularly conduct stress tests and use results to inform banking supervision. — Short-term - Give the BCM all needed powers to promote financial stability, in cooperation with the CSBF and MFB. — Short-term - Enhance the powers and independence of financial supervisors. — Medium-term - Expand the definition of related parties, and intensify supervision of concentration risks. — Short-term - Improve asset classification and provisioning rules. — Short-term - Increase minimum capital requirements for credit institutions and MFIs. — Medium-term - Enhance the banks’ internal control regulation and introduce detailed corporate governance requirements. — Medium-term - Strengthen the legal framework for the resolution of credit institutions and MFIs. — Medium-term - Implement a graduated intervention system for problem institutions. — Longer-term - Explore setting up a deposit guarantee mechanism once banking supervision and the resolution framework are strengthened. — Longer-term - Intensify and enhance supervision of insurers and reinforce supervisory independence. — Medium-term - Institute independent, well-resourced prudential supervision of pension, savings and investment funds. — Medium-term - Conduct independent financial audits of the National Savings Fund (CEM) and the savings network of the postal service, and then define restructuring/resolution strategies. — Medium-term - Establish the legal framework for issuing and using electronic money, and implement a supervision and oversight mechanism. — Medium-term - Adopt a draft law governing the national payment system. — Medium-term - Unify and enhance credit risk registries. — Longer-term - Modernize the security registers. — Longer-term - Improve mechanisms to freeze assets in cases of suspected money laundering and recovering goods acquired illegally. — Longer-term - Footnote defining time horizons: Short-term: to 6 months; Medium-term: 6 to 24 months; Longer-term: over 24 months. ### Institutional and structural snapshots - Market structure and inclusion: - Four banks (all subsidiaries of foreign banking groups until 2014) predominate; the top four banks hold over four fifths of deposits and loans. - The government retains a minority stake in three of these banks. - Other licensed banks are majority foreign owned except one small bank recently converted from an MFI. - Financial sector composition (selected items from structure table): - Deposit collecting institutions: 38 licenses in 2015; Billion MGA 8,091; Percent of GDP 28.3. - Banks: 11 licenses in 2015; Billion MGA 7,010; Percent of GDP 24.5. - Microfinance institutions: 25 licenses in 2015; Billion MGA 401; Percent of GDP 1.4. - Insurance: 5 licenses in 2015; Billion MGA 705; Percent of GDP 2.5. - Pension funds: 1 license in 2015; Billion MGA 728; Percent of GDP 2.5. - Total (2015): 54 licenses; Billion MGA 9,891; Percent of GDP 34.8. *Source: IMF staff summary of the Madagascar FSAP Executive Summary.* ### 5. The microfinance sector provides financial services to numerous poorer ### _cr16377 - 5. The microfinance sector provides financial services to numerous poorer ### Microfinance sector (MFIs) - Activity is concentrated in five MFIs, which account for three fourths of the credit portfolio and half of the sector’s deposits. - Much of the sector operates on a cooperative basis and is organized into networks. - Two MFIs are currently being resolved. - Aggregate MFI indicators and memorandum items (selected) - Number of MFIs: 26, 28, 31, 31, 29, 25 (2010–2015) - Total assets (MGA billions): 184, 252, 315, 363, 417, 401 (2010–2015) - MFI financial soundness indicators (2010–2015, percent unless indicated) - NPLs/total loans: 7.7, 3.8, 3.9, 4.4, 5.9, 7.1 - Loan loss reserve/NPLs: 81.6, 74.5, 78.5, 74.6, 80.7, 85.3 - Annualized loan growth: 10.0, 45.1, 29.2, 20.8, 8.6, -6.3 - Net interest margin: 17.3, 15.9, 17.5, 18.4, 17.3, 17.1 - Efficiency (cost/income): 83.7, 83.8, 88.1, 88.4, 86.6, 82.5 - Return on assets: 2.8, 1.8, 2.0, 2.0, 1.8, 1.7 - Return on capital: 11.6, 7.8, 8.6, 9.0, 8.4, 8.4 - Loan to deposit ratio: 128.3, 131.4, 133.7, 125.6, 115.0, 92.5 - Liquid assets/total assets: 26.1, 21.5, 20.8, 19.7, 23.1, 27.3 - Liquid assets/short term liabilities: 77.8, 64.0, 65.3, 56.3, 67.4, 63.0 - Capital to risk-weighted assets: 15.5, 14.6, 9.3, 6.3, 4.2, 31.6 - Summary assessment - The MFI sector in aggregate is liquid and adequately capitalized and provisioned, despite the presence of some weaker institutions. - The situation of several MFIs has deteriorated but does not present a systemic risk due to their small size and very limited deposit base. - Some MFIs enjoy backing from foreign partners. - Profitability is modest despite high interest spreads because of high operating costs and the need for provisioning. ### Nonbank financial institutions (NBFIs) and government role - The government remains the dominant operator in the NBFI sector. - Government controls: the two main insurance companies, the savings network provided through the postal service, the CEM, and, to a large extent, the National Insurance and Social Security Fund (CNAPS), which manages the main pension scheme for private sector retirees and other benefits. - The NBFI sector structure has been stable except for the establishment of certain investment funds, which are outside the regulatory perimeter. - CNAPS is the only pension fund with significant assets. ### Risk factors for financial sector stability - Historical and external vulnerabilities - Madagascar has a history of sharp contractions in output and real GDP affecting especially the tradable goods sector. - External events (slow growth in advanced economies, commodity price fluctuations) have affected export earnings and the cost of imported inputs. - Political turmoil and concerns about persistent corruption have disrupted economic activity, discouraged capital formation, and led to reductions in foreign aid and concessional financing. - Government arrears and expenditure cuts on infrastructure have had knock-on effects on suppliers and purchasing capacity of public-sector workers. - Quantitative rationing of foreign exchange has sometimes intensified economic dislocation. - Concentration risks - The economy, banking sector, and corporate sector are concentrated; a few large corporates have borrowed substantially from several banks. - Individual banks’ loan portfolios often lack diversification. - Natural catastrophes could affect a large part of the formal sector and destroy banks’ fixed assets and equipment. - Funding, liquidity, and interest-rate risks - Despite a comfortable deposit base, shocks may be amplified through higher funding costs and liquidity effects. - If policy rates rise sharply or confidence falls, banks may have to increase deposit rates; higher costs could not be