Financial Sector Overview
Togo is a small West African country of 8.2 million inhabitants (2019) that shares borders with Ghana, Benin and Burkina Faso. The country has a surface area of 56,700 km2, a coastline of 56 km and one of the most efficient ports in the region. The port in the capital, Lomé, is a strategic facility for dynamic intra-regional trade, particularly with landlocked WAEMU countries. Trade within WAEMU accounted for more than half of Togo's exports in 2016. Togo is also one of 8 member countries of the West African Economic and Monetary Union (WAEMU). The real economy is dominated by the agricultural sector, which accounts for just over 40% of GDP and occupies 60% of the labour force. Although Togo was negatively impacted by a political crisis in 2017, it posted an average economic growth of approximately 7% between 2014 and 2018, slightly above the 2018 WAEMU (6.6%) and sub-Saharan Africa average (3.1%). Like other WAEMU countries, inflation remains low overall: -0.7% in 2017 and 0.8% in 2018. Moreover, a national development plan (PND) for 2018-2022 is being implemented and requires that more than CFAF 4,622 billion, or USD 7.9 billion, be raised. Priority actions under PND 2018-2022 include stimulating agricultural sector performance, investing in infrastructure, enhancing basic social services (water, health, electricity, etc.), promoting financial inclusion and initiatives in favour of women, and developing a sustainable development policy. The business environment improved significantly in the last decade. The country made a significant 19-spot jump in the World Bank Doing Business 2019 ranking to be placed 137th in the world.
Financial Sector Overview
As of end-2017, the Togolese financial sector comprised 15 credit institutions (11 commercial banks, 2 bank subsidiaries and 2 banking financial institutions), 11 insurance companies, 2 pension funds, 75 approved microfinance institutions (MFIs), 2 mobile operators providing mobile money services, 2 payment institutions and a regional branch of the sub-regional stock exchange (BRVM). Financial institutions operate within a harmonised regulatory framework organised around several Community structures, the most important of which are the Central Bank of West African States (BCEAO), the WAMU Banking Commission, and the Regional Council for Public Savings and Financial Markets (CREPMF), the Inter-African Conference on Insurance Markets (CIMA) and the Inter-African Conference on Social Welfare (CIPRES). As part of sub-regional cooperation, Togo shares a single financial market with 7 other WAEMU countries, which revolves around the Regional Stock Exchange (BRVM) based in Abidjan, Côte d'Ivoire. There is a regional market for government securities. However, this market remains undeveloped 20 years after its establishment. It continues to be dominated by short-term government securities and concentrated among local and sub-regional stakeholders. Secondary market transactions are severely limited.
The Togolese financial sector is dominated by the banking sector. Moreover, the government's budget deficits of the last decade have been significantly financed by banks and have resulted in the under-financing of the domestic private sector. The banking penetration rate in the strict sense (24%) remains low despite the entry of new players into the domestic market. However, access to financial services made significant progress between 2014 and 2017; the financial inclusion rate rose from 18% to 45%, driven by microfinance and mobile money services.
To reduce asymmetric information between lenders and borrowers in the subregional credit market, and to improve access by the population to financial services, the BCEAO in 2013 initiated a project to promote Credit Information Offices (BICs). CREDITINFO-VOLO is the approved BIC for WAMU and launched its activities on 1 February 2016 in WAMU States, the same date the uniform law regulating BICs became effective. The Togolese National Assembly adopted the law on 1 March 2016. In addition, Togolese authorities in 2012 adopted a strategy for the development of the financial sector, which comprises 5 key strategic thrusts: (i) credit institutions (banking sector); (ii) decentralised financial systems (microfinance sector); (iii) social security and insurance; (iv) public debt management and State treasury management; and (v) improvement of governance and the business environment.
Structure of the banking market - In 2017, the banking sector comprised 13 commercial banks (including 2 bank subsidiaries) and 2 banking financial institutions. The banking network has gradually expanded over the past 10 years in terms of branches, automated teller machines (ATMs) and assets. The total banking sector balance sheet in 2017 stood at CFAF 2,636.5 billion (USD 4.7 billion), or 19.6% of that year’s GDP. The number of bank branches increased from 211 in 2015 to 237 in 2017, i.e. by 12.3%, while the number of bank counters rose by 19% from 239 to 284 between 2015 and 2017. However, the banking network remains concentrated around the capital Lomé, preventing access to financial services for a wider public, especially in rural areas. Banking sector capital, which accounted for 67.4% in 2017, is mainly held by foreign shareholders.
