New banking regulations fuel growth in Morocco

In recent years Morocco’s banking sector has experienced a period of consolidation at home and expansion abroad following a surge in lending in the decade leading to 2012. The country’s leading banks are now among the largest in Africa, with extensive continent-wide holdings. Despite GDP growth trending lower and the associated slowdown in lending and spike in non-performing loans (NPLs), profitability and capitalisation have remained relatively stable, underpinned by important regulatory changes.

The authorities are working to increase financial inclusion by targeting small and medium-sized enterprises (SMEs), women, youth and rural residents, all of whom are traditionally under-represented in the financial system. Diversified offerings, including sharia-compliant participatory banking and financial technology (fintech) products such as e-wallets are important developments towards this end.

Structure

There are 24 banks operating in the country, five of which are majority state-owned, seven majority foreign-owned and five sharia-compliant participatory banks. These Islamic institutions were first granted banking licences in 2017. Three of the foreign-owned banks also operate participatory windows through which they offer sharia-compliant financial products. In addition to these core banks, the country also has six offshore banks, 13 micro-lenders, 13 payment operators and 30 credit institutions.

Despite the relatively large number of players, the sector is highly concentrated, with the three largest domestic banks – Attijariwafa Bank, Groupe Banque Centrale Populaire and BMCE Bank of Africa – having a combined asset share of 64.3% in 2018, only slightly below 65.9% in 2016. When the fourth- and fifth-largest banks – Société Générale Marocaine de Banques and Banque Marocaine pour le Commerce et l’Industrie, both French-owned – are taken into account, market concentration reaches nearly fourfifths, at 78.7% in 2018, down from 79.8% in 2016.

Continental Ambitions

With relatively stiff competition for lending opportunities in the domestic market, leading banks have expanded across the continent to increase profits. While investments in less mature markets offer the opportunity for higher margins and strong growth, the often-challenging and less transparent operating environments represent a higher degree of risk than domestic activities. Even so, the expansion has been largely successful. Moroccan banks operate throughout Africa through 42 subsidiaries and four branches across 27 countries, 10 of which are in West Africa, six in Central Africa, six in East Africa, three in the Maghreb and two in Southern Africa. Moroccan banks also have branches and subsidiaries in seven European countries, as well as China.

The authorities are working to increase oversight and mitigate risks to the banking system’s overall integrity brought on by this expansion. To that end, there has been an increase in the number of cooperation agreements with foreign banking regulators. By the end of 2018, the number of such agreements reached 13 covering 24 countries, following the conclusion that year of an agreement with Mauritania and an update to the agreement with Tunisia.

Oversight

Bank Al Maghrib (BAM), the country’s central bank, is the main regulatory and policymaker. BAM’s independence was granted by statute in 2006 and reconfirmed with the constitution of 2011. The authority leads government efforts to maintain financial stability and implements nationwide strategies.

In the wake of the 2008-09 global financial crisis and in light of Moroccan banks’ increased overseas activities, the authorities have moved to strengthen the regulatory framework. A banking law that came into effect in January 2015 represented a key step in aligning the sector with international standards. It aimed to create growth opportunities for banks, laying the foundations for both participatory banking and non-banking payment institutions. By facilitating innovation, the sector has been able to enhance financial inclusion by offering customers a greater variety of sharia-compliant products and accelerating the development of digital banking.

The 2015 law also strengthened BAM’s capacity to oversee financial conglomerates that effectively control credit providers, as well as improved the central bank’s capacity for cross-border supervision and risk management on a consolidated basis. This development was seen as critical to overseeing the system as it expands into African markets.

In its 2019 Article IV Consultation released in July, the IMF noted that “solid progress” had been made in upgrading the financial services-related policy framework through both the implementation of Basel III initiatives and joint IMF and World Bank recommendations. The majority of the regulations pertinent to the new banking legislation had been introduced, with the exception of crisis management and bank resolution frameworks, according to the IMF report.

