Page 1 Report No: 38146 -TG T OGO F INANCIAL S ECTOR R EVIEW F INAL REPORT N OVEMBER 2006 W ORLD B ANK F INANCIAL S ECTOR U NIT A FRICA R EGION AFTFS Page 2 i TABLE OF CONTENTS Preface and Acknowledgement.......................................................................................iv Executive Summary.........................................................................................................v List of Acronyms............................................................................................................vii Chapter 1. Introduction and Background on Togo .......................................................1 A. Rationale and Objective of a Financial Sector Review...........................................1 B. Background on the Economy of Togo ....................................................................2 C. Background on the Financial System of Togo........................................................2 Chapter 2. The Banking Sector in Togo .......................................................................6 A. Structure of the Banking Sector in Togo.................................................................6 B. Products Offered by Banks in Togo........................................................................9 C. Performance and Financial Condition Banks in Togo..........................................13 D. Banking Regulation and Supervision....................................................................22 E. The Story of the Partial Restructuring of the Banking Sector in Togo.................23 F. Recommendations for Strengthening the Banking Sector....................................26 G. The Future of the Banking Sector and Access to Financial Services in Togo......29 Chapter 3. The Microfinance Sector in Togo .............................................................30 A. Evolution of the Microfinance Sector in Togo......................................................30 B. Main Institutions and Characteristics of the Microfinance Sector........................32 C. Microfinance Clients, Products and Services........................................................34 D. Performance and Financial Condition of the Microfinance Sector in Togo.........35 E. Supervision and Monitoring Mechanisms of Microfinance in Togo....................38 F. The Postal Financial Services and Microfinance in Togo.....................................39 G. The National Microfinance Strategy and the Role of Donors...............................40 H. The Future of Microfinance in Togo.....................................................................42 Chapter 4. The Pension System in Togo.....................................................................44 A. The Caisse Nationale de Sécurité Sociale (CNSS)...............................................44 B. The Caisse de Retraites du Togo (CRT) ...............................................................50 C. The Future of the Pension System in Togo...........................................................53 Chapter 5. Financing State-Owned Enterprises in Togo ............................................55 A. State-Owned Enterprises and the Banking Sector.................................................55 B. SOTOCO...............................................................................................................55 C. OTP/IFG (Office Togolais des Phosphates/International Fertilizer Group).........60 D. Other State-owned Enterprises in Togo................................................................65 E. The Future of State-Owned Enterprises in Togo and Banks.................................67 Selected References........................................................................................................68 Annex 1: Togo at a Gla nce............................................................................................69 Annex 2: Notes on the Banking Sector in Togo ............................................................71 Annex 3: Notes on the Insurance Sector in Togo...........................................................82 Annex 4: Institutional and Legal Framework for Public Enterprises in Togo...............86 Page 3 ii List of Tables Table 1.1: Togo Selected Economic and Financial Indicators, 2000 – 2004......................3 Table 1.2:Structure of the Financial System as of December 31, 2004..............................5 Table 2.1:Structure of Banking Sector and Importance of Government Ownership in 2004 and 2005..............................................................................................................................7 Table 2.2: Share of Banking Sector in WAMU Region as of December 31, 2003.............8 Table 2.3: Average Gross Non Performing Loans for Banks within WAMU..................14 Table 2.4: Non-Performing Loans, and Level of Provisioning by Bank as of December 31, 2004.............................................................................................................................15 Table 2.5:Government of Togo Debt (in CFAF billion)...................................................15 Table 2.6: Bank Compliance with Prudential Ratios as of September 2005 ....................19 Table 2.7: Selected Prudential Ratios for Banks, 2003-2005 ...........................................20 Table 2.8: Operating Ratios and Net Profits for Banks, 2000-2004.................................21 Table 3.1: Selected Statistics of the Microfinance Sector, 2000-2004 .............................31 Table 3.2: Selected Performance Indicators for the Five Most Active.............................35 Table 3.3: FUCEC-Togo: Selected Performance Indicators, 2000-2004..........................36 Table 4.1: CNSS-Togo Contributors and Beneficiaries, 2000 - 2004 ..............................45 Table 4.2: Contribution Rates to Pensions Schemes in the CIPRES Region....................46 Table 4.3: CNSS-Togo Benefits Formula.........................................................................47 Table 4.4: CNSS-Togo Income Statement, 2004 (in million CFAF)................................48 Table 4.5: CNSS - Togo Summarized Balance Sheet, 2004 in CFAF billion..................50 Table 4.6: CRT: Evolution in Number of Participants and Dependency Rate, ................51 Table 4.7: CRT Benefits Formula.....................................................................................52 Table 4.8: CRT Income Statement, 2000-2004 (in CFAF)...............................................53 Table 5.1: Cotton Production in Togo over the last 11 crop years: ..................................56 Table 5.2: SOTOCO Balance Sheet, 2001 – 2004 (in CFAF billion)...............................57 Table 5.3: SOTOCO Income Statement, 2001 – 2004 (in CFAF billion) ........................57 Table 5.4: SOTOCO: Capital and Net Income: 2001- 2004.............................................59 Table 5.5: Evolution of Phosphate Production by CTMB, 1961-1973.............................60 Table 5.6: Evolution of Phosphate Production by the Nationalized OTP, 1974-2001 .....62 Table 5.7: OTP/IFG Phosphate Production, 2002-2004...................................................63 Table 5.8: OTP/IFG Balance Sheet, 2002 – 2004 (in CFAF billion) ...............................64 Table 5.9: OTP/IFG: Summary Income Statement, 2002-2004 (in CFAF million).......64 Table A2.1: Market Share of Banks..................................................................................71 Table A2.2.: Distribution of Bank Credits by Term to Maturity......................................73 Table A2.3: Distribution of Bank Deposits by Term........................................................74 Table A2.4: Distribution of Bank Clientele at end September 2005 ................................75 Table A2.5: Distribution of Bank Deposits by Size for Selected Banks at end- September 2005...................................................................................................................................76 Table A2.6: Distribution of Loans by Size at BTCI at end September 2005....................77 Table A2.7: BTCI: Plausible Balance Sheet of the Good Bank........................................78 Table A2.8: BTCI: Distribution of Deposits by Size and Category..................................79 Table A3.1: Structure of Life and Non-Life Insurance Markets, 2004.............................83 Page 4 iii List of Figures Figure 2.1:Evolution of Bank Deposits Vs. Bank Credits, 2000-2005.............................10 Figure 2.2: Solvency Status of Banks, 2000-2005............................................................17 Figure 2.3:Average Liquidity Ratios for Commercial Banks, 2000-2005........................18 Figure 3.1: Evolution of Microfinance Deposits and Loans, 2000-2004..........................31 Figure A2.1: Evolution of Bank Deposits Vs. Bank Credits, 2000-2005.........................71 Figure A2.2: Evolution of Bank Deposits by Sector, 2000-2005.....................................72 Figure A2.3: Evolution of Bank Credits by Sector, 2000-2005........................................72 Page 5 iv PREFACE AND ACKNOWLEDGEMENT 1. In the context of preparation of donor’s reengagement in Togo in the short to medium term, a World Bank team conducted a review of the financial sector of Togo and visited the country during a mission that took place November 14 to 25, 2006. 1 2. The team for the financial sector review of Togo was composed of Ms. Korotoumou Ouattara (AFTFS) and Task team leader, Ms. Fatou Assah (OPD), Ms. Yvette Dan-Houngbo (PREM), Messrs. André Ryba (AFTFS), Jonathan Darboux (AFTFS), and Kofi Egbeto (AFTPS). 3. The team met with several officials and authorities of the Central Bank, the Ministry of Economics, Finance and Privatization, and Ministry of Development, commercial banks and quasi-banks, microfinance institutions, insurance companies, state-owned enterprises, and other public and private sector agencies. 4. The mission wishes to express its sincere appreciation to the Togolese authorities and private sector officials for their excellent cooperation with the mission. 1 The mission was led by André Ryba (AFTFS). Page 6 v EXECUTIVE SUMMARY 1. The financial sector review of Togo focused on providing a diagnosis of the main institutions in the sector including: (i) a quantitative assessment of banking sector performance and condition; (ii) a review of the performance of non-bank financial institutions including microfinance, insurance and pensions; (iii) the financial condition of state-owned enterprises and their impact on the financial sector. 2. Togo’s financial sector, with total assets of 51 percent of GDP is in critical condition. The sector is dominated by commercial banks which holds 62 percent of total financial system’s assets and is in distress. Between 2000 and 2004, non performing loans levels were the highest in the WAMU region and fluctuated between a low of 33.5 percent to a high of 42 percent. Over the same period the banking sector as a whole was insolvent. There is a considerable degree of government ownership of banks in a sector which is small, concentrated and highly inefficient. Only a thorough restructuring of the banking sector will help rejuvenate the sector and ensure that it plays a more meaningful role in the growth of the economy and the development of the private sector. 3. Supervision of the banking sector by sub-regional authorities has not been very effective . Although external factors such as deficiencies in the judicial system which hamper creditors’ ability to enforce contracts and collect credit may explain the high level of non performing loans, weak supervision of institutions with poor corporate governance and lack of transparency played an important role. Banking supervision by the sub-regional Banking Commission, while professional, can be rendered ineffective by weak enforcement of regulations or directives of the Banking commission which is a responsibility shared with national Ministries of Finance.. 4. The critical condition of the banking sector in Togo is very closely linked to loans to large state-owned companies where corporate governance and performance are questionable. Large exposure of the banking sector to poorly performing large firms, sometimes in violation of banking regulations, ultimately caused loan defaults that the Government is trying to clean up. An analysis of the state of public enterprises operating in the phosphate, and cotton sectors suggests that strong, radical measures need to be taken to improve the management of those firms to stop their negative impact on the banking sector and the rest of the economy. 5. The relatively stable microfinance sector in Togo is well suited to help expand access to financial services to the under-served. Microfinance has a rather long history in Togo with the creation of the largest financial cooperative (FUCEC) in 1969. The sector has been growing rapidly and reached more than 265 000 clients by the end of 2004, mobilized US$48 million and had US$39 million in loans outstanding. Savings deposits and loans from microfinance institutions represented 10 percent and 11.6 percent of those of banks respectively. The growth in the microfinance sector has been fueled in part by the donor community including the World Bank. With the withdrawal of donor support and especially the European Union in 1993 due to political turmoil, microfinance in Togo Page 7 vi suffered but was still able to deliver its services fully to low income clients. Togolese microfinance institutions have been performing rather well with low levels of non- performing loans and very high compliance with prudential ratios. 6. Supervision of microfinance which is being handled by the Ministry of Finance in accordance with the PARMEC law 2 which governs microfinance regulation in the UMOA countries needs to be improved. The resources of the Ministry of Finance are currently insufficient and the monetary authorities need to enhance the quality of supervision by entrusting the supervision of the largest entities as soon as possible to the regional Central Bank as planned. 7. The insurance sector in Togo includes eight insurance companies, with five non- life and three life companies currently in operation . With total premium of US$22 million (as of 2003), the Togolese market is small and ranked 137 th in the world for the life business, and 118 th for non-life. As of December 31, 2004, As of December 31, 2004, insurance penetration represented 1.2 percent of GDP and insurance density was also very low with US$4.56 per capita. Weaknesses of the insurance industry in Togo include the instable political situation and low economic growth, which have hindered further development of the sector, as demonstrated by the rather erratic premium growth recorded over the past years. Analysis of the financial condition of the insurance sector and its potential for access to finance was not deemed a priority and, thus, not undertaken by the review. 8. The pension system in Togo includes two institutions, the Caisse des Retraites du Togo (CRT) for civil servants, and the Caisse Nationale de S écurité Sociale (CNSS) for private sector employees and other categories of government-employed personnel. Both systems are unfunded defined benefit schemes, whereby contributions from active employees finance current benefits entitlements. Both institutions are public entities and face financial difficulties and structural challenges that will become critical in the short to medium term. CRT financial condition is extremely critical with large government contribution arrears and the weight of Government debt on CNSS is threatening the institution’s survival. Reforms are needed as soon as possible for both pension funds to allow the Government of Togo to eliminate the increasing fiscal liability that it is facing. In addition, saving the pension system will not only insure some income security for retirees and other beneficiaries but will also unleash much needed funds for the development of the financial sector. 2 Togo ratified the PARMEC Law for microfinance in 1998. Page 8 vii LIST OF ACRONYMS APIMFT Association Professionnelle des Institutions de Microfinance du Togo BCEAO Banque Centrale des E tats de l’Afrique de l’Ouest BIA Banque Internationale pour l’Afrique BOAD Banque Ouest africaine de Développement BRS Banque Régionale de Solidarité BTCI Banque Togolaise pour le Commerce et l’Industrie BTD Banque Togolaise de Développement CAS- IMEC Cellule d’Appui et de Suivi des Institutions Mutualistes ou Coopératives d’Epargne et de Crédit CEET Compagnie Energétique et Electrique du Togo CET Caisse d’Epargne du Togo CIMA Confédération Inter-africaine des Marchés de l’Assurance CIPRES Conférence Inter-africaine de Prévention Sociale CNSS Caisse Nationale de Sécurité Sociale COFIPA Compagnie Financière pour l’Afrique CRCC Caisse de Retraite Complémentaire des Cadres CRN Country Re-engagement Note CRT Caisse de Retraite du Togo CTMB Compagnie Togolaise des Mines du Bénin DNA Direction Nationale des Assurances ETI Ecobank Transnational Incorporated FBT Financial Bank Togo FUCEC Faîtière des Unions de Coopératives d’Epargne et de Crédit GDP Gross Domestic Product GoT Government of Togo ICSID International Center for Settlement of Investment Disputes IFG International Fertilizer Group IMCEC Institutions Mutualistes ou Coopératives d’Epargne et de Crédit IMF International Monetary Fund LICUS Low Income Country Under Stress MFI Microfinance Institution NGO Non Governmental Organization NPLs Non Performing Loans OHADA Organisation pour l’Harmonisation du Droit des Affaires en Afrique OTP/IFG Office Togolais des Phosphates/International Fertilizer Group PAR Portfolio at Risk PARMEC Projet d’Appui à la Réglementation des Mutuelles d’Epargne et de Crédit PE Public Enterprise ROA Return on Assets ROE Return on Equity ROSCA Rotating Saving and Credit Association SIAB Société Inter-Africaine de Banque SMB Société Minière du Bénin SME Small and Medium Enterprise Page 9 viii SNI Société Nationale d’Investissement SOE State-Owned Enterprises SOTOCO Société Togolaise de Coton STOCA Société Togolaise de Crédit Automobile TdE Togolaise des Eaux UTB Union Togolaise de Banque WAMU West African Monetary Union Page 10 Page 11 1 TOGO - FINANCIAL SECTOR REVIEW Introduction and Background on Togo 1. The West African country of Togo covers a land area of 56 800 sq. km. Its population estimated at close to 6.0 million in 2004 is growing at a rapid annual rate of 2.6 percent. Togo is a low income country, one of the poorest in the world, with estimated Gross National Income (GNI) per capita of US$380 and a gross domestic product (GDP) of US$2.1 billion in 2004 (See Annex 1 on Togo Development Indicators). 2. The donor community halted its financial assistance to Togo in 1993 out of concerns over governance and flawed elections. This aid suspension has taken a heavy toll on the country’s socio-economic situation. Due to significant arrears, World Bank lending to Togo has been inactive since May 1, 2002. However, during this current non- accrual period, the World Bank continues to provide analytical and advisory assistance on key aspects of socio-economic development within the Low Income Country Under Stress (LICUS) framework. R ATIONALE AND O BJECTIVE OF A F INANCIAL S ECTOR R EVIEW 3. In preparation of donor’s re-engagement in Togo in the medium term, the World Bank, together with UNDP prepared and issued a Country Re-engagement Note (CRN) for Togo covering the period of January 2005 to June 2006, which was discussed by the Board on December 14, 2004. The CRN aims at defining a strategic framework for donors’ re-engagement in the medium term (12 to 18 months) by laying out a process that would ultimately lead to a clearance of Togo’s arrears to IDA and other creditors, and a full resumption of Bank operations in the country. 4. In light of the growing evidence that financial sector development can spur economic growth whereas financial instability can harm growth and cause major disruptions and have a negative impact on poverty reduction and shared-growth, the CRN recognized that, to accelerate economic growth and reduce poverty significantly, Togo will need to restore private sector confidence in the economy and in particular improve the investment climate by restoring the banking system’s ability to finance economic activity. In addition, prompt actions are needed to improve the quality and access to utility services, and strengthen the regulatory framework of port, telecommunications, water and electricity sectors, where private operators already play an increasing role. 5. The objective of this financial sector review of Togo is to acquire a better knowledge of the sector by undertaking a diagnostic of the financial institutions in operation and identify issues that need to be addressed to restore the financial sector’s Page 12 2 ability to finance economic activity and improve private sector access to financial services as planned in the CRN. 6. The next sections of this introductory chapter will provide some background on the economy as well as the financial system of Togo with a description of the main institutional players as well as the regulatory and supervisory framework. The next Chapters will deal successively with the banking and microfinance sectors as well as the pension system. The last chapter 5 will deal with the financing of Togo’s largest state- owned enterprises by commercial banks and its impact on the entire financial system. B ACKGROUND ON THE E CONOMY OF T OGO 7. The economy of Togo has traditionally depended on primary good production and services. The main source of growth of the Togolese economy remains exports of phosphates, cotton, coffee, cocoa and cement which accounted for 35 percent of GDP in 2005 (EIU, Country report, 2005). Performance in agriculture, which accounted for 41 percent of GDP in 2004, remained poor (Table 1.1). The cotton industry which is a pillar of Togo’s economy has experienced a steady decline in its production after reaching a peak of 187, 703 tons in 1998/99. The failure of the state-owned cotton company (SOTOCO) to pay cotton producers several years in a row may be partly to blame for cotton output reduced to only half of its peak production volume. By contrast, industrial production which represented 22.8 percent of GDP in 2004 grew by 1.3 percent in the first quarter of 2005 according to BCEAO. However, manufacturing continued its long decline, falling by 2.7 percent in 2005. 8. The economic performance of Togo has not been consistent during the past decade. Periods of growth (1994-97) corresponded closely with improved political conditions, better macroeconomic, and the partial resumption of external aid. Conversely, periods of economic decline (1991-93, and 1998-2001) were correlated with political disruption, poor economic management and the suspension of donors’ assistance. In fact, economic activity in Togo was severely disrupted by political turmoil followed by cessation of donor funding in 1992 causing GDP to fall by 22 percent in two years from 1991 to 1993. Despite recent good economic performance in Togo with GDP real growth estimated at close to 3 percent in 2004, economic growth remains hampered by the continued suspension of external aid. B ACKGROUND ON THE F INANCIAL S YSTEM OF T OGO 9. The financial deepening ratio (M2/GDP) 3 of 28.6 percent in 2004 was higher than the Sub-Saharan Africa average of 25 percent but remained low by comparison to 3 M2 is a broad measure of money which equals the sum of currency outside deposits money banks and demand deposits other than those of the Central Government, time savings and foreign currency deposits of residents. Page 13 3 countries like South Africa which stood at 59 percent (Table 1.1). The shallowness of the financial system in Togo is in large part due to the low level of development of its economy. Credit to the private sector included credit to all state-owned enterprises as well and represented 96 percent of total domestic credit. However, it was still low at 16.3 percent of GDP (Table 1.1). Table 0.1: Togo Selected Economic and Financial Indicators, 2000 – 2004 Indicators General Indicators 2000 2001 2002 2003 2004 Population (million) 5.36 5.53 5.68 5.84 5.99 Population growth (%) --- 3.17 2.71 2.82 2.57 GDP (CFAF billion) 946.0 955.3 1006.0 1044.5 1071.6 GDP (US$ billion) 1.34 1.28 1.61 2.01 2.22 GDP per capita (Atlas method, US$) 344 371 Key economic ratios --- 1984 1994 2003 2004 Exports of goods & services/GDP --- 51.2 30.5 33.8 33.5 Gross domestic savings/GDP --- 12.9 11.3 5.3 4.5 Gross national savings/GDP --- 13.8 9.3 7.6 8.5 Inflation (CPI, average, %) --- 3.9 3.2 -0.9 0.4 Growth trends 1984-94 1994-04 2003 2004 (Average annual growth) Real GDP growth (%) --- 0.5 3.3 3.0 2.8 Real GDP per capita growth (%) --- 0.3 0.5 0.8 0.8 Structure of the Economy ( % of GDP) 1984 1994 2003 2004 Agriculture --- 33.5 34.9 40.8 41.2 Industry --- 20.2 21.2 22.2 22.8 Manufacturing --- 6.4 9.1 9.3 9.4 Services --- 46.3 43.8 37.1 36.0 Financial Indicators 2000 2001 2002 2003 2004 M2 (Money + Quasi-money) (CFAF billion) 246.3 239.7 234.6 260.0 307.1 M2/GDP (%) 25.0 28.6 Total Domestic Credit (CFAF billions) 206.3 189.0 164.0 183.9 181.4 Credit to private sector* (CFAF billion) 147.8 137.6 127.9 167.0 174.2 Credit to Private sector/GDP (%) -- -- -- 16.0 16.3 Source: World Bank and IMF Staff Estimates Note: * Private sector credit includes credit to state-owned enterprises Page 14 4 10. At the end of 2004, the financial system in Togo was comprised of seven commercial banks, four quasi-banks or finance companies, 145 licensed retail microfinance organizations, eight insurance companies, and a pension system (Table 1.2). The banking sector dominated the financial system in Togo with total bank assets accounting for 62 percent of total financial system assets. By contrast, the insurance sector with five non-life 4 and three life companies was small and represented only 3 percent of total financial assets. 