On the back of a rise in both capital investment and transport activity, Djibouti’s banking sector has seen considerable expansion in recent years. The most visible change has been the increase in the number of players in the market, which has led to an uptick in competitiveness and the expansion of products and services targeting local clients.
The increasingly robust regulatory role that is being adopted by the Central Bank of Djibouti (Banque Centrale de Djibouti, BCD) has led to the promulgation of various new rules – ranging from risk assessment frameworks and sharia compliance to regulations for new payment systems – which should help pave the way for increased retail and corporate activity.
Although some vulnerabilities persist, as evidenced by the increase in non-performing loans, the country’s banking sector is overall in comparatively healthy shape, and should benefit from the government’s efforts to increase foreign direct investment and promote diversification.
On A Solid Footing
The Djiboutian banking system, like many emerging and frontier markets, avoided much of the fallout of the sub-prime meltdown of 2008. It has benefitted from the country’s broader macroeconomic stability and relative openness – a valuable trait in the region – with a fully convertible currency, a fixed exchange regime and free movement of capital.
The country’s financial openness is not common in the region, surrounded as it is by more restrictive regimes in the Middle East and the Horn of Africa. This is a key aspect of the government’s drive to make Djibouti a bigger financial centre for flows in and out of neighbouring Ethiopia, with its 90m population, Somalia and beyond.
Exchange Regime
The Djiboutian franc has had its value fixed to that of the US dollar since 1949, and the current ratio of $1:DJF177.721 has been in place since 1973. The rate is kept by the BCD through a coverage of money in circulation in foreign currency. As of October 2015 foreign exchange coverage of money in circulation had reached 152%, according to the BCD. These reserves are stored with the US Federal Reserve. In a recent report the IMF said that the BCD’s gross foreign assets were likely to remain solid and allow for complete currency board cover up to 2020.
Size
Overall, financial services account for 13% of GDP. Banking accounts for the vast majority of Djibouti’s financial services industry, with 97% of assets. The insurance sector accounts for an additional 2.5% of assets, while microfinance is responsible for the remaining 0.5%.
The country’s recent high headline growth rate – which has hovered between 6% and 6.5% over the past 24 months – combined with legislation changes has led to a significant rise in the number of commercial banks, from two in 2006 to 11 by 2014. The penetration of banking services has not unexpectedly also experienced a steep rise, going from 5% of the country’s adult population in 2007 to 20% in 2015, according to the BCD.
Key Figures
The regulatory change that made banking institutions increase their minimal capital achieved its goal. According to the BCD’s 2014 annual report, the average ratio between assets and liabilities in the sector was 11%, close to the BCD’s minimum solvability ratio of 12%. Credit allocation by the sector has progressed significantly.
Credit allocated to the private sector grew from 20% of GDP in 2005 to 29.5% of GDP in 2015, according to figures by the BCD. According to central bank figures quoted in international media, lending in Djibouti rose from DJF38bn ($212.8m) in 2006 to DJF116bn ($649.6m) in 2014. Total banking deposits have also seen a rise, going from DJF90bn ($504m) in 2005 to DJF254bn ($1.4bn) in October 2015. The BCD has also reported that the money supply rose by 6.5% during 2014.
Penetration
Despite the considerable number of banking institutions in this country of 900,000 people, the level of banking penetration remains very low. “There are currently around 100,000 bank accounts in the country. But the bankable population in Djibouti is much larger than that,” Ismail Guyo, chief financial officer at East Africa Bank, told OBG. This potential for expansion is evident from the country’s limited banking infrastructure. According to East Africa Bank estimates, as of December 2015 the ATM network was made up of 25 machines across the whole of Djibouti, and only around 5% of the population had a bank card.
A major reason for the limited penetration is the challenge presented by the country’s high poverty rate. Lending tools for lower-income households, as is the case in many emerging and frontier markets, have remained limited, although the recent increase in microfinance and Islamic lenders may help increase overall inclusion.
“Djibouti’s challenge is to foster a switch from a cash culture to a situation where more people are making use of banking services. Investing in IT and rolling out e-banking would help, and could create user-friendly ways for households to pay their bills electronically,” Ahmed Hameed Al Deib, director-general of CAC bank, told OBG.
