Financial Sector Overview
Overview of Guinea-Bissau’s Economy
Guinea-Bissau is a small Lusophone country in West Africa located between Guinea and Senegal, with a seafront. Its economy primarily relies on agriculture - including cashew nut farming - and the fishing industry. After a period of political instability leading to the election of a president in 2014, Guinea-Bissau gradually returned to international financial institutions such as the IMF for the consolidation of key macroeconomic and financial indicators, through a program of reforms. The country has also put in place a Strategic Operational Development Plan (PSOD) to support the dynamic of economic growth and positively impact foreign investment. Even if Guinea Bissau's mining potential is not yet explored, the country's governing bodies should step up efforts to guarantee political stability in order to improve the business environment (Doing Business Ranking), reduce the heavy dependence on outside help and significantly improve the living conditions of the population. Indeed, according to data from the World Bank, more than 69.3% of the population lived below the poverty line in 2010.
After joining the West African Economic and Monetary Union (WAEMU) in 1997, Guinea-Bissau shares a common currency, central bank (BCEAO) and a set of legal and institutional arrangements related to the financial sectors with the following countries: Benin, Burkina Faso, Cote d’Ivoire, Mali, Niger, Senegal and Togo. These financial institutions interact in a harmonized framework around community bodies that ensure the regulation and supervision of the sector. The BCEAO regulates banks and supervises them through the WAEMU Banking Commission. The insurance and financial / stock market sectors are, respectively, regulated and supervised by the Inter-African Conference of Insurance Markets (CIMA) and the CREPMF (Regional Council for Public Savings and Financial Markets). Finally, the Inter-African Conference on Social Welfare (CIPRES) regulates and supervises Guinea-Bissau's pension system since its accession in December 2017. The financial sector is dominated by banks which hold more than 90% of the assets and there were 5 in 2016, including 3 licensed banks and 2 bank branches. In addition, 3 insurance companies and one national social security institute - dedicated to pension management - are the other main players in the national financial system. According to the IMF's Financial Access Survey, at the end of 2012, 5 microfinance institutions (MFIs) had local authority approvals and were being supervised by a dedicated unit of the Ministry of Finance out of a total of 18 institutions in operation in 2016. However, none of them complied with the operational procedures set by the BCEAO in 2018.
The Banking sector
- Although being the main provider of financing in the national economy, the banking sector remains marginal compared to the WAEMU market: it accounts for only 0.7% of total assets in the sub-region, according to the 2016 report of the WAEMU Banking Commission. 5 banking groups share the market; these include Ecobank, Banco Da Africa Occidental (BAO), Banco Da Uniao (BDU), and branches of Orabank and Banque Atlantique (Cote d’Ivoire) with a total asset volume amounting, respectively, to CFAF 75.3, CFAF 74.5, CFAF 47.5 and CFAF 43.5 billion in 2016; hence a total balance sheet of CFAF 240.8 billion, accounting for 33% of GDP in the same year5. Loans granted at an annual rate ranged between CFAF 34.4 billion in 2011 to CFAF 56.8 billion in 2016, while reaching CFAF 44.7 billion in 2014. The outstanding loans to the economy in 2016 represent 16.2% of GDP in 2016 (Financial Access Survey -IMF), while most of the credits have been directed towards the cash requirements of private productive sector enterprises, as well as individuals to a lesser extent. As for the deposits collected, they fluctuated rather strongly between 2011 and 2016, rising from CFAF 14 to CFAF 67.4 billion between 2011 and 2012, and CFAF 47.9 billion and CFAF 38.7 billion, respectively, in 2014 and 2016. This irregular growth of deposits collected by banks affects their ability to effectively support the economy through granting a regular and significant level of credit to the economy over the years.
- As for lending rates, Guinea Bissau and Niger have relatively higher rates than the WAEMU average. According to the BCEAO report on the conditions of banks in 2016, this rate amounts to 9.42% on average in Guinea Bissau in 2016, while the WAEMU average fell from 7.26% in 2014 to 6.93% in 2016. The deposit rates of the Bissau-Guinean banks are also, on average, the lowest in the Union and they decreased marginally between 2013 and 2016, from 4.71% to 4.24%. It shows that Guinea-Bissau, in WAEMU, is the least favorable country in terms of access to credit in the economy, since the debit and credit interest rates are among the highest, thus discouraging demand for credit - and the least attractive regarding the attractiveness of deposits in particular. Regarding the risks faced by banks in Guinea-Bissau, the average risk coverage ratio is 20.3% and was rather satisfactory in 2016 compared to the regional average (11.3%). This suggests that local banks have a higher perception of risk in their activities.
