Overview of the Financial Sector

Morocco has achieved a relatively high level of financial development with a sophisticated banking system that has expanded rapidly both domestically and across the African continent. Its financial sector comprises 19 commercial banks, 7 of which are majority foreign-owned and 5 majority state-owned, 5 licensed intermediary banks, 28 finance companies, 6 offshore banks, 13 micro-credit associations and 13 payment institutions. There are 6,503 local bank branches and 7,289 ATMs.  

The intermediary banks that are part of the Islamic finance sector, started operations in 2018. That year, Morocco issued its first sovereign Sukuk for the domestic market worth MAD 1 billion (USD 103.8 million). The International Financial Reporting Standard (IFRS 9) was adopted on 1 January 2018.

The Banking Sector

Banking Market Structure – The Moroccan banking sector is among the most efficient in Africa, with an international network covering 35 countries, including 27 in Africa, 7 in Europe and one (1) in Asia. The sector comprised 45 subsidiaries and 15 branches with nearly 1,427 outlets outside the country. In 2018, the banking sector’s total balance sheet stood at MAD 1 341 billion (USD 139.4 billion), or 122% of GDP, a 5.5% increase over 2017. The share of the top three banks in the sector's total assets stood at 64.3% and that of the five largest banks at 78.7%. The banking density in terms of the number of branches per 10 000 inhabitants was two (2) compared to one (1) fifteen years ago. The banking penetration rate is 74%.

Credit Structure and Banking Sector Deposit – Bank credit attained MAD 891 billion (USD 92.6 billion), or 81% of GDP, up 6.5% compared to 2017. This increase was supported by VAT credit financing operations in 2018. Bank credit to the private sector amounted to MAD 765 billion (USD 79.6 billion), or 69.5% of GDP, up 2.4% over a year. Loans are mainly allocated to households, which account for about 32% (MAD 284 billion, or USD 29.5 billion) of total credits from the banking sector. Loans to the public sector stood at MAD 126 billion, i.e. USD 13.1 billion. Customer deposits stood at MAD 928 billion (USD 96.5 billion), an increase of 2.9% compared to 2017. In 2018, sight and term deposits accounted respectively for 61% and 18.3% of total deposits, while the share of savings accounts stood at 17.1%. The majority (50%) of bank deposits were from private individuals.

Lending and Deposit Rates – Monetary policy was accommodative in a moderate inflation environment. The Central Bank maintained its key interest rate at 2.25% as of March 2016. Lending rates dropped slightly from 5.5% in 2017 to 5.2% in 2018. Despite the shortage of liquidity in the money market, deposit rates fell by 3 and 9 basis points for 6- and 12-month deposits, respectively, between 2016 and 2017.

Financial Strength of the Banking Sector

The Central Bank successfully implemented the transitional capital adequacy provisions in accordance with Basel III agreements. The sector maintains adequate levels of capitalization and liquidity. The solvency and Tier 1 capital ratios exceed the regulatory minima by 12% and 9%, respectively. The short-term liquidity ratio^[1] averaged 135% in 2018, above the required level of 90%. The non-performing loans ratio remained relatively high (6.8% in 2018) but provisioning levels were still adequate (around 70%). Although providing opportunities for diversification and profit, the cross-border activity of Moroccan banks, mainly in Africa, is also potentially a channel for transmitting risk (such activities account for about 20-30% of total assets and one-third of profits). Bank profits remain positive despite the decline in net banking income and the increase risk-related costs. Return on assets (ROA) and return on equity (ROE) were stable at 0.9 and 9.5% in 2017 and 2018, respectively.

Financial Inclusion

Although the number of bank branches has more than doubled since 2010 (from 4,800 to nearly 12,700 in 2017), the Global Findex results highlight the low level of financial inclusion in Morocco. The proportion of adults with bank accounts is 28.8 percent, well below the average for lower-middle income countries (57.8 percent). The inclusion rate is even lower among various population segments, particularly women (16.8%), low-income households (19.3%) and rural dwellers (20%), compared to respective averages of 53%, 50.7% and 57.6% in comparable countries.

The main obstacles to financial inclusion are low income levels, offers that are not adapted to the needs of low-income segments and the socio-cultural exclusion of women, among others. The informal sector is significant (11% of GDP) and the financial services it offers (family, tontine, advances from small businesses, etc.) are widely used: 15% for savings and 23% for credit compared to 6 and 3% respectively for formal services. To address the situation, the country adopted a National Financial Inclusion Strategy in 2019 aimed at reducing the most significant inclusion gaps.

The Microfinance Sector

The sector has 13 Microcredit Associations (MCAs) with a network of 1,767 outlets and 890,000 clients, nearly half of whom are women. The Central Bank regulates the sector that is represented by the National Federation of Microcredit Associations. The sector finances income-generating micro-projects in several areas including trade, agriculture, handicrafts and services. Loans extended to clients amounted to nearly MAD 6.8 billion (USD 705 million) in 2018, of which almost 92% were granted by the three largest associations; 88% of total loans were extended to microenterprises and nearly 76% were concentrated in urban areas. Outstanding loans decreased by 8% to about MAD 204 million in 2018 (USD 21.2 million). This improvement was due to the write-off of overdue receivables. The coverage rate of these receivables by provisions rose to 86% against 82% in 2017. In 2018, return on assets and equity stood at 2.4% and 6.6%, respectively.

