## Executive Summary ## Source details **Canonical URL:** [Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07125.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07125.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07125.pdf.json) --- ### Background - The Maghreb region comprises Algeria, Libya, Mauritania, Morocco, and Tunisia and has a population of over 81 million and per capita income averaging less than $3,000 in 2005. - Recent economic reforms have contributed to macroeconomic stability and increasing growth in most countries, but the growth dividend has been modest compared with other emerging market economies. - Higher growth is required to bring down unemployment and raise living standards. - A healthy and dynamic financial sector is essential to achieving high and sustainable economic growth because financial intermediaries: - facilitate the exchange of goods and services; - mobilize savings; - lower the cost of financing; and - facilitate risk management. ### Overview of financial systems in the region - Main characteristics: - bank dominance and heavy public sector presence in most countries; - limited financial sector openness in some countries; - bank soundness exhibiting significant cross-country variations; - public banks burdened with inefficiencies and a high level of nonperforming loans (NPLs) in certain countries; - still embryonic fixed-income and equity markets, with the exception of Morocco and Tunisia; - nascent institutional investor industry and generally underdeveloped microfinance; - shortcomings in the legal, regulatory, and supervisory frameworks despite tangible progress; - a largely cash-based payment systems that is being modernized. - Regional aggregate indicators (five countries combined): - Credit to GDP ratio rose from 33 percent in 1995 to 40 percent in 2004. - M2 to GDP ratio rose from 50 to 53 percent over the same period. - Financial systems remain heterogenous and underdeveloped in access: economies remain underbanked and small and medium-size enterprises face severe credit constraints. ### Key findings and challenges - Strengthen bank soundness in all five countries: - reduce the high level of NPLs; - restructure state-owned banks; - secure compliance with prudential rules. - Increase competition: - extensive state ownership and restrictions on foreign bank entry stifle competition and financial deepening; - state banks saddled with high NPLs are a burden on national budgets. - Deepen financial markets: - money, interbank, foreign exchange, equity, and securities markets are nascent or shallow in most countries; - nonbank financial institutions are generally underdeveloped. - Strengthen oversight and infrastructure: - prudential controls remain only partly effective; limited observance of international standards in some countries; - upgrade accounting, auditing, transparency, governance, legal/judicial frameworks, payment systems, and credit information. ### Bank structure, soundness, and credit (selected statistics) - Share of commercial banks in total financial system assets at end-2004 ranged from 49 percent in Morocco to 93 percent in Algeria. - Public bank market shares: - Algeria and Libya: public banks account for over 90 percent of banking sector assets (Algeria: six state banks accounted for 93 percent of banking assets in 2005). - Morocco: public banks’ market share reduced to 24.4 percent (including specialized banks) after privatizations. - Tunisia: public banks’ market share reduced to 30.6 percent after privatizations. - Mauritania: private commercial banks account for 88.2 percent of total assets (2004). - Financial System Structure highlights (2004; percent of total assets): - Morocco: Pension Funds 15.6; Insurance companies 10.6; Commercial banks total 48.7. - Tunisia: Commercial banks total 69.7; Pension Funds 6.5; Other institutions 17.4. - Financial Soundness Indicators for Commercial Banks (2005; end of period, in percent): - Algeria: Capital Adequacy 12.9; Nonperforming Loans to Gross Loans 32.4; Provisioning to Nonperforming Loans 55.6; Profitability (ROA) 0.4; Growth of Credit in Real Terms over 2000–05 100.7. - Libya: Capital Adequacy 13.7; Nonperforming Loans to Gross Loans 25.0; Provisioning to Nonperforming Loans 66.0; Profitability (ROA) 0.4; Growth of Credit in Real Terms over 2000–05 26.1. - Mauritania: Capital Adequacy 22.2; Nonperforming Loans to Gross Loans 46.0; Growth of Credit in Real Terms over 2000–05 33.7. - Morocco: Capital Adequacy 11.5; Nonperforming Loans to Gross Loans 10.9; Provisioning to Nonperforming Loans 71.0; Profitability (ROA) 0.5; Growth of Credit in Real Terms over 2000–05 32.2. - Tunisia: Capital Adequacy 12.4; Nonperforming Loans to Gross Loans 20.7; Provisioning to Nonperforming Loans 48.4; Profitability (ROA) 0.6; Growth of Credit in Real Terms over 2000–05 30.0. - Country notes: - Algeria: private banks well capitalized but only 10 percent of assets; overall NPL ratio remains high; government takeover of public banks’ NPLs cost about 3 percent of GDP annually from 1991–2001; public banks’ remaining NPLs to public enterprises estimated at 4 percent of GDP at end-October 2006. - Morocco: commercial banks generally profitable and efficient; NPLs to total loans reduced from 15.6 percent in 2005 to 10.9 percent at end 2006; Casablanca Stock Exchange market capitalization 72 percent of GDP. - Tunisia: NPLs partly reflect ageing directed-credit backlog; NPLs to the tourism sector account for about a quarter of total NPLs. - Libya and Mauritania: data weaknesses limit assessments; concerns about loan concentration, connected lending, and related-party lending in Mauritania. ### Progress on privatization, markets, and microfinance - Privatization and restructuring progress: - Mauritania privatized all but one public bank in the mid-1990s. - Algeria: privatization envisaged for two of six state-owned banks; first privatization on track. - Libya: intends gradual privatization; first privatization launched in 2005; three other public banks recapitalized in 2005. - Morocco and Tunisia: significant privatizations and restructuring completed or underway. - Fixed income and equity markets: - Morocco’s stock exchange market capitalization: 55 percent of GDP (another source indicates Casablanca market capitalization 72 percent of GDP). - Tunisia: government bonds bulk of tradable securities; stock exchange small and relatively illiquid. - Algeria: only three stocks listed; trading almost nonexistent. - Libya and Mauritania: no fixed income and equity markets. - Institutional investors, insurance, pensions: - Morocco: insurance premiums reached 3 percent of GDP in 2003. - Tunisia: premiums reached 1.5 percent of GDP in 2003. - Pension and mutual fund industry nascent except in Morocco. - Microfinance: - Morocco: outstanding loans by microfinance institutions tripled in the last three years and service over 800,000 people, two-thirds women. - Tunisia: several microfinance institutions operate. - Algeria: microfinance programs linked to government-run social services. - Mauritania: legislation in 1998 spurred microfinance growth; activity heavily dependent on foreign aid. ### Legal, regulatory, supervisory, and infrastructure reforms - New central bank laws passed in: - Algeria (2003) - Libya (2005) - Morocco (2005) - Tunisia (2006) - Compliance with Basel Core Principles (BCP) is uneven; BCP assessments referenced: Algeria (2003), Mauritania (2005), Morocco (2002), Tunisia (2006). - Key supervisory weaknesses: - supervision often rules-based and backward-looking rather than risk-based and forward-looking; - limited frequency and scope of on-site inspections in some countries; - incomplete formal agreements for cross-border information exchange. - Central bank autonomy variations and limits (selected features preserved as in source): - Algeria: central bank may provide advances to the government not exceeding 10 percent of the previous year’s revenues; repayment period cannot be longer than 240 days in any given year. - Libya: advances to the Treasury not exceeding 20 percen[t] of the total annual revenues in the general budget. - Mauritania: advances to the government not exceeding 5 percent of the previous year’s revenues and outstanding for no more than 300 days in any calendar year. - Morocco: direct financing prohibited except a cash facility limited to 5 percent of the previous year’s tax revenue, total duration not to exceed 120 days per year. - Tunisia: governor and vice-governor appointed for six-year terms; central bank acts as treasurer but does not directly finance the treasury; annual budget approved solely by its Board. - Payment systems modernization: - Algeria: RTGS started February 2006; automated clearing house for retail payments May 2006. - Morocco: RTGS effective September 2006. - Tunisia: high-value automated clearinghouses being tested. - Libya: RTGS and comprehensive reform project under implementation with an expected three-year timeline. - Mauritania: plans to introduce an RTGS system as a priority. - Credit information: - Algeria, Mauritania, Morocco, and Tunisia have a public credit registry; no private credit bureaus in the Maghreb countries. ### Toward regional financial integration — benefits and outlook - Regional integration would: - enhance competition; - provide scope for economies of scale; - spur financial deepening; - increase efficiency; - lower the cost of financing to households and firms; - provide more diversification opportunities to investors; and - enhance the resilience of the Maghreb economies to shocks. - Progress within the Maghreb has been limited: a 1991 agreement among the five central banks on payment systems has not been implemented by all countries; a decision was recently taken to establish a Maghreb investment bank. - Lessons from EU and GCC experiences include: - adopting a gradual approach; - consolidating macroeconomic stability in all the countries; - strengthening financial markets; - harmonizing rules and regulations; - improving regional coordination; - lifting restrictions on cross-border flows of goods and services. ### Steps and policy measures toward financial integration (near term and medium term) - Near-term actionable steps: - Implement necessary reforms in each country to modernize financial sectors. - Harmonize regulatory and supervisory frameworks to prevent regulatory arbitrage and reduce compliance costs. - Harmonize financial contracts and standardize financial information. - Harmonize payment systems; use ongoing national payment system upgrades as opportunities for regional harmonization. - Facilitate trade financing by addressing barriers to intra-Maghreb trade, including cost and availability of trade finance and streamlining administrative requirements for trade-related banking operations. - Proceed with establishment of the Maghreb Bank for Investment and Foreign Trade (BMICE). - Eliminate financial barriers to intra-Maghreb trade, including by allowing Maghreb banks to set up cross-border branches or subsidiaries. - Medium-term measures: - Gradual liberalization of the capital account, sequenced based on country circumstances and financial sector preparedness. - Continue consolidating macroeconomic stability and adapt macroeconomic frameworks to increased capital flow volatility. - Harmonize market infrastructure: regulatory/supervisory frameworks, payment systems, and financial information and contracts (e.g., move toward IFRS/IAS). - Stimulate regional equity market integration through information/technology sharing, cross-listings, and use of exchanges in privatizations. - Improve regional