## _cr16394

## Source details

**Canonical URL:** [_cr16394](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16394.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16394.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16394.pdf.json)

---

### Government Revenues and Grants
- Fiscal performance and outlook adversely affected by systemic challenges in revenue administration and public financial management, producing a structural imbalance between domestic resource mobilization and current spending, especially on public wages and salaries.
- Imbalance limits domestically-financed capital spending essential for growth and social development; more pronounced relative to similar sub-Saharan African countries even after sizeable one-off budget grants are accounted for.

Findings (2005–2015)
- Total resources (internal and external) over the last decade generally exceeded those available to most similar sub-Saharan African countries, with a peak in 2013 due to the HIPC Initiative.
- Excluding the HIPC debt relief grant, resources were generally above the sample average.
- Excluding external project grants and other grants financing, domestic revenue (tax and non-tax) has mostly been below the median for the comparator sample.
- Domestic revenue peaked at 19 percent of GDP in 2012 due to receipts from the Economic Citizenship Program (ECP).

Tax and non-tax revenue
- Tax revenue mobilization weak: tax revenue performance generally drops into the first quartile of the comparator sample.
- Contributing factors: inefficient revenue administration at both general tax and customs administration levels.
- Non-tax revenue stronger, supported by:
  - Economic Citizenship Program (ECP) receipts in 2012.
  - Sale of the second telecommunication license in 2015.

Grants and composition
- External grants generous relative to most similar countries, including and excluding HIPC debt relief.
- Project grants particularly high:
  - As of end-2015, project grants represented 6.1 percent of GDP for Comoros.
  - The respective average of SSA countries was about 2.3 percent of GDP.
- Budget grants generally lower and more volatile; notable one-off peaks: Qatar in 2010 and Saudi Arabia in 2015.
- HIPC-related:
  - Irrevocable debt relief in 2013 led nominal external debt to decline from 40.3 percent of GDP at end-2012 to 18.5 percent at end-2013.
  - In 2014, France unilaterally cancelled a debt of about $6.6 million Comoros owed to the French Post Office.

Government expenditures
- Total government expenditure over the last decade close to sample median of about 23 percent of GDP.
- Current spending above average for sample during most of the decade but converged toward median more recently; broadly flat relative to GDP with a dip in 2013.
- Spending on goods and services:
  - Average about 3.9 percent of GDP over the last decade, in line with SSA average.
- Total capital spending:
  - Broadly in line with SSA average of about 6.6 percent of GDP, but more volatile than current spending.
- Financing of capital spending:
  - Externally financed capital spending above average for the sample.
  - Externally financed capital spending stood at 6.3 % of GDP in 2015 while the sample median was about 4.4% of GDP at end-2015.
  - Given broadly average total capital spending, domestically-financed capital spending generally more constrained than in most sample countries, except during the ECP peak.

Wage bill dynamics and structural imbalance
- Wage bill has consistently consumed more than 60 percent of domestically-generated revenue over the last decade.
- Wage bill-to-tax-revenue ratio typically close to 80 percent, making Comoros a clear outlier.
- Consequences: very limited room for non-wage items (social services, education, infrastructure); structural imbalance has grown and needs addressing to create fiscal space and resilience.

Policy implications
- Comoros is an outlier for low tax revenues and disproportionate wage bill despite peer similarities in total expenditure and goods/service spending.
- Volatile and sometimes large external inflows (budgetary grants and ECP/passport sales) have masked the structural imbalance.
- Recommended treatment of volatile external resources: finance extraordinary expenses (create buffers, one-off structural projects, resolve state enterprise problems) rather than ordinary current spending.
- Required measures to create sustainable fiscal space:
  - Mobilize additional sustainable domestic resources.
  - Reduce the wage bill to finance current expenses on a sustainable basis and free resources for domestically-financed capital spending and social priorities.

Data sources
- Country Authorities; WEO and IMF staff calculations.
- Prepared by Mounir Bari (AFR); November 22, 2016 — 2015 data.