Regulations

One of the most important regulatory changes was the January 2018 adoption of International Financial Reporting Standard 9 (IFRS 9). The standard upgrades banks’ loan classification and provisioning practices, which is particularly relevant given the high level of NPLs. In particular, the first-time application of expected credit losses on banks’ equity was significant, above 10% of end-2017 equity in the case of BMCE Bank of Africa, for example. However, there is a five-year transition period before this needs to be reflected in regulatory capital. In the medium term, this regulatory change means that the banks may need to raise capital by issuing shares or – more likely – conserve capital, either by constricting lending or distributing less as dividends.

More recently, in July 2019 a law was implemented that strengthened the role and independence of BAM. Under the new legislation BAM is not allowed to accept instructions from the government or a third party, while provisions were made to encourage cooperation in aligning monetary and financial policies. An audit committee was also established.

Monetary Policy

Against a backdrop of weakening economic growth, price inflation has remained at or below 2% since 2009, with the core inflation indicator closing 2019 at 1%. BAM has maintained its main policy interest rate at 2.25% since its last reduction of 0.25% in March 2016. Despite the low-rate environment, commercial banks’ lending has been largely subdued.

Morocco has a managed exchange rate regime, although in January 2018 BAM increased its flexibility by extending the daily band of fluctuation in dirham measured against a basket of currencies (60% euro and 40% US dollar) from plus or minus 0.3% to plus or minus 2.5%. BAM has not intervened in the currency market since March 2018, but even so, exchange rate fluctuations have been relatively limited. The real effective exchange rate rose an estimated 0.9% in 2019, up from -0.4% in 2018, but down from the 2.1% seen in 2017. In its July 2019 report, the IMF encouraged the country to move to further enhance flexibility, as it would help the economy weather potential external shocks and boost competitiveness. However, Moroccan authorities signalled that they would wait before introducing additional measures.

Lending & Deposits

Beginning in the early 1990s, Morocco experienced two decades of rapid credit expansion, with private sector credit provided by banks increasing from 13.7% of GDP in 1990 to a peak of 71.5% of GDP in 2012. The subsequent slowdown in economic activity and lending growth saw some retrenchment, falling to 62.1% of GDP by 2018. Although this remains higher than the MENA average of 55.2% in 2018, it lags behind the 68% seen in Tunisia that year, which gained a lead over Morocco in 2015. Domestic credit grew by 5.5% in 2019, with growth averaging 6.6% between 2002 and 2019.

With a collective deposit-to-loan ratio fluctuating around 100% in recent years, for the most part Moroccan banks are not heavily exposed to wholesale money markets for funding. CIH Bank – part of state-owned Caisse de Dépôt et de Gestion – is an exception, as longer-term borrowing better matches its mortgage and real estate lending asset portfolio.

Total deposits amounted to Dh710.3bn ($74bn) in August 2019, of which 78.5% consisted of demand deposits. Total deposits increased at an annual rate of 3.1%, lagging behind credit growth and therefore suggesting a tendency towards increased reliance on money markets as a source of funding.

NPL

While delinquent loans were already high – at around 5% – before 2013, a sluggish economy weighed on the health of borrowers finances. By July 2019 NPLs measured in at 7.7%. Even so, provisioning levels were a comfortable 70%. “Risks from large credit exposures persist despite strict regulatory limits,” the IMF wrote in its July 2019 Article IV Consultation for Morocco. “The continued expansion of Moroccan banks in Africa provides diversification and profit opportunities, but is also a potential channel of risk transmission.”

The international institution expects regulatory reforms such as IFRS 9 to ease NPLs moving forward. “The new legal frameworks for bankruptcy and collateral regime are welcome steps that will help reduce the relatively high NPL levels,” the IMF wrote. “The monitoring of consolidated financial statements and incentives to rely more on syndicated lending should contribute to lower concentrated credit exposures.”

