DIG/ This is information that has gone almost unnoticed but could have the effect of a bomb.
According to the specialized site « Sika Finance »renowned for being the economic benchmark in West Africa, for the rest of 2024 and until the end of 2025, banks operating in CEMAC must have greater capital to cover credit risk when They lend to a state in the region.
This is the substance, indicates the media, of a circular letter signed on October 18, 2024 by the general director of COBAC and addressed to credit institutions.
The banking regulator sets the weighting rates by State on the basis of compliance with the convergence criteria.
Thus, this rate is 80% for Congo, 85% for Equatorial Guinea and the CAR; 90% for Cameroon and Chad, and… 100% for Gabon.
“This means that during bond issuesareas on the regional market, for example, a bank that invests 1 billion FCFA in a Cameroonian security must have at least 900 million FCFA in its own funds throughout the life of the security. This is huge, because it will affect the balance sheets of the banks which support the State in its financial operations”, commented a banker contacted by Sika Finance.
Since 2010, a regulatory system considers that non-compliance by a State with each of the community convergence criteria constitutes a credit risk for the banking system.
Systemic risk
After analyzing the economic and budgetary situation of the countries in the region, COBAC reveals that none of them respects the criterion of non-accumulation of arrears.
Congo is the only one which has a surplus budget balance while the inflation threshold is only effective in Equatorial Guinea and the CAR.
Cameroon only respects one criterion, that of debt rate, and Gabon is in violation of all the requirements.
These shortcomings are therefore logically reflected in the weightings assigned to them.
“This means that the level of risk is very high and the resources allocated to credits to States will decrease,” reacted a Gabonese expert.
“Liquidity will become increasingly scarce during the period at the end of 2024 and 2025. This will affect the ability of banks to lend to economic agents or to invest in other assets. Actually causing a slowdown in the economy. Any bank with significant exposure to a state could be more vulnerable to economic shocks or sovereign crises, thus affecting its financial stability.
The convergence criterion “reference budgetary balance” of the circular letter informs us that the majority of CEMAC States (with the exception of Congo) spend more than they generate income. The expression of poor financial management thereof; excessive reliance on borrowing or inefficiency in tax revenue collection. Making States unable to honor their future commitments, hence the high weighting to protect banks from payment defaults” he warned.
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Title: Analyzing the New Banking Regulations in CEMAC: An Interview with Economic Expert Dr. Amina Ndong
Time.news Editor (TNE): Welcome, Dr. Ndong. Thank you for joining us today. The recent circular from COBAC regarding the credit risk rates for banks in the CEMAC region has certainly stirred discussions. Can you help us unpack its significance?
Dr. Amina Ndong (DAN): Thank you for having me. Absolutely, this circular is indeed a pivotal moment for the banking sector in CEMAC. It essentially elevates the capital requirements that banks must hold against the credit risks associated with lending to member states.
TNE: That’s correct. The requirements vary by state, with Gabon facing the highest at 100%. What implications does this structuring have on banks’ operations within the region?
DAN: This is monumental. When a bank invests in government securities, like a Cameroonian bond, it must now set aside a significant portion of its capital—900 million FCFA for every billion invested in Cameroon, for instance. This tightening not only puts pressure on the banks but could also limit their ability to finance other critical projects, affecting the broader economy.
TNE: Many in the banking world are calling this a “systemic risk.” Could you elaborate on why they feel this way?
DAN: Certainly. If none of the CEMAC states are meeting the convergence criteria, as indicated in the COBAC analysis, banks are essentially being told to brace themselves for loans that hold a high likelihood of default. With states like Gabon violating all criteria, the health of banks is under serious threat. This could engender a domino effect where reduced lending leads to slower economic growth, exacerbating fiscal challenges.
TNE: It seems the regulatory system has been in place since 2010, marking non-compliance with these criteria as a credit risk. Why do you think we are seeing such violations persistently?
DAN: It’s a complex situation. Many of these countries face economic challenges that hinder compliance, such as poor fiscal management, inflationary pressures, and a lack of diversified economies. The short-term needs often overshadow long-term financial prudence, which leads to a cycle of default and further regulatory constraints.
TNE: With these reforms in place, how might banks adapt? Are there strategies they might employ to remain solvent while still supporting governmental financing?
DAN: Banks may explore diversifying their investment portfolios to reduce reliance on sovereign bonds, thereby lessening their exposure to associated risks. Additionally, they might seek stronger partnerships and promote public-private collaborations. Emphasizing risk management, improving capital buffers, and focusing on governance improvements will be crucial.
TNE: Dr. Ndong, what do you envision for the future of banking in CEMAC if these regulations are strictly enforced?
DAN: If the regulations are embraced rather than resisted, we could see a stronger, more resilient banking sector that adheres to prudent practices. However, this will require concerted efforts from both regulators and governments to instill trust, ensure compliance, and address the underlying economic challenges that threaten sustainability.
TNE: Thank you, Dr. Ndong, for your insights. This discussion has been enlightening, and we look forward to following the developments in CEMAC’s banking landscape.
DAN: Thank you for having me. It’s an important topic, and I hope for a constructive evolution in the region’s banking sector.
