The Role of Regulators in accelerating growth and wealth creation in the

Gambia.

Presented By:Presented By:

S.Bai SenghorS.Bai SenghorDirector, Microfinance DepartmentDirector, Microfinance Department

Central Bank of The GambiaCentral Bank of The Gambia

At At

WACRAT II Sub Regional Workshop.WACRAT II Sub Regional Workshop.August 18-20, 2010, August 18-20, 2010,

Accra, GhanaAccra, Ghana

1.0 Introduction• The Gambia is a small open economy with

a population of 1.7 million people• Economic growth has remained strong• Real GDP grew by 6.5% in 2006 and

2007,but output growth decelerated to 6.3% and 5.0% in 2008 and 2009 respectively due the global financial crisis

• Growth is forecast at 4.8% in 2010 (IMF)

Introduction continued• Strong growth in agriculture largely

because of good rains helped to offset the negative impact of the global financial crisis, particularly for the rural poor.

• End-period inflation was 2.72% in December 2009 before accelerating to 4.14% in June 2010.

• Monetary policy was tight throughout 2009 and the first half of 2010.

2.0The Gambia’s Financial System (FS)

• Comprises 14 Banks,11 insurance companies, 4 Finance Companies, 60 Village Savings and Credit Associations (VISACAs) and 50 Forex bureaus in 2009

• 14 banks have 74 branches, 22 outside greater Banjul area

• The banking sector is concentrated with 3 banks accounting for 49% of total loans and 62.6% of deposits

2.0 Gambia’s FS continued

• Deposit liabilities and loans totaled D9.9 (46% of GDP) and D4.6 billion (22% of GDP) respectively in 2009.

• Credit to the private sector totaled D19.25 billion (20% of GDP)

Sectoral distribution of loans

  Mar-09 Dec-09 Mar-10 % of Gross Loans

Agriculture 296,650 262,536 384,955 8.32 %

Fishing 19,156 16,924 14,394 0.31%

Manufacturing

176,846 217,372 259,393 5.61%

Building 398,950 499,045 511,876 11.07%

Transport 322,375 312,674 323,201 6.99%

Distributive Trade

866,500 1,160,689 1,226,749 26.53%

Tourism 249,526 211,243 231,768 5.01%

Financial inst

135,869 164,404 178,076 3.85%

Other Comm. loans

657,543 816,779 816,387 17.65%

Other L & A

617,467 769,345 682,171 14.75%

Total 3,740,882 4,413,011 4,624,493  

2.0 Gambia’s FS contd Limited access and high costs of finance are key

obstacles to enterprise growth. The following indicators attest to this stark fact:

Less than 10% of the adult population hold a bank account

Level of financial intermediation proxied by the loan to deposit ratio at 46% in 2009 is low

Credit to the private sector at 19.25% of GDP is minuscule.

Domestic savings (8% of GDP) and domestic investment (19% of GDP) are insufficient to drive sustained high economic growth.

The Gambia needs a sustained growth rate of 8-9% to significantly reduce poverty.

3.0 Regulation• The Central Bank of the Gambia (CBG) is

responsible for the regulation and supervision of Banks and Non-Bank Financial Institutions (NBFIs)

• The primary responsibility for oversight of financial institutions lies with the owners and managers. There is no substitute for adequate internal governance.

3.0 Regulation contd• Regulation (which encompasses laws,

decrees, administrative rules intended to control behavior) is necessary because of failures in internal governance and market discipline.

• Although specific regulatory practices vary across countries, several broad categories are used to reinforce financial institutions operating environment, internal governance and market decline.

3.1 Regulations reinforcing the operating

environment• Regulators typically control entry into the financial

industry. Rules governing entry are needed because some forms of competition from news entrants can be destructive. While liberal entry rules may increase competition and lower costs to customers, say, new banks that are inadequately capitalized, or poorly governed or managed, often offer above-market deposit rates to attract resources and then cover their higher costs with riskier loans

• At the same time excessively restrict entry rules may also result in unsound institutions

• In essence, the appropriate goal of entry regulation is not to be protect individual institutions by providing them with monopoly rents but to bring about a financial system that efficiently serves the economy and the public interest.

