Financial Sector Overview
A former Portuguese colony and member of the Southern African Development Community (SADC), Mozambique is classified as a low-income country with a gross domestic product (GDP) per capita of USD 490, among the lowest in the world (2018). However, the country is endowed with about 150 trillion cubic feet of natural gas reserves and ranked third and twelfth largest natural gas reserve in Africa (after Nigeria and Algeria) and the world, respectively. It also has a significant hydropower potential and a favourable geographic location providing maritime access to several landlocked countries. Despite these assets, Mozambique remains particularly vulnerable to frequent natural disasters (cyclones, floods and drought). The country has recovered from a 16-year civil war that ended in 1992 and has resumed economic growth, with GDP growing at an average 7.8% over the period 2001-2015. Capital-intensive investment in the extractive sector has helped to boost domestic demand, creating conditions for rapid growth. The share of agriculture in GDP decreased from 29.5% in 2010 to 23.5% in 2017, due mainly to extensive or subsistence farming methods, even though the sector is the country's main source of employment (about 75% of the population). Average GDP growth slowed down between 2016 and 2019 to 3.1%. The decline is attributable to several factors, including lower prices for the main commodities (coal, aluminium and tobacco), leading to reduced export revenue, and natural disasters, which have significantly impeded the country's economic recovery efforts. Moreover, the loss of confidence among international donors caused by the revelation in 2016 of "hidden sovereign debts" led to a major financial crisis and negatively affected domestic growth. According to the IMF, the stock of public debt that attained about 110.5% of GDP in 2018, continues to weaken the economy.
The business environment is still unattractive, and the country ranked 138th on the World Bank’s Doing Business report (out of 190 economies), down 3 places compared to 2018. Poverty levels are high (48.4% of the population in 2015) although there has been relative improvement compared to 2009 (58.7%). Lastly, the Government has drawn up a long-term development strategy for the period 2015-2035, to be implemented based on five-year programmes. The strategy aims to improve the living conditions of the people through structural economic transformation as well as expansion and diversification of domestic production.
Overview of the Financial Sector
The domestic financial sector includes 19 commercial banks, 9 micro-banks, 24 exchange bureaus, 3 mobile money service providers, 21 insurance companies and several pension funds. There are 4 savings and credit cooperatives and 69 specialized microcredit finance institutions.
The financial sector is still underdeveloped and dominated by a banking sector with an embryonic capital market and limited capacity to effectively finance the private sector. Significant reforms have been implemented to consolidate and stabilize the financial sector. These include risk-based supervision by the Central Bank in line with the Basel II Agreements and strengthening the fight against money laundering and terrorist financing. Parliament approved amendments to Law No. 14/2013 in May 2018 for the full implementation of the United Nations’ Security Council Resolutions on freezing terrorist assets (Resolutions 1267 and 1373).
Banking Market Structure – In 2018, the banking sector consisted of 19 banks compared to 12 in 2005. The country also has 659 bank branches (214 in 2005) mostly in the urban areas (about 71%). In 2017. The five largest banks accounted for 81% of sector assets, 81.2% of loans and 85.3% of deposits. Most of the banks are subsidiaries of foreign groups, mainly from Portugal or South Africa. All but one of the banks are privately owned. Most of the banks (at least 9) are small, with capital of less than MZN 1.7 billion (USD 27 million).
Credit and Deposit Structure of the Banking Sector – Loans granted in 2017 represented 41% of total assets compared to 53% in 2016. The restrictive monetary policy recently implemented by the central bank contributed to decelerating credit to the economy from 36.8% of GDP in 2016 to 28.1% of GDP in 2017. Moreover, the high cost of credit has limited the ability of many borrowers to repay their debt, further sharpening banks' caution towards loan applicants. Credit to the private sector accounted for about 26% of GDP in 2017, down from about 35% in 2016. Rising interest rates also increased bank demand for short-term government securities (treasury bills). The sources of financing of banking institutions are mainly customer deposits, which accounted for 84.4% of their liabilities in 2017. Demand deposits remain the main component of customer deposits (63% in 2017).
A Deposit Guarantee Fund (FGD), established by Decree No. 4/2010 of 11 March 2010, was set up to protect customer deposits. The objective of this Fund is to reimburse deposits made in banks if the latter prove to be insolvent or have their licence withdrawn. However, the Fund provides low-level guarantee per depositor (MZN 20,000 equivalent to USD 321.1). It is also limited in scope since it only covers deposits in local currency and less than 1% of deposits, well below the 3% target. In 2016, the Central Bank withdrew the licence granted to Nosso Banco, a bank representing less than 1% of the sector's assets. The revocation followed a deterioration in prudential and profitability indicators, especially the low capitalisation and serious management (non-compliance with reserve requirements) and liquidity (for meeting commitments to customers) problems facing the bank. The guarantee fund contributed to the recovery of part of the depositors' assets.
