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© 2001 International Monetary Fund

October 2001

IMF Country Reports No. 01/189

Senegal: Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Monetary and Financial Policy Transparency; and Securities Supervision

The Financial System Stability Assessment on Senegal was prepared by a staff team of the International Monetary Fund and the World Bank as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on August 24, 2001. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Senegal or the Executive Board of the IMF.

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International Monetary Fund

Washington, D.C.



Financial System Stability Assessment

Prepared by the Monetary and Exchange Affairs and African Departments

Approved by Stefan Ingves and G.E. Gondwe

August 24, 2001

This Financial System Stability Assessment (FSSA) is based on the work of the joint IMF/World Bank mission that visited Senegal as part of the Financial Sector Assessment Program (FSAP) in November 2000 and January 2001. The FSAP mission’s findings were discussed with the authorities in July 2001 in the context of the 2001 Article IV Consultation. The FSAP team was composed of Piero Ugolini (IMF, Mission Chief), Anne Rennie (World Bank, Deputy Mission Chief). Mark Zelmer, Christine Sampic, and Sandra Marcelino (all IMF), Luc Cardinal, Carlos Cuevas, Elena Folkerts-Landau, Charlie Garrigues, Daria Goldstein, Gregorio Impavido, Andres Jaime (all World Bank), Kalidou Gadio (African Development Bank), Arnaud de Villepoix (Consultant-Banque de France), Brian Gelfand (Consultant-IOSCO), and Marcel Maes (Consultant-Belgium).

The banking system in Senegal has gradually regained health and is generally well regulated and supervised. The Senegalese authorities and the regional central bank, the Banque Centrale des Etats de 1’ Afrique de l’Ouest (BCEAO), have addressed most of the problems that caused the banking crisis of the 1980s in order to avoid a repetition of similar problems. The lack of banking supervision has been successfully addressed by the creation of the regional Banking Commission followed by effective supervision. Government ownership and interference in the banking sector has been significantly reduced. However, the economy remains vulnerable to the same external and domestic policy factors (e.g., prices on oil, groundnuts, and domestic energy), which, in turn, could affect the stability of the banking system. This vulnerability is compounded by the high concentration of credit risk in bank loan portfolios and emerging inefficiencies in the judicial system related to the foreclosure process. Notwithstanding these vulnerabilities, the probability of a major systemic crisis is low, insofar as there is the capacity of the public enterprises or the government to repay bank loans.

Other financial sectors (insurance, pension, microfinance, and capital markets) are fairly small and at an early stage of development, and thus do not constitute a source of systemic risk even though they all suffer from a number of weaknesses. Owing to a limited regional interbank market, liquidity does not flow smoothly across the member countries of the West African Economic and Monetary Union (WAEMU), but there have not been any liquidity crises. The current obsolete manual payment system is being replaced by a new system that will comply with international standards by 2002. No systemic risks were found in this area, inasmuch as most transactions are conducted using cash. Since Senegal is a member of the WAEMU region, monetary policy and financial sector supervision are conducted for the region as a whole by regional institutions. Therefore, the assessments made in the context of Senegal apply for the region as a whole. There was partial observance of IOSCO principles. The transparency of monetary policy is satisfactory overall. A preliminary assessment of the Basel Core Principles was made.

Areas that need to be addressed to strengthen the financial sector further are: domestic pricing policy, the legal framework, and the high concentration of credit risk. In the future, strict coordination between the BCEAO and Ministry of Finance to facilitate the management of public debt will be required when Senegal and other countries in the region begin issuing public debt in the market. Action in this latter area is already under way.

This report was prepared by Piero Ugolini and Mark Zelmer.



