Financial Crime World

Commodity Prices Plummet Amidst Banking System Concerns in Democratic Republic of Congo

Banking System Crisis Hits DRC

Kinshasa, DRC - Commodity prices have taken a drastic hit globally, but the situation is particularly dire in the Democratic Republic of Congo (DRC), where concerns over its banking system are sending shockwaves through the market.

According to recent figures from the International Monetary Fund (IMF) and the Central Bank of Congo (BCC), the DRC’s banking system has been struggling with low capital levels, high non-performing loans, and a lack of transparency. The country’s sovereign bank nexus is also a significant concern, as over 90% of total bank loans are made to households and businesses, rather than the government.

Macrofinancial Vulnerabilities Identified

The IMF has identified five key macrofinancial vulnerabilities in the DRC’s banking system:

  • Weakness of the Banking System’s Capital Base: The aggregate capital levels are too low and have not grown in line with activity over the past decade.
  • Difficulties in Appraising Non-Performing Loans: The COVID-19 measures have made it challenging to assess non-performing loans, leading to increased risks for banks.
  • Risks Related to Financial Dollarization: The high level of dollarized deposits and credits in the DRC’s banking system makes it vulnerable to currency fluctuations.
  • Breakdowns in Credit Bureaus: The de-risking efforts have led to breakdowns in credit bureaus, making it difficult for banks to assess creditworthiness.
  • Tendency for Subsidiaries to Centralize Liquid Assets Abroad: This trend increases the risk of capital flight and reduces the ability of local banks to respond to economic shocks.

Banking System Performance

The banking system’s aggregate capital adequacy ratio is a mere 14%, well below that of its African peers. The solvency ratio has plummeted since mid-2017, falling from above 20% to a mere 12.1% by end-September 2021.

  • Undercapitalized Banks: Three banks are currently undercapitalized, with one in the process of being transformed into a microfinance institution and corrective actions underway at two others.
  • Non-Performing Loans: The loan portfolio shows a high level of non-performing loans, standing at 8.5% of total loans, with system provisioning moderate at 69.2%.
  • Capital Requirements: Four more banks are undercapitalized with a total solvency requirement of 12.5%, while eight out of 15 banks have satisfied the current minimum capital requirement of US $30 million.

Urgent Action Needed

The IMF has applied a solvency stress to current capital levels, highlighting the need for urgent action to address these concerns. The DRC’s banking system is not alone in its struggles, as commodity prices continue to plummet globally. It is essential that policymakers take swift and decisive action to stabilize the banking system and restore confidence in the market.

The situation has significant implications for the country’s economy and the wider region, making it crucial that policymakers work together to address these concerns and prevent a potential crisis from unfolding.