Benin: Financial Sector Profile

Benin's economic performance has improved since the mid-2000s following successful political transition, major investments in public works and a revitalization of agricultural production. However, the economy remains largely undiversified and heavily reliant on cotton production which largely dominates exports.

Real GDP growth averaged 3.6 percent between 2002 and 2005 and 4.5 percent between 2006 and 2008, supported by important economic and structural reforms undertaken throughout the decade. Economic activity slowed in 2009 as lower cotton production, combined with weaker cotton exports, falling re-export trade to Nigeria and decreasing FDI inflows stemming from the global financial and economic crisis have caused real GDP growth to decline to 2.7 percent in 2009. Severe flooding and continued falls in cotton production in 2010 posed further challenges to economic recovery as GDP growth decreased to 2.5 percent. Never-the-less, following the presidential election in March 2011, real GDP growth increased to 3.5 percent in 2011 with similar projections for 2012 and 2013.

Benin's financial sector remains generally shallow and dominated by commercial banks. As of 2009, financial system deposits represented 24.2 percent of GDP. The supply of credit has continued to increase over the past few years, though credit growth appears to have decelerated in 2009, with total domestic credit and credit to the non-government sector expanding by 12.3 percent and 5.7 percent respectively in 2009, compared to 24.3 percent and 12.9 percent in 2008. Bank credit to the economy increased by 11 percent in 2009 to reach an estimated 19.7 percent of GDP, in part due to a reduction in regulatory reserve requirements from 15 percent to 9 percent.

As a member of the West African Economic and Monetary Union (WAEMU), Benin's banking sector, which included 12 banks as of 2013, is governed at the community level. Three large banks, holding approximately 20 percent of the assets are Nigerian, however, banking sector penetration remains low. Concentration is high, and the 4 largest banks account for about 70 percent of assets. The performance and asset quality of commercial banks has improved in recent years, although one bank has been placed under provisional administration due to severe capital deficiencies and was eventually forced to close in 2012 and liquidated. Bank loan portfolios have been adversely affected by government payment delays in early 2009; the ratio of non-performing loans to total loans has decreased to 8.1 percent in 2009, down from 9.2 percent in the preceding year, but deteriorated in the next years to reach 18.6 percent in 2012, while the capital adequacy ratio of the commercial banks was 10.5 percent (at the end of 2011) above the 8 percent regulatory threshold.

Legal and regulatory frameworks regarding licensing, bank activities, organizational and capital requirements, inspections and sanctions is in place and underwent significant reforms since 1999. Access to financial services overall has increased in the past years with private credit by deposit money banks and other financial institutions passing from 14 percent of the GDP in 2004 to 22 percent in 2010. However, interest rates offered by Beninese banks on loans to companies and households remain the highest in the WAEMU.

Benin has developed a very active microfinance sector which accounts for approximately 9.5 percent of the total loans offered by the financial sector in the country. and authorities have attached a high degree of importance to the use of microfinance as a tool to alleviate poverty. The microfinance sector is also subject to supervision through the Central Bank as well as the responsible Ministry for Microfinance and Employment of Youth and Women. However, a significant increase in the number of unlicensed microfinance institutions in recent years, with a number of them offering unrealistically attractive deposit rates, present risks of "ponzi-types" schemes and risk increasing vulnerability in the sector as a whole.

While still relatively undeveloped, regional capital markets have been expanding in recent years. The payment and settlement system and clearing mechanisms were reformed in 2004 through the Central Bank of West Africa (BCEAO) and offer RTGS and SWIFT access to banks, financial institutions, the Stock Exchange as well as the Central bank and special banks. Benin is also member of the regional Stock exchange "Bourse Regional des Valeur Mobiliés" (BRVM) located in Abidjan, Cote d'Ivoire. Stocks have been issued by a number of companies in the region. Listed bonds have been partly issued by companies and partly by governments of the West African Monetary and Economic Union (UEMOA).

As a member of the WAEMU, Benin shares a common currency, Central Bank (the BCEAO), and joint monetary policy with other member states. The BCEAO is not only responsible for the monetary and reserve policy of Benin and the other member states, but also for the regulation and oversight of financial sector and banking activity. In particular, the Banking Commission within BCEAO is the overall responsible body for matters relating to financial sector supervision.

Benin's fixed income market is integrated with that of other WAEMU member states. The Central Bank, governments and regional banks all issue bonds and treasury bills, and member states have increasingly started to issue treasury bills to finance public spending in an effort to move away from Central Bank loans, though the BCEAO remains the most important issuing entity in the region. As of March 2013, Benin received a sovereign credit rating of B by both Fitch and Standard and Poor's.

Regional and national fixed incomes markets are still in their early development stages. Issuance by corporate entities remains limited. Investors can directly access primary markets, and various brokers and dealers provide indirect access, while foreign investors participate through local banks. Commercial banks still largely dominate the investor base as the mains purchasers of treasury bills and bonds. Access to secondary markets within the WAEMU remains limited; transactions can only be conducted by certified intermediaries, while most investors adopt a buy-and-hold approach.

The insurance sector in Benin remains relatively small, with insurance premium equivalent to 1.2 percent of GDP. Eight insurance companies, two of which are majority-owned by foreign companies, are involved in the provision of life and non-life insurance products. The two largest insurance companies control almost two thirds of the entire market, reflecting a high degree of concentration. Insurance supervision is carried out through the Direction du Contrôle des Assurances, reporting to Benin's Ministry of Finance and the Commission Régionale de Contrôle des Assurances.

Two pension funds operate in the country, one for civil servants, and the other mostly for salaried employees of private sector companies. The first covers approximately 30,000 people, while the latter about 15,000 people.

Remittances are a relatively important source of foreign exchange for Benin, with inflows representing an estimated 2.2 percent of GDP in 2009.