Assistance Technique aux Caisses Populaires d’Epargne et Crédit


African Development Bank


Banque Centrale des États de l’Afrique de 1’Ouest


Bourse Régionale des Valeurs Mobilières


Conférence Interafricaine des Marchés Publics d’Assurance


Conférence Interafricaine de la Prévoyance Sociale


Commission Régionale de Contrôle d’Assurance


Commission Régionale de l’Épargne Publique et des Marchés Financiers


Dépositaire Central/Banque de Réglement


Direction Nationale des Assurances


Financial Action Task Force


Federal Deposit Insurance Corporation


Fond National de Retraite


Financial Sector Assessment Program


Financial System Stability Assessment


General Data Dissemination System


International Association of Insurance Supervisors


Industries Chimiques du Sénégal


International Organization of Securities Commissions


Institution de Prévoyance Retraite du Sénégal


Microfinance institutions


Monetary and Financial Policies


Nonbank financial institutions


Organisation pour l’Harmonisation en Afrique du Droit des Affaires


Société Africaine de Raffinage


Special Data Dissemination Standard


Société Nationale d’Électricité


Sociéeté de Gestion de Patrimonie


Société de Développement des Fibres Textiles


Société Nationale de Commercialisation des Oléagineux du Sénégal


Self-Regulatory Organization


Société Nationale de Recouvrement


West African Economic and Monetary Union


West African Monetary Union

Overall Assessment

1. Senegal’s financial sector is dominated by ten commercial banks, which account for more than 85 percent of total financial sector assets. Banks controlled by international financial conglomerates make up almost 80 percent of banking system assets. Insurance companies account for most of the remainder of total financial sector assets, and there is an embryonic securities market. Microfinance institutions’ activities are growing very rapidly and reaching an increasing share of households, small enterprises, and informal sector business. With the exception of the regional development bank, the African Development Bank (ADB), there are no development financial institutions operating in Senegal, but there are two banks that specialize in providing agricultural credit and housing loans, respectively.

2. The banking system in Senegal has gradually regained health and is generally well regulated and supervised. However, nonperforming loans, as a share of total private sector loans, albeit relatively low, are on the rise. The Senegalese authorities and the regional central bank, the Banque Centrale des Etats de l’Afrique de POuest (BCEAO), have addressed most of the problems that caused the banking crisis of the 1980s in order to avoid a repetition of similar problems. The Senegalese authorities’ objective is to build a stronger financial sector capable of supporting a higher rate of economic growth necessary to reduce poverty and unemployment as part of the PRGF program. As of April 2001, financial sector assets represented 39 percent of GDP.

3. The major vulnerabilities of the past fall into four main categories: (i) lack of supervision; (ii) substantial government ownership and interference in the banking sector; (iii) a narrow economic base, which left the country and its financial system highly exposed to shocks in the areas of groundnut production, export and petroleum import prices; and (iv) the effects of some government policies in the setting of producer prices for groundnuts and domestic energy prices. The lack of supervision has been successfully addressed by the creation of the regional Banking Commission and effective supervision. Government shareholdings in the banking sector and interference in the day-to-day management of banks have been significantly reduced. However, the economy continues to remain vulnerable to external shocks and government policies in the setting of producer prices for groundnuts and domestic energy prices, which, in turn, could seriously affect the stability of the financial system. This vulnerability is compounded by the high concentration of credit risk in bank loan portfolios.

4. The high concentration of credit risk in bank loan portfolios is unavoidable given that banks have little scope for further portfolio diversification. In addition, the banks are earning wide spreads in their current lending activities that are mainly focused on loans to the largest enterprises. While wide spreads make it easier for the banks to absorb external shocks, they may reduce the incentive to seek out lending opportunities that may exist among small- and medium-sized businesses and the household sector. (This may partly explain the growing microfinance sector). Moreover, risks associated with lending to the latter are high due to some problems in the legal system (discussed below) and the lack of reliable information on the financial condition of prospective borrowers because of existing problems in the accounting and corporate governance systems. The problems encountered by the banks’ exposures to SONACOS and SENELEC in 2001 are clear examples of the potential vulnerabilities that exist in the banking sector. These are highlighted in the stress test exercise.

5. Notwithstanding these vulnerabilities, the mission is of the view that the probability of a major systemic crisis is low. A number of major factors contribute to the resilience of the system. They are: (i) the introduction of permanent, systematic supervision mechanisms;(ii) enhanced governance; (iii) modernization of bank management; (iv) regulation of financial activities at the regional level; and (v) the implementation of preventive policies. Additional factors are the membership of Senegal in the West African Economic and Monetary Union (WAEMU), which ensures that shocks to Senegal are not compounded by inflation and exchange rate uncertainties, and the low level of monetization in Senegal. Finally, the embryonic state of the interbank market, and the current high level of liquidity in the banking system make a contagion effect in the event of a bank failure unlikely. There remains, however, a risk of contagion from the banking sector to other financial subsectors, since both insurance companies and microfinance institutions maintain large deposits with the banks.

