## 1. Episodes of Banking Crisis in Sub-Saharan Africa

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### Introduction and research questions
- Banking crises occurred throughout sub-Saharan Africa in the 1980s and 1990s, hobbling or collapsing banking systems and setting back financial development.
- Resolution of crises in some cases imposed very large costs on the government.
- Research questions addressed:
  - Which factors behind these crises were most important?
  - Were the sources of crises in sub-Saharan Africa the same as those linked to crises in other parts of the world, or were some special to Africa?
  - What were the different channels through which the government in sub-Saharan African countries intervened in the banking system?

### Sample, time frame, and crisis definition
- Study sample: ten countries — Benin, Cameroon, Côte d’Ivoire, Ghana, Guinea, Kenya, Nigeria, Senegal, Tanzania, and Uganda.
- Time frame: 1985–95, chosen to coincide with the emergence and unfolding of banking crises in the sample countries.
- Crisis dating sources: Caprio and Klingebiel (2002) and Lindgren et al (1996), using the notion of systemic banking crisis.
- Systemic banking crisis definition (Caprio and Klingebiel (1997)): nonperforming loans are at least 5–10 percent of total assets and thus likely to be sufficient to wipe out most or all of the banking system’s capital.
- Captures “silent form of distress” where significant portion of banking system is insolvent but remains open.

### Analytical framework for causes
- Causes classified into three categories:
  - Operating environment: macroeconomic developments/policies and state of financial market development (limited diversification, exogenous shocks, weaknesses in macro policymaking, institutional shortcomings).
  - Market structure: banking sector characteristics (ownership, concentration, funding sources) affecting behavior.
  - Banks’ conduct: competitive behavior, internal governance, lending practices (notably lending to public enterprises and insider lending).

### Factors identified in cross-country literature
- Macroeconomic volatility (growth, inflation, terms of trade, international interest rates, real exchange rates) alters asset–liability values.
- Lending booms and surges in capital flows may prompt excessive lending; crises follow when bubbles burst.
- Asset–liability mismatches, inadequate capital and loan-loss provisions, combined with large shocks, increase fragility.
- Inadequate preparation for financial liberalization raises crisis risk.
- Heavy government involvement and loose controls on connected lending hurt profitability and efficiency.
- Weak accounting, disclosure, and legal frameworks adversely affect performance.
- Distorted incentives for owners, managers, and depositors lead to excessive risk-taking and delay corrective action.
- Exchange rate regime can undermine bank soundness via speculative attack vulnerability, downward adjustment in real capital, and reduced central bank lender-of-last-resort capacity.

### Honohan’s three “syndromes” of banking crises
- Macroeconomic epidemics: boom–bust lending cycles that leave weak portfolios after bubbles burst.
- Microeconomic deficiencies: poor management practices (connected lending), systemic weaknesses allowed to worsen under common external conditions and weak supervision.
- Omnipresent government in banking systems: banks used as quasi-fiscal mechanisms; government involvement masks problems in good times and exposes insolvency under shocks.

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### Overview of banking crises (1985–95) — timing, scope, and severity
- Severe crises were endemic and often recurrent; dating crises was difficult.
- Waves:
  - First crises: Ghana, Guinea, and Kenya in the early to mid-1980s.
  - Second wave: CFA franc zone countries in the late 1980s.
  - Third wave: Guinea, Kenya, Nigeria, and Uganda in the first half of the 1990s.
- Crisis durations were long (example: Ghana crisis spanned almost the entire decade of the 1980s) and recurrent (Guinea and Kenya).

- Selected episodes and scope (preserved exact figures where given):
  - Benin, 1988–90: Collapse of all three banks; 78 percent of banking system loans nonperforming at end-1988. Estimated losses/costs: 17 percent of GDP.
  - Cameroon, 1987–93: 60–70 percent of banking system loans nonperforming in 1989.
  - Côte d’Ivoire, 1988–91: 4 large banks accounting for 90 percent of banking system loans affected; nonperforming loans at 4 largest banks reached about half of total credit outstanding. Government costs equivalent to 25 percent of GDP.
  - Ghana, 1982–89: 7 of 11 audited banks insolvent; 40 percent of bank credit to nongovernment borrowers nonperforming in 1989. Restructuring costs equivalent to 6 percent of GDP.
  - Ghana, 1985: 6 banks accounting for 99 percent of banking system deposits insolvent; 80 percent of banking system loans nonperforming. Repayment of deposits equivalent to 3 percent of 1986 GDP.
  - Guinea, 1993–94: 3 banks accounting for 45 percent of market affected.
  - Guinea, 1985–89: 4 banks and 24 NBFIs accounting for 15 percent of financial system liabilities affected by liquidity/solvency problems.
  - Kenya, 1993–95: Solvency problems in banks accounting for more than 30 percent of financial system assets; 66 percent of loans of one third of banks nonperforming in 1993.
  - Nigeria, 1991–95: 8 banks insolvent and 45 percent of banking system loans nonperforming at end-1992; 34 out of 115 banks accounting for 10 percent of deposits insolvent in 1994.
  - Senegal, 1988–91: 50 percent of banking system loans nonperforming in 1988. Estimated losses/costs: 17 percent of GDP.
  - Tanzania, 1987–1990s: Main financial institutions in arrears amounting to half of their portfolio in 1987; government-owned banks, accounting for 95 percent of banking system assets, insolvent as of 1990 at least; 60–80 percent of all loans nonperforming at end-1994. Implied losses equivalent to nearly 10 percent of GDP.
  - Uganda, 1990–present (as of the report): Half of banking system facing insolvency problems in 1994.

### Nonperforming loans: systemic proportions
- Nonperforming loan shares far exceeded the 5–10 percent systemic threshold:
  - Reached 50 percent or more in Benin, Cameroon, Côte d’Ivoire, Guinea, Senegal, Tanzania, and Uganda.
  - Nigeria: 45 percent of bank loans outstanding nonperforming at end-1992.
  - Ghana: about 40 percent of bank credit to nongovernment borrowers nonperforming in 1989.
  - Kenya: nonperforming assets in June 1993 estimated at less than 20 percent of total financial sector assets.

### Case example — Senegal (end-September 1988; in billions of CFA francs)
- Loan portfolio: 323 (Eight Distressed Banks) / 166 (Sound Banks) / 489 (Total)
- Nonperforming loans: 233 (Distressed) / 6 (Sound) / 239 (Total)
- Capital and reserves: 36 (Distressed) / 29 (Sound) / 65 (Total)
- BCEAO refinancing: 167 (Distressed) / 30 (Sound) / 197 (Total)

### Patterns by ownership and institution
- Financial distress especially acute among government-owned commercial banks and development banks:
  - Cameroon: government-owned commercial bank and two development banks technically insolvent as of 1987.
  - Côte d’Ivoire: development banks’ share of nonperforming loans between 41 percent and 93 percent (examples: BNEC 57 percent, BICT 93 percent in April 1988; BIDI 41 percent, CCI 76 percent in June 1989).
  - Nigeria: 8 of 16 banks technically insolvent at end-1992 were state government banks; by 1994 about 60 percent of total loans and advances of these banks were nonperforming; capital and reserves negative by N 8.4 billion (about US$100 million) in 1994.
- Some government-owned banks remained solvent (examples: four major federal government banks in Nigeria; Kenya Commercial Bank (KCB)).
- Local bank vulnerability:
  - Kenya (1993–94): about one-third of local banks and NBFIs closed or placed under statutory management of the Central Bank of Kenya.
  - Nigeria (end-1992): eight local banks among the 16 insolvent banks.
- Foreign banks often profitable but not immune:
  - Côte d’Ivoire: three of the four largest banks were affiliates of major French banks and the fourth an affiliate of BIAO-SA; nonperforming loans of these four banks in 1990 totaled CFAF 450 billion (about half of total credit outstanding). Individual bank ratios of nonperforming loans ranged from 36 percent to 76 percent.
  - A few foreign banks in Senegal and Uganda became insolvent.

