Tuesday, May 30, 2023

Reasons Why Local Banks in Cameroon Failed Within the 1980-1990 Peroid

The financial crisis has afflicted many local banks in Cameroon, many of which have been closed or restructured under their supervision by regulatory authorities. In

Cameroon banks like BICIC Meridian BIAO Cameroon Bank closed

Many more local banks were distressed and under some form of

“Holding Action”. failed local banks accounted for 23 percent of the total commercial

Bank property in Cameroon.

It is very difficult to estimate the cost of these bank failures: most of the data is not available

public domain, while the ultimate cost to depositors and/or taxpayers of most

Bank failures that occurred between the period 1988 and 2004 will depend on how much of the assets of the failed banks are eventually recovered by liquidators. The costs will almost certainly be high.

Most of these bank failures were caused by bad loans. most affected areas

More than half of the loan portfolio was typical of failed banks. had many bad debts

Causes of moral hazard: bank owners have perverse incentives to act imprudent

Lending strategies, especially internal lending and lending to borrowers at higher interest rates

in the riskiest areas of the credit markets.

internal borrowing

The biggest contributor to the bad loans of many of the failed local banks was

internal borrowing. Internal loans account for at least half of the bank failures mentioned above.

for a major chunk of bad loans. Most of the big local banks in Cameroon failed,

Contains extensive insiders such as Cameroon Bank, BIAO Bank and BICIC Bank

Lending, often to politicians. Insider loans account for 65 percent of total loans

These local banks were virtually all unreachable.

About half of the loan portfolio of one of the local banks was extended to its directors and employees. The threat posed by insider lending to the soundness of banks was exacerbated because many insider loans were invested in speculative projects such as real estate development, violated large-lending exposure limits, and were extended to projects that could not generate short-term returns (such as hotels and shopping centres), resulting in a mismatch between the maturity of the bank’s assets and liabilities.

High incidence of insider lending among failed banks suggests ethical problems

The threat was particularly acute in these banks. Several factors contributed to this.

At first, politicians were involved as shareholders and directors of some local banks.

Political connections used to get public sector deposits: Many failed banks,

A small number of firms were heavily dependent on wholesale deposits.

Small banks that have made these deposits due to political pressure are unlikely to have

Made a purely business decision regarding the safety of your deposit. Other than this,

The availability of micro deposits reduced the need to raise funds from the public. hence

These banks faced little pressure from depositors to establish a reputation for safety.

Political connections also facilitated access to bank licenses and in some cases were used

Pressure on bank regulators for not taking action against banks for violation of banking laws

were discovered. All these factors reduced the odds on careless bank management.

Furthermore, the banks’ reliance on political ties meant that they were exposed to

pressure on politicians to lend themselves in return for aid given in obtaining

Deposit, license, etc. Many of the biggest insider loans made by failed banks in Cameroon

Belonged to prominent politicians.

Second, most of the failed banks were not capitalised, partly because the minimum

The capital requirements when they were set up were very low. the owners had little

their own funds were at risk if their bank failed, which created a huge asymmetry

Potential risks and rewards of insider lending. Bank owners could invest bank deposits

into their own high-risk projects, knowing that they will make huge profits if their projects

succeeded, but would lose a small portion of their own money if they weren’t profitable

A third factor contributing to insider lending was the excessive concentration of

possession. In many failed banks, the majority of shares were held by one person or

families, while managers lacked sufficient freedom from interference by bosses

operational decision. a more diversified ownership structure and a more independent

Management can be expected to impose more restrictions on insider lending,

because at least some of the directors would stand to lose more than they gained

Insider lending, while managers did not want to risk their reputations and careers.

The high cost of funds meant that local banks had to earn a high income from it.

their property; For example, by charging higher lending rates, with consequences for the quality of

their loan portfolio. Local banks almost inevitably faced adverse selection.

their borrowers, many of whom were (or would be) rejected by foreign banks

did they apply for the loan) as they did not meet the strict creditworthiness criteria

demanded of them. because they had to charge higher lending rates to compensate for this

high cost of funds, it was very difficult for local banks to compete with foreign

Bank for “prime” borrowers (ie borrowers with the most credit). As a result, the

Credit markets were fragmented, with many local banks operating in the riskiest areas

segment, serving borrowers prepared to pay higher lending rates because they could not access

Alternative sources of credit High-risk borrowers included other banks that were

lack of liquidity and ready to pay higher than market interest rates for inter-bank deposits and

Loan. We all experienced in Douala and Yaoundé how some local banks were hit hard by the financial houses that collapsed in large numbers in the 1990s.

As a result, to what extent was the impact of the bank crisis

Local banks lend to each other.

Within the segments of the loan market serviced by local banks, there were probably

Exposure to good quality (i.e. creditworthy) borrowers as well as poor quality ones. but serving

Borrowers in this segment of the market require strong credit appraisal and monitoring

systems, not least because informational gaps are acute: the quality of borrowers

Financial accounts are often in bad shape, many borrowers do not have a track record of successful business,

Etcetera. The problem for many failed banks was that they didn’t have enough

expertise to scrutinize and monitor your borrowers, and hence differentiate between good and

Bad risk. In addition, credit processes, such as loan and loan documentation

Securities and internal controls were often very poor. Managers and Directors of

Banks often lacked the necessary expertise and experience.

Recruiting good employees was often difficult for local banks as banks were established

Usually the most talented bank officers can offer better career prospects. Other than this,

The rapid growth in the number of banks outstripped the supply

Experienced and Qualified Bank Officer.

Macroeconomic instability contributed to these failures to an extent;

Poor credit quality problems faced by local banks further exacerbated

widespread economic instability. The devaluation of the FCFA was preceded by a period of high and very volatile inflation in Cameroon. With the liberalization of interest rates, nominal lending rates were also high, with real rates fluctuating between positive and negative levels, often in unpredictable ways, due to inflationary volatility.

Macroeconomic volatility will have two important consequences for debt

The quality of local banks first, high inflation increases the volatility of business profits

because of its unpredictability, and because it normally has a high degree of variability

rates of increase in the prices of particular goods and services that make

Composite Price Index. Firms are more likely to suffer losses as the probability

that they will make windfall profits. This intensifies both adverse selection and adverse incentives for risk-taking, and thus the probabilities of loan default.

Another consequence of high inflation is that it makes loan appraisals more difficult.

banks, because the viability of potential borrowers depends on the unpredictable

Developments in the overall rate of inflation, its individual components, exchange rates and

Rate of interest. Furthermore, asset prices are also likely to be highly volatile under such

conditions. Therefore, the real future value of the debt security is also highly uncertain.

Crucially, we should not be alarmed when we see microfinance houses flourishing today in the economic capital of Cameroon, Douala and Yaoundé, all heavily involved in the banking sector, that this can only happen as a result of these massive bank failures. has been registered in The last few years.

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