Financial Sector Overview
Cabo Verde is a small archipelago of ten islands in West Africa whose population was 550,000 inhabitants in 2018. Cabo Verde was taken off the list of least developed countries (LDCs) in 2018 and reclassified as a middle-income country (MIC), thanks to a substantial rise in per capita income and significant human capital formation. The Gross Domestic Product (GDP) per capita increased from USD 975 to USD 3,633 between 1991 and 2017, an almost four-fold rise in average income in a quarter century. Economic growth between 2014 and 2018 also remained robust, at 4% on average. Trade openness, measured as the ratio between the sum of exports and imports normalised by GDP remains high (101% in 2017) compared to the sub-Saharan African average, which is around 60%. However, the Cape Verdean economy is still heavily dependent on tertiary-sector performance, including tourism specifically, which accounted for 61.3% of GDP in 2017, compared to 6% for the primary sector, which employs over two-thirds of the country’s active population. The Euro-zone’s sluggish economy negatively affected Cabo Verde’s public debt, which peaked at 126% of GDP in 2017. Strongly anchored to the Euro, the local currency, the Cape Verdean Escudo (CVE), enjoys a certain amount of stability and average inflation was rather low (0.3%) between 2013 and 2018. Cabo Verde ranks 131st out of 190 in the Doing Business 2019 ranking, four spots down from 2018. Political and institutional stability, together with the upsurge in tourism, fishing and public construction, are assets for investment attractiveness and have, so far, offset the potentially adverse effects of macroeconomic vulnerability and climate change.
Financial Sector Overview
The Cape Verdean financial sector has grown significantly in recent years. It essentially comprises 7 commercial banks, 2 insurance companies, 1 stock exchange, mobile money operators and microfinance institutions. Between 2010 and 2016, financial sector assets grew by about 67%. They represented 139% of GDP at end-2016, or USD 2.28 billion. The sector is mainly dominated by the banking segment, whose assets represented 85% of the sector’s total assets in 2017. The financial depth level stood at 86% of GDP at the same time, therefore higher than the average for the West African region and other island countries of the continent. The central bank, Banco de Cabo Verde (BCV), oversees the accreditation, regulation and supervision of financial sector players, including banks, the stock market, microfinance institutions and insurance companies. Until 1993, BCV played the role of both monetary authority and sole commercial bank. The Banco Comercial do Atlantico (BCA) was Cabo Verde’s first private bank and inherited BCV’s commercial operations in the same year.
As part of the reform of the regulatory and supervisory framework, the central bank set up a macro-prudential unit and strengthened monitoring procedures in order to mitigate credit, exchange and interest rate risks. BCV also takes measures to protect consumers of financial services. Through its consumer support office (GAP), the central bank monitors the quality of financial institutions' services to their customers, defining specific rules to protect their rights and interests, and proposed guarantees. In addition, SME financing in Cabo Verde remains the subject of significant constraints, despite measures taken by the BCV, such as the establishment of a mutual credit guarantee system (CVGarante) and a public credit register.
Lastly, the stock exchange, Bolsa de Valores de Cabo Verde, was established in 1998. Its capitalization reached CVE 67.8 billion (USD 700 million) in February 2019, 35.4% of the previous year's GDP.
Banking Market Structure - In 2017, the banking market consisted of 7 commercial banks, mostly subsidiaries of Portuguese banks. Total domestic banking assets stood at CVE 240.3 billion in 2017, or 149.4% of GDP. Two banks dominate the market with nearly 67.3% of loans and 71.8% of deposits in 2017: These are Banco Comercial do Atlantico (BCA) and Caixa Economica de Cabo Verde (CECV). Ten international offshore banks, with few links to local banks, are also part of the Cape Verdean banking market with assets equivalent to 107% of GDP in 2017. The intermediation role of offshore banks in the domestic market has been limited by stricter regulations. They also present a growing risk in correspondence banking relations, which are a significant part of their activities. Ecobank is the only pan-African bank subsidiary in the domestic market (onshore) together with Portuguese bank subsidiaries and a bank with mixed capital (held by local and Portuguese shareholders). The Cabo Verde banking system is highly based on remittances by the diaspora, which have increased significantly in recent years. They accounted for about 38% of total deposits in 2017 and about 37% of GDP the same year.