### Fiscal Outcome and Context: 0.9 percent of GDP in 2015 (overview)
- Overall fiscal balance moved from a deficit of 0.8 percent of GDP in 2014 to a surplus of 3.6 percent of GDP in 2015.
- A Saudi budget grant equivalent to 7.5 percent of GDP contributed to the 2015 fiscal outcome.
- Domestically-generated resources insufficient for meeting the current obligations of the State.
- Real economy stagnated in 2015, accentuating vulnerabilities in the financial system.

### Financial System Structure and Depth
- Composition:
  - Eight financial institutions: four commercial banks, three microfinance institutions, and SNPSF (Société Nationale des Postes et Services Financiers).
  - Large international money transfer agencies operate indirectly via banks or licensed microfinance networks; local entity MCTV.
  - Insurance, pensions and capital markets do not exist.
- Financial institution assets just over 47 percent of GDP in 2015.
- Net foreign asset holdings insignificant and limited to transactional needs.
- Deposits at the central bank well in excess of prudential requirements (minimum of 15 percent of deposits).
- Three largest financial institutions control about 57 percent of total sector assets (Herfindahl index for asset concentration is 0.16).
- Compared to peers at end 2015:
  - Deeper than low-income SSA average but significantly shallower than frontier SSA economies.
  - Financial institutions liquid; lending financed primarily by deposits.
  - Lending-deposit rate spread lower, indicating comparable efficiency and competition to low-income SSA in 2015.

Deposit money bank indicators (selected values, percent of GDP)
- Net Foreign Assets: 0.81 (2010), 2.19 (2011), 0.25 (2012), 2.60 (2013), 0.23 (2014), 0.70 (2015)
- Net Domestic Assets: 24.02 (2010), 23.26 (2011), 28.29 (2012), 25.17 (2013), 28.00 (2014), 30.46 (2015)
- Cash Holdings: 0.74 (2010), 1.00 (2011), 1.18 (2012), 0.89 (2013), 1.00 (2014), 1.08 (2015)
- Deposits at the central bank: 9.61 (2010), 10.54 (2011), 12.54 (2012), 8.64 (2013), 10.44 (2014), 10.55 (2015)
- Domestic Credit: 29.13 (2010), 29.44 (2011), 34.10 (2012), 31.30 (2013), 34.30 (2014), 37.26 (2015)
  - Net Credit to Government: 0.37 (2010), -0.34 (2011), -0.15 (2012), -0.08 (2013), -0.16 (2014), -0.34 (2015)
  - Claims on Private Sector: 17.32 (2010), 17.60 (2011), 20.21 (2012), 21.35 (2013), 22.64 (2014), 25.62 (2015)
- Bank Reserves: 10.18 (2010), 11.54 (2011), 13.72 (2012), 9.53 (2013), 11.44 (2014), 11.63 (2015)
- Total deposits: 24.83 (2010), 25.45 (2011), 28.53 (2012), 27.77 (2013), 28.22 (2014), 31.16 (2015)
  - Demand Deposits: 11.90 (2010), 13.18 (2011), 15.00 (2012), 14.23 (2013), 14.44 (2014), 16.84 (2015)
  - Term and Savings Deposits: 12.93 (2010), 12.27 (2011), 13.53 (2012), 13.54 (2013), 13.78 (2014), 14.32 (2015)

### Lending Patterns, Asset Quality, and Risks
- Credit to the private sector grew by about 16 percent in 2015, up from 10 percent in 2014.
- 2015 new lending allocation:
  - Around 70 – 80 percent of total loans extended to general commerce, the informal sector, and for financing imports.
  - Commerce and household sectors together accounted for around 50 percent of total new loans in 2015.
  - Manufacturing accounted for 11 percent of new lending; construction accounted for 8 percent.
- Loan maturities:
  - Around half of lending is short-term.
  - Long-term loans comprise less than 5 percent of loans.
- Non-performing loans (NPLs):
  - NPLs to gross loans reached 21.7 percent at end 2015, rising to 27.4 percent as of end March 2016.
  - New NPLs in 2015: general commerce and households accounted for more than two thirds of total new NPLs.
  - When scaled by new credit, information and communication, extractive, and transport and storage industries exhibited particularly high NPL rates in 2015.
  - Legacy loans (e.g., vanilla sector loans of about KMF 1.3 billion non-performing since early 2000s) contribute to NPLs.
  - Provisioning has not kept pace; NPLs net of provisions are approaching 100 percent of own capital in one case.