### Repercussions on intermediation and the economy
- Banking system and payments system collapsed in some countries; in Benin and Guinea all banks were closed when crises became public.
- Sharp drops in credit to the private sector in Benin, Cameroon, Côte d’Ivoire.
- Financial intermediation (broad money to GDP) dipped to new lows in Benin, Ghana, Guinea, Senegal, Tanzania, Uganda.
- Côte d’Ivoire: government costs of restructuring the banking system amounted to about 25 percent of GDP.

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### Monetary performance indicators (selected exact values)
- Benin — Broad money/GDP: 23.7 (1985), 25.4 (1986), 22.2 (1987), 24.0 (1988), 11.4 (1989), 17.6 (1990), 21.9 (1991), 25.6 (1992), 25.9 (1993), 26.2 (1994), 25.3 (1995). Broad money growth: 0.6 (1985), 5.5 (1986), -11.2 (1987), 11.4 (1988), -52.9 (1989), 62.0 (1990), 31.2 (1991), 25.6 (1992), 5.9 (1993), 40.9 (1994), 16.3 (1995).
- Ghana — Broad money/GDP: 13.6 (1985), 13.5 (1986), 14.2 (1987), 14.7 (1988), 16.9 (1989), 13.4 (1990), 13.4 (1991), 17.5 (1992), 17.2 (1993), 18.6 (1994), 21.3 (1995). Broad money growth: 46.2 (1985), 47.9 (1986), 53.3 (1987), 46.3 (1988), 54.7 (1989), 13.3 (1990), 27.2 (1991), 52.2 (1992), 26.4 (1993), 45.7 (1994), 70.1 (1995).
- Nigeria — Broad money growth: 11.6 (1985), 2.9 (1986), 22.5 (1987), 33.8 (1988), 10.9 (1989), 40.3 (1990), 33.4 (1991), 45.3 (1992), 53.4 (1993), 38.0 (1994), 19.5 (1995). Credit to private sector: 9.2 (1985), 32.3 (1986), 7.7 (1987), 18.5 (1988), 10.3 (1989), 16.1 (1990), 26.1 (1991), 141.2 (1992), 18.1 (1993), 61.4 (1994), 41.9 (1995).
- Table notes: 1/ Data as of 1989 refer only to new banks. 2/ Loans to nongovernment sector/nongovernment deposits.

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### Sources of crises — operating environment and macro shocks
- Macroeconomic environment shaped by economic structure, policy framework, and macro shocks.
- Limited diversification rendered countries highly vulnerable:
  - In 1985, agriculture share ranged from 20 percent to 65 percent of GDP in the ten countries.
  - Top three export products accounted for about 40 percent of total exports in Senegal, and 60 percent or more in the other study countries.
- Heavy reliance on export taxes and expenditure rigidities constrained fiscal adjustment.
- CFA franc zone countries faced constraints from monetary union rules.
- External shocks in the mid-1980s:
  - Protracted decline in world prices of coffee, cocoa, cotton, and oil.
  - Sharp rise in international interest rates.
  - Depreciation of the U.S. dollar from its 1985 high against major currencies, including the French franc.
- Negative effects of external shocks often compounded by internal shocks from macroeconomic policy.

---

### Box 1. The Framework for Monetary Policy in the CFA Franc Zone

### Institutional setup and core provisions
- Two monetary unions:
  - WAEMU: 8 countries (including Benin, Côte d’Ivoire, Senegal).
  - CEMAC: 6 countries (Cameroon largest).
- In 1994 two new economic unions complemented existing unions; central banks:
  - WAEMU: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO).
  - CEMAC: Banque des Etats de l’Afrique Centrale (BEAC).
- Four essential provisions:
  - Shared CFA franc convertible into the French franc at a fixed exchange rate, supported by an overdraft facility through an operations account with the French Treasury.
  - Uniform interest rate structure.
  - Uniform ceilings on bank lending margins fixed to a common interest rate structure.
  - Common limits for government borrowing from the two central banks: except for temporary overruns, government borrowing could not exceed 20 percent of the previous year’s fiscal revenues.

### Implications and instruments
- Limited room for independent monetary policy; inflation and interest rates constrained to be similar to France (allowing for country risk).
- Central bank instruments: national and bank-by-bank credit targets, ceiling on access to central bank financing, rediscount rate, interbank money market, liquidity ratio.

### Macroeconomic effects and timing of deregulation
- Terms of trade declines (1985–92): Cameroon 56 percent decline; Côte d’Ivoire 27 percent decline; Senegal 19 percent decline.
- Real effective exchange rates appreciated considerably, cutting external competitiveness and moderating inflation.
- Fiscal stress examples:
  - Cameroon: government budget deficit equivalent to 13 percent of GDP in 1987.
  - Côte d’Ivoire: deficit averaging almost 19 percent of GDP in 1989–90.
- BCEAO claims on banks in Côte d’Ivoire rose from CFAF 392 billion at end-1985 to CFAF 524 billion at end-1990.
- Timing of nominal interest rate controls lifted:
  - Ghana and Nigeria: 1987.
  - WAEMU countries: 1989.
  - Cameroon: 1990.
  - Kenya: 1989–91.
  - Tanzania: 1991–93.
  - Uganda: 1992–94.

### Banking-sector transmission of macro shocks and distortions
- Asset-side: borrowers’ reduced ability to service loans as incomes and demand fell.
- Liability-side: deposit falls in Benin (1989), Cameroon (1986–87), Côte d’Ivoire (1989–90) hurt liquidity due to sluggish GDP growth, drawdown of government deposits, and capital flight (Côte d’Ivoire).
- Government arrears acted as an unanticipated tax, contributing to slowdown and bank illiquidity.
- Banks increased recourse to central bank refinancing, often at penalty rates (“taux d’enfer”).
- Credit controls and uniform interest margins produced perverse incentives and revenue losses for banks (WAEMU pre-1989 example of skewed spreads and misallocation).
- Directed and crop marketing credits often carried unreimbursed government subsidies onto banks’ books and counted against credit ceilings.
- Example: requirement to extend credit to agriculture equivalent to at least 17 percent of deposits noted outside CFA zone (no penalties meant limited compliance).

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### Legal, institutional, accounting, and supervisory weaknesses
- Legal environment:
  - Lengthy loan recovery; Côte d’Ivoire: more than three years could elapse between initiation and decision in late 1980s.
  - Court delays, injunctions, high legal fees (Côte d’Ivoire: non refundable fee of 5 percent of the claim), shortage of judges (Cameroon about 600; Côte d’Ivoire 195 in early 1990s).
  - Guinea: about 200 judges in early 1990s, only about 30 trained; bankruptcy legislation dated to 1967; no procedure for mortgage registration in first half of 1990s.
- Accounting and disclosure:
  - Weak standards; interest on delinquent loans often counted as income (Uganda: loan could be “good” and income accrued up to two years even if never serviced).
  - Poor loan loss provisioning; bank earnings and capital frequently overstated.
- Regulation and supervision:
  - Outdated/incomplete legal frameworks; deficiencies in asset quality, liquidity, maturity matching, capital adequacy standards, accounting rules.
  - Ambiguities/division of supervisory responsibility (WAEMU: national Banking Control Commission vs. BCEAO; Uganda: Ministry of Finance vs. Bank of Uganda).
  - Off-site supervision hampered by poor reporting; on-site supervision infrequent (some banks not visited for several years).
  - Staffing shortages and low civil-service salaries constrained qualified examiners and training (Ghana Bank Examination Department 1988: 45 persons, about 30 examiners; about five capable of leading teams; only one had more than 10 years’ experience).
  - Example: Uganda Commercial Bank not examined on-site in 10 years as of 1991.
- Net effect: supervision failed to signal or prevent deterioration; functions lacked transparency, independence, consistency, enforcement and were subject to political interference.

