Critical review of literature on formal and informal finance in Senegal

Senegal shows the lowest GDP growth rates of all francophone countries in Africa since independence -- about 2.3% per year for a population growth rate of almost 3%. As a consequence, both rural and urban per capita incomes are presently lower in real terms than in 1960. On the one hand, an over-dependence on agriculture, particularly groundnut production for export, makes the Senegalese economy vulnerable to fluctuations in climate and in the world market; the droughts of 1980, 1981 and 1984, and the downward trends in prices in the international edible oil markets seriously affected Senegalese export revenues and overall economic growth. On the other hand, the burden of inefficient public structures, notably the "Organisation Nationale de Cooperation et d"Assistance pour le Developpement" (ONCAD), and a lack of fiscal discipline contributed to the poor performance of the Senegalese economy in the first half of the 1980"s. Hence, after once holding a predominant position among the former French colonies in West Africa, Senegal now lags far behind Cameroon and Cote d"Ivoire in overall economic status. Current projections indicate only modest growth in per capita GDP at best, and most likely a continuing fall in income if reforms are not implemented and external financing does not meet expectations. The Senegalese formal financial system, in the midst of a liquidity and stability crisis, appears unable to perform the functions of domestic savings mobilization and funds allocation. The delinquent portfolio of the banking system approaches one- half of total loans outstanding and almost 30% of total assets, while illiquidity is becoming a widespread disease in the banking system. Growing concern within the Government of Senegal (GOS) and the donor community has resulted in a banking sector reform program already being implemented with French, USAID and World Bank assistance. Although the banking sector policy reform program appears to be comprehensive, and addresses the key issues of the current banking sector crisis, its effects on the overall (formal and informal) financial system have not been ascertained in the literature associated with the reform. This report seeks to provide USAID with some insights into the impact which policy- induced changes in the banking system are likely to have on the overall financial system of Senegal. The report critically reviews the literature on formal and informal finance in Senegal, emphasizing the materials dealing with the less-known informal financial sector. The next chapter reviews the status of the formal financial system, emphasizing discussion of the major constraints faced by the banking system, and particular features of formal agricultural finance. The literature on informal finance is reviewed in Chapter III, devoting special attention to the mid-to-late 1980"s. The final chapter outlines a number of conclusions and recommendations. (Author abstract)