Financial stability indicators and institutional concerns
- Ratio of capital to assets for individual banks remains well over regulatory minimum of 10 percent, though sector-wide aggregate has declined slightly since 2011.
- Liquidity ratios broadly satisfactory but FSIs heterogeneous across institutions.
- Provisioning rates of some institutions lag despite high NPLs.
- Systemic and market risks:
  - Variations in the price of gold are a systemic market risk because secured lending against gold jewelry is widespread; jewelry is illiquid and sensitive to local demand and gold prices.
  - No interbank lending market; inter-institution deposits limited, reducing interconnectedness and spillover risk.
- SNPSF-specific risks:
  - Ongoing difficulties at SNPSF represent a significant fiscal risk; government is sole shareholder and obliged to financially backstop SNPSF.
  - SNPSF is a significant deposit market player (government salaries and some public enterprise funds deposited there).
  - Limited links to other financial institutions limit contagion through inter-institution exposures.
- Institutional/legal constraints:
  - Weak institutional and judicial frameworks impair enforcement of financial contracts and creditor rights.
  - Use of gold jewelry as collateral reflects uncertain legal environment.
  - Tightly-knit social relations hinder even-handed application of law.
  - Reinforcing legal institutions, improving property rights and collateral quality, and rigorous enforcement of financial contracts are critical.

Regulation, concentration and market structure
- Since 2013, all financial institutions subject to a harmonized banking law requiring common norms except minimum required capital and internal control mechanisms.
- Since 2015, harmonized taxation rules apply to financial institutions, but one microfinance institution retains special taxation status.
- Market concentration in 2015:
  - Three largest financial institutions account for over 65 percent of system-wide deposits and just over 55 percent of loans.
  - One microfinance institution is the second largest deposit-taker and largest loan provider.
  - Concentration increases systemic importance of large institutions but limited interconnectedness mitigates contagion risk.

Emerging threats and near-term outlook
- Risks that could worsen asset quality:
  - Continued sluggish economic growth could push NPL ratio higher.
  - Reemergence of salary arrears or prolonged downturn in consumption could tighten repayment capacity.
- Legacy NPLs from early 2000s continue to affect ratios; central bank coordinating write-offs under agreements to repay or write-off portions.

### Financial Inclusion: Importance, Current Access, Barriers, and Policy Recommendations
Importance
- Improved financial access permits all economic agents to take advantage of more opportunities and conduct basic transactions.
- Reducing market frictions and increasing household participation may promote sustainable growth and reduce poverty and inequality (Sustainable Development Goals 2015).
- Deposits of public enterprises constitute about 20 percent of total deposits at SNPSF.

Access and participation (key statistics)
- In 2011, 21.7 percent of households in Comoros held an account at a formal financial institution.
- Proportion of respondents aged 15 years and over with access to an account in 2011 was well above the average for low-income SSA countries, but well below SSA frontier markets.
- Financial access/use more unequal across income levels and gender in Comoros than in comparator countries:
  - Ratio of bankable ‘better-off’ to the ‘poor’ higher in Comoros than for low-income SSA countries.
  - Ratio of financial access for males to that for females higher in Comoros than on average in comparator countries.

Barriers and usage patterns
- Key barriers for the poor: lack of funds, lack of necessary documentation, and cost (accounts perceived as too expensive).
- Bank accounts chiefly used to receive wages; other uses (business, government transfers, remittances) less widespread.
- Informal channels (family/friends, employer, store credit, private informal lenders) play an important lending role.
- Loan use skewed toward health/emergencies and funerals/weddings rather than investment.
- Low use of electronic payments, checks, credit cards, and debit cards relative to comparators.