Returns

Despite weakening economic activity and declining credit growth, profitability has been stable, if modest, in recent years. Return on assets fluctuated between 0.8% and 1.1% during 2015-18, settling at 0.9% at the end of 2018, according to the IMF. Return on equity fluctuated between 9.5% and 11.7% over the same period, falling to 9.5% at the end of 2018. Among the larger banks, the share of profits derived from foreign holdings surpassed the share of foreign holdings in total assets. For example, in the first half of 2018 international activities accounted for 24% and 31% of the assets of Attijariwafa Bank and BMCE, respectively, but accounted for 37% and 43% of net income, according to Fitch Ratings. This is largely the result of the higher profit margins in less-mature markets such as those in Africa.

Financial Inclusion

While more Moroccans are joining the formal banking sector, the rate of financial inclusion has slowed. In 2013 the number of new bank accounts rose by 8.9%, but fell to 6.4% in 2017 and then to 4.7% in 2018. By 2018, there were a total of 27m bank accounts. This was enough to see the share of the adult population with at least one bank account reach 60%, up from 56% in 2017. The improvement was largely due to the growing number of women opening accounts. Although the share of adult women with at least one account increased only from 37% in 2017 to 40% in 2018, the number of adult men with bank accounts remained stable, at 77%.

There are significant gaps in financial inclusion by age groups, with 83% of those aged 60 and over having at least one account in 2018, compared to 69% of those aged 25-59 and 24% of those aged 15-24. To address these gaps, BAM – in partnership with the Ministry of Economy and Finance – adopted the National Financial Inclusion Strategy in April 2019. The key pillars of the strategy are to accelerate the development of alternative finance models such as mobile payment, microfinance and inclusive insurance; encourage traditional banks to prioritise financial inclusion; develop tools to better understand the barriers to accessing finance for underserved people and businesses; promote the use of financial products; and put in place an appropriate governance structure.

In February 2019 the authorities and the World Bank agreed a $700m financing programme to support the strategy’s implementation and the transition to a digital economy. Seven inter-institutional, thematic working groups were launched in September 2019 to deliver various elements of the strategy. “The overarching objective of the National Financial Inclusion Strategy is to address the so-called exclusion zones, or segments of the population such as women, youth and rural residents, who are less likely to have access to formal financial products and services,” Hakima El Alami, director of surveillance of payments and financial inclusion at BAM, told OBG.

Participatory Banking

After legislation was passed permitting sharia-compliant banking in 2015, BAM authorised the first five participatory banks in early 2017, with an additional three French-owned banks allowed to open Islamic windows. The early years have seen modest growth. By mid-2019 loans from participatory banks and windows accounted for less than 1% of the total, with the authorities targeting a 5% market share by the mid-2020s (see analysis). However, by the end of 2018 – the first full year of operations for participatory banks – the segment’s balance sheet had reached Dh7.3bn ($760.5m), up from Dh2.6bn ($270.9m) in 2017.

Distribution Channels

The proportion of bank branches to the population has doubled since 2005, from one per 10,000 inhabitants to two in 2020. The financial and population centre of Casablanca dominates in terms of branch density, while rural areas are underserved. In 2018, 115 new bank branches – of which 56 were those of participatory banks, up from 44 in 2017 – were opened, bringing the network to 6503. At 1.8%, the network’s annual rate of expansion in 2018 was below the 3.6% and 3.8% seen in 2014 and 2015, respectively, but above the 1.7% in 2017.

The number of bank cards rose by 7.2% in 2018 to 15.1m, from 14.1m in 2017. This was more than double the 7.1m cards in circulation in 2010, with the number of cards growing by around 1m per year since 2009. Meanwhile, the number of ATMs expanded more rapidly than bank branches, increasing by 3.8% to 7289 in 2018. Similarly to bank branches, however, the pace of growth has slowed, from 14.2% in 2009.