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### Financial market development, market structure, and ownership
- Financial markets small and underdeveloped in mid-1980s:
  - As of 1985: four study countries had financial markets less than $1 billion; five ranged between $1 billion and $3 billion; Nigeria had $23 billion.
  - Overall index of financial market development in 1987 characterized as “minimal.”
  - Limited products, banks often did not pay interest on demand deposits; concentrated short-term lending; government securities short maturities.
  - Stock exchanges existed only in Kenya (1954), Nigeria (1960), and Côte d’Ivoire (1974).
  - Financial systems highly repressed in 1987; most closed or minimally open (only Kenya largely open).
- Consequences:
  - Small markets limited efficiency, risk diversification, and investment in infrastructure.
  - Reliance on direct monetary instruments discouraged intermediation and constrained liquidity.
  - High share of demand deposits increased vulnerability; reliance on central bank refinancing notable in CFA franc zone.
- Market structure features:
  - Bank ownership: government-owned banks, local private banks, foreign-owned banks; development banks government-owned/controlled.
  - State-owned banks:
    - Established to fill financing gaps; often lacked separation of ownership and management, faced lending pressures to public enterprises and politically connected borrowers, frequently performed poorly.
    - Dominant in planned economies (Guinea, Tanzania, Benin); significant in franc zone countries, Ghana, Nigeria, Uganda; less dominant in Kenya.
  - Banking concentration:
    - Mid-1980s: maximum of four banks held one half or more of system loans in each country.
    - Extreme: NBC in Tanzania accounted for more than 80 percent of total banking sector loans.
  - Entry conditions and licensing:
    - Most countries tightly controlled entry during 1985–95; Kenya and Nigeria were exceptions with comparatively lax entry.
    - Kenya: liberal licensing of NBFIs in 1980s; NBFIs not required to hold reserves or subject to ceilings until 1989.
    - Nigeria: licensing loosened and politicized in late 1980s; minimum capital eroded so by 1988 commercial bank could be established with paid-up capital equivalent to $300,000. Approximately 27 local commercial banks established during 1987–92.
    - Restrictive entry protected weak banks; overly accommodating entry allowed undercapitalized, politically connected entrants.

### Bank financing, shareholders, and political involvement
- Main financing: demand deposits, time deposits, central bank refinancing; limited markets exacerbated liquidity instability.
- Examples:
  - By 1988, BCEAO refinancing accounted for more than one third of banks’ resources in Côte d’Ivoire.
  - End-1985: government and public enterprise deposits in Cameroon amounted to 50 percent of total deposits.
- Consequences: private sector deposits fell as GDP slowed; heavy central bank refinancing increased vulnerability (BCEAO’s 1988 decision to stop refinancing distressed banks in Senegal triggered liquidity crisis).
- Political involvement: politicians as shareholders/directors influenced licensing and discouraged sanctions; banks pressured to lend to politically influential borrowers; Kenya example of access to public enterprise deposits via political connections.

### Unsound conduct and operational weaknesses
- Common weaknesses:
  - Lax credit appraisal, inadequate collateral verification, poor credit monitoring, poor loan documentation (Côte d’Ivoire: loan contracts sometimes unsigned), weak internal controls, passive boards, fragmented information systems.
  - Failure to trace problem loans (Uganda Commercial Bank example).
- Consequences: problem loans went unaddressed; deficiencies most pronounced in government-owned banks.

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### Box 2. Government Ownership in Banks — overview and country cases

### Rationale and practical outcomes
- Governments established banks (including development banks) to finance priority sectors; results included greater government control but weak financial performance due to limited diversification, political interference, and secondary emphasis on profitability.

### Country examples and figures
- Benin: Banks nationalized in 1975. Three specialized banks: Banque Commerciale du Bénin (BCB) held bulk of domestic credit and preponderant share of deposits (mainly demand deposits); Banque Béninoise pour le Développement (BBD) for industry; Caisse Nationale de Crédit Agricole (CNCA) for agriculture.
- Cameroon: Decree August 1985 required at least one-third of subscribed capital from government; actual government equity considerably higher; one bank wholly government-owned.
- Ghana: Post-independence banks wholly or majority government-owned. Ghana Commercial Bank (GCB) set up in 1953 held 36 percent of total bank deposits in late 1980s. Government acquired 40 percent equity stakes in Barclays and Standard and Chartered after 1975 indigenization decree.
- Kenya: Government set up Cooperative Bank and National Bank of Kenya (NBK). Kenya Commercial Bank (KCB) resulted from nationalization/renaming in 1970. End-1993: KCB held 22 percent of bank deposits and NBK held 10 percent.
- Nigeria: Federal and state governments established banks; federal government had major shareholdings in eight commercial and five merchant banks and minority stakes in others; state governments held equity in 10 banks by 1980 and 25 banks by 1992.
- Senegal: End-1986 among 14 banks government had equity shares greater than 50 percent in five banks (examples: Société Nationale de Banque 88 percent, Banque Nationale de Développement du Sénégal 81 percent, Société Nationale de Garantie et d’Assistance au Commerce 76 percent).

### Development banks and local/foreign banks
- Development banks: intended to finance modernization and priority sectors but typically weak financially due to government selection of priorities and interference.
- Local banks and NBFIs: emerged where private sector relatively developed (Kenya); found niches but faced risks: lack of stable deposit base, imprudent loans, insufficient capital, insider lending.
- Foreign banks: benefits (strong capital, parent support, conservative policies) and risks (cream skimming, reduce head-office credit lines). Examples:
  - Kenya: two of three largest banks accounted for 38 percent of deposits in 1993 and were foreign-owned.
  - Côte d’Ivoire: beginning of 1991 three largest banks were subsidiaries of French banks controlling 74 percent of sector assets.
  - Senegal: end-1989 of 12 banks, one wholly foreign-owned and four majority foreign-owned; government maintained share up to 29 percent in some.
  - Uganda (1987–89): foreign banks’ shareholders’ funds largely revaluations of premises; after excluding revaluations liquid shareholders’ funds to total assets unduly low; foreign banks distributed 75 percent of profits as dividends during 1987–89 rather than reinvesting.

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### Box 4. An Example of Bank Fraud and Collapse (Guinea)

### Mechanics and scale
- Management permitted irregularities enabled by lack of qualified staff, absence of internal control and reconciliation, excessive partitioning of operations, and poor interdepartmental communication.
- Fake/altered documents and forged book entries used; depositing certified checks drawn on another bank for immediate credit was common.
- Fictitious assets reported:
  - about GF 30 billion at end-1984, comprising GF 12 billion difference in net claims of central bank on specialized banks (as reported), GF 5 billion discrepancy between reciprocal claims between specialized banks, GF 13 billion gap in interbranch account (“compte de liaison”) of the CNCIH.
  - by closure on December 22, 1985, fictitious assets jumped to about GF 40 billion—approximately 80 percent of total assets—including GF 4.5 billion in certified checks issued after July 26, 1985 when the practice was prohibited.

### Common weaknesses and insider lending
- High portfolio concentration, low capital/reserves, unrecognized loan losses, insufficient provisioning, capital-to-assets ratios often insufficient.
- Insider lending widespread:
  - Most larger local bank failures in Kenya involved insider lending.
  - About 65 percent of total loans of four local banks liquidated in Nigeria in 1995 were insider loans, essentially all irretrievable.
  - Almost half of loans of one Ugandan local bank taken over by the BOU in 1995 had been granted to its director and employees.
- Undercapitalization example (four commercial banks taken over by Central Bank of Nigeria in 1995):
  - average paid-up share capital N 51 million compared with average N 94 million for all 36 private sector banks;
  - paid-up share of these failed banks amounted to an average of only about 4 percent of their total loans.

### Lending to public enterprises and political pressure
- Banks pressured to fund government priorities and public enterprises; planned economies exhibited strongest interventions (Benin, Guinea, Tanzania).
- Example NBC Tanzania (end-December 1988):
  - among top 40 borrowers, 97 percent of loans to 34 public enterprises and 3 percent to 6 private enterprises;
  - among top 40 borrowers in industrial/commercial sectors, 74 percent of credit to public enterprises and 26 percent to private enterprises;
  - for comparison, 58 percent of total industrial sector value added generated by public enterprises and 42 percent by private enterprises.