5 Overall, total assets of the financial system in Togo represented close to 51 percent of the country’s GDP and had the potential to significantly contribute to economic growth. 11. Togo is a member of the Union Monétaire Ouest Africaine (UMOA) or West Africa Monetary Union (WAMU) established in 1973 6 and consequently hosts a branch of the regional Central Bank or Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), the regional Central Bank, as well as an antenna of the regional stock market or Bourse Régionale des Valeurs Mobilières (BRVM). Several other regional financial organizations also have their headquarters in Lomé including the Banque Ouest Africaine de Développement (BOAD), and the Reinsurance Company CICA- Ré. Regulatory and Supervision Framework for the Financial System of Togo 12. Monetary policy, currency, and foreign exchange regulations in Togo are controlled and determined by the country’s membership in the WAMU or Franc Zone. BCEAO (the Regional Central Bank) and Commission bancaire (the Regional Banking Commission) established in 1990 oversee all financial intermediaries in the WAMU zone. 13. In WAMU countries commercial banks and credit institutions are governed by the banking law of BCEAO 7 and supervised by the banking commission (C ommission bancaire ). Microfinance institutions (MFIs) are regulated and supervised under the regional Institutions Mutualistes ou Coop ératives d’Epargne et de Crédit (IMCEC) Law most commonly known as the PARMEC 8 law. Supervision of MFIs has been delegated by the regional Central Bank to each country Ministry of Finance. In Togo, a microfinance unit at the Ministry of Finance named Cellule d’Appui et de Suivi des Institutions Mutualistes ou Coopératives d’Epargne et de Crédit (CAS-IMEC) has been in charge of supervising licensed MFIs since the law went into effect in the country in July 1995. With the revision to the PARMEC Law currently underway, BCEAO will 4 There were six non-life insurance companies by December 2005 5 The insurance sector was not considered a priority for this study, given its small size and minor role played in the financial system of Togo. A few notes on the sector are provided in Annex 2. 6 WAMU is made up of eight countries including Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger , Senegal, Togo and Guinea Bissau. 7 The Law was adopted in Togo in November 1990 as law n0. 90-17 of November 05, 1990. 8 PARMEC = Projet d’Appui à la Réglementation des Mutuelles d’Epargne et de Crédit Page 15 5 assume a greater role in supervising MFIs particularly those with deposits greater than CFAF 300 million (US$600,000). Table 0.2:Structure of the Financial System as of December 31, 2004 December 2004 Number Total Assets (in billions of CFAF) In percent of total financial system In percent of GDP Banks 7 342.4 62 32 Private banks 4 140.5 25.5 -- Domestic 1 80.5 14.6 -- Foreign 3 60.0 10.9 -- Public banks 3 201.9 36.6 -- Insurance and Pension Funds 10 149.8 27 14 Insurance Companies 8 20.5 3.7 -- Pension Funds 2 129.3(*) 23.5 Other Non Bank Financial Institutions 53 58.8 11 5 Quasi-banks (savings bank, leasing) 2 25.9 4.7 -- Microfinance Institutions (licensed)** 51 32.9 6.0 -- Total Financial System 70 551.0 100 51 Source: World Bank Staff Survey Notes: (*) Pension Funds assets appear to be large as (i) they benefited at inception from a strong capital endowment, and (ii) they were able to build reserves as they were a few pensioners until a decade ago. However, it is estimated that this amount includes about 75% of government related debt, in the process of being provisioned. ** Information not available for all 145 licensed MFIs 14. In 1994, Togo became a member of the Conférence Inter-africaine des Marchés de l’Assurance (CIMA), which provides a unified supervisory and regulatory regime for insurance companies of the 14 CFA franc zone countries. Under the terms of the CIMA treaty, all 14 countries are bound to a single set of insurance laws and regulations. Decisions regarding granting or withdrawal of licenses and sanctioning of insurance companies that are not in compliance with the rules are made by the Commission Régionale de Contrôle des Assurances (“the Commission”). The Commission is governed by a representative council with participants nominated by member countries, as well as representatives from the regional reinsurance company CICA-RE, and from the insurance trade association for the region. At the national level, the Direction Nationale des Assurances (DNA), a unit of the Ministry of Finance also supervises domestic insurance companies. 15. The Conseil Régional de l’Epargne et des marchés financiers is the sole regulator of the capital market in all WAMU countries. In a treaty signed in October 1993, all WAMU countries also adopted the Organisation pour l’Harmonisation du droit des Affaires (OHADA) law which promotes regional integration and economic growth through harmonization of business law in member countries. Togo is also a member of the regional Conférence Inter-Africaine de Prévention Sociale (CIPRES) which regulates and supervise all pension funds in the region. Page 16 6 The Banking Sector in Togo 16. The banking sector dominates the financial system in Togo. As of December 31, 2005, the Togolese banking sector was composed of seven banks (BTCI, BIA, BTD, Ecobank, Financial Bank, SIAB, UTBA) 9 and four quasi banks (CET, STOCA, Gari, and Cauris). Three new banks ( Banque Régionale de Solidarité (BRS), Banque Atlantique, and Banque Sahélo-Saharienne- BSIC ) received a license in 2005, but had not yet started operations. 17. The Togolese banking sector has been in distress for many years with several banks in a negative net worth position and unable to meet prudential norms. In fact, from 2000 to 2004, the banking sector as a whole was insolvent. This chapter will examine the state of the banking sector in Togo, its structure and products before providing appropriate recommendations for its restructuring. S TRUCTURE OF THE B ANKING S ECTOR IN T OGO 18. The seven banks in operation and two quasi banks 10 under consideration had, as September 30, 2005, total assets of CFAF 393.7 billion (US$652.5 million), an increase of close to 7 percent compared to total assets of CFAF 368.3 billion at end December 2004. Banks and quasi-banks had a total of 1174 employees, and 67 branches. At end- September 2005, total assets for the banks alone amounted to CFAF 367.4 billion (US$660.7 million) in September 2005; they had 1020 employees and 39 branches (Table 2.1). Total deposits reached CFAF 278.9 billion (US$501.5 million) and total credits CFAF 194.2 billion (US$349.3 million). A Small Banking Sector 19. Overall the banking sector in Togo remains small with banks and quasi-banks assets representing only 4.9 percent of total GDP of the WAMU region, although it represented 6.1 percent of the total region’s banking market (Table 2.2). However, total assets in Togolese banks were overestimated by a number of bad assets that had not been appropriately provisioned and in some cases assets had been boosted by recapitalization efforts by the Government. 11 It is worth noting that other WAMU countries including Mali and Senegal had a share of assets larger than their share of GDP and the reverse was true for Côte d’Ivoire and Niger (Table 2.2). 9 Financial Bank acquired assets and deposits from the former SNI 10 Cauris and Gari are risk capital and guarantee funds respectively that operate throughout the region but have very limited activities in Togo. Thus, they will not be reviewed in this study. 11 The amount of total assets for UTB in 2004 was boosted by a claim on Government acquired as part of the recapitalization. In 2003, total assets were close to CFAF 49 billion. Page 17 7 Table 0.1:Structure of Banking Sector and Importance of Government Ownership in 2004 and 2005 Financial Institution Capital (CFAF billion) Shareholder (percent of shares) Number of Branches 12/31/04 Nb. of employees 12/31/04 Assets 12/31/04 (CFAF billion) Assets 09/30/05 (CFAF billion) Banks BIA 4.8 Belgolaise (57.54%) Private (13.53%) Aiglo (10.00%) Cofipa (7.00%) BOAD (7.00%) Other (4.90%) 6 120 49.3 58.9 BTCI 1.7 CNSS (62.6%)* SOTOCO (22.6%)* Private (14.8%) 7 257 91.1 95.5 UTB 2.0 Government (100.0%)* 11 210 72.6 79.8 SIAB 2.8 Lybia (86.0%) GoT (14%)* 1 55 5.1 5.9 BTD 3.1 GoT (43.5%)* BCEAO (20.0%) Boad (13.4%) FBT (10.0%) CNSS (8.5%)* Afd (3.3%) Other banks (1.6%) 9 203 38.2 42.1 SNI/FBT 1.5 Financial (81.0%) Private (19.0%) 1 50 5.6 8.6 ECOBANK 2.0 ETI (80.8%) Private (14.0%) CNSS (5.2%)* 3 125 80.5 76.6 Total banks 38 1020 342.4 367.4 Quasi-banks Financial Institution Capital (CFAF billion) Shareholder (percent of shares) Number of Branches 12/31/04 Nb. of employees 12/31/04 Assets 12/31/04 (CFAF billion) Assets 09/30/05 (CFAF billion) CET 0 GoT (100.0%)* 28 152 25.6 26.0 STOCA 0.3 Safca (44.0%) Cfao (22.0%) Holdef (34.0%) 1 2 0.3 0.3 Total Quasi-banks 29 154 25.9 26.3 Sources: BCEAO, Banking Commission, Individual banks’ annual and auditors’ reports, and staff estimates Note: * Represents direct or indirect Government ownership Page 18 8 Table 0.2: Share of Banking Sector in WAMU Region as of December 31, 2003 Country Banks Quasi- banks Total Share of banks and quasi banks Assets in percentage Share of GDP in percentage Benin 9 2 11 10.0 9.6 Burkina 8 5 13 10.7 11.8 Cote d’Ivoire 16 2 18 31.3 36.9 Guinea-Bissau 1 -- 1 0.3 0.7 Mali 8 1 9 14.0 11.5 Niger 8 1 9 3.2 6.5 Senegal 12 2 14 24.4 18.1 Togo 7 4 11 6.1 4.9 WAMU 71 20 91 100 100 Source: Banking Commission 2004 Report Large Government Presence and Small Foreign Participation 20. The Government of Togo (GoT) had directly and indirectly (through public enterprises) an important stake in five 12 out of the nine establishments in operation in the banking sector as of September 2005. The assets of these institutions represented 62.5 percent of total banks and quasi-banks’ assets in Togo in 2004. The four commercial banks in the capital of which GoT had a stake accounted for 68 percent of total bank credits and 60 percent of total bank deposits in 2004. 21. In general, government presence in the capital of financial institutions, particularly when it is substantial as in Togo, has been shown to be a hindrance to the development of these institutions and their viability. Management decisions in those instances may not be based on sound business practices. This has been the experience in many African countries and has led almost everywhere to the disengagement of the State from the capital of banks and quasi banks. 22. The Regional Central Bank (BCEAO) held 20 percent of the capital of BTD despite being the bank regulator. In fact, BCEAO has taken a 20 percent share in development banks in many WAMU countries. However, it has indicated its willingness to entertain requests from national Governments to disengage from the capital of banks on their territory. Such an action would eliminate the conflict of interest inherent in BCEAO’s participation in banks it is supposed to regulate. 23. Foreign banks had an important stake in only three banks (BIA, FBT and SIAB) which account for 19.8 percent of total bank assets as of September 2005. BIA is a 12 BTCI, UTB, SIAB, BTD and CET Page 19 9 subsidiary of Belgolaise, a Belgium bank. FBT is a member of the Financial Group which holding is based in Lomé, Togo and SIAB is an affiliate of the Lybian Foreign Arab bank. 24. Belgolaise has indicated its intention to withdraw from Togo and is looking for a replacement partner for BIA. The Lybians have agreed to put up for sale part of their holdings to Togolese nationals at an appropriate time. French banks are no longer present in Togo after BNP recently withdrew from the capital of BTCI which has since been dominated by two public enterprises, CNSS (largest shareholder) and SOTOCO. SOTOCO is the largest borrower of BTCI. It is, however, considering withdrawing from the capital of the bank. Ecobank is a subsidiary of ETI (a holding company located in Lomé) and is, therefore, considered a domestic bank, although it was recently involved in a merger with the First Bank of Nigeria. 25. Foreign participation in quasi-banks existed with STOCA a leasing and equipment finance company, which is majority owned by a group based outside of Togo. However, that group has asked for the withdrawal of STOCA’s license. A Concentrated and Undiversified Banking Sector 26. The banking sector in Togo appears quite concentrated. At end September 2005, the largest bank accounted for 26.0 percent of total bank assets, 29.4 percent of total deposits and 39.5 percent of total credits (Table A.2.1 in Annex 2). The market share held by the two largest banks account for almost half of the sector with 47.8 percent of bank assets, 50.7 percent of total deposits, and 57.5 percent of total credits. The concentration of the sector is even more striking when looking at the share of the market held by the three largest banks which accounted for 68.7 percent of total bank assets, 71.2 percent of total deposits and 66.5 percent of total credits. In general, a very concentrated banking sector could signal of lack of competition that may adversely affect the quality and access of financial services. P RODUCTS O FFERED BY B ANKS IN T OGO 27. Banks in Togo primarily offered loan and deposit services to their clients. Both bank deposits and credits in Togo saw a remarkable increase between end December 2000 and end September 2005. However total deposits rose faster than total credits (Figure 2.1). Page 20 10 Figure 0.1:Evolution of Bank Deposits Vs. Bank Credits, 2000-2005 DEPOSITS AND CREDITS 0 500000 1000000 1500000 2000000 2500000 3000000 D E C . 2 0 0 0 D E C . 2 0 0 1 D E C . 2 0 0 2 D E C . 2 0 0 3 D E C . 2 0 0 4 S E P T . 2 0 0 5 CREDITS DEPOSITS Source: BCEAO 28. Private sector nominal deposit growth (61.5 percent between December 2000 and September 2005) was the main factor behind the rise in total deposits. While public enterprises deposits rose faster, a 169 percent jump over the period 2000-2005, they represented only a small proportion of total deposits. Thus, at end December 2004, private sector deposits accounted for 87.3 percent of the total deposits, public enterprises held 7 percent of all deposits, and Government held 9 percent (Figure A. 2.1 in Annex 2). 29. The growth in bank credit in Togo between 2000 and 2005 was primarily fueled by a 22.9 percent increase of credit to the economy, including public enterprises (Figure A.2.2 in Annex 2). Credits and Deposits are Mainly Short Term 30. Almost three-quarter of the amount of bank credit outstanding was of short term nature in September 2005 (Table A.2.2 in Annex 2). Three banks (SIAB, FBT and BTD) departed, however, from the general pattern. BTD had a predominance of medium term loans (81.2 percent) in its portfolio because it provided primarily small equipment loans to individuals. Medium term loans at FBT represented 68.8 percent of its portfolio because of a claim on Government resulting from the restructuring of the bank, as discussed later in the report. Without this claim on Government of CFAF 2.7 billion, the distribution of loans between short and medium term would have been 75 and 25 percent respectively at FBT. Page 21 11 31. From these figures, it can be inferred that either banks in Togo did not finance investment expenditures of firms or they financed these expenditures with short term credit which could have a negative impact on the firms’ financial structure. 32. To a large extent, short term credits are favored by banks because of the absence of longer term resources. Close to 80 percent of bank deposits were short term in nature at end September 2005 (Table A.2.3 in Annex 2). They were either sight deposits or savings deposits, both of which were redeemable on demand. Banks in Togo did not raise funds on the financial market. Any savings deposit with maturity between 7 days and over five years qualifies for term deposit. However, the prominence of relatively short maturity for term deposits at banks could reinforce the incentive to favor short term credits. 33. Only two banks (FBT and BTD) had longer term resources representing more than 30 percent of their total deposits base. For FBT, this was the result of negotiations with insurance companies to balance its medium term loan made to Government. However, those term resources were insufficient to fully cover its medium term credits. Bank Clientele in Togo 34. Bank customers in Togo include a diverse mix of clients from private to public firms as well as individuals. At the end of September 2005, the majority of bank deposits (47 percent) originated from private firms and 35 percent from individuals (Table A.2.4 in Annex 2). These resources were mainly used for loans to private sector firms (54 percent of the loan portfolio). Loans to public enterprises and individuals accounted respectively for 35 percent and 9 percent of the total bank loan portfolio. 35. However, major differences existed among public and private banks. The largest public banks lent primarily to public enterprises. Thus, over 58 percent of BTCI loans were outstanding to public enterprises, mainly SOTOCO, the state cotton company. UTB was also a major lender to public enterprises, in particular to OTP, the state-owned phosphate company. 36. Among the banks that focused their lending activity to private firms are BIA (92.6 percent) and Ecobank (88.3 percent). SIAB concentrated its loan activity mainly on individuals which accounted for 58.4 percent of its loan portfolio. It is worth noting that Ecobank had a large proportion of its assets in interbank loans (48.4 percent or CFAF 39 billion) which were not included in the loan figure of Table A.2.4. These were mainly loans outstanding to other members of the group in the context of spreading the risk on large credits. 37. Other institutions such as BTD and CET also lent primarily to individuals. Sixty five percent of loans at BTD were consumer loans as well as a few housing loans which did not exceed CFAF 2 billion and had a maximum term to maturity of 10 years. CET had a very diffuse clientele made up mostly of individuals. Page 22 12 38. Bank deposits came primarily from private sector firms and individuals even for banks such as BTCI which lent primarily to public enterprises. At BTCI, public enterprise and government deposits accounted for 26.8 of total deposits compared to 72.8 percent held by the private sector. Distribution of Bank Deposits and Credits 39. The distribution of deposits by size for banks for which information is available, shows that there were a large number of small deposits which accounted for, however, a small share of total deposits (Table A.2.5 in Annex 2). While between 54 and 90 percent of the number of deposit accounts were those with an amount less than CFAF 200,000 (US$400), they represented only between 1 and 4 percent of total deposit amounts. 40. With 90.9 percent of its total deposits held in accounts of less that CFAF 200,000 (US$400), SIAB appeared to cater more to small depositors compared to other banks. The same focus on small depositors appeared to be true for CET and BDT, although that could not be verified with available data. 41. A comparison of credits and deposits of clients at BTCI 13 shows that small depositors held 54.5 percent of all deposits accounts, while they benefited from only 39.7 percent of the number of total loans (Table A.2.6 in Annex 2). This underscores a lending bias towards larger customers. 42. Several banks are, however, making an effort to reach poorer customers as well as small and medium enterprises (SMEs). Information collected from a survey questionnaire submitted to banks showed that Ecobank had a non negligible amount of loans outstanding to SMEs. At BTD, SMEs could also access different types of financing. FBT had a lending program for SMEs based on the following: (i) Medium sized firm with volume of business between CFAF 1 billion and CFAF 3 billion could receive credit up to CFAF 100 million for a maximum maturity of 3 years at 11.5 percent annual interest rate; (ii) Small firms with a volume of business between CFAF 100 million and CFAF 1 billion could get up to CFAF 50 million loan amount for up to two years at a 12 percent annual interest rate; and (iii) Very small firms with a volume of business less than CFAF 100 million could receive CFAF 10 million in loans for up to 18 months at a 14 percent annual interest rate. While these loan terms appear to favor access to SMEs, the enterprises were still required to provide balance sheets for the past three years, estimated financial statements for the next two years and a minimum guarantee contribution of 30 percent of the amount of the project being financed. 43. Some banks were also offering refinancing to microfinance institutions. Both Ecobank and BTD had lines of credit to WAGES, FUCEC. The Financial Group has microfinance subsidiaries in Benin and Chad but not in Togo. However, FBT intends to diversify into the micro finance field in the medium term. 13 BTCI was the only bank where data for available for a comparison of credits and deposits by size Page 23 13 P ERFORMANCE AND F INANCIAL C ONDITION B ANKS IN T OGO 44. The Togolese banking sector is in critical condition. It suffers from a high level of non performing loans leading to a negative net worth, and from high operating costs and negative returns. The precariousness of the banking system is illustrated by the fact that six out of seven banks and one quasi bank were under close surveillance (surveillance rapprochée ) as of September 30, 2005. 14 Five institutions have been under close surveillance since 1994, one since 1995 and the last one since 2002. This shows that the problems have been with the banking sector for a long time and that little effort (at least until recently) was made to remedy the situation. In most cases, the reasons identified by the supervisory authorities for the close surveillance relate to information and accounting systems, quality of management, insufficient net worth, and lack of respect of prudential norms. STOCA, a leasing and equipment finance company has asked the authorities to withdraw its license. While the request makes sense because the institution has been experiencing difficulties for many years, and has ceased lending activities to focus on recoveries. The disappearance of STOCA without a replacement would, however, leave Togo without an important instrument of financing, particularly for SMEs. A Banking Sector in Distress 45. The banking sector in Togo is visibly in crisis, registering a very high level of non performing loans (NPLs). At end December 2004, NPLs for banks in Togo were 29.5 percent, still the highest in WAMU countries despite a decrease from a very high 41.3 percent in December 2003 (Table 2.3). However, the decline in the average NPLs for Togo in 2004 reflected the recapitalization of UTB and CET which was done by transfer of fully provisioned loans to the Government. 46. For the banking sector as a whole, the ratio of gross NPLs, i.e., before provisions, would have been higher had the NPLs included credits that either the banking commission or external auditors asked the banks to downgrade from performing to non- performing but which the banks did not do. 14 The establishments under close surveillance are: BIA, BTCI, UTB, BTD, ECOBANK, SIAB and CET. The latter is also under interim administration. Ecobank Togo close surveillance was lifted in December 2005. Page 24 14 Table 0.3: Average Gross Non Performing Loans for Banks within WAMU End December 2003 End December 2004 Benin 10.3% 12.9% Burkina 12.45 13.3% Cote d’Ivoire 25.1% 26.5% Guinea-Bissau 27.4% 2.9% Mali 15.6% 23.1% Niger 26.5% 19.2% Senegal 14.0% 12.9% Togo 41.3% 29.5% WAMU 19.7% 20.4% Source: Banking Commission annual reports 47. To get a full appreciation of the extent of the NPL problem and its contribution to the banking sector crisis in Togo, it is necessary to examine the data for individual banks before restructuring as shown in Table 2.4. 48. Non performing loan ratios ranged from a low of 23.7 percent to a high of 83.9 percent. However, even the low of 23.7 percent is high by international banking standards, and even in the WAMU region (Table 2.4). 49. The level of provisions for non performing loans turned out to be insufficient for BTCI, BIA, UTB, CET and Ecobank. This under-provisioning would have, thus, led to an overestimation of these institutions’ annual profits (or underestimation of losses) and an overestimation of their effective net worth. 50. Two large public enterprises, SOTOCO, the cotton company, and OTP, the phosphate company, were responsible for a large part of these non-performing loans. 15 In addition to financing the cotton industry, which is facing difficulties, SOTOCO also financed a number of investments on behalf of the Government, using bank loans. The Government did not reimburse these advances which made it even more difficult for SOTOCO to service its debt. 51. The phosphate company (OTP), the other large bank debtor, has been facing financial difficulties for many years. After Government gave a mandate to a foreign firm (IFG) to run the phosphate mining activities, IFG signed an agreement with banks to pay OTP consolidated debt over a ten years period (with one year grace period) at a 2 percent annual rate of interest. Unfortunately, IFG has missed all the payments due thus far. 15 Sotoco’s debt to the banking system was CFAF 44 billion and OTP’s CFAF 26 billion (see Chapter on financing public enterprises). . Page 25 15 Table 0.4: Non-Performing Loans, and Level of Provisioning by Bank as of December 31, 2004. Banks Gross Non Performing Loans ratio Level of Provisions of non performing loans BIA 69.1% 41.6% BTCI 60.6% 80.0% SIAB 32.3% 95.0% BTD 27.8% 99.7% FBT - - ECOBANK 23.7% 76.3% STOCA 83.9% 75% UTB* 65.5% 70.1% CET* 47.0% -- Source: Commercial banks and staff estimates Note: * Data is for 2003 because restructuring occurred in 2004. 52. It is worth noting that several banks made loans to the same enterprises and thus, many debtors are found in the non-performing portfolio of several banks. SICOT (in the cotton industry), Yentoumi, Cap Oil Togo, SONAPRA, STS, SOCITO, S3G, are such examples. 