Monetary Policies and Banking Regulations in Cameroon free essay sample

Monetary policy is the program of action undertaken by monetary authorities to control and regulate the supply of money and the flow of credit to the public with a view to achieving pre-determined macroeconomic objectives. The objectives of monetary policy are the same as those of macroeconomic policy, which include: Maintain a high growth rate High rate of employment Stabilization of prices, output and employment Ensure equity in income distribution Balance of payments equilibrium Stability of foreign exchange Monetary instruments are generally classified under two categories: Quantitative measures, and Qualitative or selective credit controls Quantitative measures of monetary control are also called ‘traditional’ measures and are the following: Open market operations Discount rate or bank rate policy Cash reserve ratio Qualitative or selective credit controls include Credit rationing/special deposits Change in lending margins (effecting changes in required mortgage property-land, building, shares etc. ) Moral suasion Direct controls The transmission mechanism describes the channels through which changes in money supply impact the real variables of the economy. We will write a custom essay sample on Monetary Policies and Banking Regulations in Cameroon or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The stages and ways in which changes in the money supply affect the economy are subject to debate among economists (mostly the Keynesians and the monetarists). The Keynesian transmission mechanism According to Keynes, an increase in the supply of money leads to an increase in the cash balances that people hold. Economic agents use the excess cash balances to buy financial assets (bonds). An increase in the demand for bonds leads to an increase in the prices of bonds and a fall in the interest rate. The fall in interest rates leads to an increase in investment by firms. The lower cost of borrowing may equally encourage household consumption spending. The increased investment and consumption increase aggregate demand which in turn increases output with a multiplier effect. Thus according to Keynes, the monetary policy only affects AD indirectly through changes in the interest rate. The Monetarist transmission mechanism The monetarists believe that an increase in money supply has both a direct and indirect effects. To the monetarists an increase in money supply will mean that economic agents including both firms and households will hold excess cash balances which they will attempt to spend. Some of this spending will be on goods and services such as machinery, land, cars, healthcare, tourism, etc. This represents the direct effect on spending of the increase in money supply and is called the direct transmission mechanism. The increase in money supply will also tend to depress interest rates. This will stimulate investment and consumption further. This is the indirect effect on spending, and is also referred to as the indirect transmission mechanism. Banking regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. Bank Supervision * needed to reduce moral hazards * ensures that banks take only sensible risks * controls money supply Reserve Requirements * helps control the money supply This paper examines the monetary policy and banking regulations in Cameroon. Monetary policies, banking regulations and legislation in Cameroon have been designed to assure the stability of the Banking system and this involves a diverse range of policies, rules, and regulations. Introduction The diagram below gives an overview of the Banking System in Cameroon. Overview of the Banking Sector in Cameroon The Banking Sector in Cameroon is can be divided into two levels: The Supervisory/Regulatory Level and the Operational level. The main supervisory/regulatory institutions which operate in Cameroon are BEAC, MINFI, COBAC, NCC, APECCAM and ANEMCAM. They are in charge of setting and enforcing the monetary policies of the CEMAC region and the banking regulations in the country. The operational level is made up of depository and non-depository institutions. These carry out the banking functions in the country. Depository institutions include Commercial banks, Micro Financial Institutions (MFIs) and informal savings and loan systems known in the local parlance as â€Å"njangis’ and â€Å"tontines’. These take the place of banks for many tribal members, with repayment enforced by social pressure. While non-depository institutions include Special Funds like FEICOM, SNI, Credit Foncier etc. The Economic and Monetary Community of Central Africa (or CEMAC from its French acronym: Communaute Economique et Monetaire de lAfrique Centrale), is an organization of states of Central Africa established by Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon to promote economic integration among countries that share a common currency, the CFA franc. CEMAC promotes the entire process of sub-regional integration through the forming of a monetary union with the Central Africa CFA Franc as its common currency. CEMACs objectives are the promotion of trade, the institution of a genuine common market, greater solidarity among peoples and towards under-privileged countries and regions. In 1994, CEMAC introduced quota restrictions and reductions in the range and amount of tariffs. Currently, CEMAC countries share a common