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### Conclusions and policy-relevant findings
- Banking crises in sub-Saharan Africa reflected common global causes: macroeconomic shocks (including exchange rate shocks); pervasive government involvement and loose controls on insider lending; weaknesses in legal and institutional frameworks; inadequate capitalization and loan loss provisions; distorted incentives encouraging excessive risk-taking.
- Regional specificities:
  - Crises were prototypes of endemic crises associated with heavy government intervention.
  - Lack of strong legal/institutional environment and absence of a “credit culture” worsened outcomes.
  - High vulnerability to limited economic diversification and primary commodity price volatility.
- Factors not prominent relative to other regions:
  - Contagion did not play an important role in propagating crises in sub-Saharan Africa.
  - Bunching of crises in late 1980s and early 1990s reflected common external shocks and common policy/regulatory deficiencies.
  - Financial liberalization was not a major factor — systems remained highly repressed and interest-rate deregulation often occurred after crisis onset (except Nigeria).
  - Little evidence that deposit insurance schemes contributed to crises (schemes existed only in a few study countries at the time).
- Government intervention affected banks through macroeconomic setting, legal system and institutions, market structure, ownership patterns, entry conditions, and direct pressure to lend to public enterprises.
- Government–bank relationship often mutually beneficial short term: governments used banks to further development agendas; banks used government to protect or favor certain activities and tolerate inappropriate conduct.
- Good governance mattered: government-owned and foreign banks with professional management, cautious portfolios, and resistance to noncommercial lending recorded solid performance during crisis periods.
- Primary triggers: economic recession and deterioration in the terms of trade.
- Principal underlying factors: government interference, poor supervision and regulation, and management shortcomings.

### Suggestions for future research (as presented)
- Build an empirical framework (data permitting) to test relative importance of causes of banking crises in sub-Saharan Africa.
- Formalize themes into a simple theory of banking crises focusing on government intervention and institutional problems, drawing on third generation currency crises models.

*Source: _wp0455*

### 1.     Episodes of Banking Crisis in Sub-Saharan Africa............................................................7

### 1.     Episodes of Banking Crisis in Sub-Saharan Africa............................................................7

### Introduction
- Banking crises occurred throughout sub-Saharan Africa in the 1980s and 1990s.
- The banking system in many countries hobbled along or simply collapsed altogether, and financial development suffered a major setback.
- Resolution of crises in some cases imposed very large costs on the government.
- The experience of sub-Saharan Africa with banking crises has drawn relatively little attention compared with literature covering industrialized, developing, and Asian countries.

### Research questions addressed
- Which factors behind these crises were most important?
- Were the sources of crises in sub-Saharan Africa the same as those linked to crises in other parts of the world, or were some special to Africa?
- What were the different channels through which the government in sub-Saharan African countries intervened in the banking system?

### Sample, time frame, and crisis definition
- The study illustrates major themes or trends with examples drawn from ten countries: Benin, Cameroon, Côte d’Ivoire, Ghana, Guinea, Kenya, Nigeria, Senegal, Tanzania, and Uganda during 1985–95.
- The time frame is the period 1985–95, chosen to coincide with the emergence and unfolding of banking crises in the sample countries.
- The dates of the crises are taken from Caprio and Klingebiel (2002) and Lindgren et al (1996), with the notion of systemic banking crisis underlying these dates.
- Definition of systemic banking crisis used (Caprio and Klingebiel (1997)): nonperforming loans are at least 5–10 percent of total assets and thus likely to be sufficient to wipe out most or all of the banking system’s capital.
- This definition captures the endemic nature of the banking crises in the ten sample countries—what Caprio and Klingebiel (1997) call a “silent form of distress” in which a significant portion of the banking system is insolvent, but still remains open.

### Framework for analyzing causes of banking crises
- Causes are classified into three categories to emphasize differing nature and channels through which they affect banks’ soundness:
  - Operating environment: factors linked to macroeconomic developments and policies as well as the state of financial market development; includes limited diversification, susceptibility to exogenous shocks, weaknesses in macroeconomic policymaking, and shortcomings in institutions.
  - Market structure: characteristics of the banking sector such as bank ownership, banking concentration, and sources of bank funding that affect decision making and behavior of banks.
  - Banks’ conduct: extent of competitive behavior among banks, internal governance, and lending practices (notably lending to public enterprises and insider lending); highlights impact of banks’ own behavior on operations and financial performance.

### Factors identified in cross-country literature (Goldstein and Turner (1996))
- Macroeconomic volatility (e.g., volatility in growth and inflation rates or in the terms of trade, international interest rates, and real exchange rates) can alter the relationship between the values of bank assets and liabilities.
- Lending booms and surges in capital flows may prompt banks to lend excessively and unwisely during the expansion phase; a crisis is created when the bubble bursts.
- Serious mismatch of bank assets and liabilities, inadequate bank capital and/or loan-loss provisions, combined with large shocks, increase risk of bank fragility.
- Inadequate preparation for financial liberalization can increase the danger of a banking crisis.
- Heavy government involvement and loose controls on connected lending can hurt bank profitability and efficiency.
- Weaknesses in the accounting, disclosure, and legal framework can adversely affect bank performance.
- Distorted incentives for bank owners, managers, and bank depositors can lead to excessive risk-taking and delay corrective actions.
- The exchange rate regime can undermine bank soundness through vulnerability to speculative attack, downward adjustment in the real value of bank capital, and reduced ability of the central bank to act as lender of last resort.

### Honohan’s three “syndromes” of banking crises (Honohan (1997))
- Macroeconomic epidemics:
  - Arise from boom and bust cycles.
  - During good times banks lend excessively to projects with poor long-term prospects; when the bubble bursts, banks face weak portfolios.
- Microeconomic deficiencies:
  - Poor management practices such as connected lending.
  - Tend to be systemic or bunched together in time because shortcomings in different banks are allowed to worsen under common external conditions, including weak supervision.
- Omnipresent government in banking systems:
  - Banks operate as a quasi-fiscal mechanism financing a broad spectrum of government activities.
  - Good times can mask problems; an adverse shock can expose underlying insolvency leading to system-wide problems.

### Approach and sources
- The paper uses a broad-brush approach guided by Goldstein and Turner (1996) and Honohan (1997) to highlight factors relevant to sub-Saharan Africa.
- Country and financial sector reports prepared by the World Bank are a key source of information.
- The selection of countries was also dictated by availability of information, which can be spotty and variable in quality even among the chosen sample.

### Structure and next steps
- Following the introduction, Section II presents a brief overview of banking crises in the ten study countries, focusing on the nature of the crises and manifestation of financial distress.

*Source: _wp0455 - 1.     Episodes of Banking Crisis in Sub-Saharan Africa............................................................7*

### Section III analyzes the causes of banking crises in the study countries. Section IV offers

### _wp0455 - Section III analyzes the causes of banking crises in the study countries. Section IV offers

### Overview of banking crises (1985–95)
- Severe banking crises hit the ten study countries during the period 1985–95.
- Crises were often endemic, making dating the crises difficult.
- First crises: Ghana, Guinea, and Kenya in the early to mid-1980s.
- Second wave: CFA franc zone countries in the late 1980s.
- Third wave: Guinea, Kenya, Nigeria, and Uganda in the first half of the 1990s.
- Crisis durations were long (example: Ghana crisis spanned almost the entire decade of the 1980s) and recurrent (examples: Guinea and Kenya).

