Capital Market and Portfolio Investment
The Congolese financial system continues to improve with new regulations and guidelines seeking to maintain stability and consolidate the system. Although reforms have been initiated, the Congolese financial system remains small, heavily dollarized, characterized by fragile balance sheets, and cumbersome to use. The GDRC backed away from its short-lived (2013-2016) de-dollarization program, and further reforms are needed to strengthen the financial system, support the expansion of the financial sector, and spur economic growth. Shock resilience is undermined by inadequate risk-based controls, weak enforcement of regulations, low profitability, and excessive reliance on demand deposits. The system is also characterized by a significant concentration of credit and exposure to systemic failure in the event of the insolvency of a large borrower.
Financial inclusion is increasing, but substantial progress is needed to develop payment systems, facilitate the use of financial services, and strengthen regulation of the non-banking sector. Consolidation and strengthening of microfinance along with reform of the pension sub-sector and continued privatization of the insurance sector could facilitate the expansion of financial services and attract long-term investors.
The DRC’s capital market remains underdeveloped and consists mainly of the issuance of treasury bonds. There are no stock exchanges operating in the country, although a small number of private equity firms are actively investing in the mining industry.
The institutional investor base is not well developed, with only an insurance company and a state pension fund as participants. The Central Bank of Congo (BCC), developed a market for short-term bonds, but most of these bonds are bought and held by local Congolese banks. In the absence of private debt securities, the fixed-rate market is limited to government-issued treasury bonds with maturities of up to 28 days traded through commercial banks.
Access to the primary market is limited to commercial banks holding securities accounts at the BCC, and all investors, including institutional and individual investors, must submit bids through banks. Commercial banks, which dominate the investor base, may trade in treasury bills in the secondary market, but in order to do so, bids and prices for which they agree to trade must be transparent and publicized. There is no market for derivatives in the country.
The DRC suffers from a weak and fragile financial infrastructure. National payment systems are not governed by central legislation, although the DRC’s National Payments and Settlement Committee is in the process of proposing legal reform through a draft bill that was proposed in 2016, has been adopted by the DRC Senate, and, as of the date of this report, is before the National Assembly for a second reading.
The Central Bank worked for a decade to implement reform on the national payment system via a gradual and interactive approach that identified and corrected deficiencies at each stage. This culminated with the Central Bank inaugurating in September 2017 an automated system that supports customer transfers, regulation of monetary policy operations, and the processing of transactions for the regional payment system-REPSS, set up by COMESA member countries. The system also includes an interbank automated clearing module for check payments, collections, and bills of exchange.
Borrowing options for small and medium enterprises (SME) are limited. Maturities for loans are usually limited to 3-6 months, and interest rates typically hover around 16-21 percent. Several companies complain that the inconsistency of the legal system, the often-cumbersome business climate, and the difficulty in obtaining inter-bank financing discourages banks from providing long-term loans. There are limited possibilities to finance major projects in the domestic currency, the Congolese franc (CDF). The Central Bank sets minimum capital requirements for local banks in CDF or its equivalent in USD. Prior to 2016, the average was roughly USD 12 million per bank, but the economic downturn prompted the Central Bank to mandate an increase to USD 30 million by January 2019. Foreign currency deposits account for almost 90 percent of bank holdings.
As for the insurance sector, the DRC Insurance Authority, ARCA, began implementing privatization of the sector in 2018, granting licenses to four private insurance companies. These approvals came four years after passage of the 2015 Insurance Reform Law, and three years after the decree establishing ARCA as the regulator of the insurance sector. Once the state owned insurance company SONAS is fully privatized, the DRC insurance sector should operate under competitive market conditions. While analysts estimate that the DRC insurance market could be worth roughly USD 5 billion in ten years’ time, the current Congolese insurance market comprises roughly USD 80 million worth of insurance premiums for a penetration rate of only 0.5 percent.
Portfolio investment is absent in the DRC. Cross-shareholding and stable shareholding arrangements are also not common. There are occasional complaints about unfair privileges extended to certain investors in profitable sectors such as mining and telecommunications.
Money and Banking system
The Congolese financial system is growing but it remains fragile and operates primarily through the Central Bank. The financial sector is comprised of 17 licensed banks, a national insurance company (SONAS), the National Social Security Institute (INSS), one development bank, SOFIDE (Société Financière de Development), a savings fund (CADECO), 102 microfinance institutions and cooperatives, 95 money transfer institutions which are concentrated in Kinshasa, Kongo Central, North and South Kivu and the former Katanga provinces, three electronic money institutions, and 23 foreign exchange offices. There is no secondary equity or debt market.
The Congolese Central Bank developed a charter of compliance with international financial rules that has been accepted by virtually all banks operating in DRC. The stricter regulatory regime put in place after the global financial crisis increased bank compliance costs, however, and the resultant “de-risking” saw the bank lose two of its three remaining correspondent banks. It currently works with one correspondent bank, Citigroup. All foreign banks accredited by the Congolese Central Bank are considered Congolese banks with foreign capital and fall under provisions and regulations covering the credit institutions’ activities in the DRC.
The financial system is mostly banking-based with aggregate holdings estimated at USD 5.1 billion, about 95 percent of the overall holdings of the financial system. Bank deposits account for about 90 percent of total deposits, with the balance held by microfinance institutions. Among the five largest banks, four are local and one is controlled by foreign holdings. The five largest banks hold almost 65 percent of bank deposits and more than 60 percent of total bank assets.