financial, regulatory, and legal structure, and maintain a common external tariff on imports from non-CEMAC countries. In theory, tariffs have been eliminated on trade within CEMAC, but full implementation of this has been delayed. Movement of capital within CEMAC is free. In 1989, these six Central African countries formed a monetary union with the Bank of Central African States (BEAC) as the regional central bank. These two bodies BEAC and CEMAC constitute part of the Franc zone. The franc zone is made up of African states whose monetary policy is being directed by France especially in the domain of exchange rate with respect to currencies of other countries, convertibility to other currencies, centralization of international exchange reserves and harmonization of regulations. The Bank of the States of Central Africa (BEAC) is an African international establishment governed by the convention instituting the Monetary union of Central Africa (UMAC), the Convention of Monetary Cooperation passed between France and six member States of this Union: Republic of Cameroon, Central African Republic, Republic of Congo, Republic of Gabon, Republic of Equatorial Guinea and Republic of Chad. Monetary Policy in Cameroon The bank of issue in the CEMAC region and Cameroon in particular is the Bank of the Central African States (Banque des Etats de lAfrique Central? BEAC), which replaced the Central Bank of the State of Equatorial Africa and Cameroon in November 1972. Its headquarters are in Yaounde. In 1993, member states of the BEAC created a supranational supervisory authority, Commission Bancaire de lAfrique Centrale (COBAC) in order to secure the regions banking system. The common currency CFA, is pegged to EURO at a parity rate of 1Euro=655FCFA. The primary objective of BEAC is to maintain the fixed exchange rate regime. The attainment of this objective is complicated by differences between the economies of CEMAC in particular in relation to their dependence on oil exports. Common monetary policy is further exacerbated by limited labour and capital mobility between countries as well as restrictions in the movement of citizens across borders. Without prejudice to this objective, it brings its support of the general economic policy worked out in the Union. The main mission of BEAC comprises: defining the monetary policy of the Union; Monetary policy could be defined as a Program of action undertaken by monetary authorities to control and regulate the supply of money and the flow of credit to the public with a view to achieving macroeconomic objectives such as: maintaining high growth rate maintaining high rate of employment ensure equity in income distribution Balance of payments equilibrium Stability of foreign exchange issuing banknotes and official exchange rate and with exempting power in the Monetary union; Establishing the politics of exchange rate of the Union; keep and manage the official reserves of exchange rate of Member states; promote the good functioning of the systems of payment and of regulations. The convention governing the Monetary Union of Central Africa and the Statutes of the BEAC give the powers of formulation and implementation of monetary policy in the Franc Zone. The Monetary Policy Committee is the BEAC Decision-making body on monetary policy and management of foreign exchange reserves. Its mission and duties as well as its composition and rules of operation are specified in the Statutes of the Bank and its Rules of Procedure. The main responsibilities of the Monetary Policy Committee are to: †¢ Define the strategy and objectives of monetary policy and policy management of foreign exchange reserves as well as the modalities of their implementation; †¢ Set the conditions of intervention of the Central Bank; †¢ Require credit institutions to hold minimum reserves; †¢ Clarify the terms of execution by the Central Bank: lending or borrowing money, and the conditions of purchase transactions and sale of gold and those supported by the Central Bank to the member states for the issuance and management of government securities †¢ Proceed, if necessary, to revise the proceedings of National Committees Monetary and Financial in monetary policy which contravene the statutory provisions and the general rules of procedure, operation and jurisdiction. To achieve the ultimate objective of monetary stability, the CPM uses indirect monetary policy instruments, including liquidity management in part of the money market and the imposition of reserve requirements Since the introduction of money market on 1 July 1994, BEAC uses indirect instruments for its operations. This mode of action based on safe bank liquidity control is exercised through political refinancing (action on the supply of base money), supplemented by the imposition of reserve requirements (action on the demand for base money). The exchange rate regime of the six countries of the Economic and Monetary Community of Central Africa based on four basic principles: a fixed parity between the CFA franc (franc Financial Cooperation in Central Africa) and the euro; convertibility of the CFA franc guaranteed by France; total freedom of transfers between countries of the Franc Zone; and the pooling of foreign exchange reserves. The conduct of monetary policy is principally carried out by varying the amount and rate at which commercial banks are allowed to borrow at the discount window (la Politique de