Bank competition, interest rates and access to finance

 Bank competition, interest rates and access to finance in the WAEMU Mame Fatou Diagne* January 7, 2011 Did the entry of several banks in West African Economic and Monetary Union (WAEMU) markets since 1995 lower the cost of and increased access to banking services for firms and individuals? While greater competition is generally associated with lower prices and higher output, the effect of competition on bank interest rates and access to credit is ambiguous in theory, especially in poor information environments. In the WAEMU, bank concentration fell in most countries but the stability of net interest margins does not indicate a reduction in bank market power or higher efficiency. Similarly, Central Bank data on interest rates on new deposits and loans show that, in the countries where there was more market entry, SMEs did not experience lower interest rates on loans or higher deposit interest rates. Large firms, however, appear to have benefited from more favorable prices for bank services. Evidence from a panel dataset of firms from the World Bank enterprise survey for Senegal (where the number of banks increased markedly) shows that access to short-­‐term bank credit expanded for medium and large firms, but not micro-­‐enterprises, which remain unbanked. Overall, taking into account all loans, fewer SMEs had loans or credit lines from a financial institution in 2006 than in 2003; also, loan collateral ratios increased. The failure of competition to improve access to finance for small firms is consistent with the view that bank competition does not promote relationship lending. *
Economist, GERSEG, Saint Louis, Senegal and The World Bank. I am grateful to Mr. Kossi Tenou and Mr Sogue Diarisso, Directors of Research and Statistics, and Amadou Cissé, Demba Diallo, Pape Lamine Diop, Balamine Diané and Babacar Fall at the BCEAO for their assistance in obtaining data. I am indebted to Jean-­‐Louis Correa for advice. I thank John Bellows, Ali M. Khadr, Didier Correa, Adama Diaw, Gabriela Dobrescu, Seydou Ouedraogo, Jean-­‐Paul Pollin and seminar participants at the BCEAO/Université Cheikh Anta Diop conference for helpful comments. This paper's findings, interpretations and conclusions are entirely those of the author, and not those of the World Bank, its Executive Directors, or the countries they represent. 1 1. Introduction Following liberalization in the 1990s, the banking sectors of West African Economic and Monetary Union (WAEMU) countries have undergone profound changes, most remarkably the rapid increase in the number of banks, as new establishments entered markets that had long been dominated by a handful of subsidiaries of French banking groups. Still, and in spite of visible transformations such as the rapid growth in the number of bank branches (cf. figure 2) and the diversification of banking products offered, the region has some of the lowest financial intermediation ratios of the world, as well as very low access to banking services, which remain costly and tailored to high or middle-­‐income urban dwellers1. The positive impact of financial development on growth (King and Levine, 1993) comes from numerous channels, including the associated reduction in the costs of external finance to firms (Rajan and Zingales, 1998) and higher resource allocation efficiency (Levine, 2005). Cross-­‐country studies suggest that higher competition in the banking sector generally lowers the costs of financial intermediation and increases firms' access to external financing (Claessens and Laeven, 2005; Demirguç-­‐Kunt et al, 2004). The negative impact of bank concentration on access to finance (particularly for SMEs) is especially strong in low-­‐income countries with weak institutions (Beck et al, 2003). Indeed, higher concentration is associated with monopoly power and an equilibrium with less loans and higher interest rates. Conversely, greater competition (and better regulation) are expected to benefit consumers by yielding price reductions (through efficiency gains and lower rents as prices converge to marginal cost) and improving service quality (or increasing the offer of products) through greater innovation. However, the theoretical relationship between bank concentration and access to finance is not linear and can even be ambiguous when information asymmetries are taken into account. Petersen and Rajan (1995) provide empirical evidence that higher local credit market competition is negatively associated to access to finance by small businesses in the United States because competition does not encourage relationship lending. Due to high uncertainty about the firm's prospects, and unlike a monopolist (which can get a share of a firm's future profits by extracting rents in the future) creditors in a competitive market impose high interest rates, leading to credit rationing (Stiglitz and Weiss, 1981), distorted incentives and high bank liquidity. Furthermore, in banking sectors characterized by high excess liquidity, a small market size concentrated on a few firms and sectors, and short credit maturities, the effects of increased competition on the price of banking services can be ambiguous, particularly if a larger number of banks have to compete on quality on a non-­‐increasing client base. In this case, the combination of high fixed costs (for example the cost of network infrastructure) and the existence of economies of scale (Dem, 2003) could produce a high price (and low output) equilibrium in spite of competition. 1