Outreach and infrastructure (2014)
- Commercial banks do not serve the overwhelmingly rural population well:
  - In 2014, Comoros ranked well behind comparator countries such as Cabo Verde and Sao Tomé & Principe for physical access to commercial bank branches.
  - Comoros fared slightly better than low-income SSA on physical access to ATMs, but per capita access to commercial bank services is relatively poor.

Distributional aspects and informal finance
- Considerable proportion of households obtain loans outside formal system; family/friends are a major source.
- Rich have better access to formal savings and borrowing channels.

Risks, tradeoffs, and stability considerations
- Improving financial inclusion can bolster stability by providing a more solid deposit base and better risk-management tools.
- Some types of inclusion (broadening credit access) can be detrimental if supervision is weak; broadening credit may negatively affect bank stability (IMF 2015).
- Given upward trend in NPLs, policymakers should guard against increased credit access causing rising doubtful loans.
- Measures that remove market imperfections and implement lending technologies to reduce transaction costs and improve borrower identification can mitigate asymmetric information and reduce stability risks.

Policy recommendations and opportunities
- Focus on access by the poorest:
  - Introduce low-fee or fee-free accounts.
  - Improve documentation quality for the poor to reduce transaction costs.
- Expand payment methods and strengthen judicial enforcement:
  - Increase geographical penetration of financial institutions and access to electronic payments.
  - More rigorous contract enforcement to improve creditor rights and entice borrowers into the formal system.
- Leverage telecommunications and mobile money:
  - Sale of second telecommunications license to TELMA could expand mobile banking services.
  - Pending introduction of mobile money transfer service ‘Rial Pay’ by MCTV should bolster inclusion, especially in rural areas.
- Strengthen information infrastructure:
  - Implementation and strengthening of the credit bureau (Centrale des Risques et des incidents des paiements) by the central bank is a welcome step to alleviate asymmetric information.

Conclusions
- Developing the underdeveloped and fragile financial sector would benefit medium-term growth, but issues must be resolved: accelerating NPLs, lagging provisioning, SNPSF troubles, and weak enforcement of financial contracts.
- Ensuring adequate access for a diffuse, largely rural population across three islands is challenging; microfinance has broadened services, but mobile banking offers opportunities to improve rural access.
- Financial development, inclusion, and stability can be complementary if policies alleviate asymmetric information and broaden deposit depth by bringing poor ‘unbanked’ individuals into the system.
- Tradeoffs must be managed: resolving SNPSF issues could improve financial stability yet potentially reduce financial inclusion if public employees lose minimum access ensured by the state-owned bank.

*Source: IMF staff analysis contained in the Comoros country report chapter on financial inclusion and financial sector development.*

### 1. Government Revenues and Grants ______________________________________________________ 5

### 1. Government Revenues and Grants

### Comparative fiscal performance (overview)
- The fiscal performance and outlook for Comoros is adversely affected by systemic challenges in revenue administration and public financial management, producing a structural imbalance between domestic resource mobilization and current spending, especially on public wages and salaries.
- This imbalance leaves little scope for domestically-financed capital spending essential for economic growth and social development, and is more pronounced compared to similar sub-Saharan African countries even after accounting for sizeable one-off budget grants.

### Government revenues (2005–2015)
- Total resources (internal and external) available to Comoros over the last decade have generally exceeded those available to most similar sub-Saharan African countries, with a particular peak in 2013 as a result of the HIPC Initiative.
- Even excluding the HIPC debt relief grant, resources available to Comoros over the last decade have generally been above the sample average.
- When external project grants and other grants financing are excluded, domestic revenue (tax and non-tax) has been mostly below the median for the comparator sample.
- Domestic revenue peaked at 19 percent of GDP in 2012 due to receipts from the Economic Citizenship Program (ECP).

### Tax and non-tax revenue
- Tax revenue mobilization has been weak: Comoros’ tax revenue performance generally drops into the first quartile of the comparator sample (three-quarters of countries performed better).
- Factors include inefficient revenue administration at both general tax and customs administration levels.
- Non-tax revenue performance has been comparatively stronger, supported by:
  - Economic Citizenship Program (ECP) receipts in 2012.
  - Sale of the second telecommunication license in 2015.