passed to borrowers without incurring substantial credit risk. - Possibility of deposit “runs” or system-wide liquidity loss through the balance of payments. - Foreign ownership considerations - Foreign ownership is usually a strength but could expose local banks to exceptional losses if the parent bank were to be intervened. - Many Malagasy banks place excess resources with parents; they are not vulnerable to a sudden withdrawal of external funding in normal circumstances. - Prudential and structural weaknesses - Prudential supervision has been uneven. - Governance problems in the judicial system make enforcement of contracts and loan recovery difficult. - Some banks and MFIs may be under-estimating problem loans; accounting practices in some major NBFIs and nonfinancial corporates are questionable; external audit standards and practices are reportedly weak. - Potential future macroprudential issues - Rapid economic and financial acceleration could lead to excessively rapid credit and real estate growth, translating into higher NPLs. - Relaxation of the foreign exchange constraint could intensify dollarization of bank lending, increasing borrower exchange rate risk. ### Bank soundness — indicators and stress testing - Financial soundness indicators (FSIs) overview - Capital Adequacy - Tier 1 capital adequacy ratio: 12.7, 14.5, 15.4, 16.2, 16.3, 15.0, 13.2, 13.1 (2008–2015) with standard deviation 25.9 (table shows 2015 preliminary). - Tier 1 capital/total assets: 6.5, 7.0, 7.8, 7.6, 7.8, 8.0, 7.7, 7.7 (2008–2015) and 12.7 (2015 1/ column) - Asset Quality - NPLs/total loans: 8.9, 11.3, 12.5, 13.3, 13.4, 13.0, 11.6, 10.5 (2008–2015) with standard deviation 6.3 - Loan loss reserve/NPLs (coverage): 55.7, 55.1, 59.9, 63.0, 66.6, 62.1, 62.2, 61.3 (2008–2015) with standard deviation 21.2 - Loan loss reserve/total loans: 4.9, 6.2, 7.5, 8.4, 8.9, 8.1, 7.2, 6.4 (2008–2015) with standard deviation 2.9 - Annualized loan growth: 25.6, 3.1, 9.7, 2.9, 8.7, 17.9, 20.7, 18.5 (2008–2015) with standard deviation 44.5 - Profitability and efficiency - Net interest margin: 5.5, 4.9, 5.0, 5.2, 5.1, 5.5, 5.9, 6.0 (2008–2015) with 9.3 in 2015 1/ column - Efficiency (cost/income): 48.5, 58.9, 58.9, 57.1, 59.4, 54.6, 49.4, 48.7 (2008–2015) with standard deviation 32.1 - Return on average assets: 2.9, 1.6, 1.7, 1.9, 1.8, 2.4, 3.3, 3.7 (2008–2015) with standard deviation 2.3 - Return on average Tier 1 capital: 34.9, 20.7, 21.0, 22.0, 20.3, 26.1, 34.0, 47.6 (2008–2015) with standard deviation 31.2 - Liquidity and funding - Loan to deposit ratio: 55.9, 54.8, 57.0, 52.8, 52.9, 63.0, 68.0, 70.3 (2008–2015) with standard deviation 38.1 - Liquid assets/total assets: 45.5, 46.8, 46.0, 49.8, 50.5, 43.4, 39.9, 37.8 (2008–2015) with standard deviation 15.1 - Liquid assets/short term liabilities: 67.6, 69.3, 67.6, 71.4, 74.1, 63.9, 59.2, 55.3 (2008–2015) with standard deviation 70.6 - Foreign currency liabilities/total liabilities: 19.6, 18.0, 19.5, 18.4, 17.6, 16.4, 17.6, 16.7 (2008–2015) with standard deviation 10.0 - Foreign currency deposits/total deposits: 21.0, 19.4, 21.5, 19.5, 19.2, 16.6, 18.1, 17.7 (2008–2015) with standard deviation 9.9 - Claims on BCM/short term liabilities: 29.6, 25.2, 23.9, 30.8, 28.9, 21.3, 19.1, 17.9 (2008–2015) with standard deviation 26.1 - Nonbank deposits/total liabilities: 82.0, 83.3, 82.4, 82.3, 81.6, 79.7, 78.8, 78.8 (2008–2015) with standard deviation 11.6 - Interconnectedness - Claims on other credit institutions/total assets: 15.9, 16.9, 17.9, 14.5, 14.3, 12.1, 13.7, 12.6 (2008–2015) with standard deviation 8.5 - Claims on NBFIs/total assets: 0.0 (2008–2015) - Liabilities to other credit institutions/total liabilities: 0.8, 1.4, 1.3, 0.8, 1.1, 1.6, 2.3, 1.6 (2008–2015) with standard deviation 7.0 - Liabilities to NBFIs/total liabilities: 0.4, 0.4, 0.8, 1.1, 1.3, 1.1, 0.9, 0.9 (2008–2015) with standard deviation 7.0 - Net Open For. Curr. Position to Capital: 10.6, 15.4, 15.1, 14.5, 11.9, 17.1, 8.9, 9.3 (2008–2015) - Stress testing framework and scenarios - Tests covered all 11 commercial banks. - Two top-down scenarios: - Scenario I (severe): based on the possibility of another episode of output contraction similar to 2008–10, leading to higher NPLs and higher provisioning needs on existing and new NPLs. - Scenario II (external crisis - extreme): involves feedback through constrained foreign currency availability and government operations, leading to an output collapse and deterioration in loan quality concentrated in affected sectors; a rise in funding costs; and falling fee income. - Additional sensitivity tests included: loan quality migration; provisioning of performing loans; provisioning of non-performing loans; provisioning of non-resident claims; exchange rate appreciation; natural catastrophe (destruction of nonfinancial assets); increase of financing costs; increases in long-term and all rates; drop in commission revenues; natural catastrophe (loss of revenue). - Banks also conducted bottom-up tests on non-performance of loans to their two largest borrowers. - Key stress test results and findings - Under the severe scenario, several banks would become under-capitalized, but all banks would remain solvent. Retaining all earnings for a year would allow capitalization levels to be restored. - Under the more extreme economic shock scenario, much of the banking system (including some of the large banks) would become under-capitalized, in some cases substantially, but not insolvent. - Deterioration in loans currently classified as performing, or tighter classification rules that reveal their true quality, may have a somewhat larger effect than would an increase in provisioning on loans already classified as nonperforming. - Possible losses on exposures to (parent) banks abroad constitute a substantial risk for individual banks. - A large rise in funding costs that cannot be passed on to borrowers or the direct costs of natural disasters are significant but do not appear in isolation to constitute systemic threats. - Interest rates, the slope of the yield curve, and the nominal exchange rate do not in themselves constitute important risk factors, except through links to credit risk. - Top-down solvency stress testing summary (Table 5 high-level outcomes) - Historic - severe: 4 banks in 4 to 8 percent CAR category; 10 banks in 0 to 4 percent; 0 under 0 percent; system average losses/Avg. 2014-15 Net Income 67...0899 (table formatting preserved as in source). - External crisis - extreme: 1 bank in 4 to 8 percent; 5 in 0 to 4 percent; 0 under 0 percent; system average losses/Avg. 2014-15 Net Income ...7304165 (table formatting preserved). - Bottom-up test on two largest exposures - Some banks would have to double provisioning, at a cost of more than one third of capital, if exposures to their two largest borrowers