Alongside investment in transport infrastructure, Djibouti’s economy has benefitted significantly from the ongoing expansion of its financial services sector. Liberalisation of banking activity since 2006 has made the country an attractive location for banks and insurance companies aiming to satisfy the growing demand linked to logistics services and trading. With a population of slightly more than 1m people, Djibouti remains a relatively small domestic market. But the low penetration of financial services, coupled with the country’s natural competitive advantage as a regional maritime transport centre, underline the unexploited potential for traditional financial services and digital-based banks.
Banking activity continues to dominate the financial services sector, and accounted for approximately 97% of total assets as of December 2021. Interest from a growing number of domestic and international banks has been matched by a strengthened regulatory environment in which monetary authorities are working to diversify the overall market offer while keeping systemic risks at bay. The Central Bank of Djibouti (Banque Centrale de Djibouti, BCD) has made targeted efforts to improve credit allocation, upgrade communications systems within the monetary sector and encourage banking services penetration.
Market Structure
Most of Djibouti’s GDP growth has been driven by the capital-intensive development of infrastructure projects, which has left economic diversification in its initial stages. However, according to figures from the BCD, nominal GDP per capita has risen from $2420 in 2014 to $3480 in 2021, leading to an increase in potential customers for banking services.
Aiming to cater to this expanding market, the number of commercial banks operating in Djibouti grew from two in 2005 to 13 in 2021. Despite added competition, the original players continue to be active in the market. The first bank to operate in the territory was Indosuez-Mer Rouge Bank, which started operations in 1908 and was acquired by Bank of Africa (BOA), in 2010, changing its name to BOA-Mer Rouge. The second institution to offer its services in Djibouti was Banque pour le Commerce et l’Industrie Mer Rouge (BCIMR), established in 1957 and acquired by Bred-Banque Populaire in 2007 from BNP Paribas.
Banking Sector
The sector experienced heightened competition in the first decade of the 21st century. In 2006 two banks entered the market; Yemeni-owned Saba Islamic Bank, which transformed into Saba African Bank, and Malaysian International Commercial Bank, now Investment International Bank IIB. In January 2007 Switzerland-based Banque de Dépôt and Credit Djibouti joined the banking sector. Salaam African Bank arrived in the market in December 2008, Dahabshil International Bank began operations in April 2010, and Tanzania-based Exim Bank followed in March 2011.
With an increasing presence of private operators, the Djiboutian government’s role in the sector remains limited compared to other countries in the region, with a 25% participation in Silk Road International Bank and a 33% stake in BCIMR. The market shares of the two legacy banks have been gradually reduced as the number of banks in the sector rose. “The growing number of financial institutions has led to a visible increase in competition,” Mohamed Robert Carton, head of the research department at the BCD, told OBG.
As of September 2022 three banks – BCIMR, BOAMer Rogue and CAC International Bank – represented 49% of the market share in terms of assets. In terms of credit, the three banks constituted 43% of the total banking sector. Moreover, the resources of the three banks accounted for 63% of the total number of financial instruments managed by the banking sector.
In addition to traditional banking institutions, the sector also benefits from the activity of 20 exchange and money transfer bureaux, four insurance companies, the Djibouti Sovereign Fund, two companies that issue electronic money, and three microfinance institutions – as well as two government-owned development funds, the Economic Development Fund of Djibouti (Fonds de Développement Economique de Djibouti, FDED) and the Fonds de Garantie Partielle de Crédit de Djibouti.
Regulatory Evolution
The monetary authorities have leveraged regulation to make the sector more attractive. One crucial step was taken in 2005 with the requirement that any bank operating in the sector be 30% owned by a reputable multinational banking group. This change opened the door for smaller banking institutions with roots in the region to enter the market and counter the weight of the two established legacy banks.
Other policy measures helped to increase the number of banking customers. A government rule implemented in 2009 established that all salaries above DJF40,000 ($225.35) had to be paid through the recipient’s bank accounts, which drove the volume of people with such accounts. In 2011 minimum capital requirements for banks were raised from $1.7m to $5.6m to strengthen the banking system’s solvency, even as monetary authorities gave banks a three-year period to adapt.
Strengthening the integrity of Djibouti’s financial system is a key regulatory focus amid the goal to become a regional financial centre and stem the loss of US correspondent banking relationships affecting commercial banks. Under the guidance of the Middle East and North African Financial Action Task Force, the country will undertake the mutual evaluation of its anti-money-laundering and combatting the financing of terrorism (AML/CFT) measures in 2024. In preparation for this exercise, Djibouti launched a national risk assessment in March 2021 to identify AML/CFT vulnerabilities, culminating in a detailed action plan.
More recently, the regulators have focused attention and resources on improving the sector’s technological infrastructure. One example is the SYRAD system which was launched in July 2021 and fully financed by the World Bank. SYRAD allows banks to connect to the BCD using a secure digital link. The system has contributed to time and cost savings, digitalising payments that used to be processed manually.