Deposit and Credit Interest Rates – The central bank tightened its monetary policy in 2016 to reduce inflationary pressures and restore macroeconomic stability. Inflation had since fallen significantly from 25.3% in 2016 to 5.65% in December 2017. In April 2019, the year-on-year inflation rate stood at 3.25%. The decline in inflation facilitated the implementation of a loose but prudent monetary policy to keep the inflation rate below 10%. Measures included reducing the interbank market rate (MIMO) from 21.75% in April 2017 to 19.5% and 14.25% at the end of 2018. Furthermore, the Central Bank lowered the reserve requirement rate for local currency liabilities from 15.5% to 14% in October 2017. However, it increased the reserve requirement ratio for foreign currency liabilities from 14% to 22% in March 2018 and 27% at the end of 2018, to contain the inflationary impact on the exchange rate. Despite these measures, the rate increased from 21.2% in 2016 to 27.9% in 2017. The average deposit interest rate also rose (from 10.8% in 2016 to 17.1% in 2017). Consequently, the interest spread stood at 10.8% in 2017 compared to an average of 6.2% in 2010-2015. This increase reflects banks' preventive management of credit risk coverage, and structural problems such as high operating costs, lack of credit information, insufficient collateral and weak competition in the sector.
Financial Strength of the Banking Sector: The Central Bank's Notice No 04/GBM/2013 provides the reference framework for the implementation of prudential rules in compliance with Basel II principles. To ensure adequate levels of liquidity and solvency, the Central Bank increased bank solvency ratios from 8 % to 12 % (Notice No 08/GBM/2017). It has also raised the minimum capital requirement for banks from MZN 70 million (USD 1.1 million) to MZN 1.7 billion (USD 27.3 million), a provision (Notice No. 08/GBM/2017) to better respond to the risks inherent in banking activity as well as the adverse conditions of the national economy. Banks have until 2020 to comply with this new minimum capital requirement. As part of the strengthening of banking sector supervision, the publication of reports on the systemic risk of commercial banks has been done quarterly since September 2017. These provisions have enabled the banking sector to remain broadly well-capitalized, liquid and profitable, despite the deterioration in loan portfolios. The capital adequacy ratio increased from 8.8% in 2016 to 23.8% in 2018, above the regulatory minimum of 12%. The frequency of overnight borrowing from the central bank was limited to 2 days per week, forcing banks to strengthen their liquidity management. Therefore, the liquidity ratio (broadly defined) increased slightly from 37% in 2017 to 39.3% in 2018. However, given the sharp increase in the non-performing loan ratio, the quality of bank assets deteriorated considerably. That ratio increased from 5.7% in 2016 to 12.6% in 2017 before falling to 11.1% in 2018. The quality of banking assets deteriorated due to a combination of factors including slower economic growth, high real interest rates and large arrears by government and state-owned enterprises. The government issued two series of bonds totalling MZN 7.4 billion (USD 119.3 million), or 0.9% of GDP, directly to commercial banks in 2017 in exchange for expired government bonds. The provisioning requirements following the implementation of IFRS 9 (effective since January 2018) helped to keep the provisioning rate for non-performing loans at a comfortable level. The rate was 95.7% in 2018 compared to 87.4% in 2017. Sector profits did not reflect the deterioration in asset quality. Return on equity (ROE) and assets (ROA) stood at 29.8% and 3.1% in 2018 respectively, against 9.9% and 0.7% in 2016. The increase in commercial bank returns is attributable to high interest rates, the rise in income from holding public securities and various fees and commissions generated by banking activities.
The country has a National Financial Inclusion Strategy (SNIF, 2016-2022), aimed at expanding access of over 60% of the adult population to financial services by 2022, by strengthening financial infrastructure, consumer protection and financial education. According to the World Bank's 2017 edition of Global Findex, 41.7% of adults have an account, a level slightly below the sub-Saharan average (42.6%). Inadequate basic economic and financial infrastructure (such as central credit or securities registries) is a barrier to financial inclusion. The cost of borrowing for households remains high, while high costs and low economic density in some areas make it impossible for banks to set up branches. Moreover, lending to the agricultural sector, which employs a large proportion of the population, remains particularly limited and accounted for only 4% of loans to the economy in 2017 compared to an average of 12% in 2000-2010. Lastly, certain legal requirements hinder financial inclusion. These include the obligation to present a national identity card when opening a bank account, although around 42% of adults do not have this document. Persons under 21 years of age are also not allowed to open bank accounts, thereby excluding about 55% of the population.
