CREDIT HARD TO OBTAIN IN COTE D'IVOIRE

UNCLAS ABIDJAN 000229


E.O. 12958: N/A
TAGS: EFIN ECON IV
SUBJECT: CREDIT HARD TO OBTAIN IN COTE D'IVOIRE


1. Summary. The Ivoirian banking sector is made up of 18
banks, approximately half of which are undercapitalized.
Banks here play a relatively small role in the economy, even
when compared with banks in other low-income countries. The
lack of credit is an element that impedes the expansion of
the private sector. However, the entry of new banks into the
market will likely result in an increase in banking services
and a consolidation of the sector over the next 10 years.
End summary.

--------------
STRUCTURE OF THE BANKING SECTOR
--------------


2. Generally speaking, the larger Ivoirian banks (including
subsidiaries of France's Societe Generale and BNP Paribas)
have operated here for decades. Citibank, the sole U.S. bank
in the country, has been in Abidjan for over 30 years,
providing commercial banking but no retail banking. The
large, stable banks typically cater to well established
businesses based in Abidjan, and there seems to be moderately
strong competition between them in that segment of the
economy. Banking services outside Abidjan are limited,
especially in the central-north-west region, which has not
been under GOCI control since 2002, when rebel forces took
over that part of the country.


3. In recent years, several African banks--primarily
Nigeria-based--have moved into the Ivoirian market. Because
of high capital requirements imposed by Nigerian regulators,
Nigerian banks are generally better capitalized than Ivorian
banks. In Cote d'Ivoire, investors need only about USD 10
million to establish a bank; in Nigeria, approximately USD
200 million is required The emergence of new banks
(approximately five in the past five years) indicates a
relatively open banking regime. A representative of one of
the Nigerian banks that recently opened in Abidjan told
econoff that although he suspected other banks were working
behind the scenes to keep his bank out of the country, the
process was simple and it took only 18 months to set up the
bank.

--------------
LENDING RATES AND PRACTICES
--------------


4. Individuals and businesses, especially small- and
medium-sized enterprises (SMEs),complain that Ivoirian banks
charge high interest rates, require too many documents, and
often refuse to make loans. There appears to be some truth
to these claims. Economist Intelligence Unit (EIU) figures
indicate that the average real lending interest rate in Cote
d'Ivoire in 2007 was 7.4 percent, well above the median of
4.7 percent for countries in the EIU database.


5. Bankers retort that businesses rarely have proper
financial statements and often request loans in unrealistic
amounts. Furthermore, bank officials argue that they operate
in an environment in which it pays to be conservative: the
Ivoirian judiciary system is arbitrary, making recovery of
collateral very difficult; and the GOCI demands pre-payments
of taxes from bank clients and delays payments to suppliers
for long periods. Additionally, some banks must submit loan
applications for evaluation by bank counterparts in developed
countries, where Cote d'Ivoire is seen as quite risky.

--------------
HEALTH AND REGULATION OF THE BANKING SECTOR
--------------


6. The IMF reports that approximately half of Cote d'Ivoire's
banks have inadequate capital. The IMF's three-year Poverty
Reduction and Growth Facility (PRGF) for Cote d'Ivoire,
approved March 27, addresses financial-sector reform. In it,
the GOCI agrees to recapitalize and/or restructure private
banks in distress and to restructure the state-owned national
investment bank (BNI) by restoring its solvency and
compliance with prudential norms.


7. Ivoirian bankers generally respect their regulator, the
West African Economic and Monetary Union (WAEMU) Banking
Commission, but say that some of the Commission's norms are
unrealistic, a fact the Commission tacitly acknowledges by
failing to enforce them.


8. In short, there appear to be three general types of banks
in Cote d'Ivoire: large, healthy banks related to European
or U.S. banks (four banks); healthy African banks that have
recently entered the market (approximately five); and poor,
undercapitalized local banks (approximately six, two of which
are relatively new).