### Episodes and scope (selected entries from Table 1)
- Benin, 1988–90: Collapse of all three banks; 78 percent of banking system loans nonperforming at end-1988. Estimated losses/costs: 17 percent of GDP.
- Cameroon, 1987–93: 60–70 percent of banking system loans nonperforming in 1989.
- Côte d’Ivoire, 1988–91: 4 large banks accounting for 90 percent of banking system loans affected; nonperforming loans at 4 largest banks reached about half of total credit outstanding. Government costs equivalent to 25 percent of GDP.
- Ghana, 1982–89: 7 of 11 audited banks insolvent; 40 percent of bank credit to nongovernment borrowers nonperforming in 1989. Restructuring costs equivalent to 6 percent of GDP.
- Ghana, 1985: 6 banks accounting for 99 percent of banking system deposits insolvent; 80 percent of banking system loans nonperforming. Repayment of deposits equivalent to 3 percent of 1986 GDP.
- Guinea, 1993–94: 3 banks accounting for 45 percent of market affected.
- Guinea, 1985–89: 4 banks and 24 NBFIs accounting for 15 percent of financial system liabilities affected by liquidity/solvency problems.
- Kenya, 1993–95: Solvency problems in banks accounting for more than 30 percent of financial system assets; 66 percent of loans of one third of banks nonperforming in 1993.
- Nigeria, 1991–95: 8 banks insolvent and 45 percent of banking system loans nonperforming at end-1992; 34 out of 115 banks accounting for 10 percent of deposits insolvent in 1994.
- Senegal, 1988–91: 50 percent of banking system loans nonperforming in 1988. Estimated losses/costs: 17 percent of GDP.
- Tanzania, 1987–1990s: Main financial institutions in arrears amounting to half of their portfolio in 1987; government-owned banks, accounting for 95 percent of banking system assets, insolvent as of 1990 at least; 60–80 percent of all loans nonperforming at end-1994. Implied losses equivalent to nearly 10 percent of GDP.
- Uganda, 1990–present (as of the report): Half of banking system facing insolvency problems in 1994.

### Nonperforming loans and systemic proportions
- Nonperforming loans far exceeded the threshold of 5–10 percent of total assets used to define systemic crises.
- Share of nonperforming loans in total banking system loans reached 50 percent or more in Benin, Cameroon, Côte d’Ivoire, Guinea, Senegal, Tanzania, and Uganda.
- Nigeria: 45 percent of bank loans outstanding nonperforming at end-1992.
- Ghana: about 40 percent of bank credit to nongovernment borrowers nonperforming in 1989.
- Kenya: nonperforming assets in June 1993 estimated at less than 20 percent of total financial sector assets.

### Case example — Senegal (Table 2, end-September 1988; in billions of CFA francs)
- Eight Distressed Banks vs Sound Banks vs Total:
  - Loan portfolio: 323 (distressed) / 166 (sound) / 489 (total)
  - Nonperforming loans: 233 (distressed) / 6 (sound) / 239 (total)
  - Capital and reserves: 36 (distressed) / 29 (sound) / 65 (total)
  - BCEAO refinancing: 167 (distressed) / 30 (sound) / 197 (total)

### Financial distress patterns by ownership and institution
- Financial distress was especially acute among government-owned commercial banks and development banks.
  - Cameroon: government-owned commercial bank and two development banks technically insolvent as of 1987.
  - Côte d’Ivoire: development banks’ share of nonperforming loans between 41 percent and 93 percent (examples: BNEC 57 percent, BICT 93 percent in April 1988; BIDI 41 percent, CCI 76 percent in June 1989).
  - Nigeria: 8 of 16 banks technically insolvent at end-1992 were state government banks; by 1994 about 60 percent of total loans and advances of these banks were nonperforming; capital and reserves negative by N 8.4 billion (about US$100 million) in 1994.
- Some government-owned banks remained solvent (examples: four major federal government banks in Nigeria; Kenya Commercial Bank (KCB)).
- Local banks vulnerability:
  - Kenya (1993–94): about one-third of local banks and NBFIs closed or placed under statutory management of the Central Bank of Kenya.
  - Nigeria (end-1992): eight local banks among the 16 insolvent banks.
- Foreign banks often profitable but not immune:
  - Côte d’Ivoire: three of the four largest banks were affiliates of major French banks and the fourth an affiliate of BIAO-SA; yet nonperforming loans of these four banks in 1990 totaled CFAF 450 billion (about half of total credit outstanding). Individual bank ratios of nonperforming loans ranged from 36 percent to 76 percent.
  - A few foreign banks in Senegal and Uganda became insolvent.

### Repercussions on financial intermediation and the economy
- Banking system and payments system collapsed in some countries; in Benin and Guinea, all banks were closed when crises became public.
- Credit to the private sector recorded sharp drops in Benin, Cameroon, Côte d’Ivoire.
- Financial intermediation (broad money to GDP) dipped to new lows in Benin, Ghana, Guinea, Senegal, Tanzania, Uganda.
- Côte d’Ivoire: government costs of restructuring the banking system amounted to about 25 percent of GDP.

### Monetary performance indicators (selected observations from Table 3, 1985–95)
- Non-exhaustive series of country-level indicators (broad money/GDP, broad money growth, credit to private sector, ratio of loans to deposits, real interest rate) show large variability and stress across countries and years.
- Examples of exact values preserved from the table:
  - Benin: Broad money/GDP: 23.7 (1985), 25.4 (1986), 22.2 (1987), 24.0 (1988), 11.4 (1989), 17.6 (1990), 21.9 (1991), 25.6 (1992), 25.9 (1993), 26.2 (1994), 25.3 (1995). Broad money growth: 0.6 (1985), 5.5 (1986), -11.2 (1987), 11.4 (1988), -52.9 (1989), 62.0 (1990), 31.2 (1991), 25.6 (1992), 5.9 (1993), 40.9 (1994), 16.3 (1995).
  - Ghana: Broad money/GDP: 13.6 (1985), 13.5 (1986), 14.2 (1987), 14.7 (1988), 16.9 (1989), 13.4 (1990), 13.4 (1991), 17.5 (1992), 17.2 (1993), 18.6 (1994), 21.3 (1995). Broad money growth: 46.2 (1985), 47.9 (1986), 53.3 (1987), 46.3 (1988), 54.7 (1989), 13.3 (1990), 27.2 (1991), 52.2 (1992), 26.4 (1993), 45.7 (1994), 70.1 (1995).
  - Nigeria: Broad money growth: 11.6 (1985), 2.9 (1986), 22.5 (1987), 33.8 (1988), 10.9 (1989), 40.3 (1990), 33.4 (1991), 45.3 (1992), 53.4 (1993), 38.0 (1994), 19.5 (1995). Credit to private sector: 9.2 (1985), 32.3 (1986), 7.7 (1987), 18.5 (1988), 10.3 (1989), 16.1 (1990), 26.1 (1991), 141.2 (1992), 18.1 (1993), 61.4 (1994), 41.9 (1995).
- Table notes: 1/ Data as of 1989 refer only to new banks. 2/ Loans to nongovernment sector/nongovernment deposits.

### Sources of banking crises — Operating environment and macroeconomic shocks
- The macroeconomic environment is shaped by economic structure, policy framework, and macroeconomic shocks.
- During 1985–95, study countries had limited diversification, rendering them highly vulnerable to external and internal shocks.
  - In 1985, the share of agriculture ranged from 20 percent to 65 percent of GDP in the ten countries.
  - The top three export products accounted for about 40 percent of total exports in Senegal, and 60 percent or more in the other study countries.
- Heavy reliance on export taxes and expenditure rigidities constrained fiscal adjustment to shocks.
- CFA franc zone countries faced additional constraints due to rules of the monetary union.
- A series of external shocks in the mid-1980s:
  - Protracted decline in world prices of key primary export commodities such as coffee, cocoa, cotton, and oil.
  - Sharp rise in international interest rates.
  - Depreciation of the U.S. dollar from its 1985 high against major currencies, including the French franc.
- Negative effects of external shocks were often compounded by internal shocks produced by macroeconomic policies of the authorities.

*Source: _wp0455 - Section III analyzes the causes of banking crises in the study countries. Section IV offers*

### Box 1. The Framework for Monetary Policy in the CFA Franc Zone

### Box 1. The Framework for Monetary Policy in the CFA Franc Zone

### Institutional setup and membership
- Two monetary unions associated with the CFA franc zone:
  - West African Economic and Monetary Union (WAEMU): 8 countries (including Benin, Côte d’Ivoire, Senegal).
  - Central African Economic and Monetary Community (CEMAC): 6 countries (Cameroon is the largest).
- In 1994, two new economic unions were created to complement existing monetary unions; central banks:
  - WAEMU: Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO).
  - CEMAC: Banque des Etats de l’Afrique Centrale (BEAC).