dŚŝƐƉĂƉĞƌĨŽĐƵƐĞƐŽŶĐŽŵŵĞƌĐŝĂůĂŶĚŵƵƚƵĂůďĂŶŬƐĂŶĚĚŽĞƐŶŽƚĂŶĂůLJnjĞĨŝƌŵƐ͛ƵƐĞ of microfinance institutions, which are reported to be dynamic and to serve the most creditworthy micro-­‐enterprises (IMF, 2004). 2 This paper assesses whether the entry of several banks in WAEMU markets since 1995 lowered the cost of and increased access to banking services for firms and individuals. It analyzes various measures of bank competition and find that, despite a rapid increase in the number of banks and branches, and despite lower bank concentration ratios, net interest margins did not decline; this is consistent with structural estimates of bank market power (based on the elasticity of bank revenue to input prices), which do not indicate an increase in the degree of competition in Senegal and Cote d'Ivoire between 1993 and 2004. Central Bank data show, overall, little change in deposit and loan interest rates for SMEs over the period 2005-­‐2009 but more favorable bank conditions for large firms. Finally, a panel dataset of firms from the World Bank enterprise survey for Senegal (where the number of banks increased from 11 in 2002 to 18 in 2006) allows an analysis of changes in access to banking services by firms of different size. This shows that access to short-­‐term bank credit expanded for medium and large firms, but not micro-­‐enterprises, which remain unbanked. The failure of competition to improve access to finance for smaller firms is consistent with the view that lower bank market power does not promote relationship lending (Petersen and Rajan, 1995). 2. Background on WAEMU banking sectors Policy and regulatory environment The eight countries that form the WAEMU share a common currency (with a fix exchange rate to the euro) and a single regional centraůďĂŶŬ͕ ǁŝƚŚĂƌĞŐŝŽŶĂů͞ĂŶŬŝŶŐŽŵŵŝƐƐŝŽŶ͟ĂŶĚĂƌĞŐŝŽŶĂůĐĂƉŝƚĂů
market. However, bank licensing remains subject to the approval of national authorities, which provides variation in market entry and structure across countries. In spite of the creation of a regional Treasury bill market and the modernization of payment systems, financial integration is in its early stages (Sy, 2007) and the national level remains the relevant market to assess competitive conditions. This setting allows comparing the evolution of the costs of credit and other financial services across WAEMU countries without accounting for monetary and exchange rate shocks. Another possible important predictor of variations in the interest rates offered by banks (beyond the efficiency and competitive structure of the banking sector), could be changes in the quality of information and law enforcement environment in which banks operate. However, available indicators from the World Bank's Doing Business survey do not suggest significant changes in the legal and regulatory environments of WAEMU countries over the past decade (cf. table 1). In the seven WAEMU countries studied2, the strength of legal rights index is equal to 3 on a 0 to 10 scale (where higher scores indicate that collateral and bankruptcy laws are better designed to facilitate lending). This reflects 2
Guinea Bissau became the eighth member of the WAEMU in 1997. It is not included in this paper, due to data unavailability for several indicators. 3 largely harmonized business law within the WAEMU and is much below the 4.5 average for Sub-­‐Saharan Africa. The enforcement of these laws varies by country but differences in the legal and regulatory environment across countries have remained broadly stable. Since deregulation in the 1990s, interest rates on savings accounts and loans have been largely liberalized. However, there remains a minimum rate on small savings accounts; also, the effective cost of credit (including fees and commissions) is limited by usury laws to an annual 18% for banks and 27% for mutualist banks or savings and loans cooperatives. Lending Similar to many African countries, WAEMU banking sectors are characterized by low intermediation, high interest rates, wide intermediation spreads and high bank profitability (Honohan and Beck, 2007). Loan to deposit ratios are around 100% in all WAEMU countries (with the exception of Togo, where loans now only account for 61% of deposits). In 2008, domestic credit to the private sector ranged from 11% in Togo to 24.2% in Senegal, substantially below the Sub-­‐Saharan Africa average (40.1%, see table 1). In fact, both the loan to deposit ratio and private sector credit (in percent of GDP) have been on a declining trend in Cote d'Ivoire, Senegal and Togo, the countries with the highest level of financial development in the region (figure 1). This is related to the development of local capital markets and the government T-­‐bill market3 over the same period. Bank lending is concentrated on short-­‐term maturities with large collateral requirements and a small number of large firms, as weaknesses in the judiciary system and accounting make lending to SMEs (the majority of which are informal) very risky. 3. Theory This section presents a basic model of bank asset allocation and pricing adapted from Klein (1971), with heterogeneous borrowers to analyze the effect of changes in bank market power on deposit and loan rates. The predictions of the model are used in sections 5 and 6 to interpret the evolution of returns on assets, deposit interest rates and lending rates as competition increased in WAEMU markets. Assume a representative bank with two sources of funds F: equity (W) and deposits (Di), collected among two distinguishable types of customers i={e,s}, where e denotes large firms and s denotes individuals or single-­‐owned firms. ‫ ܨ‬ൌ ܹ ൅ σ௜ ‫ܦ‬௜ (1) 3
