Reasons Why Local Banks in Cameroon Failed Within the 1980-1990 Peroid

Financial distress has afflicted numerous local banks IN Cameroon, many of which have been closed down by the regulatory authorities or have been restructured under their supervision. In
Cameroon banks such as the B.I.C.I.C. Meridian B.I.A.O. Cameroon Bank were closed
Many more local banks were distressed and subject to some form of
"holding action". Failed local banks accounted for as much as 23 per cent of total commercial
bank assets in Cameroon.
The cost of these bank failures is very difficult to estimate: much of the data is not in
the public domain, while the eventual cost to depositors and/or taxpayers of most of the
bank failures which occurred between the 1988 to 2004 period will depend upon how much of the failed banks' assets are eventually recovered by the liquidators. The costs are almost certain to be substantial.
Most of these bank failures were caused by unprofitable loans. Areas affecting more
than half the loan portfolio were typical of the failed banks. Many of the bad debts were
attributable to moral hazard: the adverse incentives on bank owners to adopt imprudent
lending strategies, in particular insider lending and lending at high interest rates to borrowers
in the most risky segments of the credit markets.
Insider lending
The single biggest contributor to the bad loans of many of the failed local banks was
insider lending. In at least half of the bank failures referred to above, insider loans accounted
for a substantial proportion of the bad debts. Most of the larger local bank failures in Cameroon,
such as the Cameroon Bank, B.I.A.O. Bank and B.I.C.I.C. Bank, involved extensive insider
lending, often to politicians. Insider loans accounted for 65 per cent of the total loans of
these local banks, virtually all of which was unrecoverable.
Almost half of the loan portfolio of one of the local banks local banks had been extended to its directors and employees .The threat posed by insider lending to the soundness of the banks was exacerbated because many of the insider loans were invested in speculative projects such as real estate development, breached large-loan exposure limits, and were extended to projects which could not generate short-term returns (such as hotels and shopping centres), with the result that the maturities of the bank assets and liabilities were imprudently mismatched.
The high incidence of insider lending among failed banks suggests that problems of moral
hazard were especially acute in these banks. Several factors contributed to this.
First, politicians were involved as shareholders and directors of some of the local banks.
Political connections were used to obtain public-sector deposits: many of the failed banks,
relied heavily on wholesale deposits from a small number of firms.
Because of political pressure, the small banks which made these deposits are unlikely to have
made a purely commercial judgement as to the safety of their deposits. Moreover, the
availability of micro deposits reduced the need to mobilize funds from the public. Hence
these banks faced little pressure from depositors to establish a reputation for safety.
Political connections also facilitated access to bank licences and were used in some cases to
pressure bank regulators not to take action against banks when violations of the banking laws
were discovered. All these factors reduced the constraints on imprudent bank management.
In addition, the banks' reliance on political connections meant that they were exposed to
pressure to lend to the politicians themselves in return for the assistance given in obtaining
deposits, licences, etc. Several of the largest insider loans made by failed banks in Cameroon
were to prominent politicians.
Second, most of the failed banks were not capitalized, in part because the minimum
capital requirements in force when they had been set up were very low. Owners had little of
their own funds at risk should their bank fail, which created a large asymmetry in the
potential risks and rewards of insider lending. Bank owners could invest the bank deposits
in their own high-risk projects, knowing that they would make large profits if their projects
succeeded, but would lose little of their own money if they were not profitable
The third factor contributing to insider lending was the excessive concentration of
ownership. In many of the failed banks, the majority of shares were held by one man or one
family, while managers lacked sufficient independence from interference by owners in
operation`l decisions. A more diversified ownership structure and a more independent
management might have been expected to impose greater constraints on insider lending,
because at least some of the directors would have stood to lose more than they gained from

insider lending, while managers would not have wanted to risk their reputations and careers.