53. Government of Togo domestic debt and arrears were creating a ripple effect on the situation of banks and contributed to the increase in their non performing loans. Indeed, suppliers of services to Government as well as public enterprises which contracts had not been paid could not meet their obligations towards banks. Total Government domestic debt was estimated at CFAF 268.4 billion (US$536.8 million), representing 25 percent of Togo’s GDP as of March 2005 and had been more or less stable, without any noticeable decrease over the past five years (Table 2.5). Table 0.5:Government of Togo Debt (in CFAF billion) 2001 2002 2003 2004 March 2005 Commercial debt 104.7 96.0 96.9 100.6 94.6 Debt to the private sector 82.8 74.1 75.0 78.7 72.7 Debt to Pub. Enterprises 21.9 21.9 21.9 21.9 21.9 Financial debt 120.7 119.0 116.1 113.8 114.5 Other 57.2 49.5 62.4 60.0 59.3 Total Debt 282.6 264.5 275.4 274.4 268.4 Source: Ministry of Finance Page 26 16 54. Government commercial debt was estimated at CFAF 94.6 billion in March 2005 of which CFAF 72.7 billion was owed to the private sector. Government has been unable to repay its debt to the telecommunication, electricity and water companies 16 which, so far are in good standing with the commercial banks. However, should Government arrears persist and even grow, these companies are likely to run arrears towards banks and contribute to a deepening of the banking crisis. 55. Aware of the negative impact of its debt on the economy, the Government of Togo recently launched a call for bids to hire a firm to conduct an audit of its debt, as a first step towards its restructuring. The Government also established in 2001 a loan recovery commission ( commission de recouvrement ) chaired by the President of the Supreme Court to help banks recover some of their loans in arrears. The commission can call in delinquent borrowers to work out a repayment schedule and to pressure them into reimbursing their loans. According to commercial bankers, the novelty of this commission had an initial positive impact, but it appears to have already lost its effectiveness. 56. Unfortunately, the legal and judicial environment in Togo is not very helpful in enforcing contracts including loan contracts. Realization of mortgages in Togo is also very difficult. Even when the judiciary has authorized the seizure of property, a banker will be hard pressed to find a buyer because society does not endorse purchase of seized property. Negative Net worth in the Banking Sector 57. The large non-performing loan portfolio affected the net worth of the banking sector which remained negative for the past several years. In fact, Togo was the only country within WAMU where the average solvency ratio for banks was negative. With the exception of 2000, the ratio was consistently negative from December 2001 to September 2005 (Figure 2.2). It is worth noting that these levels of net worth were still underestimated because they did not take into account under-provisioning of NPLs by banks. Were the banks to adequately provision for bad loans, effective net worth would have been lower, thus, accentuating the negativity of the solvency ratio. 16 Debt to the telecommunication company (TogoTelecom) was estimated at CFAF 10.5 billion, and debt to CEET was CFAF 1.9 billion. Page 27 17 Figure 0.2: Solvency Status of Banks, 2000-2005 Source: BCEAO Liquidity of Banks below Prudential Norms 58. With the exception of the year 2002, the banking sector of Togo as a whole did not meet the regulatory liquidity ratio several years in a row between 2000 and 2004 (Figure 2.3). However, by September 2005, five banks out of the six 17 for which data was available, were in compliance with the liquidity ratio requirement (Table 2.6). That was due in part to the restructuring of UTB, CET and BTCI (discussed later in the report) which brought some liquidity into the system 59. Maintaining a certain level of liquidity is important for banks to meet withdrawal request from customers, and avoid a liquidity crisis. Thus far, Togolese banks have been able to meet the demands for cash from their customers. In fact so long as deposits outstanding keep growing, i.e., that entry of funds are greater than withdrawals, banks in Togo will be able to manage. 60. It should be noted that a shift in the term structure of deposits could also influence the liquidity ratio as term deposits contribute to lower the liquidity ratio. Between end- December 2000 and end September 2005, demand deposits held by the private sector in Togo rose by 45 percent compared to a 75.5 percent increase in term/savings deposits. Thus, term deposits have been increasing faster than demand deposits and claiming a higher share of total deposits at banks. At end September 2005, term deposits represented 53 percent of total private sector deposits compared to 48 percent of at end December 17 Ratio for FBT was not yet available as the bank started operations only in 2005. -8 -7 -6 -5 -4 -3 -2 -1 0 1 DEC.2000 DEC.2001 DEC.2002 DEC.2003 DEC.2004 SEPT.2005 SOLVENCY RATIO Page 28 18 2000. If the current trend continues, the liquidity ratio is likely to deteriorate further and cause greater concern. 18 Figure 0.3:Average Liquidity Ratios for Commercial Banks, 2000-2005 Prudential Ratios Mostly Unmet 61. Most banks in Togo have been having difficulties to comply with the prudential ratios set by the banking commission (Table 2.6). As of September 30, 2005, numerous violations of the prudential norms could be observed. Three out of six banks did not meet the minimum capital, or the solvency ratios. By comparison, in December 2003, four banks out of six did not meet the solvency ratio. That slight improvement comes from the fact that the September 30, 2005 figures took into account the partial restructuring of UTB which met its solvency ratio starting in 2004. Five banks out of six did not meet the transformation ratio. That is an indication that term lending remained constrained by the lack of availability of longer term resources, as in other WAMU countries. According to BCEAO, a slight improvement in the situation of banks was visible as of September 2006 and showed that a total of four banks met the ratios for minimum capital, solvency, fixed assets, total large exposure, and liquidity. Three banks rather than one also met the transformation ratio. 62. The figures in Table 2.7 show the trend for individual banks compliance with regulatory norms from 2003-2005. Two banks, BTCI and BIA representing 46.3 percent of deposits and 57.5 percent of credits had a negative solvency ratio (with negative net worth) as of September 30, 2005. Two other banks, UTB and SIAB, did not meet the solvency ratio at the end of 2003, and were subsequently recapitalized in 2004. 19 It 18 Of course, as noted earlier, this will depend on the maturity of the term deposits. 19 UTB and SIAB were recapitalized by the Government of Togo and Lybia respectively. LIQUIDITY RATIO 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 DEC.2000 DEC.2001 DEC.2002 DEC.2003 DEC.2004 SEPT.2005 Page 29 19 should be noted that the quasi bank CET still posted a negative solvency ratio in 2005 despite its recapitalization in 2004. Table 0.6: Bank Compliance with Prudential Ratios as of September 2005 Ratios* Requirement Number of banks in compliance Amount of minimum capital CFAF 1 billion 3 out of 6 Solvency (capital adequacy) ratio > 8% 3 out of 6 Fixed assets ratio < 100 3 out of 6 Insider lending < 20% 4 out of 6 Single large exposure < 75% Net worth 3 out of 6 Total large exposure < 8 * Net worth 3 out of 6 Portfolio structure > 60% 0 out of 6 Transformation ratio > 75% 1 out of 6 Liquidity ratio > 75% 5 out of 6 Source: BCEAO Notes: * Ratios calculated for six banks out of seven. FBT started operating in 2005 and several ratios were not yet available. 63. As described later in the report, if UTB were to allocate additional provisions, as was recommended by its external auditors its net worth and solvency ratio would have been negative. In that case, three banks, BTCI, BIA and UTB, accounting for 67.6 percent of deposits and 73.9 percent of credits would have been in violation of the solvency ratio, thus, illustrating quite vividly the extent of the banking crisis in Togo. 64. By contrast, some banks in Togo had very high solvency ratios as well as liquidity ratios that were above the norms. BTD and SIAB had very high solvency ratios of 38.6 and 84.2 percent respectively as of September 30, 2005. That is an indication that these two banks were very far from using up their lending capacity. They were, thus, under- leveraged and forsaking income as a result. An explanation of this behavior could be that these banks did not find acceptable lending risks, either by lack of bankable projects or because of their inability to assess the risks of projects and firms. Four institutions, out of eight, boasted a liquidity ratio above the norm. Two of them, SIAB and BTD are banks that were recapitalized. 65. All in all, only three banks (Ecobank, SIAB and BTD) met the main prudential norms (solvency, liquidity, transformation). However, these banks operations only accounted 30 percent of total deposits and 24 percent of total bank credits. 66. In general most banks in Togo did not meet several of the required prudential norms and in particular, like in the rest of the WAMU, no bank met the portfolio structure ratio according to which 60 percent of total credits should benefit from a positive rating “ accord de classement ” from the Central Bank. According to banks, compliance with the portfolio structure norm is difficult because of the lack of availability of financial statements for their customer, particularly SMEs. Page 30 20 67. It is worth noting that enforcement of the portfolio structure norm by the Banking authorities will likely result in lower access to bank financing for a number of current bank customers, especially SMEs. Although the banking regulator does not currently enforce compliance of the portfolio structure ratio, it still wants to keep it, on the basis that this ratio brings more discipline in bank lending. Rather than keeping a norm that is not being enforced, it could make more sense for BCEAO and the Banking Commission to eliminate this ratio as a prudential norm, but make it an important component of the rating of commercial banks to be introduced shortly by BCEAO. This would be an incentive for banks to sharpen their lending techniques and invite their clients to be more transparent. Table 0.7: Selected Prudential Ratios for Banks, 2003-2005 BIA BTCI UTB SIAB BTD Ecobank FBT CET Effective Net Worth (in CFAF billion ) 09/05 -5.3 -23.3 5.2 1.8 10.7 5.9 1.3 - 0.495 12/04 -5.3 -29.3 5.2 1.9 10.4 5.9 - 0.506 12/03 -6.9 1.2 -12.3 0.2 10.1 5.2 - 3.6 Solvency Ratio/Capital adequacy = 8% of risk weighted assets 09/05 -10.7% -22.0% 12.5% 84.2% 38.6% 17.9% 18.3% -10.6% 12/04 -11.6% -28.9% 13.0% 63.2% 44.4% 15.0% -- -11.3% 12/03 -14.0% 1.6% - 37.6% 6.7% 51.0% 15.0% -- -88.1% Liquidity Ratio > 75% 09/05 61.5% 22.6% 104.7% 152.% 87.9% 95.2% 66.4% 363.4% 12/04 51.9% 22.4% 101.2% 181.% 90.2% 98.8% -- 389.9% 12/03 51.6% 25.8% 54.9% 129.% 89.2% 97.8% -- 307.4% Portfolio Structure Ratio > 60% of loans should be rated 09/05 1.5% 0.7% 5.1% 4.8% 17.8% 20.8% 0.0% 0.0% 12/04 0.8% 0.4% 1.4% 1.7% 16.5% 1.9% -- 0.0% 12/03 1.4% 0.3% 10.6% 7.9% 19.1% 1.9% -- 0.0% Transformation Ratio > 75% of LT deposits to cover LT loans 09/05 -20.0% -155.2% 40.6% 802% 91.6% 78.3% 50.8% 33.0% 12/04 -27.9% -402.4% 36.7% 1175 88.6% 78.9% -- 18.1% 12/03 -85.7% 23.2% -23.0% 236% 75.% 76.4% -- 3.8% Source: Commercial banks High Costs and Low profitability in Togo Banking Sector 68. Banks in Togo appeared to be running very high cost operations. The operating/efficiency ratio which measures the internal efficiency of a bank by dividing administrative (operating) expenses by the net banking product (income from banking operations less expenditures on banking operations) was on average above 55 percent from 2003 to 2005. A ratio of less than 55 percent would leave sufficient income for the Page 31 21 bank to cover provisioning, amortization and taxes and provide for a net profit to shareholders. 69. Only three banks in Togo had acceptable operating ratios in 2004. All other institutions had operating expenses out of line with their net revenue from banking operations (Table 2.8). SIAB recorded operating expenses twice as high as its net banking product. In the absence of corrective measures, the newly recapitalized SIAB will thus, eat up all its net worth. BIA, UTB and newly recapitalized CET had operating expenses equal to their net banking products, meaning that they had no resources to cover amortization, taxes and provisions in 2003. It was, therefore, not surprising that these institutions showed negative net results that year. Table 0.8: Operating Ratios and Net Profits for Banks, 2000-2004 Operating ratios (in Percent) BIA BTCI UTB SIAB BTD Ecobank CET 2004 100 44 99 175 54 45 119 2003 100 52 121 200 55 49 100 Net profits (in CFAF million) BIA BTCI UTB SIAB BTD Ecobank CET 2004 3 191 14,875 - 133 1,048 1,294 3,112 2003 -239 101 - 2,380 - 282 502 1,889 - 402 2002 -394 62 - 396 - 469 658 849 - 676 2001 - 3,022 19 336 - 157 495 1,062 - 566 2000 284 7 - 7,651 170 452 1,247 -1,961 Source: Commercial banks and CET 70. Banks in Togo had relatively high interest margins 20 reflecting low interest rates on deposits and comfortable lending rates. Most savings rates were near the regulated 3.5 percent nominal annual rate. Loan rates fluctuated in a range of 4 to 5 percentage points above the base rate ( taux de base bancaire ). Generally, the maximum applied lending rate was 14 to 15 percent. But lending rates could be as low as 9 percent. 21 71. Interest margins ranged from 7.9 percent at BIA to 18.7 percent at BTD. Banks with higher margins such as BTD 22 and Ecobank were consistently profitable year after year from 2000 to 2004 (Table 2.8). 72. BTCI registered a nominal net profit over the past five years (CFAF 7 to 191 million). In 2004, its net profit was attributable to exceptional income. However, had the bank correctly provisioned its non-performing loan portfolio, it would have registered a loss. UTB and CET which had historically posted losses registered large profits in 2004 as a result of their recapitalization rather than an improvement in performance. 20 Calculated as the average income on credits less the average interest expense on deposits over one period 21 Inflation rate in Togo was 1.7% on average between 2001 and 2004. 22 BTD restructuring was completed in 1993 and the bank has been profitable since then. Page 32 22 D. B ANKING R EGULATION AND S UPERVISION 73. In Togo, commercial banks are governed by the banking law of BCEAO and supervised by the regional banking commission (C ommission bancaire ). Throughout the recent years of difficulties in the Togolese banking sector, the regional banking commission has kept abreast of all the developments. With a few exceptions, the regional regulatory framework and prudential rules for commercial banks in the WAMU region has been deemed globally satisfactory. The exceptions relate to the level of capital required, the concentration ratio and the portfolio structure ratio which are singular to the region and not respected by any bank. 74. In Togo, the on-site inspections by staff of the Secretariat of the Banking Commission produced quality reports which documented well banks’ violations of the rules and made appropriate recommendations. Although commercial bank inspections were at times followed by injunctions, the Banking Commission appeared hesitant to recommend tough measures for Government-owned banks. It could be because these measures such as the appointment of an interim administrator and the withdrawal of a bank license need the agreement and signature of the Minister of Finance. Indeed, only two institutions were put under interim administration (UTB and CET), albeit with mixed results. BTCI, the largest state-owned bank in Togo was only put under a less restrictive regime of “ surveillance rapprochée ” or close surveillance in 1994. Only in 2005 was BTCI asked by the banking commission to provide a credible restructuring plan aimed at improving its liquidity and governance. The Banking Commission has still not put BTCI under interim administration despite its alarming performance year after year. No bank license was withdrawn outright. 23 According to BCEAO, given the high costs for Governments of bank liquidations, withdrawal of a bank license is only pronounced as a last resort. 75. Banking supervision by the regional Banking Commission, while professional, can be rendered ineffective by weak enforcement of directives of the Commission throughout the WAMU region because it is a responsibility shared with national Ministries of Finance. Renewed efforts should be made at the regional level to strengthen the powers of the Banking Commission by having national authorities delegate their power to the Commission to appoint an interim administrator and to withdraw a license, i.e., to enforce its recommendations in general. This would be beneficial not only for Togo but for all WAMU countries as well. 23 SNI’s license was withdrawn after its portfolio and its deposits were taken over, in part, by Financial bank. Page 33 23 E. T HE S TORY OF THE P ARTIAL R ESTRUCTURING OF THE B ANKING S ECTOR IN T OGO 76. Faced with the prolonged poor performance of banks and the fragilization of the banking sector since 1999, the Government of Togo initiated in 2003, albeit with limited resources, the recapitalization of public banks in difficulty. However, despite the recapitalization done over the past two years, the restructuring and strengthening the banking sector remain only half accomplished. As described below, several unresolved issues are still pending at almost each of the banks that were recapitalized. 77. SIAB was recapitalized by the Lybian shareholder who put in his share as well as that of the Government by injecting CFAF 2 billion into the capital of the Bank. As a result, Lybia now holds 86 percent of the capital of SIAB. The Lybian shareholder will in effect carry the shares of the Government until it sells them to private Togolese at an appropriate time. The restructuring of SIAB was limited to the recapitalization. There was no internal strengthening of SIAB which continues to have operating expenses much larger than its net income from banking operations. For SIAB , it is, therefore, recommended that strong measures be taken to reduce the operating efficiency ratio which, if not lowered, will bring about negative results that will annihilate the positive impact of the recapitalization. Costs should be reduced but business should also be developed to increase leverage, and help achieve profitability. 78. Financial Bank Togo (FBT) emerged from the sale of the assets of SNI. The de- facto privatization of SNI used a mixture of split/liquidation method and the treasury transferring to FBT CFAF 2.7 billion owed to SNI. In a nutshell, the newly created FBT signed an agreement to take over assets and liabilities of the former SNI which has been experiencing difficulties for a number of years. The Minister of Finance issued a banking license to FBT on November 8, 2004, following a non objection issued by the Banking Commission on September 14, 2004. At the same date the Minister of Finance withdrew the license of SNI. On January 10, 2005 a liquidator was appointed for SNI. FBT started operations on March 18, 2005 with a capital of CFAF 1.5 billion. 79. All 86 SNI employees were paid their legal rights (with the financial support of FBT). FBT retained 46 out of these 86. They joined as new employees without any vested rights. FBT took over all deposits of SNI with the exception of CNSS deposits which remained in the liquidation structure. FBT acquired some loans from SNI, but its portfolio was mainly composed of a government debt of CFAF 2.8 billion bearing a 3.5 percent annual interest rate. This was a long term debt with no specific maturity which is being repaid by compensation of income tax due to Government by FBT. At the end of September 2005, this Government long term debt represented 57.7 percent of FBT total portfolio. FBT recognized that this claim on Government introduced a mismatch between the maturity of assets and liabilities. FBT, thus, negotiated with the insurance companies and CEB so that 50 percent of their deposits would be converted in long term deposits and 50 percent in subordinated loans. For these companies, it was either accepting the conditions posed by FBT or finding themselves in the SNI liquidation. This arrangement relieved some of the pressures on FBT’s balance sheet structure. In the Page 34 24 absence of a secondary market for this Government debt, FBT still has to bear rigidities in the management of its portfolio and has to accept a much lower income than that it could have obtained on alternative assets such as loans to the private sector. 80. The restructuring of the Caisse d’Epargne du Togo (CET) is well advanced. CET has been under interim administration since November 22, 1999 following a decision to that effect by the Banking Commission. The current interim administrator ( administrateur provisoire ) was appointed on February 25 th 2004 by the Minister of Finance and is the second one to be at the helm of CET. Under his leadership, some restructuring took place. For instance, twenty branches were closed and staff was reduced by 239. 81. A new privatization plan was devised following an unsuccessful attempt at privatization in 2002. The current interim administrator has contacted several banks including Groupe Banque Atlantique 24 , CBAO 25 , BHS 26 and Banque Populaire du Maroc to probe their interest in participating in CET capital The current privatization plan calls for CET to be converted into a people’s bank ( banque populaire ) with 51 percent of the capital sold to the general public through an equity issue on the regional capital market, 34 percent held by the Government, of which 24 percent as portage for an institutional reference partner (strategic investor), 10 percent for institutional partners and 5 percent for staff. Total capital is estimated at about CFAF 2.5 billion. 82. In the meantime, the negative net worth of CET has been reduced by the following operation: Government gave CET a subsidy of CFAF 3.6 billion by committing to make quarterly payments of CFAF 150 million for seven years. The subsidy was reported on CET balance sheet as a claim on Government. In exchange CET ceded to the Government CFAF 2.168 billion of fully provisioned doubtful loans. This allowed CET to release an equivalent amount in provisions ( reprise de provisions ). The difference between the amount of the subsidy and the provisions was accounted as exceptional revenues. Authorization was then given by the Government to BCEAO to make the quarterly payments on the debt service out of the tax revenues received by the Government at the Central Bank. 83. Given its limited resources, the Government of Togo did the best it could under the circumstances. Despite its financial restructuring CET’s net worth remained negative. . Government debt now represents 50 percent of CET portfolio and creates a mismatch between its assets and liabilities, particularly in the absence of a secondary market for that debt. Such a mismatch could make it difficult for CET to reimburse depositors in a timely fashion. The operating ratio of CET still remained very high at 108 percent as of September 30, 2005. That is further evidence that the restructuring of the institution is not yet complete and that strong measures to reduce cost are still required. 24 A newly c reated group with a holding company located in Lomé 25 CBAO = Compagnie Bancaire de l’Afrique de l’Ouest, a Senegalese commercial bank 26 BHS = Banque de l’Habitat du Sénégal, a Senegalese housing bank Page 35 25 84. UTB, which, as documented earlier had been experiencing serious difficulties at least for the past five years, was restructured in 2004 in a similar fashion as CET. UTB was under interim administration between September 1999 and November 2002. The current general manager was appointed in January 2005 and is the second one since the lifting of the interim administration. 85. To recapitalize the bank and boost liquidity, Government offered a subsidy of CFAF 15.5 billion to be paid in quarterly installments of CFAF 600 million over a seven- year period. The total subsidy amount was entered in the balance sheet as a claim on Government. Authorization was given by the Government to BCEAO to make the quarterly payments to service this debt out of the tax revenues received by the Government at the Central Bank. In exchange, UTB ceded to Government a portfolio of fully provisioned bad loans in the amount of close to CFAF 21 billion. The income statement was adjusted by recording as income a release of provision for the full amount of the portfolio transferred and an exceptional expense of CFAF 5 billion for the discount on the purchase of the portfolio (gross value of the portfolio less the amount of the subsidy). Following this operation, the net worth of UTB became positive. 27 Government debt now represents 40 percent of the portfolio of UTB, introducing the same kind of rigidities discussed above for other banks. 86. The cleaning up of UTB’s balance sheet was not complete, however. External auditors recently recommended additional provisions of CFAF 9.8 billion for loans to OTP, CFAF 2.8 billion for loans to SOTOCO, and CFAF 750 million for judicial case involving ATN. Altogether this would bring the net worth back into negative territory to CFAF -4.6 billion. Additional resources of CFAF 4.6 billion would, thus, be needed to bring BTCI net worth to zero. Much more resources would be needed for recapitalization to bring net worth to a level high enough to comply with regulatory norms. If these additional resources were to take the form of Government bonds, these bonds would represent half of UTB portfolio. 