52423 FINANCIAL SECTOR ASSESSMENT BURUNDI DECEMBER 2009 AFRICA REGION VICE PRESIDENCY FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY BASED ON THE JOINT IMF-WORLD BANK FINANCIAL SECTOR ASSESSMENT This Financial Sector Assessment (FSA) is based on the amended aide memoire1 from the joint International Monetary Fund-World Bank mission, which visited Bujumbura for the Financial Sector Assessment Program (FSAP) from January 12-23, 2009.2 The objectives of the mission were to assess Burundi's financial sector with a view to providing information to the government that would help in devising a financial sector development strategy. The mission's work was focused on the sector's stability and development problems. 1 Dated June 2009 2 The team was composed of André Ryba (mission head, World Bank), Abourhamane Sarr (deputy mission head, IMF), Romain Veyrune and Etienne Yehoue (both from the IMF), Pierre Olivier Colleye, Djibrilla Issa, Adja Dahourou, Eric Mabushi, and Salifou Noma (all of the World Bank), Eric Haythorne, Charlie Garrigues, Christine Sampic, Keith Bell, Ahmed Lahrache, and Guillaume Gilkes (consultants). The mission was assisted by the resident representatives of the World Bank and International Monetary Fund in Burundi. 1 ACRONYMS AND ABBREVIATIONS AFD French Development Agency [Agence Française de Développement] ARCA Insurance Regulation and Control Agency [Agence de Contrôle et de Régulation des Assurances] ATM Automatic Teller Machine BANCOBU Commercial Bank of Burundi [Banque Commerciale du Burundi] BBCI Burundi Bank of Commerce and Industry [Banque Burundaise du Commerce et de l'Industrie] BCB Credit Bank of Bujumbura [Banque de Crédit de Bujumbura] BGF Bank of Management and Finance [Banque de Gestion et de Financement] BNDE National Economic Development Bank [Banque Nationale de Développement Economique] BRB Bank of the Republic of Burundi CAR Central African Republic CCP Postal Checking Account [Comptes Chèques Postaux] CEBAC Burundi Arbitration and Reconciliation Center [Centre Burundais d'Arbitrage et de Conciliation] CECAD Savings and Credit Cooperative for Self-Development [Coopérative d'Epargne et de Crédit pour l'Auto Développement] CEO Chief Executive Officer [Président Directeur Général] CGA Authorized Management Center [Centre de Gestion Agréé] CIMA Inter-African Conference for the Insurance Market [Conférence interafricaine des Marchés d'assurance] CNAC National Confederation of Coffee Growers' Associations [Confédération Nationale des Associations des Caféculteurs] CNTB National Commission for Land and Other Assets [Commission Nationale des Terres et autres Biens] COMESA Common Market for Eastern and Southern Africa COSPEC Citiboke Cooperative for Small Farmer Solidarity for Savings and Credit [Coopérative Solidarité avec les Paysans pour l'Epargne et le Crédit de Citiboke] CP Core Principle EAC East African Community EIB European Investment Bank EPT Electronic Payment Terminal FBu Burundi Franc FENACOBU National Federation of Cooperatives of Burundi [Fédération Nationale de Coopératives du Burundi] FNL National Liberation Front [Front National de Libération] FORCE Fund for Microfinance Revitalization, Advice, and Exchanges [Fonds pour la Relance, les Conseils et les Echanges en Microfinance] FPHU Urban Housing Promotion Fund [Fonds de Promotion de l'Habitat Urbain] FSA Financial Sector Assessment FSAP Financial Sector Assessment Program 2 FSCJ Court Personnel Solidarity Fund [Fonds de Solidarité des Cadres Juridiques] FSSA Financial System Stability Assessment FSTS Health Worker Solidarity Fund [Fonds de Solidarité des Travailleurs de la Santé] GDP Gross Domestic Product HIPCI Heavily Indebted Poor Countries Initiative IBB InterBank du Burundi IFC International Finance Corporation IFRS International Financial Reporting Standards ILO International Labor Office IMF International Monetary Fund INSS National Social Security Institute [Institut National de la Sécurité Sociale] ISA International Standards on Auditing MED Foreign Exchange Auction Market [Marché des Enchères en Devises] MFI Microfinance Institution MFP Civil Service Mutual Association [Mutuelle de la Fonction Publique] NPO Nonprofit Organization OBI Internal Banking Operations [Opérations Bancaires Internes] OCIBU Burundi Office of Industrial Crops [Office des Cultures Industrielles du Burundi] ONATEL National Telecommunications Office [Office National des Télécommunications] OTB Burundi Tea Office [Office du Thé du Burundi] PAGE Economic Management Support Project [Projet d'Appui à la Gestion Economique] RCCM Commercial Registry [Registre du Commerce et du Crédit Mobilier] ROA Return on Assets ROE Return on Equity ROSC Report on Standards and Codes RTGS Real Time Gross Settlement SBF Burundi Finance Company [Société Burundaise de Financement] SG Secretary-General SIP Public Realty Company [Société Immobilière Publique] SMEs Small and Medium-Size Enterprises SOCABU Burundi Insurance Company [Société d'Assurance du Burundi] SOGESTAL Coffee Washing Station Management Company [Société de Gestion des Stations de Lavage] US$ U.S. dollar 3 I. OVERALL ASSESSMENT 1. The financial sector, dominated by the banks, is vulnerable to external shocks. The country is exposed to terms of trade shocks mainly from coffee and oil prices, which could impact banks through real sector effects. The banking system is also vulnerable to a decline in external assistance which funds nearly half of the government on which a large share of the economy depends. Burundi has not been directly affected by the international crisis, but second round effects are likely to impact growth and foreign aid prospects. 2. Credit risk is the greatest risk to which the banking sector is exposed. Banking soundness indicators are favorable, but the analysis of bank portfolios reveals a sharp rise in lending which may lead to vulnerabilities, since it occurred against the backdrop of weak economic performance. Bank lending has for the most part been extended to the trade sector, which accounts for over 60 percent of bank credits but only 12 percent of GDP. Market risks are limited. 3. Banks globally meet the main prudential norms, namely the capital adequacy and liquidity ratios. The average operating ratio and profitability are at satisfactory levels. 4. Stress tests suggest that the banking system is stable and resilient to shocks. Under most shocks to its loan portfolio, the banking sector capital adequacy ratio remains above the prudential standard. Banks also appear to resist well the shocks to the public enterprises and the coffee sector given the low proportion of related loans in their portfolios. However, were the five largest debtors to default, or a sizable share of loans to the trade sector to become nonperforming, several banks would have insufficient capital. Overall, banks with majority state ownership are the most vulnerable 3. 5. Nevertheless, staff urged the authorities to: (i) closely supervise the banks' risk management practices and credit standards; (ii) take appropriate steps to address emerging risks, especially in the trade sector and as regards the concentration of lending, possibly require additional general provisions given the rapid credit growth observed; and (iii) begin to regularly conduct stress test exercises and initiate dialogues with banks on stress testing. 6. The BRB is making major efforts to improve the regulation and supervision of the financial institutions under its responsibility, but it continues to face significant obstacles. The BRB appears to be unable to impose strict compliance with regulatory provisions. This is mainly because of the insufficient number of adequately trained human resources. The regulatory framework in place is lagging considerably with respect to the Basel Core Principles (BCP) for 3 Despite these findings of overall stability, the analysis warrants some caveats. The quality of data in Burundi is questionable because of shortcomings in the reporting and auditing infrastructure. The information system of the central bank is not sufficiently computerized and a clear banking sector accounting framework is lacking. 4 banking supervision and in terms of the requirements of risk-based supervision. BRB was in conformity or relative conformity with 6 of 25 principles. 7. The BRB must make considerable progress to improve its liquidity management and the functioning of the monetary and exchange markets. The BRB has difficulty coordinating its monetary operations in relation to its monetary policy objectives. Liquidity management and the quarterly objective for the monetary base have not been reconciled resulting in banks' holding significant reserves in excess of requirements. In addition, policy interest rates, which should mainly be determined by the market given the BRB's quantitative operating target, are controlled and have been negative in real terms. Interbank transactions are also limited. Foreign exchange auctions should be mainly conducted in line with an objective for the level of foreign exchange reserves in light of the BRB's monetary framework and managed float exchange rate regime. 8. Since the creation of the primary market for Treasury securities, the interest rate ceiling had been set by the authorities, undermining the development of the market. These ceilings have been removed since the FSAP mission. The volatility of external budgetary resources should also be taken into account when calibrating issues possibly having the government's cash balance at the BRB as a target. The preparation of a debt management strategy and an updating of the legal, regulatory, and institutional framework for managing public debt are necessary to comform with international best practices. 9. Reform and modernization of the payment system are priorities in view of its low level of development. The central bank's charter makes only a brief reference to the BRB's responsibilities with regard to the payment system. There should be a clarification of the BRB's role in the area of payment systems and means of payment, especially regarding its oversight function. It would be advisable to establish a special directorate responsible for payment systems. A comprehensive clearing and settlement infrastructure must be defined and built. It should include the automation of small value transactions (checks and transfers) within an electronic clearing system and a real time gross settlement system (RTGS) for large transactions4. 