While North Africa is not normally known for acuteness in financial management, lately Morocco’s banks have been earning competitive ratings, as well as partnerships with some of the world’s most powerful financial institutions. With low inflation, booming real estate and tourism, and its first-ever budget surplus, the strengthening economy is improving the national outlook as the financial sector now looks hungrily to Africa and Europe.
The opening of the Moroccan economy and increased international investment in the country cannot proceed without the support of sound financial institutions. With globalization increasing financial risks in emerging markets and record-high prices for oil and foodstuffs fueling social unrest, the financial sector has its work cut out for it. But is the banking sector up for the challenge?
In 1983, Morocco began liberalizing its banking practices, with support from the International Monetary Fund (IMF). Since then, reforms have focused on increasing openness to foreign competition and improving the system of intermediation by the central bank. Successive waves of reform in the early and mid-90s reformed the intermediation system by making the dirham fully convertible, de-partitioning capital markets, and creating a coherent legislative and regulatory framework to oversee credit institutions. To tap into the vast economic potential of international trade, reforms also removed barriers to foreign investment, income transfer, foreign technical assistance and tourism.
Liberalization reforms have largely succeeded in opening the economy, with Morocco recently signing free trade agreements with America, Turkey, Egypt, and Jordan. It will become a free trade partner with the European Union in 2012. At this crucial juncture, the banking sector’s principal challenge is to accompany the opening of the Moroccan economy, according to Assem El Adaoui, Deputy Manager of the Research and International Relations Department at the central bank, Bank Al-Maghrib. “In order to accompany this opening, it must develop its regional and international dimensions,” he said, and in recent years, the banking sector was doing just that.
Modernization through liberalization
European banks like Santander, Société Générale, and BNP Paribas have entered the country, injecting the sector with a healthy dose of competition. These banks have modernized the financial sector by taking advantage of liberalization measures to become partial owners of or partners with local commercial banks. In turn, local banks are subject to increased competition and corporate takeovers, creating larger institutions with more regional influence and higher capital assets. Although there are currently 14 commercial banks in Morocco, experts predict that consolidation over the next few years will reduce this number to between four and ten.
Three large banks currently control around three quarters of Moroccan banking assets and deposits. Attijarwafa Bank is a partner of Spanish Bank Santander, the second largest shareholder with 14.57%. Created by a merger in 2004, it is now the leading financial group according to total assets. The second-largest, BMCI (Banque Marocaine pour le Commerce et l’Industrie), is a subsidiary of BNP Paribas, one of the most important European banks which owns a 64.67% share. Banque Centrale Populaire, rounding out the trio, was wholly owned by the government until 2002 and now has only Moroccan shareholders. The entry of these global financial powerhouses may raise the standards, but BCP is holding its own against the tough competition.
These three banks are spearheading the internationalization of the Moroccan banking system, as well as looking to expand their operating potential through national and regional mergers and acquisitions. In 2005, Attijariwafa Bank Group acquired a majority share in Tunisia’s Banque du Sud, opening branches in Senegal the following year. In April 2008, the Moroccan group concluded its acquisition of 79.15% of the capital of the Compagnie Bancaire de l’Afrique Occidentale (CBAO), acting on its promise to promote development in West Africa. Its expansion plan also specifically targets MREs (Moroccans Living Abroad), aiming to become their leading bank by 2010. BMCI acquired ABN Amro Bank Group’s Moroccan subsidiary in 2001, buying a 99.4% stake. Banque Centrale Populaire signed an agreement in 2007 to acquire a 43.53% stake in insurance company La Marocaine Vie from the Société Générale group. All three banks European branches and will face heated competition for MREs.
Commercial banks face the immediate challenge of complying with international standards, as Basel II was instituted in June of 2007, and International Financial Reporting Standards (IFRs) in January of 2008. “The banks are preoccupied right now by this work and are arranging for the technical and human resources to confront these challenges. The implementation of Basel II means a new vision of management, internal organization, and long-term stability,” said Ahmed Lahrache, Deputy Director of Banking Supervision.
As liberalization and internationalization measures stimulate the banking sector, increasing deregulation will need to be balanced with effective risk-management. Bank Al-Maghrib, the central bank, is wary of the risks of globalization, in particular with regard to the liberalization of capital accounts. Capital account liberalization, which eases limitations on various capital flows (mainly FDI, portfolio flows, and bank borrowing) across a country’s borders, has been known to prove disastrous when implemented in conjunction with a fixed exchange rate, most notably resulting in the Asian bank crisis.
The Asian lesson
“The crisis has shown the utmost importance of supervision of the banking and financial sector to ensure its soundness and stability in the face of the problem created by the sudden decline in banking system cash liquidity,” asserted former Finance Minister Fathallah Oulalalou at a World Bank seminar on globalization. “The unexpected decline in capital flow to the Asian crisis countries, and the accompanying sharp drop in exchange rates and sharp rise in interest rates, revealed the weakness and fragility of many banking systems there and the lack of adequate supervision of such systems.”
Financial analysts attribute the Asian crisis to the fixed exchange rate, as the affected countries had pegged their currencies to the US dollar. “When they were opened, the capital accounts were completely opened and they had a crisis because of this. So now we are very conscious of this and we are preparing to avoid this kind of risk. In parallel, as we increase openness, we move towards more floating and flexibility,” said Mr. El Adaoui of the Bank Al-Maghrib. Affiliations with European banks translates into the best risk-assessment evaluations at the international level, safeguarding the Moroccan banking system.
In addition to skillfully managing risks, the Moroccan banking industry faces the challenge of more effectively extending credit to consumers overburdened with high income taxes and job insecurity. A survey of young professionals in Casablanca found a pronounced reluctance to borrow from banks, with high interest rates and job insecurity cited as the principal reasons. Many Moroccans are more likely to ask a family member for a short-term interest-free loan than to contract with a bank.
Extremely high taxes reduce rates of return and incentives for saving and investing, particularly making potential borrowers wary of risk taking and entrepreneurship. “The country and the banking sector need to improve access of domestic investors to foreign capital and financial markets in order to increase returns and lower risks. This will increase competitive pressures on domestic banks,” stated John Tatom, Director of Research at the Networks Financial Institute at Indiana State University and an expert in Moroccan banking. He suggests strong capital inflows from abroad, especially from the GCC, create the ideal context for deregulating capital accounts, allowing Moroccans increased access to foreign investment and joint venture partners.
Some banks are channeling their new wealth into economic development for poor and rural communities. In April BMCI signed a partnership agreement with the powerful Confédération Générale des Entreprises du Maroc (CGEM) to promote corporate social responsibility. The bank will offer special services to enterprises that earn CGEM’s seal of approval, certifying that they conform to “the fundamental principles of the constitution and to international conventions and recommendations relating to the fundamental rights of the individual, protection of the environment, healthy government, and loyal competition.”
Other banks are active players in the flourishing microcredit industry. Banque Populaire’s Foundation for Microcredit is rated 12th in Forbes’ 2007 listing of the top 50 microfinance institutions. In May 2008, Banque Marocaine du Commerce Extérieur (BMCE) loaned $12.5 million to Moroccan microfinance institution FONDEP, whose mission is to extend microcredit to the poor, particularly women and youth.
The banking sector will be an able support for the development challenges Morocco faces in the coming years. Opponents of public spending, who promote liberalization and openness at all costs, fail to recognize the contradictions in Moroccan society, where extreme wealth and extreme poverty do not balance easily. Regarding this, the banking sector has chosen to proceed with cautious and heightened risk management, while emphasizing openness to the international markets and welcoming international standards for banking practices.