coordination, including enhanced exchange of supervisory information and creation of regional fora and institutions. ### Recommended priority actions (Main recommendations) A. Further reforms to modernize financial sectors: - 1. Ensure banking system soundness - 1.1 Reduce NPLs. - 1.2 Ensure adequate loan classification and provisioning. - 1.3 Comply fully and timely with internationally accepted prudential rules. - 2. Strengthen banking system competition - 2.1 Privatize some public banks to reputable investors where needed. - 2.2 Restructure and strengthen governance in remaining public banks. - 2.3 Level the playing field between public and private banks. - 2.4 Gradually lift remaining restrictions to foreign bank entry in some countries. - 3. Deepen financial markets - 3.1 Strengthen regulation and supervision of securities markets. - 3.2 Deepen government bond markets and develop a benchmark yield curve. - 3.3 Build a dynamic capital market investor and issuer base. - 3.4 Stimulate interbank money markets by making it more expensive for banks to transact with the central bank outside regular market operations. - 3.5 Further liberalize foreign exchange markets consistent with capital account liberalization and banks’ risk management development. - 4. Strengthen financial oversight - 4.1 Increase independence of supervisory agencies and define legal grounds for dismissal of their heads and board members. - 4.2 Distinguish roles of ministry of finance and regulatory authorities. - 4.3 Provide supervisory agencies with adequate financial resources to hire, retain, and train staff. - 4.4 Upgrade prudential regulation toward international standards and adopt a more risk-based supervision approach. - 5. Upgrade financial sector infrastructure - 5.1 Improve bankruptcy and foreclosure proceedings and establish commercial courts. - 5.2 Strengthen corporate governance, including in the banking sector. - 5.3 Move to international standards in financial reporting and auditing. - 5.4 Set up public credit registries and facilitate development of private credit bureaus. - 5.5 Accelerate payment systems reform. B. Key steps toward regional financial integration - Near term: - 1.1 Eliminate financial barriers to intra-Maghreb trade and reduce cross-border payments frictions. - 1.2 Proceed with establishment of the Maghreb Bank for Investment and Foreign Trade. - 1.3 Ensure close coordination between central banks. - 1.4 Continue upgrading payment systems toward harmonization. - Medium term: - 2.1 Consolidate macroeconomic stability and adapt frameworks to capital flow volatility. - 2.2 Minimize risks to financial stability by strengthening bank balance sheets. - 2.3 Harmonize market infrastructure and oversight frameworks. - 2.4 Gradually liberalize the capital account. - 2.5 Stimulate regional integration of domestic equity markets. - 2.6 Improve regional coordination and cooperation. *Source: IMF Working Paper: Executive Summary and selected sections (content unit: _wp07125).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Background - The Maghreb region comprises Algeria, Libya, Mauritania, Morocco, and Tunisia and has a population of over 81 million and per capita income averaging less than $3,000 in 2005. - Economic reforms undertaken in recent years have generally contributed to achieving macroeconomic stability and increasing growth in most countries, but the growth dividend has been modest compared with other emerging market economies. - Higher growth is required to bring down unemployment and raise living standards. - A healthy and dynamic financial sector is essential to achieving high and sustainable economic growth because financial intermediaries: - facilitate the exchange of goods and services; - mobilize savings; - lower the cost of financing; and - facilitate risk management. ### Overview of Financial Systems in the Region - Financial systems have developed substantially in the last decade but still need further modernization and regional and global integration. - Main characteristics: - bank dominance and heavy public sector presence in most countries; - limited financial sector openness in some countries; - bank soundness exhibiting significant cross-country variations; - public banks burdened with inefficiencies and a high level of nonperforming loans (NPLs) in certain countries; - still embryonic fixed-income and equity markets, with the exception of Morocco and Tunisia; - nascent institutional investor industry and generally underdeveloped microfinance; - shortcomings in the legal, regulatory, and supervisory frameworks despite tangible progress; - a largely cash-based payment systems that is being modernized. - All five countries are implementing reforms with encouraging results, but several problems remain that need to be addressed. ### Key Findings and Challenges - Strengthen the soundness of the banking systems in all five countries: - reduce the high level of NPLs; - restructure state-owned banks; - secure compliance with prudential rules. - Increase competition in the banking system: - extensive state ownership and restrictions on foreign bank entry stifle competition and financial deepening; - state banks saddled with high NPLs are a burden on national budgets. - Deepen financial markets: - money, interbank, foreign exchange, equity, and securities markets are nascent or shallow in most countries; - nonbank financial institutions are generally underdeveloped. - Strengthen financial sector oversight: - prudential controls remain only partly effective in most Maghreb countries; - limited observance of relevant international standards and codes in some countries. - Upgrade financial sector infrastructure: - strengthen accounting and auditing practices, transparency and governance, the legal and judicial framework, and payment systems. ### Toward Regional Financial Integration - Progress toward financial integration within the Maghreb region has been limited. - A 1991 agreement among the five central banks on payment systems has not been implemented by all the countries. - A long-awaited decision was recently taken to establish a Maghreb investment bank. - Lessons from other integration experiences (e.g., EU and GCC) include: - adopting a gradual approach; - consolidating macroeconomic stability in all the countries; - strengthening financial markets; - harmonizing rules and regulations; - improving regional coordination; - lifting restrictions on cross border flows of goods and services. ### Steps and Policy Measures Toward Financial Integration - Implement necessary reforms in each country. - Harmonize regulatory and supervisory frameworks to prevent regulatory arbitrage and reduce compliance costs. - Harmonize financial contracts and standardize financial information to aid financial deepening and integration. - Harmonize payment systems: - ongoing upgrades of national payment systems provide an opportunity for closer harmonization within the region. - Facilitate trade financing by addressing barriers to intra-Maghreb trade stemming from financial sector bottlenecks, including: - the cost and availability of facilities to finance trade; - streamlined administrative requirements for trade-related banking operations. - Proceed with the establishment of the Maghreb Bank for Investment and Foreign Trade (BMICE) to serve as a catalyst to financial integration and promote trade and investment within the region. - Gradual liberalization of the capital account: - restrictions on capital movements (including barriers to foreign bank entry) are a key obstacle to increased financial integration but currently shield national financial systems from global market volatility. - increased openness will be a challenge for financial stability. - Improve regional coordination: - as cross-border linkages deepen, enhanced exchange of information between national supervisors, both within the region and elsewhere, becomes increasingly important. *IMF Working Paper: Executive Summary (content unit: _wp07125 - Executive Summary).* ### 10. Regional financial integration could facilitate broader financial integration by ### 10. Regional financial integration could facilitate broader financial integration by ### Regional integration: benefits and outlook - Regional financial integration would: - enhance competition; - provide scope for economies of scale; - spur financial deepening; - increase efficiency; - lower the cost of financing to households and firms; - provide more diversification opportunities to investors; and - enhance the resilience of the Maghreb economies to shocks. - A Maghreb region where goods, services, and capital can flow relatively freely would be a very attractive market for domestic and foreign investors. ### Paper structure (as presented) - Section II: describes financial systems in the five Maghreb countries, emphasizing common elements and main differences; overview of financial systems, salient structural features, oversight frameworks, strengths and vulnerabilities, and current status of regional and international market integration. - Section III: takes stock of reform efforts and highlights challenges—focus on promoting competition in the banking system, deepening financial markets, strengthening financial sector oversight, and upgrading financial sector infrastructure. - Section IV: devoted to financial integration, reviews lessons from EU and GCC integration efforts, and discusses measures necessary to facilitate financial integration. ### Financial development: recent progress and remaining gaps - Regional aggregate indicators (five countries combined): - Credit to GDP ratio rose from 33 percent in 1995 to 40 percent in 2004. - M2 to GDP ratio rose from 50 to 53 percent over the same period. - Despite gains: - Economies remain underbanked; a relatively small share of the population has access to bank services. - Small and medium-size enterprises typically face severe constraints when seeking funds from banks. - Financial development varies significantly across countries (see Figure 6 indicator: Credit to the economy in percent of GDP). ### Financial system structure and public sector presence - Bank dominance and heavy public sector presence characterize the region: - Share of commercial banks in total financial system assets at end-2004 ranged from 49 percent in Morocco to 93 percent in Algeria. - State controls significant shares of banking systems in most countries: - Algeria and Libya: public banks account for over 90 percent of banking sector assets. - Morocco: public banks’ market share reduced to 24.4 percent (including specialized banks) after privatizations. - Tunisia: public banks’ market share reduced to 30.6 percent after privatizations. - Mauritania experienced bank privatizations in the 1990s; exception within the region. - Table 2 highlights (Financial System Structure, 2004; in percent of total assets): - Algeria: Commercial banks — State-owned 83.4, Private 9.4, Total 92.8; Insurance companies 2.8; Other institutions 4.4. - Libya: Commercial banks — State-owned 76.5, Private 3.7, Total 80.2; Specialized banks 17.2; Insurance companies 2.6. - Mauritania: Commercial banks — Private 88.2, Total 88.2; Insurance companies 5.0; Other institutions 6.8. - Morocco: Commercial banks — State-owned 13.4, Private 35.3, Total 48.7; Specialized banks 11.0; Insurance companies 10.6; Pension Funds 15.6; Other institutions 14.1. - Tunisia: Commercial banks — State-owned 30.6, Private 39.1, Total 69.7; Specialized banks 3.0; Insurance companies 3.4; Pension Funds 6.5; Other institutions 17.4. ### Country-specific financial sector structures and