Sector Performance
The banking sector showed resilience during the Covid-19 pandemic by supporting the efforts of public authorities to mitigate the repercussions of the health crisis on the repayment capacities of debtors, the deterioration of the credit portfolio and the profitability of banks. The strength of the sector is based on a recovery in economic growth of 3.6% in 2022 despite successive exogenous shocks, including the pandemic and the war in Ukraine.
Since the end of 2020 banks’ capital levels have increased while financial institutions’ net capital performance has remained stable. The solvency ratio of the banking sector therefore stood at 14.7% in the second quarter of 2022, well above the minimum required. The banking system also had a high average liquidity ratio of 73.8% over the same period.
According to the World Bank, Djibouti’s banks were spared in part because of the low level of exposure to the economic sectors most affected by the shocks. Those institutions were also protected by the overall improvement of non-performing loans (NPLs) and liquidity regulations implemented by the BCD.
Assets
Djibouti’s banking sector experienced an 11.7% increase between 2020 and 2021. Total banking assets rose to DJF614bn ($3.5bn) from DJF549.7bn ($3.1bn) in 2020. Customer deposits, meanwhile, expanded by DJF23.9bn ($134.7m) in 2021 to reach DJF442.9bn – up from DJF418.9bn ($2.36bn) in 2020 – and remained a key component of total banking assets. In light of the pandemic’s impact, the BCD imposed a ban on the distribution of banking dividends, helping banks shore up their financial positions.
However, bank deposits fell by DJF8bn ($45.1m) between 2021 and 2022. In volume, customer deposits in 2022 accounted for DJF435bn ($2.45bn) compared to DJF443bn ($2.6bn) in the previous year. In terms of currency distribution, deposits in Djiboutian francs and deposits denominated in foreign currencies represented DJF221bn ($1.2bn) and DJF214bn ($1.2bn), respectively at the end of 2022. Of that amount, DJF190bn ($1bn) was denominated in US dollars.
Credit Growth
Despite increasingly becoming intertwined in the Djiboutian economy, the country’s banking sector faces several challenges in terms of deploying its deposits in an effort to help facilitate wider economic activity. At times, this has been attributed to a lack of information about the market. “A significant issue for banks aiming to distribute loans is the lack of detailed statistics about economic sectors, making it hard to project outcomes,” Fouad Hussein, CFO at Exim Bank, told OBG. “In many cases, banks end up loaning to the sectors they already have experience in.”
Nonetheless, recent years have seen significant improvements. According to the BCD, the banking sector’s transformation rate increased from about 33.5% in March 2020 to 58.9% in June 2022.
Credit allocation accelerated significantly as the economy rebounded from the worst impacts of the pandemic, due to the distribution of more than DJF78bn ($496.4m) in credit from the Bank of China in 2021. After rising from DJF126.1bn ($710.4m) to DJF149.3bn ($841.1m) between 2019 and 2020, credit allocation to the economy grew by 54.2% to settle at DJF230.3bn ($1.3bn) by the end of 2021, according to BCD statistics. Loans remained largely concentrated in transport and logistics, and construction and real estate. By the first quarter of 2022 total credit allocation had expanded further, to DJF240bn ($2.4bn), before slowing slightly to DJF236bn ($1.3bn) by June 2022.
As of early 2022 only about 5% of formal SMEs had access to banking credit. However, the authorities expect that part of this gap can be covered through the use of specialised banking institutions. For example, the FDED provides concessional loan options to SMEs overlooked by the traditional banking sector. The fund also runs specific credit guarantee programmes, supporting women and recent graduates in investment projects. Support envelopes vary from DJF2m ($11,300), for small entrepreneurs of microcredit clients, to DJF30m ($169,000). As of 2020 the total credit stock allocated by the FDED amounted to DJF5.7bn ($32m), according to the BCD.
Loan Quality
In addition to implementing policies that aimed to ease credit allocation, the BCD encouraged banks to clean NPLs off their balance sheets in order to improve the quality of their credit portfolios. For years the sector struggled with weighty NPL rates, although a large percentage of problematic credit was traditionally concentrated on the two biggest market players, BCIMR and the BOA, which as of 2019 accounted for 92% of NPLs.
To that end, the monetary authorities established rules to govern how NPLs would be reported by banking institutions. The regulations came into effect in January 2021 and established that unpaid loans of over five years would continue to be pursued in courts but taken off of banks’ books. The regulations also increased the volume of provisions required for NPLs, reducing their weight in the evaluation of banking assets.
The impact of these measures has been palpable. NPLs have decreased significantly, from 18% of the total in 2019 to 7% by the end of 2022. That said, improvements have also originated from efforts to improve information regarding NPLs and minimise exposure for financial institutions.
Initially, banks relied on a sector-wide risk database listing all loans above $15,000. However, the authorities launched a new digital credit registry system in 2018. The collateral guarantee system listing properties or real estate was expanded to include a more extensive set of assets that can be used as collateral in loan requirement processes. That has made it easier for SMEs without land to request loans using other types of assets, such as machinery, vehicles and other equipment, as collateral. With this change, regulatory steps have made it easier for banks to take possession of assets used as collateral in cases where individual customers or firms have become non-compliant.