### Grants and their composition
- Comoros has benefited from sizeable one-off budget grants; overall external grants to Comoros have been generous relative to most similar countries, both including and excluding HIPC debt relief.
- Most grants are project grants (donor-financed projects), with the level of project grants being particularly striking:
  - As of end-2015, project grants represented 6.1 percent of GDP for Comoros.
  - The respective average of SSA countries was about 2.3 percent of GDP.
- Budget grants have generally been significantly lower than project grants and more volatile; notable peaks were one-off budget grants from Qatar in 2010 and from Saudi Arabia in 2015.
- HIPC-related context:
  - Comoros received extensive irrevocable debt relief in 2013, leading to a decline in nominal external debt from 40.3 percent of GDP at end-2012 to 18.5 percent at end-2013.
  - In 2014, France unilaterally cancelled a debt of about$6.6 million Comoros owed to the French Post Office.

### Government expenditures
- Total government expenditure over the last decade has been close to the sample median of about 23 percent of GDP.
- Current spending was above average for the sample during most of the last decade but has converged toward the median more recently; in Comoros current spending has remained broadly flat relative to GDP with a dip in 2013.
- Spending on goods and services:
  - Comoros is in line with the sub-Saharan African country average.
  - Over the last decade, average spending on goods and services in Comoros was about 3.9 percent of GDP.
- Total capital spending:
  - Broadly in line with the sub-Saharan African average of about 6.6 percent of GDP, but more volatile than current spending.
- Financing of capital spending:
  - Externally financed capital spending in Comoros was above average for the sample.
  - Externally financed capital spending in Comoros stood at 6.3 % of GDP in 2015 while the sample median was about 4.4% of GDP at end-2015.
  - Given broadly average total capital spending, domestically-financed capital spending has generally been much more constrained than in most sample countries, except during the ECP peak.

### Structural fiscal imbalance and wage bill dynamics
- The wage bill has consistently consumed more than 60 percent of domestically-generated revenue over the last decade, a much higher share than the average for other sub-Saharan African countries.
- The wage bill-to-tax-revenue ratio has typically been close to 80 percent, making Comoros a clear outlier in the sample.
- Consequences:
  - Very limited room for non-wage items such as social services, education, or infrastructure projects.
  - Structural imbalance has grown and needs to be addressed to create fiscal space for capital and social spending and to build resilience against external shocks.

### Policy-relevant conclusions and implications
- Comoros is an outlier in terms of low tax revenues and the disproportionate weight of its wage bill despite similarities with peers in total expenditure and goods and services spending.
- Volatile and sometimes large external inflows (budgetary grants and ECP/passport sales) have masked the structural fiscal imbalance.
- Recommended stance for volatile external resources:
  - Use volatile external resources to finance extraordinary expenses (e.g., create buffers, execute one-off important structural projects, or address structural problems in state enterprises) rather than ordinary current spending.
- Required measures to create sustainable fiscal space:
  - Mobilize additional sustainable domestic resources.
  - Reduce the wage bill to finance current expenses on a sustainable basis and free resources for domestically-financed capital spending and social priorities.

### Data sources
- Country Authorities; WEO and IMF staff calculations.

*Prepared by Mounir Bari (AFR); November 22, 2016 — 2015 data.*

### 0.9 percent of GDP in 2015, due to favorable one-off factors, including a Saudi budget grant equivalent to

### _cr16394 - 0.9 percent of GDP in 2015, due to favorable one-off factors, including a Saudi budget grant equivalent to

### Overview and fiscal context
- Overall fiscal balance moved from a deficit of 0.8 percent of GDP in 2014 to a surplus of 3.6 percent of GDP in 2015.
- A Saudi budget grant equivalent to 7.5 percent of GDP contributed to the 2015 fiscal outcome.
- Domestically-generated resources were insufficient for meeting the current obligations of the State.
- Real economy stagnated in 2015, accentuating vulnerabilities in the financial system.