### Core provisions of the monetary unions (first 15 years) and persistent elements
- Four essential provisions for monetary integration:
  - Shared CFA franc convertible into the French franc at a fixed exchange rate, supported by an overdraft facility through an operations account with the French Treasury (role of the French franc, now the euro, remains valid).
  - Uniform interest rate structure throughout the zone.
  - Uniform ceilings on bank lending margins fixed to a common interest rate structure.
  - Common limits for government borrowing from the two central banks: except for temporary overruns, government borrowing could not exceed 20 percent of the previous year’s fiscal revenues.

### Implications for national monetary policy and instruments used
- Limited room for independent monetary policy; inflation and interest rates were constrained to be similar to those in France (allowing for country risk).
- Credit policy emphasized maintaining an appropriate level of foreign reserves.
- Main central bank policy instruments:
  - National and bank-by-bank credit targets.
  - A ceiling on access to central bank financing to maintain aggregate demand consistent with balance of payments and domestic growth objectives.
  - A rediscount rate.
  - The interbank money market.
  - A liquidity ratio.

### Macroeconomic effects in franc zone countries (selected findings)
- Among study countries in the franc zone, terms of trade during 1985–92 fell markedly:
  - Cameroon: 56 percent decline.
  - Côte d’Ivoire: 27 percent decline.
  - Senegal: 19 percent decline.
- Movements of the CFA franc mirrored the French franc; real effective exchange rates appreciated considerably, which:
  - Cut into external competitiveness.
  - Moderated prices (lower inflation pressures).
- Budget outcomes and fiscal stress (examples):
  - Cameroon: government budget deficit equivalent to 13 percent of GDP in 1987.
  - Côte d’Ivoire: deficit averaging almost 19 percent of GDP in 1989–90.
- Central bank claims and costly refinancing:
  - BCEAO claims on banks in Côte d’Ivoire rose from CFAF 392 billion at end-1985 to CFAF 524 billion at end-1990.
- Interest rate deregulation timing in study countries (when nominal interest rate controls were lifted):
  - Ghana and Nigeria: 1987.
  - WAEMU countries: 1989.
  - Cameroon: 1990.
  - Kenya: 1989–91.
  - Tanzania: 1991–93.
  - Uganda: 1992–94.

### Banking-sector transmission of macro shocks
- Asset-side: reduced ability of borrowers to service loans as incomes and demand fell.
- Liability-side: deposit falls in Benin (1989), Cameroon (1986–87), and Côte d’Ivoire (1989–90) hurt liquidity—due to sluggish GDP growth, drawdown of government deposits to finance deficits, and capital flight (Côte d’Ivoire).
- Government arrears acted as an unanticipated tax on the private sector, contributing to economic slowdown and bank illiquidity.
- Banks increased recourse to central bank refinancing, often at penalty rates (“taux d’enfer”).

### Credit controls, interest rate structure, and distortions
- Nominal interest rate controls were widely used to keep credit cheap and favor selected borrowers; controls often did not account for maturity or risk, creating perverse incentives.
- WAEMU practice prior to 1989 (example of skewed margins):
  - Spreads: crop credits normally limited to 1 percent over the “taux d’escompte privilégié” (TEP); small and medium enterprise loans fixed at a maximum of 3 percent; other borrowing limited to 5 percent over the “taux d’escompte normal” (TEN).
  - Same bank lending margin applied to TEP and TEN regardless of financing source.
  - Result: privileged borrowers used cheap credits for other purposes; banks lost income on “normal” credits.
- Reliance on bank-by-bank credit ceilings (Comité National du Crédit) allowed government intervention and favored weak banks:
  - Example: in Senegal in 1986–87, problem banks accounted for 68 percent of credits but 87 percent of BCEAO rediscounts.
- Directed and crop marketing credits:
  - Crop marketing credits often financed full collection costs; governments set producer prices higher than export prices and were frequently unable to pay the subsidy to participating banks. Under central bank regulations, unreimbursed portions were carried as normal credit to crop marketing agencies, guaranteed by government and counted against credit ceilings.
  - A general requirement noted outside CFA zone: financial institutions extend credit to agriculture in amounts equivalent to at least 17 percent of deposits (no penalties meant limited compliance).

### Legal environment and enforcement weaknesses
- Effective banking requires enforceable financial contracts, recoverable collateral, and sound bankruptcy procedures; study countries exhibited serious shortcomings:
  - Lengthy and cumbersome loan recovery procedures; in Côte d’Ivoire more than three years could elapse between initiation and decision in the late 1980s.
  - Court delays and injunctions frustrated possession and realization of assets (example: Uganda and Guinea).
  - High legal fees discouraged action (Côte d’Ivoire: non refundable fee of 5 percent of the claim to initiate legal procedures).
  - Shortage of judges: early 1990s counts included about 600 judges in Cameroon and 195 in Côte d’Ivoire.
  - Guinea: approximately 200 judges in the early 1990s, only about 30 trained as professional magistrates; bankruptcy legislation dated to 1967; no procedure in the first half of the 1990s for registration of mortgages and other guarantees.
- Consequences: lenders had difficulty pursuing defaults; collateral realization impeded; delinquency costs effectively lowered, discouraging contractual compliance.

### Institutional environment: accounting, disclosure, regulation, and supervision
- Accounting and disclosure:
  - Generally very weak; absence of standard accounting principles and required balance sheet formats.
  - Banks often counted as income interest on delinquent loans or loans with principal repayment in serious doubt (example: in Uganda, a loan could be considered “good” and income accrued for up to two years even if never serviced).
  - Poor loan loss provisioning and reserve practices; in some countries banks were not required to quantify portfolio risk or provide adequate loan loss reserves.
  - Result: bank earnings and capital were frequently overstated; supervisors lacked reliable information.
- Banking regulation shortcomings:
  - Outdated or incomplete legal frameworks often failed to provide clear supervisory authority or modern prudential standards (examples: Tanzania, Kenya, Ghana, CFA franc zone).
  - Deficiencies in areas such as asset quality, liquidity and maturity matching, standards for capital adequacy, and accounting rules.
- Supervision practices and capacity constraints:
  - Ambiguities and division of responsibilities (examples: WAEMU—national Banking Control Commission vs. BCEAO; Uganda—Ministry of Finance vs. Bank of Uganda) undermined decisive supervisory action.
  - Off-site supervision hampered by poor reporting systems; on-site supervision intermittent and infrequent (some banks not visited for several years).
  - Staffing and skill shortages: low civil-service salaries limited ability to attract qualified examiners and training was inadequate.
  - Example from Ghana (1988): Bank Examination Department of 45 persons included about 30 examiners; of these about five judged capable of leading teams; only one had more than 10 years’ experience; only four had between 5 and 10 years’ experience.
  - Some large banks had not been examined on-site for long periods (example: Uganda Commercial Bank not examined on-site in 10 years as of 1991).
- Net effect: regulation and supervision did not signal or prevent deterioration in bank liquidity and solvency—supervisory functions operated in environments lacking transparency, independence, consistency, and enforcement and were subject to political interference.

### Financial market development and market structure (implications for banks)
- Financial markets were small and underdeveloped in the mid-1980s:
  - As of 1985, using broad money as a rough proxy, four study countries had financial markets less than $1 billion; five ranged between $1 billion and $3 billion; Nigeria had $23 billion.
  - Overall index of financial market development for the ten study countries in 1987 was characterized as “minimal.”
  - Limited financial products; banks generally did not pay interest on demand deposits; concentrated short-term lending; government securities short maturities.
  - Stock exchanges existed only in Kenya (1954), Nigeria (1960), and Côte d’Ivoire (1974).
  - Financial systems were highly repressed in 1987; most were closed or minimally open (only Kenya largely open).
  - Monetary policy instruments available to authorities were rudimentary.
- Consequences for banks:
  - Small markets limited efficiency, risk diversification, and cost-effective financial infrastructure investment.
  - Reliance on direct monetary instruments and difficult macro environment discouraged financial intermediation and constrained liquidity.
  - Limited financial instruments made alternative funding sources scarce; high share of demand deposits increased vulnerability; reliance on central bank refinancing notable in CFA franc zone.

