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Democratic Republic of Congo: Returns on Assets and Equity

June 10, 2020 - December 21, 2021

In a recent report, the International Monetary Fund (IMF) and the Bankers’ Consortium of the Democratic Republic of Congo (BCC) have highlighted several key vulnerabilities in the country’s banking system.

Assets and Liabilities

The banking system has seen significant growth in customer deposits, with assets increasing by over 50% since the start of the pandemic. However, these deposits are largely being placed with correspondents abroad rather than being used to fund lending.

Return on Assets

  • The return on assets for the banking system has been declining, with net earnings amounting to less than 1% of total assets.
  • This is attributed to large and growing interbank placements abroad, which have led to lower returns compared to interest rates on loans.

Return on Equity

  • The return on equity for banks in the Democratic Republic of Congo remains low, with some banks recording negative returns.
  • The high level of non-performing loans (NPLs) has contributed to this trend.

Macrofinancial Vulnerabilities

The IMF and BCC have identified five key macrofinancial vulnerabilities in the banking system:

  • Weakness of the banking system’s capital base
  • Difficulty in appraising NPLs following COVID-19 measures
  • Risks related to financial dollarization
  • Breakdown of correspondent banking relationships (CBRs) due to de-risking
  • Tendency of subsidiaries to centralize their liquid assets with parent companies abroad

Capital Adequacy

Aggregate capital levels are too low and have not grown in line with activity over the past decade. The aggregate capital adequacy ratio is 14%, well below that of its African peers.

Loan Portfolio

The loan portfolio shows a high level of NPLs at 8.5% of total loans. System provisioning is moderate at 69.2% of NPLs.

Recommendations

The IMF and BCC have recommended several measures to address the vulnerabilities in the banking system, including:

  • Strengthening capital adequacy
  • Improving risk management practices
  • Enhancing data quality and governance
  • Reducing financial dollarization
  • Promoting correspondent banking relationships

Conclusion

The Democratic Republic of Congo’s banking system faces significant challenges, including low returns on assets and equity, high levels of NPLs, and weaknesses in capital adequacy. Addressing these vulnerabilities will be crucial to maintaining financial stability in the country.

Source: International Monetary Fund (IMF) and Bankers’ Consortium of the Democratic Republic of Congo (BCC)

Figures

  • Figure 1: Return on Assets
  • Figure 2: Capital Adequacy Ratio
  • Figure 3: Loan Portfolio Composition
  • Figure 4: Solvency Stress Test Results