### Structure and depth of the financial system
- Financial system composition:
  - Eight financial institutions: four commercial banks, three microfinance institutions, and SNPSF (Société Nationale des Postes et Services Financiers).
  - Large international money transfer agencies (e.g. Western Union) operate indirectly via banks or licensed microfinance networks; a local entity is Maison Comorienne de Transfert des Valeurs (MCTV).
  - Insurance, pensions and capital markets do not exist.
- Financial institution assets amounted to just over 47 percent of GDP in 2015.
- Net foreign asset holdings are insignificant and limited to transactional needs.
- Deposits at the central bank were well in excess of prudential requirements (minimum of 15 percent of deposits).
- The three largest financial institutions control about 57 percent of total sector assets (Herfindahl index for asset concentration is 0.16).
- Compared to peers:
  - At end 2015, Comoros was deeper than the low-income Sub-Saharan Africa (SSA) average but significantly shallower than frontier SSA economies.
  - Financial institutions are liquid; lending financed primarily by deposits.
  - Lending-deposit rate spread was lower, indicating comparable efficiency and competition to low-income SSA in 2015.

### Detailed deposit money bank indicators (selected Table 2 values)
- Net Foreign Assets: 0.81 (2010), 2.19 (2011), 0.25 (2012), 2.60 (2013), 0.23 (2014), 0.70 (2015) (percent of GDP)
- Net Domestic Assets: 24.02 (2010), 23.26 (2011), 28.29 (2012), 25.17 (2013), 28.00 (2014), 30.46 (2015) (percent of GDP)
- Cash Holdings: 0.74 (2010), 1.00 (2011), 1.18 (2012), 0.89 (2013), 1.00 (2014), 1.08 (2015) (percent of GDP)
- Deposits at the central bank: 9.61 (2010), 10.54 (2011), 12.54 (2012), 8.64 (2013), 10.44 (2014), 10.55 (2015) (percent of GDP)
- Domestic Credit: 29.13 (2010), 29.44 (2011), 34.10 (2012), 31.30 (2013), 34.30 (2014), 37.26 (2015) (percent of GDP)
  - Net Credit to Government: 0.37 (2010), -0.34 (2011), -0.15 (2012), -0.08 (2013), -0.16 (2014), -0.34 (2015) (percent of GDP)
  - Claims on Private Sector: 17.32 (2010), 17.60 (2011), 20.21 (2012), 21.35 (2013), 22.64 (2014), 25.62 (2015) (percent of GDP)
- Bank Reserves: 10.18 (2010), 11.54 (2011), 13.72 (2012), 9.53 (2013), 11.44 (2014), 11.63 (2015) (percent of GDP)
- Total deposits: 24.83 (2010), 25.45 (2011), 28.53 (2012), 27.77 (2013), 28.22 (2014), 31.16 (2015) (percent of GDP)
  - Demand Deposits: 11.90 (2010), 13.18 (2011), 15.00 (2012), 14.23 (2013), 14.44 (2014), 16.84 (2015) (percent of GDP)
  - Term and Savings Deposits: 12.93 (2010), 12.27 (2011), 13.53 (2012), 13.54 (2013), 13.78 (2014), 14.32 (2015) (percent of GDP)

### Lending patterns and asset quality
- Credit to the private sector grew by about 16 percent in 2015, up from 10 percent in 2014.
- Lending allocation in 2015 (new lending):
  - Around 70 – 80 percent of total loans extended to general commerce, the informal sector, and for financing imports.
  - Commerce and household sectors together accounted for around 50 percent of total new loans in 2015.
  - Manufacturing accounted for 11 percent of new lending; construction accounted for 8 percent.
- Loan maturities:
  - Around half of lending is short-term.
  - Long-term loans comprise less than 5 percent of loans.
- Non-performing loans (NPLs):
  - NPLs to gross loans reached 21.7 percent at end 2015, rising sharply to 27.4 percent as of end March 2016.
  - New NPLs in 2015: general commerce and households accounted for more than two thirds of total new NPLs.
  - When scaled by new credit, information and communication, extractive, and transport and storage industries exhibited particularly high rates of NPLs in 2015.
  - Some NPL increase reflects legacy loans (e.g., vanilla sector loans of about KMF 1.3 billion non-performing since early 2000s).
  - Provisioning has not kept pace with the increase in doubtful loans; NPLs net of provisions are approaching 100 percent of own capital in one case.