10. There is no operational card payment system in Burundi. Some banks are launching individual projects. It is essential that the card systems being designed provide for bank interoperability. 11. The microfinance sector is facing major challenges, and its supervision reflects the constraints affecting the BRB. All the on-site inspections organized by the BRB revealed serious problems and violations of prudential rules, in particular in the areas of accounting, governance, or the absence of reliable internal controls. In order to put the industry on a sound footing, it is essential to: (i) update the regulatory framework to facilitate the growth of a sound industry and introduce a specific chart of accounts; (ii) develop supervision that is capable of 4 To benefit from economies of scale, authorities have, since the FSAP, decided to install the RTGS simultaneously with the electronic clearing system. 5 preserving the health of the sector, and of deposits in particular; and (iii) promote the professionalization of the industry itself, with improved human capacities, appropriate management tools, modern methodologies, and good governance. 12. The insurance sector could play an important role in the development of the financial sector by intermediating risks and making long-term resources available, but its performance falls well short of the mark. The sector is outmoded, and has a limited product range concentrated on mandatory auto insurance products (63 percent). The financial health and solvency of companies fall below regulatory requirements and international standards. Arrears in premiums are also a problem. 13. For national insurance companies to participate in the development of the sector a number of actions are required: recapitalize the companies, ensure compliance with the rules on solvency margins and the constitution of technical provisions, restore the principles of good governance and combat conflicts of interest, regulate brokerage activities, maintain the obligation for foreign firms to operate in the country through a subsidiary company and not a representative office, and develop coinsurance in order to increase the capacity of local insurers. 14. The regulations have many gaps and supervision is nonexistent, despite the fact that a decree calls for the establishment of an Insurance Regulation and Supervision Agency (ARCA). ARCA has never been operational. It is urgent to set up a supervisory authority for the sector. A review of the regulatory texts is also required, as is the development of a chart of accounts. 15. The INSS is running a deficit on a cash basis and on an actuarial basis. A review of the parameters is required, and an actuarial study has already been initiated. 16. Lack of access to financial services is a problem for the majority of the population, for SMEs and rural areas. Only about 1.9 percent of the total population hold bank accounts, 0.42 percent use bank lending services, and 4 percent are members of microfinance institutions. There is little diversification in the financial products offered by banks. The banks generally have no units devoted to SMEs. Most SMEs have difficulty obtaining loans for a number of reasons, the two most important of which are the unavailability of the tangible collateral sought by banks and the absence of reliable information on borrowers. Poorly adapted supply, lack of conducive business environment, weaknesses in management and information infrastructure, and the low capacity of SMEs are also factors. 17. The legal and judicial environment offers scant guarantees. The main legal difficulties observed by financial system transactors lie in the implementation of legal provisions and the uncertainties arising as a consequence. In particular, the ineffectiveness in practice of some types of collateral (mortgages and the rare use of business goodwill as collateral) and in the functioning of collective procedures for clearing liabilities, result in a general lack of trust in the effectiveness and reliability of existing judicial mechanisms, and restricts the supply of financing. In addition, the judicial system moves slowly and judges lack training. 6 18. The authorities have well received the conclusions and recommendations5 of the FSAP and have asked for support for the implementation of reforms. A request will be submitted to FIRST Initiative for assistance with the design of a detailed financial sector strategy. A FY10 Bank project is under preparation to support important and urgent activities whose implementation cannot wait for the elaboration and adoption of the strategy. II. MACROECONOMIC BACKGROUND 19. Burundi is a poor country with a per capita income of about US$120. Its recent economic performance has been influenced by four key factors: (i) the effects of the civil war from 1993 to 2003, which resulted in a decline in economic activity, the destruction of infrastructure, and the discouragement of external assistance; (ii) the vulnerability of the agricultural sector to climatic conditions in an economy that is basically rural, and this sector employs 80 percent of the labor force; (iii) the volatility of income from coffee, the main cash crop which accounts for 90 percent of exports; and (iv) an economy that is little diversified with limited competitiveness. 20. Burundi has entered a period of relative political stability after a number of years of civil war, but peace remains fragile, which constitutes a vulnerability factor for the economy. A peace accord was signed in September 2006 with the last armed resistance movement (the FNL) which has now become a registered political party. General elections are planned for 2010. The performance of the Burundi economy is dependent on the consolidation of peace. 21. Economic performance improved between 2003 and 2008 but the macroeconomic situation remains fragile. Real GDP growth averaged 3 percent over this period but was volatile, reflecting the cyclical and conjunctural fluctuations of the agricultural sector. The country is dependent on external assistance, and the volatility of aid affects macroeconomic management and performance. Inflation has declined but remains high, and is volatile. 22. The external position is fragile, with a current account deficit of the balance of payments of almost 15 percent of GDP (including grants) in 2007. The external debt level is also very high (155 percent of GDP at end-2007). Foreign exchange reserves come to about 3 months' imports, a level that could be insufficient given the volatility of external aid and the high levels of the current account deficit and external indebtedness. The exchange arrangement is a managed float. 23. Burundi thus finds itself confronted by a number of challenges, including achieving and maintaining macroeconomic stability and improving growth. To do so, it needs to diversify its economy, and its agricultural sector in particular. It also needs to invest in human resources and physical infrastructure in order to recover from the lags attributable to the years of civil war, and increase productivity. External assistance is contributing a great deal to achieving 5 A list of main recommendations can be found in Annex. 7 these objectives. The mobilization of domestic resources and financing of the economy by a highly performing financial sector assisting the private and public sectors are also needed in order to reduce external vulnerabilities and support growth. Sound macroeconomic management, as well as proper operation of the financial sector, are critical components of such a strategy. 24. Burundi has resolutely embarked on this path. The medium-term projections made under the program with the IMF suggest continued improvement in economic performance. Burundi has reached the completion point under the HIPC initiative. Burundi has also embarked on a regional integration process (Box 1), which should favor economic diversification and upgrading to regional standards defined with its partners, in particular in the financial sector. Box 1: The East African Community (EAC) The Treaty for the Establishment of the East African Community was signed on November 30, 1999 and entered into force on July 7, 2000 following its ratification by the original three partners, namely Kenya, Tanzania and Uganda. Rwanda and Burundi joined on July 1, 2007. The EAC aims at widening and deepening co-operation among the partner states, particularly in the political, economic and social fields. The EAC countries established a customs union in 2005 and are working towards the establishment of a common market by 2010 and a monetary union by 2012. The five countries have a combined population of 126.2 million, and combined GDP of 60 billion US dollars, resulting in a GDP per capita of 424.2 US dollars. Burundi's GDP accounts for 1.5 percent of the EAC total. It has the lowest GDP per capita (120 US dollars) of the five countries and Kenya the highest (724.5 US dollars). In the financial sector, the objectives of the EAC are: monetary policy harmonization, macro convergence, capital account liberalization, harmonization of legal and regulatory framework of banking supervision, development of payments system, information technology infrastructure development, financial markets integration and monetary union. In all these areas, BRB lags behind the central banks of other member countries. For instance, the capital account liberalization in Burundi remains partial. All countries except Burundi have introduced risk based banking supervision. There is a lack of a unique identifier in the credit bureaus managed by BRB. All four other countries have adopted a strategic approach to payments system development and harmonization between the countries is under way. Burundi is just starting the reform process. Four countries have designed a five year financial markets development plan. Burundi has launched this exercise. 