Financial Sector Overview
Sao Tome and Principe (STP) is an archipelago sharing maritime borders with Equatorial Guinea, Gabon, Cameroon and Nigeria. This least populated African country is a fragile and remote island-state highly vulnerable to exogenous shocks and constrained by limited resources and capacity. The economy is based mainly on subsistence agriculture and fisheries and relies heavily on foreign grants, which stood at 13.6 % of GDP in 2017. STP faces challenges that are typical of small economies and affect its ability to deal with shocks and achieve a balanced budget. GDP growth has been relatively steady since 2009, but remains heavily reliant on government spending and has not significantly contributed to poverty alleviation. GDP grew at an average rate of 6.7 % between 2014 and 2018. Real GDP growth was bolstered in 2018 by increased foreign direct investment (FDI) supporting the construction sector. Overdependence on imports for private consumption continues to create imbalances. The high cost of energy, which is produced largely from fossil fuels, is a major constraint to private sector development but projected public investments/expenditures in renewable energy could provide some relief. The country is ranked 170th (out of 190) in the World Bank Ease of Doing Business. The ranking has deteriorated from 160 in 2015. The government is stepping up efforts to strengthen the business environment through the 2016 investment benefit incentive law, a new tourism development strategy and a Public-Private Partnership (PPP) law approved in 2018.
Financial Sector Overview
STP has a small financial system, with the Dobra as the local currency. The Central Bank (BCSTP) acts in a supervisory role over the national financial system and defines monetary and exchange rate policies in the country. Commercial banks account for 98 % of financial sector assets and 6 of the 7 banks are foreign owned. The sector is highly concentrated with the three largest banks holding almost 75 % of total assets and the largest bank holding about 50 % of total assets. High concentration in the banking system has led to limited competition. There are 2 insurance companies, 4 small consumer lenders operating in STP, and no stock exchange market. “Although the government is working in setting up a new legal framework that enables the modernization of STP’s financial system, as of now, there is not presence of additional potential payment service providers: post office is not authorized for delivering payment, telephone companies do not have authorization to cash out payments, there are not consolidated microfinance institutions. In addition, the regulation for the operation of agents is not yet in place” (ISPA – World Bank, 2018). The country is ranked 161 in the Word Bank Doing Business report 2019 for access to credit, due to high interest rates and a general lack of regulatory polices to ensure credit distribution. According to a 2016 World Bank report, 48% of people have a savings account while only 7% of small and medium-sized enterprises (SMEs) have a bank loan. The BCSTP recently strengthened its efforts to introduce domestic debt instruments through issuances of two local currency-denominated treasury bills in 2015 and 2016. These are expected to be instrumental in improving the interbank market, which has not been used by the banks so far due to high risk aversion. The issuance of treasury bills and bonds are also expected to serve as collateral to back lending in the interbank market. Additionally, development of the treasury bills market would help the BCSTP build a yield curve, which would decrease both uncertainty in the market and the risk premium in investments.
In recognition of the poor performance of the financial sector as a whole, the Financial Sector Development Implementation Plan (FSDIP) 2017-2019 was initiated with a focus on policy reforms and actions in 3 key areas: (i) strengthening financial sector supervision; (ii) increasing financial inclusion; and (iii) upgrading financial infrastructure.
There are 7 commercial banks, 26 bank branches, 33 ATMs and 125 Point-of-sale (POS) devices in the country. Despite low levels of income, half of the population has a savings account at a bank. There were 953 bank accounts per 1000 adults in 2017, with 25 bank branches per 100,000 adults in the country. This high level of account ownership – in comparison with other Sub-Saharan African countries – is the result of relatively low financial, documentation and physical barriers to enter the financial system. Banco Internacional de STP (BISTP) is the banking leader and the only locally-owned bank, with 48% of public ownership. The bank accounts for two thirds of the industry total deposits, half of the total assets and 70 % of foreign currency deposits. It is also worth noting that foreign currency deposits make up 40% of the total deposits in the banking systems, and these assets represent a strategic and competitive advantage for BISTP when servicing clients involved in international trade, imports especially.
With fewer transactions and customers, delivering of banking services seems more expensive in small countries due to relatively high fixed costs. Compared with other very small financial systems, the interest rate spread has been higher in STP, hovering around 15% (in 2016 and 2017) versus the 9.25% average in small financial systems. While declining since 2010, the lending rate on average was as high as 19% and deposit rate around 4% in 2018. The high lending rate reflected both high operating costs and increase in banks’ risk aversion as a result of high rate of NPLs. NPLs were at 25% of total loans in 2018 and continued to weaken the banking sector and curtail credit expansion. Negative banks’ return ratios (return on assets and return on equity) turned positive in 2018, after several regulatory steps taken by the BCSTP. The system-wide capital adequacy ratio improved to 33.6 % of risk-weighted assets as banks shifted resources into government paper.
Commercial banks have held excess liquidity with loans to deposits ratio decreasing from 101.7% in 2012 to 59.7% in 2017. In 2015 and 2016, private credit to GDP ratio continued to fall from 25.3% (80.4 USD million) to 24.6% (86.3 USD million). Loans for construction (24 %), trade (24%) and consumption (21%) account for the largest share of credit . Agriculture and tourism sectors are largely financed by grants and FDI. To support lending activities, a moveable collateral registry is also being developed with support from the World Bank.