oversight (Box 1) - Algeria: - Banking credit about 34 percent of GDP. - Six state banks accounted for 93 percent of banking assets in 2005. - Nonbank institutions marginal; insurance premia about 0.5 percent of GDP. - Oversight split among Banking Commission, Monetary and Credit Board, and Banque d’Algérie; stock market regulated by Commission d’Organisation et de Surveillance des Opérations de Bourse. - Libya: - Dominated by five state-owned commercial banks (nationalized in 1971); majority ownership by Central Bank of Libya. - Four private banks (three entered since 2001); 48 regional banks; three state-owned specialized banks. - Nonbank sector very small; no equity market. - Central Bank of Libya regulates and supervises commercial banks; Bank Supervision Department reorganized to align with international standards. - Mauritania: - Ten commercial banks; nine fully privately owned. - Insurance sector assets less than 1 percent of GDP. - Microfinance sector expanding with 64 institutions as of end-2005. - Banque Centrale de Mauritanie regulates financial institutions except insurance. - Morocco: - Largest and most diversified in the region; total assets about 155 percent of GDP. - Banks (including specialized banks) account for about 60 percent of total financial system assets. - Insurance industry over 16 percent of financial system assets; Casablanca Stock Exchange market capitalization 72 percent of GDP. - Bank Al-Maghrib oversees banking activities; ministry of finance supervises insurance and pension funds; Conseil Déontologique des Valeurs Mobilières supervises stock exchange. - Tunisia: - Total assets about 90 percent of GDP. - Banking system broad, includes 20 commercial banks, eight offshore banks, 11 leasing companies, two factoring companies, and two merchant banks. - After privatizations, state banks, local private banks, and foreign banks have roughly equal market shares. - Banking supervised by Banque Centrale de Tunisie; insurance by Directorate General of ministry of finance; securities by Conseil du Marché Financier. ### Financial sector openness and capital controls - Financial sector openness is limited across the region: - Restrictions on foreign currency purchases by residents, including surrender requirements. - Capital transactions limited in all five countries; capital transfers abroad typically not completely prohibited. - Restrictions affect money, securities, and derivative market transactions—for example, banks have access to forward foreign exchange hedging instruments only in Algeria, Morocco, and Tunisia. - Entry of foreign banks limited in Algeria, Libya, and until recently Mauritania. - Table 3 highlights controls (summary of column entries per country): - Algeria: Capital transfers abroad subject to central bank approval; repatriation by nonresidents must be through authorized intermediaries; controls apply to all credit transactions; FDI permitted freely except in certain sectors. - Libya: Capital transactions subject to controls; trading by residents subject to approval; controls apply to credit transactions; foreign participation in industrial ventures is permitted on a minority basis and full ownership must be approved by the Foreign Investment Board. - Mauritania: Subject to controls; nonbank flows and purchases require approval; controls apply to credit transactions; FDI governed by Law No. 2002–03. - Morocco: Subject to controls; trading of instruments by residents subject to approval but nonresidents face no limitations; some credit transactions subject to approval; outward FDI subject to approval though residents of foreign nationality may invest abroad using foreign exchange holdings. - Tunisia: Subject to controls; controls on all transactions in capital and money market instruments; outward direct investments subject to approval by central bank; foreigners may invest freely in most sectors. ### Bank soundness, nonperforming loans, and credit growth - Cross-country variations in bank soundness (Table 4, Financial Soundness Indicators for Commercial Banks, 2005; end of period, in percent): - Algeria: Capital Adequacy 12.9; Nonperforming Loans to Gross Loans 32.4; Provisioning to Nonperforming Loans 55.6; Profitability (ROA) 0.4; Growth of Credit in Real Terms over 2000–05 100.7. - Libya 1/: Capital Adequacy 13.7; Nonperforming Loans to Gross Loans 25.0; Provisioning to Nonperforming Loans 66.0; Profitability (ROA) 0.4; Growth of Credit in Real Terms over 2000–05 26.1. - Mauritania 1/: Capital Adequacy 22.2; Nonperforming Loans to Gross Loans 46.0; Provisioning to Nonperforming Loans ...; Profitability (ROA) ...; Growth of Credit in Real Terms over 2000–05 33.7. - Morocco 2/: Capital Adequacy 11.5; Nonperforming Loans to Gross Loans 10.9; Provisioning to Nonperforming Loans 71.0; Profitability (ROA) 0.5; Growth of Credit in Real Terms over 2000–05 32.2. - Tunisia 3/: Capital Adequacy 12.4; Nonperforming Loans to Gross Loans 20.7; Provisioning to Nonperforming Loans 48.4; Profitability (ROA) 0.6; Growth of Credit in Real Terms over 2000–05 30.0. - Key findings and concerns: - Private banks in Algeria: well capitalized and profitable but represent only 10 percent of financial system assets; overall NPL ratio remains high. - Morocco: commercial banks generally profitable and efficient; NPLs to total loans reduced from 15.6 percent in 2005 to 10.9 percent at end 2006. - Tunisia: commercial banks generally profitable and efficient but have relatively high NPLs due to ageing directed-credit backlog and tourism sector downturn in 2002–03; NPLs to the tourism sector now account for about a quarter of total NPLs. - Libya and Mauritania: weaknesses in banking data prevent full assessment; concerns in Mauritania about high loan concentration, connected lending, and NPLs—most banks belong to large nonfinancial conglomerates. - Libya: pervasive directed credit policies and interest rate controls have likely had an adverse effect on bank performance. - Public banks and legacy of directed credit: - Public banks often burdened with inefficiencies and high NPLs due to directed credit policies and continued lending to unprofitable public enterprises. - Algeria: government takeover of public banks’ NPLs cost about 3 percent of GDP annually from 1991–2001; ministry of finance estimated public banks’ remaining NPLs to public enterprises at 4 percent of GDP at end-October 2006. - Libya: public enterprise debt significant part of public banks’ NPLs; despite debt buy-back operations and restructuring schemes, state banks still require considerable restructuring. - Morocco: restructuring of specialized public banks—long undercapitalized and burdened with large NPL portfolios—is nearing completion. - Tunisia: faces similar challenges for remaining public banks, albeit less severe. - Credit growth since 2000: - The region experienced significant credit growth since 2000. - Algeria: credit to the economy in real terms doubled during 2000–05. - Other countries also experienced very strong credit growth over the period, with Libya and Mauritania starting from a very low base. *Source: IMF working paper section titled "10. Regional financial integration could facilitate broader financial integration by" (excerpts). ### 18. There has been tangible progress in the privatization and restructuring of public ### _wp07125 - 18. There has been tangible progress in the privatization and restructuring of public ### Privatization and restructuring of public banks - Mauritania privatized all but one public bank in the mid-1990s. - Algeria: privatization envisaged for two of the six state-owned banks; the first privatization, twice attempted before, is now on track. - Libya intends to gradually privatize all its public banks and launched its first privatization operation in 2005; three other public banks were also recapitalized in 2005. - Morocco: considerable progress in restructuring specialized public banks, including the sale of the government’s share in one bank and a commitment to ensure full compliance of the two previously exempted public banks with prudential regulations by June 2007. - Tunisia sold one large state bank to a major private French bank in early 2002, and another one to a Moroccan-Spanish banking consortium in 2005. - Governance improvements: strengthening performance contracts of public bank managers and submitting all public banks to external audits. ### Fixed income and equity markets - With the exception of Morocco and Tunisia, fixed income and equity markets are in their infancy. - Morocco’s stock exchange market capitalization: 55 percent of GDP. - Over fifty companies listed on Morocco’s exchange in 2005; market concentration remains high (the top five stocks account for over half of capitalization and trading). - Tunisia: government bonds represent the bulk of tradable securities; Tunis Stock Exchange remains small and relatively illiquid. - Algeria: only three stocks listed; trading almost nonexistent. - Libya and Mauritania: no fixed income and equity markets. - Libya: comprehensive financial markets law at drafting stage to allow establishment of a stock exchange and a secondary market for financial instruments. ### Institutional investors, insurance, pensions, and mutual funds - Institutional investor industry is nascent across the region. - Insurance sector liberalized in most countries in the 1990s but remains relatively insignificant, with exceptions: - Morocco: premiums reached 3 percent of GDP in 2003. - Tunisia: premiums reached 1.5 percent of GDP in 2003. - Nonlife (notably automotive insurance) accounts for the bulk of premiums. - Recent restructuring: consolidation through mergers and acquisitions and adoption of a new insurance code in Morocco; efforts to replenish mathematical reserves and technical provisions in Tunisia. - Pension and mutual fund industry in its infancy, except in Morocco where the sector has expanded considerably due to activity of insurance companies, nonfinancial enterprises, and provident and pension funds. ### Microfinance - Microfinance generally underdeveloped but growing sharply in some countries. - Morocco: outstanding loans by microfinance institutions have tripled in the last three years and they service over 800,000 people, two-thirds of which are women. - Tunisia: several microfinance institutions operate. - Algeria: microfinance programs associated with government-run social services. - Mauritania: legislation introduced in 1998 spurred growth in microfinance institutions; activity still heavily dependent on foreign aid for funding. ### Legal and regulatory framework strengthening - New central bank laws passed in: - Algeria (2003) - Libya (2005) - Morocco (2005) - Tunisia (2006) - Algeria: central bank placing more emphasis on banks’ internal controls and strengthening on-site supervision; young supervisors being hired and trained. - Libya and Mauritania: banking supervision departments reorganized; new staff hired and trained; Libya issued new regulations on loan classification and provisioning and guidelines on bank risk management. - Morocco: advances to grant central bank more regulatory and supervisory powers and extend oversight to all institutions engaged in banking activities (including offshore banks and microfinance institutions). - Tunisia: tightened rules on credit risk management, connected lending, consolidated accounting, and remedial measures for noncompliance with prudential regulations. ### Compliance with Basel Core Principles (BCP) and supervisory shortcomings - Remaining weaknesses result in a lesser degree of compliance with the Basel Core Principles for Effective Banking