28 The completion of the restructuring of UTB will also need to address the current inefficiency of the bank that translates into a high operating ratio. 87. BTCI became the latest bank to be partially restructured with an agreement signed in December 2005 for the assumption by the Government of CFAF 23 billion of BTCI’s frozen claims on SOTOCO. This operation would bring up the net worth of BTCI to almost close to zero and inject liquidity into the bank. It will also result in Government debt representing 30 percent of total BTCI loan portfolio. The amount of CFAF 23 billion provided by Government corresponded to the amount of loans taken by SOTOCO to execute work on behalf of the Government and was going to help SOTOCO with its need of additional provisions of CFAF 26.6 billion. However, in its latest audit report, the Banking Commission requested a much higher overall increase in provisions of CFAF 37.1 billion. Such a level of provisions would result in a CFAF 33.9 billion 27 The net worth became CFAF 5 236 million, after taking account a re-evaluation of CFAF 7 536 million for real estate that could not be accounted for as long as net worth was negative. 28 Recapitalization to a level high enough to comply with all prudential norms would be left to private investors. Page 36 26 negative net worth and thus a need for an equal amount of Government subsidies. Howev er, such level of subsidies would increase Government’s debt to 44.2 percent of BTCI total loan portfolio, increasing even more the mismatch between assets and liabilities and the rigidities in portfolio management. Restructuring of BTCI is clearly an unfinished agenda which has to be dealt with for the overall well being of the banking sector. F. R ECOMMENDATIONS FOR S TRENGTHENING THE B ANKING S ECTOR 88. An important role of the banking sector is to contribute to macro-stability, shared growth and the development of the private sector. To achieve these objectives, the sector must be sound and efficient and offer access to its services with products adapted to a large share of the population. In its current state, the banking sector in Togo is unable to play its role in the development of the economy and may not be able to do so in the future unless urgent measures are taken for a more complete restructuring of the sector. Principles for a Successful Restructuring 89. Several principles must guide any effective restructuring of the banks and quasi- banks in Togo, such as: (i) The cleaning up must be complete . So far, the restructuring of banks in Togo has been partial. Without a thorough cleaning up, the restructured institution will not be able to resume/pursue its activities on a solid basis. It will remain fragile and at the mercy of external shocks. (ii) The restructuring needs to be organizational as well as financial . Operating costs should be brought down to be in relation with the level of activities. Internal controls, loan granting and monitoring procedures should be put in place and implemented. (iii) The restructuring should not introduce rigidities , such as a mismatch between the term structure of assets and liabilities as was the case in most restructuring so far in Togo. (iv) The cost of restructuring should be minimized . It should be clear who will assume the costs of restructuring and assess fully their capacity to do so. In particular, if the Government were involved, the costs it assumes should be fully compatible with its budgetary constraints. There have been too many examples across Africa where, after a bank restructuring, Government has not been able to service its debt. (Cameroon in the early 1990s is a case in point). In such a situation the benefits from the restructuring will not last. (v) A prerequisite to launching the restructuring process is a credible set of actions that will bring back macro-stability in the country . The health and sustainability of the banking system is tributary to macro-stability. Macro- stability requires a Government budget that is fully financed. Sustainability of the reforms also requires the financial capacity of Government to meet its Page 37 27 obligations. Thus, a restructuring that imposes costs on Government that it cannot afford will not be sustainable. (vi) Restructuring of Government domestic debt and of the debt of several public enterprises , particularly SOTOCO and OTP should accompany that of banks. Without restructuring of public sector debt, commercial banks’ portfolios will continue to be at risk since banks are directly and indirectly exposed to the Government and the large public enterprises. (vii) An adequate regulatory and supervisory environment is required for a successful restructuring and viable banking sector. In the case of Togo, the regulatory framework is regional and discussions are being held at the regional level to strengthen this environment (such as the transformation of the portfolio structure norm into a rating component, the tightening of the division of risks norm, etc…). (viii) The judiciary system needs to be strengthened and a legal framework for the restructuring put in place. The judiciary system needs to fully support the enforcement of contracts and the recovery of loans. A legal framework that protects restructured institutions from lawsuits related to disputes preceding the restructuring needs to be in place. Recommended Approaches for a Complete Restructuring of Banks in Togo 90. Restructuring of the banking sector of Togo is an unfinished agenda which needs to be completed to deliver a strong and more vibrant sector in the future. Complete bank restructuring should go beyond recapitalization. It should involve a full internal reorganization, including bringing costs in line with revenues, strengthening internal procedures and controls, focusing on loan recoveries improving management, and capacity building. The Government of Togo will have to choose among several alternatives for a complete restructuring, subject to several constraints, and in particular budget constraint. Approached to be considered to clean up the banking sector are: (i) Government absorption of past losses at public banks; (ii) Repayment of all Government loan arrears with banks; (iii) Undertaking good-bank, bad-bank splits; and (iii) Bank closures. 91. Government absorption of past losses at public banks : This is the approach that has been followed, thus, far by the Government of Togo and has produced mixed results at best due to its numerous flaws: (i) it focuses almost exclusively on recapitalization (absorption of past losses) ; (ii) it is not fiscally sustainable ; it has already cost the Government, excluding BTCI, CFAF 21. 8 billion; should the same approach be used to complete the absorption of past losses in UTB and with new banks, such as BTCI, and BIA, the total cost may rise to CFAF 70.2 billion. This is 6.5 percent of the country’s GDP. If CFAF 117 billion owed the social security institutions (see Chapter 4 on social security), and the domestic arrears of CFAF 268 billion were added, the total cost would climb to CFAF 455.2 billion, i.e., 45 percent of GDP; (iii) any amount of Government debt that brings its relative importance in the portfolio of a bank above 30 percent introduces costly rigidities in asset management and in matching assets and liabilities , particularly as there is no secondary market for that debt; and (iv) large amounts of Page 38 28 government debt in the balance sheets of commercial banks are likely to discourage private sector investors as witnessed in other countries. Thus, the approach being currently implemented by the authorities remains an incomplete restructuring which is not sustainable either. 92. Repayment of all Government ’s Bank Loan Arrears : This approach which would have little cost to the banks and the real sector would be for Government to fully pay its arrears over one or two years and assume its responsibility as shareholder towards the banks (i.e. recapitalize the banks if their net worth remains negative after the settlement of Government arrears). However, even after restoring its relations with the Bretton Woods institutions and with their full support, the Government of Togo may not be able to mobilize such funds for the banks. Competing demands on the budget coming from various sectors such as health, education, road maintenance and construction, etc. will not allow such Government commitment to the banking sector. This ideal solution is, thus, not very realistic, if at all feasible. 93. Closure and/or merger of banks : Adopting the strategy to close outright distressed banks could be considered by the Government of Togo if it is not willing to spend any more money on bank recapitalization or preparation for a take-over. However, bank liquidation will not be a cheap endeavor for the Government as it would have to repay all the depositors due to the absence of deposit insurance in the WAMU zone. On the other hand, a merger of banks is less likely to generate a negative reaction from the public but may be difficult to achieve with distressed banks. 94. Complete Restructuring and Privatization via a Good-bank, Bad-bank Approach : This fourth strategy advocates a complete restructuring (financial as well as operational). The approach calls for a split of the distressed banks between a so-called “good “bank” and a liquidation structure, i.e. “the bad bank”. 29 The good bank would retain all the good assets and liabilities and be offered for sale to the private sector. 30 Several banks are potential investors in the “good” structures (some have even made their readiness to do so, known to the authorities. Such a scheme would minimize Government cost and in fact allow a sharing of costs between the Government, shareholders and depositors. It would also be a good incentive to accelerate the recovery of bad loans as the reimbursement of large depositors left in the liquidation structure (the bad bank) will be contingent upon recoveries. On the other hand, some deposits would remain frozen for an uncertain period of time, as their reimbursement depends on recoveries. Nonetheless, given the existing and foreseeable budgetary constraints, the need to have relatively quickly operational banks freed from the burden of the past, and the appropriate signal resulting from the sharing of losses among all stakeholders, this is the most realistic option for most banks. In fact, the creation of FBT in Togo followed the good-bank, bad bank model with a variant. The variant being that, in order to keep all the deposits of SNI in the good bank, with the exception of those of CNSS, FBT accepted 29 Such schemes have been successfully implemented in several African countries including Cameroon and Congo. 30 It could be done individually or after merging several “good banks”. See Annex 2 for more details. Page 39 29 a relatively large amount of Government debt as assets on its balance sheet. The strategy seemed to have worked with the complete transformation of SNI into FBT, a fully private bank that is well capitalized and adequately staffed. Great caution still has to be exercised to implement this approach and several factors have to be present to make the strategy a successful one including: · A rigorous fit and proper analysis of potential private investors · Implementation of a legislation giving preferential treatment to small depositors · Subordination of Government deposits to private sector ones · Minimization of number of deposits remaining in the liquidation structure G. T HE F UTURE OF THE B ANKING S ECTOR AND A CCESS TO F INANCIAL S ERVICES IN T OGO 95. A successful restructuring of the banking sector of Togo, as per above, is an urgent need for a return to an efficient, viable, and profitable banking sector in the future. Privatization of distressed state-owned banks is ultimately needed to solve bad governance problems created by government interference in the management of banks. Better functioning banks would ultimately allow greater access to financial services to the majority of the population in the long run. Access to bank services would also be facili tated with more accurate assessment of clients’ risks by banks and a better functioning credit bureau. Thus, improved financial statements would increase access to banking services for SMEs. Banks could also develop internal capacity to assess risks of various sectors of economic activity and in particular SMEs. Capacity building aimed at both SMEs and banks would therefore be helpful. In the meantime, poorly performing banks need to be closely monitored by supervisory national and regional authorities to avoid a full fledge banking crisis in Togo. 96. Once their good financial health restored, banks in Togo could turn to the regional capital market to fulfill the investment needs of their customers for longer term resources. On-going discussions in the WAMU region with monetary authorities would make it a little easier for banks to be more active on the capital market. For instance, the replacement of the requirement of a 100 percent guarantee on any bond issue with a rating of the issuer would contribute to lower the costs of issuing bonds. 97. Another important product for SMEs access to financial services is leasing. Unfortunately, with the request by STOCA to have its license withdrawn, leasing products might become less accessible to Togolese firms. Undertaking a study to understand the reasons behind the failure of STOCA and determining the conditions needed to bring new equipment financing and leasing firms to Togo would be most helpful for future access of firms to appropriate financial services. Page 40 30 The Microfinance Sector in Togo 98. Microfinance is defined as the provision of financial services (primarily savings and loans) to relatively low-income clients who typically lack access to normal commercial bank products. Microfinance loans are typically granted to groups or individuals backed by non-traditional collateral. E VOLUTION OF THE M ICROFINANCE S ECTOR IN T OGO 99. Despite sluggish economic performance and the suspension of donor aid, the microfinance sector in Togo experienced noticeable growth over the past decade. In order to adequately play its role of serving urban and rural populations who do not have access to traditional financial services provided by banks, MFIs are active not only in Lomé, the capital city, and other large cities but in small rural towns as well. 100. As in the rest of the WAMU region, microfinance institutions (MFIs) in Togo are classified in three main categories: (i) savings and credit cooperatives, (ii) credit-only MFIs, and (iii) donor projects with a microfinance component. At end of the year 2004, there were 145 licensed retail microfinance organizations in all three categories of MFIs and a total of 238 service outlets. Eighty seven percent (126 organizations) of licensed retail organizations were affiliated with six networks while the remainders (19) were independent organizations. Thus, in reality, there were a total of 25 distinct or separate organizations 31 that received a license to operate in Togo. These formal MFIs were represented all over Togo and served more than 265,000 people, i.e., a penetration rate of 4.4 percent of the population and 11 percent of the active population according to the Ministry of Finance (Table 3.1). They mobilized deposits totaling CFAF 26 billion (US$47 million) 32 while the total outstanding loan amount reached CFAF 21 billion (US$38 million). The sector is dominated by FUCEC, the largest savings and credit cooperative network which possessed 26 percent of all outlets, catered to 65 percent of all clients (173,323 members), mobilized 76 percent of total deposits (CFAF 20,012 million or US$36 million) and provided 65 percent of total outstanding loans (CFAF 13,779 million or US$25 million). 101. Over a five-year period between 2000 and 2004, the number of clients of the Togolese microfinance sector grew 39 percent (190,537 clients in 2001 to 265,431 clients in 2004). Savings deposits grew 76 percent, from CFAF 14,923 million (US$27 million) to CFAF 26,213 million (US$48 million), while total outstanding loans increased by 50 percent reaching CFAF 21,261 million (US$ 39 million) in 2004 (Table 3.1). As shown in figure 3.1 savings deposits remained consistently higher than loans outstanding over the period, emphasizing the pre dominance of savings and loans organizations in the 31 Twenty five separate organizations include 6 networks and 19 independent MFIs not organized in networks. 32 The exchange rate used in this chapter and thereafter is US$1 = CFAF 550 Page 41 31 sector. By the end of 2004, deposits from MFIs reached 10 percent of those of banks while their loans amounted to 11.6 percent of banks loans. 102. Through 2000-2004, the growth in the microfinance sector was also reflected in average deposits per client which grew 50 percent, from CFAF 65,796 (US$ 120) to CFAF 98,756 (US$ 180) and represented 55 percent of the GDP per capita compared to 37 percent five years earlier (Table 3.1). Table 0.1: Selected Statistics of the Microfinance Sector, 2000-2004 2000 2001 2002 2003 2004 Number of licensed MFIs 25 Number of retail institutions 76 116 135 143 145 Number of active clients 226808 190537 237639 224205 265431 Total Savings deposits (million CFAF) 14923 16518 18102 20165 26213 Total Loans outstanding (million CFAF) 14133 13837 14619 16896 21261 Ave. deposit/client (CFAF) 65796 86692 76174 89940 98756 Ave. deposit/client(US$)(*) 120 158 138 164 180 Ave. loan balance (CFAF) 62313 72621 61518 75360 80100 Avg. loan balance (US$)(*) 113 132 112 137 146 Avg. deposit, %of GDP per capita 37 50 43 50 55 MFIs deposits/Banks Deposits (%) 8.6 9.4 9.2 8.5 10.0 MFIs loans/Bank loans% 9.4 9.3 10.8 9.9 11.6 Source : CAS-IMEC, MFIs progress reports and IMF IFS Yearbook 2005 (*) 1US$=550 CFAF Figure 0.1: Evolution of Microfinance Deposits and Loans, 2000-2004 Page 42 32 103. Meanwhile, average loan balance increased by 29 percent, from CFAF 62,313 (US$113) to CFAF 80,100 (US$146). Despite the steady increase in both savings and loan sizes, average loan amount remained at US$150, a sign that microfinance in Togo still cater to the poor. 33 It is worth, however, noting that microfinance activities remain quite concentrated in Lo mé, in the “Maritimes” and the “Plateaux” regions, where mainly small urban commercial activities are financed. As a result, rural areas are quite marginalized leaving farmers and others with no access to microfinance services. M AIN I NSTITUTIONS AND C HARACTERISTICS OF THE M ICROFINANCE S ECTOR 104. The Togolese microfinance sector is led by MFIs organized in networks which represent roughly 87 percent of licensed and/or authorized institutions. There are six networks which are FUCEC, UMECTO, UCMECS, URCLEC, IDH and FECECAV. At the end of 2004, the six networks had 53 percent of all outlets and 77 percent of the total sector’s clientele. They mobilized 81 percent of all deposits and provided 71 percent of all outstanding loans. Savings and Loan Cooperatives 105. Among the three types of microfinance organizations officially in operation in Togo, savings and loans cooperatives also known as credit unions dominate the market. As of December 31, 2004, savings and loan cooperatives owned 58 percent of outlets (139 over 238), catered to 80 percent of clients (212,451 people), mobilized 82 percent of deposits (CFAF 21,484 million or US$39 million) and provided 79 percent of all loans (CFAF 16,867 million or US$31 million). 106. The dominance of the microfinance sector by savings and loans cooperatives is undoubtedly due to FUCEC which remains the largest savings and loan cooperative as well as the largest microfinance institution in Togo. Credit-Only MFIs 107. Credit-only institutions are the second largest category of MFIs in Togo in terms of amount of loans granted. As of December 31, 2004, with only 2 percent of outlets (4 out of 238), they served 6 percent of the sector’s clients (14,681 people) and granted 12 percent of outstanding loans (CFAF 2,621 million or US$4.8 million). Credit-only institutions also mobilized 6 percent of the overall sector’s deposits (CFAF 1,675 or US$3 million) in the form of forced savings. 33 According to CGAP, outstanding loan balance below 20% per capita GDP or $US 150 is a rough indication that clients are poor. Page 43 33 108. The largest institution in this category, TIMPAC 34 , mobilized about 23 percent (CFAF 382 million / US$695,000) deposits and granted 42 percent of the outstanding loans (CFAF 1,100 / US$2 million) of all credit-only institutions. TIMPAC was originally created in 1994 by the American NGO Care International in the savanna region of Togo to provide access to financial services, as well as access to education to underprivileged women to enable them to increase their income. In 1998, the project that created TIMPAC came to an end, enabling the organization to become an independent association and obtain in 1999 an authorization to operate from the Ministry of Economy and Finance under the convention regime of the microfinance law. Donor Projects with a Microfinance Component 109. Although donor projects with microfinance component possessed about 40 percent (95 out of 238) of outlets and catered to 14 percent of clients (38,299 people), they mobilized approximately 12 percent of deposits (CFAF 3,054 million / US$5.5 million) and provided about 8 percent of outstanding loans (CFAF 1,773 million / US$ 3 million) in 2004. Institutions in this category include WAGES, APGA, JARC-SIFA, ESPOIR TOGO and IDH. 110. WAGES 35 which was created in 1994 by the NGO Care International remains the most important institution of the category and is classified among the top 10 MFIs in Togo. Aiming originally to reach 3,900 low income women of Lomé and vicinity with an array of activities including credit, the institution expanded progressively its activities to farther rural areas and by 1997, WAGES surpassed its original objective and had 5,576 members. In 1998, Wages became independent of Care international and transformed itself in 1999 into to a full fledged microfinance NGO. At end December 2004, WAGES had 23,456 members, mobilized CFAF 2,618 million (US$4.8 million) in deposits while its outstanding loans reached CFAF 1,242 million (US$ 2.3 million). Informal Microfinance Organizations 111. In addition to the formal microfinance market, there are a large number of informal microfinance organizations in Togo including money keepers, money lenders, rotating savings and credit associations (ROSCAs) or tontines, in urban and rural markets. There are also “yes-yes” systems, which are informal microfinance organizations that allow clients to save regularly, on a daily basis, with individual money collectors who in turn are able to extend loans to their clients. Professional Associations 112. Until recently, the Togolese microfinance institutions were organized around two professional associations namely APIMFT ( Association Professionnelle des Institutions de Microfinance du Togo ) and Consortium Alafia. APIMFT had about 20 MFIs as members and Consortium Alafia had about 30 MFIs. Many MFIs were members of both 34 Tous Impliqués dans la Mobilisation des ressources locales et la Promotion des Actions Communautaires 35 Women and Associations for Gain both Economical and Social Page 44 34 associations which happened to have similar objectives and were involved in the same activities. Thus, the duplication of activities and competition between the two associations to attract donors and gain favors from the same Government authorities resulted in an inefficient use of financial resources and a loss of negotiation power for the sector. In sea rch of a better synergy and in order to streamline the sector’s capacities, the two associations merged in August 2004 to create APIM-Togo which has a management structure that includes a Board of Directors and an Executive Director. APIM currently counts about 40 members, is now the main advocacy group for MFIs in Togo and its Board meets every two months to discuss the issues confronting the sector. M ICROFINANCE C LIENTS , P RODUCTS AND S ERVICES 113. Microfinance institutions in Togo grant loans to individuals as well as groups that are guaranteed by non-traditional collaterals such as household items. The clientele is quite evenly divided between men and women, and as a result, slightly more than half (50.2 percent) of total loans outstanding belong to women. 114. The terms and conditions of loans are very similar from one institution to another. All institutions offer very small, micro-loans. There are no MFI which offers small and medium enterprise (SME) loans like in neighboring Benin. Despite recent efforts by Togolese MFIs to diversify their products in order to attract more clients, there are still only basic savings and loan products being offered. The most popular product is savings deposit which is remunerated and made on a voluntary basis. Some MFIs have a forced- savings product made as a pre requisite for a loan. Differentiated savings products are being offered by some institutions and include “savings for young people”, “savings for the Togolese of the Diaspora.”, “savings contracts with negotiable rates”, and “term deposit savings”. The second most popular type of financial products offered by MFIs is the “rotating savings and credit” product. This product originated from traditional informal Rotating Savings and Credit Associations (ROSCAS) and has now been adopted by formal regulated MFIs. A few institutions in the microfinance sector are also offering some innovative products such as “money transfer services” for their clients. There are no MFIs which offer housing or insurance products or even specialize in agricultural finance. 