Players
Today, Djibouti has 10 banks, four of which are Islamic institutions. Of these, however, two were in the process of liquidation as of December 2015, due to lack of compliance with banking regulations. The sector also features 17 money transfer companies, three microfinance companies, two insurance providers – Assurance AMERGA and GXA Insurance – and the Fund for Economic Development of Djibouti.
There is a considerable foreign presence in Djibouti’s banking sector, although this has largely come about only over the past decade. Until 2006 the sector was a duopoly, with only two institutions present in the country: Indosuez-Mer Rouge bank which opened in 1908, and became BOA-Mer Rouge after being acquired by Bank of Africa, and Banque pour le Commerce et L’Industrie Mer Rouge (BCI-MR) which started to operate in 1957.
Changes in banking regulation in the early 2000s – including the 2005 elimination of a requirement for banks entering the market to be at least 30% owned by internationally renowned banks – led to the arrival of several new banks.
Yemeni-owned Saba Islamic Bank entered the Djibouti market in June 2006, followed by International Commercial Bank of Djibouti, a subsidiary of Malaysia’s International Commercial Bank Group, in September of the same year.
Two other banks started to operate in the country in 2008: Swiss-owned Banque des Dépôts et Crédits Djibouti and Djibouti-based Salaam Africa Bank, an Islamic bank. Another Yemeni bank, the Cooperative Agricultural and Credit International Bank, entered the following year, and by the end of 2009 Djibouti got its third Islamic bank with the arrival of Dahabshiil Bank International, now East Africa Bank, part of Dahabshiil, a Dubai-based money transfer firm focused on Africa.
An additional bank entered the market in 2010, Tanzania’s Exim Bank, which signalled Djibouti’s growing importance on the continent. May 2015 saw the official start of operations of Commercial Bank of Djibouti (CBD), which announced its intention of focusing on investment banking, a novelty in the country’s retail-oriented banking sector.
However, despite the competition, the two incumbent banks have traditionally held sway over the sector. BOA-Mer Rouge and BCI-MR accounted for 95% of customer deposits and 80% of domestic lending in 2012, according to the World Trade Organisation. In March 2015 BCI-MR – in which the state has a 33% share – opened a representative office in Addis Ababa in neighbouring Ethiopia.
The arrival of several institutions in the market – small though they may be – has noticeably boosted the level of competition. “When the central bank raised the minimum capital requirements in 2011 there were no mergers and acquisitions as was expected. The newer banks decided to go at it alone, because they saw that they were beginning to have an impact on the overall market conditions,” Guyo told OBG. Working hours rose, banks started to expand their networks and the number of ATMs increased, according to the BCD.
Structuring The Market
One of the key attractions of Djibouti’s market has been the country’s stable regulatory framework and what, for the region, has proved to be a relatively open and prudential approach to oversight.
The central bank – which is limited by acting as a lender of last resort due to the fixed exchange regime – has sought to aggressively ensure the solvency and health of local banks, with a particular focus in recent years on capital requirements and risk management practices. The BCD has sole responsibility for regulating and allocating licences not only to banks, but to all financial institutions operating within the national territory.
Key reforms of banking legislation took place in 2000, 2005 and 2011, allowing Djibouti’s banks to slowly adapt to higher requirements in terms of prudential ratios and governance. The country has also taken several steps to ensure the transparency of its capital flows, and ensure banks comply with key international laws regarding money laundering and financing of terrorism.
The government has also worked to provide ancillary support to the sector. In 2009 it passed a circular ordering that workers earning more than DJF40,000 ($224) every month be paid into a bank accounts. The measure had an important impact on the sector, given Djibouti’s predominant cash culture. The number of bank accounts rose considerably, as did the penetration of banking services across the population. In 2011 a new change in the law was implemented, with the minimum capital for banks being raised from $1.7m to $5.6m. This was done as a means of solidifying the system, and meant that all banks had three years, from 2011 to 2014, to raise their capital to the new standards.
“This was done to achieve a better balance between existing banking assets and raise the sector’s lending capacity,” Abdirahman Robleh, head of statistics at the BCD, told OBG.
Added Regulation
New regulatory measures that had been under preparation in 2015 are expected to be rolled out over the first semester of 2016. One is the establishment of a more adequate risk assessment mechanism, which banking authorities hope will help both reduce the danger of non-performing loans and increase credit allocation by allowing banks to collect sufficient information to support credit decisions.