Refinancement). If required, BEAC withdraws liquidity from the system by using negative bids( offering a high interest rate for the placement of excess reserve) whereby commercial banks are offered a certain rate for the placement of their free reserve at the central bank. In addition, the central bank also sets a floor for lending rates and ceiling for deposit rates above and below which interest rates are negotiated freely. Over the years, BEAC has carried out several monetary policies in the region. Worthy of note are the following: In September 2001, BEAC decided to impose minimum reserve requirements on commercial banks in the region in order to contain the rise in liquidity. The level of required reserve is calculated based on the level of deposits on the 10th, 20th, and the 30th of each month and the commercial bank is required to satisfy these requirements on these dates. As a consequence of the different economic conditions in the CEMAC zone, BEAC decided in July 2004 to introduce differentiated reserve requirements across countries with a higher reserve ratio such as Cameroon, The Republic of Congo and Equatorial Guinea rather than Chad, Gabon and Central African Republic. In May 2003, reserve requirements in the Central African Republic were temporarily suspended in response to the difficult economic situation the country was going through. Currently, commercial banks receive remuneration on their required reserves at a rate which is fixed at 0. 4%. Also, BEAC has currently fixed a ceiling of not more than 1. 5% remuneration interest rates for demand deposits to encourage economic agents to invest or use their savings for other activities. This is because commercial banks and other financial institutions in the CEMAC zone are experiencing excess liquidity. Excess liquidity weakens the monetary policy transmission mechanism and thus the ability of monetary authorities to influence demand conditions in the economy. Brief History of BEAC 29 June 1901: Creation of the Banque dAfrique Occidentale B. A. O authorized to issue the franc in the French Occidental Africa to continue the activities of the â€Å"Banque du Senegal† (21 December 1853) ; 1920: Extension of the issue privilege to French Equatorial Africa (Afrique Equatoriale Francaise-AEF) ; 02 December 1941: Creation of the â€Å"Caisse Centrale de la France Libre† (CCFL), in charge of monetary issuing in Central Africa; 24 July 1942: Ordinance authorising the CCFL to issue money from the 1st of August 1942; 02 February 1944: Creation of the â€Å"Caisse Centrale de la France dOutre-Mer† (CCFOM) replacing the CCFL ; 25 December 1945: Creation of the â€Å"Franc des colonies francaises dAfrique† (FCFA) at a parity rate of 1 franc CFA = 1. 70 FF (French Franc); 17December 1948: Change of parity rate of the FCFA to FF: 1 F CFA = 2FF ; 20 January 1955: Creation of the Issuing Institue (lInstitut dEmission) of the A. E. F. and of Cameroon; 26 December 1958: Change of parity rate of the FCFA to FF: 1 FCFA = 0,02 FF ; 14 April 1959: Creation of the Bank of the Equatorial African States and of Cameroon (Banque Centrale des Etats de lAfrique Equatoriale et du Cameroun B. C. E. A. C. ) ; 22 November 1972: Creation of the Bank of the Central African States (Creation de la Banque des Etats de lAfrique Centrale B. E. A. C. ) and of the Franc de la Cooperation Financiere en Afrique Centrale F CFA ; 02 April 1973: Start of activities of BEAC ; 01 January 1977: Transfer of the Seat of Central Services (Head Quarters) of BEAC from Paris to Yaounde; 01 April 1978 : Appointment of Africans as Governor and Vice Governor of BEAC; 01 January 1985: Equatorial Guinea joins BEAC ; 16 October 1990: Important reforms and formulation intervention laws of the central bank and the creation of the Banking Commission of Central Africa (Commission Bancaire de lAfrique Centrale – COBAC); 12 January 1994: New parity rate: 1 FCFA = 0,01 FF ; 01 January 1999: Pegging of the F CFA to the Euro at a parity rate of 1 Euro = 655,957 FCFA. Banking Regulations in Cameroon The following are the banking regulatory bodies in Cameroon. COBAC (The Banking Commission for Central African States) MINFI: The Ministry of Finance NCC: The National Credit Council APECCAM: The Banking and Credit/Finance Association COBAC COBAC is the main regulator of the banking and microfinance in the six states of CEMAC. It ensures the solvency, profitability and liquidity of credit institutions and microfinance. It is responsible for the stability of the banking system of CEMAC and ensures the protection of deposits of depositors. On the institutional level, the COBAC is a member of CEMAC and is backed by BEAC and enjoys institutional independence. The authoritative document on Banking regulations is the COBAC text dated 17/01/1992 harmonizing banking regulations in the six member states. This text describes banks and other financial institutions. It provides for the licensing procedure for such institutions, as well as the appointment of their key executives (GM/DGM) as well as provides the approval procedures for banks auditors. It then stipulates on the controls to be effected, the reporting procedure and sanctions to contravening institutions. The text further lays out certain prudential guidelines for their operations. On the required minimum paid-up capital/capital adequacy On risk sharing For provisioning/risk coverage, On liquidity ratios etc. MINFI The Ministry