Restructuring Senegal's ailing banks

NUMBER 120 * ED Preciss Operations Evaluation Department June 1996 Restructuring Senegal's Ailing Banks Senegal's first World Bank-supported eral countries, the problems in the and by liberalizing prior authori- Financial Sector Adjustment Program banking sector were also acute. But zation mechanisms. Banks that (approved in 1989 and closed in 1992) for the union, the most critical case did not meet the prudential ratio succeeded in restructuring the banking was Senegal's, which accounted for risked losing their license. Finally, sector. The restructuring followed one-fifth of the combined GDP of the program abolished the dual regionwidefinancial reforms adopted the union and more than a fourth interest rates (a discount rate for by the West African Monetary Union of its bad loans. In 1988, Senegal's loans, targeted for priority sectors (UMOA) and was the forerunner for nonperforming loans made up and a normal rate) replacing them similar operations in other countries half the value of the country's total by a single rate fixed to the Paris of the union. The reforms led to the loans, the equivalent of 3.7 times money market rate. Though an closing of weak banks and helped the sum of capital and reserves improvement, the reform did not strengthen viable banks through a held by the country's banks. fully liberalize the interest rate, program of partial privatization and which remains for the next finan- financial restructuring. Although But neither Senegal's nor any of cial adjustment to complete. the program failed in collecting the other member countries' finan- nonperforming loans, particularly cial crisis could be addressed with- The Senegalese reform of the from large borrowers, it succeeded in out first correcting the banking, banking sector followed the re- helping the remaining banks become credit, and monetary policies of gional reforms and was sup- solvent. the union's central bank: Banque ported by IDA through a $45 Centrale des Etats de l'Afrique de million financial sector adjust- In Senegal, the reform of the bank- l'Ouest. In 1989 members of the ment credit, with $34 million cofi- ing sector took place at the same time Council of Ministers of UMOA nancing provided by France and as the country's fourth structural ad- agreed on a regional reform pro- $33 rmillion by the United States. justment program, and about three gram, inspired by an earlier pro- While the key decisions on credit, years before the CFA franc devalua- posal made by the World Bank. banking, and monetary policies tion. The delay in the exchange rate The reform measures: were taken up by UMOA, re- adjustment severely undermined the forms in Senegal focused on re- other policy reforms being undertaken * closed loopholes to established limits structuring the country's ailing under the structural adjustment opera- on credit by bringing crop credits banks to prevent the collapse of tion. But it proved fortuitous that the and refinancing of government banking reforms had just been com- guaranteed loans under the central pleted when the government carried bank's ceilings, and by abolishing 'Performanice audit rteport: out the devaluation in 1994. The banks preferential borrowing costs. Setegeal Tlhe Fou rtli Structural were in relatively good shape, thus en- .AlljuslinIcnt Credit and Financial abling the financial sector to remain . strengthened bank supervisioni by Sector Adjus tmnent Credit," by calm during the adjustment. The expe- giving the central bank sole respon- Gerardo Siat, Report No. 14818, rience once again highlights the impor- sibility for defining accounting June 1995. Performance audit re- tance of a strong banking sector in standards, setting prudential ratios, ports are available to Bank execu- countries undergoing adjustment. and supervising banks in all mem- tive directors and staff from the ber countries. Internal Documents Unit and During the 1980s the seven from Regional Information Ser- countries of West African Mon- * liberalized credit allocations by vices Centers. Precis written by etary Union were mired in eco- progressively abolishing sector and Farah Ebrahimi. nomic and financial crises. In sev- bank-by-bank allocation of credit  the banking system. The reforms Senegal's two specialized SNR's, reducing pressure on the ran parallel with Senegal's fourth banks-the national agricultural newly restructured banks. structural adjustment program, credit bank and the housing bank- also supported by the Bank. While were not fully restructured even Outcome the financial sector reforms largely though the reforms called for gov- succeeded, SAL IV mostly failed, ernment divestiture. No taker The financial sector reforms primarily because the government was found to buy the agricultural made most of the domestic banks failed to devalue the CFA franc credit bank's government shares, in Senegal solvent. Five commer- on time. which exceeded the 25 percent cial banks emerged from the re- limit. Based on the restructuring structuring, all of which fully Implementation criteria, the bank should have been satisfied the reform criteria. In closed, but at the time, there was 1994, the government carried out Two principles guided Senegal's no substitute for providing credit a devaluation of the CFA franc, an banking reforms: first, that no to the rural population. Both banks adjustment that should have been bank should survive unless it still have poor loan portfolios. Two undertaken earlier. But the restruc- could become profitable, solvent, privately owned banks were given turing of the banks was useful and liquid after the restructuring; time to recapitalize, and after fail- when the devaluation took place, and second, that the surviving ing in their attempt, were also because it enabled the banking and banks should be able to allocate closed. financial sectors to remain rela- credit on the basis of economic tively calm during devaluation. rather than political consider- Financial workout The banks were thus able to re- ations. For this purpose, the spond more positively to the ben- government's share in any bank The total cost of the banking cri- efits of the adjustment. was not to exceed 25 percent. sis was about CFAF 250 billion Added to this, restructuring had (about $830 million), equivalent to Weaknesses remain, however. to take place without losing the 17 percent of Senegal's GDP. Since The monetary union needs to fully confidence of the public. Hence most of the cost had to be shoul- liberalize interest rates, and the ag- it was necessary to recover bad dered by the state, which did not ricultural bank still needs to be re- loans and to compensate the de- have the money, it was necessary structured. Although the banking positors of the liquidated banks. to find a borrowing scheme whose sector is healthier, for it to remain debt service could be borne by the so depends largely on instilling Restructuring treasury over time. The workout economic criteria for bank lending scheme proposed three sources for to ensure repayment, as well as on Out of Senegal's 11 commer- the funds: (1) CFAF 126 billion the success of structural adjust- cial banks, 8 were distressed. Of through rescheduling of the debt ment-a process still in progress. the eight, five were closed. The due by the distressed banks to the healthy part of their portfolio was monetary union's central bank; (2) Conclusions too small to form the basis of a CFAF 38 billion from IDA, France, new bank. The sound portion of and the United States; and (3) The financial adjustment pro- their assets was liquidated and CFAF 32 billion to be recovered gram was well focused, both in its together with an equivalent from nonperforming assets. The objectives and instruments. The amount of deposits distributed latter proved a major weakness of program was a sound example among the operational banks. the program. of regional reforms being trans- The assets of two other distressed lated into a concrete sector reform banks were sufficient to form two The financial adjustment opera- within one country. It also pro- new banks. A single liquidating tion wanted to convey the message vided an example of how the company, Soci6te Nationale de that debtors would be pursued, Bank can play a significant role Recouvrement (SNR), was estab- even if well connected, but SNR in supporting regional reforms lished to take over and collect the was unable to recover bad debts, affecting a group of countries. nonperforming loans of the dis- especially from large borrowers. The restructuring of the banks en- tressed banks. After a protracted With the bad loans transferred abled them to respond positively startup period, SNR became opera- from the banks to the facility, the to opportunities when the adjust- tional in 1991. problem of loan recovery became ment took place. OED Precis is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. This and other OED publications can be found on the Internet, at http:/ / www.worldbank.org/html/oed. Please address comments and enquiries to the managing editor, Rachel Weaving, G-7137, World Bank, telephone 473-1719. Internet: rweaving@worldbank.org June 1996