Supervision than the average for all countries in the Middle East and Central Asia as well as European countries. - Note on BCP assessments: assessments referenced are Algeria (2003), Mauritania (2005), Morocco (2002), and Tunisia (2006); they reflect compliance at time of assessments and may not reflect subsequent changes. - Specific BCP-related findings: - Preconditions for effective banking supervision (BCP 1): lack of central bank autonomy is a key challenge, notably absence of clearly defined legal grounds for dismissal of central bank governors and board members. Need to establish formal arrangements for information sharing with other domestic supervisory agencies (Morocco example: new banking law of February 2006 establishing a commission for coordinating financial sector supervisory agencies). - Licensing (BCPs 2–5): licensing criteria broadly adequate in most Maghreb countries; higher degree of compliance than the average for Middle East and Central Asian countries. - Prudential regulations and requirements (BCPs 6–15): supervision often rules-based and backward looking rather than risk-based and forward looking; in some countries supervisory authorities lack a formal system to detect difficulties and scrutinize prudential returns. - Methods of ongoing banking supervision (BCPs 16–20): frequency of on-site inspections has generally increased but in some countries not sufficiently; off-site monitoring sometimes requires assembling inconsistent data from various sources. - Information requirements (BCP 21): except Morocco and Tunisia (where accounting practices and compliance broadly adequate) there is room to improve accuracy and timeliness of banking data. - Formal powers of supervisors (BCP 22): sanctioning powers upgraded in some countries (notably Morocco and Tunisia) but need strengthening in others. - Cross-border banking (BCPs 23–25): formal agreements on information exchange with foreign supervisory agencies generally lacking; Morocco’s banking law requires consultation with authorities in country of origin for licensing applications by foreign banks. ### Central bank autonomy (summarized country details from Table 5) - Algeria: - Governor and three vice-governors nominated by presidential decree; no fixed term of office; may be dismissed for serious infringement of the law. - Central bank may provide advances to the government not exceeding 10 percent of the previous year’s revenues; repayment period cannot be longer than 240 days (consecutive or not) in any given year. - Central bank has financial autonomy; Council of Money and Credit decides on monetary policy instruments. - Requests to overturn supervisory decisions may be submitted to the Council of State; this has no bearing on personal or institutional responsibility of officials. - Libya: - Governor and deputy governor appointed by congress for a renewable five-year term; grounds for removal include breach of the law, health reasons, or incompatibility with other posts. - Central bank may provide banking services to public administrative units; Art. 11 allows advances to the Treasury not exceeding 20 percen[t] of the total annual revenues in the general budget. - Central bank has financial autonomy. - Mauritania: - Governor appointed to a five-year renewable term by presidential decree; term may be revoked by decree following recommendation by a 2/3 majority of the Board; vice-governor and directors appointed for five years. - Central bank may provide advances to the government not exceeding 5 percent of the previous year’s revenues and outstanding for no more than 300 days in any calendar year. - Central bank has adequate financial and operational autonomy. - Banking Law does not explicitly indemnify inspectors against personal liability; new banking ordinance stipulates supervisors and inspectors are liable only to the BCM in carrying out institutional and personal responsibilities. - Morocco: - Governor and vice-governor appointed by royal decree; law does not specify grounds for dismissal; board members may be dismissed for incapacitation or serious infringement of the law. - Direct financing of the government by the central bank is prohibited except for a cash facility limited to 5 percent of the previous year’s tax revenue, total duration not to exceed 120 days per year; facility is remunerated and may be suspended by the central bank. - Central bank has financial and operational autonomy. - Central bank officers responsible for supervising credit institutions are held safe from liability under civil and criminal law except in cases alleging personal misconduct or fraudulent acts. - Tunisia: - Governor and vice-governor appointed by decree for six-year terms (renewable indefinitely); removal by decree; board members appointed by decree for three-year terms. - Central bank acts as a treasurer and provides financial services for the government and other public entities but does not directly finance the treasury. - Central bank has financial autonomy; annual budget approved solely by its Board; law gives necessary instruments to conduct monetary policy, though a ceiling on government securities held by the central bank may constrain monetary policy. - Central bank protects its staff against threats and compensates them for harm endured in exercise of their functions. ### Supervision of nonbank financial intermediaries - Quality of supervision shows considerable cross-country variation. - Mauritania: central bank is the unified supervisor of all financial services. - Elsewhere: separate agencies supervise insurance and securities markets. - Insurance supervision generally suffers from lack of financial and operational independence (in Morocco and Tunisia it is performed by a department within the ministry of finance) and limited resources, leading to nonsystematic enforcement of prudential regulations and infrequent on-site inspections. - Securities market regulation and supervision modernized in Morocco and Tunisia; human resources could be further increased. - Supervision of nonbank intermediaries in Algeria, Libya, and Mauritania is at an embryonic stage due to sector underdevelopment. ### Accounting, transparency, and legal/judicial reforms - Progress uneven in strengthening financial discipline and increasing transparency. - Morocco and Tunisia: modernized accounting rules and brought them closer to international principles; international accounting standards adopted; rules tightened on external auditing. - Morocco: credit institutions expected to be in compliance with international accounting standards by 2008. - Other countries: local accounting norms and regulations remain vague and financial statements may fail to give an accurate view of company performance (example: Algerian accounting standards do not set out accounting treatment for a number of important transactions and events). - Since the early 1990s, considerable progress made on legal and judicial front; wide-ranging modernization of laws and regulations governing financial intermediation. - Despite reforms, most countries do not compare favorably with the world average for regulatory quality, rule of law, and control of corruption. - Legal inefficiencies impose major costs on financial intermediation: variable protection of shareholders and creditors, lengthy court proceedings, lack of commercial/finance training among magistrates and attorneys, costly enforcement, underutilized extra-judicial arbitration. - Some countries lack a modern bankruptcy framework—notably Algeria, Libya, and Mauritania. - Morocco and Tunisia have made the most progress: establishment of commercial courts and, in Tunisia, introduction of accelerated procedures for auctioning foreclosed real estate collateral. ### Credit information and payment systems - Credit information: - Algeria, Mauritania, Morocco, and Tunisia have a public credit registry. - No private credit bureaus in the Maghreb countries. - Morocco: central bank expected to launch a bid to put its new credit risk database under private management before end-2006. - In most countries, scope, access, and quality of information remains limited. - Payment systems: - Predominantly cash based in the Maghreb. - Manual procedures and paper-based checks contribute to slow financial flows and higher intermediation costs. - Check clearance may take from six days up to several weeks for inter-regional transactions. - Libya and Mauritania: informal payment channels ubiquitous; juridical and technical frameworks inadequate for a modern payment system. - Modernization efforts: - Algeria launched RTGS in February 2006 and automated clearing house for retail payments in May 2006. - Morocco set up an RTGS system effective September 2006 to reduce settlement risk, shorten lag time for fund transfers, and facilitate monetary policy implementation. - New RTGS systems being introduced in Libya and Tunisia. - New systems intended to meet best practice requirements, including settlement finality, fully collateralized intraday central bank advances, and optimization procedures for queues. ### Ongoing reforms and heterogeneity of starting points - All five Maghreb countries implementing reforms aimed at establishing modern, market-based financial systems and preparing for possible regional financial integration. - Reform starting points differ: - Morocco and Tunisia: took the lead and started upgrading early in the last decade. - Algeria and Mauritania: began reforms in the second half of the 1990s. - Libya: followed more recently. - As a result, countries are at different stages of reform. *Source: IMF content unit _wp07125 - 18. There has been tangible progress in the privatization and restructuring of public* ### 32. Reforms in Morocco have for the most part focused on overhauling the legal and ### _wp07125 - 32. Reforms in Morocco have for the most part focused on overhauling the legal and ### Country reform summaries - Morocco - Promulgation in 2006 of a new banking law and of a new central bank charter. - New banking law: reinforces the supervisory authority of Bank Al-Maghrib (BAM) over the activities of credit institutions. - New BAM charter: strengthens the central bank’s monetary policy autonomy and clarifies its functions and powers with respect to exchange policy and the security of payment instruments. - BAM has relinquished its management role and sold its remaining capital shares in all the credit institutions in which it previously participated. - Government has sold its share in one public bank and committed to ensure full compliance of the two previously exempted public banks with prudential regulations by 2007. - Tunisia - New banking law promulgated in May 2006; measures to strengthen banks’ credit policies and require increased provisioning for NPLs. - Tax deductibility of provisions for NPLs was increased and legal reforms introduced to accelerate the sale of collateral. - Two public banks privatized and a number of private banks recapitalized. - New Banque Centrale de Tunisie (BCT) law promulgated in May 2006: gives BCT new authority in advisory assistance, monitoring, transparency, supervision, and publication of economic and financial information. - New law emphasizes price stability as the main objective of the central bank with the policy interest rate as the main instrument. - Algeria - Steps to modernize the financial system: regulatory modernization followed by privatization of a first public bank on track for completion in early 2007 and sale of a second public bank scheduled soon thereafter. - Improvements in governance of remaining public banks via strengthened performance contracts and