8 The Financial Sector 25. The commercial banks clearly dominate the financial sector, with 79 percent of total assets, followed by social security and microfinance (Table 1). Banking thus represents the systemically important sub-sector for financial sector stability. Table 1. Assets of Financial Institutions in Burundi (2007) (In billions of Burundi francs) Institutions Assets Share Banks 568.9 78.6% Microfinance 36.0 5.0% Insurance 36.0 5.0% INSS 36.0 5.0% BNDE 21.6 3.0% FPHU 16.4 2.3% Postal system 9.4 1.3% Total 724.1 100.0% III. THE BANKING SECTOR 26. There are seven commercial banks and two financial establishments in Burundi, a development bank and a housing bank. Banks with a majority of private capital predominate, holding 73 percent of assets, gathering 80 percent of deposits, and distributing 69 percent of the lending from the banking system, including the financial establishments. The State is the majority shareholder in two banks, with over 55 percent of the capital, and in the two financial establishments, at over 80 percent. The capital structure of the banks has changed over the past two years with the entry of foreign banks with large pan-African networks in the capital of three Burundi banks. The market is relatively concentrated, with the three largest banks holding 79 percent of deposits and 74 percent of credits at end-2008.6 The market shares of the four other banks range from 4 to 8 percent. 27. At end-November 2008, the total assets of Burundi's banks amounted to FBu 568 billion, or 53.5 percent of 2007 GDP. The banking sector had extended credit to the economy in the amount of FBu 263 billion. 28. The profitability level of the commercial banks has remained relatively high over the past three years. In 2008 return on assets was 3.4 percent and return on equity 33.1 percent. The banks' operating ratios at end-2008 averaged 48.7 percent, which is quite reasonable. 6 In terms of the size of their assets there are three large, one medium-sized, and three small banks. 9 29. The average cost of resources is low and decreased from 4.8 percent to 2.8 percent between 2005 and 2008, 7 owing to the fact that a sizable proportion (over 50 percent in general) of customer deposits are unremunerated demand deposits. The average lending rate is high, although it declined from 26.7 percent in 2005 to 17.0 percent in 2008. The inflation rate was 13 percent in 2005 and 22 percent in 2008. The interest rate margin averaged 14 percent for all banks. Table 2. Burundi: Banking System Solidity Indicators, 2005­08 (in percent) Dec. 2004 Dec. 2005 Dec. 2006 Dec. 2007 Nov. 2008 SOLVENCY Equity capital / weighted assets / 16.6 18.3 13.5 13.5 14,5 ) Core capital (Tier 1 capital)/weighted assets 15.6 16.5 7.6 10.9 8.6 ASSET QUALITY Gross delinquency rate 1/ 20.1 20.6 18.6 18.8 14.7 Net delinquency rate 2/ 5.4 3.5 1.4 1.6 1.4 Coverage rate 3/ 73.8 84.4 90.2 92.6 96 Largest exposures /capital 48.5 41.6 52.4 PROFITABILITY ROA 1 1.9 1.7 2.3 4.4 ROE 9.9 14.1 17.5 26.4 29.4 Interest income/total gross income 62.4 57.9 56.4 59.7 62.3 Nonbanking costs/gross proceeds 183.9 193.6 188.9 156.6 129 Payroll expenses / Total charges excluding interest 25.8 23.2 28.1 27.7 LIQUIDITY Liquid assets/total assets 34 33.1 38.1 41.3 Liquid assets/short-term liabilities 87 106.8 135.2 137.9 Transformation ratio 4/ 89.8 96.4 101.7 101.1 111.2 1/ Gross nonperforning loans/gross lending. 2/ Gross nonperforming loans net of provisions /net lending. 3/ Provisions constituted/gross delinquent loans. 4/ Ratio of stable resources/long-term resource uses (average for banks). 30. The indicators of banking system performance show that the banking system is adequately capitalized. The average solvency ratio of the banking system stood at 14.5 percent in November 2008, above the 8 percent norm. The small banks are generally better capitalized than the larger ones. Among the latter, the banks in which the state is the majority shareholder have the lowest ratios. 7 The average cost of resources is the ratio of aggregate interest charges of all banks to total customer and interbank deposits. 10 31. Asset quality has improved since 2005. The ratio of nonperforming loans to total loans dropped from 20 percent in 2005 to 15 percent in November 2008. It is possible that the sharp increase in lending may have been the cause, which would constitute a potential risk factor. The level of provisioning of nonperforming loans has improved, rising to 96 percent in November 2008. 32. The liquidity level of the banking system is generally comfortable. with an overall liquidity ratio of 109 percent, exceeding the 100 percent norm required by the BRB. However, some banks have ratios slightly below 100 percent, which does not necessarily represent a serious risk, even though it is a violation of regulation. 33. The banking system with little international connections has been little affected by the international crisis. The main channels of impact should be second round effects, especially slower global growth and lower external assistance. 34. Burundi's dependence on external assistance is also a source of banking system fragility. The state is the largest driver of economic activities in the country, but 50 percent of the budget is financed by foreign aid. The volatility and unpredictability of external assistance are often reflected in payment delays to enterprises who in turn can have difficulty fulfilling their commitments to banks. 35. The banking system is vulnerable to poor performance on the part of public enterprises. There are some 50 public enterprises in Burundi of which 21 are relatively large entities. A recent World Bank study8 found that the financial performance of public enterprises in Burundi is generally weak. They have governance problems. They have accumulated substantial arrears to the state and among themselves. All except three have registered losses. These difficulties reduce their capacity to honor their liabilities vis-à-vis the banking system and the state. However, the banking sector's exposure to the public enterprises amounts to only about 11 percent of its claims. 36. Stress tests were conducted for 7 banks active at end-November 2008. Single-factor sensitivity tests were conducted on credit risk, exchange rate risk, interest rate risk, and liquidity risk. The scenarios assume a deterioration in macroeconomic conditions resulting from the vulnerability factors enumerated earlier. 37. Globally, the banking sector resists credit risk well, but is highly vulnerable to the concentration of lending. There must be a 100 percent increase in delinquent loans before banks become insolvent.9 However, if the five largest debtors were to fail, the banking system would be in crisis, with large banks and medium-sized banks seeing their solvency ratios drop significantly. Among them, the one in which the state is the majority shareholder is particularly vulnerable. 8 World Bank: " Burundi: banks and public enterprises" April 2008 9 Although a 100 percent increase may appear high, it is not impossible in a post-conflict country where political stability remains extremely fragile. 11 38. The vulnerability of the banking sector to the poor performance of the public enterprise sector appears limited. The banking system overall can resist losses of up to 90 percent of the loans to this sector, given the low level of such lending in the banks' portfolios (11 percent). However, certain large or medium-sized banks would have their solvency ratios fall below the 8 percent threshold. Among them, the one in which the state is the majority shareholder is particularly vulnerable to a deterioration in the quality of loans to public enterprises. 39. The banking sector is less vulnerable to exchange rate fluctuations. Liquidy and interest rate risks are limited. The multiple-shock macroeconomic scenario considered is a combination of three individual shocks, and leaves the solvency ratio of the system above the required minimum. 40. In order to mitigate the risks highlighted above, the BRB should: (i) closely monitor the risk management practices of banks, their credit standards, and their financial position; (ii) take appropriate measures to address emerging risks, especially in the trade and coffee sectors, and pay particular attention to credit concentration; and (iii) begin to conduct stress test exercises on a regular basis and initiate dialogues with banks on stress testing. Regulation and Supervision 10 41. The central bank enjoys independence in monetary matters and contributes to the stability of the financial system. The BRB is authorized to issue and withdraw the licenses of banks and financial establishments as well as of microfinance establishments. It also has full powers to issue prudential regulations. 42. However, the central bank does not seem to be in a position to impose rigorous compliance with regulatory norms. The performance of the supervision unit is also hindered by weaknesses of information, inadequate procedures (currently being revised), and low capacity of staff. 43. The assessment of compliance with the Basel Core Principles for Banking reflects the weaknesses in the supervisory framework. While licensing critieria are globally consistent with international standards, they would benefit from clarification. In order to better monitor bank ownership structures, the thresholds for shareholding that must be reported to the BRB should be reviewed. Prudential regulations fall far short of standards. The analysis found that BRB was in compliance with one principle, in relative compliance with 5, in relative non- compliance with 12 and in non compliance with 6. One principle is without object. 44. The supervisory approach adopted by the BRB is still largely based on monitoring compliance with laws and regulations, despite the fact that the international trend favors the risk-based approach. The level of supervision could also be stepped up by developing closer surveillance methods so as to have greater visibility with respect to the major risk areas and fragilities of each establishment. 