became impaired. - Vulnerability is reduced where banks can realize collateral. - Impact of additional provisioning on two largest exposures (Number of banks, percent) - Excluding collateral: less than 10 percent: 4; 10 to 30 percent: 3; more than 30 percent: 2; average: 3 - Including collateral: less than 10 percent: 5; 10 to 30 percent: 5; more than 30 percent: 0; average: 1 - Liquidity stress testing - Short-term liquidity risk does not appear to be a major vulnerability for the system as a whole, but results vary greatly across banks. - A few banks have above-average exposure to both credit risk and liquidity risk and would have few buffers to withstand a liquidity outflow absent help from a foreign parent. - Representative liquidity measures (baseline and stressed percentiles) - Liquid Assets / Total assets: 38, 32, 23, 23, 33, 32, 25 - Liquid Assets / Short term liabilities: 55, 49, 37, 50, 40 - Liquid assets less mandatory reserves / Total assets: 28, 21, 12, 22, 21, 14 - Liquid assets less mandatory reserves / Short term liabilities: 40, 32, 19, 33, 22 - Data and risk-mitigation gaps - Some data gaps raise concerns that risk factors may be overlooked or under-estimated. - Limitations: weak supervision and loan classification rules, questionable accounting practices in some major NBFIs and nonfinancial corporates, weak external audit standards. - Authorities have few means to support financial system stability or deal quickly with bank deterioration. - Recommendations on stress testing and supervisory practice - Authorities are encouraged to continue to undertake stress testing exercises regularly and to refine them. - Authorities have initiated their own stress testing exercise since the FSAP mission and intend to use results to inform supervisory prioritization. - Suggested extensions/refinements: - Undertake a quantitative evaluation of common exposures to large borrowers, including SOEs. - Develop liquidity measures that better reflect the true ability of banks to dispose of assets quickly and differentiate between liquidity by currency. *Source: IMF staff report content provided in the submitted PDF excerpt.* ### 23. Insurance undertakings’ accounts display high solvency margins, but the valuation ### 23. Insurance undertakings’ accounts display high solvency margins, but the valuation ### Insurance sector: findings and concerns - Accounts show high solvency margins, but: - Valuation of some investments is questionable (many investments in real property seem to be over-valued). - Some claims on the public sector (notably SOEs) may be questionable. - Provisioning on assets appears to be inadequate. - Profitability is weak and operational efficiency is low. - Insurers have difficulty in collecting premiums on a timely basis and in paying out on claims, despite substantial operating expenses. - Investment choices of dominant state-owned insurers suggest pressures from special interests. - While these weaknesses are unlikely to cause systemic financial instability, they reduce the sector’s contribution to overall economic efficiency and development. - Recommendations: - External audits of the main companies. - Change in governance, leading to privatization, is recommended. ### Table 9. Madagascar: Insurance Sector Indicators (percent) 201220132014 - Non-life premiums/GDP0.50.50.5 - Life premiums/GDP0.10.20.2 - Non-life premiums/total premiums77.076.178.0 - Claims/premiums45.041.441.4 - Operating expenses/premiums30.228.525.4 - Net revenue/premiums11.810.410.5 - Provisions on claims due/claims paid out104.396.0105.7 - Investments/technical provisions118.0139.9142.1 - Own funds/technical provisions86.980.884.4 - Profits/own funds5.75.76.0 *Sources: Malagasy authorities and Fund staff estimates.* ### Savings institutions: findings and recommendations - Major savings institutions—CNAPS, CEM, and the post office saving scheme—display: - Unsound investment decisions to varying degrees. - Under-provisioning and operational weaknesses. - Disproportionate investment in troubled SOEs and questionable asset valuations. - Sporadic provisioning for non-performance. - Poor service quality and difficulty maintaining timely and accurate accounts. - These institutions hold savings amounting to almost five percent of GDP and thus represent a contingent government liability. - Recommendations: - Urgent independent financial and operational audits conducted in accordance with internationally accepted standards. - To continue in business they need substantial financial resources, improved and independent governance, and effective risk management systems. - Consider a narrow mandate for some institutions (invest only in assets of the highest quality and leave credit risk assessment to commercial banks). - Bring CNAPS, CEM, and the post office under prudential supervision by the CSBF as resources permit. ### Macro- and microprudential framework — Cross-cutting issues - Institutional responsibilities and gaps: - CSBF: prudential regulation and supervision of banks and MFIs; closely linked to the BCM. - BCM: macroprudential surveillance and lead role in payment system functioning. - Insurance Supervision Service (SCA) in the MFB: prudential supervision of insurance undertakings and brokers. - CEM and the post office: under financial oversight of the MFB but not subject to prudential regulations; CNAPS not subject to prudential regulations. - A dedicated consumer protection mandate exists for the financial sector. - Governance and independence issues: - Supervisory agencies lack full independence and satisfactory governance; government can intervene in supervisory decisions and control budgets. - Acute conflict of interest as owner or part-owner of financial institutions that it supervises and from which it borrows substantially. - Recommendation: place supervisory responsibility with a strong and independent agency while major NBFIs remain in public ownership; adopt a code of ethics; grant budgetary autonomy (perhaps based mainly on contributions from industry); agencies accountable to parliament and the public. - Human resources and communication: - Shortage of well-trained staff; existing staff engaged in data entry or localized crises. - Need for a pro-active communication strategy on financial sector issues; consider establishing a communications division at the BCM, possibly jointly with the CSBF. ### Macroprudential framework - BCM has established a financial stability unit to monitor systemic risks and analyze macrofinancial linkages; the recent Financial Stability Report is comprehensive. - Given currently limited macroprudential concerns, authorities should: - Develop the institutional framework to track and react to systemic risks; proactive policy not needed now. - Amend legislation to give the BCM a mandate and the