6. Other sectors of the financial system in Senegal are fairly small and underdeveloped, and thus do not pose major sources of systemic risk. Insurance companies, which account for 10 percent of total financial assets, present a number of weaknesses: low minimum capital; weak licensing procedures; lack of internal control procedures; little use of reinsurance; and a lack of on-site inspectors. In addition, the ability of insurance companies and pension funds to invest in a diversified range of longer-term investments is hindered by a lack of suitable domestic investments and the difficulty of investing offshore because of existing arrangements surrounding the convertibility guarantee of the CFA franc, which effectively preclude such investment. As a general rule, the larger companies appear to be profitable, while the smaller ones are encountering difficulties.

7. While the pension system in Senegal does not pose systemic risks for the financial system, its current financial position is unsustainable in the medium and long term, and may have a significant budgetary impact if fundamental reforms are not undertaken. The Senegalese government is well aware of this problem and has made pension system reform one of its priorities.

8. Capital markets. The regional stock exchange in Abidjan is a relatively new component of the financial system in the WAEMU, having commenced operation in September 1998. Senegal has only one company listed on the exchange. At this stage of development, the financial market has not yet reached the volume of activity necessary to cover all of its operating costs, including those of the supervisory system. In addition, owing to this low level of activity, intermediation costs are high, which further limits the market’s liquidity.

9. Microfinance development in Senegal has kept pace with the dynamic evolution of this sector in the WAEMU region. In Senegal, the number of institutions and their membership has reportedly grown to about 18 percent of the households. Deposit balances in microfinance institutions (MFIs) have increased in relative importance vis-à-vis bank deposits from the equivalent of 1 percent in 1996 to 2.4 percent as of June 2000. Aside from the three dominant MFIs, there are a large number of entities with small membership and weak institutional structures. The lack of appropriate supervision framework is the key problem.

10. The legal framework governing the financial sector in Senegal is quite comprehensive, covering most areas. However, the functioning of the Senegalese judicial system, which has traditionally been recognized as quite satisfactory, is currently becoming a matter of some concern, since delays in the foreclosure process compound the credit risk in the financial system. The development of the justice system in Senegal has not kept pace with the growth of the financial sector. Several factors need attention: (i) the system can be quite slow; (ii) the judicial infrastructure is inefficient; (iii) no modern information system exists to collect all relevant information regarding court cases; and, (iv) on the whole, decisions are not systematically published. The financial community is now often critical of the functioning of the judicial system, especially certain banks, which have expressed doubts about the competency and the quality of the decisions of some judges in financial matters.

11. Liquidity management. Owing to the small number of intraregional interbank operations (with the exception of intragroup operations), liquidity does not flow smoothly across the member countries of the Union, and the BCEAO does not engage in regular open market operations. Reserve requirements are at times used to manage liquidity in each country. Reserve ratios are not uniform across the Union and Senegal’s ratio, at 9 percent, is one of the highest in the region. There have not been any liquidity crises.

12. The current manual payment system is slow and obsolete. It does not meet the needs of a modern economy or an active interbank market. The weaknesses of the system have been clearly identified by the BCEAO, which has launched a reform project at the regional level with the help of the World Bank, to establish a system that complies with international standards by 2002. Despite the weaknesses of the current system, no systemic risks were found by the mission since most transactions in the economy are conducted in cash.

Compliance with international standards and codes

13. Since Senegal is a member of the WAEMU region, monetary policy and financial sector supervision are conducted for the region as a whole by regional institutions. Therefore, the assessments made in the context of Senegal apply for the region as a whole.