10 See technical note on the Basle Core Principles analysis 12 45. The BRB is vested with a number of powers that enable it to deal effectively with distressed banks, whether the problems derive from liquidity difficulties or are attributable to solvency problems. Establishments confronted with transitory liquidity problems and which provide the appropriate guarantees could access its normal liquidity facilities. Establishments of systemic importance that submit a recovery plan deemed acceptable by the central bank can also access emergency liquidity subject to issuance by the Minister of Finance of a written guarantee of repayment in favor of the BRB. 46. The banking law also provides the organization of market solidarity, requiring all banks to provide a contribution to a failing establishment. The terms and conditions of this contribution would be set forth in a convention signed by the parties concerned. The exact role of the central bank in this latter case is not precisely defined. The authorities should study the desirability of a deposit insurance scheme to strengthen the existing mechanisms. A crisis management plan should be put in place to coordinate the actions of the stakeholders (central bank, Ministry of Finance, and possibly the regulatory authorities of the host country or home country of the distressed bank). 47. Other means are available to the central bank under the banking law, in particular: the cessation or limitation of repayments to depositors or other creditors in the event of insufficient funds, divestiture, and the restructuring and liquidation of the bank. IV. LIQUIDITY AND PUBLIC DEBT MANAGEMENT 48. The principal objective of monetary policy in Burundi is price stability, and the BRB pursues an intermediate objective of controlling monetary aggregates based on a monetary base target. 49. The BRB has difficulty coordinating its monetary operations in relation to its monetary objectives and operating framework. The management of short-term liquidity and the quarterly objective for the monetary base have not been reconciled. The ceiling on interest rates in BRB's weekly auction is also incompatible with its policy of controling monetary aggregates. As a result, its policy rates, including those on the marginal facility, are disconnected from market reality and have been below the rate of inflation. Interest rates should be mostly market-determined to be consistent with the monetary policy framework. Eliminating interest rate caps should make it possible for positive real interest rates to appear, which might help slow excessive credit growth and encourage real savings. 50. The BRB plays an important role on the exchange market. Interbank exchange transactions are quite limited in scope. The BRB conducts weekly auctions mainly to limit the accumulation of foreign exchange reserves, since the state is a major foreign exchange earner. 51. The primary motivation for intervention on the exchange market by the BRB should be the management of its exchange reserves in the context of its monetary policy. These interventions should be guided by an estimation of the adequate level of reserves and result in a preannounced program for foreign exchange sales throughout the year. 13 52. Since the creation of the primary market for Treasury securities, interest rate ceilings have been set by the authorities. More often than not, total amounts bid have been below the announced amount possibly reflecting the opportunity cost. It should be noted, however, that the government has difficulty projecting intra-annual needs, which makes issuance amount unpredictable. Bidders show a distinct preference for the shortest term (13 weeks), and banks prefer a four-week maturity to facilitate their cash flow management. It is essential to ensure proper coordination between government cash flow management, the issuance of Treasury securities, and the management of bank liquidity. For each objective there should be a corresponding instrument assigned, and it is advisable to avoid having the same instrument used for multiple objectives that could prove to be contradictory. 53. The authorities should undertake key reforms in the government securities market and adhere to best practices in debt management. The primary market for government securities should be reformed to make it more sensitive to market signals and enhance the reliability of cash flow forecasts to make issuances volume more predictable. Interest rates ceilings (or minimum prices) should be eliminated11, a clear calendar of issuances announed and adhered to. In determining issuance volumes, it would also be desirable to take the past volatility of external resources into account by considering building a government cash buffer at the BRB. Reforms of the institutional framework for public debt management are also needed to conform to best practices in this area. 54. In the context of its integration into the East African Community, it is planned for Burundi to draw up a plan for developing its financial market over a five-year period including the government securities market. The objective is to increase investment possibilities, facilitate the financing of the government, improve the channels for monetary policy transmission and promoting financial stability. This commitment provides a good opportunity to initiate reforms in related areas, including to address issues identified by the FSAP. V. PAYMENTS SYSTEM 55. The payments system in Burundi is characterized by the preponderance of cash transactions, strong distrust for checks, and physical exchanges of payment instruments, which are the source of errors, delays and costs. The number of accounts opened is estimated at 130,000 for the banking sector and in the order of 120,000 for the postal checking system. 56. The central bank's charter makes no reference to the BRB's responsibilities as regards to the payments system oversight. It is therefore recommended to clarify the BRB's role in the area of the payments system and means of payment, in particular as regards the oversight of the payments system in a manner consistent with EAC recommendations. It would be advisable to establish a special department responsible for the payments system and means of payment and covering three main functions: (i) definition of the strategy and policy for modernizing the infrastructure of the payments system and payment instruments in keeping with EAC action plans; (ii) the management of modernization plans and, following their 11 This has been done following the FSAP mission. 14 implementation, the operational management of an automated payments system under the direct auspices of the BRB; and (iii) the oversight of operators (both the BRB and outside operators) engaging in activities in this area so as to ensure the proper application of fundamental principles and international standards. 57. The number of operations traded in the clearinghouses has not grown for a number of years. Interbank activity is quite limited, with fewer than two operations per year per account, showing that exchanges between economic agents are essentially in cash, with a sizable number of withdrawals at teller windows. 58. The clearing system is mainly manual. Moreover, the BRB unit responsible for clearing has only one old computer and no backup computer. Clearing is therefore delayed whenever the computer is down. 59. A complete clearing and settlement infrastructure must thus be defined and built. These developments should incorporate, as a top priority, the automation of retail payments (checks and automatic transfers) within an electronic clearing system. This first stage should include the development of other payment instruments such as debit transfers, card transactions, and other electronic payments. In order to reduce risks, speed processing, and implement international recommendations, it is essential to process large value transactions outside the clearinghouses. The implementation of a real time gross settlement (RTGS) system is also important. 60. Burundi should be able to take advantage of EAC work and to apply international standards and recommendations. The team recommends in particular a stocktaking of progress with the projects underway in Rwanda. The objective would be to establish cooperation with the Central Bank of Rwanda and, where appropriate, with the suppliers now being selected for their systems or installation, so as to accelerate the modernization of the payments system in Burundi and reduce costs and time lags12. 61. There is no operational card payment system in Burundi. Most banks and the postal service have card projects, either individually or in the context of their multicountry group. These projects are still under consideration or in the initial test phase of installing a number of automatic teller machines (ATMs) or electronic payment terminals (EPTs) with several merchants. The few VISA cards issued are principally of the electronic purse kind. It is recommended that the BRB organize, with the banking association and the postal service, a working group to take stock of the projects underway, so as to promote synergy among them and guarantee interoperability. 62. The development of a new electronic payment medium based on the use of mobile telephones and the direct transfer of "money or quasi-money" from mobile to mobile unit is under consideration by most mobile telephone operators. It is certain that this payment mode will open important prospects to extend access to payment services to a sizable proportion of the population: the mobile telephone park is estimated at nearly 500,000 and is rapidly 12 Following this mission, the authorities suggest to follow the Rwanda approach to install the RTGS and electronic clearing system simultaneously. 