9. Although many Ivoirian banks are subsidiaries or otherwise
have relationships with foreign banks, bankers in Cote
d'Ivoire claim that their banks are "self-contained," i.e.,
they engage in little inter-bank lending. Their portfolios
are typically separate from those of their parent banks--a
factor that has limited Ivoirian banks, exposure to the
world financial crisis. However, Ivoirian bankers also note
that they are beginning to see the impact of the global
recession, as the revenues of some of their
commodity-exporting clients have fallen.

--------------
MEASURES OF LENDING ACTIVITY
--------------


10. Various measures show that the banking sector plays a
relatively small role in the Ivoirian economy. World
Development Indicators (WDI) show that domestic credit to the
private sector equaled 14.3 percent of GDP in 2006. As one
might anticipate, Cote d'Ivoire's ratio falls well below that
of high-income countries (161.3 percent). However, Cote
d'Ivoire's ratio is also significantly lower than the average
for low-income countries (24.8 percent).


11. Similarly, WDI figures for 2006 show that credit provided
by the Ivoirian banking sector equaled 18.1 percent of GDP.
For high-income countries, the ratio was 193.5 percent; for
low-income countries it was 30.0 percent.


12. The World Bank's Doing Business 2009 report ranks Cote
d'Ivoire number 145 of 181 countries (ranking countries from
best to worst) in terms of firms, ability to get credit.
Among sub-Saharan African countries, Cote d'Ivoire ranks 27th
of 45.

--------------
REASONS FOR LOW LEVELS OF BANKING ACTIVITY
--------------


13. While the relatively low level of economic development
and high poverty rates are likely important factors in the
limited level of financial deepening in Cote d'Ivoire, these
factors alone do not seem to explain the low level of bank
activity in the economy. Additionally, it is difficult to
explain this lack of financial deepening as the result of bad
monetary policy or bank instability. Since 1980, average
annual inflation in Cote d'Ivoire has exceeded 10 percent in
only two years. From 1996 through 2007, the average annual
inflation rate never exceeded 5 percent. Furthermore, bank
accounts have never been frozen, and there have never been
large-scale runs on banks here.


14. One of the reasons for the low level of bank activity is
the lack of data on credit worthiness of potential borrowers.
The 2007 WDI gives Cote d'Ivoire a rating of "one" on a
scale of zero to six in terms of credit information
availability (with zero representing less information and six
representing more information).


15. Cultural factors also seem to play a role in the low
level of financial deepening. For example, Ivoirians whose
employers deposit their salaries directly into bank accounts
often withdraw the cash right away--in part to distribute the
cash to members of their extended family who rely on them for
support. Educational levels also seem to be a factor. West
African bankers relate anecdotes about wealthy but uneducated
businesspeople who withdraw cash, sometimes huge amounts,
from their bank accounts just to make sure it is still "in
the bank" or to hand it over to a business partner as part of
a deal. Another factor is Cote d'Ivoire's lack of a reliable
system for dealing with bad checks, making acceptance of
checks a risky--and therefore unusual--practice.

--------------
FUTURE PROSPECTS
--------------


16. Banks that have recently entered the market bring new
competition to the financial sector. They will likely find
it difficult to break into the market for the large corporate
accounts, for which there is already a relatively healthy
level of competition. However, given the relatively small
role banks currently play in the economy, there seems to be
room for some of the newer, perhaps more aggressive banks to
gain ground with individuals and SMEs. This is a market that
remains underserved.


17. The introduction of new products indicates that
competition is underway. Banque Atlantique - Cote d'Ivoire
has introduced a Visa credit card that clients can pre-load
with euros or U.S. dollars to use on trips abroad. BICICI, a
subsidiary of BNP Paribas of France, has teamed up with
Orange, a French cell-phone service provider, to allow Orange
customers to make utility payments, effect money transfers,
and carry out other transactions via text messages.
Additionally, many employers now give each employee a card to
use to withdraw his or her salary from the employer's account
at automatic teller machines, even if the employee does not
have a bank account.


18. As Ivoirians' contact with banks increases and as
technology makes banking easier, it seems likely Ivoirians
will increase their use of bank services. It also seems
likely that there will be a consolidation of banks in the
country over the coming years. It is hard to conceive of all
18 banks continuing to operate in a market the size of Cote
d'Ivoire's over the medium or long term.


NESBITT