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Guinea Financial Sector Stability Review Summary (February 2020)

Core Content

This document outlines the findings and recommendations of the Financial Sector Stability Review (FSSR) conducted by the International Monetary Fund (IMF) in June 2019 in response to a request from the Central Bank of the Republic of Guinea (BCRG). The review focused on five key areas: financial stability oversight, systemic liquidity, payments systems, banking regulation and supervision, and crisis management, bank resolution, and the financial safety net. The mission team included Dirk Jan Grolleman (Mission Chief), David Blache, and external experts such as Amel Ben Rahal, Jean-Michel Godeffroy, Ahmad el Radi, and Alain Vandepeute.

The report highlights that while the current economic situation is stable, there are increasing financial stability vulnerabilities, particularly in the banking sector, as indicated by Financial Soundness Indicators (FSIs). These include rising nonperforming loans (NPLs), large exposures, and net-open positions, though data quality and availability issues complicate the interpretation of these trends.

Main Views

1. Financial Stability Oversight

• The BCRG needs to periodically evaluate the risks and benefits of its non-core activities, such as correspondent banking and gold exports, which may lead to pressures.
• There is a need to reconcile data discrepancies, increase data coverage, and ensure data quality to support accurate financial stability assessments.
• A financial stability surveillance unit (FSSU) should be created and operationalized to monitor and address these issues.

2. Systemic Liquidity

• The banking system is liquid in GNF, and major banks have access to foreign currency liquidity through parent companies.
• A collateral framework needs to be established to ensure structured and ranked collateral management.
• The Emergency Liquidity Assistance (ELA) framework should be implemented to support liquidity during crises.

3. Payments Systems

• A payments law should be adopted to ensure legal validity of clearing, payment finality, and collateral protection.
• A national payments committee should be set up to oversee payments operations.
• A "switch" mechanism and end-of-day settlement regulations should be introduced to improve payment system efficiency.
• The use of high-value checks should be discouraged, and the check clearing mechanism should be enhanced.

4. Banking Regulation and Supervision

• Resources for banking supervision should be increased.
• Risk-based supervision (RBS) and reporting systems need to be strengthened.
• The banking law should be revised to clarify the BCRG’s macroprudential mandate and include specific provisions for development banks.
• The BCRG should divest its stake in the development bank to avoid conflict of interest.
• Basel II/III standards should be implemented, including capital adequacy, liquidity requirements, governance and risk management, and interest rate risk in the banking book (IRRBB).
• Cross-border cooperation agreements should be completed for all banks.

5. Crisis Management, Bank Resolution, and Safety Nets

• The legal and regulatory framework for deposit insurance should be enhanced.
• The BCRG's early intervention powers should be strengthened in the law, including review of recovery plans.
• Resolution-related provisions in the banking law should be improved.
• Capacity building for resolution and deposit insurance is essential.
• A body for coordinating crisis measures should be established.

Key Information

• Financial Sector Structure:

  • The financial system is shallow and informal, with total financial sector assets at 22% of GDP.
  • Commercial banks dominate the sector, holding 94.6% of total assets, while nonbank deposit-taking institutions and insurance companies account for 2.5% and 2.8%, respectively.
  • All commercial banks are subsidiaries of foreign financial groups, with the top three banks accounting for 57.4% of total assets.
  • The government holds a minority stake in three commercial banks, and one failed in 2011.

• Mobile Money Growth:

  • Mobile money services have significantly increased financial inclusion.
  • By the end of 2017, 13.8% of the population had access to mobile wallets, compared to 1.5% in 2014.

• Development Bank:

  • A government-owned development bank has been established, operating in cooperation with other financial institutions.
  • It is not intended to take public deposits, but the BCRG holds 25% of its shares, creating a conflict of interest.
  • The BCRG should divest its stake to avoid this conflict and align with best practices.

• Data Issues:

  • There are serious data quality and availability issues, especially in prudential reporting.
  • The BCRG does not provide adequate analysis of the drivers behind financial sector trends.
  • FSIs show negative trends, but these need further analysis due to discrepancies in data.

TA Road Map

• Short-term (ST) priorities include:

  • Reconciling data discrepancies.
  • Implementing past liquidity management recommendations.
  • Creating and operationalizing the FSSU.
  • Establishing ELA and collateral framework.
  • Adopting payments law and end-of-day settlement regulations.

• Medium-term (MT) priorities include:

  • Enhancing RBS and reporting systems.
  • Revising the banking law to include macroprudential provisions and Islamic banking.
  • Implementing Basel II/III standards.
  • Strengthening deposit insurance and resolution tools.
  • Setting up a national payments committee and payment systems oversight structure.

• Long-term (LT) priorities involve further institutional development and policy implementation to ensure financial stability surveillance and crisis coordination.

Conclusion

The FSSR emphasizes the need for improving data quality, modernizing the regulatory framework, and enhancing crisis management capabilities. It also calls for greater oversight of financial market infrastructures and stability in the payments system. The BCRG is encouraged to divest its stake in the development bank and strengthen its supervisory role to avoid conflicts of interest and ensure the financial sector's long-term stability.