15 growing. It is recommended that a focus group be set up with the mobile telephone operators to examine, on the basis of similar experiences in other EAC countries, how to encourage these new payment or money transfer modes while controlling risks to customers, in particular as regards the possibilities of fraud or money laundering that these new technologies could make possible to perform. VI. MICROFINANCE 63. In the context of Burundi, where rural areas are home to 80 percent of the population, microfinance institutions (MFIs) are expected to play an important role. 64. There are 26 microfinance institutions (MFIs) licensed by the Central Bank since the 2006 Decree on Microfinance Activities was put into effect, of which only 24 are operational. They offer primarily demand and savings deposits and short- and medium-term credit to about 320,000 persons, or more than the banks and postal service combined. The total assets of these 24 institutions come to about FBU 36 billion.13 With the exception of a few cooperatives, the industry is still relatively young and no longer receiving sizable assistance from donors. Table 4. Microfinance in Burundi (June 2008) Number of Main products Customers/ Deposits Outstanding Averag Averag Service Type of institution institutions Members loans e e points loan savings En million FBu Microlending 8 Loans only 8,850 0 768 425 12 program Microfinance 5 Savings from 39,300 2,666 2,135 1,059 68 27 enterprises public and loans Savings and loan 11 Savings and 269,313 19,987 12,179 365 74 140 cooperatives lending to members TOTAL 24 317,463 22,653 15,082 179 Source: Data collected by the mission from the BRB and RIM. 65. It is not possible to make precise statements about the financial health (portfolio quality, profitability, or efficiency) of the MFIs. The vast majority of the institutions do not have reliable financial statements, operating subsidies are often not shown in the accounts, and the institutions regularly have insufficient provisions, which, once corrected, could change some declared profits into losses. All of the on-site inspections organized by the BRB have identified serious problems and violations of the regulation, in particular as regards accounting, governance, or the lack of reliable internal controls. 66. To establish the industry on a sound basis, it is essential to: (i) update the regulatory framework to facilitate the growth of a sound industry; (ii) establish supervision that is able to "guarantee" the health of the sector, especially deposits; and (iii) professionalize the industry itself, with improved human capacity, suitable management tools, modern methodologies, and good governance. 67. The regulatory framework remains insufficient and should be revised: 13 As of December 31, 2007, according to the institutions' financial statements. 16 A number of prudential rules should be revised, in particular those which: (i) bar an institution from lending more than 100 percent of its deposits14 (which would enable it to leverage its resources and lend more); and (ii) require a minimum of 300 members for the creation of a cooperative; Prohibited operations should be removed from regulation, such as real estate financing, leasing15 , and certain transfers of funds; Consideration should also be given to the requirement of posting the effective cost of the various products in the MFI premises. A chart of accounts specific to MFIs should be put in place. Supervision should be reinforced by computerization and training of the supervisory unit. 68. To contribute to Burundi's development, the MFIs need to correct their major weaknesses in the areas of financial management, product management, personnel management, accounting, planning, internal controls, governance, transparency, and the quality of human capital. They should seek lines of credit to mitigate the lack of long-term resources. 69. The microfinance vision in Burundi should include a broadening of the customer base, its range of products (such as micro-insurance or longer-term loans, loans for agriculture, school and housing savings), and especially strategic partnerships (banks, telecom, insurance, postal service). It should also entail the creation of genuine financial bodies that could offer a complete range of services to member MFIs, including the management of liquidity and the refinancing of credit lines, and even a link to the payments system or a service for transfers to and from foreign countries, to which individual institutions are not entitled. VII. INSURANCE 70. The insurance sector should play an important role in Burundi's development through risk intermediation and making long-term resources available to the economy. In Burundi, the absence of supervision and the presence of institutions in poor condition prevent insurance companies from making an effective contribution16. 71. The size of the insurance sector is quite modest by comparison with other countries in the Africa region. Penetration (premiums/GDP) is 1 percent, or 2.5 times less than in Kenya 14 Even though it is true that this restriction does not include the donors' funds. 15 These activities will require prior authorization from the central bank that will ensure that the MFI has the required financial capacity and skills to perform such activities. 16 For more details see technical note on insurance and pension systems. 17 and 4.5 times less than the African average; density (premiums/inhabitant) of US$1.3 is 15 times less than that of Kenya and 50 times less than the average in Africa. Total assets of the companies in the sector in 2007 were the same as in Rwanda 5 years earlier (US$30 million) and represent 3.2 percent of GDP or 5 percent of Burundi's total assets. In 2008, the market consisted of six companies, one of which was specialized in life insurance. Only Burundi nationals are shareholders of insurance companies. Two companies have the state and public enterprises as shareholders. 72. The sector is highly concentrated. The largest company represents half of the market, and the four largest firms (out of a total of six companies) represent 98 percent of the market. 73. The insurance sector is not modern, and has a highly limited range of products, with 63 percent of business concentrated on mandatory automobile insurance products. The life insurance market is also underdeveloped. 74. The financial health and solvency of the companies are not consistent with regulations and with international standards. Of the five companies governed by the insurance code, only one company appears to be in compliance with all the standards for share capital, solvency margin, and technical provisions (two companies are in compliance with the minimum capital norms). In addition, the companies suffer from arrears in premiums. 75. There are numerous gaps in the existing regulations, including: (a) the minimum capital standard (FBu 30 million), which doubtless was justified for Burundi in the past but is now totally inadequate; (b) the lack of a schedule for benefit payments; and (c) the lack of implementing ordinances following the 2002 law in order to provide a specific inspection framework for supervision. In addition, the lack of a chart of accounts specific to insurance is an obstacle to the development of the sector. 76. Supervision is nonexistent: A 2001 decree called for the establishment of an Insurance Control and Regulation Agency (ARCA), and 2007 decrees named the Director-General and the Board of Directors. However, the structure has never been operational. The general manager did not submit proposals for an operational structure nor a budget request to fund its establishment and its operations. It is the Ministry of Finance that is authorized to issue and withdraw the licenses of insurance companies. Needless to say that the current supervision situation does not meet the IAIS standards, notably with respect to governance. 77. The failure to establish the insurance regulatory agency can be attributed to several factors: (a) a positioning within the administration that deprives it from independence and autonomy of management: (b) inadequate resources; (c) a lack of knowledge and know-how to put into place such an agency; and (d) a lack of eagerness to establish the agency. 78. The critical weakness of supervision is reflected in continued activity by manifestly insolvent companies, which survive only by the dodge of using new premiums to settle extremely old damage claims, at the cost of continually expanding net liabilities. 79. In the short-term, a three pronged approach is required to modernize the sector. First it is urgent to establish a solid and credible supervisory authority . In view of the failures to apply the law in recent years and establish oversight, an alternative would be for the 18 supervisory authority to benefit from the support of a firmly established authority, in this instance the BRB, to get off to a right start. An alternative could be to keep the agency outside BRB but to strengthen its independence by transferring to it the power to grant and withdraw licenses and to impose sanctions, as well as initiate changes in regulation. In both cases, the agency would be established de novo with a staff hired through a call for expressions of interest. The head of the agency would be a person of experience, possibly an inspector from CIMA. Revisions to the insurance law and the decree establishing the supervisory authority would be required to create an independent agency. Supervision will not be efficient without the establishment of a chart of accounts and reporting standards for insurance companies. 80. Second, encourage opening of the market to modernization through: (a) the development of brokers, whose activities are regulated within a framework to be established; and (b) the entry of foreign companies, but maintaining the obligation to create a local subsidiary and the obligation to be insured in the country (perhaps only via fronting)17. 81. Third, restructure the domestic sector. Several actions are required: recapitalization of the companies, compliance with the solvency margin rules and the rules on constituting technical provisions, restoration of the principles of governance, and combating conflicts of interest. One year after the operationalization of the insurance supervision agency, companies that meet prudential norms will obtain a license, the others will be closed. VIII. SOCIAL SECURITY SYSTEM 82. The National Social Security Institute (INSS) administers a pension system and an occupational risk coverage system for private-sector wage earners, contractual employees of the government and of public institutions, and military and police personnel. The Civil Service Mutual Association (MFP) provides health coverage for civil servants. The pensions of civil servants are paid directly from the government budget. 83. The major challenges for the INSS are: parametric reform (the pension system has been in deficit since 2007 and, at the current rate of use, the reserves will be exhausted by 2015), governance (management that is not bi-partite, employers/employees but government-led, contrary to the dispositions of the Social Security Code18), and organizational reform (computerization, payment system, internal control and internal audit, collection of contribution arrears that amount to FBu 5 billion, or 57 percent of all contributions, and cost control). 