Credit and deposit structure - The total volume of domestic credit increased from CFAF 198.5 billion (USD 385.5 million) in 2005 to CFAF 1140.6 billion in 2017 (USD 2.03 billion). Credit to the economy is mainly medium-term that has supplanted short-term credit over the years. The level of long-term credit remains marginal. In 2017, short-term credit accounted for 38.5% of the economy’s overall credit portfolio, while medium- and long-term credit accounted for 52.9% and 3.6%, respectively. Government securities holdings accounted for 15% of total banking sector assets in 2016, up from 5% in 2005, illustrating the significant growth in financing allocated to public spending. Financing of the budget deficit by banks caused a decline in credit to the private sector from 27% of total bank assets in 2015 to 20% in 2017. In terms of the breakdown of loans to the economy by sector of activity, the "agriculture, forestry and fisheries" sectors (0.1%) and "manufacturing industries" (4.4%) accounted for less than 4.5% of total credit to the economy in 2015. Deposits collected by the Togolese banking sector stood at CFAF 1,619.4 billion (USD 2.9 billion) in 2017, compared to CFAF 1,349.5 billion (USD 2.2 billion) in 2015, i.e. a 20% increase in two years. Term deposits represent the bulk of savings collected by banks and accounted for 62.5% of total bank deposits in 2017. Besides, the capacity of banks to process credit deposits has fallen sharply in a decade. The commitment ratio or the loans-to-deposit ratio decreased by 25.4% from 95.8% to 70.4% between 2008 and 2017.
Lending and deposit rates - The average lending rate in Togo was 8.1% in 2017, down 0.2% from 2016, compared to the WAEMU average of 6.9% (2017). The average rate on deposits was 5.4% in 2017, down 0.16% from 2016. This rate was slightly higher than the WAEMU average of 5.28% in 2017.
Financial strength of the banking sector - The Togolese banking sector has remained generally profitable in recent years. Profits earned by banks amounted to CFAF 27 billion in 2017 or 1.02% of the total balance sheet and 2.4% of the total volume of loans of the same year. Net Banking Income (NBI) stood at CFAF 121 billion, against CFAF 91 billion in 2016; i.e. 6.6% of the WAEMU GNP in 2017. However, like the regional banking sector, cash flow in Togolese banks continued its downward trend in 2017, with a deficit of CFAF 44.5 billion. Moreover, the average risk cover ratio (principal solvency ratio) stood at 8.4% in 2017, slightly above the regulatory minimum of 8%, while the sub-regional average is 11.7%. The sector also suffers from the poor performance of state-owned banks that recently underwent a restructuring plan. Since such banks account for 20% of market assets, they brought down the sector’s solvency ratio, leading to its undercapitalisation. Lastly, the high level of bad debts (17% in 2017) and financing of the public budget deficit by banks, as well as the concentration of credit on few economic sectors and a limited number of borrowers, contribute to the emergence of significant systemic risks in the domestic banking market. The exposure of banks to the country's top 5 borrowers was estimated at 90% of equity in 2017, and the increase in public debt financing by banks could have a significant impact in terms of the tightening of bank refinancing conditions by the Central Bank.
Regional monetary authorities have recently been working on setting up a system of financial protection against systemic risks in WAEMU, including a guarantee fund for interbank transactions, a deposit guarantee scheme and a bank resolution fund.
Although access to formal financial services remains relatively low in Togo, the country has made significant progress within a few years. While the financial inclusion rate in 2014 was 18.3% in 2014, compared to 34.2% for sub-Saharan Africa, it rose sharply in 3 years to 45.3% in 2017 i.e. slightly higher than the average for Sub-Saharan Africa for the same year (42.6%). Togo’s recent improvement in financial inclusion has been driven mainly by the dynamism of the local microfinance sector and the rapid penetration of mobile money services. Moreover, Togolese policy makers have also introduced initiatives to promote access to financial services, including the establishment of a National Fund for Inclusive Finance (FNFI) in 2014 and a Directorate for Inclusive Finance Promotion (DPFI) in 2015. FNFI has facilitated access to financing programmes for low-income earners, young people, farmers and women, while DPFI is responsible for establishing and implementing the country’s National Financial Inclusion Strategy and monitoring the FNFI.
The Microfinance Sector
Togo’s microfinance is governed by WAEMU zone laws and regulations. Supervision is provided jointly by the Central Bank of West African States (BCEAO) and the Support and Monitoring Unit for Mutuals or Credit and Savings Cooperatives (CAS-IMEC) housed in Togo’s Ministry of Economy and Finance. According to recent data from March 2018, the microfinance sector in Togo has 75 institutions (MFIs) licensed to operate as of 2017. These institutions are also called "decentralised financial systems" (DFS) in the WAEMU context and include 7 mutual networks and 4 associative-type MFIs. In 2018, the network of MFIs was denser than the banking network. There are about 12 MFI agencies per 100,000 people in Togo, compared with 5 bank branches per 100,000 inhabitants. The country also has more than 2.3 million MFI clients against approximately 1 million bank customers. In March 2018, the country had 15.1% of MFI deposits outstanding in WAEMU (ranking third after Senegal and Côte d'Ivoire), and 12.7% of micro-credit outstanding, ranking fourth after Senegal, Côte d'Ivoire and Burkina Faso. MFI lending rates in 2017 ranged from 5% and 24%, while credit rates varied between 3.5% and 7%. In all, deposits collected by MFIs amounted to CFAF 174.1 billion as of March 2018, or 10.7% of the total volume of bank deposits in 2017. Loans granted in March 2018 stood at about CFAF 145 billion, with a majority share dedicated to trade and real estate.
