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Senegal’s Banking System Faces Challenges Amid Covid-19 Crisis

The banking system in Senegal is facing significant challenges as the country navigates the impact of the COVID-19 pandemic. The sector, which has been growing steadily in recent years, is now under pressure due to reduced domestic activity and demand, as well as a decline in overseas remittances.

Challenges Facing Senegalese Banks

According to Fitch Ratings, Senegalese banks are entering the economic downturn with high levels of overdue public sector loans, high single-name borrower and depositor concentrations, and limited capital buffers. The agency downgraded the long-term issuer default rating of UBA Senegal earlier this month, citing concerns over the bank’s ability to manage its debt servicing.

Measures Taken by the Bank of Central African States (BCEAO)

To mitigate these challenges, the BCEAO has taken a series of measures to preserve financial stability and provide additional liquidity across the region. The central bank has:

  • Encouraged banks to adopt a flexible approach to customers’ debt servicing, allowing lenders to better manage their loan classifications and ease short-term pressure on capital ratios.
  • Provided CFAFr340bn in additional liquidity to support banks, bringing the total made available by weekly and monthly auctions to CFAFr4750bn.
  • Extended its refinancing framework to include CFAFr1050bn of bank loans to 1700 prequalified private sector companies.

Encouraging Digital Transactions

The BCEAO has also introduced measures to encourage digital transactions rather than hand-to-hand cash exchanges. These measures include:

  • Fees will no longer be applicable on minor transactions, including digital money transfers under CFAFr5000.
  • Withdrawal and transfer fees at ATMs have been cut by 50%.

Low-Cost Financing for Member States

The central bank has also announced plans to help member states access low-cost financing through the issuance of Treasury bills, dubbed “COVID-19 bonds,” with a three-month maturity. Lenders will be able to obtain liquidity from the central bank at a fixed rate of 2.5%.

Challenges Ahead

Despite these efforts, the IMF has warned that Senegal’s banks may face significant challenges in the coming months. “Uncertainty about the timing and pace of the economic recovery will make it hard to assess borrowers’ future repayment capacity and, in the longer term, [Senegalese] banks’ asset quality is likely to come under pressure,” said Janine Dow, senior director at Fitch Ratings.

National Financial Inclusion Strategy

The government has planned to implement a national financial inclusion strategy by June 2020, which aims to identify constraints and policy options to expand access to financial services. The country’s credit bureau is rapidly expanding and will improve its data sources by using information from large billers such as utilities, enabling it to improve information availability and reduce information asymmetries.

Support for SMEs

The government has also prioritized improving SMEs’ access to credit, with the International Islamic Trade Finance Corporation (ITFC) playing an important role in supporting SMEs in the country. The organization has approved trade financing valued at $708m to Senegal, focusing on agriculture, energy and financial institutions that support SMEs and the private sector.

Conclusion

The Covid-19 pandemic has brought significant challenges to the banking system in Senegal, but with the government’s efforts to provide liquidity support and encourage digital transactions, the sector is likely to weather the storm.