Bank financing is dominated by the collection of deposits, nearly 90 percent of which are denominated in U.S. dollars and held in demand accounts. Bank operations are highly dollarized and financed largely by demand deposits. Nearly 95 percent of loans are in dollars, and clients are mainly companies seeking working capital primarily for daily operations and import/export activities. National and local government entities have significant balances in some banks (deposits in dollars used for investments) and also borrow funds from a few banks to finance administrative expenses. Statistics on non-performing loans do not seem reliable. According to the Central Bank’s regulatory framework, many banks only record the balance due rather than the total amount of the non-performing loan.
Transactions involving correspondence with associated foreign banks represent a significant part of the activities of DRC banks. Correspondent accounts represent more than 30 percent of bank assets and more than 95 percent of interbank market activity. They allow banks to settle transactions denominated in dollars, reflecting efforts to limit risks. The profitability of the banks is fragile and has deteriorated over the last year, reflecting high operating costs and exchange rates. Fees charged by banks are a major source of their revenues.
The banking system faces challenges in terms of net income and profitability. In 2018, the banking system recorded a steady increase in net banking income and confirmed a strengthening and enrichment of banks. Yet, the banking sector struggled to offset the increase in its cost/income ratio and the deterioration in the quality of its loan portfolio.
The DRC has roughly USD 4.6 billion of deposits in the banking system, up from USD 3.7 billion in 2017. The 2018 Mining Code increased the percentage of export revenue that mining companies are required to repatriate from 40 percent to 60 percent. This likely accounts for a good proportion of the increase in deposits, and will contribute to a further increase in 2019. An estimated USD 10 billion of savings exist outside of banks informally. Most deposits in the formal system are U.S. dollar-denominated. A slight increase in bank penetration occurred after 2011 as the GDRC switched public employee payments from cash to bank transfers.
Bank penetration is roughly 6 percent or about 3.9 million accounts, which places the country among the most under-banked nations in the world. Based on its strategic plan, the Central Bank seeks to increase the number of bank accounts to more than 20 million by 2030. Banks are increasingly offering savings accounts that pay approximately 3 percent interest, but few Congolese hold savings in banks.
The overall balance sheet of the banks amounted to roughly USD 6.9 billion in 2018. Credit volume is estimated at roughly USD 2.8 billion in comparison to USD 1.9 billion in 2017. Credit remains scarce, short-term, and highly concentrated. Domestic credit granted by banks increased from USD 1.9 billion in 2017 to USD 2.8 billion in 2018. In 2018, the largest depositors in the banking system are private enterprises and households with 48 and 40 percent of deposits, respectively. Public enterprises and central administration deposits comprise six percent and four percent, respectively.
Foreign Exchange and Remittance
As part of broad economic reforms begun in 2001, the DRC adopted a free-floating exchange rate policy and lifted various restrictions on business transactions, including in the mining sector. The international transfer of funds takes place freely when channeled through local commercial banks. On average, bank declaration requirements and payments for international transfers take less than one week to complete.
The Central Bank is responsible for regulating foreign exchange and trade. The only currency restriction imposed on travelers is a USD 10,000 limit on the amount an individual can carry when entering or leaving the DRC. The GDRC requires that the Central Bank license exporters and importers. The DRC’s informal foreign exchange market is large and unregulated and has tended to offer exchange rates not widely dissimilar from the official rate. In practice, the nation’s economy remains highly dollarized.
On September 25, 2014, the Central Bank put into place new foreign exchange regulations. These regulations declared the Congolese franc (CDF) as the main currency in all transactions within the DRC. Payment of fees related to education, medical care, water and electricity consumption, residential rents, and national taxes were mandated to be paid in CDF. In the last several years, this requirement has been relaxed and where the parties involved and the appropriate monetary officials agree, exceptions may, and routinely are, made.
Any payments exceeding USD 10,000 must be executed within the banking system, unless there is no presence of banking entities. The largest, albeit rarely used, banknote in circulation is the CDF 20,000 note (approximately USD 12.36). Far more common are the CDF 500 and CDF 1,000 notes worth approximately USD 0.30 and USD 0.61 respectively. U.S. banknotes printed after 2008 are readily accepted in virtually all transactions, with the exception of one-dollar bills. Banks provide accounts denominated in either currency. In September 2013, the GDRC embarked on a process of “de-dollarizing” the economy by requiring that tax records be kept in CDF and tax payments from mining companies be paid in CDF. In March 2016, however, as a result of a dollar shortage, the GDRC began requiring mining and oil companies to pay their customs fees and taxes in U.S. dollars.
The economic forecast calls for continuing inflation and currency depreciation over the long term, but the currency has remained stable since August 2017. The annualized inflation rate, which was stable at an average 1.4 percent from 2013 through 2015, increased to 54 percent in 2017 and decreased to 7.2 percent in 2018. As of April 2018, foreign exchange reserves totaled USD 1 billion or 4.2 weeks of import cover in comparison to the 2017 level of USD 859 million 2.9 weeks of cover. If government revenues from the extractive sectors continue to increase, the Central Bank will again have the option to support the CDF and maintain currency stability.
Although there is no legal restriction on converting or transferring funds related to investment, new exchange regulations will increase the time for in-country foreigners to repatriate export and re-export income from 30 to 60 days. Foreign investors may remit through parallel markets when they are legally established and recognized by the Central Bank.
Sovereign Wealth Funds
The DRC has no reported Sovereign Wealth Funds, though the 2018 Mining Code discusses a Future Fund that is to be capitalized by a percentage of mining revenues.