right to obtain relevant information (including from credit registries) and use instruments to support systemic stability, in coordination with the CSBF. - Identify and fill data gaps and upgrade capacity to analyze macrofinancial issues, taking into account cross-border and external aspects (home-country developments of banks active in Madagascar; commodity and energy prices; effects on domestic liquidity of interbank foreign exchange market events). ### Banks: supervision, regulations, and prudential requirements - Basel Core Principles assessment identified challenges: low compliance due to legislative gaps and supervisory practice weaknesses. - Supervisory functions: - Supervision and on-site supervision must become more pro-active and intrusive; mobilize resources for regular on-site supervision by institution and by theme. - Short-term measure: on-site inspection of large loan portfolios of the four major banks (process already started). - CSBF must adopt risk-based tools and procedures; integrate them into supervision chain. - Need for a modernized and extended rating system (covering banks and MFIs, incorporating stress testing results). - Introduce an automated prudential reporting system. - Cross-border cooperation: - Continue to deepen relationships with supervisory counterparts; sign cooperation agreements with other counterparts, particularly in Europe. - Corrective measures: - Establish a framework specifying triggers, responsibilities, and time limits for effective response to bank violations and vulnerabilities. - Prudential regulations to strengthen: - Broaden the definition of parties related to a bank; review large exposures regulation given the concentrated economy and corporate interconnectedness. - Apply guidelines for conservative assessment of guarantees and tighten prudential treatment of restructured loans. - Update instructions on internal controls; reinforce provisions on compliance and governance. - In due course, capital requirements should consider other risk factors (exchange rate risk, operational risk); raise the 8-percent minimum to reflect macroeconomic volatility. - Implement guidelines on liquidity risk management (including separate foreign currency liquidity) and a prudential liquidity ratio. ### Microfinance - Regulatory amendments needed: - Establish stricter rules for loan classification and provisioning. - Support supervision of networks of mutual institutions. - Set minimum liquidity levels and higher capital requirements (including revised risk-weightings) for MFIs with more extensive operations. - Supervision and intervention: - Onsite inspections need prioritization by risk; improve offsite supervision with at least larger MFIs and networks reporting half yearly through an automated process. - Decision-making on problem MFIs (restructuring/liquidation) has been slow due to legal/practical constraints and lack of willingness to act. - Relaxing constraints: - A stronger prudential system would allow lifting constraints related to credit ceilings (low and unchanged since 2007), portfolio composition, and provision of certain services (e.g., electronic money and debit cards) for non-bank microfinance providers. ### Other financial sectors: insurance, savings institutions, and investment funds - Insurance supervision: - Efforts stymied by lack of capacity and lack of independence. - SCA conducts inspections and demands corrective measures but expertise is limited, regulations are partially outdated, and supervisors rely on accounting statements that contain questionable valuations. - Recommendation: transfer supervision of the insurance sector to an independent agency (possibly the CSBF). - Privatization of dominant state-owned insurers should be on the agenda to upgrade management, financial performance, and customer service; privatization would foster competition and better products. - Supervision of CNAPS, CEM, and postal service: - Given large customer resources collected, effective supervision is critical. - These institutions face serious difficulties obscured by non-transparent accounting; they should undergo external audits to international standards and then be subject to independent supervision. - They need licensing, reporting and supervision requirements commensurate with their fiduciary responsibilities toward many retail clients. - Investment funds: - Need to be subject to regulation and supervision, starting with an investigation of the nature of their business and governance. ### AML/CFT - Risk and framework status: - Threat of money laundering significant (smuggling, tax offenses, corruption); could affect financial system stability and reputation. - AML legislation timeline: - 2004: AML legislation adopted; financial intelligence unit (SAMIFIN) established. - 2007: Regulations on internal procedures, know-your-customer requirements, detection and reporting of suspicious transactions promulgated. - 2012: Criminal sanctions detailed. - 2014: Law against financing of terrorism and transnationally organized crime adopted. - Madagascar is in the process of joining the Egmont group and the Eastern and Southern Africa Anti-Money Laundering Group. - Gaps and recommendations: - Legislation in preparation to close remaining gaps, including coverage of designated nonfinancial enterprises and professions; criminalization of FT; provisions for freezing assets designated under UN Security Council Resolutions and when ML/FT is suspected; subsequent management of those assets; and customer due diligence for politically exposed persons. - Proposed amendments should comply with FATF recommendations. - Implementation weaknesses: - SAMIFIN processes STRs diligently but lacks resources to process other information (bank declarations of large value cash operations, MFB reports on tax offenses). - Public prosecutor does not seem to fully use STRs; no convictions for ML or FT. - World Bank to conduct a detailed assessment of FATF recommendation implementation; meantime, an AML/CFT risk assessment to be prepared with World Bank help. ### Crisis management and safety nets - Lender of last resort: - Current BCM law provisions lack flexibility and efficiency; not used in recent years. - Draft revisions list conditions for exceptional assistance (beneficiary solvent and provide adequate collateral; recovery plan accepted by CSBF; liquidity provision to preserve financial system stability). - Recommendation: complement provisions with an explicit requirement that no alternative financing be available including from shareholders. - BCM needs to develop and test operational procedures (penal interest rate determination; valuation and securing of collateral under tight deadlines). - Bank intervention, crisis management, and resolution: - System limited to a few instruments of questionable