### Financial stability indicators and institutional concerns
- Aggregate sector indicators:
  - Ratio of capital to assets for individual banks remains well over the regulatory minimum of 10 percent, though sector-wide aggregate has declined slightly since 2011.
  - Liquidity ratios broadly satisfactory, but FSIs exhibit heterogeneity across institutions.
  - Provisioning rates of some institutions lag, even where NPLs are above sector-wide benchmark.
- Systemic and market risks:
  - Variations in the price of gold are a systemic market risk because secured lending against gold jewelry is widespread and jewelry is illiquid and sensitive to local demand and gold prices.
  - No interbank lending market; inter-institution deposits limited to small parking by microfinance institutions, reducing interconnectedness and spillover risk.
- SNPSF-specific risks:
  - Ongoing difficulties of state-owned postal bank SNPSF represent a significant fiscal risk to the state’s balance sheet.
  - Government is sole shareholder and obliged to financially backstop SNPSF; SNPSF is a significant deposit market player (government salaries and some public enterprise funds deposited there).
  - Links to other financial institutions are limited, limiting contagion through inter-institution exposures.
- Institutional and legal constraints:
  - Weak institutional and judicial frameworks impair enforcement of financial contracts and creditor rights.
  - Uncertain legal environment leads to use of gold jewelry as collateral.
  - Tightly-knit social relations hinder even-handed application of the law.
  - Reinforcing legal institutions, improving property rights and collateral quality, and rigorous application of financial contracts are critical for financial stability and deepening.

### Regulation, concentration and market structure
- Banking law and taxation:
  - Since 2013, all financial institutions are subject to a harmonized banking law requiring common norms (prudential ratios, rules for distribution of risk), except minimum required capital and internal control mechanisms.
  - Since 2015, harmonized taxation rules apply to financial institutions, but one microfinance institution retains special taxation status.
- Market concentration:
  - In 2015, three largest financial institutions account for over 65 percent of system-wide deposits and just over 55 percent of loans.
  - One microfinance institution is the second largest deposit-taker and largest loan provider.
  - Concentration increases systemic importance of large institutions but limited interconnectedness mitigates contagion risk.

### Emerging threats and near-term outlook
- Risks that could worsen asset quality:
  - Continued sluggish economic growth could push NPL ratio higher as existing debts are fully accounted for.
  - A reemergence of salary arrears or prolonged downturn in consumption could tighten loan repayment capacity.
- Legacy issues:
  - Legacy non-performing loans from the early 2000s continue to affect NPL ratios; central bank coordinating efforts for write-offs under agreements to repay or write-off portions of outstanding amounts.

_ UNION OF THE COMOROS INTERNATIONAL MONETARY FUND _

### 17. Recent evidence indicates that enhancing financial inclusion is important for achieving

### _cr16394 - 17. Recent evidence indicates that enhancing financial inclusion is important for achieving

### Importance of financial inclusion
- Improved financial access permits all economic agents, including households, to take advantage of a greater range of economic opportunities and conduct basic economic transactions.
- Reducing financial market frictions and allowing greater household participation in financial markets may promote sustainable economic growth and reduce poverty and inequality (Sustainable Development Goals 2015).
- Deposits of public enterprises constitute about 20 percent of total deposits at SNPSF.

### Current access and participation (key statistics)
- In 2011, 21.7 percent of households in Comoros held an account at a formal financial institution.
- The proportion of respondents aged 15 years and over with access to an account at a financial institution in 2011 was well above the average for low-income SSA countries, but well below SSA frontier markets.
- Financial access and use are more unequal across income levels and gender in Comoros than in comparator countries:
  - The ratio of the bankable ‘better-off’ to the ‘poor’ is higher in Comoros than for low-income SSA countries.
  - The ratio of financial access for males to that for females is higher in Comoros than on average in comparator countries.

