Chapter 4. Giving business and individuals access to funding

The growth of the Ivorian economy is handicapped by a lack of funding. For firms and individuals to have easier access to financing, more bank loans are needed and alternative funding sources have to be developed. Lower credit risks and a more effective guarantee system will cut the cost of financial intermediation and result in more lending. More funding for loans is needed, with longer repayment times, to develop a financial system that can meet the demands on the road to emerging nation status. The issue of financial inclusion is of prime importance.

  

Côte d’Ivoire has funding limitations and its financial sector is not adapted to the character of a country transforming itself into an emerging economy. Not enough loans go to the private sector, especially to small and medium-sized enterprises (SMEs), a shortcoming that limits investment and economic growth. This is not specific to Côte d’Ivoire: similar economies, with a large informal sector, uncertain property rights and weak institutions, have the same problem, but the expected economic transformation in Côte d’Ivoire will probably be driven by its SMEs, so funding them is a major issue.

Private sector access to credit must be the focus of the financial sector’s growth if emergent status is to be achieved

A strategic vision to develop the financial sector, one shared by all involved, is absolutely essential. Morocco is often cited as a successful example: government determination to increase bank funding, along with reforms to banks and stakeholders in finance increased financial inclusion and business funding. Côte d’Ivoire’s financial sector development programme (PDSFI) launched in October 2014 was a positive step and should help remove the main obstacles in the sector. The support of all participants is essential, along with better linkages to programmes, such as the Phoenix Plan (2013), to encourage the funding of SMEs.

The extent of lending to the private sector depends on the returns on loans and on the amount of money available to lend. Figure 4.1 shows the factors affecting bank loans to the private sector. The lender looks at what he can expect by way of return. The amount available to lend is another factor. The low level of bank deposits and bank capital and the infrequency of long-term loans options hamper this funding, which can also be reduced by more attractive opportunities, such as government bonds in CFA francs that are less risky, have high yields and cost less to manage.

Figure 4.1. Loans to the private sector depend on returns and availability of funds
picture

Note: This figure refers to the recommendations and action plan presented at the end of this report. “ER 1” stands for the main expected result and bracketed numbers to action plan recommendations.

Source: Authors.

Returns on these CFA bonds reflects the availability of funds in this monetary area. Reducing their yield would make it necessary to make them less available, which is unwise because of the region’s major need for public investment. Increasing the supply of money to buy them would need major political changes, such as improving the convertibility of the CFA franc with foreign currencies, backed by greater credibility and sustainability of the region’s money and budget policies. But despite this in-built constraint, WAEMU’s policies provide stability and good governance which helps the financial sector expand.

To improve bank loans to the private sector, banks need to interact more efficiently with SMEs and reduce their charges for making loans. Decisions to grant loans are affected by their cost to SMEs, which are themselves affected by problems of assessing the chances of default, inadequate information and difficulties providing guarantees. Returns on loans greatly depend on revenue generated by the loans (interest) but also the cost of financial intermediation, determined by the cost of management and supervision and the risk of customer default. The recommendations below aim at lifting the constraints on funding Ivorian firms by reducing intermediation costs and increasing the amount of money available for loans (especially long-term) through recourse to national savings – in effect, narrowing the gap between loans to SMEs and risk-free returns sought by investors.

Financial intermediation costs must be reduced

Lending to SMEs is not very attractive for Ivorian banks because of high intermediation costs. Banks lend mainly to governments and to big national and foreign firms but to very few SMEs because of different risk profiles. Asymmetric information between banks and borrowers, little risk diversification and the shaky finances of some firms create a perception that borrowers represent a high risk and that discourages banks from making loans. The inability of institutions to monitor regularly borrowers and problems with raising collateral increase the cost of managing and supervising loans.

Less credit risk would encourage loans to SMEs

Exchange of information must be made easier (Recommendations 1 and 2)

The central bank should support Côte d’Ivoire’s new privately run information office on bank loans, in operation since June 2015. The banks are generally not keen on it and are reluctant to share data with an office in which they do not have a formal stake. But similar offices in Brazil, Turkey and Singapore have had quick success after banks pledged to exchange information. The World Bank, which reviews international best practices in lending, says central banks have a transformative role in encouraging the banking sector to take part (IFC, 2012).

