At its last meeting, on 22 June, the Bceao's  Monetary Policy Committee noted that the situation of minimum reserve requirements by WAEMU banks remains "comfortable". Behind this euphemism lies a reality well known to specialists: the overliquidity of the Union's banks. In the public's understanding, it is as if the banks would prefer to hoard or reinvest the money in less risky activities (treasury bills, public securities issued by governments), rather than financing SMEs. The reality is much more complex. Analysis and explanation.

When do we talk about bank overliquidity?

Senegalese banks (and WAEMU banks in general) are, for the most part, overliquid. That is a fact. In its latest report on monetary policy in the West African Monetary Union (UMOA), of March 2020, the Bceao notes that the required reserves of banks over the maintenance period from 16 November to 15 December 2019 are estimated at 701.9 billion CFA francs. Over the same period, banks' reserves averaged 1639.6 billion, exceeding the minimum regulatory level required by 937.7 billion. Despite the fact that excess reserves decreased by $43.4 billion compared to the situation in the maintenance period from August 16 to September 15, 2019, they represent 133.6% of the required reserves compared to 134.3% in the previous quarter. However, the number of banks in reserve requirement deficits increased from four to seven. Simply put, most banks in our area are overliquid. To understand the notion of bank excess liquidity, we must first circumscribe the concept of bank liquidity. A banking institution is said to be liquid if it has availability or opportunities for rapid mobilization of funds to cover its liabilities during a given period. Indeed, banks often provide long-term financing through the mobilization of short/medium-term resources. In doing so, they have to deal with the regular withdrawal requests of their customers. Holding a certain amount of liquidity is therefore necessary to contain all these withdrawal operations.

The banking regulator (Bceao), as part of its prudential regulation , has set up a minimum liquidity threshold, called the "liquidity ratio", which any commercial bank must respect. It consists of a ratio between different assets and liabilities on the bank's balance sheet. Therefore, "a bank that holds liquidity above this ratio can be considered overliquid," says Habib Ndao, executive secretary of the Observatory of the Quality of Financial Services (Oqsf). A definition very close to that of Olivier Santi, CEO of the Outarde bank. For the latter, we speak of bank overliquidity "when a bank has collected more savings than it has granted credits". In this case, the commercial bank is faced with three options: lend to customers (individuals, companies, State); keep with the Central Bank or keep this liquidity. Banks can also opt for a combination of these three situations. "In the first option, the bank is in a situation of excess liquidity if and only if it does not lend all the excess liquidity to the standard to be respected. On the other hand, in the last two situations, the bank is simply overliquid," says Ndao. Bank excess liquidity can also be estimated, he adds, by the level of excess reserves that results from the difference between the reserves built up by banks and the required reserves or minimum reserves.

A concept that is difficult to grasp

However, at the level of the Dakar market, the situation is generally in deficit (senegalese banks' loans exceed the available savings), "but in practice, the situation is more contrasted and the issue of bank overliquidity is difficult to grasp", Olivier Santi tells us. "The two core businesses of banking, which are the collection of savings and the distribution of loans, are intertwined over time. It can happen, during a period, which can be the day, the month or the year, that a bank collects more savings than it grants credit or vice versa," he says. Thus, a bank can be overliquid, because it has chosen to be cautious, or it considers that it does not have enough business, therefore credits to distribute, or, worse, it refuses to grant these credits despite the demand, notes our interlocutor. "This is the trial that is lent to some banks, but this accusation does not last long when the valuation is finer," defends the banker, recalling that a bank is a company that manages risks and assesses them in the light of the return it hopes to derive from them.

In the end, bank overliquidity can be "punctual and temporary, can mean a deficit of business or commitment of a bank in the economy, adequacy to rules of good management of maximum protection of the saver (often built as a result of a liquidity shock like most large banks experienced in 2008), or simply be synonymous with prudence, anticipation in the face of a deteriorating environment, risk assessment," concludes Olivier Santi. In the end, the excess liquidity of some banks is "less the cause than the consequence of the imbalances observed in the credit market".

