Financial Sector Overview
The Gambia is the smallest country on mainland Africa. Its economy is limited and undiversified, relying primarily on tourism, agriculture, and remittances inflows. It is also vulnerable to external shocks, such as the recent West African Ebola crisis and poor harvests. As a consequence, The Gambia’s growth has been mediocre, with real per capita GDP growth between 2004 and 2014 averaging less than 0.5 per cent per year, one of the lowest in sub-Saharan Africa (SSA). The country was reclassified as a fragile state in 2014, which mainly reflects the deterioration in its macroeconomic conditions, in particular the recent significant build-up of public debt and large balance of payment imbalances.
The Gambia’s financial system comprises the Central Bank of the Gambia (henceforth, CBG), 14 commercial banks, and other financial institutions including 13 insurance companies, microfinance institutions and foreign exchange bureaus. There is also two licensed finance companies, namely Reliance Financial Services Ltd, a non-bank financial institution providing deposits, loans and remittances service to medium/low-income Gambians, and the National Association of Cooperative Credit Unions of The Gambia (NACCUG), the apex body for all credit unions in the country. The NACCUG promote and support the development of credit unions through various services including capacity building and finance facilities.
The financial system is largely dominated by commercial banks, the majority of which are foreign owned. The country also has a fixed income market but it is relatively small and largely limited to government securities.
Table 1 : Main Financial Institutions in The Gambia, – Number of, 2010-2016
Source: Central Bank of The Gambia. Note: VISACAS: Village Savings and Credit Associations.
The level of financial depth in The Gambia, approximated by financial system deposits or by deposit money banks’ assets to GDP, is well above the rest of African countries. Global Financial Development Data (GFDD, 2016) shows that in 2014, the ratios of financial system deposits to GDP and deposit money banks’ assets to GDP for The Gambia were, respectively, 20% points and almost 16% points above their median in sub-Saharan Africa (developing only).
However, the private sector credit to GDP ratio for The Gambia in 2014 was approximately 3 percentage points below the median for sub-Saharan Africa (developing only).
Deposit money banks dominate the financial system and are the sole providers of credit to the private sector. Data are not available on the relative size of stock markets as well as on the size of non-bank financial institutions in the economy.
Table 2 :
Source: Global Financial Development Database, 2016. *Developing only.
Two key features emerged from the evolution and allocation of bank credit over the past few years. First, government borrowing is increasing, with the issuance of short-term Treasury Bills to finance government fiscal operations, which in turn crowds out private lending sharply. The share of The Gambia’s government T-bills in total bank assets increased from 23.7 per cent in 2008 to 32.7 per cent in 2012. Over the same period, the share of private sector credit in total assets decreased from 23.6 per cent to 21.2 per cent. Loans to the public sector increased marginally, from 2.6 per cent to 3.7 per cent. Second, agriculture continues to be the lowest recipient of credit from commercial banks, despite being the second-largest contributor to GDP after the services sector. The share of total bank lending to the agriculture and fishing sectors decreased sharply over the 10-year period between 2004 and 2013, from an average of 16.4 per cent in 2004 to 2006 to an average of 4.8 per cent in 2011 to 2013.
Lending to the manufacturing sector was virtually non-existent until 2010, reflecting the fact that it is a small and undeveloped sector, contributing less than 5 per cent of GDP (CBG, 2013). The share of total lending to this sector averaged 5.8 per cent between 2010 and 2013.
The sector “trade, tourism and finance” received the largest share of bank credit over the decade, averaging 35 per cent of total bank credit. Its share has expanded recently, going from 31.3 per cent in 2009 to 41.7 per cent by the end of 2013. (see Chart 1).
A substantial portion of commercial banks’ loans and advances is unclassified: this category of loans received the second-largest share of total bank lending, averaging 20.9 per cent over the period, followed by the “personal loans” category, which constituted 15.9 per cent of total bank credit on average.
Chart 1 :
Source: Data from the Central Bank of the Gambia
Bank interest rates
Average rates on lending remained sticky at the 21.5 to 22.5 per cent range between 2009 and 2013. Over the same period, the minimum rate on 3-month time deposits remained within the 3.5 to 5 per cent range.
Data from the World Bank’s Global Financial Development Database (2016) shows that bank lending-deposit spreads in The Gambia are among the highest in SSA: over the period 2010-2014, they varied between 12 and 16 per cent; the median spreads for the group of developing countries in SSA remained below 10 per cent over the same period.
The prolonged high interest rates, partly caused by the government’s high net domestic borrowing, have been damaging to the private sector, and in particular to state-owned enterprises, contributing to the deterioration of NAWEC’s (water and electricity) and GAMTEL’s (telecommunications) financial position (IMF, 2015a).