ĂŶŬƐ͛ŝŶĐĞŶƚŝǀĞƐƚŽŝŶǀĞƐƚŝŶd-­‐bills (and disincentives to engage in other lending) are numerous: ``interest earned in T-­‐bills is tax exempt, carries a zero-­‐weight risk in the calculation of the capital adequacy ratio and can be refinanced at the BCEAO for liquidity purposes" (Sy, 2007) 4 These funds are allocated among 3 asset classes: cash reserves (K), a homogeneous government security (G) and loans to the private sector (L). Let Xj be the proportion of total funds allocated to the jth asset type j={K, G, L}) and Ej be the expected rate of return on that asset. Assets. The expected rate of return on loans to borrowers i, ELi is a function of the loan interest rate ri and the cost ci (XLi) (specific to each customer type)4 : ELi (XLi)= ri ( XLi) -­‐ ci (XLi) (2) ri ( XLi) = f(XLi, mi) (3) Let డ௥೔ ሺ௑ಽ೔ ሻ
డ௑ಽ೔
where mi is bank market power (ability to price above marginal cost), with ൏ Ͳ and డ௥೔ ሺ௑ಽ೔ ሻ
డ௠೔
൐ Ͳ. Assume government securities are in perfect elastic supply to banks and yield return EG. Cash yields implicit return EK. Deposits. Deposits Di are supplied by customers i in exchange for return Ri: Di = Di (Ri) with Di͛;Ri)> 0. Solution. Banks choose XK, XG, XLe, XLs , Re and Rs to maximize return on equity EW5. The solution is straightforward (cf. Klein, 1971): banks choose an asset allocation that equalizes the marginal return on each asset, such that: ௗሺாಽ೐ Ǥ௑ಽ೐ ሻ
ௗ௑ಽ೐
ൌ
ௗሺாಽೞ Ǥ௑ಽೞ ሻ
ௗ௑ಽೞ
ൌ ‫ ீܧ‬ (4) (as EG is the average (and marginal) return on government securities) and the interest rate offered on deposits is: 4
Default risk is not explicitly accounted for in this model. Assume that the bank spends ci to screen applicants or secure collateral such that it lends only to borrowers who will not default on their loans. ௑ೕ ாೕ
5
‫ܧ‬௪ ൌ σ௝
ௐ
5 ܴ௜ ൌ ‫ܧ‬௔ െ ஽೔ ሺோ೔ ሻ
஽೔ᇲ ሺோ೔ ሻ
(5) where Ea measures average returns on assets. The interest rates offered by banks on deposits are therefore a function of the average return on assets and the elasticity of the supply of deposits to the deposit interest rate for customers i. Empirical implications: effect of a decrease in market power By definition, a decrease in market power for market segment i (a lower mi) reduces the interest rate on loans for that group ri) and the bank's expected rate of return to borrowers i (ELi (XLi)) for every loan amount XLi. However, the effect on the share of assets allocated to loans to customers i is ambiguous, depending on the cost function. Equation (5) shows that competition also has an ambiguous effect on the deposit interest rates. Indeed, if the reduced market power lowers banks' average returns on assets (Ea), banks will offer a lower interest rate on deposits. However, competition among banks to attract deposits can raise the elasticity of the supply of deposits to the deposit interest rate offered by a specific bank or branch and therefore make banks offer a higher interest rate to depositors. Note that, in this model, the asset allocation between the two types of customers is independent of the deposit rate decision. This may not be the case in practice if, for example, banks offer preferential loan rates to customers who hold deposits with them or if they compete to attract deposits for less risky customers (for example, large firms) because the cost of loans to depositors is lower and information on their riskiness higher. 4. Measures of bank competition An increase in the number of banks encourages competition by raising the costs of collusion. Yet, as shown by Baumol et al. (1982) and Claessens and Laeven (2003), the actual extent of competition is more related to the threat of entry or ͚͛contestability" than to the actual number of firms in a market. The relatively small number of banks in every WAEMU country hampers direct measurements of bank market power (mi, their ability to price above marginal cost) through markups calculations. In the empirical analysis (sections 5 and 6), market power mi is proxied by measures of bank concentration (share of assets held by the largest three banks). 4.1 Market entry, banks and branches since 1995 Market entry was particularly sustained in the first half of the decade: the number of banks in the WAEMU increased from 64 in 2002 to 93 in 2006, averaging one new bank per country per year (cf. table 2). The increase in the number of banks in operation occurred in all WAEMU countries but was highest in Senegal, Benin and Burkina Faso. In Senegal, rapid market entry (from 11 banks in 2002 to 18 6 in 2006) was followed by a consolidation phase, with mergers reducing the number of banks to 16 in 20086. The creation of bank branches was even more rapid than what bank market entry alone would suggest. In the six years to 2008, the number of bank branches was almost multiplied by four in Benin and Togo and was multiplied by three in Cote d'Ivoire and Niger. The number of branches almost tripled in Senegal and Mali and doubled in Niger over the same period (table 2). This development can be explained by competition, as banks strived to be closer to their customers and provide them with new services. Over the same period, the number of bank accounts also increased markedly, albeit less rapidly than the rate of increase in the number of branches, in all countries but Niger. The latter country is an outlier, with the number of bank accounts being multiplied by six between 2002 and 2008. However, this increase was from a low base, as Niger had the lowest level of financial development of the seven countries. Despite this remarkable increase in the number of bank accounts, Niger still had a ratio of accounts to adults much below the other countries. Over the same period, the number of bank accounts more than doubled in Benin and Senegal. The smallest rate of increase was in Cote d'Ivoire where the number of bank accounts increased by only a third (whereas there were three times as many branches in 2008 as in 2002). The lower rate of increase in accounts (relative to branches) is a reflection of the small client base on which banks competed (cf. figure 2). 