Importance
1. The Importance of Financial Services
The financial sector is integral to the functioning of a modern economy, playing a central role in financial intermediation and resource allocation. Businesses and individuals with investment ideas often lack the necessary financial capital, while those with savings are rarely positioned to identify good investment opportunities. A well-functioning financial system is therefore needed to efficiently allocate capital so that investments required for economic growth can occur.
The financial sector also plays a major role in managing risk. Markets face various volatilities and uncertainties, including credit risk, operational risk, and liquidity risk, among others. Without the financial sector and the instruments provided by financial institutions to help manage these risks, many economic activities would not take place.
With well-developed financial institutions, firms are better able to make investments. This leads to the production of goods and services, as well as the introduction of new technology, which in turn creates job opportunities and reduces poverty. While it is easier for the financial sector to function when an economy is growing, the financial sector can also be a driver of sustained economic growth.
2. Current Status of Financial Services
The Gambian financial sector consists mainly of the following: commercial banks, insurance firms, microfinance institutions, foreign exchange bureaus, village savings and credit associations (VISACAs), and mobile money operators. The size of the country's financial sector is relatively small, at about D 100 billion.
a. Bank-dominated financial sector: Banks comprise the largest share of the financial sector. Given the size of the country, there is a high number of commercial banks (12). These banks are mostly foreign-owned and account for almost 90% of the assets in the financial sector. Like other African countries, the banking industry is concentrated in The Gambia, with the top four banks accounting for about two-thirds of the banking industry's assets.
All non-bank financial institutions (NBFIs) collectively account for about 10% of the financial sector's assets. Among these, the insurance sector is a distant second in terms of assets. There are 21 insurance firms in the country, but most are insignificantly small. The insurance market is also quite thin, with few products offered. For instance, individual health insurance is rarely available from any of the insurers currently in the market. Another feature of the financial sector in The Gambia is the absence of many other financial institutions such as leasing, factoring, warehouse financing, and reinsurance companies. A shallow financial sector is extremely limited in the range of financial instruments it can provide, and consequently, its ability to allocate capital and manage risk would be highly constrained.
b. Many banks but limited intermediation: Despite the large number of banks in the country (relative to its size), they don't play a key role in providing credit to the private sector. On one hand, the ratio of deposits to GDP in The Gambia is higher than the sub-Saharan African average. On the other hand, the ratio of loans to deposits is much lower than the regional average. This implies that Gambian banks are highly liquid but provide loans at a far lower rate than other African countries. This is confirmed by the low credit-to-GDP ratio, which is about 10% in Gambia compared to about 15% for sub-Saharan Africa. In general, the lending rates (interest rates on loans) of banks are quite high (15%) but rates on deposits are low.
The lack of access to finance for Gambian enterprises is significant. In multiple surveys, a majority of Gambian firms indicated that access to finance is a major constraint for their businesses. Without access to loans to start or expand businesses, the private sector cannot reach its potential, which will has adverse consequences for the economy.
current state
c. No long-term financing: There is no long-term financing available in The Gambia. In other words, loans with tenors longer than 12 months are extremely rare. Additionally, loans with grace periods longer than 2 months are also rare. These realities are detrimental to addressing the sort of development challenges that the financial sector should tackle. Without long-term financing, many important investments cannot be carried out. Numerous investment opportunities need time before they can start repaying debt obligations, which means there is a need for long-term financing and grace periods.
d. Dependence on public sector borrowing: The banking sector is highly dependent on the public sector. Indeed, more than half of Gambian banks’ assets are in government treasury bills. While private credit as a share of GDP is less than 10%, yields on government treasury bills remain high. In other words, excessive government borrowing is not only adding to the country’s debt burden but is also crowding out lending to the private sector.
e. Sector concentration: The vast majority of lending by banks and NBFIs in The Gambia is concentrated in two main sectors: (i) real estate and (ii) wholesale and retail. These two sectors account for more than 50% of banks assets. Only a small proportion of lending goes to economically important sectors such as agriculture and manufacturing, which collectively account for only about 5% of bank assets. Such portfolio concentration is not only a risk issue for the financial institutions themselves but also has development implications for the country as a whole.
f. Limited financial inclusion: A large number of people in The Gambia have no bank accounts or access to financing from financial institutions. Studies by the IMF and the World Bank show that the degree of financial inclusion in The Gambia is much lower than in comparator countries, using indicators such as the share of adults with access to financial services. The degree of financial exclusion is much higher in rural areas and among youth.