### Market structure and government ownership
- Bank ownership categories: government-owned banks, local private banks, foreign-owned banks; development banks owned/controlled by governments.
- State-owned banks:
  - Established historically to fill perceived financing gaps after independence.
  - Often lacked separation between government ownership and management; managers had limited autonomy and incentives; faced pressures to lend to public enterprises or politically connected borrowers.
  - State banks frequently performed poorly and their large size sometimes amplified systemic deterioration.
  - Variation across countries: state banks dominated in strictly planned economies (Guinea, Tanzania, Benin); significant roles in franc zone countries, Ghana, Nigeria, Uganda; less dominant in Kenya.

*Source: Husain and Faruqee (1994); International Monetary Fund, African Department database.*

### Box 2. Government Ownership in Banks

### Box 2. Government Ownership in Banks

### Overview
- Governments in all study countries established their own banks, often creating sectoral specializations or development banks to finance priority sectors (agriculture, industry, housing).
- Development banks increased government control of the banking system but were prone to weak financial performance due to limited diversification, government interference, politically sensitive lending, and secondary emphasis on profitability.

### Country cases and government ownership
- Benin
  - Banks were nationalized in 1975. Three banks specialized: Banque Commerciale du Bénin (BCB) (bulk of domestic credit, preponderant share of deposits—mainly demand deposits), Banque Béninoise pour le Développement (BBD) (industrial sector), and Caisse Nationale de Crédit Agricole (CNCA) (agricultural sector).
- Cameroon
  - Decree of August 1985 required no less than one-third of a bank’s subscribed capital to come from the government; actual government equity was considerably higher sector-wide and one bank was wholly government-owned.
- Ghana
  - Banks established post-independence were wholly or majority government-owned. Ghana Commercial Bank (GCB), set up in 1953, held 36 percent of total bank deposits in the late 1980s.
  - Government acquired 40 percent equity stakes in Barclays and Standard and Chartered following a 1975 indigenization decree.
- Kenya
  - Government set up Cooperative Bank and National Bank of Kenya (NBK). Kenya Commercial Bank (KCB) resulted from nationalization and renaming of National and Grindlay’s Bank in 1970.
  - At end-1993, KCB held 22 percent of bank deposits and NBK held 10 percent of deposits.
  - Two additional government-owned commercial banks were established in 1990.
- Nigeria
  - Federal and state governments established banks; federal government had major shareholdings in eight commercial and five merchant banks and minority stakes in others; nine of these were joint ventures with foreign investors.
  - State governments held equity in 10 banks by 1980 and 25 banks by 1992.
- Senegal
  - At end-1986, among 14 banks the government had equity shares greater than 50 percent in five banks (examples: Société Nationale de Banque 88 percent, Banque Nationale de Développement du Sénégal 81 percent, Société Nationale de Garantie et d’Assistance au Commerce 76 percent).

*Sources: Brownsbridge and Harvey (1998), International Monetary Fund, and World Bank.*

### Development banks and typical array
- Rationale for development banks: finance modernization of agriculture, reduce housing shortages, provide sector-specific expertise where commercial banks were unwilling or unable to lend.
- Practical outcomes:
  - Greater government control and selection of priority sectors often with little regard for sustainable growth.
  - Inherent weak financial performance due to lack of diversification, frequent government interference that reduced economic lending criteria, constrained loan recovery in politically sensitive sectors, and secondary emphasis on profitability.
- Example (Côte d’Ivoire)
  - Five development banks established in the 1950s–1960s: two industrial banks (Crédit de la Côte d’Ivoire (CCI), Banque Ivoirienne de Développement Industriel (BIDI)), two housing banks (Banque Nationale pour l’Epargne et le Crédit (BNEC), Banque Ivoirienne de Construction et de Travaux Publics (BICT)), and a rural development bank (Banque Nationale pour le Développement Agricole (BNDA)).

### Local banks and NBFIs
- Local/indigenous commercial banks and numerous NBFIs emerged where private sector was relatively well developed (notably Kenya).
- Local banks entered as entry requirements were relaxed and found niches (small businesses, rural customers) neglected by government-owned and foreign banks.
- Market opportunities for local banks included:
  - Kenya: introduction of Treasury bill (T-bill) auctions and large domestic government borrowing increased T-bill rates, enabling banks to profit by purchasing T-bills.
  - Nigeria: foreign exchange auction from 1986 created arbitrage opportunities; resale of auctioned foreign exchange yielded a premium averaging 33 percent during 1987–90.
- Risks and weaknesses among many local banks:
  - Lack of stable deposit base, imprudent loan policies, inappropriate conduct, vulnerability to policy changes (e.g., foreign exchange regime), insufficient capital and professionally qualified staff, and lending to associated companies.

### Foreign banks: benefits and risks (examples and figures)
- Potential benefits:
  - Stronger capital base, recourse to parent bank recapitalization, easier access to external liquidity, more conservative credit policies, insulation from government pressure, superior technical and operational capacities, and competitive pressure on domestic banks.
- Potential risks:
  - Cream off best clients (adverse selection), benefit from flight to quality at expense of local banks, reduce lines of credit from head offices in deteriorating conditions.
- Examples and statistics:
  - Kenya: two of the three largest banks accounted for 38 percent of bank deposits in 1993 and were foreign-owned.
  - Côte d’Ivoire: at the beginning of 1991 the three largest banks were subsidiaries of French banks and controlled 74 percent of banking sector assets.
  - Senegal: of 12 banks at end-1989, one was wholly foreign-owned and four others were majority foreign-owned, with the government maintaining a share of up to 29 percent in some.
  - Uganda (1987–89): bulk of foreign banks’ shareholders’ funds consisted of revaluations of premises; after excluding revaluations, liquid shareholders’ funds to total assets were unduly low. Foreign banks distributed 75 percent of profits as dividends during 1987–89 rather than reinvesting retained earnings.

### Banking concentration
- In the mid-1980s, banking sectors were highly concentrated: a maximum of four banks held one half or more of banking system loans in each study country.
- Extreme example: National Bank of Commerce (NBC) in Tanzania accounted for more than 80 percent of total banking sector loans.
- High concentration related to weakened banking soundness via magnified systemic problems when large banks failed, limited competition, and poor corporate governance.

### Entry conditions and licensing practices
- Entry regulations aim to ensure entrants are “fit and proper,” have a business plan, and sufficient capital to operate profitably and absorb shocks.
- Most study countries tightly controlled entry during 1985–95, protecting nationalized banking systems or preserving early post-independence bank structures.
- Kenya and Nigeria had comparatively lax entry:
  - Kenya: liberal licensing of NBFIs in the 1980s with NBFIs not required to hold reserves or subject to deposit and lending ceilings until 1989.
  - Nigeria: licensing criteria loosened and politicized in the late 1980s; minimum capital eroded by inflation such that by 1988 it was possible to establish a commercial bank with paid-up capital equivalent to $300,000. Approximately 27 local commercial banks were established during 1987–92.
- Supervisory outcomes:
  - Excessively restrictive entry in many countries protected poorly performing banks vulnerable to shocks.
  - Overly accommodating entry in Kenya and Nigeria allowed incompetent or politically connected entrants, leading to undercapitalized institutions that made bad loans and mismatched resources.