4.2 Bank asset concentration Bank concentration, as measured by the share of the three largest banks in total banking sector assets has been declining in most WAEMU countries over the past 15 years, with the exception of Benin and Mali. The reduction of the market share of the three largest banks has been most pronounced in Burkina Faso, Niger and Cote d'Ivoire ( figure 3). In Senegal, bank concentration fell until 2000, then increased slightly as a result of the consolidation phase that followed market entry. 4.3 Intermediation margins Differences across countries in net interest margins (defined as interest income net of interest expenses) may reflect numerous differences in operating conditions, including costs and market power. Accordingly, the levels of intermediation margins can only be partly explained by competition or bank concentration: Benin, which has a highly concentrated banking sector, has lower margins (around 4%) than low-­‐concentration (and low financial development) Burkina, Mali and Niger (around 6%). 6
The market had been dominated since the country's independence by three banks. Six new commercial banks were established, along with investment banks and large mutualist and microfinance institutions. These included Ecobank (a Nigerian group subsidiary) in 1999, Bank of Africa in 2001, Banque Sahélo-­‐Saharienne pour l'Investissement et le Commerce-­‐Senegal in 2003, Banque Atlantique in 2005, Moroccan Group Attijariwafa Bank in 2006, and most recently Nigerian UBA (in 2009). 7 To the extent that net interest margins are a measure of market power or efficiency, they should fall with greater competition7. Consistent with strong market entry and lower bank asset concentration, net interest margins (from Bankscope bank income statements) have declined slightly in Senegal and Cote d'Ivoire and sharply in Togo (figure 4). However, since 1996, they have remained broadly stable in Benin, Burkina Faso and Mali and even increased in Niger. Assuming that default risk and cost structures have remained stable during the period of analysis, this could indicate that there was no change in the market power of banks, or that banks have not become more efficient. To explore the possibility that changes in average price deposit margins could also reflect heterogeneity among banks (for example if the new entrants are less efficient than incumbents), figure 4 also plots the margins for the three largest incumbents (the three largest banks in 1996). The two curves are confounded for most countries, except for Togo and Senegal. In Senegal, the net interest margins of incumbents (which are foreign-­‐owned and generally thought to be very efficient) have increased slightly suggesting that they have retained some market power (or made efficiency gains), despite price competition from new entrants. On the contrary, in Togo the fall in margins has been more pronounced among incumbents. Table 1 presents the results of a regression of net interest margins, with asset concentration as the main explanatory variable and country and year fixed effects. The regressions show no significant effect of bank concentration on net interest margins over the period considered. This is true when all banks are considered (as in columns (1) and (2)) as well as when only incumbents are considered. 4.4 Input prices and bank revenues A more structural approach to estimating the level of competition is provided by measuring the extent to which changes in factor input prices are reflected in bank revenues. Specifically, the ``H statistic" measures (using bank-­‐level data) the elasticity of banks' total revenue with respect to input prices8 7
Demirguç-­‐Kunt and Huizinga (1998) show that banks in countries with a more competitive banking sector (as measured by the share of banking assets in GDP) and smaller banks have smaller interest margins and are less profitable. However, they also show that cross-­‐country differences in margins can be explained by various other factors other than concentration and competition, notably the activity mix of banks, their capitalization and foreign ownership, taxes, inflation and legal and institutional differences. 8
The basic empirical reduced form equation in Bikker and Spierdijk (2008) is: Ž ‫ ܫܫ‬ൌ ߙ ൅ ߚ Ž ‫ ܴܨܣ‬൅ ߛ Ž ܲܲ‫ ܧ‬൅ ߜ Ž ܲ‫ ܧܥ‬൅ σ௝ ߝ௝ Ž ‫ܨܵܤ‬௝ ൅ ߟ Ž ܱ‫ ܫ‬൅ ߳ with II denoting interest income, AFR the annual funding rate, PPE the price of personnel expenses, PCE the price of capital expenditure and other expenses, BSF bank-­‐specific exogenous factors and OI the ratio of other income to total assets. H is calculated as: ‫ ܪ‬ൌ ߚ ൅ ߛ ൅ ߜ Assuming the banking system is in long-­‐term equilibrium, it is in monopoly or perfect cartel for ‫ ܪ‬൑ Ͳ, perfect competition for H=1 and monopolistic competition for 0<H<1. In short-­‐run equilibrium, Shaffer (1983) shows that the H statistic provides only a one-­‐tail test, with H>0 rejecting the monopoly or cartel structure. The long-­‐run equilibrium could be characterized with an absence of entry or exit of firms in response to changes in factor prices (Shaffer, 1983), which is not the case in any of the WAEMU countries over the period 1990-­‐2009. 