To ensure the success of the credit information office, the BCEAO’s risks department must no longer respond to lender requests and must make use of credit reports obligatory. Credit and microfinance institutions must send information about their customers to the central bank to be gathered by the information offices (BCEAO Directive 005-05 2015). The regulatory body is a link between collection of bank data and private credit information offices in several countries, including Ecuador and Morocco where, unlike in Côte d’Ivoire, risk departments no longer respond to lender information requests, obliging them to seek it from the credit information office. Egypt and Morocco have given their offices a leading role by obliging lenders to ask for credit reports before giving new loans.

Côte d’Ivoire must ensure that borrowers have confidence in the credit information office. That the permission of borrowers is needed for release of information by the office is often cited as an obstacle to its future, but this provides broader information and thus better service by the office. In Côte d’Ivoire, the rate of permission given is still below 20% (and especially low among former bank customers). It could be increased by publicity and awareness campaigns about data confidentiality, responsible use of loans, risks of over-indebtedness, the usefulness of the credit information office and courses about the rights and obligations involved. Panama’s office created a financial education programme (Finanzas Bajo Control) which trained borrowers in financial management (personal advice sessions, a special website, web-based seminars (webinars) and physical seminars, use of mass media, free-of-charge press and social media Facebook and Twitter). Côte d’Ivoire must also see that all steps are taken to ensure security of data.

The credit information office presently only collects negative data about borrowers, so it must quickly move to collect positive material. The World Bank says such offices that supply full information get the best results. Combining positive data (solvency ratios, credit limits, type of loans, collaterals, repayment schedules) with negative (unmet financial obligations, arrears, court judgements) means high-risk borrowers who accumulate debts without defaulting on payments may not be refused loans, or be refused on the basis of a single negative event.

The office must quickly include data from non-traditional sources. Gathering information on firms and individuals to assess the stability of a business is vital in an economy where personal and company funding are often not separated and where a business-owner’s past often indicates the firm’s credit risk. Rapidly including data from large public utilities and small microfinance institutions (two-year turnover of under XOF 2 billion) will help expand coverage of individuals. Special rates have been negotiated to encourage microfinance institutions in Egypt to provide data, with technical support and a free trial period.

The office’s transparency is crucial. Statistical assessment of the likelihood of repayment by a borrower, along with their credit score, boosts the chance of getting a loan and should be a service offered by the office, which must ensure transparency (borrowers having the right to consult their credit report and information) and allow borrowers to appeal against inaccurate data.

The offices need to be computerised. The performance of the BCEAO information offices has improved but more computerisation is needed to clear sizeable data backlogs. Some banks also do not systematically pass on information. Computerisation, better monitoring and a penalties system will solve these problems.

Risk must be better shared among stakeholders (Recommendation 3)

Mutual guarantee associations are risk-sharing solutions that should be explored by Côte d’Ivoire. These associations of entrepreneurs aim to link up with banks to help SMEs without enough collateral to obtain loans. The companies examine the requests of their members and pass on satisfactory cases to the partner bank. Their evaluation and knowledge of their own professional sector make for better risk assessment and thus reduce the bank’s administrative costs. The passed-on applications get an extra guarantee through the guarantee fund to which the mutual members contribute (entry fees, regular dues, commissions, and sometimes public contributions). This kind of guarantee, based on member solidarity, encourages formalisation of the economy, financial inclusion, funding of businesses and growth of promising sectors.

These mutual associations have not produced adequate results in Côte d’Ivoire, where the unsuitable legal and regulatory situation penalises them. The WAEMU stipulates that financial entities must have the form of a financial institution or be subject to the same laws. But the non-profit co-operative structure of the mutuals, which get tax breaks, have benefited many countries, in particular Italy. (Box 4.1).

Box 4.1. Mutual guarantee associations in Italy and developing countries

The first mutual guarantee companies appeared in Europe in the 1940s, with the most successful in the crafts sector in Italy. Organised into co-ops, all members were equal (especially in voting). A committee of bank officials and co-op members examined loan applications. Agreements between co-ops and banks vary and are often revised. The commonest public intervention is a grant to expand and strengthen the guarantee fund. The government has sometimes backed the mutuals in seeking business development funding from the European Union. Such aid often goes to local beneficiaries through regions and chambers of commerce and in line with the mutual’s links to a sector.

