Cape Verde: Financial Sector Profile

Decades of strong economic performance, combined with a rapidly expanding tourism industry, substantial capital inflows and significant investments in infrastructure and telecommunications, have helped Cape Verde move towards a service-based economy. The economy is concentrated in services, which account for 80 percent of the GDP and tourism, which dominates the tertiary sector, contributes approximately to 80 percent of it, accounting for about 26 percent of total GDP.

Real GDP growth averaged 7.3 percent a year over the 1992-2001 period and 6.4 percent a year between 2002 and 2008. Economic growth slowed following the global economic and financial crisis, with falls in tourism, construction and foreign direct investments (the later decreasing by 44 percent in 2009) contributing to a decline in real GDP growth from 6.2 percent in 2008 to 3.7 percent in 2009. The economy has however recovered, with real GDP growth reaching 5.2 and 5 percent in 2010 and 2011 respectively and stable projections for the next two years.

Cape Verde features a small but well established financial system which has been rather resilient to the effects of the financial crisis thanks, in part, to limited integration with global capital markets and relatively strong prudential regulations. Over the years there have been improvements in product and service offerings, taking Cape Verde into the forefront of high-tech banking practices, including mobile banking, in a country where over 75 percent of the adults population owns a mobile phone.

Cap Verde's banking system, dominated by Portuguese private capital, comprises of an onshore market including 5 commercial banks and an offshore market with 8 international banking institutions, remains generally sound, although the financial crisis has resulted in some increased vulnerability. By late June 2010 the overall capital adequacy ratio for the onshore banking sector stood at 12 percent, while liquid assets represented 15.6 percent of total assets. However two banks have fallen below minimum prudential requirements, with one bank somewhat under-capitalized and another placed under corrective actions. Profitability and asset quality for the sector as a whole deteriorated in the aftermath financial crisis; between end-2008 and June 2010 the share of non-performing loans to total loans increased from 10 percent to 13.4 percent, but fell to 5.5 percent in the 2010-2011 timeframe. Deposits from the Diaspora, which account for almost 37 percent of total deposits in the banking sector, have however remained steady and continued to grow by over 5 percent year-on-year. Increasing inflows of foreign deposits attracted by high onshore interest rates, and currently exempt from reserve requirements, risk increasing the sector's vulnerability to destabilizing capital inflows, though authorities are looking to adopt new prudential regulations and impose punitive minimum reserve requirements to address the issue.

The provision of housing finance services is heavily geared towards the tourism industry and emigrants building their second homes on the island. However, bank exposure to real estate is largely through residents, with loan-to-value ratio averaging 80 percent.

The microfinance sector remains small, with only about 50,000 clients. A recent study indicated that about 75 percent of the unemployed population eligible for financial services offered by microfinance institutions (MFIs) was unaware of either the MFIs in general or the services they offered, indicating the sector's limited penetration and visibility.

Authorities are actively pursuing reforms to regulatory and supervisory frameworks and revising banking laws in efforts to further safeguard financial stability. Planned measures include establishing of a macro-prudential unit within the Central Bank, enhancing supervisory procedures and strengthening supervisory capacities, and developing prudential regulations to address credit, foreign exchange and interest rate risks.

Though liquidity levels remain relatively low, the Cape Verde Stock Exchange has been revitalized and registers steady growth. The stock market now plays an important role in capital mobilization, and raises about 94 percent of private credit.

Activity on Cap Verde's fixed income market is increasing as authorities continue to expand primary and secondary markets for government debt instruments. Government securities largely dominate the market and authorities regularly issue a diverse range of debt instruments of varying maturities. Non-government securities issuance is relatively limited, though a few transport companies, real estate operators and commercial banks do issue a few corporate bonds, with the first non-government-guaranteed private bank bond issued in 2008. As of March 2013, Cap Verde received sovereign credit ratings of B+ by Fitch and Standard and Poor's.

Commercial banks largely dominate the fixed income market's investor base, though the Cap Verde Diaspora also represents an important share of small-scale investors. Issuance of all government securities is handled by the Central Bank and all non-government instrument transactions are conducted through commercial banks. However, government bonds are, for the most part, not fungible, and the primary market is largely dominated by the National Social Security Institute which fragments the markets and constrains liquidity on the secondary market. Secondary market activity is thus limited and most investors adopt a buy-and-hold approach; though activity is likely to increase as the authorities have identified the expansion of the secondary market as a key aspect of the country's debt market development strategy.

Financial Sector Development Indicators
  2007 2008 2009 Average Africa 2009
Liquid Liabilities /GDP 0,781 0,803 0,824 0,412
Deposit Money Bank Assets / GDP 0,617 0,646 0,679 0,32
Other Financial Institutions Assets / GDP n.a. n.a. n.a. 0,288
Private Credit By Deposit Money Banks and Other Financial Institutions / GDP 0,449 0,478 0,508 0,272
Bank Credit / Bank Deposits 0,631 0,631 0,631 0,728
Net Interest Margin n.a. n.a. n.a. 0,069
Bank Concentration n.a. n.a. n.a. 0,841
Stock Market Capitalization / GDP n.a. n.a. n.a. 0,947
Remittance Inflows / GDP 0,1 0,084 0,071 0,237
Mobile Cellular Subscriptions (Per 100 People) 30,955 55,682 - 40,33
Private Credit Bureau Coverage (% Of Adults) 0 0 0 4,539
Public Credit Registry Coverge (% Of Adults) 20,3 21,8 23 2,575