INCREASED COMPETITION revives FINANCIAL SECTOR

MOZAMBIQUE'S financial sector may well still be in its infancy, but that infancy is certainly a healthy one, to judge by the rate of growth. Between 1998 and 1999 deposits jumped by 22.7%, to US$647 million, financial sector assets rose 9.8% to US$1.2 billion, and international reserves were up 32.8%, to US$436 million.

Mozambique's leading commercial banks, such as Banco Austral and Banco de Fomento, are counting on the government to continue to increase liquidity and boost investment. The government, for its part, would like to see even more competition among lenders, in order to bring interest rates on credit down further. The country's overall position has been improved enormously by the debt relief it has received from the International Monetary Fund (IMF) and the World Bank. A total of US$4.3 billion in debt was canceled, which was a boon to Mozambique, especially after the devastating floods last February and March.

Nevertheless, there is still US$750 million of debt out-standing, and as Finance and Planning Minister Luisa Diogo points out, "the amount we have to pay to service that debt is enormous." "We have to pay between US$50 and 60 million, despite the fact that there are no extra disbursements this year since they have been pardoned in the wake of the floods," she says. "Compare that with the amount available for housing, which is US$32 million, or education, US$72 million." Overall, Ms. Diogo is satisfied with the progress made so far, pointing to the reduction of the inflation rate from 70% in 1994 to 1% in 1998, for example.

The privatization and diversification of the banking sector is another area where great strides have been taken. Although the World Bank initially suggested liquidating state-owned banks, Mozambique preferred to privatize them, and at the same time issued decrees to attract new investors in the sector. Ms. Diogo wishes to see continued diversification of ownership in the sector and even more competition to bring down commercial bank lending rates, especially for small- and medium-sized businesses. "We still need more foreign banks to compete," she says.

However, the present level of competition has already brought favorable results for borrowers, according to Banco Austral, which claims credit for forcing down its competitors' interest rates on loans, some-times as high as 32%, by introducing a 19% 'prime rate' for preferred customers. One of Austral's rivals, Banco de Fomento, sees the need for increased liquidity in order to further bring down lending rates. Banco de Fomento's CEO, Joaquim de Carvalho, believes Mozambique should "discuss this issue with the IMF again, because the liquidity right now is quite short and the risk in credit operations is very high." On balance, though, Mr. Carvalho feels that "the reforms that have taken place in the banking system are remarkable indeed," pointing to the presence of ten different commercial banks, all privately owned. He also stresses that the banking system is rapidly modernizing: "there are electronic means of payment, more technologies and systems are being used, and almost all the banks are online."

Banco Austral has the largest network of offices in Mozambique, with well over 100 branches. It also leads in the number of customers, with some 800,000, and within three to five years expects to be number one in terms of assets. The bank's executive director, K. Muganthan, explains that its ranking in terms of assets dropped last year from second to fourth only because "we cleaned up our portfolio" by writing off bad debts. "It was a strategy to sort out our books and show more solidity in our balance sheet," he adds. And, it would seem, one that has al-ready paid dividends. "Because of the improvements to our balance sheet and image," says Mr. Muganthan, "international banks are opening up credit lines to us. MasterCard and Visa gave us the principal license to operate, which no other bank in this market has." Banco de Fomento is also developing its online services, although, as Mr. Carvalho notes, there is a need "to educate clients, because they don't know some of these products." He explains that "the transformation and reforms that are taking place in Mozambique are so fast that people are still adapting to them."