The Italian success compares with many failures in developing countries, such as Morocco, Tunisia, Madagascar and some West African countries. Comparative analysis shows that Italy’s success is linked to basic principles absent in developing countries – a strong and ethical management team well trained in finance that can separate itself from economic vested interests of mutual members, risk-sharing between banks and upstream guarantee funds (an agreement that spells out the kind of risk-taking and ongoing constructive dialogue between a bank and the mutual) and strong professional associations that have substantial negotiating power with the banks.

Source: Gobbi (2003).

Firms must be financially reliable (Recommendations 4, 5 and 6)

SMEs are far from being financially transparent. Banks can better assess credit risk when they have good quality and accessible financial and accounting information about firms. The practice by some Ivorian firms of giving different figures to different officials has not been entirely eliminated by the setting up a central balance-sheet office and a one-stop shop for filing financial statements (GUDEF). Pooling the cost of accountants can help solve the problem of financial constraints that can hamper financial transparency of SMEs (see Chapter 2). Computerisation and linking systems that handle financial statements (GUDEF, the national statistics institute and the central balance-sheet office) can also detect fraud.

Auditing quality must improve through stronger internal and external monitoring to improve the profession’s credibility and ensure better service for SMEs. The work of uncertified accountants lowers standards and SME support structures must make firms aware of this. The accountants’ professional association must rapidly set up an internal quality-control system and ensure national ethics and rules comply with international standards set by the International Federation of Accountants in 2014 and that WAEMU quality standards are respected.

The model of officially-approved management centres (CGA) must be made more attractive. The centres were set up to provide management and accounting help to SMEs, bring them into the formal economy and so boost government revenue. But the CGAs do not interest firms much and accounts are not systematically audited because accountants are not very active. A thorough survey of the centres’ failings would help firms produce more reliable and audited accounts.

Institutional flaws prevent effective monitoring of borrowers and the system of collaterals needs upgrading

The institutional flaws in Côte d’Ivoire (the guarantees system, monitoring borrowers) increase the cost of overseeing and managing loans. An insufficiently transparent system of guarantees and problems in realising collateral mean banks are slow to make loans. Successful surveying reforms should make customer monitoring easier (Recommendation 9).

Realising collateral must be done better (Recommendation 7)

Lenders’ fears of borrower default and non-implementation of collateral increase the banks’ perception of risk. Weaknesses in settling commercial litigation deter banks. The substantial progress made since the Abidjan commercial court was set up in 2012 has reassured stakeholders, but efforts need to continue, especially to expand the court (in particular Abidjan Sud and San Pedro), along with greater communication and transparency.

The collateral system must be more transparent and easier for firms (Recommendation 8)

Côte d’Ivoire must have a computerised and single central register of collateral to reduce the risk for banks, since some borrowers give the same assets as collateral to several lenders. A register would allow an asset lien to be recorded, confirm the possession of collateral and say if it is legally disputed. This must be centralised and notice-based (without special documentation, just a standard form), with online access, a special identification number, and cover all types of assets (moveable or fixed) and all individuals and firms. Research shows that such registers improve access to bank loans by an average of eight percentage points, cause a drop in interest rates of three points and extend repayment by six months (World Bank, 2014). The World Bank says setting up registers for loans and collateral is more effective when done at the same time, so the collateral register should be quickly set up, either through a PPP, by a private body (credit information office or chamber of commerce) or by a supra-national body such as the BCEAO.

Whatever option is chosen for the register of collateral, the identification of businesses on the commerce and property credit register (RCCM) with an identification number is vital. The RCCM can be put online to join all the other RCCMs, to improve monitoring of promoters by listing all firms in Côte d’Ivoire and giving them an identification number, as well as saving time and money in the registration of firms. With more data, it could be extended to cover not just mortgages but all kinds of collateral (land titles, vehicle registration documents and so on). The RCCM data could be linked to and used by a credit register.