Djiboutian Franc
Djibouti’s economic development has been helped by a fixed exchange rate system. Even before securing independence, the Djiboutian franc was pegged to the US dollar at $1:DJF177.7. As such, the BCD is mandated to cover money in circulation through its management of foreign exchange reserves, primarily kept in US dollars. The system has allowed Djibouti to largely contain inflationary pressures and has been a primary factor in easing the participation of foreign investment in the economy. According to the BCD, as of June 2022 Djibouti’s regulators’ reserve-to-base money ratio stood at 106.2%.
Microfinance
The authorities alongside development financial institutions are aiming to establish microfinance offerings to increase banking penetration and improve the way that financial services promote economic growth. Public policy is driven by the Microfinance Strategy 2019-23 and the broader National Strategy for Financial Inclusion 2021-26. Most microcredit allocation is channelled through three Caisses Populaires d’Epargne et de Crédit (CPEC). Acting across the country, the CPECs have focused support mechanisms for women, who make up over 70% of their client base. In 2020 the number of microcredit clients supported by CPEC loans expanded by around 35%.
“Only about a third of the bankable population currently participates in the banking sector. We need to diversify banking offerings, invest in infrastructure to include the rest of the population and enhance the attractiveness of financial services through more favourable conditions,” the BCD’s Carton told OBG. “Much can be achieved through simple mobile banking products that the entire population can access.”
Mobile Banking
Djibouti’s regulators increasingly view digital banking offers as the fastest way to increase sector penetration. The digital payment environment has improved overall, with a number of banks investing to leverage their digital platforms and offerings. In addition, government-owned telecommunications provider Djibouti Telecom’s electronic money issuing institution, D-Money, launched a digital mobile money service to allow for digital payments and money transfers in 2020. In February 2022 the BCD granted Somali-based electronic money issuer Waafi a licence to operate.
However, for online banking to take off, telecommunications services must improve. Since the sector runs as a monopoly, prices have remained high while penetration of services has been low. Approximately one-fourth of Djiboutians had access to mobile internet services in 2021, and this is partly due to cost: a monthly high-speed mobile internet subscription costs an average of $95.52 in Djibouti, compared to $33.08 in Ethiopia. Even household access remains costly with, a fixed-internet subscription priced at the monthly revenue of about 60% of the country’s poorest households.
Islamic Banking
Since 2011 the BCD has allowed traditional banks to operate Islamic banking windows. However, commercial banks that wish to offer Islamic financial products are required by law to maintain separate operations between the two activities.
Several factors contribute to the appeal of Islamic finance in Djibouti. Alongside offering sharia-compliant financial products, Islamic banks operating in the country have successfully combined an efficient digital footprint with physical networks. Out of a total of 114 ATMs in the country in 2021, 54 belonged to Islamic banks, as did 22 of the total 50 banking branches. The number of Islamic bank accounts rose from approximately 34,500 in 2013 to over 56,000 in 2021.
The segment has also been growing in terms of its total assets. As of December 2022 three of the sector’s 13 institutions were Islamic banks, with their total assets growing from DJF45.2bn ($254.7m) – or 17.7% of total banking assets – in 2013 to DJF136.5bn ($769m) in 2021. “Islamic finance is growing at an average of 20% per year, so this could be a good way to increase banking penetration. Financial technology can also accelerate growth,” Carton told OBG.
Outlook
Djibouti’s banking system has evolved as it expanded in line with the country’s economy since the early 2000s. Despite the disruptions associated with the pandemic, regional conflicts and ongoing global macroeconomic instability, the sector has broadly been able to maintain a solid financial position in recent years.
Equally important, Djiboutian banks have become better at deploying more of the volume of accumulated deposits to help drive wider and more sustainable economic growth through the effective allocation of credit. As the number of banking institutions has increased, so has the sector’s offer and reach. However, loan allocation to SMEs remains somewhat muted, and although the sector has been able to reduce the number of NPLs and improve transformation rates substantially, measures to better align credit demand and supply will be of critical importance in the coming years. An increase in the volume allocated by the government to serve as loan guarantees will likely affect the number of domestic companies and entrepreneurs who are able to access banking credit.
In early 2023 the government launched an affordable housing project with the creation of a Guarantee Fund for housing. The project’s objectives are two-fold: first, to improve access to long-term financing solutions for populations that are underserved by the financial system – such as low- and middle-income groups, or those with irregular incomes – enabling them to acquire decent housing; second, to increase the private sector’s contribution to the housing construction value chain.
Although the role of Islamic finance in increasing banking penetration has been significant, access to financial services can be further expedited by mobile banking services. However, consumer-led growth in this area will depend on lowering telecommunications prices, the high cost of which serves as a hindrance to the expansion of mobile banking. As a number of other banking markets on the continent have showcased, making financial services widespread can be challenging without affordable telecommunications offers.
Given the difference in size and scale between the largest and smaller players in the market, it is likely that the sector will undergo some consolidation moving forwards. This will be further accelerated by the expected arrival of new competitors to the market in 2023.
Read More from OBG