The sector has recovered from the severe crisis it faced between 2008-2011 as a result of efforts to streamline and adapt offers to the market, capacity building and a strong collaborative approach among all sector stakeholders.  The sector adopted a national microfinance strategy in 2012, one of the objectives of which was to reach 3.2 million active beneficiaries by 2022. Morocco is today considered as the leading microfinance market in the MENA region.

Despite this progress, MCAs serve only 10% to 20% of the target market. Moreover, the financing obtained by MFIs from banks contributes to raising interest rates that are between 30 and 35%. Poor risk management practices are another aspect of current challenges. In this regard, the Central Bank issued Circular No. 3/W/2018 in July 2018, which imposed new requirements on adapting the risk management, internal control and governance mechanism to the nature, complexity and volume of MCA activities.

Digital Finance

The financial market infrastructure comprises an interbank system for large-value payments and two retail payment systems (the electronic money switch and the Moroccan interbank remote clearing system). The Casablanca Stock Exchange and Maroclear Central Custodian are dedicated to securities clearance, settlement or delivery.

The number of card payments, including ATM and online services, stood at about 56.1 million for a value of MAD 24 billion (USD 2.5 billion), i.e. a 24.6% increase between 2016 and 2017. This increase was mainly due to a rise in the number of Electronic Payment Terminals (EPTs) and the expansion in e-commerce through bill payment services (telephone, water, electricity, etc.) and tax collections (stickers, tax, etc.). The e-Gov services launched as part of the Maroc Numéric 2013 (Digital Morocco 2013) Plan and aimed at modernizing the administration and local authorities currently account for around 12.6% of online payments, with a sharp increase in recent years (+98.2% between 2016 and 2017). However, digital financial services are still limited despite these advances. The payment ratio ^[2] is low (below 17% in volume and 9.03% in value in 2017), owing mainly to large cash withdrawals, which account for the bulk of bank card transactions. Nearly 90% of payments are made in cash and about one-third of remittances are paid directly in cash without recourse to the banking system. This is because of the strong tendency to use cash and the unfamiliarity with the mobile money financial services. Less than 1% of adults have a mobile money account compared to 5.3% on average in similar economies.

SME Financing

SMEs account for 93% of active businesses in Morocco, more than 38% of GDP, 46% of total employment, 50% of investments and 30% of exports. Their survival rate stands at 62% five years post-establishment and they hardly grow in size. SMEs are generally financed by banks. 

Bank loans to SMEs account for about 17% of GDP. This level is relatively high compared to the prevailing average in the Middle East, North Africa, Afghanistan and Pakistan (MENAAP) region. However, access to financing continues to be an obstacle for SMEs. Their low profitability and inability to meet requirements of financial institutions are partly responsible for this difficulty of access. For micro-, small- and medium-sized enterprises (MSMEs), the financing gap represents 31.4% of GDP compared to an average of 11.4% for MENAAP. The relatively high degree of concentration of credit to large and public enterprises partly explains this gap. Only 42% and 57% of small- and medium-sized enterprises, respectively, benefited from a bank loan or line of credit, while the rate for large enterprises was as low as 76%. The number of micro-enterprises with access to bank financing is even lower (6% according to the IMF); 91% of loans granted by banks to SMEs are contingent on guarantees that are not always available to MSMEs. Moreover, long delays in payment by customers increase the working capital financing needs of SMEs. Stock market financing is still limited.

Several initiatives have recently been implemented to increase credit for SMEs and improve their access to it. These include the upward revision of the micro-credit ceiling from USD 5,000 to USD 15,000 and the extension of public guarantees for bank loans to SMEs up to USD 100,000 through the Central Guarantee Fund. Another initiative involves the Caisse de Dépôt et de Gestion (Deposit and Management Fund - CDG), which offers appropriate credit packages to finance investment projects and the cash flow needs of SMEs. In 2019, CDG and Banque Centrale Populaire signed a refinancing agreement for SMEs amounting to more than MAD 1 billion (USD 103.5 million).

Insurance

In 2017, the sector comprised 23 insurance and reinsurance companies, 1,865 intermediaries, including 1,416 agents and 449 brokers. The sector has significant potential. Considered the second African market in terms of premium volume, it recorded MAD 41.4 billion (USD 4.3 billion) of written premiums in 2018 (an increase of 6.3% compared to 2017), 56% of which by non-life insurance. Motor insurance accounts for the large share of the non-life segment, with 48.1% of issue. Due to its compulsory nature and the growth of the vehicle fleet, motor insurance is rising steadily. Life insurance and capitalization dedicated essentially to savings (80.4%) continue to develop thanks to bank insurance. The sector remains financially viable with a return on equity (ROE) of 9.4% and an average of 9.7% over the last five years. The solvency margin was 414%, more than four times the required regulatory minimum.