legal robustness and operational efficacy. - CSBF authorized to take administrative or disciplinary measures, but measures are limited and can be adopted only when problems are advanced; decision-making is cumbersome. - CSBF may appoint a provisional administrator, but power is exercisable late, limited in scope/duration, and may be costly for authorities. - System characterized by lack of: - Operational preparedness of different agents. - Available resources for financing possible resolution measures. - Mechanisms to speed recovery of assets. - CSBF has not developed internal processes for prompt intervention; credit institutions have not drawn up recovery plans. - Public resources for financing resolution actions are very scarce given the fiscal situation. - Legal proceedings to seize and liquidate assets are typically long and legally uncertain. - Recent resolution cases highlight damaging results of delays in corrective measures and appointment of provisional administrators, omissions in auditors’ certification work, conflicts of interest in choice of provisional administrators or liquidation trustees, and legal risks. *Sources: Malagasy authorities and Fund staff estimates.* ### 51. The banking law therefore needs to be amended to introduce a comprehensive and ### _cr16377 - 51. The banking law therefore needs to be amended to introduce a comprehensive and ### Bank recovery and resolution - Recommendation: Amend the banking law to introduce a comprehensive and legally robust bank recovery and resolution system. - Mandate and powers: - Give the CSBF a specific mandate for resolution with broad powers related to capital transactions; making transfers to a third party; limiting or temporarily prohibiting certain operations; or temporarily suspending creditors’ rights to take legal action. - Powers intended to resolve the institution’s problems and preserve critical functions without using public funds or undermining public confidence. - Resolution legislation should supersede ordinary commercial law; some shareholders’ or creditors’ rights may be overridden, and decisions by the CSBF, in its capacity as resolution authority, may not be suspended. - Operational rollout requirements: - Establish and test procedures for key stages: identification of vulnerable institutions; trigger thresholds and criteria for choosing recovery or resolution options; verification of prior conditions; communications policy; preparations for securing assets. - Formalize coordination among BCM, CSBF, MFB, including a dedicated decision-making process for crisis prevention and crisis management. - Amend existing agreements with foreign home-country authorities (given considerable foreign bank penetration) to enable cooperation centered on resolution as well as supervision. - Legal provisions should anticipate cooperation (information sharing, non-discrimination against creditors based on nationality or claim location). ### Protecting depositors - Depositor preference: - Apply the principle of “depositor preference” to assign depositors preferential status (instead of equal ranking with other unsecured creditors under ordinary liquidation law) to limit losses in liquidation. - Deposit guarantee scheme: - Once prudential supervision and resolution mechanisms are substantially strengthened, explore establishment of a deposit guarantee scheme to preempt ad hoc public-fund rescues. - Scheme objectives: provide social protection for the underprivileged; protect the public sector from ex post support to failed institutions. - Design features: explicit guarantee limited in terms of amounts and scope of beneficiaries (small depositors); could be funded largely or entirely by the banks. - Possible mandate extension: involvement in financing bank resolution where in the interest of insured depositors. ### Financial development — Judicial system, credit and bankruptcy law - Overall finding: Improvement in effectiveness and integrity of the judicial system is crucial for financial intermediation and stability. - Observations: - Credit and bankruptcy legislation is broadly acceptable but implementation is slow and erratic. - Court decisions inconsistent and ill-founded; lenders distrustful of justice system—uncertainty on time frame, cost, and outcome of enforcement. - Lenders largely restrict credit to counterparties with ongoing relationships (often foreign corporations). - Collateral and guarantees: - Guarantees and collateral are less used due to enforcement difficulties, high recording costs, lack of marketable securities, and sizeable difficulties in realizing guarantees. - No provision for forfeiture (direct transfer of property ownership to creditor without court intervention) if debtor fails to perform. - Registers and fees: - Personal and real security registers are incomplete, difficult to access, and need modernization; land title processes are long, difficult, and costly. - Fees for entering and removing mortgages: 2 percent of the amount of the loan for each recording, with no ceiling — recommendation to bring fees into line with marginal costs. ### Credit reporting - Current system: - Credit Registry for Banks (CRB) managed by BCM’s Credit Directorate; Credit Registry for MFIs (CRM) managed by CSBF. - Registries are interconnected but data not harmonized; uploading information is difficult; limited and possibly inaccurate information. - Priority actions: - Unify management of the two databases; harmonize and integrate data transmitted by banks and MFIs. - Improve observance of deadlines, accuracy of data, and introduce possible sanctions for non-compliance. - Make consulting the credit information system a possible prerequisite for credit distribution. - Complete legal framework for credit reporting; authorities preparing a draft law on the BCM’s Integrated Information System. - Supporting statistics and findings cited: - Doing Business 2015 simple scenario: 871 days for a debt to be paid (650 days on average in Sub-Saharan Africa), at a cost of 42 percent of the debt (including 20 percent in attorneys’ fees and 16 percent in court costs). ### Other financing instruments - Leasing: - Underdeveloped due to disadvantageous tax regime and problems repossessing leased items amid poorly-defined rights and unpredictable court judgments; recommendation: more beneficial tax regime to promote leasing for SMEs. - Factoring: - Substantial internal financing in value chains (textiles and agriculture) indicates potential for factoring for export and SME sectors. - Enabling factoring requires legal framework for assigning accounts receivable. ### Financial infrastructure — Payment systems and instruments - Automated systems: - Implementation of RTGS and ACH represents significant advance. - RTGS processes large-value transactions in real time on a