Other causes of high interest rates include high reserve requirements, high overheads as well as legal and institutional difficulties in recovering loans and realising collateral.
There is a dearth of financial access data for The Gambia. The recent IMF Financial Access Survey Database (2015) has few indicators but only up to 2012 (see the Table of financial access indicators appended at the end of the report).
The Government’s reform agenda continues to be based on the country’s Vision 2020 long-term development plan and the medium-term Programme for Accelerated Growth and Employment (PAGE), which was adopted in 2012, with the aim of accelerating economic growth and development.
Strengthening the financial system is one of the goals of the first pillar on “Accelerating and sustaining economic growth”. In that perspective, the CBG is in charge of implementing several reforms to increase the robustness of the banking system, including the increase in the statutory capital requirement from D150 to D200 million in 2013 (US$4.4 million to US$5.8 million 1 ), the introduction of an IT platform automating the processing of regulatory returns, and the migration from a hybrid supervisory framework that considers both compliance and risk to a fully-risk based framework (more details below) (Ministry of Finance and Economic Affairs, 2011:50).
The CBG has tightened its monetary policy in recent years, given the macroeconomic vulnerabilities. The policy rate was adjusted upward from 12 per cent at year-end 2012 to 20 per cent in the second half of 2013. However, deposit oney banks’ average lending rate to the major sectors of the economy remained unchanged at 21.5 in December 2013 compared to 2012. The policy rate was subsequently increased to 22 per cent in August 2014 and was at 23 per cent in the first quarter of 2016.
Policies to increase access to private sector investment are underway. To improve loan recovery, the CBG established a Collateral Registry, which became fully operational in July 2015. This should help banks realising collateral, and lead to lower domestic interest rates.
Efforts to safeguard financial stability and supervision have also been made, following a recent episode with two small financially distressed Nigeria-based banks that were preventively recapitalised by the CBG in May 2014 (IMF, 2015b)
The CBG is upgrading its credit risk stress test and is in the process of establishing National Crisis Resolution Framework Plans to strengthen supervision. It also plans to migrate from a hybrid compliance and risk-based supervisory framework to a fully risk-based format once the architecture to implement risk-based supervision is completed. Finally, since December 2013, commercial banks have been submitting their audited accounts in accordance with International Financial Reporting Standards, in compliance with a CBG Directive.
Other important developments in The Gambia’s financial infrastructure include the creation of the Financial Intelligence Unit (FIU) in 2012, charged with Anti-Money Laundering (AML) and Combating Terrorism Financing (CFT).
The banking industry of The Gambia in 2016 consists of fourteen banks, of which one is an Islamic bank, and thirteen are conventional commercial banks. This marks an expansion of the number of banks from eight in 2006. The number of bank branches per 100 000 adults increased from 5.2 in 2006 to 8.8 in 2012 (more recent data are not available).
The banking system is highly concentrated, with the six largest banks accounting for 81 percent of assets in the system while the top four borrowers account for 54 percent of the total loan portfolio (World Bank, 2015).
Assets and liabilities
The asset base of banks expanded significantly between 2004 and 2013, growing by over 300 per cent over the 10 year period (Chart2). This may be explained by the entry of six new banks over the period, coupled with the geographic expansion of bank branches.
The growth of banks’ loans and advances and that of banks’ deposits have also been striking. The volume of total deposits nearly quadrupled, while the volume of total loans and advances increased by a factor of 3.7 over the same period.
Chart 2: Non-Performing loans to total loans (in % ).
Source: MFW4A. Data from Central Bank of Liberia.
Commercials banks’ holdings of government commercial papers, including Treasury bills and bonds constitutes the highest share of total assets, accounting for 33.8 per cent in 2013. Loans and advances accounted for 23.5 per cent of total assets the same year.
On the liabilities side, deposits account for the largest share of total liabilities, up to 63.8 per cent in 2013. Capital and reserves both accounted for 12.8 per cent of total liabilities that same year. Time and savings deposits constitute the largest part of total deposits. They accounted for 56.5 per cent of total deposits on average over the 5-year period 2008-2012. Demand deposits accounted for 32.7 per cent on average over the same period.
In terms of transformation of deposits into credits to the private sector, the loans-to-deposits ratio is relatively low and has fallen from 42.3 per cent in 2010 to 36.9 per cent in 2013 (Chart 2). This may be explained by banks’ increasing preference to lend to the central government (Chart 1). These relatively low levels of loans-to-deposits ratios reflect the low level of financial intermediation in the economy.
Source: Data from the Central Bank of The Gambia.