84. Over time, an extension of coverage could be envisaged (5 percent of the population are covered by a retirement scheme, and 10 percent have health insurance) and the introduction of a second pillar of mandatory supplementary pension based on a fully funded scheme. 17 This is already happening. Two brokers were provisionally licensed in 2007. The forthcoming entry of foreign companies through the EAC opening is a lever for the modernization and rehabilitation of the sector. The Kenyan company Jubilee has already filed a license application in late 2008. 18 There is a need to adapt INSS statutes to the Social Security Code (Law1/010 of June 16 1999) which call for a bipartite management. 19 IX. FINANCIAL SECTOR CONTRIBUTION TO THE DEVELOPMENT OF THE COUNTRY 85. Access to financial services is limited in Burundi. Available data show that about 1.9 percent of the total population have bank accounts, 0.42 percent use bank credit services, and 4 percent are members of microfinance institutions (MFIs). Bank branches are concentrated in the towns, with 45 percent of all branches located in Bujumbura alone. On the other hand, the postal checking administration has 57 offices and plans to install an office in each commune. Access to insurance services is limited for individuals and enterprises installed outside Bujumbura, as only three companies have agencies outside the capital city. 86. A breakdown of credit by economic sector shows a large concentration in the commerce sector, representing 60 percent of the outstanding credit of all banks at end-2008, whereas this sector accounts for 12 percent of GDP. 87. As regards the supply of financial services, Burundi's performance trails those of countries at a similar level of development. With 4.02 accounts per thousand inhabitants, Burundi is below the average for countries such as the Central African Republic (5.6), Uganda (5.8), and Cameroon (14.4). Relative performance with respect to deposits is also weak, with only 10.03 accounts per thousand inhabitants, compared, for example, with 15.4 for Guinea- Bissau; this clearly reflects the widespread use of currency. 88. The financial products supplied by banks are little diversified. Short-term credits and deposits are the mainstream. 89. A 2006 study19 on the investment climate confirmed the low access to external finance. Seventy four percent of microenterprises and informal firms, 67 percent of enterprises in the manufacturing sector, and 67 percent of enterprises in other sectors use internal funds or reinvested earnings as their first and foremost source for financing their assets. A. Financing of Small and Medium-sized Enterprises 90. An analysis of the portfolios of Burundi banks and financial institutions shows that access to financing for SMEs is still limited20. In terms of clientele segmentation, only two banks and one financial institution out of the nine operating in Burundi have a unit to deal specifically with their clientele of SMEs. In the credit stock of the five banks which have provided data on SME lending, only 20-25 percent was allocated to this category of customers. 91. Only one financial institution (the BNDE) participates significantly in the financing of SMEs in the agricultural and livestock sub-sectors. But its financing capacity remains constrained by a lack of resources and operational problems. 19 World Bank" Burundi: investment climate assessment" 2006 20 The private sector is not very developed. There are about 8,000 enterprises on the Commercial Register (RCCM), of which 3,000 are formally registered with the public authorities, and 90 percent of those registered represent small and medium-sized enterprises (SMEs). 20 92. Most SMEs have difficulty obtaining credit because of a number of factors, one of the most important being the unavailability of the real guarantees required by banks and the weakness of the judicial system21. Other constraints are: (i) a supply of funds that is often ill-adapted; (ii) an unfavorable business climate; (iii) the inappropriateness of some regulations; (iii) weaknesses in the financial reporting infrastructure22; and (iv) the low capacity of SMEs. In addition, the commercial banks have little incentive to develop lending to SMEs because, according to them, there is an absence of creditworthy applicants (or at least of correctly formulated and presented projects) and a context of political and macroeconomic uncertainty, among other things. In addition, the financial information centers set up by the central bank do not provide the support required by the commercial banks. 93. To facilitate the access of SMEs to financial services, a two fold approach should be envisaged: Adopt a policy for the development of SMEs, in particular: (a) assist SMEs to increase their access to markets and technology and improve their financial and accounting management skills; and (b) further develop the activities of the BNDE as an instrument for implementing government policy on the financing and promotion of SMEs. Encourage the introduction of new financial products: (a) providing technical assistance to banks and MFIs to develop techniques appropriate for SMEs; (b) improving capacity within banks and MFIs for risk management; (c) establishing a specialized SME unit within commercial banks; and (d) removing regulatory constraints such as the ones forbidding MFIs from providing leasing. B. Rural Financing 94. The rural sector has very limited access to financial services in Burundi. The banks have only seven branches in the rural provinces and no ATMs. The commercial banks focus their attention on urban enterprises and wage-earners. They become engaged in funding agriculture only through structured financing for the coffee subsector and, to a lesser extent, for the rice subsector, through two different banking pools. The principal institution really intervening in the other subsectors--apart from coffee and rice, which are more or less structured--is the BNDE. Nearly 80 percent of members/customers of microfinance institutions are wage-earners. Thus MFIs continue to exclude a majority of the population (non wage-earners) while serving a market that is uncertain for it in the medium term, as the banking industry could rather easily serve these customers should it make this its objective. The financing of agriculture or 21 The exclusive acceptance of real securities by commercial banks does not favor the financing of SMEs, which have little such collateral. Steps are needed to facilitate the use of endorsements, pledges, domiciliations, and the leasing or backing of stocks. Partial guarantee funds can be considered. 22 According to the commercial banks, small borrowers (and even some larger borrowers) do not engage in reliable accounting; nor do they provide all the information required for decision-making by commercial banks. 21 production in general remains marginal, with the exception of two or three institutions such as Ucode (80 percent coffee) or COSPEC (80 percent agriculture). 95. Since the 2005/06 crop year, private banks have practically withdrawn from financing the commercialization of coffee, following the accumulation of payment arrears, particularly because of poor performances by the state enterprises active in the subsector (especially SOGESTAL and OCIBU), losses in the subsector resulting from the decline in prices and the depreciation of the U.S. dollar, as well as the government decision to stop guaranteeing crop campaign financing. 96. There are two types of constraints on the development of rural financing: (a) structural constraints related, on the one hand, to the lack of structure in the rural and agricultural sector, and, (b) the unavailability of products adapted to rural financing. 97. The agricultural subsectors in Burundi, apart from coffee, are hardly structured to be credible counterparties for the financial institutions. Indeed, from a functional standpoint, the producers' associations, where they exist (for example, the CNAC in the case of coffee), lack technical expertise in management, accounting, etc. Farmers and associations will need technical support. The lack of storage facilities and of access to up-to-date information on agricultural product prices, as well as the poor management of secure storage facilities, where they exist, also represent a drag on production and, consequently, on financing. In addition to the weak organization, rural customers have very few assets that can be used as collateral from a legal standpoint; hence, the collateral issue is key in any efforts to resolve the problem of rural financing. 98. There are various problems concerning the supply of financing. Loans in rural areas are constrained by: (i) the lack of familiarity of the main financial institutions with rural customers and instruments; (ii) the lack of low-cost financing for MFIs; and (iii) the high cost of transactions and the low average amount of loans contracted by numerous rural producers. 99. For rural financing to be effective and durable, the real sector must first be strengthened through better organization of the export subsectors (coffee, tea, citrus fruits, etc.) and their structuring in integrated value chains. In addition, the following steps would be appropriate: Build bank capacity, through the establishment of technical assistance programs where applicable, to encourage the banks to: (a) develop new products and new lending techniques that facilitate use of the collateral available in rural areas; and (b) create within the commercial banks special departments/units to deal with the rural/farming clientele; Build BNDE capacity to play a greater role in rural financing. To that end, it would be necessary to (a) increase its financial resources; (b) transfer the allocations of the Rural Microcredit Fund to the BNDE and, accordingly, transfer to the BNDE the task of refinancing MFIs, limiting its current direct interventions in granting microcredit; and (c) strengthen its governance. 