Chad’s Financial Sector: Challenges and Recommendations

Overview

The Chadian financial system is underdeveloped, with a narrow base and limited depth. The banking system has total assets equivalent to only about 12 percent of GDP, which is lower than the average for the CEMAC region.

Challenges in the Banking System

Soundness Deterioration

The soundness of the banking system has been deteriorating for several years (23). Two state banks are being restructured, and their asset quality continues to decline. Prudential limits to large exposures are rarely respected, despite high limits set by COBAC.

Asset Quality Decline

Asset quality has declined, with the ratio of non-performing loans (NPLs) increasing from 10.4 percent in 2009 to 12.1 percent in 2010.

Vulnerabilities

The greatest vulnerabilities of the banking sector stem from its exposure to the public sector and a few large private companies (25). The government and public entities hold approximately one-third of banking system deposits, and bank loans generally fund expenditure by government and large companies in the cotton, sugar, and oil sectors.

Issues to be Addressed

1. Narrow Base and Limited Depth: The financial system’s narrow base and limited depth hinder its ability to support economic growth.
2. Deteriorating Soundness: The banking system’s deteriorating soundness poses a risk to financial stability.
3. Lack of Collateral: The lack of collateral for bank loans leads to a reliance on short-term deposits, making the banking sector vulnerable to liquidity risks.
4. High Exposure to Public Sector and Large Private Companies: The banking sector’s high exposure to the public sector and a few large private companies increases its risk profile.
5. Limited Range of Financial Products: Commercial banks offer a narrow range of financial products, limiting access to financial services for small and medium-sized enterprises (SMEs) and individuals.

Recommendations

Develop the Financial System

• Implement policies that encourage investment in the banking sector to develop the financial system.
• Strengthen prudential regulations and supervision to improve the soundness of the banking system.
• Establish a central securities depository to encourage the use of collateral for bank loans.

By addressing these issues, it is possible to strengthen the Chadian financial sector and improve access to financial services for all segments of the population.