8 (Panzar and Rosse, 1977). The interpretation is based on the theoretical prediction that under perfect competition, firms price at marginal cost 9while for a monopoly, an increase in input prices would increase marginal costs, reduce equilibrium output and total revenues. Bikker and Spierdijk (2008) estimate H statistics for 101 countries, using balance sheet and income statement data from Bankscope on commercial, cooperative and savings banks. While their point estimates for WAEMU countries (Senegal and Cote d'Ivoire) are subject to cautious interpretation due to small sample sizes (and other limitations in the validity of comparing H statistics across countries or periods), they are indicative of monopolistic competition for both Senegal and Cote d'Ivoire (H>0). Their estimates of a time-­‐dependent Panzar and Rosse model suggest a marginally significant (at the 10% level) reduction in competition in Senegal (over the 1993-­‐2004 period) and no significant change in competition in the Ivory Coast (1992-­‐
2004). Such findings (based on the transmission of changes in input prices to costs and revenue) are consistent with evidence that the reduction in costs that followed investments in the region's payment systems was not reflected in the price of services at the consumer level (IMF, 2004). However, these estimates do not cover the period after 2005, which may have seen some changes in competition. Also, it is worth noting that Bikker and Spierdijk (2008) take the banking sector as supplying an aggregate product. While there may not be large changes in competitive pressures overall, there could be differences across banking products, with some business segments being more competitive than others. We will analyze this possibility in section 5, with respect to interest and deposit rates. In particular, as in the model presented above, we distinguish competition in the individual and SME market from the large-­‐firm market. 5. Cost of financial services 5.1
General banking conditions WAEMU banks have historically required stringent conditions to open and operate accounts, with high fees, commissions and documentation requirements10. The BCEAO data on bank conditions11 is not available nor reliable for all countries. However, it shows that the price of banking services remains very high. Table 3 presents country averages of the minimum deposits and fees required by banks to open and maintain an account. These amounts are difĨĞƌĞŶƚ ĨŽƌ ĨŝƌŵƐ ;ŽƉĞƌĂƚŝŶŐ Ă ͞ĐƵƌƌĞŶƚ ĂĐĐŽƵŶƚ͟) and ŝŶĚŝǀŝĚƵĂůƐ;ŽƉĞƌĂƚŝŶŐĂ͞checking account͟). It is important to note that comparisons across countries -­‐-­‐
or even the interpretation of the data within one country-­‐-­‐ are not straightforward. For example, Senegal reports a relatively low required minimum deposit for opening a current account (20,000 CFA) 9
Under perfect competition, an increase in input prices [proxied by the ratio of interest expenses to total deposits and money market funding] raises both marginal costs and total revenues [ratio of total revenue to total assets] by the same amount as the rise in costs. 10
As an example, in August 2009, one generalist Bank in Senegal required the following to open a checking account: two passport photographs, one government-­‐issued identification document, one proof of address and an initial deposit of: CFA100,000 (US$ 218) for a non-­‐salaried wage earner, CFA50,000 (US$108) for a salaried wage earner, CFA20,000 (US$44) for a salaried wage earner whose wage is directly deposited to the checking account. The account holding fee was CFA6,000 (US$13) per quarter, plus taxes. 11
Recueil statistique sur les conditions de banque ʹ 2009. 9 and no deposit requirement for a checking account but these reported minimum amounts depend on a variety of factors, including the wage-­‐earning status of the customer and whether his wage is received through a direct deposit. The minimum deposit required of firms is inversely related to the country's income and financial development level: it is lowest in Senegal and Cote d'Ivoire and highest in Niger, Mali and Benin. For individual checking accounts, the average minimum deposit required to open an account represents 19% of annual income in Mali and 64% in Niger. Although very high, this minimum deposit requirement on checking accounts in Niger has been substantially reduced (by 36%, from CFA 146,622 in 2006 to CFA 94,444 in 2008). Likewise, the minimum quarterly fees levied by banks on checking accounts also fell substantially in Niger, by 46%, from an average CFA 5,782 in 2006 to an average 3,117 in 2008. Yet such fees remain very high, at 9.5% of average income in Niger in 2007 and 5% in Mali. 5.2 Loan and deposit interest rates This section is based on data on bank conditions (average interest rates on new loans and new deposits) calculated by the BCEAO (from monthly reporting by commercial banks of all new credits and deposits). The data is available for all WAEMU countries, since 2005. Figure 7 shows average interest rates for new bank credits granted to individuals, private firms and single-­‐owned firms (the categories are mutually exclusive). With the exception of Cote d'Ivoire, the interest rate differential between individuals/single-­‐owned firms and private firms is about 200bp and has been slightly declining since 2005. Over the period, there has been a decrease in the money market rate from almost 5% in 2005 to 3.3% at the end of 2009 (see figure 6). But nominal interest rates on new ĐƌĞĚŝƚƐŚĂǀĞƌĞŵĂŝŶĞĚďƌŽĂĚůLJƐƚĂďůĞŝŶ^ĞŶĞŐĂů͕ŽƚĞĚ͛/ǀŽŝƌĞĂŶĚĞŶin. Overall, there has not been a decline in interest rate spreads on new credits over the period 2005-­‐2009. This is