115. In general, MFIs in Togo apply an annual nominal loan rate of 18 to 24 percent to their clients. However, effective rates including a variety of fees charged can be much higher than 27 percent, the maximum set by the regional usury law. It is worth noting that a study by BCEAO of several microfinance programs in the region, confirmed that charging an interest rate of 27 percent would not allow MFIs to cover their costs and this, be viable and sustainable. However, BCEAO insists on maintaining a usury rate that should be eliminated as no MFI is able to comply with. Nominal rates on savings deposits in Togo range from 2.5 to 6 percent annually. The maximum of 6 percent is paid on mobilized within a network. With an inflation rate of 0.4 percent in 2004, that still leaves the microfinance clients with a positive remuneration of 2.1 to 5/6 percent for their savings deposits. Page 45 35 P ERFORMANCE AND F INANCIAL C ONDITION OF THE M ICROFINANCE S ECTOR IN T OGO 116. Of all the licensed MFIs in Togo, only five have reached a somewhat significant scale with more than CFAF 550 million (US$1 million) in loans outstanding at the end of December 2004 or serving more than 1,000 clients (Table 3.2). The five most active MFIs had 73 outlets over 238, which represented 31 percent of official microfinance outlets. Their membership reached 213,404 people representing 81 percent of the overall microfinance beneficiaries in the country. The “big five” provided 84 percent of the outstanding loans in the amount of CFAF 17,922 million and 86 percent of the outstanding deposits which amounted to CFAF 22,641 million. FUCEC remains a dominant player in the microfinance sector in Togo not only as a predominant network and an important refinancing entity to other MFIs. Table 0.2: Selected Performance Indicators for the Five Most Active MFIs as of December 2004 FUCEC WAGES UMECTO TIMPAC CETRASTOC Number of retail institutions 62 4 4 2 1 Total members/customers 173,323 23,446 759 14,681 1,195 Number of Loan Clients (outstanding) 24,849 2,057 7,805 9,711 1,125 Total Loans outstanding (CFAF million) 13,779 1,861 1,100 737 445 Total Loans outstanding (US$000) 25,053 3,385 2,000 1,340 810 Average Loan Size (CFAF) 554,509 904,954 140,935 75,893 395,815 Average Loan Size (US$) 1,008 298 256 138 720 Total Deposits outstanding (CFAF million) 20,012 1,293 495 382 459 Total Deposits outstanding (US$000) 36,385 2,351 900 695 835 Lines of credit (CFAF million) 93 548 654 287 0 Lines of credit (US$000) 169 997 1,189 522 0 Bank deposits (CFAF million) 4,516 111 110 21 38 Bank deposits (US$000) 8,211 202 200 38 69 Portfolio at risk (PAR)*(%) 3.9 0.3 14.7 5.5 0 Operational Self-Sufficiency** (%) 101 122 NA NA 108 Non Performing Loans (NPLs)***(%) 2.2 1.2 5.2 0.8 0 Net worth (CFAF million) 788 394 191 NA 22 Net worth (US$000) 1,433 716 347 NA 40 Net profit (CFAF million) 359 84 44 -5 1 Net profit (US$000) 653 153 80 -9 2 Sources : CAS-IMEC and Institutional reports Notes: - NA= Not Available - 1US$ =CFAF 550 * (Portfolio At Risk)>90 days = (Outstanding balance of loans overdue>90 days)/Gross loan portfolio * * Operational Self Sufficiency = [Operating revenues/(Operating expenses including provisions)] *** NPLs = Gross Non Performing Loans/Total Loans Outstanding Page 46 36 FUCEC-Togo 117. Created in 1969, FUCEC-Togo is the largest MFI in the country with more than 173 000 members and close to CFAF 14 billion (US$25 million) in loans outstanding at the end of December 2004 (Table 3.3). Management at FUCEC is keenly aware that to achieve financial sustainability, the institution still has significant work is do to (i) enhance institutional capacities and (ii) strengthen financial performance. In the area of institutional capacity enhancement, a five-year restructuring program has been underway following the recommendations of a study conducted in 2001 which found that 80 percent of the network’s revenues are realized by only 15 of the 152 member-MFIs. The restructuring program calls for a reduction in the number of MFIs in the network to 50 between 2001 and 2006, by merging and/or closing institutions. Thus far, however, implementation of the program resulted in cutting the number of MFIs remaining in the network down to 62 MFIs in 2004 and 58 MFIs at end 2005. Despite this reduction, FUCEC membership still grew 31 percent, reaching 173,323 members in 2004 against 132,278 members in 2001. Table 0.3: FUCEC-Togo: Selected Performance Indicators, 2000-2004 Indicators 2000 2001 2002 2003 2004 Number of retail MFIs 152 152 125 71 62 Total membership 119,664 132,278 154,551 156,167 173,323 Percent of women 27 28 35 37 33 Percent of groups 9.5 9.6 8.7 8.6 9.7 Total number of Loans clients (outstanding) 10,490 14,165 16,556 30,720 24,849 Total Loans outstanding (CFAF million) 8,902 10,137 10,764 11,663 13,779 Total Loans outstanding (US$000) 16,185 18,431 19,571 21,205 25,053 Total Deposits outstanding (CFAF million) 12,492 13,343 14,235 16,058 20,012 Total Deposits outstanding (US$000) 22,713 24,260 25,882 29,196 36,385 Net worth (CFAF million) 1,055 922 991 597 788 Net worth (US$000) 1,918 1,676 1,802 1,085 1,433 Line of credit (CFAF million) 128 123 129 83 93 Line of credit (US$000) 233 224 235 151 169 Loan/Deposit ratio (%) 71 76 76 73 38 Bank deposits(CFAF million) 2,297 3,413 2,938 3,763 4,516 Bank deposits(US$000) 4,176 6,205 5,342 6,842 8,211 Portfolio At Risk (%) 22.2 13.1 9.7 5.2 3.9 Sources : FUCEC progress reports Notes: - NA= Not Available - 1US$ =CFAF 550 * (Portfolio At Risk)>90 days = (Outstanding balance of loans overdue>90 days)/Gross loan portfolio * * Operational Self Sufficiency = [Operating revenues/(Operating expenses including provisions)] Page 47 37 118. In order to increase the management responsiveness in making appropriate and timely managing decisions, an internal audit department staffed with 12 professional auditors was created to complement the existing internal control unit. The department plans to perform the audit of each retail organization member of FUCEC at least once a year. In addition, FUCEC is also seeking donor support to help the institution update its information technology (IT) system as well as train its personnel training in using the new technology. 119. In terms of financial performance, at the end December 2004, FUCEC mobilized 76 percent (CFAF 20,012 million or US$36 million) of the sector’s total deposits and provided 65 percent of total outstanding loans (CFAF 13,779 million / US$ 25 million). 120. At the same time, its net worth amounted to CFAF 788 million (US$1.4 million) while the net profit reached CFAF 359 million or US$653,000 (Table 3.3). Financial Performance of MFIs in Togo 121. Analysis of the financial performance of the microfinance sector will focus on the five most active MFIs in Togo which represent 84 percent of the microfinance market in loans and 86 percent in deposits, and therefore, provide a very accurate picture of the entire sector. Portfolio Quality and Sustainability of MFIs in Togo 122. Non performing loans measured in microfinance as the 90 days portfolio at risk (PAR) was within the international norms of 5 percent for at least three of the five most important MFIs (FUCEC, wages and Timpac). Significant progress was achieved in particular by FUCEC in trying to halt its deteriorating portfolio quality. Over a five-year period, from 2000 to 2004, FUCEC reduced significantly its portfolio at risk from 22.2 percent to 3.9 percent, which is below the generally accepted level of 5 percent for mature well performing MFIs. 123. Available data show that three out of the five MFIs have achieved operational sustainability and are profitable as well (Table 3.3). Although, FUCEC has been able to achieve operational sustainability, the institution is not yet financially sustainable and has to rely on lines of credit at concessional rates to achieve its results as well as refinance other MFIs. Compliance with Prudential Norms 124. Most licensed MFIs in Togo are in compliance with the prudential rules of the PARMEC law, except for the reserves requirement ratio and the liquidity adequacy ratio. According to PARMEC, a general reserve requirement of 15 percent of the MFI’s annual net income is to be set by MFIs. However, most MFIs registered a negative profit at the end 2004. For the liquidity adequacy ratio, only three licensed MFIs including FUCEC Page 48 38 complied with the ratio stating that current assets of the MFI has to cover at least 80 percent of its liability. 125. It is worth noting that in general, the prudential rules of the PARMEC law fall short of the international standards in microfinance. There are no minimum capitalization requirements, no capital adequacy ratios, and the provisioning guidelines for delinquent loans appear significantly less stringent than those recommended by microfinance best practices such as PEARLS 36 . 126. After a decade of implementation and recognizing the shortcomings, BCEAO is planning, in cooperation with CGAP 37 , the donor community, and leading microfinance institutions and professional associations in the WAMU region, to make adjustments to the law and prudential regulation to make them more compatible with international best practices. The revised package will address among other issues, those related to: (i) the conformity of prudential rules with international standards, (ii) the expansion of the regulation and prudential norms to all MFIs not just financial cooperatives, (iii) the adjustment of the OHADA Uniform Act to the regional microfinance regulation frame in order to strengthen it, especially regarding credit guarantees and specifically non- traditional collateral used by MFIs and their execution, and (iv) the strengthening of internal and external control requirements. S UPERVISION AND M ONITORING M ECHANISMS OF M ICROFINANCE IN T OGO 127. Legislation to implement what is commonly called PARMEC law was enacted in Togo in July 1995 (law no 95-014). Under the PARMEC law, only independent financial cooperatives, their regional unions and their networks federation can be granted a full- fledged license. Other MFIs are permitted to operate within the realms of rules defined by a convention-cadre signed with the Ministry of Finance for five years and renewable by mutual consent. The PARMEC law excludes groupements , i.e., small and informal microfinance organizations, from the application of the law, and provides for their voluntary formalization and registration called reconnaissance . However, this provision applies only to groups organized as credit and savings cooperatives. 128. Just like its equivalents in other WAMU countries, the microfinance supervision unit at the Ministry of Finance in Togo has been unable to take charge of all its prerogatives and to supervise all licensed and registered MFIs in the country effectively due to a lack of human, technical and material capacities. As a result, many licenses were delivered over the years without CAS-IMEC verifying applicants’ ability to perform the activities they were requesting a license for. CAS-IMEC which was created in June 1996 did not inspect any MFI applying for a license between 1996 and 2000. 36 The PEARLS monitoring system was developed by The World Council of Credit Unions (WOCCU) and tailored to the specific needs of credit unions. 37 CGAP: Consultative Group to Assist the poor is a consortium of 33 donors which has become a recognized resource center for microfinance including the definition of industry standards. Page 49 39 129. In addition to off-site supervisions based on the examination of financial statements received from MFIs, CAS-IMEC is supposed to inspect all licensed MFIs once a year. During the year 2000, CAS-IMEC performed seven inspections, 14 in 2001, seven in 2002 and 2003 and 9 inspections 2004. These results indicate that in 2004, CAS-IMEC was able to inspect 6 percent of the 145 licensed retail MFIs. As part of its mission, CAS- IMEC can impose fines on MFIs that are late in complying with the submission of financial statements. However, only 25 percent of all required financial statements were submitted by licensed MFIs and no fine was applied, thus implying a lack of enforcement of the rules. 130. It is worth noting that, according to the PARMEC Law, CAS-IMEC can inspect licensed MFIs through their apex organizations for those organized in networks. However, since CAS-IMEC has delivered 145 licenses when it could have delivered only 25, it feel obliged to inspect all of them. The inability of CAS-IMEC to properly supervise the microfinance sector is, thus, not only due to a lack of human and financial resources but to internal organization as well. CAS-IMEC currently has a total of 11 staff members, of whom eight were responsible for on-site inspection of all licensed MFIs. Since its creation CAS-IMEC has relied on the donor community, mainly IFAD and BCEAO, to finance its activities. However, in the absence of any government budget support, these donor resources remain inadequate to provide proper coverage of CAS- IMEC material and equipment needs as well as personnel expenses. 131. To undertake a decent job of supervising the growing microfinance in Togo, CAS- IMEC estimates that, for the next five years (2007-2011), it will need a total of 33 staff members including 15 high-level staff and five support-staff. The total budget for the five-year strategic plan of CAS-IMEC is estimated at CFAF 3.3 billion (US$5.9 million) of which 28.6 percent representing CFAF 924 million (US$1.7 million) would be provided by the Government and the remaining 71.4 percent i.e. CFAF 2.3 billion or US$4.2 million would be financed by donors. 132. The reliance of CAS-IMEC on donors funding its activities is not a sustainable strategy, given its uncertainty. CAS-IMEC needs to reorganize itself to be a more efficient and cost effective organization. First, CAS-IMEC should only supervise licensed MFIs through their apex organizations and encourage smaller independent MFIs to form networks. Second, the supervision of larger MFIs such as FUCEC and four others should be assumed entirely by BCEAO at soon as possible as proposed by the regional monetary authorities. T HE P OSTAL F INANCIAL S ERVICES AND M ICROFINANCE IN T OGO 133. At the end of December 2004, the postal system provided financial services to 9318 current account clients with an outstanding total amount of CFAF 3.3 billion and 4773 savings accounts with an amount outstanding of CFAF 560 million. Serving clients with Page 50 40 an average of savings of CFAF 117,300 (about US$235) would qualify financial services rendered by the postal system as microfinance. 134. To leverage its microfinance services even more, on July 1, 2004, the post office signed a partnership agreement with FUCEC whereby the largest microfinance network in Togo would extend short term credits to clients having domiciled their salary or pension at the post office. 135. A difficult issue still to be resolved is the lack of separation of financial accounting between the general postal services and the operations related to the delivery of financial services (checking and savings deposit facilities). There are no assets to back up deposits received from clients, and deposits have been used to fund salaries and other expenses. The post office registered successive net losses of CFAF 194 million in 2003, and CFAF 166 million in 2004, thus putting at continuing risk the deposits of low income clients. 136. To preserve the integrity of clients’ deposits, several alternatives could be considered: (i) Split the postal financial services from the general postal system to create an autonomous entity for the delivery of financial services which would remain a subsidiary of the post office 38 (ii) Transfer the financial services of the postal system to CET, and have CET sign a contract for service delivery with the postal system; (iii) launch a call for bids to choose a private sector firm to deliver financial services in rural/remote areas at the lowest possible subsidy and (iv) Eliminate the financial services altogether and reimburse the depositors. A successful split would result in the creation of a financial institution which could continue to offer microfinance and other financial services. A cost/benefit analysis of the various options is recommended to guide the choice of an option. T HE N ATIONAL M ICROFINANCE S TRATEGY AND THE R OLE OF D ONORS 137. Mindful of the importance of microfinance and the necessity of having a common vision and a harmonized approach to its development, the players of the sector have decided to elaborate a national microfinance strategy. The strategy described in a document called “National Microfinance Strategy 2004-2008” was validated on February 2004 and adopted by the Government on Mai 2005. The strategy is based on the use of international best practices for the purposes of fighting poverty, supporting private sector development, promoting women, and developing agriculture. Objective of the National Microfinance Strategy 138. The National Strategy’s overall objective is to facilitate access to viable microfinance services for a majority of poor households and micro entrepreneurs over 2004-2008, through integration of viable MFIs to the national financial market. Other more specific objectives include: (i) improving the legal, regulatory and institutional 38 A system currently being put in place in Senegal and in Niger Page 51 41 framework to ensure a harmonized and secured development of the microfinance sector, (ii) helping viable MFIs provide well adapted, a diversified and large array of microfinance products and services, mainly in rural and isolated areas, (iii) ensuring that the legal framework enables an efficient and coordinated implementation of the National Microfinance Strategy and its harmonization with other development strategies. 139. Among the quantitative results of the microfinance strategy, it is expected that by the year 2008 the microfinance sector will reach at least 430,000 beneficiaries 39 , have an outstanding credit portfolio of CFAF 50 billion (US$90 million) and an outstanding savings deposits of CFAF 30 billion (US$55 million). Of the 215,000 loans expected, 25 percent will go to micro and small enterprises. Implementation of the National Microfinance Strategy 140. The implementation cost of the National Microfinance Strategy has been estimated at 5,729 billion CFAF or about US$ 10.7 million. The action plan includes (i) workshops, seminaries, (ii) trainings and sensitizations, (iii) studies and document publications, (iv) technical support, (v) equipment and logistic, and (vi) financial mechanisms (e.g.: fund for institutional support, and credit fund). The actions are expected to be undertaken by a variety of stakeholders including the National Microfinance Committee, the Government, the Professional Association, the Ministry of Finance and CAS-IMEC, the regional supervisory authority (BCEAO), the donor community and MFIs. 141. As a contribution to the implementation of the National Microfinance Strategy and of the Millennium Development Goals (MDGs) aiming at halving poverty in the world by 2015, the United Nations Development Program (UNDP) and the United Nations Fund for Equipment (UNFE) have started a three and a half year program on January 1 st 2005, called Programme d’Appui à la Stratégie Nationale de Microfinance (PASNAM).With a budget of US$2.7 million funded by UNDP (US$ 1.4 million) and UNFE (US$ 1.3 million). PASNAM aims to reduce poverty through (i) revenue increase for poor populations, (ii) the creation of income generating activities, (iii) the strengthening of MSMEs networks, and the reinforcement of local development areas. The expected outcomes from PASNAM which is planned to end in June 2008 include: (i) an improved legal, regulatory and institutional framework that is conducive to a harmonized and secured development of the microfinance sector, (ii) major players in the sector are trained on the new legal, regulatory and institutional framework, (iii) CAS- IMEC supervisory capacities are strengthened by the provision of additional human, material resources and equipment, (iv) Two to three MFIs are financially sustainable, and (v) a microfinance promotion fund is created to help the sector grow. PASNAM remains the latest donor initiative aimed at building capacity in microfinance in Togo and its success will depend in part on efforts to harmonize support in the sector. 39 As of December 31, 2004, MFIs in Togo provided services to 265,431 people representing 4.4 percent of the total population and 11 percent of the active population. Page 52 42 The Role of the Donor Community in Microfinance in Togo 142. Over the last fifteen years, about 30 donors including United Nations agencies, governmental agencies, NGOs, foreign technical partners, and regional development institutions 40 were involved in the development of the microfinance sector in Togo. 143. Donors actively supported the microfinance sector with diverse activities such as the creation of MFIs through started as social projects, the provision of capacity building assistance as well as lines of credit. Creation of MFIs from projects included WAGES and TIMPAC which were created by Care International in 1994, and UMECTO which was promoted by both SOCODEVI and FDA in 1995. Technical capacity building support to MFIs was also directed by FDA and SOCODEVI to UMECTO, DID to FUCEC, the German Cooperation (DED) to CECA. In addition to providing capacity building support, many donors provided financial support in the form of lines of credit. This was the case of BOAD (PUFS), SIDI, and ALTERFIN to WAGES, Care International, UNDP, SIDI and ALTERFIN to TIMPAC, FDA to UMECTO, and Plan International and Freedom from Hunger to FUCEC. Thus, the donor community’s decision to stop its aid flows to Togo out of concern over poor governance has hit some MFIs, especially credit-only MFIs, particularly hard. Today, only a few donors such as UNDP are continuing their support to Togolese MFIs. The scare donor funding available should, thus, be invested in capacity building initiatives which is what Togolese MFIs need most for their development. T HE F UTURE OF M ICROFINANCE IN T OGO 144. The microfinance sector in Togo has been growing and expanding its reach despite the recent lack of support from the donor community. However, the sector remains fragile and needs to be strengthened to be viable in the long term. 145. In order to increase their outreach and sustainability, MFIs in Togo need to adapt and diversify their products beyond basic savings and loans. A diversification strategy emphasizing the provision of products and services to address specific groups or regional needs should help reach more beneficiaries, increase MFI’s profitability and, thus, paving the way to viability. For instance, MFIs in Togo should explore the possibility of offering micro-insurance products in collaboration with insurance companies. Money transfer services are also in high demand by microfinance clients and should be added to the services offered. 40 Donors included the United Nations Development Program (UNDP), the United Nations Equipment Fund (UNEF), the French Development Agency (FDA), the World Bank, the United States Agency for International Development (USAID), the Belgium DGCI, The Central Bank of West African States (BCEAO), the West African Development Bank (BOAD), the European Union (EU), the United Nations Organization for Food and Agriculture (FAO), the United Nations Fund for Children (UNICEF), the French Cooperation, the German Cooperation (DED), the German GTZ, Care International, Plan International, RABOBANK, Bread for the World, Développement International Desjardins (DID) and SOCODEVI from Canada. Page 53 43 146. Proper supervision of the sector and capacity of supervisory authorities to be effective are lacking and should be strengthened. However, given the dominance of the microfinance sector by the largest MFIs, BCEAO should assume as soon as possible direct supervision of those entities as planned. For the supervision of the smallest licensed MFIs, the supervision unit at the Ministry of Finance, CAS-IMEC should also encourage independent MFIs to create networks of meaningful size. CAS-IMEC needs also to align its priorities with its capacities and start inspecting those MFIs through their apex organizations as intended by the Law. With the pull out of most donors from Togo, the BCEAO’s program aimed at improving the legal and regulatory framework and strengthening supervision as well as the capacity of MFIs should be supported to foster a better development of the microfinance sector. Page 54 44 The Pension System in Togo 147. Pension funds play a central role in offering protection to the elderly through income maintenance. Funded pension schemes are also important source of development for capital markets and can also have a strong impact on the functioning of financial markets for the following reasons: (i) they are ideal vehicles for providing term finance to Government, corporate and household sectors; (ii) their development is usually associated with increased market capitalization and volume traded in stock markets (Vittas, 2000, Impavido et al., 2000, Palacios et al., 2000). In low-income countries like Togo, pension funds may be the only long-term financial resources available for firms and households. 148. The pension system in Togo includes two institutions, the Caisse des Retraites du Togo (CRT) for civil servants, and the Caisse Nationale de Sécurité Sociale (CNSS) for private sector employees and other categories of government-employed personnel. Both systems are unfunded defined benefit schemes, whereby contributions from active employees finance current benefits entitlements. Both institutions face financial management and structural challenges that will become critical in the short to medium term, as far as their fiduciary responsibilities and primary mandate are concerned. 