Financial difficulties have affected numerous local banks in Cameroon, many of which have been closed by the regulatory authorities or have been restructured under their supervision. On
Cameroonian banks such as BICIC Meridian BIAO Cameroon Bank were closed
Many more local banks were in trouble and subject to some form of
“withholding action”. Failed local banks accounted for up to 23 percent of the business total.
bank assets in Cameroon.
The cost of these bank failures is very difficult to estimate: much of the data is not in
the public domain, while the eventual cost to depositors and / or taxpayers of most of the
The bank failures that occurred between the period 1988 to 2004 will depend on the amount of assets of the bankrupt banks that are finally recovered by the liquidators. The costs will almost certainly be substantial.
Most of these bank failures were caused by unprofitable loans. Areas that affect the most
half of the loan portfolio were typical of failing banks. Many of the bad debts were
attributable to moral hazard: adverse incentives for bank owners to adopt
Lending strategies, particularly internal loans and high-interest loans to borrowers.
in the riskiest segments of the credit markets.
Internal loans
The largest contributor to bad loans from many of the failing local banks was
insider loans. In at least half of the bank failures mentioned above, domestic loans
for a substantial proportion of bad debts. Most of the major local bank failures in Cameroon,
such as Bank of Cameroon, BIAO Bank and BICIC Bank, involved a lot of inside information
loans, often to politicians. Domestic loans accounted for 65 percent of total loans from
these local banks, virtually all of which were unrecoverable.
Almost half of the loan portfolio of one of the local banks, the local banks had been extended to its directors and employees. Real estate development violated large loan exposure limits and spread to projects that could not generate short-term returns (such as hotels and shopping centers), with the result that the maturities of bank assets and liabilities were recklessly disqualified.
The high incidence of domestic lending among failing banks suggests that morale problems
The dangers were especially acute on these banks. Several factors contributed to this.
First, politicians participated as shareholders and directors of some of the local banks.
Political connections were used to obtain deposits from the public sector: many of the failed banks,
it relied heavily on wholesale deposits from a small number of companies.
Due to political pressure, the small banks that made these deposits are unlikely to have
made a purely commercial judgment as to the safety of your deposits. In addition, the
the availability of micro-deposits reduced the need to mobilize funds from the public. Because
These banks faced little pressure from depositors to establish a reputation for safety.
Political connections also facilitated access to banking licenses and were used in some cases to
pressure banking regulators not to take action against banks when banking laws are violated
were discovered. All of these factors reduced the limitations on reckless bank management.
Furthermore, the banks’ dependence on political connections meant that they were exposed to
pressure to lend to politicians themselves in exchange for help to obtain
deposits, licenses, etc. Several of the largest domestic loans granted by failed banks in Cameroon
they went to prominent politicians.
Second, most failed banks were not capitalized, in part because the minimum
the capital requirements in force at the time of its incorporation were very low. The owners had little
your own funds at risk if your bank fails, creating a large asymmetry in the
Potential risks and rewards of internal loans. Bank owners could invest bank deposits.
on their own high-risk projects, knowing that they would reap huge benefits if their projects
were successful, but would lose little of their own money if they were not profitable
The third factor that contributed to domestic lending was the excessive concentration of
property. In many of the failed banks, the majority of the shares were held by a man or
family, while managers lacked sufficient independence from owners’ interference in
operational decisions. A more diversified ownership structure and a
The administration might have been expected to impose tighter restrictions on domestic lending,
because at least some of the directors would have lost more than they gained from
privileged loans, while the managers would not have wanted to risk their reputations and careers.
The high cost of funds meant that local banks had to generate high profits from
your assets; for example, charging high interest rates for loans, with consequences for the quality of
their loan portfolios. Local banks almost inevitably suffered from adverse selection of
its borrowers, many of whom had been turned away by foreign banks (or would have been
if they had applied for a loan) because they did not meet the strict solvency criteria
demanded of them. Because they had to charge higher interest rates to offset the
higher costs of funds, it was very difficult for local banks to compete with foreign ones
banks for “prime” borrowers (ie, the most creditworthy borrowers). As a result, the
Credit markets were segmented, with many of the local banks operating in riskier markets.
segment, catering to borrowers willing to pay high interest rates because they could not access
alternative sources of credit. High-risk borrowers included other banks that were
lack of liquidity and is willing to pay higher than market interest rates for interbank deposits and
loans. We all experienced in Douala and Yaoundé how some of the local banks were heavily exposed to financial houses that collapsed in great numbers in the 1990s.
Consequently, the banking crisis had domino effects due to the extent to which
local banks slow each other down.
Within the credit market segments served by local banks, there were probably
good quality (i.e. creditworthy) borrowers, as well as poor quality risks. Purpose of serving
Borrowers in this section of the market require strong loan evaluation and monitoring.
systems, especially since information imperfections are serious: the quality of borrowers
financial accounts are often poor, many borrowers lack a history of successful business,
etc. The problem for many of the failed banks was that they did not have the
experience in selecting and monitoring its borrowers and thereby distinguishing between good and
bad risks. Also, credit procedures, such as loan and loan documentation
internal values and controls were often very weak. Managers and directors of these
banks often lacked the necessary knowledge and experience.
Recruiting good staff was often difficult for local banks because established banks
it could generally offer the most talented bank officers better career prospects. In addition, the
Rapid growth in the number of banks outstripped the supply of
Experienced and qualified bank officials.
Macroeconomic instability contributed to some extent to these failures;
The poor credit quality problems faced by local banks were compounded by
macroeconomic instability. In Cameroon there were periods of high and very volatile inflation, just before the devaluation of the FCFA. With interest rates liberalized, nominal lending rates were also high, with real rates fluctuating between positive and negative levels, often unpredictably, due to the volatility of inflation.
The macroeconomic instability would have had two important consequences for the loan
quality of local banks. First, high inflation increases the volatility of business earnings
due to its unpredictability, and because it usually involves a high degree of variability in
the rates of increase in the prices of the particular goods and services that make up the
global price index. The probability that companies will make losses increases, as does the probability
that they will obtain extraordinary benefits.
The second consequence of high inflation is that it makes it difficult to appraise loans for
the bank, because the viability of potential borrowers depends on unpredictable
Evolution of the general inflation rate, its individual components, exchange rates and
Interest rates. Furthermore, asset prices are also likely to be very volatile under such
terms. Therefore, the future real value of the credit guarantee is also highly uncertain.
In conclusion, we should not be scared when we see that microfinance houses multiply in the economic capital of Cameroon, Douala and Yaoundé today, all, very involved in the banking sector, it is simply as a result of these huge bank failures registered in the past years.