gross basis; ACH processes retail transactions (checks, credit transfers, bills of exchange, promissory notes). - Operational statistics: - The RTGS processed 75,510 operations in 2014, totaling MGA 38,507 billion, which is equivalent to the country’s GDP. - The remote clearing system processed 8.9 million transactions, totaling MGA 13,342 billion, equivalent to about ⅓ of GDP. - Legal and operational gaps: - Legal framework for payments incomplete; draft law on payment systems being prepared but scope should be expanded to securities settlement systems and retail payments. - Draft should include netting, protection against bankruptcy proceedings, dematerialization of securities, and direct debits. - BCM oversight should extend over the entire national payment system to guide stability and modernization. - Retail payments market issues: - Underdeveloped; high cash predominance. - Checks are not crossed and can be endorsed multiple times then paid in cash. - Payment cards lack interoperability. - Policy levers to discourage cash: pay higher-level government salaries directly into bank accounts; allow MFI networks to issue debit cards. - Securities settlement: - Securities leg processing is manual with no mechanism to ensure simultaneous cash settlement. - Recommendation: introduce delivery versus payment mechanism via RTGS confirmation of cash settlement before delivery. ### Electronic money - Development and usage: - Since 2010, three banks authorized to issue electronic money in partnership with mobile telephony operators acting as operational intermediaries. - Number of active subscribers reached about 10 percent of the adult population. - Legal framework and supervision: - A law on electronic money is at an advanced stage of preparation; should create statutes for electronic money institutions (EMIs) and provide for effective supervision. - Draft law covers access and practice rules for issuing electronic money and prudential supervision of EMIs. - BCM’s role: structure and develop electronic money and supervise implementation of interoperability project between operators, particularly with respect to rates. ### Risk Assessment Matrix — selected system risks (summary) - Sharp contraction in output / foreign exchange crisis — Staff assessment: medium - Sources: dependence on commodity and energy prices; political turbulence; corruption reducing donor aid and investment; vulnerability to cyclones, floods, droughts. - Impacts: restricted foreign exchange availability; government arrears and expenditure cuts; loss of output and infrastructure. - Systems for impaired loans and problem banks are underdeveloped — Staff assessment: medium - Impacts: high loss given default for tradables sector and suppliers to government; possible government arrears on treasury bills; decline in bank fee income and higher funding costs; banking system appears adequately capitalized and profitable with limited systemic linkages. - Failure of a major borrower — Staff assessment: medium - Many banks have large exposures to one or two nonfinancial groups; prudential limits exist but are sometimes breached; loan classification and provisioning questionable, especially in NBFIs. - Impacts: large effect for the bank or NBFI; protracted loan recovery; potential concentration risk if multiple banks exposed to same borrower. - Failure of a parent institution — Staff assessment: low (but scenario discussion notes medium operational impact) - Most banks are foreign owned and keep substantial balances with parent; parent difficulties may demand financing; reforms in home countries increase likelihood of bail-in of creditors; Malagasy operations may be small relative to group. - Impacts: net loss to individual bank could be substantial; reduced liquidity of foreign currency assets; potential increase in funding costs and deposit runs; limited immediate liquidity outflow as banks do not receive substantial funding from parents. ### Basel Core Principles (BCP) assessment — Introduction and methodology - Assessment context: - Part of the update of the Madagascar FSAP undertaken jointly by the IMF and the World Bank in 2015; reflects framework and practices as of the completion date of the assessment (October 2015). - Subsequent actions after October 2015 are not taken into account. - Scope and approach: - Covered entities supervised by CSBF: credit institutions (CIs) and micro-finance institutions (MFIs). - Performed according to the Revised Core Principles Methodology issued by the BCBS in September 2012; not directly comparable to the 2005 assessment due to methodological changes and higher supervisory expectations. - Proportionality principle applied in assessment to reflect complexity, interconnectedness, size, risk profile, and cross-border operations. - Authorities chose to be assessed against both Essential and Additional BCP criteria but rated against the Essential Criteria only. - Evidence and judgment: - Assessment based on review of legal framework, supervisory materials, meetings with SG-CSBF, senior CI management, Professional Banking Association, and external auditors. - Authorities provided a self-assessment, supplementary questionnaire answers, and access to supervisory documents and files. - Conclusions required judgment by assessors, with the methodology providing internationally consistent measures of supervisory quality relative to BCPs. *Italic: IMF staff report content as provided in the source document.* ### 8. The assessors appreciate the excellent cooperation shown by the authorities. The ### 8. The assessors appreciate the excellent cooperation shown by the authorities. The ### C. Overview of the Institutional Setting and Market Structure - The CSBF is the main body responsible for regulating and supervising CIs and MFIs. - Legal and organizational basis: - Banking law no. 95-030 (February 1996) — CSBF competent authority for issuing banking regulations and enforcing them. - Law no. 2005-016 (September 2005) — CSBF oversight of MFIs. - SG-CSBF (General Secretariat) performs CSBF operational activities and is composed of staff from Central Bank of Madagascar (BCM). - SG-CSBF structure: - Offsite control department (DCP) - Onsite inspection department (DIE) - Regulation and studies department (DRE) - Support department responsible for supervisory methods, procedures and database (DMP) - CSBF governance: - Chaired by the governor of the Central Bank of Madagascar (Banque Central de Madagascar, BCM) - Comprises eight members including: the BCM General Director, the Director of Treasury, a member nominated by the ministry of finance, a member nominated by the Head of the Supreme Court, and three members nominated by the government (for their professional competence) - Banking sector structure and size: - Commercial banks dominate; foreign