Efforts have been made to improve financial inclusion through financial education programmes implemented by the Central Bank since 2014. Such programmes cover consumer awareness of financial services and competition between financial services providers and consumer protection. Awareness-raising activities have contributed to improving financial inclusion in rural areas, including the government's "one district, one bank branch" programme. However, access points are still limited in many districts. Only 55% of Mozambique's 154 districts have at least one bank branch. The authorization given to banks or micro-banks to use bank agents, according to Notice No. 3/GBM/2015 of 4 May, also aims to increase the national financial service coverage rate.
The Central Bank regulates and oversees the payment system (Law No. 02/2008 of 27 February). Significant progress has been made in this area. The volume of RTGS processed transactions increased to attain 31.6% of GDP in 2017. The Central Bank cancelled the limit for international credit card payments set at MZN 700 000 (USD 11 292) per year to further liberalize the sector. By 2017, the country had 1 744 ATMs and 31 169 POS terminals. Digital finance is also fast expanding with the rapid spread of mobile money transactions handled by three providers in the country. According to the IMF (Financial Access Survey, 2019), the number of mobile money accounts more than doubled between 2014 and 2018, from 226 accounts per 1,000 adults to 489 accounts per 1,000 adults. The value of transactions per mobile phone increased to 18.4% of GDP in 2017 against an average of 0.9% over the period 2014-2016. Despite its expansion, the mobile money sector is still dominated by one operator, mPesa, which in mid-2018 held 3.5 million active mobile money accounts. The country had more than 32,000 mobile money agents in May 2018.
The payment system's inter-operability remains almost non-existent for the moment at the retail payment level, especially between mobile money operators and banks. Mozambique is the only country in the SADC region that does not have a comprehensive system for settling large-value funds, while the RTGS system is waiting to be upgraded to international standards for financial market infrastructure. The number of mobile money agents in rural areas with sufficient liquidity is still relatively low, which reduces the volume of transactions. Difficulties in identifying account holders due to the often non-existent documentation also impede the implementation of customer identification procedures (KYC - Know Your Customer). The public's preference for cash settlement of transactions, especially in rural areas, remains high owing to limited awareness of the benefits of e-money. Lastly, although the volume of electronic transfers has increased, a significant share of government payments to beneficiaries of social programmes is still almost exclusively in cash.
SMEs account for more than 95% of legal businesses in Mozambique. They generate 28% of GDP and provide 42% of formal employment, but only 2% of micro-, small- and medium-sized enterprises (MSMEs) have access to bank loans. Limited information, lack of knowledge about SME activity and uncertainty about the profitability of their activities (Republic of Mozambique, 2016) are pushing banks towards other more lucrative business opportunities at the expense of SMEs. When operating in rural areas, particularly in the agricultural sector, SMEs have features that pose additional constraints on access to credit, such as inadequate storage and marketing infrastructure, the physical distance between production units, and their relatively small size. The sluggish administrative and judicial system (warranty registration and debt recovery) is another risk for banks, leading to additional costs and risks. These factors reinforce the perception of greater credit risk vis-à-vis SMEs, pushing banks to raise lending rates.
The Insurance Sector
The insurance sector is narrow with a low penetration rate (1.5% of GDP in 2016 against 1.3% in 2012). However, the sector has become increasingly attractive in recent years owing to its dynamism. From 12 companies in 2012, the sector had a total of 21 insurance companies in 2018, with more than half specializing exclusively in the non-life segment. The insurance sector is supervised by the Insurance Supervisory Institute of Mozambique (ISSM). The sector's performance enabled it to record about MZN 13 159 million (USD 207.5 million) in gross written premiums in 2018, i.e. an increase of 1% compared to 2017. The sector remains focused: the top 5 companies represented 91.7% of the written premiums in 2018. Moreover, Law No. 2/2003 of 21 January 2003 makes mandatory the third-party automobile liability insurance which is still the dominant segment of the non-life branch with 29% of the market share.
The insurance sector's assets amounted to MZN 31 247.4 million (USD 501.5 million) in 2018 while shareholders' equity stood at MZN 11 983.6 million (about USD 192 million). The sector's investments in 2018 amounted to MZN 21 651.2 million (USD 347.5 million), most of which (38.5%) were in real estate. However, several insurance companies remain under-capitalized. A corrective measure to this situation was the May 2018 adoption of a decree to increase the minimum capital required for insurance companies. The capital required was raised from MZN 33 million (USD 528 865) to MZN 97 million (USD 1.6 million), and companies were given 3 years to comply. This measure aimed to strengthen the financial soundness of the sector and guarantee compensation to policyholders. Moreover, the autonomy of the supervisory body (the ISSM) remains limited. Almost all regulatory decisions, including the application of sanctions, require the approval of the Ministry of Finance, which is the supervisory authority.
The Capital Markets
The capital market is embryonic and its contribution as an alternative source of financing for the domestic economy is limited. Only 6 companies had listed shares in 2018 on the Mozambique Stock Exchange (BVM), in addition to 20 government and 13 corporate bonds. The market capitalization in December 2017 amounted to USD 1.23 billion (9% of GDP), of which USD 668 million (4.9% of GDP) was in government securities. The Central Bank acts as the stock exchange regulator and supervisor and is responsible for managing treasury bill auctions. Treasury bills are not listed on the stock exchange for monetary policy reasons.
