The regulatory overhaul, which is set to be rolled out this year, includes plans to improve operational efficiency and set up a new credit information system to help banks manage credit risk.
The measures are in line with a raft of reforms introduced by the Central Bank of Djibouti (Banque Centrale de Djibouti, BCD) in recent years aimed at strengthening the position of local lenders and increasing transparency.
The new changes, which will also be overseen by the BCD, aim to digitise the country’s payment system and provide the necessary framework to integrate its financial system with neighbouring countries.
Ahmed Osman, governor of the BCD, explained that the planned national payment system would link industry operators through a secure connection, replacing the costly and time-consuming current method of processing payments manually.
“Putting in place digital infrastructure and making it accessible will allow for everybody, including operators and entrepreneurs, to benefit from the launch of the payment system,” he told OBG earlier this year.
Djibouti is also looking to set up a centralised credit information system that will provide industry players with the tools to carry out accurate risk assessments and share key data for making lending decisions.
A unified credit control system is expected to play a central role in helping banks reduce the share of non-performing loans (NPLs) on their books. NPLs made up 22% of all commercial bank loans as of June, according to estimates from the IMF, one of the highest ratios in the region.
Creating an electronic credit registry should also dovetail with the growing use of mobile and digital technology in banking in the region, which banks in Djibouti could use to target the country’s increasingly urbanised population.
“I think technology and mobile banking platforms will drive the next phase of the sector’s expansion, and in a sense Djibouti will bypass that phase of physical banking expansion that other countries have experienced,” Ismail Guyo, CFO at East Africa Bank, told OBG earlier this year.
Islamic banking holds potential
The government is also hoping to tap into rising global interest in Islamic financial services, by clarifying the regulatory framework for what constitutes a sharia-compliant product. The authorities are currently working on establishing a National Sharia Council to oversee Islamic banking and ensure it meets the required standards.
Creation of the council marks a key step forward for Djibouti in its efforts to develop a sub-regional Islamic finance base. Four of Djibouti’s 10 banks are Islamic, with a combined value of DJF55.5bn ($312.2m) and roughly 15-20% market share.
“Since their introduction into the Djiboutian market in 2006, and following their adaptation process, Islamic banks have experienced rapid development of their market shares,” Osman told OBG earlier this year. “This success is strongly linked to the operating principles of Islamic finance based on sharia that are more in line with society’s values.”
Competition in the segment is set to increase in the coming years, with conventional banks also targeting Islamic finance as an avenue for further growth.
In 2011 the BCD authorised commercial banks to open Islamic banking windows. With a minimum capital requirement of DJF300m ($1.7m), these windows must be structured as separate subsidiaries.
Casting a wider net
Officials are also hoping that Islamic finance could play a part in bringing the sizeable number of unbanked citizens into the system.
Just 20% of the roughly 850,000 Djibouti nationals had bank accounts as of last year, according to the BCD, though this was up significantly from 5% in 2007.
Prior regulatory changes have been pivotal in spurring growth across the sector and boosting competition amongst lenders. Having increased its contribution to the economy over the past decade, the financial services sector now accounts for around 13% of GDP.
Total lending more than tripled between 2006 and 2014 to DJF116bn ($652.5m), according to figures from the BCD, while credit allocated to the private sector rose from 20% of GDP in 2005 to 29.5% last year. Deposits, meanwhile, more than doubled to DJF254bn ($1.4bn) in the decade to 2015.
SOURCE: Oxford Business Group