3.2 Regulations reinforcing internal

governance• Prudential regulations can provide

assurance that owners and managers are “fit and proper” that owners share the risks to which they expose their depositors and that portfolio quality and risk management standards are high

3.3 Regulations reinforcing market

discipline• Regulations can enhance the

soundness of and confidence in the financial system by ensuring that market participants have as much information as possible to judge the soundness of institutions and that the sanctions imposed by the market can take effect

4.0 Role of CBG • As noted earlier, the essence of regulation is to ensure

that deposit taking institutions operate in a safe and sound manner

• A sound financial system is important because of the key role it plays in the economy: intermediation, maturity transformation, facilitating payment flows, etc

• Empirical studies confirm that countries with well functioning financial systems grow faster.

• In the Gambia the over-riding objective of regulation is to deliver a banking and financial system that acts as a stabilizing force and supports the real economy.

• But strive to ensure that there is the right balance between promoting the safety of the financial system and keeping it innovative and efficient.

4.1 Govt & CBG • The Central Bank in collaboration with major

stakeholders formulated the Microfinance Coordination Framework to coordinate the activities of the myriad stakeholders with varied objectives and modes of operation.

• The Central Bank is the Secretariat for the highest coordination committee, (IDMC) on this framework.

• To enhance national coordination, a Microfinance Summit, which brought together all stakeholders to share experiences, take stock, and chart the way forward, was launched as an annual event in 2003.

4.2 Projects and Programmes

• donor funded government projects/programmes executed by government are involved in wholesaling credit to MFIs and groups and/or providing support services such as institutional development and capacity building (training, workshops, backstopping, etc) of the MFIs and other microfinance organizations.

Projects and Programmes Contd

• To name a few, the Social Development Fund (SDF) funded by the African Development Bank (ADB) is mainly focused on the provision of credit lines to MFIs. In 2009 alone, SDF disbursed about D3.4 million in loans to some 128 groups and 7465 individuals, 70% of whom were women

• Rural Finance Project (RFP) also provides institutional development and capacity building to VISACAs.

4.3 Support Institutions and Organizations

• GAMFINET

• The Microfinance Promotion Centre (MFPC) has hitherto focused on the replication of the VISACA model and training. To a lesser extent, the Centre has also provided loans from external funds to its VISACA network.

• In view of its inability to perform all these functions efficiently, the Centre was restructured to focus on training and monitoring of the VISACAs.

Support Institutions and Organizations

Contd• A new training centre has been built in

Brikamaba Lower Fulladu West to provide training to the VISACAs at their steps.

• This is in line with the decentralization programme of government aimed at achieving improved services and greater impact of projects and programmes on beneficiaries.

4.4 Constraints• Dominance of VISACAs

• Their impact in terms of savings mobilization and investments is still low.

• The objectives of the Microfinance Coordination Framework not realized due to lack of commitment from some stakeholders. This has in turn resulted in the slow execution of some programmes e.g. the Microfinance Summit and support to GAMFINET.

Constraints (Contd)• Institutional capacities are still inadequate; as a result

operational efficiencies and ultimate attainment of sustainability of the MFIs remains a pipe dream.

• The growing number of VISACAs continues to place challenges to the supervisory authorities.

• Absence of a critical mass of viable MFIs to create effective demand for wholesale credit lines from the projects/programmes. This has in turn compromised the profitability and sustainability of the projects/programmes.

5.0 Way forward• Economic growth is the strongest antidote to

poverty• We need stronger fundamentals particularly a

higher domestic savings and investment to achieve a high growth rate of 8-9%. This in turn is predicated on a safe and sound financial system.

• Promote microfinance as the best way to address the problem of commercial banks’ reluctance to lend to the poor.

Way forward• Reactive and energize the coordination framework

• Sensitization campaigns to foster private sector investment in microfinance

• Promotion of linkage banking initiatives

• Promotion of new innovations

• Micro insurance

• Development of non-financial support systems.

• Housing Microfinance

THANK THANK YOUYOU THANK THANK YOUYOU