Challenges of providing efficient banking services in a fragile environment: The case of Guinea-Bissau

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by Yannis Arvanitis

Guinea-Bissau’s categorization as a “Fragile state” by many donors and development partners largely mirrors the status of its financial sector. Although it has gone a long way since its complete collapse in the aftermath of the 1998/99 civil war, the financial system is still underdeveloped: in 2013, financial intermediation accounted for about 4% of GDP in 2013 (AfDB, 2014), banking penetration in the country is below 1% of the population and Access to finance is cited as the second most important constraint for business operations behind political instability (80.6%) at par with electricity (75.7%). There are many reforms to be undertaken in the sector, yet they not only pertain to structural transformations from within. Without minimizing the importance of regulatory issues, it is also important to engage in efforts to diversify the economy, improve the equilibrium between the supply and demand of financial services, and promote access to finance.

As reviewed in a recent African Development Bank publication titled Challenges of Providing Efficient Banking Services in a Fragile Environment, the financial system in Guinea-Bissau is very much limited to the banking sector. There are currently four banks operating in a comparatively small market.

  • Figure 1: Private sector credit to GDP in WAEMU
  • Source:  World Bank; BCEAO for Guinea-Bissau; 2013 Data for all countries but Guinea-Bissau are author estimates based on the least squares method.
  • Figure 2: Total lending to the economy in Guinea-Bissau (FCFA mln)
  • Source: BCEAO

Following the 1998/99 civil war, the country experienced an economic collapse, and its formal financial sector nearly disappeared. Private sector credit to the economy plummeted below 1% of GDP in 2003. Since then, overall credits to the economy have been on the rise, reaching 13.8% of GDP in 2013, yet still far below fellow WAEMU countries (Figure 1). What is more, these credits remain predominantly of a short-term nature (Figure 2).

Today, the banking system in Guinea-Bissau is not only narrow, but it is also characterized by low intermediation. Financial intermediation is the basic function performed by banks through the pooling of deposits to be converted into loans. On average in 2011, African banks intermediated about 74% of their deposits, while the ratio was of 109% in non-African banks (Beck et al 2011: 38). In Guinea-Bissau, although the trend has been on the increase, the ratio stood at 60% in 2013. The implication of this low ratio is that existing resources held by banks are not efficiently channeled to support private sector activities. This has roots in many factors.

One explanation lies in the generalized lack of economic opportunities. Indeed, more than 25% of bank lending is concentrated in the cashew sector. Interestingly, bank lending in the country is very much linked to the emergence of Guinea-Bissau as a major cashew nut producer. Lending is mostly used in the context of pre and post cashew harvest financing, and also includes loans to small processing plants, and trading advances to exporters. Figure 3 illustrates how the country’s cashew production evolved alongside short- and medium-term credit.

  • Figure 3: Cashew production and short term-credit
  • Source: BCEAO, African Cashew Alliance

Sector inefficiency is also explained by further supply-side constrains: through a risky and weak business environment, large information gaps throughout the market as well as fragile recourse mechanisms in case of disputes. Conversely, on the demand-side, the economic structure of the country and the overall lack of business opportunities as well as high firm informality which are not conducive to bank lending (although as suggested by Figure 1 the situation is improving). Lack of collaterals, inadequate business plans also come into play. Last but not least, as detailed in the above-mentioned AfDB paper, political and institutional insecurity are also constraining factors.

All in all, considering the level of financial development to date, a carefully sequenced deepening, i.e. an increased presence of finance in the economy, could prove beneficial to the sector’s development. Indeed, economic literature suggests that financial depth is strongly linked to long-term economic growth. In this respect, a pre-condition would be the development of stronger legislation and the build-up of capacity in the national institutions overseeing and promoting finance.

Beyond making use of its legislative prerogatives to strengthen the structuring of the sector, the government must also deal with the fact that many issues constraining financial deepening pertain to broader economic and governance issues. These include the promotion of banking access through implementing the unified payroll system to increase access to banking services. This is all the most important as the greater use of accounts tends to be associated with higher efficiency in financial institutions (World Bank 2012:32). What is more, beyond higher access to individual banking services, this will also support transparency purposes in public financial management. It also includes working on a credit reference system to substitute any need for related-party lending, and increase trust in lending. Finally, policies should emphasize macroeconomic and sector policies devoted to economic diversification. Diverting lending away from the cashew sector will decrease concentration risk. For instance, setting-up structures alongside the recently created “Center for Entreprise Formalisation” to accompany newly created firms to set-up business plans and access credit could be a small but encouraging start. Such issues will need to be tackled through coordinated public policy proposals by the newly elected government, which came to power following the April/May 2014 elections.

For further reading:

  • African Development Bank / OECD (2014). African Economic Outlook 2014: Guinea-Bissau.
  • Beck, T., Maimbo, S.M., Triki, T. and Faye, I. (2011). Financing Africa: Through the Crisis and Beyond, Making Finance Work for Africa, World Bank.
  • World Bank (2012). Global Financial Development Report 2013: Rethinking the Role of the State in Finance. World Bank, Washington, DC


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