The banking system as a whole is profitable, liquid and well capitalized. Over the 2011-2015Q1, Return on Assets (ROA) and Return on Equity (ROE) for the industry stood respectively at 3.2 per cent and 19.3 per cent on average.
The capital adequacy ratio was close to or above 30 per cent over the period 2011-2015, well above the minimum requirement of 10 percent.
Also, the ratio of liquid assets-to-short-term liabilities averaged 76 per cent, compared to the statutory minimum of 30 percent. This high-level of liquidity is due to significant holdings of treasury bills relative to total assets (World Bank, 2015).
The non-performing loans (NPL) ratio declined in 2015, representing 7 per cent of gross loans, after peaking at 20.5 per cent in 2013. The high NPL ratio by end-2013 was mainly attributable to the huge volume of NPLs from one bank.
However, challenges remain. Firstly, credit concentration is significant: the top four borrowers account for 54 percent of the total loan portfolio. Secondly, there is significant variation in financial soundness indicators between banks. In particular, the capacity of some of the larger banks to absorb an increase in nonperforming loans (NPLs) or an external shock is potentially lower than the aggregate indicators would suggest (World Bank, 2015). Finally, fiscal distress related to government overspending has had a damaging impact on financial sector stability, given the high commercial banks’ exposure to government debt.
Chart 4: Financial soundness
Note: All banks. Period average in per cent
Source: IMF (2015a; Gambian Authorities).
Non-Bank Financial Institutions
Alongside banks, the Gambia’s financial system comprises a variety of other financial institutions that include:
Microfinance Institutions (MFIs): These institutions comprise Savings and Credit Associations (SACAs) - savings and credit organisations owned by a rural organisation under provisional registration by the Bank of Gambia, which includes the VISACAs (Village Savings and Credit Associations)– and Micro-Savings and Credit Institutions, (MISACI), which are upgraded SACAs and are regulated by the CBG.
Village Savings and Credit Associations (VISACAs) are registering a significant growth in membership and deposits.
Membership rose from 35,031 members at year-end 2011 to 42,104 at year-end 2013, while deposits rose from GMD13.2 million at year-end 2011 to GMD18.5 million at year-end 2013.
Managerial quality remains an issue for many VISACAs, but support from the IFAD-funded Rural Finance Project and technical backstopping from the VISACA APEX, founded two years ago, has helped revived several dormant VISACAs, increasing the number of active VISACAs to 68 in 2013, up from 62 in 2012. In addition, financial innovation has allowed some VISACAs to engage in money transfer services, including in remote areas. That said, the CBG noted in its 2013 -Annual Report that the VISACAs still suffer from a lack of adequate training of their cashiers and management - committees.
Credit Unions: There were 72 active Credit Unions at year-end 2013, supervised by The National Association of Cooperative Credit Unions (NACCUG), itself regulated and supervised by the CBG as a financial institution.
Insurance: There are thirteen insurance companies, including one Takaful/Islamic operator, Takaful Gambia Limited. Six of the thirteen companies are 100 per cent locally owned, five are of partly foreign-owned, and two are entirely foreign-owned. The thirteen insurers have a branch network of 27 offices spread across the country. The industry is regulated by the Insurance Act 2003, the Insurance Regulations Act 2005, and the Insurance Amendment Act 2006, which provides for the operation of Takaful. In addition, there are nine brokerage firms.
Credit Reference Bureau (CRB): The CBG established a Credit Reference Bureau (CRB), which became fully operational in July 2009 following the amendment of the Banking Act to allow banks to share confidential customer data through the Credit Reference Bureau. The CRB is now fully functional, but there have been delays in the updating of borrowers’ information by commercial banks (IMF, 2015a).
Mobile money services are still at a formative stage in The Gambia. The Central Bank of The Gambia, acting under sections 52 and 75 of the CBG Act 2005, introduced a regulation for the provision of the mobile Money services on October 15, 2011. This regulation allows telecoms operators to provide mobile money services, opening the way for a telecom-led development of this service. It also stipulates the requirements for the provision of this service. In particular, the capital requirements are set at ten million Dalasis (US$233,400 ), with a security deposit of five million Dalasis (US$116,700).
So far two GSM companies formed subsidiaries and successfully went through the licensing process. They were granted license in early February 2016 to provide mobile money services. The first is Africell, which launched its mobile money service “Africell money service” in February 2016, allowing subscribers to send and receive money through their mobile phone. The second, QCell launched its mobile money services under the brand name ‘Qodoo’ in March 2016.
Table of selected financial access indicators, The Gambia, 2010-2012
Source: IMF Financial Access Survey, 2015. Note: data unavailable after 2012.