Revenue is still concentrated: the top 5 insurers collect nearly 69.6% of the turnover and only 2% of intermediaries generate 53% of the market turnover. The growing involvement of banks in the sector could worsen the situation. Although efforts have been made to dematerialize (possibility for agents and brokers to fill in their declarations online), these are constrained by the difficulties related to the necessary digital signature on insurance policies. The result is a break in the digitization of the subscription procedure, as the physical contract is still indispensable at certain levels. Furthermore, modernizing the sector and bringing it into line with international standards has been subject to significant delays. Morocco ranks first in the Arab world in terms of insurance penetration rate. However, the rate itself remains relatively low (3.74% against 3.66% in 2017), compared to developed countries.

Capital Market

Morocco has a small capital market. As in 2016, the Treasury primarily financed itself through medium-term issue (55.8% of total capital in 2017). The institution's aim is to manage its domestic debt in the medium term while anticipating a decline in long-term rates. Issues on the private debt market amounted to MAD 76.6 billion (USD 7.9 billion) in 2017 - a 52% improvement over 2016 resulting from the joint increase in negotiable debt securities and corporate bonds. The volume of corporate bond issues amounted to MAD 24.8 billion (USD 2.6 billion) in 2017. The preponderance of bonds issued by the banking sector, accounting for 52% of total emissions from the banking sector, is not conducive to risk diversification and is therefore an obstacle to the sector's development. Morocco ranks 8^th (6^th in 2016) in the annual ranking of the African bond market development index published by the African Financial Markets Initiative.

On the stock market and following an annual performance of 30.46% recorded in 2016, the MASI (Moroccan All Shares Index) closed 2017 with an increase of 6.39%. Initial public offerings (IPOs) have been rare in recent years, contributing to the sluggishness of the Casablanca Stock Exchange initial market. In total, six (6) IPOs helped to mobilize the equivalent of USD 498 million between 2014 and 2018. The stock market is still underdeveloped compared to other countries. Its liquidity is structurally limited, with a liquidity ratio of 10.35 in 2017 against 25.74 and 30.71 for South Africa and Egypt, respectively. The gap is wider with emerging stock exchanges such as those in Brazil (67.02%) and Turkey (165.76%). Market capitalization, although important in the economy, showed a declining trend (from 74% of GDP in 2010 to 57% of GDP in 2017) partly due to the sporadic use of the stock market by the private sector, both for exit strategies and capital increases. The stock market is still concentrated (five stocks accounted for more than 57% of market capitalization in 2017) and heavily dependent on cyclical sectors, thus exposing the market to severe disruption. The development of assets on offer and the increased involvement of institutional investors on the demand side are other challenges to be met to boost the market.

Social Security

Contributions under the pension schemes³ amounted to MAD 50.5 billion (USD 5.2 billion) in 2018, or 4.4% of GDP for 4.6 million active members representing 42.3% of the workforce. Benefits stood at MAD 56.7 billion (USD 5.9 billion), or 5% of GDP and accrued reserves totalled MAD 310 billion (USD 32.2 billion), an increase of 5.5% compared to 2017. Pension plan investments attained MAD 305.9 billion (USD 31.7 billion), an increase of 4.8% compared to 2017. The structure of these investments showed the preponderance of bonds with a 70% share of total assets.

These schemes are part of a system that is still limited in many aspects. The coverage rate also remains low, with almost 60% of the workforce not included in any pension plan. The system is also marked by unequal treatment of pensioners. The average retirement pension paid by the CNSS is MAD 1,924 (about USD 200) compared to MAD 4,861 (USD 504) by the RCAR and MAD 6,875 (USD 713) by the CMR. Constraints also stem from the plethora of technical supervisors and control bodies, and weak coordination. Lastly, the financial viability of some schemes is questionable. This is the case of the WRC which, despite the parametric reform initiated in 2016, faces pressures that continue to threaten its short-term sustainability. Its overall deficit has increased by MAD 1 billion (USD 104 million) compared to that recorded in 2017, while its reserves have dropped by an average of MAD 1.7 billion (USD 176 million) over the last two years. It is projected that CMR reserves will be exhausted by 2027.

^[3] Morocco has five general pension schemes, including the Moroccan Pension Fund (Caisse Marocaine de Retraite - CMR), which is responsible for two schemes (the Civil Pension Scheme (RPC) and the Military Pension Scheme” (CMR)), the “Consolidated Retirement Benefit Scheme” (RCAR) for semi-public sector employees, the National Social Security Fund (CNSS) for private sector employees, and the Moroccan Interprofessional Pension Scheme (Caisse Interprofessionnelles Marocaine de Retraite - CIMR) as optional supplementary scheme for private sector companies.