22 C. Housing Finance 100. The housing sector in Burundi is characterized by unmet demand, high prices that make housing unaffordable for the bulk of the population, and a deteriorating housing stock. The annual population growth of 3.2 percent and the youthfulness of the population underline the demographic challenge facing Burundi. The number of refugees that have returned to Burundi, estimated at 500,000, have also contributed to rising demand for housing. 101. The legal framework does not foster the creation of a viable housing sector and mortgage market. Government housing policy does not reveal any clear strategy, and there is no coordination among the bodies responsible for its successful implementation23. The authorities consider resolution of the large number of land disputes one of the priority tasks of the national housing policy. 102. The housing financing market in Burundi is very rudimentary and cannot even be deemed to be emerging. Although loans tripled between 2005 and 2008, the stock at end-2008 totaled about US$15 million. Medium-term credit (maturing in 2­7 years) accounts for 62 percent of the total stock of loans granted by the banks and financial institutions. MFIs are not authorized to grant mortgage loans. 103. The largest lender is the Urban Housing Promotion Fund (FPHU), which accounts for nearly three-quarters of the market. It is followed by the Burundi Bank of Commerce and Industry (BBCI) and the BNDE24. 104. The banks are exposed to a number of risks on the mortgage market, the most substantial of which are liquidity and interest rate risks, and this is exacerbated by the lack of long term resources. Banks are reluctant to finance developers because of the difficulties of unloading stocks of houses, given the low level of incomes and the weakness of developers (with respect to cash flow analysis and marketing budgeting). 105. The main pillars of the land reform are: establishment of a cadastre, registration of property rights in rural areas, and amendment of the Land Code. The government intends to set up a National Land Commission responsible for land reform. Decentralization of the cadastre 23 Five ministries share responsibility for national housing policy (Ministry of Environment, Land Development, and Public Works; Ministry of Justice; Ministry of the Interior; and Ministry of Agriculture and Livestock Production). Also, a number of committees and commissions have been set up to deal with specific issues. All of these bodies work on different concepts and practices, without any coordination. 24 The FPHU was created in 1996 by the government as a financial institution responsible for promoting housing in Burundi. The government owns 74 percent of its capital, and BANCOBU and SOCABU respectively own 3 percent and 8 percent. The rest is held by private investors. The FPHU initially supplied only mortgage loans to civil servants but has now broadened the scope of its activities to cover the entire population, including real property developers. It provides loans for mortgages, purchases of construction materials, housing improvements, and other products. As of November 30, 2008, its loan portfolio totaled US$12.7 million, 46 percent of which were mortgage loans. 23 and land registration offices should facilitate access for rural areas and increase the transparency of the registration process. The objective of amending the Land Code is to modernize the existing law which dates back to colonial times. The process should be accelerated. In addition, budget allocations to the land registry and the cadastre need to be increased. The provision of long-term resources by INSS and insurance companies should be promoted. To increase supply of housing finance, there is a need to develop housing finance products offered by MFIs. X. LEGAL AND JUDICIAL FRAMEWORK25 106. Since 2001, the legal and judicial framework has been the subject of a mix of reforms, the purpose of which has been to modernize laws and regulations available to enterprises, banks, and financial businesses and to improve the financial sector, broadly speaking26. 107. However, the recent legislative reforms have revealed that the laws lack a certain effectiveness. The regulations necessary for enforcement of the laws have not all been adopted,27 newly created institutions have not been funded,28 new laws have been neither disseminated nor explained to the general public, and the training of magistrates has been tardy or even nonexistent. The new laws are not observed by the parties concerned, and the sanctions established by law are not enforced. 108. In addition, certain areas require modernization of legislation, namely: the payments system, factoring, liquidation of banks and financial institutions, and civil and commercial guarantees. To reform the existing obsolete property law system, Burundi is currently formulating a new land reform strategy and passing legislation for its implementation. 109. The ongoing modernization of the legal framework is performed in the absence of a strict coordination process. Certain drafts from technical ministries do not always have the benefit of input from staff of the Ministry of Justice responsible for "updating and adapting the current legislation to reflect the evolution of Burundi society." 110. Uncertainties about securities are among the reasons for the high costs and unavailability of credit. Mortgages raise issues for commercial banks because of the bureaucratic red tape involved in registering them and the judicial bottlenecks in the procedures for enforcing securities (whatever their type), often exacerbated by the delaying tactics that debtors adopt with the complicity of the courts. 25 A more detailed analysis can be found in the technical note on Legal and Judicial Framework. 26 A detailed list of the laws can be found in paragraph 6 of the technical note. 27 For example, there are still no circulars on microfinance pertaining to appropriate prudential rules. 28 This is true, for example, of the commercial investigation chambers within each Commercial Court, and the Burundi Commercial Arbitration Center. 24 111. The effectiveness of mortgages has also been stunted by the lack of diligence by the banks in registering them, registration costs being deemed dissuasive (3 percent of the loan amount). Registration is, however, a prerequisite for the effectiveness of a guarantee. 112. Tangible securities, such as pledges or other collateral in the form of goodwill or professional equipment, are rarely used. This can be explained especially by the failure experienced by some banks to enforce securities of this nature through legal proceedings. 113. Apart from the commercial registery at the Office of the Clerk of the Commercial Court29, the only registries required by law in the commercial and financial areas are those maintained at the Industrial Property Department, the one maintained for land title registration by the Land Registrar, and the one for recording pledges of goodwill.30 However, the latter registry exists only in name; it has never been really set up31. 114. There is no capacity for recording contracts regarding loans, guarantees, leasing, etc. There is also no registry in Burundi to record all the assets of a company and make them accessible to the public. 115. With respect to bankruptcy, the Judicial Concordat Law, which would permit a workout of enterprises in difficulty remains unheeded, mainly because the commercial investigation chambers within each commercial court have not been created. Finally, the functioning of the judiciary remains a serious problem as emphasized by the 2009 Doing Business report. Nowadays banks go to court to settle disputes with their customers only in exceptional circumstances. This is because of a lack of confidence in the Justice Department, in the credit reporting systems, and in the procedures for collecting claims32. 29 An entry must be made in this registry before the opening in Burundi of: (i) any principal establishment by an individual or legal entity engaging in business; or (ii) any branch, agency, or operational office by an individual or legal entity engaging in business and whose principal establishment is located outside of Burundi. 30 On the pledging of goodwill, discounts, and commercial invoices, see article 4 of the decree of January 12, 1920. 31 As indicated earlier, in practice, a registry is maintained in which Burundi banks can record pledges they have received to back their claims. 32 Among the causes of the problem: inadequacy of the material and human resources necessary for the proper functioning of departments and smallness of the operating budget allocated to the Ministry of Justice; absence of adequate training; lack of access to the law in Kirundi and lack of jurisprudence; lack of protection for magistrates under their charter, which gives the Executive all powers regarding their career and profession; magistrates facing poverty; bureaucracy in the judicial departments (3,000 judgements are pending at the Supreme Court); slowness and instability in the execution of judgments; lack of planning and programming of activities between legal and judicial departments. 25 Annex: Main Recommendations CONSTRAINT ACTION DEGREE OF PRIORITY BANKS Supervision needs Introduce chart of accounts and reporting High strengthening. standards. Computerize the BRB. Medium Introduce risk-based supervision . High Revise banking law. Medium Sign memoranda of understanding with foreign Low supervisory authorities. BRB crisis management is Sharpen crisis management procedures. Medium unsatisfactory. A public bank faces Privatize the bank in an open bidding procedure. High management and financial soundness problems. PUBLIC DEBT AND GOVERNMENT CASH FLOW MANAGEMENT There is little reliable Manage all debt (external and domestic) High information, available and coherently and comprehensively, reducing disseminated, on debt uncertainty for market participants. management and the debt position with all of its components. Several objectives have been Clarify the linkages between the various debt Medium assigned to debt management. management objectives and engage in arbitrage There is no systematic analysis with respect to risks related to public debt of risks/costs or of management and the cost of the various possible sustainability. strategies. Cash flow forecasts are largely Improve the operational management of Medium unreliable. government cash flow and the management of liquidity and monetary policy operations, and build skills in these areas. The BRB has advanced a large Quickly reduce central bank advances to the High sum to the government. government and replace them with the subscription of Treasury securities by the financial sector and especially by the nonfinancial sector. There is no secondary market Launch the secondary market in Treasury High in Treasury securities. securities. A financial market Finalize the five-year financial market High development plan is needed in development plan. the EAC context. SYSTEMIC LIQUIDITY MANAGEMENT Decision-making on foreign Make decisions on BRB foreign currency sales High currency sales is arbitrary and on the basis of an adequate reserve target. far from transparent. Prepare a foreign currency sales program and announce it in advance. 