banks control a major part of total banking sector assets. - The four largest banks account for over four fifth of the system. - Three of the four largest are subsidiaries of foreign banking groups; the fourth owned since 2014 by foreign and local investors. - Other licensed banks: eight banks comprising five subsidiaries of Mauritian, French, and Gabonese banks and three banks specialized in micro-finance (one with local ownership). - The government maintains minority stakes in several banks. - Twenty-five MFIs were in operation at end-2015. - Financial intermediation metrics (end-2015): - Total financial assets represented 35 percent of GDP. - Three-quarters of total financial assets consist of banking system assets. - Deposit accounts: 19 percent of GDP. - Credit operations: 10 percent of GDP. - Banking assets in absolute terms slightly exceed US$2 billion. - Trend: Financial intermediation very shallow with no real progress in financial deepening since 2005; ratios much lower than comparative peers. ### D. Preconditions for Effective Banking Supervision - Macroeconomic and political environment: - Trends disappointing due to episodes of domestic political turmoil. - Periods of rapid growth driven by mining and tourism, but exposed to fluctuations in international prices and conjunctural conditions. - Political disruption led to restricted donor funding, government arrears, monetarization of fiscal deficits, deteriorating infrastructure, and severe output contractions. - Legal and business environment constraints: - Bankruptcy and insolvency laws appear adequate, but enforcement is deficient due to lack in skills and competence of involved actors and interaction with various types of pressure and influence. - Judiciary process very slow; According to “Doing Business,” Madagascar ranked 146th (out of 189 countries) in respect of the smoothness of contract execution. - Banks’ credit adjudication processes impeded by difficulties in foreclosure of collateral and guarantees. - Financial reporting and accounting: - Based on the 2003 code related to commercial enterprises and 2005 general accounting framework, companies required to keep annual accounts with the commercial registry. - Documents effectively not well maintained due to lack of human resources and other necessary tools. - Financial stability framework: - BCM created a financial stability unit (FSU), but no clear established financial stability framework. - Current legal texts (Statutes) assign BCM responsibility of maintaining price stability without mention of a financial stability mandate. - Banking law empowers BCM to ensure soundness of banks and compliance with applicable regulations. - Financial stability committee (FSC) created in October 2014 by internal decision of BCM governor, but is still not functional. - A first financial stability report was published for the year 2013; prepared primarily by the FSU with input from SG-CSBF on banking data. - No framework governing interactions between BCM and other competent authorities for financial stability purposes. - No institution has a legal mandate specifically for consumer protection in the financial sector. - Crisis management and safety net: - Bank crisis management framework limited to a few measures lacking legal robustness and operational effectiveness. - Banking law empowers CSBF to take administrative and disciplinary actions, but range of actions limited and ill-suited to early and progressive intervention. - Disciplinary sanctions require agreement of six CSBF members, which may be difficult in case of vacancies. - CSBF can put a bank under temporary administration, but measure adopted late, limited in assumed powers and tenure, and has proven costly to BCM which sometimes assumes associated financial costs. - No adequate financial safety net system in Madagascar. - CSBF has limited resolution powers. - No deposit guarantee system in place; government has sometimes provided ad hoc compensation to depositors of failed institutions. - Market discipline and disclosure: - Absence of financial markets and weak financial disclosure requirements impede market discipline. - No requirements to publish consolidated statements, interim financial statements, and other qualitative information related to banks’ risk management and governance. - Annual reports of CIs and MFIs are not generally available on their webpages. ### E. Key Findings (summary of supervisory weaknesses and recommendations) - Overall compliance: - Supervisory and regulatory framework shows a low level of compliance with the BCPs due to weaknesses in CSBF powers and responsibilities, SG-CSBF functions and processes, and limitations in prudential framework and enforcement. - Strengthening CSBF powers and independence: - Decision-making on sanctions and disciplinary measures should be simplified. - CSBF board nomination and composition should be reinforced by: - (i) putting minimum criteria of competence and professional experience, - (ii) making the selection process more transparent and objective, - (iii) increasing the number of independent members, - (iv) considering terminating the ministry of finance right in nominating two of CSBF board members, - (v) establishing a code of ethics for CSBF board and its General Secretariat. - CSBF intervention and resolution powers should be enhanced to include an expanded range of tools like purchase and assumption, asset sales and mergers. - CSBF functioning and governance: - CSBF board meetings have averaged two meetings a year over the last year (with the last meeting dating back to more than a year), limiting agility in responding to emerging risks. - CSBF should hold more regular meetings to discuss banking risks and stability issues, licensing conditions, major changes in shareholders and significant acquisition operations. - Supervisory resourcing and staffing: - Increase resourcing and staffing, particularly for onsite inspection (DIE is overwhelmed with follow-up of weak banks and problematic MFIs). - Current staffing shortage impedes proper follow-up of other banks, including those that may pose systemic risks. - Risk-based supervisory approach: - SG-CSBF should adopt more risk-based tools and procedures and integrate them across supervisory processes. - Existing bank rating system (in use for ten years) is not sufficiently risk-sensitive, comprehensive, or integrated in offsite and onsite processes; should be overhauled and a similar system applied for MFIs. - Incorporate findings from stress testing and overall stability analysis into ratings. - Introduce an automated prudential reporting system to facilitate supervisory analysis and assessment. - Short-term supervisory measures: - Conduct a thematic inspection of the credit portfolio quality of the four largest banks to