A modern register will allow new kinds of collateral that are easier for firms to use. BCEAO prudential rules define collateral more strictly (mortgages, cash deposits) than Ohada (materials, stocks of merchandise), forcing banks accepting non-eligible collateral to set aside an equivalent sum. Merging the BCEAO and Ohada rules will help banks accept currently non-eligible collateral. About 80% of the share capital of firms in emerging economies is in movable assets, often easier for firms to use as collateral (IFC, 2012).

More private savings in banks will increase money for loans and improve funding of the economy

Bank assets are mostly short-term, an obstacle to medium and long-term funding of the economy. Broadening the base of deposits and increasing their length of time will make the banking system operate better. More funds from private savings are essential, along with extending loan maturity. Banks consider savings not to be very profitable because of high transaction costs, especially in isolated parts of the country with little access to banking. But household demand for savings products is high (income smoothing and securing, emergency funding) and the stock of household savings will establish a basis for development of the banking sector. Using more national savings requires more financial inclusion and bank use, increasing the range of savings products tailored to demand (especially for low earners) and to the economy (very informal, large rural economy and public unfamiliarity with the financial system).

Funding the economy requires more long-term capital

Savings products adapted to local conditions should be developed (Recommendation 10)

Côte d’Ivoire must encourage more attractive savings products (home savings plan, share savings plan) so as to expand medium and long-term savings, especially with tax incentives, and draw in more of the population. Ivorians abroad, in increasing numbers, in particular the well qualified, should be made aware of these products, which can be geared towards presidential targets such as housing (60 000 more houses by 2025, two-thirds of them low-cost). Mobilising young people’s savings is also a big economic opportunity in view of the country’s demographic profile (familiarising future adults with the formal financial environment, winning loyal customers for long-term advantage). In Morocco the Al Barid bank is cornering some of this important segment with a special savings programme (small deposit to open an account, option to block funds for a certain period and prizes for the first 20 000 new customers).

The government must devise a suitable legal and regulatory framework to capture savings through digital financial infrastructure and many such solutions exist, as in Kenya through private operators and phone companies. M-Shwari seems to be a success in Kenya but the earlier-established Jipange KuSave has not done so well as a result of an inadequate regulatory structure (Box 4.2).

Box 4.2. Kenya at the cutting-edge of innovative financial products

M-Shwari, a partnership between mobile-phone companies and banks, has had promising results in Kenya, involving a bank account offering savings and short-term loans. The innovative product uses the mobile-phone network to reach a large number of people and uses data from the operators to assess the credit scores of borrowers through links with credit information offices. Customers can get a loan when they open an account (depending on their credit profile) or after a period of saving. M-Shwari is very successful because it allows loans to customers with less access to, and visibility of, savings than with M-Pesa, which encourages greater self-discipline.

Jipange KuSave’s product combines micro-credit and savings and has not been widely marketed, for want of bank permission to collect deposits for the product creator (Mobile Venture Kenya) and of agreement with a partner bank with available deposits. Customers get interest-free loans partly deposited in a blocked savings account. After repayment, a bigger loan is possible. Digital infrastructure helps market the product, with repayments and total savings on the M-Pesa digital wallet, and customer monitoring is done by mobile-phone (text-messages to signal repayments due).

Source: CGAP (2015); Coffey International (2012); Hughes et al. (2011).

The plan to create a deposits and consignments office should go ahead (Recommendation 11)

The government should continue studying the feasibility of setting up a deposits and consignments fund (Caisse de Dépôts et Consignation, or CDC), which brings together long-term investors serving the general interest and the country’s economic development. Discussions (helped by experts from France’s CDC) began in 2015 about the goals of the Ivorian version (such as promoting SMEs and low-cost housing), its funding, management model and how the project is to be supervised. Top-level involvement will be needed to encourage and co-ordinate cross-sector work to be included in a broader reorganisation of the public financial sector.

New ICT-based solutions to encourage bank use and financial inclusion

Financial inclusion is at the heart of BCEAO policy but more work needs to be done by the Ivorian government. The professional banking association says the introduction of 19 free banking services by the BCEAO in 2014 has not led to many more people opening accounts. Central bank assessment of the effect on financial inclusion and the cost to banks of running them is not yet complete, but alternative solutions are needed to stimulate rapidly long-term bank use. Increasing the number of accounts is not enough. People must use them, and the main incentives would seem to be the possibility of using locally-adapted financial products and services and boosting people’s confidence in the banking system. A plan quickly to revive the Unacoopec microfinance body is needed and can follow the recommendations of consultants Développement international Desjardins in January 2015 (Recommendation 15).