external audits for all public banks. - Government repurchasing loans of problem public banks and replacing them with budget subsidies accompanied by enterprise restructuring plans. - Strengthening banking supervision, including increasing the number of inspectors. - Payments system improvements: RTGS system inaugurated in early 2006 and a new retail payments system in May 2006. - Mauritania - Modernization at an early stage; access to financial services remains limited and costly. - Most banks belong to business conglomerates with large exposures; related-party lending pervasive. - Since 2005, tightened banking supervision and on-site inspections in all banks led to better provisioning for NPLs. - Major reform program launched covering legal and regulatory framework of financial and microfinance sectors, foreign exchange market, and money market. - Payments system modernization with imminent start of an interbank electronic payments system. - Two foreign banks entered the Mauritanian market in 2006. - Authorities intend to increase the minimum capital for banks to open the system to new partners and bank mergers. - Libya - Recent preparations to reform predominantly state-owned financial system. - New central bank law passed in 2005. - First privatization of a public bank launched in 2005 and three other public banks recapitalized. - Steps to improve banking supervision and arrange workouts of NPLs; new guidelines on bank risk management issued. - New RTGS payments system being introduced. ### Remaining challenges — overview - Authorities in the five Maghreb countries have indicated continued commitment to further reform. - Key focus areas: strengthening the financial system; promoting competition in banking; deepening financial markets; improving financial sector oversight; upgrading financial sector infrastructure. ### Ensuring a sound banking system - Critical need: significant reduction of NPLs. - Required actions include: additional provisioning; upfront cash injections by owners; improved procedures for loan workouts; (partial) write-offs accompanied by measures to limit moral hazard. - Timely recognition of loan losses and strict implementation of provisioning requirements would enable supervisory agencies to agree with banks on required actions to restore solvency and profitability. - Steadfast implementation of prudential rules is a priority. - Supervisory agencies need strong independence de jure and de facto, clear and public support of the government, and acknowledged proficiency of staff in financial contracts and business practices of financial institutions. - Regulatory frameworks are reasonably well-established in most Maghreb countries, but predictability and speed of enforcement of prudential rules (including for public banks) can be improved. ### Strengthening competition in banking - Higher competition and efficiency would contribute to greater financial stability, product innovation, and access to financial services, improving economic growth prospects. - Specific concerns: - Extensive state participation, ownership links between banks and their borrowers, and restrictions to foreign bank entry stifle competition and financial deepening. - Ownership structure changes noted: foreign share of total bank capital in Tunisia rose from 16 percent in 2001 to 34 percent in 2005; in Morocco the foreign share of total assets represented 21.5 percent in 2005. In Algeria, the banking sector has been open to local and foreign private investors since 1990. - Public banking modernization priorities: - Privatization of public banks is difficult when banks have poor-quality assets, are overstaffed, overbranched, and undercapitalized; operational and financial restructuring will often be required prior to privatization. - Privatization strategy should be based on thorough diagnostics, sequencing, and possibly assistance from outside experts (investment banks) with adequate oversight by authorities. - Banks that remain public require stronger governance: the state must become a modern, active owner. Performance contracts between the State and bank CEOs can set clear objectives in profitability and internal controls. - Any directed lending by government through public banks should be explicitly funded through the budget, be channeled on an arms-length basis, be based on clear, objective, and easily monitorable criteria, and be fully transparent. - Eliminate remaining differences in regulatory, supervisory, and tax treatment of public and private banks; apply strengthened transparency, disclosure, and corporate governance standards to both. - Addressing mixed (financial and nonfinancial) group dominance: - Example: in Mauritania, banks’ direct ownership links with family-owned conglomerates lead banks to operate as the financial arm of the group, with pervasive related-party lending at preferential terms, restricting access to creditworthy borrowers outside the group. - Algerian banking law prohibits lending to shareholders and related persons and entities. - Gradual opening up to competition, along with tighter prudential, disclosure, and governance requirements, is necessary. - Foreign bank entry - Removing barriers to entry of reputable foreign banks would strengthen incumbents’ competitive behavior. - Evidence of progress: Tunisia privatization increased foreign banks’ share to one-third of that system’s assets; Morocco saw increased foreign capital in 2006 with entry of a foreign group; two foreign banks entered Mauritania in 2006; Algeria’s public bank privatizations and expansion plans of existing foreign banks expected to transform ownership structure. - Increased competition from foreign banks may have short-term costs (lower profitability for less efficient domestic banks) but overall benefits; policy should liberalize entry while strengthening local risk management. ### Deepening financial markets — capital markets - Need to enhance depth and liquidity of Maghreb capital markets; markets concentrated on government issuance while corporate bond and equity markets uneven or nonexistent. - Agenda items: - Strengthen regulation and supervision of securities markets; adopt international standards and good practices such as IOSCO Objectives and Principles of Securities Regulation. - Governments can catalyze capital markets by supporting a deeper government debt market and facilitating the emergence of a yield curve via issuance of paper of standard maturities on a regular basis and at market rates. - Examples: number of government securities in Morocco steadily declined from the several hundred different types that existed until 2003; a sovereign yield curve established in Algeria in 2002 and in Tunisia more recently. - Broaden buy-side participants: develop institutional investor industry (pension funds and insurance companies); supportive tax treatment for long-term savings products; level playing field with banks for attracting long-term savings; allow foreign institutions to enter domestic markets. - Reexamine quantitative limits on pension funds’ and life insurers’ investments and consider gradual move toward “prudent man” rules. - Example: legislation passed in Morocco in 2004 allowing insurance companies to invest up to 5 percent of their funds abroad. - Enhanced transparency and investor protection to promote sell-side participation and IPO activity; example: 2004 Moroccan legislation clarified and standardized IPO rules and prospectus guidelines. - Maghreb governments as owners of large corporates could hasten replacement of bank loans with domestic bonds; Algeria began replacing bank debt with corporate bonds in 2004 and saw a first private corporate issuance in January 2006; corporate debt market in Morocco is relatively large but has not reached desired growth potential. ### Deepening financial markets — money and foreign exchange markets - Reducing liquidity surpluses in banking systems is needed to deepen financial markets. - Large autonomous liquidity factors include remittances from expatriate Moroccans, privatization receipts in Tunisia, and hydrocarbon revenues in Algeria, Libya, and Mauritania. - Structural surpluses can impede efficient pricing on financial markets by reducing banks’ need for short-term interbank funding, depleting treasurers’ skills in assessing counterparties and valuing collateral. - Structural surpluses can depress interest rates, pushing banks toward riskier uses of customer deposits and leading to atrophy of the fixed-income community as buy-and-hold behaviors take hold. *Italic source: Excerpt from the provided IMF PDF content unit.* ### 46. Financial market deepening requires closer coordination between Treasuries ### 46. Financial market deepening requires closer coordination between Treasuries and central banks ### Monetary policy instruments and liquidity management - Structural liquidity surpluses that are highly persistent over time may require instruments of corresponding maturity. - Long maturity instruments discussed: - Outright sale by central banks of government securities (when the Treasury’s issues are over and above its financing requirements). - Remunerated reserve requirements. - Special liabilities of the central bank (example: deposit auctions as in Algeria). - Considerations on costs and neutrality: - The cost for carrying public debt via central bank sales would be similar to the reduction in central bank dividends from higher reserve requirements or special central bank deposits. - Both remunerated reserve requirements and special central bank deposits should pay market interest rates to ensure their neutrality for bank margins. - Central bank bills: - Can play a role, but are limited by small volumes and short maturities. - Special liabilities (e.g., deposit auctions in Algeria) can carry maturities that match more closely long-term system liquidity. ### Interbank money markets and central bank facilities - Less accommodative access to central bank liquidity facilities would support development of more liquid interbank money markets in the Maghreb. - Design of standing facilities: - The interest rate corridor at which central banks operate standing facilities should be sufficiently wide to encourage interbank transactions as a first resort and to support development of cash management skills in banks. - Frequency of central bank liquidity operations: - Frequency may need to be relatively low; otherwise, frequent operations in the middle of the interest rate corridor (particularly at the end of the day as in Tunisia) can reward ineffective cash management and undermine development of interbank markets. - Operational implication: - A narrow corridor or frequent in-corridor operations can reduce incentives for banks to manage liquidity and transact with peers. ### Deepening foreign exchange markets - Recent country actions and recommendations: - Mauritania’s elimination of the foreign exchange rationing system in October 2006 and phasing out of partial surrender requirements on fish export proceeds to create a sound basis for foreign exchange auctions is welcomed. - Tunisia relaxed requirements to sell foreign exchange to the central bank in 2005, which would encourage banks exceeding FX position limits to sell to other banks and support an interbank FX market. - In 2004, Morocco authorized banks to freely invest a portion of their foreign exchange abroad to hedge exchange risks. - Recommended measures to deepen FX markets: - Relax requirements to sell foreign exchange to the central bank. - Relax constraints on banks providing forward foreign exchange contracts, including removing requirements for banks to