confirmed by figures 8 and 9, which show the evolution of interest rates on new loans by loan purpose. Interest rates for consumer credit remained constant in all countries (at levels varying between 10 and 13%), except for Togo, where they declined to about 11%, from a high level (about 15%) in 2005. Similarly, interest rates on loans for equipment and working capital did not decrease. This pattern could be observed if credit access had expanded and riskier firms got access to credit but such an explanation is not consistent with the evolution of bank credits. Finally, figure 10 shows interest rates offered by banks on new savings and long-­‐term deposits. While these rates declined in Benin (in line with the decline in the money market rate), they have increased in ƵƌŬŝŶĂ&ĂƐŽ͕ŽƚĞĚ͛/ǀŽŝƌĞ͕DĂůŝ͕EŝŐĞƌĂŶĚ^ĞŶĞŐĂů͘These higher deposit rates could indicate greater competition to attract deposits, especially in Senegal, where they occurred within the context of non-­‐
increasing average returns on assets (see figure 5). In Mali, Senegal and Togo, the increase was larger for private firms (not single-­‐owned), suggesting higher competition for that market segment. 6. Access to financial services 10 6.1
Individuals The data does not allow calculating the proportion of individuals or households that have access to bank services (such as a bank checking or savings accounts or a loan), as reporting is at the bank level and some individuals have multiple bank accounts. Table 2 shows the number of bank accounts as a percentage of the adult population in 2002 and 2008. The increase in the number of bank accounts between 2002 and 2008 outpaced population growth. The rate of increase was largest in Niger, Benin, Senegal and Niger. In the latter country, despite this very rapid expansion in the number of bank accounts, access to bank services remained lowest, with 0.5 accounts per 100 adults in 2008 (up from 0.1 in 2002). In 2008, Senegal had the highest number of bank accounts per 100 adults, at 2.8 accounts per 100 adults, followed by Mali, Cote d'Ivoire and Benin. 6.2
Firms: the case of Senegal The World Bank Enterprise Survey provides information on access to finance by firms in Senegal. This dataset includes both a sample of micro-­‐establishments (with less than 5 employees) and larger firms, in services and all manufacturing sectors. While World Bank Enterprise Surveys are available in all WAEMU countries, some of the firms surveyed in 2003 in Senegal were surveyed again in 2006, creating a panel of 356 firms, which is used for comparing access to finance over time. In figure 11, we plot access to a bank overdraft by firm size. While over 70% of large firms (with more than 100 employees) have a bank overdraft authorization, almost no micro-­‐enterprise enjoys this service. The graph shows that the proportion of firms with a bank overdraft increased sharply in 2006, when 17% of small enterprises (with 6 to 10 employees) had access to an overdraft, from zero in 2003. This may be due in part to the better creditworthiness (and higher age) of surviving firms but there were also increases (although more modest) in access to an overdraft credit among older and larger firms. This expansion of credit access, however, did not concern micro-­‐enterprises with less than 5 employees. Also, it concerns a very short-­‐term credit instrument. When all loans or credit lines are considered, the proportion of SMEs with a loan or credit line from a financial institution actually decreased between 2003 and 2006 (figure 13). Access to credit from a financial institution increased only for medium firms, which had between 50 and 100 employees (from 33.3% to 54.5%). This is consistent with Petersen and Rajan's prediction that lower bank market power does not promote relationship lending and therefore access to credit by small firms. Also consistent with this prediction, the median ratio of collateral value to loan increased for all firms and was greater or equal to 100% (figure 14). The very high collateral ratios for all firms point to problems in the area of contract enforcement, which leads banks not to engage in relationship lending and possibly to ration credit. This in turn leads firms to self-­‐select out of banking services. With about 69% of loan requests by micro-­‐
enterprises (1 to 5 employees) to banks being rejected, very few (18%) of firms with 1-­‐5 employees applied for a loan in 2006. While the probability of success increases with firm size, the rejection rate still stood at 43.3% for firms with more than 100 employees in 2006 (figure 17). 11 Finally, median bank loan maturities lengthened substantially for all firms, especially for larger firms (figure 15). This suggests that, conditional on having access to finance, the financing needs of firms were better met in 2006 and 2003. These indicators of market access for firms do not suggest that bank market entry led to greater access to banking services in Senegal. Similarly, OLS and logistic regressions in table 2 show no significant change in access to bank loans or in loan or overdraft rates, between 2003 and 2007. However, access to a bank overdraft has increased, particularly for medium-­‐small (between 6 and 50 employees) firms. Also, conditional on having access to banking services, firms have been able to access better terms of financing, with longer maturities and slightly lower collateral ratios. Conclusion Over the past two decades, the banking sectors of WAEMU countries have undergone dramatic transformations. The long-­‐standing dominating presence of a few large French bank subsidiaries has been