assess main credit risks and adequacy of loan classification and provisioning. - Increase regular contacts with banks to monitor evolution of risk models and activities. - Enhance cross-border supervision, given most large banks are subsidiaries of foreign banking groups. - Prompt corrective action framework: - Establish a prompt corrective action framework in line with CSBF powers, with regulations and procedure manuals defining triggers, responsibilities, and deadlines. - Involve CSBF earlier in discussing and taking actions on problematic institutions. - Governance, audit and internal controls: - Update and strengthen internal control regulation (dates back to 2000) with new requirements on governance and compliance. - Enhance external audit quality by developing qualification requirements for banks’ external auditors, minimum requirements for their work and reports, and a process for evaluating their work and taking corrective measures. - Prudential regulations to better assess risks: - Expand the related party definition to align with Basel guidelines. - Closer follow-up and supervisory action on large exposures given concentrated economy structure. - Capital adequacy ratio should consider operational and foreign currency risks; the eight percent minimum should be increased. - Stricter treatment of guarantees and collateral warranted due to difficult legal and business environment. - Strengthen prudential framework for restructured loans. - Develop new regulations and prudential limits on banks’ minimum liquidity ratio and liquidity risk management (in ariary and foreign currency). ### F. Authorities’ Response - Authorities welcome the review carried out by the joint IMF-World Bank FSAP team, intended to measure compliance with the Basel Core Principles for Effective Banking Supervision and to understand banking system risks. - Authorities generally concur with the remarks and recommendations. - Actions already taken or commenced: - Commencement of a program of on-site inspection of the credit portfolios of the major banks. - Recruiting more supervisors. - Making appointments to the CSBF Board, which now meets more regularly. - Intent to implement a comprehensive reform program in keeping with FSAP findings and recommendations, noting this effort will require technical and financial support. ### Table 1 — Selected summaries of compliance with the BCPs (high-level points) - Core Principle 1 (Responsibilities, objectives, and powers): - CSBF regulations not updated regularly; escalation of corrective actions not adequate or timely; inadequate powers to require compliance with stricter prudential requirements. - Core Principle 2 (Independence, accountability, resourcing and legal protection for supervisors): - CSBF lacks sufficient independence due to board composition (two members appointed by finance ministry), budgetary constraints, and absence of legal protection for members and SG-CSBF staff; no criteria or formalized nomination processes for independent members. - Core Principle 3 (Cooperation and collaboration): - Cooperation and information sharing with other domestic supervisors neither regular nor formalized; banking law does not foresee such relations; memoranda of understanding exist with Mauritius and Morocco only. - Core Principle 4 (Permissible activities): - Banking law does not explicitly prohibit the use of the word “bank” by nonbanks. - Core Principle 5 (Licensing criteria): - Licensing assessments not very thorough; responsibilities related to withdrawal of banking licenses not fully clear; insufficient post-licensing follow-up. - Core Principle 6 (Transfer of significant ownership): - Ownership levels requiring prior CSBF approval are very high; CSBF cannot cancel or reverse improperly done changes in significant ownership without prior approval; regulation does not assess effective shareholders or beneficiaries. - Core Principle 7 (Major acquisitions): - Acquisition of participations in other banks/financial institutions not subject to notification or prior approval by CSBF; quantitative thresholds applied mechanically without specific prudential criteria. - Core Principle 8 (Supervisory approach): - Bank rating system ineffective for risk-based supervision; offsite department spends more time on manual treatment of reports with minimal analysis; no regular reports on risk tendencies and system performance; no framework for corrective actions. - Core Principle 9 (Supervisory techniques and tools): - Inspections insufficient and irregular due to staff shortages; most recent inspection of largest four banks dates to more than 10 years ago; inadequate information system for prudential reporting. - Core Principle 10 (Supervisory reporting): - Supervisory reports contain serious deficiencies (liquidity risk, stable funding risk, concentration risk, interest rate risk, etc.); frequency not well adapted; lack of automation creates burdens; penalties for late reports not sufficiently flexible. - Core Principle 11 (Corrective and sanctioning powers of supervisors): - No clear prompt action framework; corrective measures not systematic or gradual; CSBF often informed late about banking problems; range of corrective measures limited; CSBF diligent in requesting corrective action in response to off-site deficiencies. - Core Principle 12 (Consolidated supervision): - Supervision based on stand-alone positions without consolidated consideration; no prohibition on establishing banking group structures; only required consolidated reporting is for MFIs operating under a network structure; regulations do not require periodic reporting on parent companies, activities and subsidiaries. *Source: _cr16377 - 8. The assessors appreciate the excellent cooperation shown by the authorities. The* ### 13. Home-host ### 13. Home-host ### Findings - Progress was made on information exchange with home supervisory authorities of foreign banking subsidiaries established in Madagascar, including signing MOUs with Mauritian and Moroccan supervisory authorities and participating in supervisory colleges they organized for the respective banking groups. - Other issues need to be addressed: absence of cooperation framework with the home supervisor of French banking subsidiaries, and the absence of any legal provisions governing information sharing requirements with other supervisory authorities when there is no formal cooperation agreement. ### Key recommended actions - Continue to enhance information sharing with foreign supervisory authorities in the context of the already signed cooperation agreements. - Reinitiate the call for cooperation and information sharing agreements with home supervisors of French and Gabonese banking groups. *Source: _cr16377 - 13. Home-host* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16377.pdf_