Overall, MFIs in Togo face certain challenges, including partial supervision of the sector (limited to around 20 MFIs), the high number of informal financial networks, delays in the digital transformation of MFIs, and the lack of MFI information and management systems, as well as the impact of MFI engagement in FNFI activities on their capitalisation ratios.
The rapid development of the banking sector has fostered the development of ATM infrastructure. There were 284 ATMs in 2017 (compared to 104 in 2010), or almost four per 100,000 inhabitants. Nonetheless, the emergence of digital finance is fairly recent in Togo and is mainly driven by Mobile Network Operators (MNOs) providing mobile money services. The country enjoys quality telecommunications and Internet connectivity infrastructure, although access costs remain relatively high. Cash settlements are the most common form of transaction. The proportion of adult holders (over 15 years old) of mobile money accounts has risen sharply in three years from 1.4% of the population in 2014 to 21.5% in 2017, a level significantly above the average for sub-Saharan Africa (20.9%) and low-income countries (17.6%). Togo had 2.98 million mobile accounts (of which 35% active) in 2017, compared to 1.44 million in 2016, i.e. an increase of more than 100% in one year. The annual value of transactions also increased significantly between 2014 and 2017, up from CFAF 5 billion to CFAF 263.1 billion in 2016 and CFAF 394.3 billion in 2017. At the sub-regional level, the country accounted for only 6% of the number of mobile money accounts and 3% of the value of transactions in 2017 (Côte d'Ivoire and Burkina Faso are the leading markets in WAEMU).
Togo is a member of the Inter-African Conference of Insurance Markets (CIMA), a pan-African organization of 14 countries responsible for supervising insurance company activities and the development of the sector in member countries. In 2017, the total life and non-life premiums issued in Togo amounted to CFAF 57.7 billion (USD 103 million), or 2.1% of GDP in the same year, amounting to the highest penetration level in the sector in the WAEMU region, ahead of the sub-regional economic leader, Côte d'Ivoire (1.4% in 2017). Non-life and life premiums accounted for 58.6% and 41.4% of total premiums, respectively. Despite its modest size, the sector is experiencing rather encouraging growth. Between 2009 and 2017, premium levels increased by 140.4%: it is the second-best performance in WAEMU after Burkina Faso. However, the sector faces difficulties in complying with mandatory insurance, which is not yet effective. For example, only 30 to 50% of motorists in Togo subscribe to mandatory insurance policies.
The Capital Market
Togo is home to a local branch of the Regional Stock Exchange (BRVM), which has its headquarters in Côte d'Ivoire. Established in 1996, the BRVM comprises the eight (8) member countries of the West African Economic and Monetary Union (WAEMU): Benin, Burkina Faso, Côte d'Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo. BRVM national branches are operational in other member countries to ensure the effectiveness of real-time resident transaction orders on the regional stock market. The BRVM is considered the sixth African stock market in terms of capitalisation. As of 31 December 2018, only two banking institutions with corporate names in Togo were listed on the BRVM. The local financial market is mainly driven by the Treasury's issuance of debt securities, to which Togolese banks have significantly subscribed. State-owned banks in Togo accounted for almost 15% of total assets in 2017.
The risk capital market is still embryonic in Togo. Between 2013 and 2018, Togo recorded only 2% of the 282 private equity transactions in West Africa, for only 1% of the value of transactions: USD 108 million. The largest private equity markets in the region are Nigeria and Ghana, accounting respectively for 73% and 20% of the value of transactions.
Social Welfare System
In 2013, Togolese public authorities rolled out an Accelerated Growth and Employment Promotion Strategy (SCAPE), the third strategic thrust of which is partially dedicated to social protection, in view of transforming it into a key instrument to combat poverty in the country. The Togolese pension system is managed by two institutions: the National Social Security Fund (CNSS), which covers private sector workers, and the Togo Pension Fund (CRT), which manages the pension scheme for civil servants and the armed forces (police, gendarmerie and military). Togo is also a member of the Inter-African Conference on Social Welfare (CIPRES), a regional body covering 17 African countries that aims to promote a common management framework and the effectiveness of social protection in member countries. The CIPRES headquarters is in Lomé. The statutory retirement age is 60 (55 in some cases), and the payment of retirement benefits is subject to a compulsory contribution over 15 years at least. The contribution rate to the CNSS is broken down as follows: 12.5% (employer) and 4% (employee), amounting to 16.5%. For the CRT, the employee contributes 7% of their basic salary while the State contributes 20% of the employee's basic salary, which amounts to 27%.
Therefore, the CRT appears to have one of the highest contribution rates in Francophone Africa for public sector pension funds, after the FNR in Senegal and the CMR in Morocco. The same applies to the CNSS, which has a relatively high contribution rate for employers, slightly above the average for French-speaking African countries (15.96%). For the private sector, pension system costs can undermine business competitiveness and the country’s comparative advantages in terms of foreign investment. Lastly, the two pension funds operate according to a pay-as-you-go system. However, the CNSS began preliminary work in 2014 with a view to adopting a supplementary funded scheme.