Fintech

A combination of saturation and a transition towards digital banking has lessened the need to extend physical banking structure. Indeed, digital channels are becoming increasingly central to banks’ business models worldwide, reducing the need to establish extensive branch networks. While Morocco is still a largely cash economy, electronic, internet and mobile transactions have been gaining in popularity. “The digital transformation of Morocco’s banking sector is well under way,” Mamoun Tahri Joutei, head of the Economic Intelligence Centre at BMCE Bank, told OBG. “We are seeing banks consolidate their branch networks and only selectively opening new branches. Indeed, fintech is starting to take over: mobile payments are growing and new developments such as blockchain are on the horizon.”

One way to leverage fintech is through crowdfunding, with some 70 projects gaining Dh2.2m ($229.2m) in financing via crowdfunding during the 2010-14 period. However, its development has been hampered by the lack of regulation. To address this, in August 2019 the government council approved a draft crowdfunding legislation, and in December of that year the government announced that it would be implemented in the coming months. The law will cover financing in the form of a loan, donations and capital.

The creation of an effective regulatory framework will also help to support the development of local fintech companies and ensure that they remain in the country. “Morocco needs to strengthen its ecosystem to encourage local talent to stay in the country,” Rachid Bekkar, director-general of banking and financial software provider Adria Business and Technology, told OBG. “Skilled graduates are increasingly moving abroad, which is threatening the competitiveness of companies as well as the rest of the economy.”

Mobile Money

Mobile money is a fintech segment with significant potential to drive financial inclusion. Morocco introduced the M-Wallet mobile payment system in November 2018, jointly overseen by BAM and the National Agency for Telecommunications Regulation. The payment system aims to take advantage of the country’s high mobile phone penetration and robust telecommunications infrastructure in order to advance financial inclusion. This forms part of wider efforts to boost digitalisation.

“Morocco has already been successful with several digitalisation efforts, such as Customs, which are now completely paperless,” Youssef Largou, associate executive director of professional services and consulting firm PowerM, told OBG. “We can use these as examples for other public and private organisations looking to digitalise their operations.”

As of September 2019 there were 360,000 mobile wallets, with the value of mobile payments expected to hit Dh50bn ($5.2bn) per year by 2030. “The government has been pushing the digitalisation agenda by putting in place a regulatory framework and necessary infrastructure for mobile payments,” Taoufik Rabbaa, managing director of Citibank Morocco, told OBG.

Leasing

Leasing is an important segment of Morocco’s financial sector. There are seven main players active in leasing, all of which are subsidiaries of banks. Leasing is a particularly valuable financing mechanism for small businesses and sole traders who may not have the track record, collateral or other requirements to access traditional bank lending. “SMEs are at the core of the leasing business and represent about twothirds of all clients,” Mohamed Amimi, managing director of Maroc Leasing, told OBG. “These companies appreciate the availability of 100% financing without the need for a guarantee, and depend on the faster response and greater flexibility offered in leasing.”

In 2019 three leasing companies – Maroc Leasing, WafaBail and Maghrebail – held a combined market share of 70% in terms of new volume. Following a similar trend to the economy at large, the leasing segment expanded rapidly until the 2007-08 global financial crisis, after which it experienced more subdued levels of growth. “In order to boost the market, it is necessary to introduce operational leasing to give the customer more flexibility in terms of service management and risk,” Amimi told OBG.

Outlook

An expected uptick in economic activity from 2020 onwards should allow for a gradual acceleration in lending coupled with a reduction of NPLs. There is room for growth as initiatives to boost financial inclusion through fintech, mobile money and participatory banking continue to progress. Banks’ foreign holdings are expected to be profit drivers in the coming years as the local market reaches saturation levels seen in advanced economies.

However, to consolidate growth it will be necessary to provide more financing alternatives to SMEs. “SME financing is one of banking’s key challenges, and new businesses without strong financial guarantees often find it difficult to access credit,” Youssef Bencheqroun, managing director of non-profit Al Amana Microfinance, told OBG. “Micro-credit has the potential to bridge the gap between financial firms and start-ups.”