### Barriers to access and patterns of usage
- Key barriers for the poor to having a formal account: lack of funds, lack of necessary documentation, and cost (formal accounts perceived as too expensive).
- Bank accounts are used chiefly to receive wages; other uses (business purposes, government transfers, remittances) are less widespread.
- Informal channels (family/friends, employer, store credit, private informal lenders) play an important role in lending.
- Uses of loans skew toward health/emergencies and funerals/weddings rather than investment.
- Formal and electronic payment methods are not widespread:
  - Low use of electronic payments, checks, credit cards, and debit cards relative to comparators.

### Financial sector outreach and infrastructure (2014)
- Commercial banks do not serve the overwhelmingly rural population well:
  - In 2014, Comoros ranked well behind comparator countries such as Cabo Verde and Sao Tomé & Principe for physical access to commercial bank branches.
  - Comoros fared slightly better than low-income SSA on physical access to ATMs, but per capita access to commercial bank services is relatively poor.

### Informal finance and distributional aspects
- A considerable proportion of households obtain loans outside the formal financial system; family/friends are a major source.
- The rich have better access to formal savings and borrowing channels; on the savings side the rich are better able to utilize formal savings accounts.

### Risks, tradeoffs, and stability considerations
- Improving financial inclusion can bolster financial stability by providing a more solid deposit base and better risk-management tools for clients (more resilient borrowers imply more resilient banks).
- Some types of financial inclusion (notably broadening credit access) can be detrimental to financial stability if banking supervision is weak; broadening credit access may have negative effects on bank stability (IMF 2015).
- Given the recent upward trend in NPLs, policymakers should remain watchful that greater access to credit not come at the cost of rising doubtful loans and financial stability concerns.
- Increasing use of financial services other than credit generally has weak overall links to financial stability (IMF 2015).
- Measures that remove market imperfections and implement lending technologies that reduce transaction costs and improve borrower identification can mitigate asymmetric information and reduce stability risks.

### Policy recommendations and opportunities
- Focus financial inclusion policies on access by the poorest households to boost participation of poor households in formal financial markets:
  - Introduce low-fee or fee-free accounts.
  - Improve the quality of documentation of the poor to reduce transaction costs.
- Expand new payment methods and strengthen judicial enforcement:
  - Increase geographical penetration of financial institutions and greater access to electronic payment methods to facilitate access for remote areas.
  - More rigorous contract enforcement to improve creditor rights and entice borrowers into the formal system.
- Leverage telecommunications and mobile money opportunities:
  - The sale of a second telecommunications license to TELMA could expand mobile banking services.
  - The pending introduction of a mobile money transfer service known as ‘Rial Pay’ by MCTV should bolster financial inclusion, especially in rural areas.
- Strengthen information infrastructure:
  - Implementation and strengthening of the credit bureau (Centrale des Risques et des incidents des paiements) by the central bank of the Comoros is a welcome step to alleviate asymmetric information between borrowers and lenders.

### Conclusions
- Development of the relatively underdeveloped and fragile financial sector in Comoros would benefit medium-term growth prospects, but several issues must be resolved: accelerating non-performing loans, lagging provisioning, troubles of SNPSF, and problems with financial contract enforcement.
- Ensuring adequate access for a diffuse, largely rural population spread across three islands is challenging; microfinance has broadened services, but new technologies such as mobile banking offer unique opportunities to improve access for the rural poor.
- Financial development, inclusion, and stability goals can be complementary if policies alleviate asymmetric information and broaden deposit depth by bringing poor ‘unbanked’ individuals into the financial system.
- Tradeoffs must be carefully managed: actions resolving SNPSF could improve financial stability yet potentially reduce financial inclusion if public employees lose minimum access ensured by the state-owned bank.

*Source: IMF staff analysis contained in the Comoros country report chapter on financial inclusion and financial sector development.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16394.pdf_