149. The analysis below focuses on (i) understanding the operational framework and (ii) assessing the financial viability of both entities , with a view of averting a potential “old age crisis” (iii) identifying the underlying fiscal impact of their treasury situation. This review would, thus, inform a set of actions and recommendations. T HE C AISSE N ATIONALE DE S ÉCURITÉ S OCIALE (CNSS) 150. CNSS - Togo was created by Law 39/73 of November 12, 1973 as a public entity in charge of managing the provision of pension services in Togo. With subsequent Law 2001/016 of November 29, 2001, it graduated to the status of a private entity, enjoying financial independence as its treasury management became separate from that of the Ministry of Finance. Institutional Framework 151. CNSS reports to the Ministry of Labor (for policy directions), and is supervised by CIPRES (the regional social security supervisor for private sector pension providers in the CFA franc zone). CNSS also advises the Ministry of Finance on its financial transactions. CNSS is managed by a tri-partite Board of Directors (12 members), which includes in equal numbers government, unions and employers representatives, who are appointed for a four-year term. Management is appointed by the Board, with no specific term limit. The Board appoints internal and external auditors, actuaries and other technical experts, as needed. Page 55 45 152. CNSS technical operations (contributions and benefits rates as well as their parameters) are set by presidential decrees. As no specific investment guidelines are provided by Law, the Board designs the investment strategy, and monitors its implementation. Family Allowance 153. CNSS manages a social security regime providing old-age, disability and bereavement benefits, as well as protection against professional risks to private sector workers and employees of state-owned-entities. It also provides family allowances to eligible contributors. Registration is mandatory for salaried workers and voluntary for non-salaried persons. It covers about 2.5 percent of the total population which is far below the 10 percent average in Sub-Saharan Africa. 154. As shown in Table 4.1, there were a total of 66,700 contributors, 19,860 pensioners and 205, 900 beneficiaries of family allowance. Due to weak economic activity in Togo in the past few years, new registrations to the system have increased by only 3 percent, while the number of pensioners has increased by 10 percent from 2000 to 2004. More stringent controls have also been put in place for the eligibility to family allowances and professional risks benefits, resulting in a decrease in the number of beneficiaries of 27 percent and 22 percent respectively over the same period. 41 Table 0.1: CNSS-Togo Contributors and Beneficiaries, 2000 - 2004 Years Contributors BENEFICIARIES Employers Salaried PENSIONS Contributions Old age Pension Early retirement Pension Disability Pension Survivor Pensions Contributor Spouse Children 2,000 4,654 59,636 11,211 318 796 5,707 50,284 67,287 167,095 2,001 5,088 59,478 11,876 320 805 6,918 52,538 70,252 173,227 2,002 5,137 62,272 12,801 322 789 7,239 42,675 50,049 104,307 2,003 5,200 66,872 13,810 323 777 7,869 44,001 51,559 107,650 2,004 5,364 61,320 12,611 21 304 6,923 44,672 52,944 108,283 Source : CNSS Contributions 155. The global pension contribution rates doubled in 2000, from 6 percent to 12 percent with presidential decree 2000/046. Contributions are now based on the total monthly payroll, with no monthly ceiling, and are divided as follows: 4 percent contributed by employees and 8 percent by employers. For the professional risks regime, the 2.5 percent payroll contribution is fully paid by employers, so is the 6 percent for family allowances. 41 The number of recipient of professional risks benefits was 3172 in 2000 and 2454 in 2004. Page 56 46 As shown in Table 4.2, Togo’s mandated high level of contribution scheme compares only with the Senegalese managerial staff scheme, and is well above that of other countries in the region. Table 0.2: Contribution Rates to Pensions Schemes in the CIPRES Region Country Institution Employer (%) Employee (%) Total Monthly ceiling Togo CNSS 8.0 4.0 12.0 No Burkina Faso CNSS 4.5 4.5 9.0 Yes Cameroun CNPS 4.2 2.8 7.0 Yes CAR* OCSS 3.0 2.0 5.0 Yes Cote d’Ivoire CNPS 2.4 1.6 4.0 Yes Gabon CNSS 5.0 2.5 7.5 Yes Senegal IPRES/1** 8.4 5.6 14.0 Yes IPRES/2** 3.6 2.4 6.0 Yes Source: CIPRES and staff analysis. It should be noted that most CIPRES countries are currently reviewing parametric reforms options, and that certain rates may changes when this report is released. Notes: *RCA is Central Africa Republic ** Senegal operates separate pension’s funds for managerial and non-managerial staff Benefits at CNSS 156. The link between contributions and benefits in Togo CNSS does not really exist and may create a funding problem to the scheme in the medium to long term. As shown in Table 4.3, the entitlement formula is rather generous in Togo and include (i) the low number of years of contributions required, (ii) the additional 1.33 percent benefit per year over 15 years, or (iii) the fact that pension benefits are based on remuneration over the last five years rather than the average over the total number of years of employment. Experiences in other countries with similar additional entitlement practices (such as Senegal or France) show that it clearly leads to unfunded schemes, where intergenerational redistribution progressively builds into the system. 157. CNSS lacks essential analytical tools, with the absence of actuaries, and of a government agency capable of providing data on the population. Data on the length of pension period per category of beneficiaries, useful to understand whether the overall trend pension periods is an increase or decrease, are not available. Page 57 47 Table 0.3: CNSS-Togo Benefits Formula Scheme Description Pension Benefits · Old age · Disability · Survivor Qualifying conditions Old age Retired and aged 55 years with 10 years of insurance coverage, and 20 years of registration. Disability Medical affidavit of permanent loss of capacity, loss of 2/3 of earnings, 5 years of insurance coverage and 6 months of contribution during the last 12 months. Survivor The insured person deceased qualified for old-age or disability pension, or had 180 months of insurance at the time of death Entitlement Old age A minimum of 20% of average earning during the last 5 years, plus 1.33% for each 12-month period of insurance coverage over 180 months. The minimum pension is 80% of the minimum wage, while the maximum amount is 100 times the minimum wage. Disability the insured is credited with a 6-month coverage period for each year that a claim is made before the age of 55 Survivor 50% of the insured’s pension for the spouse, 25% for each orphan under 25 (with the maximum ceiling being the insured’s pension). Source: Social Security Code: Laws and texts Financial Performance of CNSS 158. The consolidated income statement of CNSS showed a CFAF 5.5 billion surplus in 2004, which was at least double the 2003 figure (Table 4.4). This positive outcome hides, however, the fact that technical operations of the old-age activities (which represent 2/3 of technical operations) recorded a deficit. This situation can be explained by the low number of registered employers (the formal sector remains marginal in the economy), but also by the weak enforcement of the mandatory registration (despite recent concerted efforts with the tax administration authority). 159. On a consolidated basis, contributions to the surplus were provided by (i) the positive but moderate results of the professional risks and family allowance activities, and (ii) the investments in public and private enterprises representing one-fifth of total income. However, the vast majority of loans made by CNSS to the State were non- performing and in the process of being provisioned. Contribution arrears from both state- owned entities and the private sector of CFAF 19 billion and CFAF 27 billion respectively, i.e., a total of 25 percent of the balance sheet before the 2004 provisioning exercise also weakened CNSS treasury situation. The recent strengthening of the internal audit and collection department has yielded encouraging results, though modest in light of the amounts to be recovered Page 58 48 160. CNSS is considering a set of reforms that should help the recovery of the pension technical operations. These include a number of parametric measures such as: (i) raising the retirement age from 55 to 60 years old, (ii) phasing out certain benefits, (iii) reviewing the structure of the contributions. In addition, a supplemental pension scheme, based on a defined-contribution system, and opened to the larger population, is currently being analyzed by a specialized firm. The study ’s conclusions and recommendations are expected by mid-2006. Table 0.4: CNSS-Togo Income Statement, 2004 (in million CFAF) OPERATING INCOME Technical income 20,271 Revenues from Immobilization and Rent 66 Received from CRCC 37 Restitution of Provisions and amortization 1,006 TOTAL OPERATIONG INCOME 21,382 Interest income from bank accounts 1,121 Income from loans 4,291 Income from shares held in companies 91 Revenues from bond held 33 TOTAL FINANCIAL PRODUCTS 5,538 EXCEPTIONAL INCOME 184 TOTAL INCOME 27,105 OPERATING EXPENSES Service Charges 11,946 Family allowances 2,537 Professional Risk 958 Old age Pensions 8,435 Sanitary and Social Actions 14 Technical Charges 8,313 Materials 238 Transportation 24 Other Services 837 Charges et diverse losses 53 Personnel Charges 1,246 Taxes 49 Financial Charges 878 Provisions and amortissements 4,984 TOTAL OPERATIONAL EXPENSES 21,325 TOTAL EXCEPTIONAL EXPENSES 227 TOTAL EXPENSES 21,552 PROFIT (LOSS) 5,552 Source : CNSS Page 59 49 Investment Practices of Togo CNSS 161. The Togolese Social Security Code does not dictate specific investment rules, but provides for three guiding principles: security, profitability and liquidity. The nature of a pension system obligation is long term, requiring matching of the maturity of assets with that of liabilities, to the extent possible. However, the availability of such long term financial instruments is limited to a few bonds (issued by regional institutions such as BOAD and CEB), and one year term deposits at commercial banks with returns of 6 percent and 4 percent per annum respectively. Other alternative include investments in real estate as well as in company shares (Table 4.5). In 2004 financial assets of CNSS amounted to CFAF 57.4 billion and reached in 2005, 82.9 billion (7.7 percent of GDP and 15 percent of financial sector assets). That represented 45 percent of its balance sheet, and were distributed as follows: (i) Government debt: CFAF 66.7 billion; (ii) Deposits: CFAF 21,570 million; (iii) Real Estate deposits: CFAF 66.9 million; (iv) Company shares: CFAF 2.4 billion; (v) Bonds: CFAF 826.2 million; and (vi) Interest on loans: CFAF 12.2 billion. 162. A closer look at the components of these assets shows the following: · A total of 80 percent of CNSS’ financial assets (or CFAF 66.7 million) constituted Government debt which Management was forced to make to the State. A rescheduling agreement on the loans was signed between the two parties in 2001, with a 12 year term, and interest accruing at a 6 percent rate per annum. However, CNSS is yet to receive any payment, and thus, management started a steady provisioning process. · As much as 72 percent of the CFA 2.4 million held in companies’ shares was invested in state-owned entities. CNSS holds 62 percent of the share capital of BTCI bank. Investments in 8 out of 13 companies (SGGG, SGI, CNCA, etc.) have been fully provisioned, due to their current weak financial situation. · About 30 percent of total CNSS assets were held in bank accounts and term deposits, with a low yield (4 percent on average). 163. In total, the weight of government debt on CNSS comes close to CFAF 100 million (loans, contribution arrears, and their interests) and it is not clear that the Government of Togo is in a position to pay back those loans any time soon. 164. CNSS appears to be a well managed institution, with competent and well trained staff, tight procedures, regular reporting despite the difficult economic and political environment in which it operates. An external auditor who reports to its Boards is appointed annually. An internal audit department was created in 2002, in order to ensure a better control of registrations, receipt of contributions and benefits payment (CFAF 107 million were recovered thanks to this department’s efforts). Page 60 50 165. According to a CNSS report yet to be completed at the time of the field visit, 42 the institution appeared to be in compliance with prudential ratios prescribed by CIPRES such as: · Administrative charges of 13 percent were below the 15 percent limit ; · Technical reserves were 3 times the minimum required; · Security reserve appeared to be just above the minimum 166. More importantly, CNSS benefits payments are current. However, continued failure of Government to meet its obligations vis- à-vis the institution may in the long run take a toll and undermine the viability of the institutions. Table 0.5: CNSS - Togo Summarized Balance Sheet, 2004 in CFAF billion ASSETS CFAF billion Fixed Assets 63.7 Real Estate 6.3 Financial Assets 57.4 Current Assets 9.6 Cash Assets 31.7 TOTAL ASSETS 105.0 LIABILITIES Capital 2.6 Family Allowances 1.4 Professional Risks 0.1 Old Age 1.1 Legal Reserves 68.2 Technical Reserves 66.9 Security Reserves 1.3 Retained Earnings 0.6 Net Profit 5.5 Current Liabilities 28.0 Cash Liabilities 0.1 TOTAL LIABILITIES 105.0 Source: CNSS Reports T HE C AISSE DE R ETRAITES DU T OGO (CRT) 167. CRT was created by Law 91/11 of May 23, 1991 as a public entity in charge of managing the provision of pension services to civil servants and the military (previously, pensions was a department in the Ministry of Labor). This Law provides for its organizational and operational guidelines. Presidential decree 91/208 of September 6, 1991 provides for contributions and benefits rates for the various categories of civil servants. CRT management reports to a Board of Directors, headed by the Minister of Finance with memberships of the Ministry of Labor, The Ministry of national Defense, 42 the report was not communicated to the mission because it was still in draft form. Page 61 51 the Ministry of Social Affairs, the Ministry of State owned Entities, public sector unions and retirees. The Board meets three times a year, approves and supervises the budget, decides on the investment strategy. The Chief Executive Officer (CEO) and Assistant CEO are appointed by the Ministry of Finance, with no specific terms. The 1991 Law provided for its financial independence, however, its treasury management remains with the Ministry of Finance as of today. CRT enjoys the government’s permanent financial guarantee. Institutional Framework 168. CRT manages a social security regime providing old-age, disability and bereavement benefits, as well as a limited medical insurance scheme (geographically limited to Lomé and to services rendered in public hospitals). Enrollment is automatic upon hiring of employee. As shown in Table 4.6, CRT covered about 24 800 civil servants in 2002. The number of active troops being confidential since then, it is estimated that the current contributors population is about 29 000. The table also shows that the scheme has reached a mature stage, and that the depreciation of the ratio contributors to beneficiaries is currently less than 2 to 1. As we will see in the financial performance section, the increasing cost of servicing pensions, while contributions income steadily decrease negatively affects the scheme’s treasury position Table 0.6: CRT: Evolution in Number of Participants and Dependency Rate, 1991-2004 Year Number of Active Contributors (a) Number of Beneficiaries (b) Dependency rate in % (a/b) 1991 34,418 5,808 5.92 1992 34,927 6,209 5.62 1993 35,148 6,461 5.44 1994 35,488 6,820 5.2 1995 35,541 7,117 4.99 1996 35,118 8,035 4.37 1998 34,073 10,140 3.36 1999 34,837 11,044 3.15 2000 NA 11,969 NA 2001 NA 13,116 NA 2002 24,853 14,093 1.77 2003 NA 15,534 NA 2004 NA 16,812 NA Source: CRT. Note: NA = Not available Contributions 169. The contribution rate of 7 percent for CRT is deducted from civil servant payroll, and has not changed since 1991. The government’s matching is a generous 20 percent, which brings the total contribution rate to 27 percent. This rate appears very high when compared with that paid to CNSS. Contributions and benefits are tax free. Page 62 52 Benefits 170. The benefits structure of CRT is extremely generous when compared to contributions. The inexistent link, associated with an unfavorable demographic situation, has clearly led to the current problematic funding situation. Table 4.7 displays the standard benefit formula. However, many exceptions to the rule are allowed in the 1991 law and include: · A lower retirement age, varying from 50 to 53 years old, according to the civil servant category (e.g. for policemen or customs officers). · A right to early retirement for the military as long as they reach 33 years of age with 15 years of service. In addition, each year in the army is considered 1 and 1/3 year. · A right to early retirement for all civil servants when they reach 50, with 15 years of service. Missing years are being “topped up” automatically with no financial equivalent. · Women are credited one free year towards retirement per child, with a maximum of 6 years credit. · A one year salary paid as a one-off “bonus” upon retirement. Table 0.7: CRT Benefits Formula Scheme Description Benefits · Old age · Disability · Survivor Qualifying conditions Old age Retired and aged 55 years with 15 years of insurance coverage Disability Certificate from “commission de réforme” of permanent loss of capacity, disability above 66% of the internal grading system Survivor The insured person deceased qualified for old-age or disability pension. Entitlement Old age 2.5% times number of years of service, based on the last gross salary The maximum amount is 80% of the times the last gross. Disability Depending on the disability rate, it may vary between 66% to 80% of last gross salary Survivor 50% of the insured’s pension for the spouse, 10% for each orphan under 21 (with the maximum ceiling being the insured’s pension). Provisions are also made for polygamy situations and extra-marital children Source: Law 91-11 describing CRT benefits for civilians and the military Financial Performance of CRT Togo 171. CRT current financial situation is extremely critical. Table 4.8 presents a summarized cash flow statement since 2000, the year when the treasury deficit started building up. The current deficit of nearly CFAF 7 billion can be explained by the following: Page 63 53 · Government contributions arrears amounting to CFAF 21.3 billions. 43 · On a purely technical basis, benefits payments represent twice the amount of contributions. · Total outflows increased by 34 percent over 2000-2004, while income decreased by 10 percent over the same period. · Likewise, interests from financial assets decreased by 35 percent. This is due to the fact that since 2000, CRT has started calling on its reserves to be able to meet its monthly benefits payments. 172. The current monthly pension bill is about CFAF 1.1 billion. Contributions from the various ministries responsible for collections amount to only CFAF 485 millions. The financial gap of CFAF 615 million is filled by taking from the reserves placed with the MOF. As a result, CRT’s reserves have dropped from CFAF 24.5 billion in 1998 to 3.6 billion en 2005. It was anticipated that by April 2006, CRT would not be able to meet its obligations with its own funds and that the state guarantee would have to kick in. CRT has very little assets, both physical and financial. It does own some un-built land, but it rents its headquarters. Financial assets are held in short-term deposits earning 4 percent to 5.5 percent interest per annum. Table 0.8: CRT Income Statement, 2000-2004 (in CFAF) 2000 2001 2002 2003 2004 1) Technical revenues* 8 324 562 220 8 536 282 984 7 919 725 833 7 597 552 199 7 600 182 029 2) Financial revenues 150 655 875 125 387 869 107 448 846 85 668 074 97 288 827 3) Other revenues 47 500 203 000 58 000 7 500 30 000 4) Total Revenues 8 475 265 595 8 661 873 853 8 027 232 679 7 683 227 773 7 697 500 856 5) Technical expenses (Services) 10 136 076 801 11 513 164 561 12 244 557 290 13 209 968 593 14 014 931 686 6) Financial expenses 105 691 962 69 274 393 21 489 483 1 216 088 5 116 399 7) Operating expenses 603 413 609 647 465 552 652 348 256 599 521 552 592 513 819 8) Provisions and Amortization 98 034 546 80 328 546 60 286 528 50 695 334 36 093 671 9) Total Expenses 10 943 216 918 12 310 233 052 12 978 681 557 13 861 401 567 14 648 655 575 RESULT (4) – (9) - 2 467 951 323 - 3 648 359 199 - 4 951 448 878 - 6 178 173 794 - 6 951 154 719 Source:: CRT Income Statements, staff analysis Notes: * Retained salary contributions from employees and employers T HE F UTURE OF THE P ENSION S YSTEM IN T OGO 173. A revision to the 1991 Law is currently being considered by CRT. It includes the following proposals: · Increasing the retirement age from 55 to 60; · Cancellation of most exceptional benefits not linked to contributions; · Applying the contribution rate to the fullest 43 Government arrears of CFAF 21.3 billion included: (i) five months unpaid in 2001 of CFAF 3.6 billion; (ii) one month unpaid in November 2005 of CFAF 1.1 billion; (iii) departure bonus of CFAF 16.3 billion; and (iv) special bonus to the military of CFAF 0.2 billion Page 64 54 · Paying gradually government arrears 174. Preliminary projections made by CRT show that should such reforms be adopted in early 2006, a potential income of CFA 30 billion could be generated by 2010. However, given that the reforms may be unpopular with the general public, Government would need to build a consensus around them and carefully plan actions to be taken such as: · Undertake actuarial studies for both institutions: CRT 44 and CNSS; · Organize public consultations involving unions for both the private and public sectors; · Have a parliamentary public debate on the issues. 175. Successful implementation of reforms for both public funds should allow the Government of Togo to eliminate the increasing fiscal liability that it is facing. In addition, saving the pension system will not only insure some income security for retirees and other beneficiaries but will unleash much needed funds for the development of the financial sector as well. 44 A preliminary study of CRT that was conducted by the ILO would need to be updated Page 65 55 Financing State-Owned Enterprises in Togo 176. The most important and largest enterprises in Togo are state-owned which get financing for their operations by credit from local banks. In recent years, however, these bank loans have become non-performing and the analysis below is aimed at determining the reasons why these enterprises are unable to honor their commitments, which is threatening the viability of the banking sector. The report is thus focused on the public enterprises and their relations with domestic banks. S TATE -O WNED E NTERPRISES AND THE B ANKING S ECTOR 177. All major state-owned enterprises (SOEs) in Togo have been entertaining a business relationship with commercial banks for quite a while. They include SOTOCO ( Société Togolaise de Coton —Togolese Cotton Company), OTP/IFG ( Office Togolais de Phosphate —Togolese Phosphates Office/International Fertilizers Group), TdE ( Togolaise des Eaux —water company), TogoElectricité (the electricity company), and TogoTelecom (the telephone company). 178. SOTOCO whose contribution to GDP represented 2.8 percent in 2004 (down from 4 percent in 1998) and OTP/IFG representing 1.5 percent in 2004 of GDP (down from 7.5 percent of GDP in 1989) have accumulated sizable loan arrears which are partly responsible for the current crisis in the banking sector. 179. Although the Government of Togo created in 2001 a “bad debt recovery commission” to help banks and debtors work out a mutually agreeable repayment schedule, the system has not been very successful, thus far. It is questionable whether SOEs which owe the banks so much money can generate enough revenues to repay their debt given their current management structure. SOTOCO 180. SOTOCO was established by Decree No. 74-67 of March 27, 1974 to develop cotton farming throughout the country. Its main functions include: · The promotion and development of cotton farming; · The design of all cotton farming programs and their implementation and monitoring; · Provision and management of agricultural inputs; · Primary collection of cotton seed; · Management of cotton processing plants; and · Marketing of finished products. Page 66 56 181. During the past ten crop seasons (1995/96 to 2004/05), cotton seed production in Togo increased by 6 percent a year on average. The weakest performance during the period was 102,050 metric tons of cotton seed in 1995/96, and the best 187,703 metric tons in 1998/99. For the 2004/05 crop year, production reached 172,500 metric tons and estimated to fall to 70,000 metric tons for the 2005/06 crop year (Table 5.1). The number of cotton farmers reached the 200,000 mark before declining starting in 1998/99 in response to the poor performance of the sector. Table 0.1: Cotton Production in Togo over the last 11 crop years: 1994/95 – 2004/05 No. of cotton farmers Area cultivated in cotton (ha) Production of cotton seed (metric tons) Yields (kg/ha) 1994/95 191,396 92,832 131,612 1,418 1995/96 185,043 96,355 102,050 1,059 1996/97 199,618 108,303 146,428 1,352 1997/98 236,318 134,927 176,218 1,306 1998/99 281,241 158,799 187,703 1,182 1999/00 255,114 153,700 133,949 871 2000/01 212,221 134,626 117,445 872 2001/02 254,798 164,925 168,340 1,021 2002/03 260,700 198,892 186,589 938 2003/04 247,461 186,798 164,210 879 2004/05 249,625 198,851 172,500 870 Source: SOTOCO. Financial Performance and Profitability Analysis of SOTOCO 182. The figures in the financial statements of SOTOCO show that the company is in the midst of a financial crisis of a scope that is unprecedented since the founding of SOTOCO (Table 5.2 and 5.3). 