deposit foreign exchange balances at the central bank at overnight rates. - Consider eliminating government-imposed fees on foreign exchange transactions. - Discontinue central bank market-making in the FX market; central banks should request firm buy-sell rates from dealers when they need to transact. - Pace and conditions: - The pace of FX liberalization should depend on country circumstances and reflect broader considerations such as the pace of capital account liberalization and the development and appropriate oversight of risk management capabilities in banks. - Sectoral constraint: - More than 90 percent of Algeria’s and Libya’s exports are in the hydrocarbon sector; the legal requirement to surrender related export proceeds will delay FX market development in these countries until non-hydrocarbon exports expand sufficiently. Box 3 — Reforming Foreign Exchange and Money Markets: The Case of Mauritania - Foreign exchange market reform measures intended by the Mauritanian authorities: - removal of any remaining restrictions on current transaction payments; - abolition of the requirement to surrender a portion of fisheries export revenue to the BCM; - introduction of a foreign exchange auction system managed by the central bank. - Money market reform measures to be introduced by the BCM: - adoption of new regulations to promote the development of an interbank market; - introduction of a new liquidity management instrument (BCM deposit certificates); - restructuring and securitization of a portion of BCM claims on the government to be used in open market operations. ### Strengthening financial sector oversight — progress and remaining needs - General assessment: - Authorities in Maghreb countries have made commendable progress in strengthening financial system regulation and supervision, but more needs to be done. - Need to enhance effectiveness of prudential controls as judged by compliance with the Basel Core Principles. - Common elements of an action plan: - Strengthen operational and financial autonomy of regulatory agencies. - Increase the effectiveness of financial sector supervision. - Progress with divesting from state ownership of financial institutions to address conflicts of interest between government as owner and supervisor. Box 4 — Reforming Bank Oversight: The Cases of Morocco and Tunisia - Morocco (selected measures): - 2001: new Chart of Accounts for Credit Institutions to facilitate consolidated supervision. - 2001: central bank granted ability to impose penalties on regulated entities for noncompliance with key prudential provisions. - February 2006: new Central Bank Law and new Banking Law strengthen supervisory powers of the BAM and grant more autonomy from the ministry of finance. - Central bank relinquished its management role and sold remaining capital shares in credit institutions where it was previously involved. - Tunisia (selected measures): - July 2002: new banking law to strengthen supervisory powers of the central bank (BCT), enabling close monitoring through on-site inspections, prudential reporting analysis, and periodic meetings with bank managers. - May 2006: revision requires banks to establish an executive credit committee reporting to the board and to emplace a compliance control system under board supervision. - May 2006: new central bank law strengthens the central bank’s authority in supervision, regulation, transparency, and publication of economic and financial information. - Tax measures to incentivize adequate treatment of NPLs: - ceilings for the tax deductibility of provisions were raised to 85 percent in 2005, and to 100 percent in 2006; - the scope of provisions related to connected lending has been significantly broadened. ### Strengthening the autonomy of supervisors - Need for independent oversight bodies with adequate resources and authority, accompanied by increased accountability. - Three key fronts for fuller autonomy: - Better defining legal grounds for dismissal of heads and board members of agencies. - Ensuring ministries of finance do not undermine supervisors’ authority in licensing and regulation; supervisors should have decisive input in licensing decisions, or licensing authority should be moved to supervisory agencies. - Lifting resource constraints to hiring, retention, and training of qualified staff. - Operational staffing issues: - Supervisors need to offer competitive salaries to attract well-trained accountants, financial analysts, and actuaries. - Lack of qualified staff has led to infrequent and limited-scope on-site inspections; some countries (Libya and Mauritania) have relied extensively on external auditors. - If outsourcing on-site work, supervisors need sufficient capacity to verify external auditors’ work, including auditor certification and joint on-site inspections. ### Improving the efficacy of prudential regulation - Move from rules-based, checklist supervision to a more risk-based approach focusing on banks’ internal risk management policies and procedures. - Risk-based supervision is a key precondition for effective implementation of the Basel II framework. - Improve coordination among domestic supervisory agencies: - Most countries have separate agencies for banking, insurance, and securities; there are few formal agreements on exchange of information. - Greater coordination or integration among domestic supervisory agencies should be a key policy priority given the increasing involvement of banks in insurance and capital markets. ### Upgrading financial sector infrastructure - Priority areas for development and stability: - Legal and judicial areas. - Accounting and auditing framework. - Payment and securities settlement systems. - Creation or expansion of credit bureaus with information on debtors to foster financial intermediation by facilitating banks’ risk assessment. Legal and judicial framework - Remaining challenges: - Improve bankruptcy and foreclosure proceedings across the region. - Few countries (such as Morocco) have modern bankruptcy approaches prioritizing corporate restructuring; need to expedite court proceedings, reduce enforcement costs, and train magistrates and officials in commercial matters. - Establish commercial courts more broadly (currently only in Algeria and Morocco) and a framework for arbitration. Loan guarantees and land registration - Upgrade laws governing loan guarantees to facilitate mobilization and recovery of loans: - Algeria tightened legislation applicable to guarantees. - Morocco could incorporate new instruments and allow use of movable assets as collateral. - Mauritania and Tunisia need to modernize registration of land tenure titles to enhance mortgage lending. Corporate governance - Importance: - Strengthened corporate governance is essential for deep and liquid financial markets. - Morocco and Tunisia have higher standards in managerial accountability and shareholders’ rights. - Remaining issues: - Barriers to effective application of laws remain. - Securities regulators’ powers to address wider corporate governance issues remain limited. - Development and application of codes of best practices regarding corporate governance would benefit all countries in the region. - Banking-sector governance: - Special attention to family- and corporation-owned banks (prominent corporation-owned banks in Mauritania) to ensure related-party lending complies with prudential rules. - For state-owned banks, ensure management incentives (for instance, performance contracts as done in Algeria) and absence of government interference in commercial activities. Transparency and disclosure - Move to international standards in financial reporting to increase transparency and access to financing. - Current state: - Accounting and auditing frameworks in most countries are inspired by IFRS and ISA; reforms have been undertaken but enforcement and some standards need improvement. - Disclosure shortcomings are notable in Algeria, Libya, and Mauritania, resulting in opaque financial information. - Training in accounting and auditing remains limited. - Country specifics and timetables: - In Morocco, credit institutions are expected to be in compliance with international accounting norms (IFRS) by 2008. - Algeria is actively preparing to implement these standards. - Role of national supervisory bodies: - Bodies that ensure quality and consistency of auditors’ work could increase public confidence in transparency and quality of financial information. *Source: IMF staff discussion on financial market deepening and regulatory reforms in Maghreb countries (content unit: _wp07125 - 46).* ### Box 5. Improving Transparency and Disclosure: ### Box 5. Improving Transparency and Disclosure: The Cases of Morocco and Tunisia ### Morocco: banking law and market transparency - The banking law promulgated in 2006 is aimed primarily at strengthening financial transparency by requiring the publication of a report on bank supervision. - Two annual reports covering the 2004 and 2005 fiscal years have already been published. - The reports: - take stock of changes made in banking regulations and actions taken to supervise lending institutions (banks, consumer loan, and leasing companies); - describe the activities and performance of these institutions during the fiscal year. - Considerable improvements in financial market transparency have occurred through continued convergence of Moroccan financial regulation norms with international standards as defined by the International Organization of Securities Commissions (IOSCO). - The central bank in Morocco decided to put its new credit information database under private management in 2007. ### Tunisia: 2005 Law on Financial Transparency — new requirements - The 2005 Law on Financial Transparency introduced new transparency requirements on companies, in particular: - a. all stock corporations and all commercial companies with balance sheets exceeding a given threshold must appoint external auditors (with a term limit of three years); - b. all companies raising funds publicly are subject now to more strict informational requirements; - c. external auditors must submit their reports to the central bank when companies raise funds publicly and when their bank borrowing exceeds a certain limit; - d. companies with consolidated accounts and with total balance sheets exceeding a threshold must have two external auditors; and - e. permanent internal audit committees must be instituted in all stock market listed companies and in those unlisted companies with a balance sheet exceeding a given threshold. ### Credit information and registries (regional guidance) - Recommendation: support the development of borrowers’ credit information. - Rationale and uses: - Private credit bureaus and public credit registries (the latter, to the extent that the information is not used solely for the purpose of banking supervision) are useful to strengthen banks’ risk management and expand lending to new market segments. - Action points: - Public credit registries should be established where they do not exist (e.g., Libya). - Accessibility and quality of the information should be improved throughout the region, along with appropriate safeguards in terms of consumer and data protection. - The development of private credit registries could also be encouraged. ### Payment systems: regional reform priorities and country examples - General reform objectives for central banks in the Maghreb: - Improvements in the legal, regulatory, and oversight frameworks; - Compliance with international standards; - Full integration of all systems; - Introduction of new and efficient payment