Credit and Deposits Structure - Credit to the economy and the government represents a significant share of total balance sheet of the banking sector in Cabo Verde, accounting for 42% in 2016 and 2017. The net domestic credit volume grew from CVE 126.4 billion (USD 1.2 billion) in 2015 to CVE 139.3 billion (USD 1.5 billion) in 2017, an increase of 10.2% in 2 years. Net credit to Government accounted for 22.6% of net credit granted in 2017. The main sectors benefiting from bank credit during the year are as follows: Trade, Restaurants and Hotels (23.2%), Transport and Communications (21.2%) and Social and Personal Services (18.4%). Deposits constitute the bulk of liabilities of banking institutions. They stood at CVE 199.9 billion in 2017, or USD 2.2 billion. They have risen steadily in recent years (+5.7% in 2017 and +10.6% in 2016). The transformation (loan-to-deposit) ratio in the banking sector peaked in 2011 (86.4%) before trending down to 55.8% in 2017.
Deposit and Lending Rates - Between 2012 and 2017, the central bank’s key interest rate dropped from 5.75% to 1.5%. Interest rates applied to residents on loans with maturities of 181 days to one year fell slightly from 8.51% in 2012 to 7.35% in 2017; while rates of loans with maturities r of one to two years, and more than ten years, remained fairly stable over the last five years, standing at 9.98% and 8.66 % respectively in 2017. Credit rates on deposits in 2017 were around 2.2% against 3% on average in 2014, 2015 and 2016.
Financial Soundness of the Banking Sector - Despite the substantial contribution of banks to the strengthening of the financial sector, their prudential soundness indicators are troubling given the poor quality of their assets and rather limited profitability. Although banks’ equity capital varied significantly from one bank to the other, they represented only 7.7% of total assets in the sector at end-2016 with several banks facing capital inadequacy. In March 2017, BCV withdrew the accreditation of a public bank (Novo Banco) and transferred its assets to the second-ranked market leader. The proportion of non-performing loans is also relatively high, although it decreased slightly from 16.5% in 2015 to 14.5% in 2017. Return on assets (ROA) is low and stood at 0.38% on average between 2015 and 2017, while the return on equity (ROE) was 5.4% over the same period. In comparison, the WAEMU (West African Economic and Monetary Union) average stood at 1.17% for ROA and 15.5% for ROE in 2016. However, the banking market’s liquidity level remains comfortable due to the growth and volume of remittances and government deposits. In order to limit risks to which banks are exposed, the BCV decided to gradually increase minimum capital requirements. Banks have to hold equity capital equivalent to 10.5% of total assets from January 2018, then 11.25% in January 2019 and 12% in January 2020.
Bank financing of the economy, estimated by the ratio of bank credit to GDP is relatively high in Cabo Verde: 86% in 2017. However, private sector companies and households suffer from rather limited access to financing due to risk aversion, which pushes banks to invest their liquidity with the central bank and in government securities. The downward trend of the BCV’s key rate to 1.5% in 2017 did not affect real lending rates charged by commercial banks, which averaged around 10%. The proportion of adults holding an account in a banking institution certainly increased from 12.5% to 15.4% in between 2010 and 2017. However, this figure was slightly lower in 2015 (18.7%). The number of Automated Teller Machines (ATMs) within a 1000 km2 radius stood at 44.4 in 2017, lower than that of other island countries of the continent such as Mauritius (221.2) and Seychelles (121.3). Although they account for over 90% of the domestic productive fabric, Cabo Verde’s small- and medium-sized enterprises (SMEs) received only 58% of loans granted in 2016; while 22% of companies were financed by banks, 48% by informal and family investors and 14% by microfinance institutions.
In recent years, monetary and government authorities have introduced major structural reforms to improve access to finance for SMEs and very small enterprises (VSE). A national credit guarantee system (CVGarante) was established in 2010 together with a public credit registry with low coverage (20% in 2016) limited to banks. CVGarante, however, is negatively impacted by weaknesses in its governance, scope of intervention and lack of credibility given to financial information published by local firms.
