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Djibouti City: Djibouti takes steps to overhaul banking sector

2016/06/19

Djibouti’s banking regulator has unveiled a series of reforms that seek to improve the efficiency and health of the country’s lenders, and expand sharia-compliant financial services.

The regulatory overhaul, which is set to be rolled out this year, includes plans to improve operational efficiency and set up a new credit data system to help banks manage credit risk.

The measures are in line with a raft of reforms introduced by the Central Bank of Djibouti (Banque Centrale de Djibouti, BCD) in recent years aimed at strengthening the position of local lenders and increasing transparency.

Linking up

The new changes, which will as well be overseen by the BCD, aim to digitise the country’s payment system and provide the necessary framework to integrate its economy with neighbouring nations.

Ahmed Osman, governor of the BCD, explained that the planned national payment system would link industry operators through a fasten connection, replacing the costly and time-consuming current method of processing payments manually.

“Putting in place digital infrastructure and making it accessible will allow for everybody, inclunding operators and entrepreneurs, to benefit from the launch of the payment system,” he told OBG before this year.

Djibouti is as well looking to set up a centralised credit data system that will provide industry players with the tools to carry out accurate risk assessments and share key data for making lending decisions.

A unified credit control system is expected to play a central role in helping banks reduce the share of non-performing loans (NPLs) on their books. NPLs made up 22% of all commercial bank loans as of June, according to estimates from the IMF, one of the highest ratios in the region.

Creating an electronic credit registry should as well dovetail with the growing use of mobile and digital technology in banking in the region, which banks in Djibouti could use to target the country’s increasingly urbanised people.

“I think technology and mobile banking platforms will drive the next phase of the sector’s expansion, and in a sense Djibouti will bypass that phase of physical banking expansion that other nations have experienced,” Ismail Guyo, CFO at East Africa Bank, told OBG before this year.

Islamic banking holds potential

The government is as well hoping to tap into rising world interest in Islamic financial services, by clarifying the regulatory framework for what constitutes a sharia-compliant product. The authorities are currently working on establishing a National Sharia Council to oversee Islamic banking and ensure it meets the required standards.

Creation of the council marks a key step forward for Djibouti in its efforts to develop a sub-regional Islamic finance base. Four of Djibouti’s 10 banks are Islamic, with a combined price of DJF55.5bn ($312.2m) and roughly 15-20% market share.

“Since their introduction into the Djiboutian market in 2006, and following their adaptation process, Islamic banks have experienced rapid development of their market shares,” Osman told OBG before this year. “This success is strongly linked to the operating principles of Islamic finance based on sharia that are additional in line with society’s values.”

Competition in the segment is set to increase in the coming years, with conventional banks as well targeting Islamic finance as an avenue for further increase.

In 2011 the BCD authorised commercial banks to open Islamic banking windows. With a minimum capital requirement of DJF300m ($1.7m), these windows must be structured as separate subsidiaries.

Casting a wider net

Officials are as well hoping that Islamic finance could play a part in bringing the sizeable number of unbanked citizens into the system.

Just 20% of the roughly 850,000 Djibouti nationals had bank accounts as of last year, according to the BCD, though this was up significantly from 5% in 2007.

Prior regulatory changes have been pivotal in spurring increase across the sector and boosting competition amongst lenders. Having increased its contribution to the economy over the completed decade, the financial services sector presently accounts for around 13% of GDP.

Total lending additional than tripled between 2006 and 2014 to DJF116bn ($652.5m), according to figures from the BCD, while credit allocated to the private sector rose from 20% of GDP in 2005 to 29.5% last year. Deposits, meanwhile, additional than doubled to DJF254bn ($1.4bn) in the decade to 2015.

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