challenged by the entry of regional private African banks. Yet competition seems to have been insufficient to substantially raise access to banking services: the proportion of the population that is served by the banking sector is estimated to be below 5% and SMEs and the informal sector continue to be excluded from access to bank loans. While the number of banks increased, the number of branches soared and bank concentration ratios fell, structural indicators show little change in the degree of bank market power. Similarly, interest rates on loans for equipment and working capital did not fall and even increased in countries where there was more market entry (Benin, Senegal). SMEs did not experience lower interest rates on loans or higher deposit interest rates. Large firms, however, appear to have benefited from better access to finance and more favorable prices for bank services. In Senegal, short-­‐term bank credit expanded for medium and large firms, but not micro-­‐enterprises, which remain unbanked. Overall, taking into account all loans, fewer SMEs had loans or credit lines from a financial institution in 2006 than in 2003; also, loan collateral ratios increased. This failure of competition to improve access to finance is consistent with the view that lower bank market power does not promote relationship lending (Petersen and Rajan, 1995). The evidence that competition can raise access to credit, lengthen maturities, reduce loan rates and raise deposit rates for large firms implies that policies aimed at reducing bank market power (for example, requiring full disclosure by banks of their fees and commissions or reducing switching costs) can encourage investment. However, these gains are limited for individuals and small firms, for which access to finance is more problematic than the cost of finance. 12 References Angelini, Paolo and Nicola Cetorelli (2003), ͞dŚĞĞĨĨects of regulatory reform on competition in the banking industry." Journal of Money, Credit and Banking, 663-­‐684. Asli Demirguç-­‐Kunt, Harry Huizinga (1998), ͞Determinants of commercial bank interest margins and profitability: some international evidence." Policy Research working paper, The World Bank. Beck, Thorsten, Asli Demirguç-­‐Kunt, and Vojislav Maksimovic (2003), ͞Bank competition and access to finance: international evidence." Working paper. Bikker, Jacob and Laura Spierdijk (2008), ͞How banking competition changed over time", Tjalling C. Koopmans Research Institute Discussion paper Series. Claessens, Stijn and Luc Laeven (2003), ͞What drives bank competition? some international evidence." Policy research working paper, The World Bank. Claessens͕^ƚŝũŶĂŶĚ>ƵĐ>ĂĞǀĞŶ;ϮϬϬϱͿ͕͞Financial dependence, banking sector competition, and economic growth." Journal of the European Economic Association, 3, 179-­‐207. Dem, Ismaila (2003), « Economies de coûts, économies d'échelle et de production jointe dans les banques de l'umoa." Notes d'information et statistiques, BCEAO. Demirguç-­‐Kunt, Asli, Luc Laeven͕ĂŶĚZŽƐƐZŽƐƐ>ĞǀŝŶĞ;ϮϬϬϰͿ͕͞Regulations, market structure, institutions, and the cost of financial intermediation." Journal of Money, Credit and Banking, 593-­‐622. Djankov, Simeon, Caralee McLiesŚ͕ĂŶĚŶĚƌĞŝ^ŚůĞŝĨĞƌ;ϮϬϬϳͿ͕͞Private credit in 129 countries." Journal of Financial Economics. 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relationships." The Quarterly Journal of Economics, 110, pp. 407-­‐443. ZĂũĂŶ͕ZĂŐŚƵƌĂŵĂŶĚ>ƵŝŐŝŝŶŐĂůĞƐ͘;ϭϵϵϴͿ͕͞&ŝŶĂŶĐŝĂůĚĞƉĞŶĚĞŶĐĞĂŶĚŐƌŽǁƚŚ͘ΗThe American Economic Review, 88, 559-­‐586. 13 ZŽƐƐĞ͕:͘ĂŶĚ:͘WĂŶnjĂƌ;ϭϵϳϳͿ͕͞ŚĂŵďĞƌůŝŶǀƐ͘ZŽďŝŶƐŽŶ͗ĂŶĞŵƉŝƌŝĐĂůƚĞƐƚĨŽƌŵŽŶŽƉŽůLJƌĞŶƚƐ͘ΗStudies in Industry Economics no. 77, Department of Economics, Stanford University. ^ŚĂĨĨĞƌ͕^ŚĞƌƌŝůů;ϭϵϴϯͿ͕͞EŽŶ-­‐structural measures of competition: towards a synthesis of alternatives." Economic letters, 349-­‐353. ^ŚĂƉŝƌŽ͕Ăƌů;ϭϵϴϵͿ͕͞dŚĞŽƌŝĞƐŽĨŽůŝŐŽƉŽůLJďĞŚĂvior." In Handbook of Industrial Organization (R. Schmalensee and R.D. Willig, eds.), volume I, Elsevier Science Publishers. ^ƚŝŐůŝƚnj͕:ŽƐĞƉŚĂŶĚŶĚƌĞǁtĞŝƐƐ;ϭϵϴϭͿ͕͞ƌĞĚŝƚƌĂƚŝŽŶŝŶŐŝŶŵĂƌŬĞƚƐǁŝƚŚŝŵƉĞƌĨĞĐƚŝŶĨŽƌŵĂƚŝŽŶ͘Η
American Economic Review, LXXI, 393-­‐410. ^LJ͕ŵĂĚŽƵE͘Z͘;ϮϬϬϳͿ͕͞&ŝŶĂŶĐŝĂůŝŶƚĞŐƌĂƚŝŽŶŝŶƚŚĞtĞƐƚĨƌŝĐĂŶDŽŶĞƚĂƌLJhŶŝŽŶ͘ΗJournal of Financial Transformation, 19, 91-­‐103. World Bank, The (2009), Doing Business 2010: Reforming through difficult times. The World Bank. 14 Graphs and tables Figure 1: Bank intermediation BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
0
0
1
20
2
40
0
0
1
20
2
40
BENIN
1990 1995 2000 2005 20101990 1995 2000 2005 2010
0
0
1
20
2
40
TOGO
1990 1995 2000 2005 2010
Loan to deposit ratio (LHS)
Private sector credit, % of GDP (RHS)
Source: IFS
15 Figure 2: Market entry and bank penetration BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
0
10
20
0 10 20 30
0
10
20
0 10 20 30
BENIN
2002
2004
2006
2008
2002
2004
2006
2008
0
10
20
0 10 20 30
TOGO
2002
2004
2006
2008
Number of banks (LHS)
Branches per million adults (RHS)
Bank accounts per 1000 adults (RHS)
Source: Commission bancaire, WDI
16 Figure 3: Bank asset concentration: assets held by the largest 3 banks, in % of total assets BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
40
50
60
70
80
40
50
60
70
80
BENIN
1995
2000
2005
20101995
2000
2005
20101995
2000
2005
2010
Source: Bankscope, Commission bancaire and IFS
17 Figure 4: Net interest margins, 1996-­‐2008 BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
2 4 6 8
2 4 6 8
BENIN
1995
2000
2005
1995
2000
2005
2 4 6 8
TOGO
1995
2000
2005
All banks
Incumbents
Source: Bank income statements from Bankscope
Incumbents designate the largest 3 banks (as measured by assets) in 1996.