183. The balance sheet of SOTOCO reveals that the core capital of the enterprise rose from CFAF 22.27 billion in 2001 and 2002 to CFAF 45.27 billion in 2003 and 2004. This was an increase of CFAF 23 billion, or 101 percent, thus, improving equity by 334 percent in 2004 (Table 5.2) . According to SOTOCO’s annual report, this sharp increase in 2003 is explained primarily by additional inflows of Endowment Funds in the amount of CFAF 23 billion from the Togolese Government to strengthen the capital structure. Page 67 57 Table 0.2: SOTOCO Balance Sheet, 2001 – 2004 (in CFAF billion) 2001 2002 2003 2004 ASSETS Fixed Assets 11.6 11.7 11.8 12.5 Current Assets 40.0 58.4 90.6 94.1 Cash 0.4 1.1 3.8 2.0 TOTAL ASSETS 52.0 71.2 106.2 108.7 LIABILITIES Capital 22.3 22.3 45.3 45.30 Reserves 7.3 1.9 1.9 1.9 Retained earnings 8.1 -7.5 -21.1 -29.67 Profit/Loss -15.7 -13.6 -8.4 -5.4 Other Equity 1.2 1.0 0.9 0.8 Total Equity 17.8 4.1 18.5 13.0 Long term debt 2.3 2.6 2.6 2.6 Current Liabilities 29.4 55.0 71.0 67.4 Short-term debt 2.4 9.4 14.1 25.6 TOTAL LIABILITIES 52.0 71.2 106.2 108.6 Source: SOTOCO Table 0.3: SOTOCO Income Statement, 2001 – 2004 (in CFAF billion) 2001 2002 2003 2004 Sales 43.8 55.7 58.4 63.6 Total Revenues 47.8 64.4 61.8 66.5 Total Expenses 63.4 78.0 70.2 71.9 Net Income -15.7 -13.6 -8.4 - 5.4 Source : SOTOCO 184. As presented, the financial statements for 2003 and 2004 showed liquidity ratios of 130 and 140 percent, respectively. This means in principle that the enterprise could honor all of its short-term debts once it has transformed a portion of its current assets into liquid assets. However, the enterprise’s continued negative profitability and its inability to honor its debts to the banking sector, suppliers, and small cotton producers called into question the credibility of the company’s financial statements which may not have reflected the real situation of SOTOCO. While an attempt has been made to present a summary of some of the financial statements, further field work will be needed to get a better understanding of the company’s bookkeeping, and better reflect the real situation of SOTOCO. For example, a detailed analysis of current assets will be needed to reconcile the seemingly insolvency of the company and the high current ratios. 185. It appears that the transfer of CFAF 23 billion by the State, the sole shareholder of SOTOCO, never materialized although it appears on the balance sheet. It was supposed Page 68 58 to help SOTOCO pay the debt it owed to BTCI bank. Thus, without taking into account that additional capital, SOTOCO’s equity would then fall to CFAF -4.47 billion in 2003 and CFAF -10 billion in 2004. This explains the reasons why SOTOCO has been unable to repay its CFAF 93 billion of short term debt, the majority of which (CFAF 26 billion) were from commercial banks. 45 The rest was due to suppliers of agricultural inputs (CFAF 20 billion), tax liabilities of CFAF 21 billion, and others. SOTOCO’s debt to small cotton producers amounted in 2004 to CFAF 23 billion which became delinquent, causing a ripple effect by forcing farmers to default on their input loans from financial institutions and suppliers. 186. It is worth noting that SOTOCO is a shareholder of BTCI, holding 22.6 percent of the capital of the bank and was given preferential treatment with regards to its loans. According to the General Management of the bank, BTCI granted a total of CFAF 41 billion in loans to SOTOCO, including CFAF 2.2 billion in off-balance-sheet items. In 2005, SOTOCO’s debt represented 48 percent of the total outstanding loan portfolio of CFAF 84.591 billion of BTCI. 187. The Banking Commission report of October 20, 2004 noted that the BTCI loans extended to some customers, including SOTOCO, relied solely upon the signature of the Managing Director of the bank, and had yet to be submitted to the Board of Directors for approval. Still according to the Commission, there was a tripling of SOTOCO liabilities between 2002 and 2003, signature loans included. Indeed, over a two-year period, lending to SOTOCO increased from CFAF 8 billion to CFAF 18.152 billion despite SOTOCO being unable to meet its rescheduled loan repayment under its debt consolidation agreement reached between the two parties. The latest agreement to repay SOTOCO’s debt was signed between the State and BTCI in December 2004 to help the bank avoid bankruptcy. The State would, thus, assume CFAF 23 billion of SOTOCO’s debt to be paid out of tax revenues collected for the Government by the Central Bank. The agreement was finalized and signed in December 2005. 188. The income statement of SOTOCO showed that despite increased business volumes, sales and revenues between from 2001 to 2004, the company remained unprofitable (Table 5.3). The financial statements for 2000 reveal the carrying forward of a positive profit of CFAF 8.10 billion. In contrast, FY 2001 shows an unprecedented loss of CFAF -15 billion and cumulative losses over the four fiscal years shown of CFAF -43.13 billion. The deteriorating financial condition of SOTOCO coincided with changes at the management level. This, therefore, begs the question of whether corporate governance at SOTOCO was working properly. 45 As of December 31, 2004, SOTOCO owed CFAF 23 billion to BTCI and CFAF 3 billion to UTB Page 69 59 Table 0.4: SOTOCO: Capital and Net Income: 2001- 2004 Corporate Governance at SOTOCO 189. In accordance with Law No. 90-26 of December 4, 1990, establishing the institutional and legal framework for public enterprises (See Annex 3 for details), SOTOCO undertook significant reforms of its governing structure. 190. Starting in 2000, the company welcomed a new Chairman of the Board of Directors. The General Management also underwent significant changes in the positions of Managing Director, Financial Director, and many other senior staff. A new Managing Director was charged with the restructuring of the company and to increase its profitability. However, the Supervisory Board, chaired by the Minister of Agriculture, which was supposed to monitor the activities of the Chairman of the Board of Directors, was not very effective. Under the new chairman, expenses kept rising despite the company’s plans to minimize them. For example, in 2002 the expenses for “Other studies and research” reached CFAF 3 billion from an original budget of CFAF 14 million, an overrun of 214 times. “Advertising and Publicity” expenses were CFAF 120 million in 2002 and totaled CFAF 467 million over the three years 2002 – 2004. These expenses are worth questioning for a company that is in critical financial situation, has been in existence for over 30 years, has a monopoly in the purchase of seed cotton and sells to a well organized international market. 191. SOTOCO seems to be suffering from bad corporate management but continues to represent an important entity for the cotton sector and the economy of Togo in general. As many small farmers (281,241) livelihood is heavily dependent on cotton cultivation and a good performing SOTOCO, more efforts should be made to guarantee the protection of producers by ensuring that the sector is more soundly managed. These - 20000000000 -15000 000000 - 10000000000 - 5000000000 0 5000000000 10000000000 15000000000 20000000000 25000000000 U n i t C F A F 2001 2002 2003 2004 Year Changes in Capital and Net Income of SOTOCO Company Share Capital Net income Page 70 60 efforts could start by a thorough financial as well as operational audit of SOTOCO to obtain a more accurate assessment of how it should be restructured. OTP/IFG (O FFICE T OGOLAIS DES P HOSPHATES /I NTERNATIONAL F ERTILIZER G ROUP ) 192. OTP/IFG is the second largest Togolese state-owned enterprise which has relied heavily on commercial banks to finance its activities over the years but failed to repay its loans. Background on Phosphate Production in Togo 193. Since its founding, the Togo phosphate company has gone through a number of mutations which can be classified in 4 phases: 194. Phase I: Creation and Startup, enterprise activities (1952-1973): the initial phosphate prospecting conducted in Togo in 1952 led to the discovery of promising samples. This research was conducted with the Geological Service of the North African Phosphates Counter (CPAN) within the context of a general prospecting effort throughout French West Africa. 195. The company came into existence in 1954 with the creation of Société Minière du Bénin (SMB) or the Benin Mining Corporation SMB collaborated with the geological service CPAN to study and develop a phosphate enrichment method, and ultimately built a phosphate enrichment pilot plant. In 1957, SMB took the name of Compagnie Togolaise des Mines du Bénin (CTMB), with 80.1 percent of its capital held by a private French Group and 19.9 percent by the Togolese State. The primary objective of CTMB was to put in place the equipment necessary for the production and export of 500,000 metric tons a year of market-grade phosphate. The first export of Togolese phosphate occurred on September 1, 1961. 196. Initially, phosphate production increased at a very encouraging pace, growing from 119,501 metric tons in 1961 to 2.3 million metric tons in 1973, i.e., an average of 1,2 metric tons per year over 13 years (Table 5.5). 197. Phase II: Nationalization of the Enterprise (1974-2001): The second important phase of phosphate production in Togo began with the nationalization of the CTMB by the Togolese Government on February 4, 1974. As the sole shareholder of a company with CFAF 3.622 billion in share capital, the government became the sole recipient of the profits from phosphate exploitation. On January 20, 1980, CTMB was merged with a new entity, the Office Togolais des Phosphates (OTP). The OTP was thereafter charged with exporting and marketing the market-grade phosphate produced by the CTMB. The share capital of the OTP, initially CFAF 15 billion, would be increased to CFAF 19.5 billion in 1997. Table 0.5: Evolution of Phosphate Production by CTMB, 1961-1973 Page 71 61 Year Annual Production (metric tons) Cumulative Production (metric tons) 1961 119,501 119,501 1962 191,705 311,206 1963 501,585 812,791 1964 752,442 1,565,233 1965 973,635 2,538,868 1966 1,145,574 3,684,442 1967 1,139,396 4,823,838 1968 1,374,000 6,197,838 1969 1,472,000 7,669,838 1970 1,508,189 9,178,027 1971 1,715,314 10,893,341 1972 1,927,604 12,820,945 1973 2,272,161 15,093,106 Source: Company files 198. The OTP was quite successful after the merger and phosphate production exceeded 3 million metric tons in 1988 and 1989. The OTP had become an important driving force of the Togolese economy, contributing up US$105 million in exports revenues, representing 15 percent of GDP. Thanks to its successful performance, OTP was very successful in borrowing from commercial Banks in Togo to finance its operations and investments in order to increase production and, thus, export earnings. Unfortunately, the company failed to properly manage its growth and production declined to 1 million metric tons in 2001, the same output as in 1966 (Table 5.6). The company was subsequently no longer able to honor its financial commitments to the banking sector. 199. The donor community, including the World Bank and the IMF recognized the disastrous impact what a possible bankruptcy of OTP would have on the Togolese economy, and proposed to the Government a plan for privatizing the company. Unfortunately, the privatization plan was not implemented until the World Bank suspended its financial support to the country in 2002. Page 72 62 Table 0.6: Evolution of Phosphate Production by the Nationalized OTP, 1974-2001 Year Annual production (metric tons) Cumulative production (metric tons) 1974 2,552,854 17,645,960 1975 1,160,502 18,806,462 1976 2,068,072 20,874,534 1977 2,857,005 23,731,539 1978 2,826,614 26,558,153 1979 2,915,811 29,473,964 1980 2,932,845 32,406,809 1981 2,244,425 34,651,234 1982 2,034,965 36,686,199 1983 2,080,674 38,766,873 1984 2,695,587 41,462,460 1985 2,451,720 43,914,180 1986 2,313,884 46,228,064 1987 2,643,933 48,871,997 1988 3,344,003 52,216,000 1989 3,355,540 55,571,540 1990 2,438,854 58,010,394 1991 2,964,642 60,975,036 1992 2,075,078 63,050,114 1993 1,794,305 64,844,419 1994 2,181,489 67,025,908 1995 2,569,103 69,595,011 1996 2,730,715 72,325,726 1997 2,631,353 74,957,079 1998 2,253,411 77,210,490 1999 1,714,530 78,925,020 2000 1,387,034 80,312,054 2001 1,066,581 81,378,635 Source: OTP Page 73 63 200. Phase III: Partial privatization of the phosphate company (2002-2003): On February 9, 2002, the Togolese Government, on its own initiative, decided to partially privatize the company by opening its shareholding to a Tunisian private partner, IFCO Holdings, Ltd. This new arrangement resulted in the creation of International Fertilizer Group-Togo (IFG-TOGO) with a CFAF 9 billion, held in equal amounts by the Togolese State and the Tunisian partner performing the General Management function of the company. IFG-Togo took some measures to rehabilitate its facilities and in 2002 and 2003, production began to grow once again and reached close to 1.5 million metric tons in 2003 (Table 5.7). However, a dispute between the two shareholding parties about an equitable distribution ended up in court. A court decision placed the enterprise under interim administration ( administration provisoire ) and the former Managing Director and his Tunisian senior staff were fired. Table 0.7: OTP/IFG Phosphate Production, 2002-2004 Year Annual production (metric tons) Cumulative Production (metric tons) Production under partial privatization 2002 1,280,609 82,659,244 2003 1,471,328 84,130,572 Production under interim administration 2004 1,115,150 85,245,722 Source: OTP 201. Phase IV: Interim Administration of the Company (2003 to Present): The court decision putting IFG-Togo under interim administration selected an Army Commander as Administrator who assumed the position on November 13, 2003. However, the situation of the company worsened rather than improve and production dropped back to its 1966 level at 1.1 million metric tons (Table 5.7). 202. On June 2, 2005, another court decision relieved the Army Commander from his position at the head of IFG-Togo and replaced him with a different Administrator who is still running the company. 203. It is worth noting that, contrary to what should have happened, OTP was not liquidated before IFG-Togo was created. In fact, IFG-Togo is still the lessee and manager of OTP’s business including its extraction, production, and marketing activities. Financial Performance and Profitability Analysis of OTP/IFG 204. Since OTP is no longer operational and is in the process of being liquidated, the financial analysis of Togo phosphate will focus on the analysis of the performance of IFG-Togo, which began its activities in 2002 Page 74 64 205. As shown in the financial statements, in the first year of operations of IFG-Togo in 2002, the company which had total assets of CFAF 47.2 billion made a profit of CFAF 51.27 million (Table 5.7 and 5.8). However, after it was placed under interim administration beginning in 2003, the company recorded sizable consecutive losses of CFAF 5.95 billion in 2003 and CFAF 5.28 billion in 2004, or combined losses over the two years of CFAF 11.23 billion. After two years of activity, OTP which had been delinquent on its bank loans for a while became insolvent. 206. As of December 30, 2005 the banking sector’s claims on OTP amounted to CFAF 26.071 billion, distributed among five banks including UTB (CFAF 9.825 billion), BTCI (CFAF 5.200 billion), BIA-Togo (CFAF 4.982 billion), ECOBANK-Togo (CFAF 2.646 billion), and SNI (CFAF 3.418 billion). Table 0.8: OTP/IFG Balance Sheet, 2002 – 2004 (in CFAF billion) 2002 2003 2004 ASSETS Fixed Assets 15.1 18.0 13.7 Current Assets 20.5 21.3 12.4 Cash 1.5 1.4 0.2 TOTAL ASSETS 37.1 40.6 26.4 LIABILITIES Capital 4.5 9.0 9.0 Reserves 0 0 0 Retained Earnings 0 0.05 -5.9 Profit/Loss 0.05 -5.9 -5.3 Other Equity 0 0 0 Total Equity 4.5 3.1 -2.2 Long term debts 20.4 16.2 15.6 Current Liabilities 10.6 15.7 8.1 Short-term debt 1.5 5.6 4.8 TOTAL LIABILITIES 37.1 40.6 26.4 Source: OTP/IFG Table 0.9: OTP/IFG: Summary Income Statement, 2002-2004 (in CFAF million) 2002 2003 2004 Sales 26.1 27.4 22.4 Total Revenues 29.8 31.3 22.7 Total costs 29.7 37.2 27.9 Net income 51.0 -5.9 -5.3 Source: OTP/IFG Page 75 65 207. Under an agreement signed on January 22, 2002, OTP/IFG-Togo was supposed to repay its debt to the consortium of banks via Belgolaise bank over a 10-year period with a one year grace period. However, OTP/IFG-Togo has not honored any commitment, and there is no guarantee that with the departure of its partners and its current critical financial condition, it will not be able to meet its commitments vis- à-vis the banking sector any time soon. 208. It is clear that the non performing loans of OTP/IFG-Togo are one of the contributing elements of the crisis in the banking sector. Good corporate governance at OTP/IFG has been lacking for a while and since its nationalization, OTP/IFG has had various different Board chairmen who were all political appointees. Before its partial privatization, OTP/IFG Supervisory Board was chaired by the Minister of Infrastructure and a Board of Directors chaired by various politically powerful individuals. In addition, the company has been under interim administration for nearly four years, with no Supervisory Board and no annual shareholders meeting. 209. Given the importance of phosphate for the economy of Togo, it would be advisable for the Government to re-launch the process of privatization to allow the company to become viable and profitable again. O THER S TATE - OWNED E NTERPRISES IN T OGO TogoElectricité 210. The electric company (TogoElectricité) is a state-owned enterprise which was under private management pursuant to a 20-year concession contract awarded to the ELYO Group (France). Its Board of Directors is chaired by an individual from the ELYO Group. 211. TogoElectricité has, thus, far being able to repay all its loans satisfactory. These include a CFAF 500 million from commercial bank UTB as well as CFAF 1 billion of supplier’s credit. 212. However, TogoElectricité is currently due about CFAF 3 billion by the Government In 2002 the company signed an agreement with the State to enable it to offset the State’s debts against taxes, fees, etc. 213. TogoElectricité would like to raise its rates to cover its increasing costs of doing business. However, the move is opposed by the Government who argues that TogoElectricité is failing to observe the concession agreement which calls for additional investment in the sector. The matter has been brought before the International Center for Settlement of Investment Disputes (ICSID). Without waiting for the judgment by the ICSID, the Government on Thursday, February 23, 2006, unilaterally announced the Page 76 66 breach of the contract with the Group ELYO. TogoElectricité became CEET ( Compagnie Energétique et Electrique du Togo ) which happened to be its former name. 214. This latest action by the Government is very worrisome as it calls into question the future of the company. There may be reasons to fear that improper management of the new company in the future may lead to successive deficits and another state-owned company which will start defaulting on its loans. Togolaise des Eaux (TdE): 215. The Togolese water company has an operating agreement with the State which has created a Fund for the Development of Drinking Water and Sanitation. This fund is to be used infrastructure investments in the sector. 216. The legal and institutional framework of TdE does not seem to be in conformity with follow best practice with the chairman of the Board of Directors and the chairman of the Supervisory Board being both ministers. The State has been delinquent with respect to its financial responsibilities vis- à-vis the company to whom it owed CFAF 2.6 billion. On the other hand, TdE debt to the State amounts to CFAF 2.2 billion. A compensation agreement signed by both parties has made it possible for TDE to recover sizable amounts of arrears from the State which still owes CFAF 0.4 billion. 217. TdE’s relations with commercial banks and other financiers have been good thus far. Monthly repayments of FCFA 10 million on a CFAF 400 million with BTD are on time. Another loan for CFAF 5 billion that has been contracted with the BOAD (West African Development Bank) does not come due for repayment until July 2006. 218. It is worth noting that Togolaise des Eaux has expressed some concerns about its capacity to repay the BOAD loan in the absence of a rate increase, which the Government opposes. Concerns have been raised with regards to the sustainability of a consolidated management of the operations and investment branches of the company. Further assessment of TdE should help the company decide whether a split is warranted or not. TogoTelecom 219. The Togolese Telecommunication company’s claims on the State amounted to CFAF 23 billion as of December 31, 2004, including CFAF 4.9 billion in advances made to the State. TogoTelecom, however owes taxes, VAT, fees, etc. to the State in the amount of CFAF 9 billion. Under a netting agreement, the company will, thus, use the amount of taxes due to reduce the amount of debt owed by the State. 220. TogoTelecom has no loans outstanding with any commercial bank. However, it benefited from guarantees provided by some banks, including the BTCI, to enable it to issue bonds. TogoTelecom is a client of BTCI where its holds a time deposit in the amount of CFAF 2.5 billion. It is worth noting that the chairman of the Board of Directors of TogoTelecom is also the Managing Director of the BTCI, and the chairman Page 77 67 of the Supervisory Board is the Minister of Infrastructure. This is, however, in compliance with the legal and institutional framework for State-owned enterprises in Togo. T HE F UTURE OF S TATE -O WNED E NTERPRISES IN T OGO AND B ANKS 221. The analysis of State-Owned enterprises in Togo showed that the largest companies (SOTOCO and OTP/IFG) are the most heavily indebted vis- à-vis the banking sector (CFAF 70 billion, i.e. US$140 million as of December 2004). Unfortunately these loans have become non-performing and threaten the viability of the financial sector. 222. It is apparent from the analysis that most state-owned companies are poorly run and suffer from heavy political interference in their operations. The State also holds a lot of responsibilities in the poor performance of the companies to which it has failed to honor its financial commitments. Also, the State diverse agreements to use tax proceeds to repay its outstanding loans to the State-owned companies is depriving the Government of much needed cash in the absence of financial support from the donor community. In its search for additional financing, the Government of Togo, thus, recently launched a 5-year bond issue, which against all odds was successfully subscribed. 223. In the end, unless, there is profound reform of the governance structure of these state-owned enterprises, they will continue to perform badly and spread their ills to the rest of the economy. Only full privatization of these companies will ultimately provide the solution for their current problems. However, in the very short run a thorough audit of the companies should be conducted followed by close monitoring and restructuring prior to privatization. Page 78 68 SELECTED REFERENCES Assah, Hervé, and Sy, Aly B. 2003. Implementation Completion Report for a Public Enterprise Restructuring and Privatization Support Project in Togo, World Bank/ Private Sector Unit, Washington D.C. E.I.U. 2005. Togo Country Report. Economist Intelligence Unit. E.I.U. 2004. Business Africa: Main Report. Economist Intelligence Unit . IMF. 2004. Togo – Staff Report for the 2003 Article IV Consultation. International Monetary Fund, Washington D.C. IMF. 2004. Public Information Notice: IMF Concludes 2003 Article IV Consultation with Togo. (PIN) N0. 04/53. International Monetary Fund, Washington D.C. OED. 2000. Togo – Country Assistance Evaluation, Report No. 21410. The World Bank, Operations Evaluation Department, Washington D.C. Planet Rating. 2004. Rating for Wages, a Microfinance Institution in Togo. Planet Rating. World Bank. 2004. Togo Country Brief. The World Bank, Washington D.C.. World Bank-UNDP. 2004. Country Re-Engagement Note – A Joint Framework For Strengthening International Assistance for the Republic of Togo. The World Bank, Washington, D.C. Page 79 69 ANNEX 1: TOGO AT A GLA NCE Page 80 70 Page 81 71 ANNEX 2: NOTES ON THE BANKING SECTOR IN TOGO A. Selected Tables and Figures on Banks in Togo Table A2.10: Market Share of Banks December 31, 2004 September 30, 2005 Assets (CFAF billion) 342.782 366.460 BIA 14.4% 16.1% BTCI 26.6% 26.0% UTB 21.2% 21.8% SIAB 1.7% 1.4% BTD 11.1% 11.5% SNI/FBT 1.5% 2.3% ECOBANK 23.5.9% 20.9% Total Assets (%) 100% 100% Deposits (CFAF billion) 264.754 278.903 BIA 14.3% 16.9% BTCI 28.1% 29.4% UTB 21.3% 21.3% SIAB 1.2% 1.2% BTD 7.7% 8.5% SNI/FBT 3.7% 1.9% ECOBANK 23.7% 20.8% Total Deposits (%) 100% 100% Credits (CFAF billion) 183.314 194.176 BIA 18.1% 18.0% BTCI 40.8% 39.5% UTB 12.9% 16.4% SIAB 1.7% 1.3% BTD 11.0% 11.2% SNI/FBT 3.3% 2.5% ECOBANK 12.3% 11.1% Total Credits (%) 100% 100% Source: BCEAO Figure A2.1: Evolution of Bank Deposits Vs. Bank Credits, 2000-2005 DEPOSITS AND CREDITS 0 500000 1000000 1500000 2000000 2500000 3000000 D E C . 2 0 0 0 D E C . 2 0 0 1 D E C . 2 0 0 2 D E C . 2 0 0 3 D E C . 2 0 0 4 S E P T . 2 0 0 5 CREDITS DEPOSITS Source: BCEAO Page 82 72 Figure A2.2: Evolution of Bank Deposits by Sector, 2000-2005 EVOLUTION OF DEPOSIT 0 500000 1000000 1500000 2000000 2500000 3000000 DEC.2000 DEC.2002 DEC.2004 PE PRIVATE GOVERNMENT TOTAUX Source: BCEAO Note: PE = Private Enterprises Figure A2.3: Evolution of Bank Credits by Sector, 2000-2005 EVOLUTION OF CREDIT 0 500000 1000000 1500000 2000000 2500000 D E C . 2 0 0 0 D E C . 2 0 0 1 D E C . 2 0 0 2 D E C . 2 0 0 3 D E C . 2 0 0 4 S E P T . 