of Finance is the main organ in charge of the fiscal policy of the country. It has four main directorates. The General Directorate of the Treasury and the Financial and Monetary Cooperation ( DGTCFM ) of Cameroon is one of the four Directorates created by Decree No. 2005/119 of 15 April 2005 bearing on the Organization of the Ministry of Economy and Finance. This is the name that has been maintained with the decree of 30 November 2008 on the Organisation of the Ministry of Finance, which did not really make any changes regarding its missions. The DGTCFM performs the following tasks: Budget implementation and maintenance of accounting the State, Regional and Local Authorities and Public Institutions Administrative; Management of the public treasury; Management of public debt; Issuing and managing government securities free subscription; Regulation and Control of Banks, Microfinance Institutions and Insurance Companies; Control Authorities Receipts and other organizations benefiting from state subsidies. Through this directorate, the finance Ministry controls all Banking activities in Cameroon especially:. Terms and conditions for banking services. Receives applications for licensing and/or the appointment of General Managers for Banks and Financial Institutions, and passes same to COBAC for approval/rejection and the latter has up to six months to so decide. In conjunction with the National Credit Council and the Governor of the Central Bank, rules on the following: The minimum capital for banks and finance houses. On the conditions for opening up branch offices. On Anti-trust issues and collaboration amongst the institutions etc NCC The National Credit Council was created by Presidential Decree no 96/138 of 24 June 1996 bearing on its composition, organization and functioning. The council pays an advisory role on all legal and regulatory activities concerning financial institutions especially in Classification of the said establishments into different categories, their minimum capital requirement, their legal form and their authorized activities; Conditions for creating branches; The closing down of financial institution, Operational issues such as, publication of financial documents; competitive advantage conditions; organization of common professional services. At the discretion of the monetary authority, NCC could also serve in an advisory capacity on regulations and decisions taken by BEAC. NCC also advises on the financing of economic programmes, conditions for state subventions, national and external. APECCAM The Professional Association of Credit Institutions of Cameroon is an advisory body under the Ministry of Finance in accordance with Decree No. 74/137 of 18 February 1974. Every Commercial Banks is required to join this association. Its role is particularly inter alia to enforce its members’ recommendations; banking regulations; and promote best practices in banking. ANEMCAM The National Association of Microfinance Institutions of Cameroon is to MFIs what APECCAM is to commercial banks. Most especially ANEMCAM is concerned with enforcing ethical banking issues in MFIs. Monetary Controls The general monetary controls that banks respect (or ought to) are within the reporting / publishing and control functions of the regulatory authorities. In particular they have to report to the regulatory authorities on :- Monthly statement or cheques without cover to the N. C. C. A quarterly statement of all loans. Casual overdrafts short mid and long term loans, nonperforming loans, contingents etc. This enables the NCC to publish the Centrale des Risques . Details on deposit mix, per bank and by branch. The every ten (10) day report to BEAC on the external position ie. NOSTRO Account balances. This is to enable the authorities to monitor against excessive holdings abroad. Conclusion BEAC is the monetary policy maker of CEMAC in general and Cameroon in particular. BEAC, through the regulatory bodies makes a reforms in the sector, imposing policies and regulations to assure the stability of the Banking system This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. While COBAC, MINFI and NCC are concerned with banking regulations and operations, APECCAM and ANEMCAM deal with ethical baking issues in commercial banks and microfinance institutions respectively. Generally Bank Supervision is needed to reduce moral hazards, ensure that banks take only sensible risks, maintain reserve requirements to subsequently control money supply. Today, there is free movement of goods and services across the frontiers which indicate a borderless economy. This therefore calls for improvements on security measures as far as commerce is concerned. Investors will not appreciate investing in a State where their investments cannot be guaranteed. The Government of Cameroon, in particular, and the other CEMAC member states in a bid to assure the stability of the Banking system and in response to this pertinent global problem keeps modifying its Banking Regulations to guarantee foreign investment. The Banking Industry in Cameroon is governed by laws and regulations derived from International Conventions, Customs Laws, Ordinances, Presidential Decrees, Ministerial Orders, Circulars and Court Decisions. These regulatory instruments are flexible in character, meaning they can be a subject of modification based on some socio-cultural, political and economic development within Cameroon.