A precarious balancing act

In order to regulate the credit and savings cycle, mechanisms exist (banking actors lend to each other and/or call on the Bceao), but the balance is not assured. "Some banks are known to be structurally overliquid, while others struggle to find the resources to cover the credits of their customers. The market is therefore not perfect in the sense that the supply of resources does not always meet demand; this can create cash flow pressures, or even some misunderstandings about the real commitment of banks in the economy," Santi said. However, he continues, the liquidity position first reflects the "business model" specific to each institution: "There are banks that refuse to lend 100 if they do not have 100 in resources". As deposits are supposed to make the loans, this classic and traditional management method was strengthened following the 2008 crisis. The Ble Committee introduced two new liquidity ratios: the Liquidity Coverage Ratio (Lcr), and the Net Stable Funding Ratio (Nsfr). The objective is to increase the propensity of banks to hedge against liquidity risk.

But some institutions show greater risk appetite by granting more credit than they collect resources. Is it risky? "Not necessarily as long as the dynamics of these imbalances are financeable, that they are controlled by flows," replies Olivier Santi, noting that like any household, you can live on credit as long as you manage to cover your commitments. In Senegal, with a rather low rate of banking and a fairly informal economy, bank financing needs are covered on average. But, according to Mr. Santi, while Senegalese banks can meet their commitments and most of their customers' demands, they do not seem overliquid. Is this a sign that there is not enough savings available or that there are too many credit applications? The question remains!

Covid-19: Banks that have become more cautious?

It is well known. In times of economic crisis, credit activity is in decline. Covid-19 has not escaped the rule. This is why governments and central banks around the world have taken accompanying measures (including massive injections of liquidity into the economic circuit), to enable the banking system to cope. However, who says economy, says credit, one of the essential levers for the development of investment, production, trade and consumption. Due to the application of preventive physical distancing measures, banks have had to adapt their internal operations and procedures (workforce reduction, rotation system, intensive use of teleworking, diversification of the offer of digital payment systems, etc.), while ensuring the continuity of the financial intermediation activity. "Despite the constraints weighing on them, banks have taken a number of initiatives to absorb the effects of the health crisis on customers, including the postponement of maturities on loans granted to private sector employees and companies impacted by Covid-19, for a period of three months renewable once, without fees, interest charges or late penalties," recalls Habib Ndao. These initiatives have been supported by exceptional measures taken by the State and the Bceao to reduce the systemic risk inherent in the accumulation of non-performing loans. The main objective is to strengthen the liquidity, solvency and resilience of the national banking system. Despite these measures, some economic actors criticize the banks for not doing enough. In other words, to let the credit application files sleep in the drawers. "The effects of the economic lockdown on credit activity would probably be more alarming if all these measures were not taken by the actors (State, banks, Sfd, Central Bank)," said Habib Ndao, the executive secretary of the Oqsf.

Credit Information Bureau (BIC): Mixed results

At the end of May 2020, the number of contracts enrolled in the database of the Credit Information Bureau (Bic), stood at 2,573,283 for a number of borrowers of 771,441. These figures do not take into account those of the major billers (telephone operators, water, electricity), whose number of subscriptions transmitted to the Bic amounts to 737,670. Notwithstanding these results deemed "encouraging" by the Executive Secretary of the Oqsf, the Bic whose objective, it must be recalled, is to reduce the asymmetry of information between lenders and borrowers remains facing some difficulties, in particular, the weak collection of customer consents as well as the insufficient number of loans declared and the consultation of credit reports by the institutions subject to tax. The results of a survey conducted by the Oqsf among customers confirm this observation since a significant proportion of the customers surveyed say they have not been the subject of a prior consent from their lending institution. Of the customers concerned, only a small proportion stated that they had to give the consent to the collection of personal data to the subject credit institution and the Bic. For this, "targeted and more reinforced mass awareness actions on the prior consent of the customer are highly expected," says Habib Ndao.

Dossier by Seydou KA