Apart from greatly reducing transaction costs, a growth of financial products and services based on innovation and ICT can increase flows within the financial system, especially by capturing informal flows. The vast majority of Ivorians and the country’s businesses do not use formal funding, but they are not outside funding circuits. Encouraging financial inclusion through innovative financial products and services will capture more informal financial flows and increase the amount of money in the banking system. Policies in Latin America increased financial inclusion, showing the importance of institutional support for developing innovative financial products (Recommendation 14). These policies used the banking sector as a way to distribute transfers from the government (as in Chile with a special electronic payment system), introduced banking agents (notably to run government aid programmes, as in Brazil) and supported the spread of mobile banking and e-banking (Dabla-Norris et al., 2015).

Interoperability between mobile-phone companies for using mobile money should be explored (Recommendation 12)

As mobile banking has taken off in Côte d’Ivoire in recent years, interoperability, enabling customers to make mobile money transfers through other operators, has become possible. It encourages financial inclusion, with easier transactions, more financial possibilities, lower financial intermediation costs and can also capture more remittances from Ivorians abroad. Interconnection of other sectors, such as card-payment networks, suggests interoperability can spur growth through greater volume of transactions and revenue. Early results in Tanzania (one of four countries that have introduced it) show more transactions (Box 4.3). Setting up such a system is long and costly and requires major technical and technological skills, which may explain why it is still uncommon. It also needs mature markets, competition between operators, a sufficient number of them, well-established mobile banking and a large-scale network. Côte d’Ivoire, helped by the BCEAO’s May 2015 go-ahead for interoperability, can encourage this development by providing operators with the right conditions and necessary information.

Box 4.3. Interoperability between mobile-phone operators in Tanzania

Interoperability in Tanzania was requested by both operators and consumers, but lack of confidence between those involved delayed its introduction. The central bank then stepped in to create the right conditions (consumer protection, risk management and frequent and transparent contacts with the operators). The government’s role was limited to providing information. The bank and the operators first researched the market, notably customer interest and willingness to pay more for transactions between operators, along with the payment infrastructure (a clearing-house, real-time gross settlement system, ATMs), existing regulations (telecommunications, laws about money-laundering) and anti-competition practices (it was decided tariffs would be bilaterally negotiated between operators). Discussions backed by World Bank experts were then held (allowing the central bank to remain neutral) to ensure everyone understood the benefits and risks of interoperability in a modernised payments system, and to list the scheme’s features (governance, technical interface, consumer protection, compensation arrangements) and operational aspects (rules of participation, resolving disputes, compensation and settlement).

Source: IFC (2015).

The system of banking agents could be tested on a small scale (Recommendation 13)

The system of agents reduces transaction costs and is one way to mobilise national savings, especially in the countryside, and should be tested in a trial project. Technology enables banks and their customers to interact through agents (neighbourhood businesses with enough cash in hand and chosen by particular criteria – pharmacies, service-stations, supermarkets, post-offices) and ensure that bank accounts are never inactive. After presenting identification, a customer can do basic operations (deposit, withdrawal, paying bills) through terminals remotely controlled by the bank (wireless network, Internet connection, satellite technology). This intermediary system unclogs some branches, can target new customers (especially those outside formal sector funding), expands geographical coverage and business volume, and avoids the cost of having to build and maintain branches in remote areas.

The model of banking agents is simpler to install from a regulatory viewpoint. Several models of branchless banking services exist, of varying complexity (Box 4.4). The agent model could be tested in Côte d’Ivoire. It can be limited to transactions (not opening accounts, which needs agents with more training and is easily open to abuse). In the intermediate banking model, banks are responsible for their agents and the banking supervisor oversees them. Systemic risks are about the same as in a traditional banking model and tied to market stability and the financial solidity of the banks. In the non-bank model, the regulations must cover major systemic issues with electronic money (such as a mobile-phone company going bankrupt) and the reliability of operators must be closely watched (how much capital they have, transparency and liquidity). In both cases, regulators must ensure rules about combating money-laundering and financing terrorism are complied with by agents and that transactions are secure.