instruments. - Specific country developments: - Algeria: - started to use the RTGS in February 2006; - an automated clearinghouse for large volume payments began in May 2006. - Morocco: - the RTGS system became effective in September 2006. - Tunisia: - high-value automated clearinghouses are being tested and will come on stream shortly. - Libya: - reform strategy defined and implementation underway; see Box 6 for project components and timetable. - Mauritania: - plans to introduce an RTGS system should be initiated as a matter of priority as part of payment systems modernization. - Box 6 (summary): Reforming the Payment System — The Case of Libya - A strategy has been defined for the reform of the payment system in Libya and implementation is underway. The Central Bank of Libya (CBL) has signed a contract with a consortium of reputable international companies to cover all the various components of the reform. - a. Real Time Gross Settlement (RTGS) system: - Settlement across accounts with the CBL will be final and irrevocable; - the system is expected to be compliant with international best practices; - the RTGS will replace the current mutual interbank payments system; - progress on the technical and infrastructural front is tangible and the RTGS is expected to be functioning in the near future. - b. Automated Clearing House (ACH): - for clearing electronic files of direct debit and direct credit instructions between banks and their customers; - will cover high-volume, low-value fund transfers such as salaries, utility bills, dividend payments, insurance premia and claims, and loan repayments; - net balances from the clearing would be settled through the RTGS; - once established, the ACH will also be used to clear the output from the Automated Check Processing (ACP) system and other low-value electronic payments and will be capable of accepting additional future modules (stock exchange for instance). - c. ATM/POS Switch: - would interconnect a shared financial network within Libya for all ATMs and EFT/POS devices; - initially will have a direct interface to either the RTGS system or a manual interface at the General Ledger (G/L), depending on the CBL’s preference; later it will interface with the RTGS via the ACH. - d. Automated Check Processing (ACP) system: - a standard ACP system will be in place to address current inefficiencies of the manual paper-based system, improve customer service, and reduce current costs; - initially will interface, depending on the CBL’s preference, either manually to the G/L or directly with the RTGS system; later it will interface with the RTGS via the ACH. - Implementation timeline: the payment system reform project is to be fully implemented within a period of about three years. *Source: Box 5, Box 6, and related paragraphs from the supplied IMF chapter PDF.* ### 71. The ongoing financial and monetary integration within the GCC countries ### 71. The ongoing financial and monetary integration within the GCC countries ### Benefits and outcomes of GCC financial and monetary integration - Financial integration between countries with relatively similar endowments and economic structures can yield significant benefits. - Progress toward monetary union has: - spurred the development of more liquid and deeper financial markets; - facilitated non-oil trade between GCC member states and furthered policymakers’ objective to diversify their economies; - been a catalyst for the design and implementation of sound macroeconomic frameworks that maintain monetary stability, enhance fiscal discipline, and promote growth. ### Political commitment and sovereignty implications - Political commitment is crucial to avoid tensions after the introduction of a single currency and to underpin credibility and sustainability of a monetary union. - Commitment must be strong, unambiguous, and at the highest level to overcome obstacles or gridlocks. - Commitment must be informed, recognizing that monetary union: - results in the transfer of sovereignty from the national to the supranational level of monetary policy; - reduces the room of maneuver in fiscal policy. ### Steps toward financial integration — general lessons for the Maghreb - No single blueprint exists; lessons from the EU and GCC suggest: - A gradual approach to financial integration is appropriate for the Maghreb region, but integration efforts must be sustained and produce continuous tangible progress. - Diagnostic assessments in each country against global standards and best practices to identify gaps, followed by agreement on regional guidelines that countries could gradually adopt. - Maghreb countries should share best practices in banking reform, tax reform, and capital account liberalization. - Key requirements to achieve and maximize benefits of regional/global integration: - consolidating macroeconomic stability and adapting the macroeconomic framework to increased cross-border capital flows; - minimizing risks to financial stability; - enhancing and harmonizing market infrastructure; - relaxing gradually and selectively restrictions on cross-border flows, taking into account the level of preparedness of domestic financial markets; - improving regional coordination. ### Box 9 — Financial Integration within the GCC Countries (summary of key points) - Background: - Established in 1981, the Gulf Cooperation Council (GCC) politically and economically united Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. - By 2003, the GCC countries developed into a customs union and all states officially pegged their currencies to the US dollar, with the aim of achieving a common market by 2007 and a monetary union by 2010. - Drivers of the single-currency objective: - common history and language, relative homogeneity of political systems and traditions, and similarity of members’ economic structures (largely dominated by the hydrocarbon sector); - a considerable degree of monetary convergence over the past decade—reflected in a high degree of exchange rate stability, generally low inflation rates, and co-moving interest rates. - Stock market integration options: - merge all the stock markets into a regional bourse; or - connect them and set unified rules and regulations for each of the six stock exchanges to permit cross-country trading under the same rules. - These options face challenges because of differences in trading systems and regulatory and supervisory frameworks. - Key issues to address for a credible and sustainable monetary union: - Steadfast implementation of the integration agenda and strengthening supranational institutions to pursue common policies as well as coordinate national policies. - Design of convergence criteria: monetary convergence is well advanced, but fiscal convergence is not; fiscal criteria based on a sound public finance framework, reflecting the region’s economic structure, are crucial. - Increased transparency and data standardization: quality and timely statistical data are key to monitoring convergence criteria and formulating economic policy. - Establish a regional central bank: decision-making on monetary and exchange rate policy must be centralized at the supranational monetary institution, which must be fully operational from day one of the monetary union and command sufficient analytical resources. ### a) Consolidating macroeconomic stability and adapting the macroeconomic framework - Continued fiscal discipline and steadfast implementation of fiscal reform agendas are crucial to preserve the generally stable macroeconomic environment achieved in the Maghreb. - The macroeconomic framework must be adapted to increased level and volatility of capital flows: - Episodes of financial crises highlight the danger of combining fixed exchange rates with an open capital account, especially when financial systems are fragile. - More exchange rate flexibility should precede removal of capital account restrictions, particularly on short-term flows. - Finding an alternative nominal anchor is necessary; Morocco and Tunisia have decided to gradually move to an inflation targeting framework. - A transitional period may be needed to move toward indirect monetary policy instruments and to develop money markets to establish an efficient monetary policy transmission channel. - Financial integration increases the efficiency of monetary policy but requires greater vigilance and discipline: - Higher degree of financial integration generally means faster monetary policy transmission. - Extracting signals regarding risks to price stability becomes more challenging. - Large and volatile capital inflows could complicate monetary policy. - Coordinated monetary and fiscal policies will be essential. - Asset price dynamics should be closely monitored even though monetary authorities’ primary objective is price stability. ### b) Minimizing risks to financial stability - A healthy financial system is fundamental; efforts to strengthen bank balance sheets and resolve relatively high levels of NPLs ought to be stepped up. - Integration can proceed while strengthening financial systems as long as weaknesses are not systemic. - Integration increases vulnerabilities and risks—supervision of cross-border banking, discouraging regulatory arbitrage, and containing regional contagion are challenges. - A strong framework for prudential regulation and supervision is necessary: - move toward risk-based supervision; - adjust prudential regulation and supervisory oversight to address cross-sectoral and cross-border activities; - increase harmonization of oversight frameworks and financial system infrastructures. - Promoting financial market development is key: - market depth, particularly in bond and foreign exchange markets, facilitates intermediation and risk management; - a relatively deep currency swap market encourages foreign issuers and investors and allows domestic hedging; - regional integration could spur development of these markets and prepare the region for global financial integration. ### c) Harmonizing market infrastructure - Financial infrastructure harmonization is crucial: regulatory and supervisory frameworks, payment systems, and financial information and contracts. - Harmonizing regulatory and supervisory frameworks: - Needed to maximize benefits of regional opening while avoiding regulatory arbitrage. - Full compliance with the Basel Core Principles for Effective Banking Supervision would reduce risks and improve efficiency. - Authorities need to build capacity to implement more risk-sensitive prudential frameworks—such as Basel II—which raises issues of: (a) capacity to supervise banks on a risk basis; (b) home-host information sharing and coordination; (c) competitive inequalities and the need to upgrade domestic banks. - Harmonizing payment systems: - Reform national payment systems and eliminate barriers to cross-border payments; adopt international standards and good practices such as those developed by the BIS-based Committee on Payment and Settlement Systems (CPSS). - Converging toward those standards creates conditions for regional harmonization; a significant volume of cross-border payments will make harmonization benefits outweigh costs. - Harmonization can occur at several levels: - private rules and procedures (market conventions, self-regulations, contractual arrangements); - laws and regulations set by legislators and regulators governing payment transfers; - technical standards and network arrangements for transacting, clearing, processing, and transferring funds and payment instruments. - Recommendation: create a payment system forum among regional central banks to discuss common