“The only existing thing at the moment is a central de risque, which lists all loans over $15,000. But the central bank is working with the World Bank to modernise the country’s financial infrastructure. This will involve the establishment of a credit information system and a national payment system,” Nur Abdi Mohamed, general manager of Salaam African Bank, told OBG.
The second measure is the modernisation of Djibouti’s payment system, to better support operations, especially those conducted through new payment methods, such as mobile banking, and through the use of prepaid bank cards. Furthermore, it also includes the necessary legal framework to integrate Djibouti’s payment system with that of neighbouring countries. “The sector is facing big changes. The new payment plan and the digitalisation of services are necessary to not only increase the number of people using banking services but also to provide the framework for a modern system that can cater to fast international transactions,” Jacky Kayiteshonga, director-general at Exim Bank Djibouti, told OBG.
Non-Performing Loans
One area that is attracting greater interest from the BCD is bad loans. While banking penetration has been improving, and competition has become more heated, the quality of credit has also deteriorated.
Non-performing loans have become a problem, increasing from 9.4% in 2011 to 11.4% in 2012 and 13% in 2013. According to IMF figures, the ratio of non-performing loans to total loans had reached 22% in June 2015, one of the highest in the region and well behind Africa’s largest financial markets.
“There need to be more universal standards that all banks abide by. Sometimes we refuse to give someone a loan because they lack the necessary criteria, then they come back later saying they got the loan from another bank even at a lower rate,” Guyo told OBG. “Some banks are risking too much and not even charging higher interest rates for that additional risk they are undertaking.”
Improving the loan allocation procedures and criteria in some banking institutions will certainly be an important priority. Improvement in this respect is expected to be triggered by the central bank’s project to establish a special unit to improve the current information and credit system of the sector’s regulator.
Guarantee Fund
One key piece of pending banking legislation that is expected to have a broad impact across the economy is the planned establishment of a partial credit guarantee fund for small and medium-sized enterprises (SMEs), which – as in many African and Middle Eastern markets – are still having problems accessing credit from the banking sector.
The plan to establish the fund was launched by the government and the BCD in September 2014, and the initiative was viewed by the IMF as a necessary step to improve financial inclusion in the country. The project is supported by the World Bank, under the First Initiative, which is tasked with enhancing the financial sectors in several emerging economies. The fund will have DJF200m ($1.1m) in initial capital and at the outset will be wholly government-owned, but authorities expect the banking sector to eventually hold a 30% stake.
“There are many banks in Djibouti, but there is a lack of financing mechanisms targeting SMEs and large-scale government projects. The sector’s strategy should be to extend the availability of microcredit to facilitate development projects and investment in the country,” Al Deib told OBG.
Islamic Banking
In 2011 the central bank also opened the door for commercial banks to establish their own Islamic banking windows. These have to be separate subsidiaries, with their own specific capital. The minimum capital requirement for an Islamic branch is DJF$300m ($1.7m).
“One of the reactions to the competition brought about by the newer entrants is that traditional banks are also opening Islamic windows to protect their niche market,” Guyo told OBG.
In terms of assets, Islamic banks now account for around 25% of the market, according to the BCD. They also account for 14% of deposits. The weight of Islamic finance is set to grow further over the coming years (see analysis).
The authorities are also working on the establishment of a National Sharia Council to help the central bank oversee Islamic banking, to ensure that sharia-compliant financing meets appropriate religious guidelines, and to ensure broader cohesion within the sub-sector. With Djibouti’s banking customer base still largely underdeveloped, growing product offers by Islamic banking institutions might help attract Djiboutians into the system. This is something that the government has sought to encourage. In November 2015, for example, the BCD organised the fourth African Conference on Islamic Finance, in a bid to further raise the country’s profile in the industry.
The expansion of Islamic finance in Djibouti has also prompted regular commercial banks to explore the segment as a further avenue for growth. In 2011 the BCD reinforced Islamic finance regulation and allowed for this possibility. The regulation states that any commercial bank wishing to open an Islamic finance branch will have to keep its assets, operations and management separate from regular banking operations.