Box 4.4. Banking service models around the world

Branchless banking in Brazil and India is run by banks, which offer their own products through agents who can open accounts and make transactions. In the Philippines and Kenya banking is done by mobile-phone companies using digital wallets. In South Africa the model is hybrid: only licensed financial institutions can offer banking through intermediaries and mobile-phone companies are not allowed to receive deposits without partnership with a bank.

Source: GAFIS (2013).

Confidence of individuals in the financial system must be strengthened

As well as offering locally-adapted innovative financial products and services, Côte d’Ivoire must create conditions for better financial inclusion, the current weakness of which stems from factors linked to what is supplied (bank conditions and charges, a physical barrier) and to what is demanded (income level, financial ignorance, cultural barriers). To ensure customers have enough sustained interest in financial products and services, banks must be more transparent, improve consumer protection and educate the public about finance.

More effort should be made to educate Ivorians about finance (Recommendation 16)

The government must look into the gaps in the public’s financial knowledge and offer familiarisation courses. Financial education encourages financial inclusion (OECD, 2012) by allowing people to gain economic independence that helps them better to manage their assets (personal or business) and develop income-generating activity. It also creates demand for formal products, makes the financial system work better (more understanding of risks and opportunities by agents) and boosts long-term savings. Research into lack of knowledge should include attitudes and behaviour (managing money, financial planning, risk and adequate use of financial services), as well as the extent of knowledge and understanding itself, perhaps using OECD and World Bank questionnaire models (Box 4.5).

Box 4.5. OECD/World Bank questionnaire to assess public knowledge of finance

The OECD and the World Bank have, with international experts and experts from national statistics institutes, designed a toolkit to measure public knowledge of financial matters and also financial behaviour and attitudes, according to income group and gender. It can be used alone or included in wider surveys and has been tested in several countries, including Malaysia and South Africa. It can be found online here: http://www.oecd.org/finance/financial-education/Toolkit-to-measure-fin-lit 2013.pdf.

Source: OECD (2013a).

After assessing the public’s financial knowledge, a national financial education strategy must be introduced, with the financial and operational involvement of several parties concerned, inclusion of financial education in the school curriculum and use of mass media and groups of interested parties, such as producers and influential people such as village chiefs. Several countries can serve as examples (Box 4.6).

Box 4.6. Financial education strategies, a priority for many developing countries

Financial education is a priority for many countries, especially in English-speaking Africa, whether through national strategies or local initiatives. It aims to improve understanding of basic concepts such as personal budget management, savings and credit, and is done through workshops, short courses, radio spots, hand-outs, documents, newspapers or even general-interest TV programmes (Kenya) and sometimes features in school curricula (South Africa). Private sector involvement often brings funding and support for efforts by central banks, financial regulation bodies and government ministries.

Indonesia’s financial education strategy is run in close co-operation with the banking sector, including the central bank. It has six pillars, including consumer protection and education. The goal is to build a society with enough information and knowledge to understand the function, benefits and risks of banking products and services so citizens can take appropriate decisions that can improve the quality of their lives. Some action is geared to special groups (students, university staff, professionals, households, the informal sector). Many national educational programmes are run by the central bank, working closely with the banking sector and government ministries, and school curricula have been revised to include more financial education.

Source: OECD (2013b), Messy and Monticone (2012).

Greater transparency needed in financial bodies (Recommendations 17 and 18)

Côte d’Ivoire should set up an observatory to monitor the quality of financial services, which is undermined by a lack of banking transparency and competition resulting in poor and costly financial services. A May 2015 BCEAO directive required banks to provide information about the conditions and costs of their products and services in a clear and comprehensible way. The Ivorian government must do this by setting up an observatory to monitor financial services quality, after Senegal’s example (Box 4.7), with sufficient funding, staff and technology. ICT could provide a mobile-phone application so customers could report their banking problems and an online platform could be tested and developed if they works well. This data could perhaps be combined with that of the payment defaults centre.