Intervention
3. Shortcomings of the Current Government
Any government has the potential to significantly impact the financial sector. Unfortunately, the current situation in The Gambia is one in which the government is the source of some of the biggest challenges faced by the sector.
a. Crowding out the private sector: Due to excessive borrowing by the government, particularly domestically, banks are more focused on lending to the public sector than to the private sector. This has pushed interest rates high and limited the amount of credit available to the private sector. Instead of addressing the root causes of high interest rates, the government imposed a cap on banks, which creates more problems than solutions.
b. Lack of reforms: The financial sector is still largely guided by regulations and legislation passed under the regime of Yahya Jammeh. These include the Banking Act 2009, Regulation of Mobile Money Service (2011), and the NBFI Act 2016, among others. These laws and associated guidelines have many gaps, with numerous ambiguities regarding responsibilities. Furthermore, many developments have long surpassed the provisions in those documents.
c. Large implementation gaps: There is a major gap in the country between what is on paper versus reality in terms of the financial architecture that the government should lead in establishing. This is particularly the case regarding credit reference bureaus and collateral registries. On paper, both of these have been in place for over a decade. The reality is different.
4. PPA's Solutions
The financial sector in the country should function towards the goal of bringing about economic development that impacts the life of Gambians. Our government will work towards that goal by addressing the following problems:
a. Control debt accumulation: The PPA leadership understands that one of the problems facing our financial sector, which is the low lending to the private sector, results from excessive domestic debt by the public sector. This excessive borrowing incentivizes banks to put most of their assets in short-term government securities. As the government's borrowing increases, it raises interest rates, which causes banks to divert more assets into government borrowing. This creates a vicious cycle where the government's debt accumulation completely strangles the credit lifeline to the private sector. This negative feedback loop must change. Domestic debt accumulation will be controlled so that banks have incentives to put assets in non-government securities. This will also allow interest rates to decline, which would be far more effective than the existing interest cap that the Central Bank has imposed on banks. The section on fiscal policy details our government's public finance management approach.
b. Credit reference system: To incentivize financial institutions to provide credit to the private sector, it should be made easy for them to assess the creditworthiness of borrowers. The infrastructure to enable financial institutions to carry this out is not functioning. On paper, there is a credit reference bureau, but it is not working well, as its use by banks is extremely limited and non-existent for NBFIs. The PPA-led government will build this system properly from the ground up, learning lessons from countries that have successfully implemented similar systems.
c. Efficient and fair contract enforcement: Financial disputes, whether between banks and their clients or between businesses, take a long time before they are properly adjudicated in The Gambia. This problem has made contract dispute resolution an intractable issue in the country. The PPA-led government will prioritize the quick adjudication of contract disputes. This will make it easier for financial institutions to extend credit and for people to enter into mutually beneficial contracts.
solutions
d. Facilitate enterprise demand for finance: The PPA leadership understands the role that government has to make it easier for banks and NBFIs to lend to businesses. Specifically, registration requirements for enterprises will be streamlined and simplified. Without a simplified business registration system, many businesses will remain informal. This will have implications for the tax revenue generation as it will lead to a low tax base.
e. Increase the presence of financial institutions in rural areas: One of the reasons why few Gambian adults have access to financial services is the limited number of banks in rural areas. This has been confirmed in studies conducted in The Gambia. It is also notable that there is currently no commercial bank with a branch in Bansang—a major town in the interior of the country. There is also no commercial bank branch in Soma apart from Trust Bank. The PPA-led government will provide incentives to ensure that all major towns in rural areas have branches.
f. Development Bank: The PPA leadership understands that the degree of lack of access to finance in The Gambia is high and will require more than removing constraints on existing financial institutions. A new development bank is needed that would complement existing financial institutions. As mentioned earlier, the sector concentration of existing financial institutions is too skewed toward two particular sectors. A developing nation such as The Gambia cannot afford to have critical sectors such as agriculture and manufacturing deprived of financing. It is important to point out that there are new models of development banking that have incorporated lessons learned from past challenges. The country needs a new development bank that would complement existing financial institutions rather than compete with them. It would help commercial banks focus on critical sectors through the provision of partial credit guarantees, as well as focusing on wholesale banking to enable long-term financing.
Follow us on @ Electionify
