Significant efforts have been made over the past two years to promote the resilience of the banking sector in Benin. However, there remain vulnerabilities requiring additional structural reforms in terms of governance, according to the IMF.
The banking sector in Benin suffers from a fairly high concentration of credit on a small number of customers. Fifteen in number, the banks dominate the financial sector in Benin with more than 90% of total assets, and totaling about 9.6% of all banking sector assets in the West African Monetary Union (Umoa) in 2021. The solvency ratio for the sector stood at 13.6% at the end of 2021, which is slightly higher than that of the whole banking sector in the Union, i.e. 12.6%.
“Before the Covid-19 pandemic, the banking sector in Benin remained in any case underdeveloped and vulnerable, which limited its ability to support the granting of credit to the private sector and, ultimately, to support economic growth. “, underlines the report 2022 Benin – Diagnosis of Governance published last February by the International Monetary Fund (IMF). The Central Bank of West African States (Bceao) and the Umoa Banking Commission (Cbu) have taken supervisory measures aimed at rebuilding banks’ capital buffers and moving towards the implementation of the so-called Basel II/III standards and the Ifrs9 standard. Among other things, they have reduced the non-performing loans (NPLs) of the banks that dominate the financial sector in Benin to more than 90% of total assets. Indeed, the preliminary gross ratio of Pnp decreased for Benin, with a gross rate of deterioration of the customer portfolio falling from 16.2% at the end of 2020 to 12.5% at the end of 2021, i.e. a decrease of 3.6%, according to the 2021 Annual Report of the Umoa Banking Commission. It remains above the UMOA average of 10.3%. Most banks have recently conducted recapitalization plans to comply with the new prudential capital rules, but some small banks, representing 5% of banking sector assets, did not meet the minimum capital requirements at end-December 2021, according to the IMF. Two small state-owned banks that suffered losses and capital shortfalls in recent years were merged in June 2020.
Increase capabilities
The 2022 Financial Sector Assessment Program (Fsap) for UEMOA recommended increasing the independence of the Cbu from member states, more effectively applying its sanctioning powers and corrective measures, as well as to strengthen the resources and capacities allocated to supervision, reports the IMF. It is a question of modifying the appendix to the Convention governing the Banking Commission of the Umoa, with the principle of explicitly registering the prohibition to the members of the Cbu to receive instructions from external entities (including therefore the States members). These texts should also oblige the representatives of the States within the Supervisory College of the Cbu to serve as members without the right to vote, or else modify the composition of the College to increase the representation of the members appointed by the Council of Ministers of Umoa on the basis of their professional qualifications, underlines the Fsap. Maintaining an appeal to the Umoa Council of Ministers on the decisions of the Cbu also raises concerns in terms of institutional independence. Therefore, the Court of Justice of Uemoa should be the sole jurisdiction of appeal for decisions rendered by the Supervisory College of the Cbu, he insists.
The Program also highlighted the need for more consistent use of sanctions to address prudential compliance issues in a timely manner. Indeed, it is noted that the sanctions seem “insufficiently strict” with regard to entities that do not comply with prudential obligations over a long period, in particular with regard to minimum capital requirements. It was recommended that penalties be published to increase their effectiveness, and that monetary penalties be used more frequently. Also, resolution and liquidation tools should be applied quickly to deal with cases of undercapitalized and unviable banks. The Fsap also recommended strengthening the resources and capacities of the Cbu and its secretariat as well as the continuation of IT investments, in order to optimize and automate the tools for the conduct of control in a changing banking environment.
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