Financial inclusion in Guinea-Bissau
Financial inclusion in Guinea-Bissau has historically been stimulated by MFIs. However, due to difficulties faced by this sector, mobile money has a greater potential in terms of facilitating access to financial services in the country.
- Microfinance: According to the aforementioned IMF Evaluation Report (2013), while in 2012 there were 5 MFIs that had been approved by the authorities, its Global Financial Inclusion Database indicates that the country has 18 MFIs collecting deposits and granting micro-credits simultaneously. The ratio of loans granted by these MFIs to the deposits collected amounts to 40.3% in 2016; it is much lower than the same ratio (1.47) for banks in 2016. It should also be noted that the bad debt ratio was rather high in the microfinance sector in Guinea-Bissau, that is, more than 50% in 2012, according to the above-mentioned IMF evaluation report. This sector remains marginal compared to the banking sector, in terms of volume of assets under management. In 2016, the loan portfolio of MFIs was well below 0.1% of the credit portfolio of banks. Major efforts to reform and consolidate the sector must be made by government authorities, insofar as no local MFI complies with the operating procedures issued by BCEAO under the regional law on microfinance.
- Digital finance: Mobile money is still underdeveloped - transactions in 2016 accounted for less than 1% of GDP - but has an encouraging potential. Indeed, out of a total population of about 1.8 million people, there are more than 246,551 mobile money accounts created in less than 10 years of the availability of such digital financial services. However, only 10.4% of these accounts were active in 2016 according to the BCEAO 2016 report on mobile financial services. The availability of Automatic Bank Machines (ABMs) is also very low and limited to the capital, Bissau. According to World Bank estimates, about 5 ABMs are available per 100,000 inhabitants. As for the agents providing mobile money services, there were 330 in 2016, compared to 448 in 2015. Information and Communication Technologies (ICT) appear as efficient marketing channels in terms of financial costs for financial services providers in Guinea-Bissau, provided that initiatives in support of literacy rates and mobile penetration – as well as ICT-related infrastructure - are undertaken in a sustainable manner by government authorities with a view to attracting private investment.
Insurance, Capital markets and Pension Systems
- Guinea-Bissau’s insurance sector has been regulated by CIMA (Inter-African Conference of Insurance Markets) since the country's accession in 2002 to this organization, which mainly comprises French-speaking African countries. The supervision of the sector is ensured by the Regional Insurance Control Commission (CRCA) which is a CIMA body. According to the above-mentioned IMF appraisal report, the sector was made up of 3 private insurance companies in 2012 that hold a rather marginal share of the total assets of the financial sector: less than 5% of assets.
- Regarding the capital market, Guinea Bissau's financial institutions have access to the BRVM (regional stock exchange) which has a national branch in the country. Nevertheless, no local financial institution or management company is actually active in the stock exchange.
- The pension system is exclusively managed by a national social welfare institute that is engaged in a reform program with the assistance of international partners such as the ILO, with a view to improving its financial and institutional governance. According to ILO 2017 data, 6.2% of the population over retirement age receives a pension, while only 0.5% of the working population contributes to a pension scheme; this shows the severity of the medium and long term challenges the country faces in providing retirement and social security schemes for the elderly.
The financing of the real estate sector is also constrained by the limited capacity of the local banking sector to provide support in the medium and long term. Indeed, according to a CAHF report on housing finance in Africa10 in 2017, Guinea-Bissau's banks mainly lend to a few sectors, including trade and manufacturing, while mortgage loans are restricted to middle-income households and applicants with a 10-year employment guarantee, equivalent to the standard duration of a mortgage loan. The report also indicates that in 2015, mortgage interest rates ranged from 9% to 11%. Plans to extend these loans to other segments of the population are being considered by some banks. However, chronic political instability is a major impediment to the growth of long-term loans, including those for residential real estate.