issues, guided by detailed assessments of cross-border payment volumes and technical arrangements, aiming to prepare minimum common features and a realistic timetable for reform. - Harmonizing financial information and contracts: - Move to a common financial reporting and accounting framework—the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS)—and standardize borrower financial information and financial contracts to facilitate integration and reduce costs. ### d) Gradual liberalization of the capital account - Gradual removal of capital and exchange controls, with appropriate prudential safeguards, could increase competition and enable access to regional and international markets. - Cross-border capital flows remain highly restricted in the region; Morocco and Tunisia have made significant progress: - Tunisia aims to fully liberalize the capital account and to float the exchange rate in the next few years. - Morocco intends to prepare a possible transition to a more flexible exchange rate. - Liberalization should be sequenced and tailored to each country’s starting conditions and objectives: - Tunisia’s three-phase plan (Box 10) includes: (1) liberalizing medium- to long-term flows; (2) liberalizing direct investment by Tunisians abroad, permitting overseas portfolio investments by institutional investors, and transitioning to a floating exchange rate; (3) full currency convertibility with liberalization of domestic portfolio investment abroad and resident loans to nonresidents—each stage contingent on financial sector robustness and market development. - Practical application of simple sequencing rules (e.g., long-term before short-term flows) is difficult due to capital fungibility. - Maintaining restrictions on certain capital transactions can buy time for restructuring financial markets, adopting prudential standards, and developing indirect monetary instruments. - Measures to stimulate regional equity market integration: - information and technology sharing, encouragement of cross-listings and cross-border investment; - using stock exchanges to carry out privatizations to create platforms for share issues that national markets cannot absorb; - deeper reforms toward a fully integrated regional exchange require harmonization of listing, trading, settlement, accounting, auditing, and tax rules. ### e) Improving regional coordination - The integration agenda requires improved regional coordination across macroeconomic policy, prudential regulation, payment system arrangements, and market infrastructure to realize the benefits while containing risks. *Italic source: _wp07125 - 71. The ongoing financial and monetary integration within the GCC countries* ### 89. For the kind of economic policies described above to take root throughout the ### For the kind of economic policies described above to take root throughout the Maghreb region ### Regional collaboration and political commitment - A growing spirit of collaboration and regional solidarity will be needed for the policies to take root throughout the Maghreb region. - Europe’s voyage toward unity was propelled by a strong political commitment to cooperate, transcending purely economic aspects; the Maghreb has recently stepped up regional dialogue. - The European experience shows that establishing a network of regional institutions and fora for discussion and policy coordination can gradually create an interlocking web of collaboration and dialogue that becomes an engine of convergence and coherence—economic, cultural, and political. ### Cross-border supervisory information exchange - With deeper cross-border linkages, enhanced information exchange with foreign supervisors—both within the region and elsewhere—is increasingly important. - Supervisory agencies from Maghreb countries typically lack formal arrangements with foreign counterparts, although prudential information is occasionally exchanged in practice, particularly in processing licensing applications. - Increasing integration will make formalized and continuous exchange of information with other supervisory agencies more pressing. - Legal restrictions can impede information exchange (examples in source: secrecy provisions as in Mauritania; requirement for bilateral international conventions as in Morocco). - International experience shows that a regional forum for cooperation in prudential matters can be useful in promoting an exchange of views among regional supervisors on reform needs and direction.21 21 See P. Brenner, 2006. ### Consolidated supervision of cross-border financial activities - As integration proceeds, consolidated supervision of cross-border financial activities will become increasingly important. - Many supervisors in the region do not carry out globally consolidated supervision, even when legally empowered, largely because domestic banks’ operations with the rest of the world and their offices abroad are very limited. - In some countries, the legal framework needs adaptation to allow consolidated supervision by giving supervisors authority to supervise: - foreign branches and subsidiaries of domestic banks, and - local branches and subsidiaries of foreign banks. - Effective implementation of existing or new legal frameworks will be a challenge. ### Medium-term cross-country coordination - Strengthening existing mechanisms could achieve the necessary cross-country coordination over the medium term. - Integration requires strong efforts and political will to coordinate economic, institutional, and legal reforms to ensure: - appropriate financial market supervision, - payment systems, - corporate governance standards, - harmonization of taxation and accounting rules, - rules governing foreign investment, - data standards and transparency. - Strengthening the secretariat of the Arab Maghreb Union and its regional cooperation mechanisms is a suggested approach. - The Wider European Neighborhood provides a forum for harmonizing the Maghreb's institutions and legal frameworks with European standards. ### D. Measures in the Near Term — Key actionable steps - Short-term measures to address financial barriers to intra-Maghreb trade: - Streamline administrative requirements for trade-related banking operations. - Reduce the cost and increase the availability of facilities to finance trade. - Overregulated cross-border financial transactions and relatively inefficient payments systems increase costs and delays for regional trade in goods and services. - Eliminating barriers for Maghreb banks to set up cross-border branches or subsidiaries could substantially reduce transaction costs. - Regional integration has started (examples in source: Tunisia’s partial sale of Banque du Sud to a consortium comprising the Moroccan Attijariwafa Bank; announcement by Banque Internationale Arabe de Tunisie to open branches in Algeria, Libya, and Morocco) but needs acceleration. - Proceed with establishment of the Maghreb Bank for Investment and Foreign Trade (BMICE) to catalyze financial integration and promote trade and investment within the region. - Ensure close coordination between central banks to support macroeconomic and financial stability as financial integration deepens, to promote development of money and foreign exchange markets, and to guide harmonization of domestic financial market infrastructures. - Reform and harmonize payment systems: - Create a payment system forum among regional central banks to discuss common payment system issues and steps toward harmonization. - Short-term focus: eliminate remaining barriers to cross-border payments; increase efficiency of network arrangements for transacting and clearing payment instruments; improve processing and communication of payment information; improve fund transfers between institutions. - Create permanent institutions for consensus-building and coordination to monitor harmonization of payment systems or bank supervision and the implementation of Basel II recommendations. ### Main recommendations A. Undertake further reforms, where needed, to modernize the financial sectors in the Maghreb countries: 1. Ensure banking system soundness - 1.1 Reduce NPLs. - 1.2 Ensure adequate loan classification and provisioning. - 1.3 Comply with other internationally accepted prudential rules fully and in a timely fashion. 2. Strengthen banking system competition - 2.1 Privatize some public banks to reputable investors where needed. - 2.2 Restructure and strengthen governance in the remaining public banks. - 2.3 As needed, level the playing field between public and private banks. - 2.4 Gradually lift remaining restrictions to foreign bank entry in some countries. 3. Deepen financial markets - 3.1 Strengthen regulation and supervision of the securities markets. - 3.2 Deepen government bond markets and develop a benchmark yield curve. - 3.3 Build a dynamic capital market investor and issuer base. - 3.4 Stimulate interbank money markets by making it more expensive for banks to transact with the central bank outside of its regular market operations. - 3.5 Further liberalize foreign exchange markets consistent with the pace of capital account liberalization and the development of banks’ risk management capabilities. 4. Strengthen financial oversight - 4.1 Increase the independence of supervisory agencies and clearly define the legal grounds for dismissal of their heads and board members. - 4.2 Distinguish clearly the roles of the ministry of finance and of the regulatory authority. - 4.3 Provide the supervisory agencies with adequate financial resources to hire, retain, and train qualified staff. - 4.4 Continue upgrading prudential regulation toward international standards, including by adopting a more risk-based approach to supervision and improving the coordination between supervisory agencies. 5. Upgrade financial sector infrastructure - 5.1 Improve bankruptcy and foreclosure proceedings by establishing commercial courts and upgrading laws on loan guarantees. - 5.2 Strengthen corporate governance, including in the banking sector. - 5.3 Move to international standards in financial reporting and auditing. - 5.4 Set up public credit registries and facilitate the development of private credit bureaus. - 5.5 Accelerate the ongoing reform of the payment systems. B. Key steps toward regional financial integration 1. Steps that can be taken in the near term - 1.1 Eliminate financial barriers to intra-Maghreb trade, including by allowing Maghreb banks to set up cross-border branches or subsidiaries. - 1.2 Proceed with the establishment of the Maghreb Bank for Investment and Foreign Trade. - 1.3 Ensure close coordination between central banks. - 1.4 Continue upgrading the payment systems with a view to their harmonization. 2. Steps to be taken over the medium-term - 2.1 Continue consolidating macroeconomic stability in each country and adapting macroeconomic frameworks to deal with an increase in the level and volatility of capital flows. - 2.2 Minimize risks to financial stability, including by strengthening bank balance sheets. - 2.3 Harmonize market infrastructure, including regulatory and supervisory frameworks, payment systems, and financial information and financial contracts. - 2.4 Gradually liberalize the capital account. - 2.5 Stimulate regional integration of domestic equity markets by sharing information and technology, encouraging crosslistings and cross-border investment, and giving a greater role to the stock exchange in carrying out privatization. - 2.6 Improve regional coordination and cooperation. *Source: IMF Working Paper content unit _wp07125 - 89.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07125.pdf_