2 0 0 5 CREDIT TO GOVERNMENT CREDIT TO ECONOMY TOTAUX Source: BCEAO Page 83 73 Table A11: Distribution of Bank Credits by Term to Maturity End September 2005 BTCI BIA Ecobank SIAB UTB FBT BTD Total Short term 88.1% 70.4% 81.7% 41.1% 84.5% 31.2% 11.2% 71.7% Medium term 11.1% 28.7% 16.4% 58.9% 14.4% 68.8% 81.2% 26.4% Long term 0.8% 0.9% 1.9% - 1.1% - 7.6% 1.9% Total (%) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Total (CFAF billion)* 68.4 14.9 21.1 2.9 21. 8 4.7 21.6 155.4 End December 2004 BTCI BIA Ecobank SIAB UTB FBT BTD Total Short term 86.5% 75.0% 77.8% 46.5% 79.8% n/a 3.2% 68.2% Medium term 12.7% 24.0% 20.9% 53.5% 18.2% n/a 80.4% 28.1% Long term 0.8% 1.0% 1.3% - 2.0% n/a 16.4% 3.7% Total (%) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Total (CFAF billion)* 74.7 20.5 21.1 2.4 13.3 -- 27.8 159.8 Source: Commercial banks reports to BCEAO Notes: * Total loan amounts are lower than loans in previous tables because they do not include non performing loans, of which the non provisioned amount appears in previous tables. Page 84 74 Table A12: Distribution of Bank Deposits by Term End September 2005 BTCI BIA Ecobank SIAB UTB BTD FBT Total Sight 47.5% 53.3% 63.3% 76.8% 53.6% 45.3% 48.3% 53.3%% Savings 22.4% 27.8% 29.9% 10.6% 25.3% 21.0% 8.5% 26.1% Term 30.0% 18.9% 6.8% 12.6% 21.1% 33.7% 43.2% 20.7% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Total* (CFAF billion) 77.2 43.0 55.0 3.2 57.3 22.7 4.8 263.2 End December 2004 BTCI BIA Ecobank SIAB UTB BTD FBT/SNI Total sight 46.1% 49.8% 66.1% 81.1% 56.0% 48.2% -- 54.4% savings 22.9% 33.5% 25.6% 16.2% 25.2% 21.2% -- 25.5% term 30.9% 16.7% 8.2% 2.7% 18.8% 30.6% -- 20.1% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -- 100.0% Total* (CFAF billion) 71.6 35.9 62.7 2.0 52.9 20.4 -- 245.5 Source: Commercial Bank reports to BCEAO Notes: *Total deposits do not include interbank deposits, nor deposits attached to a loan, thus, are lower than those in previous tables. Page 85 75 Table A13: Distribution of Bank Clientele at end September 2005 Deposits in billion CFAF and Percent Individuals Private firms Public enterprises Government of Togo Other Government Total BIA 13.8 31.7 0.8 0.4 0.2 46.9 % 29.4% 67.5% 1.8% 0.9% 0.4% 100.0% BTCI 25.7 33.6 14.9 6.9 0.2 81.4 % 31.6% 41.2% 18.3% 8.5% 0.3% 100.0% Ecobank 23.7 27.2 4.3 1.5 1.0 57.9 % 41.0% 47.1% 7.5% 2.6% 1.8% 100.0% UTB 21.5 23.4 3.9 8.1 2.1 59.0 % 36.4% 39.6% 6.6% 13.7% 3.7% 100.0% SIAB 2.0 1.2 0 0 0 3.3 % 62.5% 37.5% 0.0% 0.0% 0.0% 100.0% Total 86.8 117.1 24.0 16.9 3.6 248.5 % 34.9% 47.1% 9.7% 6.8% 1.4% 100.0% Loans in billion CFAF and Percent Individuals Private firms Public enterprises Government Togo Other Government Total BIA 2.6 32.2 0 0 0 34.8 % 7.4% 92.6% 0.0% 0.0% 0.0% 100.0% BTCI 5.8 25.8 44.7 0.3 0 76.6 % 7.5% 33.7% 58.4% 0.4% 0.0% 100.0% Ecobank 1.9 18.6 0.6 0 0 21.1 % 9.0% 88.3% 2.7% 0.0% 0.0% 100.0% UTB 3.3 12.0 13.6 0.02 2.8 31.7 % 10.4% 37.8% 42.8% 0.1% 9.0% 100.0% SIAB 1.8 1.3 0 0 0 3.1 % 58.4% 41.6% 0.0% 0.0% 0.0% 100.0% Total 15.3 89.9 58.9 0.3 2.8 167.3 % 9.2% 53.7% 35.2% 0.2% 1.7% 100.0% Source: BCEAO. Page 86 76 Table A14: Distribution of Bank Deposits by Size for Selected Banks at end- September 2005 UTB SIAB BTCI BIA Number of deposit accounts (‘000) 0-200 70.4% 90.9% 54.5% 58.1% 200-500 10.0% 3.6% 15.6% 13.2% 500-1 000 6.1% 1.9% 9.2% 8.7% 1 000-5 000 9.2% 2.6% 14.2% 13.7% 5 000-10 000 2.1% 0.5% 3.3% 3.6% >10 000 2.2% 0.5% 3.2% 2.7% Total (%) 100.0% 100.0% 100.0% 100.0% Total number of accounts 31,796 5,821 28,715 14,922 Amount of deposits (‘000) 0-200 1.6% 4.0% 1.4% 1.2% 200-500 1.6% 2.6% 1.6% 1.6% 500-1000 2.1% 3.1% 2.1% 2.3% 1000-5000 10.3% 12.6% 10.5% 11.3% 5000-10000 7.5% 8.4% 7.4% 9.8% >10000 76.9% 69.3% 77.0% 73.8% Total (%) 100.0% 100.0% 100.0% 100.0% Total (CFAF billion) 63.414 2.500 85.747 40.699 Source: Commercial banks Page 87 77 Table A15: Distribution of Loans by Size at BTCI at end September 2005 BTCI Number of Accounts (in thousands) (in percent) 0-200 39.7% 200-500 20.5% 500-1000 18.9% 1000-5000 15.5% 5000-10000 2.4% >10000 3.0% Total 100.0% (CFAF million) 11 971 Amounts of Loans (in thousands) (in percent) 0-200 0.2% 200-500 0.4% 500-1000 1.0% 1000-5000 2.5% 5000-10000 1.6% >10000 94.3% Total 100.0% (CFAF million) 84 643 Source: Commercial banks Page 88 78 B. Plausible Actions under a “Good-bank Bad-Bank” Approach 1. A complete restructuring of troubled banks following the “Good-bank Bad-bank” approach could be implemented for BTCI, UTB, and BIA. That would require financial as well as organizational restructuring that would produce more efficient and profitable institutions. Thus, internal restructuring would have to focus on improvement of internal procedures, internal controls, loan granting and monitoring procedures. BTCI 2. BTCI complete financial restructuring would require that the bank be split into two. A new bank would then be created to acquire good assets and liabilities from the former BTCI which would then be put in liquidation. Based on the information available as of end-September 2005, the balance sheet of the new structure could be as follows: Table A16: BTCI: Plausible Balance Sheet of the Good Bank Assets Amount (CFAF million) Liabilities Amount (CFAF million) Performing loans 44 042 Deposits 55 351 Interbank 9 860 Interbank 7 476 Securities 5 015 Fixed assets 3 910 Total 62 827 Total 62 827 3. The new bank will have a zero effective net worth. Investors, particularly from the private sector will bring the net worth above prudential norms. At end of September 2005, deposits and assimilated amounted to CFAF 82,065 million. There is a possibility that a maximum CFAF 26,714 million of deposits would end up in the liquidation structure. In the end, the amount may be smaller, when, in a first stage, deposits from delinquent borrowers are be used to reimburse, at least in part, their bad debts. This would contribute to reduce total deposits and amounts of non performing loans. 4. An analysis of the distribution of deposits by size indicates that at least all deposits lower than CFAF 10 million will be kept in the new bank. This represents 96.8 percent of the number of depositors. Deposits accounts with less than CFAF 10 million would amount to CFAF 19.8 billion, which is much lower than the CFAF 55.4 billion that will be kept in the healthy structure. This means that the cut-off point could be placed at a higher level than CFAF 10 million. Page 89 79 5. Such a treatment of deposits which derogates from a pari passu approach would require a legal framework (to be introduced by law or decree) which would set the global context of bank restructuring. 6. Public enterprises could also be treated differently from private sector depositors. Government and Public enterprises deposits amount to CFAF 13.4 billion. Although care ought to be taken to avoid a cash starvation that could hamper continuing operations of these enterprises. In addition large depositors have term deposits of CFA 23.4 billion (Table A.2.8). It would be useful to distribute the term deposits according to their remaining maturity. Most term deposits could have between one and two years to run before their maturity by which time, recoveries on bad loans would permit their reimbursement. This would lessen the cost to their holders of bringing these deposits into the liquidation structure. Table A17: BTCI: Distribution of Deposits by Size and Category Sight deposits Savings deposits Term deposits (‘000) Number Value (in CFAF million) Number Value (in CFAF million) Number Value (in CFAF million) 0-200 5919 313 9736 843 0 0 200-500 1290 407 3196 994 2 1 500-1000 834 589 1796 1236 2 2 1000-5000 1359 3013 1340 5938 19 51 5000-10000 293 1995 626 4268 18 101 > 10000 466 38 057 309 4498 135 23 441 Total 10 161 44 374 17 003 17 777 176 23 596 Source: BTCI 7. The reimbursements of deposits will follow the recoveries on non-performing loans. With respect to credits to SOTOCO and OTP, these reimbursements will depend on the calendar for the payment of domestic debt by the Government. Such payments will need to be compatible with budgetary capacities, thus the importance of a Government and public enterprises debt restructuring exercise. By playing with the term of deposits of large depositors and with public sector deposits, the impact of the split on the private sector depositors would be minimized. UTB 8. Complete financial restructuring of UTB would require an allocation of additional recommended provisions which would bring its net worth to a negative CFAF 4.6 billion. An equivalent amount of fully provisioned debt would then be taken out together with a similar amount of liabilities. Some claims on Government resulting from the previous recapitalization should also be removed, together with deposits, to alleviate the pressure on UTB portfolio structure. The amount of claims Page 90 80 to be taken out of the balance sheet will also depend on the outcome of the restructuring of Government domestic debt. Indeed, the claims on Government left at UTB should be compatible with the budgetary constraints and the many demands on Government. Before the proposed operation, a compensation should be engaged, if possible, between credits of delinquent borrowers and their deposits at UTB. 9. An analysis of the deposits of UTB as of September 2005 shows that whatever, the amount of claims on Government removed from the balance sheet, at least 97.7 percent of the depositors will have their total deposits untouched at UTB. In addition, Government and public sector deposits totaling CFAF 11.9 billion would be removed first from the balance sheet. That may allow some private sector deposits to remain untouched. BIA 10. Complete financial restructuring of BIA would require, as a matter of priority, the Government request that current shareholders contribute to the absorption of past losses of the bank at the pro rata of their participation in its capital. BIA posted a negative net worth of CFAF 5.3 billion, as of end September 2005. Additional provisioning of CFAF 5 billion should be made against OTP. After having made these provisions, negative net worth would stand at CFAF 10.3 billion 11. Ideally, the absorption of this loss should be shared between BIA’s shareholders, that is, Belgolaise, Togolese nationals, Aiglon, COFIPA, and BOAD. Given that Fortis, the parent company of Belgolaise is following a strategy of withdrawal from several African countries, it is doubtful that Belgolaise will be willing to participate in the absorption of past losses. The same appears likely for the other partners. The authorities could, nonetheless, ask the regulator of Belgolaise in Belgium for assistance, though chances of success are limited. 12. Alternatively, a second best strategy would be to split BIA in two and creating a good bank by removing from BIA’s balance sheet, an amount of CFAF 10.3 billion of fully provisioned non-performing loans, with an equivalent amount of liabilities. But first, a compensation should be made, if at all possible, between deposits held by delinquent borrowers and their credits on the books of the bank. This may reduce the amount of provisioned loans to be taken out of the balance sheet. The removal of the fully provisioned loans would allow the bank to carry out a provision release of the same amount, bringing its net worth to zero. New private shareholders will then have to recapitalize the bank to at least comply with regulatory prudential norms. 13. The removal of at most CFAF 10.3 billion in deposits from the balance sheet of BIA would first affect Government and public enterprises deposits of CFAF 1.9 billion which will reduce the impact on private sector deposits. Over 97 percent of the number of depositors would remain in the healthy good bank as well as 80 Page 91 81 percent of the amount of deposits. A finer analysis would have to be done for the large deposits at BIA to identify the term deposits that still have a couple of years until maturity, and have the potential to reduce further the impact of the split. B. Restructuring Strategies for Other Distressed Financial Institutions 14. For SIAB , while no further financial restructuring is required at this time, strong measures need to be taken to reduce the operating efficiency ratio which, if not lowered, will bring about negative results that will annihilate the positive impact of the recapitalization. Costs should be reduced but business should also be developed to increase leverage, and help achieve profitability. 15. For CET, the recommended restructuring measures would include a complete recapitalization of CET. That would bring its effective net worth to zero by taking out of the balance sheet some fully provisioned loans and an equivalent amount of liabilities. It would have been good to be able to remove some of the claims on the Government created by a previous exercise of absorption of past losses. This will not be advisable, however, because it would require removing an equivalent amount of deposits, most of which belong to small depositors. 16. Privatization efforts of CET by government should be encouraged and continue. It may be a good strategy to allow the reference partner to hold at least 51 percent of the capital of the privatized CET. That would give the reference partner control over management as well as important stake in the institution that strong measures to bring it operating cost down for better efficiency and profitability. A reference partner with a majority stake at CET may also have to consolidate the balance sheet and the results of CET with its own institution. That would be a strong incentive to focus on making CET a profitable venture. Page 92 82 ANNEX 3: NOTES ON THE INSURANCE SECTOR IN TOGO 1. The insurance sector in Togo was small and not a major player in the economic and financial life of Togo. As of December 31, 2004, insurance penetration 46 represented 1.2 percent of GDP and insurance density 47 was also very low with US$4.56 per capita. 48 These figures compare well with other countries in the region, but appear very low when compared with those in most other parts of the world. 2. Weaknesses of the insurance sector in Togo come primarily from the instable political situation and low economic growth, which have hindered further development of the sector, as demonstrated by the rather erratic premium growth recorded over the past years. Structure of Insurance Markets 3. As of December 31, 2005, there were six non-life and three life insurance companies operating in the Togolese market. The youngest company started operations in 2005. Six companies were foreign-owned. The largest company GTA-C2A, formed by the merger of two local companies, held 52 percent of the non-life market share. The market was highly concentrated in the non-life business with the market segment of the three largest companies represents 92 percent of the market. 4. The structure of the non-life and life insurance markets in Togo as of December 31, 2004 is shown in Table A3.1. The non-life market represents about 77 percent of the insurance business, as most of the insurance sold in Togo is purchased by industrial or commercial enterprises. Third party liability insurance is obligatory for operators of motor vehicles (about 46 percent of the non-life market), but due to ineffective methods of enforcement, it is estimated that 30 – 40 percent of vehicles on the roads are not insured. As the national social security system does not provide cover, there is a growing importance of the healthcare branch (a 23 percent market share), mainly purchased by corporations for their employees (as a retention incentive). 46 Insurance penetration is market premium as a percentage of GDP. 47 Insurance density is premium per capita. 48 The insurance sector was not considered a priority for this study, given its small size and minor role played in the financial system of Togo. It will, thus, not be extensively treated in a separate chapter. Page 93 83 Table A18: Structure of Life and Non-Life Insurance Markets, 2004 Non- Life Insurance Companies Premium (in CFAF million) Market share GTA - C2A 6,221 52% UAT 3,243 27% COLINA 1,201 10% FEDAS TOGO 663 6% AGF- TOGO 625 5% TOTAL Non-Life Insurance 11,955 100% Life Insurance Companies GTA - C2A 1,401 45% UAT 1,139 37% BLI 543 18% TOTAL Life Insurance 3,084 100% Source: Insurance federation, 2004 report 5. Little insurance is sold to individuals, whether on their own lives or as protection for their property. Corporate clients usually purchase collective policies to provide life insurance protection for employees (also as a retention incentive). Life insurance companies have designed personal retirement savings products that are targeted to assist individuals to supplement the meager pension income they can expect from the state-run social security systems. Supervisory System 6. Togo is member and signatory to the CIMA treaty negotiated by 14 Francophone Africa countries. Under the terms of the treaty, all 14 countries are bound to a single set of insurance laws and regulations. Decisions regarding granting or withdrawal of licenses and sanctioning of insurance companies that are found to be non- compliant are made by the Commission Régionale de Contrôle des Assurances (“the Commission”). The Commission is governed by a representative council with participants nominated by member countries, as well as representatives from the regional reinsurance company CICA-RE, and from the insurance trade association for the region. There is a Togolese controller as well, i.e., the Direction Nationale des Assurances (DNA), part of the Ministry of economy and Finance. Standards 7. Insurance companies must possess a minimum amount of paid-up capital prior to licensing (CFA 500 million, or about US$1 million) and, once licensed, must maintain a minimum standard of solvency as set out in the CIMA Code. Companies must have assets of acceptable quality that are at all times sufficient to cover their estimated obligations to policyholders and claimants. The asset coverage rules also impose mandatory standards for diversification in the asset portfolios. In addition to covering the liabilities, companies must maintain capital and surplus at least equal to the amount computed by a solvency formula which closely resembles that which Page 94 84 is prescribed for companies operating in the European Union. If a company fails to meet both the coverage test and the minimum solvency standard, it is subject to sanctions, including possible withdrawal of license. 8. The supervision of insurance companies is carried out through what is essentially a two-tier system. Each year, companies must file a prescribed return with the CIMA Secretariat located in Libreville, Gabon. CIMA inspectors then perform an initial desk analysis of the information received and select some companies for an on-site inspection. Each license company must be inspected at least once every two years. Vulnerabilities in the Supervisory System 9. When it was first introduced, the CIMA system of supervision with a unified body of laws and a single Secretariat, represented a significant improvement in the supervision of insurance companies in member countries, as it sets the stage for the insurance sectors to operate at international standards. In addition, CIMA created a system where applications for licenses and the review of supervisory analysis could be carried out by an independent organization, free from political influence from either the insurance companies concerned or from local Governments. 10. However, weaknesses have emerged with respect to the roles played by CIMA and those of local supervisory authorities, such as DNA in Togo. Local authorities do not appear to devote much effort to the follow-up of findings after an inspection by CIMA. Thus, while the inspectors and the CIMA Secretary-General might have directed a company to make certain changes or to correct a specific problem, no follow-up is made to ensure that these remedial measures are taken, even though the next CIMA inspection might not occur for the next two years. Current Performance of the Togolese Supervisory System 11. In the initial stages of implementation of the CIMA code and standards, there was a rapid improvement in the strength of the insurance industry in Togo, with (i) privatization of the ill-run national insurance scheme, (ii) company mergers resulting in stronger capitalization, (iii) attraction of stronger partners. Companies were obliged to correct deficiencies in a short period of time. Service to the public, including handling of insurance claims was improved, and all stakeholders in the insurance sector welcomed the changes. 12. In 2004, amidst poor financial performance of Togolese companies, CIMA ordered the restructuring of four insurance companies (including the two market leaders) that did not meet their solvency margins. Some observers thought that these companies were allowed to stay in business despite the fact that a critical appraisal of their financial condition would have concluded that they were no longer viable. 13. Several explanations have been offered to explain the weaknesses and even deterioration in the CIMA supervisory system and include: Page 95 85 · Inadequate human and financial resources provided to the CIMA Secretariat and the DNA. F inancial statement analysis of companied is still performed manually, as there is no capacity for electronic filling. As a result, there are important delays in the reports issued by CIMA. 49 · Political pressures on members of the Regional Commission. Members are nominated by authorities in the member countries and they may not be as truly independent as was first believed. · Fear of retaliation . Staff members in the Secretariat and at the DNA serve for undefined terms, and will ultimately return to their civil service. They may, thus, be reluctant to adopt severe supervisory measures that are unpopular with their hierarchy. · Uncertain role of the DNA. In the face of strengthening of the CIMA Secretariat in Libreville and the activities of its inspectors, there has been some uncertainty over the future role of local supervisory authorities such as DNA. It has been observed that local officials no longer devote much effort to the follow-up of findings after an inspection by CIMA. Thus, while the inspectors and the CIMA Secretary-General might have directed a company to make certain changes or to correct a specific problem, there may be no follow-up by DNA to ensure that these remedial measures are taken, even though the next CIMA inspection might occur only one or two years later. 49 The official 2004 report was yet to be issued in November 2005. Page 96 86 ANNEX 4: INSTITUTIONAL AND LEGAL FRAMEWORK FOR PUBLIC ENTERPRISES IN TOGO. A. Legal Framework for Public Enterprise in Togo: Law No. 90-26 of December 1990 1. Togo established the relevant institutional and legal framework for public sector enterprise on December 4, 1990. Law No. 90-26, and its implementing decree No. 91-197, are intended to: - Facilitate relations between the State and its private partners; - Strengthen the operation of more efficient public enterprises by easing the State’s supervision while making the management bodies more accountable and emphasizing ex post controls. 2. The major focuses of the new regulations may be summarized as follows: - Public enterprises are subject to private law as regards their relations with third parties and employees; - The typology is simplified; all State-owned companies and mixed capital companies in which the State holds over 50 percent of the capital are regarded as public enterprises. Public establishments of an economic nature must be transformed into State-owned companies with share capital. 3. Public sector enterprises are to include the following bodies in their structure and organization: For State-owned companies: · The Supervisory Board · The Board of Directors · The General Management For mixed capital companies: · The General Meeting of Shareholders · The Board of Directors · The General Management 4. The Supervisory Board introduced in State-owned companies is the primary innovation of the law. The representative of the State as shareholder, the Supervisory Board plays a role identical to that of the General Meeting of Shareholders in private law companies. Like the General Meeting, it appoints and dismisses board members and statutory auditors, approves the annual accounts, and Page 97 87 decides how earnings are allocated. The Supervisory Board also proposes to the Government any changes in the social pact that it may deem necessary; 5. The Board of Directors appoints and removes the General Manager as well as the Deputy General Manager, as appropriate. It has all the powers required for implementing the enterprise ’s general policy as defined by the supervisory authorities; 6. The General Manager, by delegation of powers from the Board of Directors, is responsible for the day-to-day management of the enterprise; 7. In the case of enterprises performing a public service obligation, a performance contract may be entered into with the State to define, on the one hand, the objectives to be achieved by the enterprise and, on the other hand, the obligations incumbent on the State in light of the Government’s economic and social policy; 8. In principle, in this new, less restrictive legal environment, public enterprise directors may fully exercise their functions as managers and administrators. However, actual conditions are something else altogether in some of these enterprises. B. Netting Arrangement 9. Following the suspension of cooperation in 1992, the Government, in the context of rehabilitating financial relations between the State and the public enterprises, decided to offset reciprocal debts and claims. At the end of each fiscal year, the two parties agree to meet once a year to take stock of their financial positions and decide on modalities for reconciling outstanding claims. 10. Pursuant to the agreement, the aim is to prompt these State-owned companies to pay their tax liabilities regularly, once reconciliation has occurred, in accordance with the legislation in force. This netting practice is in nearly general use among public enterprises, in particular those providing services (water, power, telecommunications, etc.).