The Microfinance Sector
Cabo Verde’s microfinance sector is small and underdeveloped. It comprises non-profit institutions focussing their activities to two islands: Santiago and Fogo. The total loan portfolio of microfinance institutions (MFIs) in 2017 stood at around USD 6 million, with an average credit level of around USD 545. The sector serves approximately 11,000 customers or about 3% of the adult population, and bank refinancing of Cabo Verde’s MFIs is still subject to significant real estate guarantees. In recent years, the regulatory framework has been strengthened by the BCV to improve MFIs’ financial reporting, support government intervention in the sector and better secure MFI refinancing by commercial banks.
The rapid development of mobile telephony in Cabo Verde is encouraging the emergence of digital and mobile financial services. The mobile telephony penetration rate measured by the number of single subscribers compared to the total population was 67% in 2017 - one of the highest levels in West Africa. Based on the criterion of the actual number of mobile subscriptions in relation to the total population, the mobile penetration rate in 2017 reached 124%. Two mobile operators drive the local market: Cabo Verde Telecom (CV Telecom) and Unitel + (TMais). However, financial institutions like Cabo Verde GMT have been offering mobile money services since 2015 accessible via the internet and the diaspora, and disconnected from mobile operators.
The insurance penetration rate remained fairly stable at 1.4% between 2013 and 2017, while the insurance density (average premium per capita) reached USD 47 in 2017, against USD 42.2 in 2016. Up 24.1% over one year, total insurance assets in Cabo Verde amounted to CVE 6.4 billion in 2017, or USD 69.6 million representing 4% of GDP in the same year. 70% of the asset structure of insurance companies is made up of investments whose composition generally includes, in order of importance, variable-yield investment securities, land and real estate, bank term deposits and fixed-yield securities.
The insurance industry has strong prudential and growth indicators, although according to the 2017 BCV report, the banking sector’s level of exposure is still high. Insurance companies hold a significant stake in bank capital and deposits. The volume of production, investment and net income in the insurance sector rose simultaneously and respectively by 6.5%, 36% and 21.9% in 2017, in comparison to 2016. The equity of companies in the sector also rose by 27% as a result of a significant increase in reserves, while the coverage of technical reserves reached 119% of the regulatory level in 2017. The solvency margin, allowing companies to hedge against unforeseen risks, rose to 275.9%, or thrice the minimum level required.
The Cape Verdean capital market is mainly driven by the local stock exchange, Bolsa de Valores de Cabo Verde, whose capitalization reached CVE 67.8 billion (USD 700 million) in February 2019, or 35.4% of the previous year's GDP. In 2017, there were four listed firms, 11 listed corporate bonds, 2 municipal bonds and 195 listed treasury bills. Capitalization stood at 39.9%, compared to 41.5% in 2016, and was dominated in value terms, almost 80%, by securities representing the debt issued by government. Commercial banks constitute the vast majority of purchasers of fixed income assets.
Of a total of CVE 14.6 billion (USD 158.8 million) issued in 2017 on the primary securities market, 83.9% were government debt securities. The remainder (16.1%) consisted of bonds issued by three firms (including two public companies). Corporate bond issues reached CVE 2.3 billion (USD 25.4 million) in the same year, while the domestic portfolio of government-issued securities peaked at CVE 12.3 billion (USD 134.3 million). The secondary market is very poorly developed and very illiquid: trade accounted for only 0.1% of GDP in 2017, compared to 8.1% of GDP for securities issues on the primary market.
The National Social Security Institute (INPS), Instituto Nacional de Previdência Social, manages the social protection system, including the compulsory pension scheme for salaried workers (including civil servants since 2006) and self-employed workers. About 20% of the working-age population is covered by a pension scheme. Contribution rates for retirement are as follows: 3% for salaried workers (plus 1% for INPS management costs) and 7% for employers (plus 1% for small companies and 2.8% for large companies), while self-employed workers contribute 11.5% of their salary for their retirement (including 1.5% for management costs). The statutory retirement age is 65 for men and 60 for women, and entitlement to a retirement pension is subject to a minimum contribution period of 15 years. INPS is also an important systemic institution. It holds the largest volume of deposits in the domestic financial system, accounting for 15.5% of total deposits in 2017, and is a major shareholder in two financial institutions.
Lastly, there is also the National Centre for Social Pensions (CNPS), Centro Nacional de Pensões Sociais, which manages a non-contributory pension programme for disadvantaged elderly persons and is entirely financed by the government. In 2016, public expenditure on this scheme amounted to 0.93% of GDP and 68% of people over 60 benefited from it.