  • Basel Core Principles: Only a preliminary assessment was made. A final assessment is envisaged to be made in the context of the forthcoming FSAP mission to Côte d’lvoire. Appendix I summarizes the main findings. The banking supervision system has improved significantly in recent years: a system of accounts has been introduced; new circulars call for internal control and audit functions to be strengthened; and the prudential system sets new licensing requirements and management standards, including capital adequacy and risk coverage standards. Moreover, a circular letter on corporate governance was issued recently. In the case of money laundering, work is under way to introduce legislation on a regional basis in this area by 2002.
  • IOSCO: Although the regulatory and supervisory framework for the financial market is quite new, a regulatory and supervisory system is already operational. This system generally observes the objectives and principles for financial regulation established by IOSCO, since most of these principles are fully or partially applied. However, some key principles are not, especially in the following areas: supervision of the secondary market, prudential regulations and management of the risks of intermediaries, and exchange of information and instances of coordination with other regulators.
  • Monetary transparency: The transparency of monetary policy in the WAEMU is satisfactory overall. Since the establishment of the Union in 1973, its governing laws have set out the general objectives and framework for the implementation of monetary policy so that all member states can have a clear view of the policy directions taken. In recent years, the BCEAO has endeavored to improve the readability of its monetary policy and the information provided to the public on its mission, objectives, main activities, and decisions. Commercial bank representatives believe that the transparency process could be enhanced by increasing the frequency of consultation. The BCEAO officials noted that meetings with the National Director (about three times a year) are held on a regular basis, and bilateral meetings are organized upon demand. In addition, the governor meets once a year with all of the regional bankers’ associations.

14. In order to cope with future challenges, the Senegalese authorities and the BCEAO have embarked on a series of steps aimed at further strengthening the macroeconomic framework and the soundness of the financial sector. These include: (a) continuing to implement prudent fiscal and monetary policies and addressing regulated domestic price policies; (b) increasing the level of openness and transparency in economic and financial decisions and activities; (c) eliminating direct central bank financing of the government and developing a regional government securities market; (d) introducing a modern payment system; (e) promoting the development of an active regional money and capital market; (f) improving the implementation of laws; and (g) strengthening the supervision of insurance and microfinance institutions and the financial market. While these efforts are to be commended, additional areas need to be addressed to further strengthen the financial system.

  • a. Legal framework: The slowness and growing inefficiency of the judicial system is a matter of serious concern. Additional human and technical resources, as well as training and specialization of court officials, should be provided to correct the problem.
  • b. The banking system remains exposed to the high concentration of credit risk, in particular for indigenous banks that have little scope for further portfolio diversification. The authorities should make efforts to alleviate the concentration of credit risk in bank loan portfolios by more rigorous application of prudential limits on risk concentration. In addition, consideration should be given to introducing credit bureaus that could gather and disseminate information on prospective borrowers.
  • c. In the case of banks in serious or irreversible difficulties, rapid action by the supervisory authority can be critical to ensure depositor protection. In this regard, the role played by the national Ministers of Finance in the appointment of temporary administrators or notification of the withdrawal of a license, and the suspensive effect of possible actions are not very well suited to specific situations. Once a deposit insurance system is in place, the authorities should plan to transfer all responsibility for the appointment of temporary administrators and notification of the withdrawal of licenses to the Banking Commission in order to improve the efficiency of the supervisory authority.
  • d. For the insurance sector, fit and proper tests should be implemented, minimum capital increased, principles of corporate governance and internal controls applied, reinsurance encouraged, and resources allocated to supervisory agencies augmented so as to increase the frequency and scope of on-site inspections.
  • e. The BCEAO has made significant progress in disseminating regulations, information, and laws related to the financial sector. However, representatives of the financial sector told the mission that they would like to meet more frequently to exchange views on issues of common interest.
  • f. Quick changes need to be made to the benefits of the pension system, while continuing the analysis and dialogue on its structural reform. Parameters in need of change include: enlarging the contribution base, strengthening the link between contributions and benefits, and tightening entitlement rules.
  • g. Microfinance in Senegal is a growing sector, which serves a very large segment of the population, in particular low-income groups and the informal sector. However, the growing number of institutions has created problems of supervision. The licensing of new institutions should be closely monitored until an assessment of the state and performance of existing institutions can be made. The advisability of evaluating the creation of a special supervisory body should be evaluated and coordinated with the interested parties.
  • h. The development of an efficient payment system, together with better circulation of information and communication among banks in the region and the creation of standard instruments (such as repurchase agreements), are essential to improve the liquidity management system. The efforts to fully develop a regional interbank market are strongly supported. The ongoing modernization of the payment system will be the first step in achieving such a goal. Additional measures (such as the use of collateral) and initiatives to encourage the exchange of information and communication among banks and countries in the region will be essential for its development. More frequent use of open market operations to adjust short-term liquidity fluctuations would be desirable once that government securities are introduced in the union. Close cooperation between the BCEAO and the Ministry of Finance to facilitate the management of public debt in the future is welcomed and encouraged.
  • i. The authorities should make efforts to reach full compliance with all of the international standards and codes.

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