26 PAYMENT SYSTEMS The role of BRB not clearly Specify the tasks of the BRB in the area of High spelled out. systems and means of payment, especially as regards payments system supervision, in accordance with the recommendations of the EAC. BRB not adequately organized Establish a directorate specifically responsible High to assume its role with respect for systems and means of payment,. to the payment system. Legal framework is Launch work, in accordance with EAC Medium inadequate. recommendations and studies, on a legal framework and harmonized standards covering all activities in the area of systems and means of payment. Clearing infrastructure is Define and construct a comprehensive clearing High inadequate. and settlement infrastructure, including as a first priority, the automation of exchanges of small amounts (checks and transfers) within an electronic clearing system. Large value transactions still Remove large-value operations from the High treated with other transactions. clearinghouses and have them processed directly in real time by Internal Banking Operations (OBI). Set up a Real-Time Gross Settlement (RTGS) High system. System is not yet integrated Review progress made on the projects to High within EAC. implement new payment systems in Rwanda, the objective being to establish cooperation with the Central Bank of Rwanda and, where applicable, with suppliers undergoing selection or installation of their systems. Card payment systems are Organize, with the Association of Banks and the High almost inexistant. Post Office, a task force to review the ongoing projects for developing card payment systems, so as to ensure synergy among them and interoperability. Encourage the banks to join together in developing card payment systems. 27 Electronic money is non Organize a group to engage in discussions with Medium existant. mobile telephone operators, drawing on similar experiences in other EAC countries, to study ways of promoting these new methods of payment and money transfer, while at the same time controlling the risks for customers. MICROFINANCE Regulatory farmework is not Modify decree to: (a) remove obligations to have High conducive to development of 300 members to create MFIs; (b) oblige MFIs MFIs. with less than 300 members to join a network; (c) permit lending beyond the level of deposits; (d) allow leasing and lending for housing subject to prior authorization of BRB. Computerize the unit. High Develop inspection methods (including manuals Medium BRB capacity for supervising and procedures for short, frequent inspections. the industry is weak. Issue licenses for individual COOPECs Medium Publish a chart of accounts and reporting High standards. Institutions severely lack Professionalize the industry. Medium governance, internal controls, Appoint an interim administrator when needed. High financial management, Computerize the industry. High accounting, etc. Develop new services, including housing and Medium The range of services is education savings accounts, individual loans for limited, and the clientele production and agriculture, and joint loans, comprises mainly wage- leasing, and transfers. earners. Create financial organisms to provide services to Medium MFIs and networks. INSURANCE The market lacks dynamism. Encourage the opening up of the market for modernization of the sector: Through brokers, within an adequate regulatory framework, to be created; and High Through the entry of foreign companies, but maintaining the requirement to create a local subsidiary and to take out insurance locally (possibly only by fronting). 28 Set up a unit to oversee the sector under two alternatives: Place the insurance monitoring unit at the BRB; appoint a manager with experience in insurance supervision (such as a CIMA inspector) for two years to lead efforts to make the unit operational, and provide it with adequate human and material High resources; Supervision is lacking. Or, establish an independent agency with its own management and budget with the authority to grant and suspend licenses and initiate regulatory changes; appoint a manager with experience in insurance supervision (such as a CIMA inspector) for two years to lead efforts to make the unit operational, and provide it with adequate human and material resources. Review law and decree to provide new agency with necessary powers. Establish a chart of accounts for insurance High companies and reporting standards. Information on companies is Audit each insurance company with particular High lacking. attention to the technical provisions. The laws and regulations are Review the insurance laws and regulations: Medium incomplete. insurance business, insurance contracts, brokerage business, and chart of accounts. Companies are operating One year after the regulatory authority is High without a license. established, issue licenses for those companies that meet the regulatory conditions, and close the others. SOCIAL SECURITY 29 The parameters are obsolete. Conduct a parametric reform of the INSS: High implement the recommendations of the current actuarial studies (contributions, benefits, ceiling, pension revaluation, military and civilian personnel). There are institutional INSS and MFP: Adopt charters on the basis of High weaknesses at INSS and MPF. the provisions of the Social Security Code (Law 1/010 of June 16, 1999) for the establishment of bipartite, rather than tripartite, management of the INSS and the MFP. Implement the agreement signed by the Medium government and the INSS on the assumption of liability by the government for war victims. Restructure the INSS and the MFP Medium (computerization, devolution, collection, internal audit, organization, etc.) HOUSING FINANCE The legal framework is Accelerate amendment of the Land Code and High incomplete. quickly implement it. The sector's resources are Allocate more budget funds to the land registry Medium insufficient. and the cadastre. Give the FHPU broader responsibilities in rural Medium areas. Encourage the supply of long-term resources by Low Mortgage financing is the INSS and insurance companies. insufficient. Encourage the development of housing savings Medium plans. Promote the housing finance products provided Medium by MFIs. FINANCING OF SMES SMEs have limited capacity. Assist SMEs to build their capacity in High accounting and financial management, technology. Provide technical assistance to banks and MFIs High The financial products offered to develop products that meet the needs of by the banks and MFIs are SMEs. unsuited to SMEs. Develop commercial bank cash flow-based Medium lending instead of asset-based lending BRB information centers do not Update the list of loans in banks in liquidation in High meet needs of users. the existing credit information centers. Facilitate consultation by credit suppliers on data regarding their customers. Lower the threshold for reporting loans to the BRB, so as to cover SMEs. Standardize the system for identifying customers of banks and financial institutions, and introduce a single identification number system. Integrate the three centers into one. Establish a balance sheet information center. 30 RURAL FINANCING There is a lack of structured Assist producers in forming strong structured High demand. associations. There is insufficient knowledge Create within the banks units and departments to Medium on rural areas. be responsible for rural and agricultural customers. The BNDE has limited capacity Authorize the BNDE to increase its resources. Medium for providing financing in rural Transfer Rural Microcredit Fund allocations to areas. the BNDE, and transfer to the BNDE the task of refinancing MFIs. Limit the direct microcredit interventions of the BNDE. LEGAL AND JUDICIAL FRAMEWORK There is no action plan. Implement a credible action plan for Justice, the High investment and credit climate, and the rule of law. There is no plan for financing Draw up a realistic five-year financing plan of High actions in the sector. projected measures, showing the sources of financing for each measure. There are no commercial Create an investigation chamber within each High investigation chambers within commercial court. the commercial courts. The budget is inadequate for the Increase the budget substantially every year. High administration of justice and judicial bodies. There are no laws and Draft a law on the liquidation of banks and Medium regulations aptly covering the financial institutions, with input from the liquidation of banks and National Legislation Unit. financial institutions. Laws are inadequate and poorly Strengthen Burundi's official gazette (Bulletin Medium disseminated. Officiel) and publish explanatory works. The registers for recording Open these registers to all creditors. Medium pledges are reserved for banks only. There is no transparency Reform the law on magistrates and the Code of Medium regarding the appointment, Professional Conduct. promotion, or sanctioning of Magistrates should be protected by the Superior judges. Council of the Magistracy, which is responsible for their career and discipline. There are delays in the Simplify the procedures. Medium processing of commercial cases. Adopt accelerated procedures. The Commercial Arbitration Make the Commercial Arbitration Center Medium Center is not operational. operational and train arbitrators. 31