Microfinance
Despite government measures to encourage the uptake of banking services among Djibouti’s households, financial inclusion remains low, and the authorities are pinning their hopes on microfinance activities to help boost it. Currently their representation remains limited, at approximately 3% of total credit allocated and 4% of banking penetration, according to Robleh.
The first microcredit institution opened in 2008, and the segment now has three players: Caisse Populaire d’Epargne et de Crédit de Djibouti (CPEC de Djibouti), CPEC du Nord and CPEC du Sud. CPEC de Djibouti was the result of the 2010 merger of two other microfinance players.
Due to organisational and technical difficulties after the merger, CPEC de Djibouti was put under a temporary management team, but appears to be primed to continue its work in 2016.
Growth Options
The country’s relatively small size and the fact that the population is increasingly concentrated in urban centres will certainly impact expansion strategies by banking institutions over the coming years, as mobile and digital tools become more prevalent. “The arrival of more corporations and foreign investors in the country has created the need for banking services that are based in the free zone and know the needs of big enterprises,” Al Deib told OBG.
According to the African Development Bank, 80% of Djibouti’s population currently lives in cities, and 60% in the capital, Djibouti City. As a result, and as is increasingly common in nearby Egypt and Kenya, digital and mobile tools are often being considered in conjunction with – or sometimes as a replacement for – bricks-and-mortar expansion.
“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 countries have experienced,” Guyo told OBG. “In some cases you only need an agent in the regions, rather than a fully fledged branch of the bank.”
The increase in capital spending and the uptick in major infrastructure projects may also help to stimulate growth in blue-chip corporate lending. Currently the sector is mostly based on SMEs and retail banking, which together make up approximately 80% of the sector. “The arrival of more corporations and foreign investors has created the need for more customised and personal services that understand the needs of a major enterprise. This corporate banking sector will become more and more important,” Jacky Kayiteshonga, director-general at Exim Bank Djibouti, told OBG.
Insurance
Total premiums in Djibouti’s insurance market reached DJF$3.2bn ($17.9m) in 2014, up 5.6% on 2013, according to the Ministry of Economy and Finance. The sector’s performance has generally followed an upward trend, with total premiums expanding from DJF2.2bn ($12.3m) in 2008. The combined market’s net results in 2014 rose to DJF504.5m ($2.8m), up from DJF368.1m ($2.1m) in 2013, and commercial margins expanded from 11.9% in 2013 to 15.4% in 2014. Of total premiums, some 56% (DJF$1.8bn, $10.1m) was accounted for by automotive insurance, which (bar mandatory insurance for imported cargo) is the only compulsory cover in the Djiboutian market.
The other segments are relatively small. Other risks and direct damages accounted for DJF649.2m ($3.6m), or around 20% of total premiums. Fire and other damages premiums accounted for DJF$297.1m ($1.7m), or 9.1% of the market, followed by general civil responsibility at 8%, life at 4%, transport insurance at 2%, and bodily injuries, accidents and health insurance at 1%, according to the Ministry of Economy and Finance.
The insurance sector remains largely underdeveloped. As is commonly the case throughout the emerging and frontier market world, life insurance remains a product with minimal intake, accounting for just DJF120.8m ($676,000) in 2014. Life insurance in the country is primarily driven by the banking sector, which generally requires it for loan applicants (see analysis).
“Regional cooperation, especially within the COMESA framework, has increased. This is mainly because insurance coverage for transit goods that cross numerous borders has to be accompanied by a matching solution that reduces the amount of administrative formalities,” David Boucher, commercial director of GXA Insurance, told OBG.
Outlook
Banking services and Djibouti’s financial sector in general face a number of constraints – including limited capitalisation, small market size, high fragmentation outside of the two majors banks, an elevated rate of NPLs, and a paucity of blue-chip corporates – but the comparative advantages also open up space for the country to create a uniquely open and accessible platform for broader regional financial growth.
Expanding the number of people who have access to banking services and establishing an adequate growth strategy for the sector will be essential for domestic and retail lending. However, efforts to improve cross-border appeal for institutions looking at neighbouring Ethiopia or Somalia will also be crucial for the sector’s profile.
Furthermore, the range of measures that are currently on the sector’s reform agenda are set to further modernise the financial industry. Better payment systems and improved credit guarantees will not only help the banking sector, but will have a positive impact on Djibouti’s economy in general.
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