STP has a good level of bank account ownership, with 953 deposits accounts (in commercial banks) per 1 000 adults in 2017; but the country still need to make efforts to strengthen the financial infrastructure in terms of bank branches, ATMs, regional breakdown of points of services and mobile money agents. The non-bank financial sector, including microfinance institutions and digital finance operators, should also significantly develop with the new law on the national payment system approved by the central bank, and other regulations being prepared on electronic funds transfers, oversight of payment systems and the use of agents. High degree of informality is also another constraint for SMEs finance and financial inclusion in STP.
A microfinance legal framework came into force in 2018. It applies to the provision of financial services for the low-income population whose economic activities are based on small and medium-size operations, or to those who operate outside the traditional financial sector. These microfinance services include micro-credit, micro-insurance and micro-savings. Microfinance Institutions (MFIs) need prior authorization from the BCSTP. The 2018 microfinance framework also allow non-Governmental Organizations (NGOs), Associations or Foundations of relevant social public interest to also carry out micro-finance, as long as they meet the requirements defined by the BCSTP. However, they cannot accept deposits or provide savings and insurance services. Banking and financial institutions may also engage in micro-credit and micro-business activities.
There are four (4) privately owned consumer finance organizations that are primarily payday lenders in STP. The largest of these institutions has 3,300 clients, 3 offices and 12 USD million in assets in 2015. While these organizations are considered MFIs, in the local context they appear to be primarily payday lenders (i.e., 60% of their loans) to salaried persons that have been turned down by banks. These loans are generally 1 day to 7 months in duration with interest rates of 55% and higher.
Despite dominance of Micro SMEs in the private sector (in terms of numbers), their access to finance is limited. In August 2015, a new facility for SMEs—funded by the International Finance Corporation (IFC) — was set up at a large bank. This USD 3 million risk-sharing facility is to provide working capital and loans to small businesses, support their expansion and modernization, and drive job growth in which they will share an equal amount of the lending risk. Access to finance by SMEs is hindered by rampant credit risk, shortage of eligible collateral, and a high degree of informality, although some banks help clients become creditworthy (e.g. forming cooperatives, promoting young entrepreneurs).
The number of ATMs per 100,000 adults (27.4) is the highest among SSA Low Income Countries, but banks face a disincentive to installing new ATMs since, by regulation, they are not permitted to charge clients for ATM usage. Interbank cash withdrawals are not possible in the country, as ATMs only work with their own bank cards. As part of its financial inclusion objective in the FSDP, the government is in the process of enacting an effective legislative and regulatory framework to cover electronic transactions and electronic transfers including mobile money and payments. Digital financial instruments could serve a large component of the unbanked or under banked population. According to Companhia Santomense de Telecomunicações (CST), the main telecommunications firm with 90% of the market share, there are 146,000 mobile lines in STP and 86% of the total population has a mobile phone. Even in rural areas, 77.8% of the population held a mobile phone in 2015. With high level of mobile phone penetration, an opportunity exists to expand the frontiers of financial services via digital financial services. After adoption by the parliament, the new law on payment systems (including mobile money operations) should enhance mobile banking and digital finance in the country.
Remittances inflows and market
Migrant remittances averaged 14.1 USD million between 2009 and 2017 and were 5.3% of GDP. These inflows were 18.6 USD million in 2017 and accounted for 5% of GDP. The highest remittances were recorded in 2014 at 26.8 USD million which were 8.3% of GDP. Main source countries are Portugal and Angola, followed by France, Belgium and the United States.
As well as the pension system, the insurance sector in STP is supervised by the Directorate of Social Protection and Insurance (DPSS) from the Ministry of Employment and Social Affairs (MEAS). Only 4.3% of adults have some form of private insurance. Premium income for auto insurance accounts for 50% of all insurance premiums. It is widely believed by insurers that the mandatory auto insurance requirement is not followed and that a review of the current auto insurance requirement needs to be undertaken. The domestic insurance industry estimated that only 5% of drivers purchased insurance in 2015. There are only two locally registered but foreign-owned insurance companies in STP. Similar to the higher-end credit needs of the market, the higher-end corporate insurance needs seem to be met primarily through foreign insurance providers. This could also be a result of the relatively small and limited lines of business offered by the two insurance companies.
The pension system in STP is managed by the National Institute of Social Security (INSS) and covers employed persons, including civil servants and military personnel, self-employed persons, and household workers. Compared to the banking sector, pension assets are marginal and the limited securities market negatively impacts liquidity management and long-term investment by the INSS. The country has set a legal framework for social protection in 2004 to replace and reinforce the two previous laws in 1979 and 1990 (social security), with the creation of a Social Protection (SP) Council to regulate the sector. A National Social Protection Policy and Strategy (PENPS) was also approved in 2014.
The contributory and mandatory social insurance system covers 45% of the old age population and 12,000 active members in 2014, with three-quarters of civil servants. However, social protection is organized in 3 levels including: (a) a non-contributory social assistance; (b) a mandatory social insurance scheme (pension); and (c) an optional/complementary scheme not yet operational. The retirement age is set at 62 with at least 180 months of contributions and enrollment in the system for at least 240 months. The average retirement allowance by month is quite low (under 40 USD) when compared with the GDP per capita (2039 USD in 2018). The funds allocated to social protection in STP therefore seem insufficient to provide benefits that are compatible with the needs of pensioners and uncovered elders/beneficiaries in the country.
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