The absence of a specialized active community that can play the role of market maker (brokers) means that stock market activity is maintained at an extremely low level. Brokerage is mainly carried out by 12 commercial banks. Mozambique ranks 25th out of 54 countries (26th in 2016) in the annual African Bond Market Development Index published by the African Financial Markets Initiative (AFMI).
The Social Security System
In 2016, the country adopted a National Basic Social Security Strategy (ENSSB) for the period 2016-2024. Two social protection schemes are being implemented: a non-contributory scheme consisting of basic social benefit programmes for vulnerable groups, managed by the National Institute for Social Action (INAS), and a mandatory social security scheme that incorporates benefits from the various contributory mechanisms. The agencies responsible for this scheme are the National Social Security Institute (INSS), covering private sector employees with a contribution rate set at 7% (4% paid by the employer and 3% by the employee), and the National Social Welfare Institute (INPS ) established by Decree 8/2014 of 19 February for public servants and State employees. In 2017, the national basic social security system covered 507,840 households. Approximately 1,400,000 workers were covered by the compulsory scheme in 2017 of whom 47,000 were retirees. Expenditure on social action programmes increased from 0.24% of GDP in 2012 to 0.59% in 2017. The target set in the National Strategy (ENSSB) is to allocate 2.23% of GDP to social welfare by 2024.
Contributions in 2018 of about 10,628 pension fund members amounted to MZN 812.6 million (USD 13.1 million), an increase of about 29.7% over the previous year, which was also due to the 32.5% increase in the number of contributors. The total value of assets of supplementary pension funds increased from MZN 3 173.1 million (USD 50.9 million) in 2017 to MZN 9 537 million (USD 153 million) in 2018, representing an increase of 49.9%, attributable to the establishment of new registered pension funds. The asset portfolio is still predominantly made up of government bonds.
However, pension coverage is still limited to workers in the formal sector and is around 7% of the population, which is among the lowest in the region. Efforts to expand coverage to informal sector workers have not yet produced meaningful results. ENSSB II aims to target about 10% of the population by 2024. Other challenges in the sector include the lack of institutional coordination of social security programmes and poor contribution recovery.
 Mozambique is frequently hit by cyclones, floods and drought. The country has more than 2,500 km of coastline on the Indian Ocean. The rapid warming of the ocean places Mozambique among the most vulnerable countries to climate change and natural disasters.
 The 2019 data is an IMF estimate.
 The 2015-2016 drought known as "El Niño", followed by tropical cyclones "Dineo" in February 2017, then "Idai" and "Kenneth" in March and April 2019 respectively, caused enormous material and infrastructural damage. Emergency assistance and reconstruction needs following Hurricane "Idai" were estimated at about USD1.5 billion (10% of GDP), and the subsequent floods destroyed about 800,000 hectares of crops.
 FGD: Fundo de Garantia de Depósitos. This Fund is made up of an initial contribution from the government (MZN 60 million or about USD 1 million), the Central Bank (MZN 30 million or about USD 0.5 million) and premiums paid by financial institutions (MZN 15 million or about USD 0.25 million). The first annual premiums from the banks were not paid until May 2017.
 Mercado Monetário Interbancário de Moçambique (Mozambique Interbank Money Market)
 According to this Notice, banks or micro-banks may use bank agents in the exercise of their functions to expand their activities. The latter may be private individuals, public or private sector companies, including fixed or mobile telephone companies, postal service operators, credit unions, or other entities approved by the Central Bank.
 The Central Bank operates a real-time bulk settlement system (RTGS), with 16 out of a total of 19 banks connected.
 The mobile money service providers are: mPesa by Vodacom, mKesh by mCel and eMola by Movitel. Mobile money was launched in 2011 and is regulated by the Central Bank.
 República de Moçambique (2016) : “Pequenas e Médias Empresas Em Moçambique : Situação e Desafios”, Ministério da Indústria e Comércio, Março de 2016 (Republic of Mozambique (2016): "Small and Medium Enterprises in Mozambique : Situation and Challenges", Ministry of Industry and Commerce, March 2016).
 The Instituto de Supervisão de Seguros de Moçambique (Mozambique Insurance Monitoring Institute)
 Bolsa de Valores de Moçambique (Mozambique Stock Exchange)
 Estratégia Nacional de segurança social Básica (National Basic Social Insurance Strategy)
 Instituto Nacional da Acção Social (National Institute of Social Action)
 Instituto Nacional de Segurança Social (National Institute of Social Security)
 Instituto Nacional de Previdência Social (National Institute of Social Welfare)