Box 4.7. Senegal’s financial services quality observatory

Senegal set up an observatory in 2009 to monitor the quality of financial services, an advisory body with an executive secretary appointed by the economy and finance minister and overseen by a steering committee. A legal and regulatory framework (paid for by banks, insurance firms, decentralised financial systems and postal financial services) introduced obligations to inform customers about products and charges so as to protect them and improve service quality. The observatory ensures the data is reliable and can be understood. Its job is to promote high quality service for customers (overview of the financial operators sector, comparison of bank conditions online according to type of customer and operation), push for better relations between customers and financial services operators, and provide mediation (banks and insurance firms).

Source: Observatoire de la qualité des services financiers au Sénégal.

Conciliation machinery could be tested at the observatory. Free financial mediation is a free alternative to amicably settle disputes or personal litigation between financial bodies and their customers. It is used by the Senegal observatory and is a first step towards a more widespread system. The bank mediators could pass on their data to a committee at the observatory which would ensure the mediators’ independence. The observatory could also work closely with the new competition body (see Chapter 2).

More broadly, the Ivorian government must strengthen consumer protection and thus public trust. Many countries have set up regulatory and consumer protection bodies (including Morocco and South Africa). Much action by these countries has been left to bank regulators but several things can be done by Côte d’Ivoire to improve protection for users of financial products and services. Parliamentary approval of the consumer law (June 2015 by the cabinet), which allows the association of users of banks and financial bodies to represent them in court, is part of this.

Alternative funding to bank loans are under-used in Côte d’Ivoire

Expansion of leasing would benefit the economy (Recommendation 19)

Côte d’Ivoire must pass the draft law on leasing. Bank loans are crucial for funding SMEs, according to the OECD, but just as important is expanding the range of financial products for them (OECD, 2015). Several products are little developed in Côte d’Ivoire for lack of tax incentives and inadequate laws and financial expertise. Leasing currently amounts to only some XOF 50 billion but has an estimated annual potential of XOF 500 billion, according to the International Finance Corporation. It is a funding solution for firms shut out of mainstream formal financing for want of collateral or bad credit history, and can thus encourage formalisation of the economy.

Targeted measures are needed to revive the regional stock exchange (Recommendation 20)

The government should encourage firms to use the stock market to raise long-term capital. Many entrepreneurs associate stock exchange listing, and the greater transparency it involves, with loss of decision-making power (obligatory audits, filing regular information). Cultural obstacles that keep entrepreneurs away from the stock market, and thus from increasing the number of listed firms and energising the market, need to be reduced. New financial infrastructure will help. The regulator’s rapid progress in setting up the SME department in the regional stock exchange and interconnection with ECOWAS member-country stock exchanges will be beneficial.

New financial products must be proposed to households. Encouraging people’s savings habits is a way of capturing more middle-class household savings and matching them to the needs of funding businesses. Stock market investment choices for small savers should be expanded with new financial products (such as share savings plans) tailored to the local market (Box 4.8).

Box 4.8. The failure of share savings plans in Tunisia: Lessons for Côte d’Ivoire

Share savings plans are medium-term savings products allowing investors to manage a portfolio of shares. Tunisia tried to energise its stock market in 1999 and increase the number of savers by introducing these products, with a minimum five-year life. Incentives included half the sum invested being tax-deductible with a limit of 5 000 Tunisian dinars (TND). At least 80% of the investment had to be in listed firms and the rest in government bonds. The shares could be sold but any profit had to be used within 30 days.

The middling results are a lesson for Côte d’Ivoire. A sufficiently competent banking sector is essential. Share savings plans need regular monitoring by banks to ensure they comply with regulations (correct use of funds and compliance with time-limits), which means having a sufficiently qualified staff and an effective computerised infrastructure. There must also be no limit on use of the savings. The Tunisian savers could not put their money in collective investments in transferable securities. Tax incentives must also be adequate. The share savings plans were not attractive because the tax breaks were poorly targeted, as most people in liberal professions (the scheme’s main target) could not benefit from them due to their legal status. Also, other savings products, such as life insurance, attracted middle-income savers while the TND 5 000 tax-deductible limit did not draw high earners.

Source: SMART Finance and GMA Capital Markets (2002).

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