Cabo Verde’s banking system is resilient but not free of credit concerns

In 2022, Cabo Verde’s Central Bank (BCV) highlighted the persistent resilience of the country’s financial system.

However, it raised concerns over the significant levels of defaulting credit held by banking institutions.

This observation comes despite the country’s financial system maintaining its stability amidst global challenges like the Ukrainian conflict and a worldwide economic slowdown.

The BCV reported a favorable performance for the Financial Stability Index in 2022, partially due to the banking robustness index.

On the flip side, this was impacted negatively by financial vulnerability and external economic environment indicators.

While there has been a declining trend since 2017 in the proportion of defaulting credits concerning the total credit, the ratio in Cabo Verde is still higher compared to other small island economies.

The BCV cited examples like Mauritius and Seychelles where defaulting credit levels are lower.

The bank noted the high credit risk cost impacting financial intermediation’s solidity and profitability.

Cabo Verde’s banking sector showed a dependency on external sources, and there was a noticeable financial decline in the non-financial sector.

Moreover, the banking concentration in credit and deposit markets was discernibly high.

However, 2022 saw an increase in the digitization of banking services, new financial products, and growing awareness of climate change impacts.

Despite high inflation and low-interest rates, the national economic activity positively influenced Cabo Verde’s banking sector.

The BCV assured that banks had suitable capital levels to handle domestic and external uncertainties.

The BCV observed that the loan credit quality improved, and banks posted significantly positive net results.

Liquidity levels in the banking sector remained consistently high, driven mainly by client deposits. Such liquidity levels ensured potential loss absorption and compliance with regulatory requirements, ensuring financial stability.

In terms of insurance, while connections with the banking sector remain high, the stability risks are low.

The capital market saw a substantial valuation of listed financial companies’ stocks, coinciding with a decline in public bond emissions amidst rising tax revenues and reduced domestic financing by the government.

Lastly, given the growing cyber threat, the BCV advised banks to bolster the security and integrity of their information systems.