### Bank financing, shareholders, and political involvement
- Main financing sources for banks: demand deposits, time deposits, and central bank refinancing; limited financial markets exacerbated liquidity instability.
- Examples and figures:
  - By 1988, refinancing by the BCEAO accounted for more than one third of banks’ resources in Côte d’Ivoire.
  - End-1985: deposits of the government and public enterprises in Cameroon amounted to 50 percent of total deposits.
- Consequences of funding pressures:
  - Private sector deposits fell in countries such as Cameroon and Côte d’Ivoire as GDP growth slowed or became negative.
  - Heavy reliance on central bank refinancing increased vulnerability; BCEAO’s 1988 decision to stop refinancing distressed banks in Senegal triggered a liquidity crisis.
- Political involvement:
  - Politicians as shareholders and directors influenced licensing and discouraged regulatory sanctions, pressuring banks to lend to politically influential individuals.
  - In Kenya, local banks accessed public enterprise deposits via political connections, reducing depositor pressure to maintain sound banking practices.

### Unsound conduct and operational weaknesses
- Competition was limited in most study countries, with Kenya and Nigeria as exceptions.
- Common weaknesses in banks’ credit policy and operations:
  - Lax credit appraisal (insufficient assessment of character, track record, cash flow).
  - Inadequate verification of collateral authenticity and adequacy; failure to verify title deeds.
  - Poor credit monitoring and loan supervision; inability to identify and act on problem loans early.
  - Poor loan documentation (e.g., loan contracts sometimes unsigned in Côte d’Ivoire).
  - Weak internal control systems and weak auditing functions; passive boards of directors.
  - Fragmented credit management information systems and poor coordination between lending groups, enabling customers to obtain loans from one group after being refused by another.
- Resulting consequences:
  - Problem loans could not be readily traced (example: Uganda Commercial Bank (UCB) failures in establishing repayment schedules and monitoring borrower performance).
  - These deficiencies were especially pronounced in government-owned banks and taken to extremes in some countries.

*Italic: Source — _wp0455 - Box 2. Government Ownership in Banks_*

### Box 4. An Example of Bank Fraud and Collapse

### Box 4. An Example of Bank Fraud and Collapse

### Example: Guinea — mechanics and scale of fraud
- Management permitted widespread irregularities, manipulations, and fraud, enabled by lack of qualified staff, absence of internal control and reconciliation, excessive partitioning of operations, and poor interdepartmental communication.
- Fake or altered documents and forged book entries were used; depositing for immediate credit a certified check drawn on another bank was a frequent means to boost account balances.
- Fictitious assets reported in bank books:
  - about GF 30 billion at the end of 1984, comprising:
    - GF 12 billion difference in the net claims of the central bank on the specialized banks (as reported in their books),
    - GF 5 billion discrepancy between reciprocal claims between specialized banks,
    - GF 13 billion gap in the interbranch account (“compte de liaison”) of the CNCIH.
  - by closure on December 22, 1985, fictitious assets had jumped to about GF 40 billion—approximately 80 percent of their total assets—including GF 4.5 billion in certified checks issued after July 26, 1985 when the practice was prohibited.

### Common banking weaknesses identified
- High concentration of risk in portfolios, low capital and reserves, and unrecognized loan losses.
- Lack of attempts to quantify portfolio risk and provide adequate loan loss reserves; management optimism led to insufficient provisioning.
- Asset growth far outpaced growth in capital funds through retained earnings, leaving capital-to-assets ratios often insufficient.
- In some cases (example given: Ghana), banking legislation did not mandate (until 1989) a minimum capital adequacy ratio.
- Concentration limits often exceeded due to limited economic diversification and pressures to lend to particular credit risks (notably public enterprises). Example: Ugandan banks as late as 1995 had some firms borrowing well in excess of the individual limit that loans to one credit risk not exceed 25 percent of core capital; in some violations loans to one credit risk amounted to about two-thirds of core capital.

### Insider lending and failures of local banks
- Insider lending was a major problem, especially in local banks established in part for that purpose.
- Examples and statistics:
  - Most larger local bank failures in Kenya involved widespread insider lending.
  - About 65 percent of the total loans of the four local banks liquidated in Nigeria in 1995 were insider loans, essentially all irretrievable.
  - Almost half of the loans of one Ugandan local bank taken over by the BOU in 1995 had been granted to its director and employees.
  - Problems were exacerbated by breaches of limits on large-loan exposures and lending to speculative projects unable to generate short-term returns, producing maturity mismatches.
- Contributing factors included moral hazard, adverse selection, political involvement of shareholders and directors, narrow ownership structures, and lack of management autonomy.
- Local banks often faced higher deposit costs and thus charged high lending rates, competing poorly for creditworthy borrowers and serving high-risk market segments (including other banks and NBFIs).
  - In Nigeria, some local banks were heavily exposed to finance houses that collapsed in large numbers in 1993 and to other local banks, spreading difficulties through interbank lending.

### Undercapitalization and owners’ incentives
- Many failed banks were undercapitalized because initial minimum capital requirements were very low; owners risked little of their own resources.
- Of four commercial banks taken over by the Central Bank of Nigeria in 1995:
  - average paid-up share capital was N 51 million compared with an average of N 94 million for all 36 private sector banks;
  - the paid-up share of these failed banks amounted to an average of only about 4 percent of their total loans.

### Lending to public enterprises and government pressure
- Banks were pressured to extend politically-based loans to finance government priorities and public enterprises, especially where governments were unwilling to provide budgetary subsidies or adopt realistic pricing.
- Degree of intervention varied; most evident in planned economies (Benin, Guinea, Tanzania) where nationalized banks allocated credit to public enterprises based on annual plans.
- Example: portfolio of NBC in Tanzania at end-December 1988:
  - among its top 40 borrowers, 97 percent of loans consisted of loans to 34 public enterprises (including cooperative unions) and 3 percent represented credit to 6 private enterprises;
  - among its top 40 borrowers in the industrial and commercial sectors, 74 percent of credit went to public enterprises and 26 percent to private enterprises;
  - for comparison, 58 percent of total industrial sector value added was generated by public enterprises and 42 percent by private enterprises.
- In Nigeria, state-government‑set-up banks extended loans to state governments and politically influential borrowers; many became nonperforming as state budgetary crises emerged in the early 1980s.
- Banks sometimes made politically-motivated loans voluntarily in hopes of gaining favor (example: Cameroon merchants in the northern part of the country during the 1980s).

### Conclusions from the study of banking crises in sub-Saharan Africa (1985–95)
- Banking crises in sub-Saharan Africa reflected many common global causes: macroeconomic shocks (including exchange rate shocks); pervasive government involvement and loose controls on insider lending; weaknesses in legal and institutional frameworks; inadequate capitalization and loan loss provisions; and distorted incentives encouraging excessive risk-taking.
- Specific regional features:
  - crises were prototypes of endemic crises associated with heavy government intervention;
  - lack of a strong legal and institutional environment and absence of a “credit culture” worsened outcomes;
  - high vulnerability to limited economic diversification and primary commodity price volatility.
- Absent factors relative to other regions:
  - contagion did not play an important role in propagating crises in sub-Saharan Africa;
  - bunching of crises in the late 1980s and early 1990s reflected common external shocks and common policy/regulatory deficiencies;
  - financial liberalization was not a major factor—financial systems remained highly repressed and interest-rate deregulation often occurred after crisis onset (except Nigeria);
  - little evidence that deposit insurance schemes contributed to crises (such schemes existed only in a few study countries at the time).
- Government intervention affected banks through macroeconomic setting, legal system and institutions, market structure, ownership patterns, entry conditions, and direct pressure to lend to public enterprises.
- The government–bank relationship was often mutually beneficial in the short run: governments used banks to further development agendas; banks used government to protect or favor certain activities and tolerate inappropriate conduct.
- Good governance mattered: government-owned and foreign banks that displayed professional management, cautious portfolios, and resistance to noncommercial lending pressures recorded solid performance during crisis periods.
- Primary triggers of crises were economic recession and deterioration in the terms of trade; principal underlying factors were government interference, poor supervision and regulation, and management shortcomings.
- Suggestions for future research:
  - build an empirical framework (data permitting) to test relative importance of causes of banking crises in sub-Saharan Africa;
  - formalize themes into a simple theory of banking crises focusing on government intervention and institutional problems, drawing on third generation currency crises models.

*Source: Tenconi (1993) as presented in the Box and subsequent sections of the document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2004/_wp0455.pdf_