Net interest margin = net interest revenue/total earning assets
18 Figure 5: Average return on assets, 1996-­‐2008 BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
-4 -2
0 2 4
-4 -2
0 2 4
BENIN
1995
2000
2005
1995
2000
2005
-4 -2
0 2 4
TOGO
1995
2000
2005
All banks
Incumbents
Source: Bank income statements from Bankscope
Incumbents designate the largest 3 banks (as measured by assets) in 1996.
Return on Assets=banks' net income/total assets
19 2.5
3
3.5
4
4.5
5
Figure 6: Money market rate (WAEMU, 2005-­‐2009, monthly) 2005
Source: IFS
2006
2007
2008
2009
2010
20 Figure 7: Average bank loan interest rates (for new loans) by type of borrower (2005-­‐2009) BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
5
10
15
5
10
15
BENIN
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010
5
10
15
TOGO
2005 2006 2007 2008 2009 2010
Individuals
Private firms
Single-owned firms
Source: BCEAO
3-month moving averages
21 Figure 8: Bank loan interest rates (for new loans) by purpose (2005-­‐2009) BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
5
10
15
5
10
15
BENIN
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010
5
10
15
TOGO
2005 2006 2007 2008 2009 2010
Housing
Consumption
Source: BCEAO
3-month moving averages
22 Figure 9: Bank loan interest rates (for new loans) by purpose (continued, 2005-­‐2009) BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
5
10
15
5
10
15
BENIN
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010
5
10
15
TOGO
2005 2006 2007 2008 2009 2010
Equipment
Working capital
Source: BCEAO
3-month moving averages
23 Figure 10: Bank interest rate (for new deposits) by type of creditor (2005-­‐2009) BURKINA FASO
COTE D'IVOIRE
MALI
NIGER
SENEGAL
3
4
5
6
3
4 5
6
BENIN
2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010
3
4
5
6
TOGO
2005 2006 2007 2008 2009 2010
Individuals
Private firms (not single-owned)
Source: BCEAO
3-month moving averages
24 Figure 11: Senegal: Access to a bank overdraft by firm size Figure 12: Senegal: Average bank overdraft rate Interest rate on authorized bank overdraft
0
9
.2
10
.4
11
.6
12
.8
13
Firm has an authorized bank overdraft
1-5
6-10
11-50
Number of employees
2003
50-100
1-5
100+
.8
.6
.4
.2
0
2003
Source: World Bank enterprise survey. Panel sample of firms
50-100
100+
2007
25 100+
2007
Proportion of firms with a loan or credit line
from a financial institution
11-50
Number of employees
50-100
Source: World Bank enterprise survey. Panel sample
Figure 13: Senegal: Access to credit by firm size, 2003-­‐2007 6-10
11-50
Number of employees
2003
2007
Source: World Bank enterprise survey. Panel sample
1-5
6-10
Figure 14: Senegal: loan collateral by firm size Figure 15: Senegal: loan maturities by firm size
Median term of bank loan, by firm size
0
80
10
90
20
months
100
30
40
110
Median collateral value, in % of loan amount
1-5
6-10
11-50
Number of employees
2003
50-100
100+
1-5
6-10
2007
11-50
Number of employees
2003
Source: World Bank enterprise survey.
Panel sample of firms with an existing bank loan or line of credit
50-100
100+
2007
Source: World Bank enterprise survey. Panel sample of firms with an existing bank loan
Figure 16: Senegal: credit loan applications Figure 17: Senegal: loan applications and rejections Average number of loan applications and rejections in 2006
by firmsize (number of employees)
.2
0
.5
.4
1
.6
1.5
2
.8
Firm has made at least one loan application in 2006
1-5
1-5
6-10
11-50
Number of employees
50-100
26 11-50
50-100
100+
Loan rejections
Source: World Bank enterprise survey 2007.
Firms that made at least one loan or credit line application with a financial institution
Source: World Bank enterprise survey.
6-10
Loan approvals
100+
27 28 29 30 31