Contributed By GENI & KEBE
Recent economic cycles and the regulatory environment are likely to have a significant impact on the lending market. In the absence of a recent impact study, the content of the reforms made nevertheless makes it possible to make the following observations:
To our knowledge, there is no study of this subject.
The loan market is likely to increase significantly due to the development of alternative financing methods and the tax incentive regime it enjoys (VAT exemption for Islamic finance and leasing operations, suspension of registration fees for the same operations, etc).
Banking techniques remain mostly classical even if the evolution of new technologies is highly developed in Senegal with great potential in mobile phones, and innovations and investments remain to be made by lenders to attract or satisfy borrowers.
The following regulatory changes are likely to affect the loan market:
Under Senegalese law, any company that seeks to provide financing to companies must apply for approval to the Ministry of Finance.
The Ministry of Finance shall transmit the application to the Banking Commission for approval. The Commission has a period of six months to respond. If it fails to do so within that period, the authorisation is deemed denied.
In the meantime, five copies of the application must be submitted to the Central Bank of West African States (BCEAO).
All the criteria and conditions for the setting up of the company or of its subsidiary banks, the minimum capital, and the rules of competition between banks and financial institutions are regulated by the BCEAO and the Council of Ministers of the West African Economic and Monetary Union (WAEMU, or UEMOA in French). In 2008, the minimum capital to open a bank was XOF5 billion (West African CFA francs), which was raised to XOF10 billion by the Council of Ministers of WAEMU in 2015.
The minimum capital requirement for financial institutions is set by the Council of Ministers at XOF1 billion in all States of the WAEMU as of 1 January 2008 and will increase to XOF3 billion. There are no restrictions on ownership and the ability to have offices in the country.
Since the enactment of the Investment Code in Senegal, foreign nationals have the same rights as nationals to conduct banking activities.
In principle, foreign lenders are not restricted from granting loans but they must use the services of an intermediary (bank, financial institution) established in the WAEMU in order to operate and transfer the funds in Senegal.
The granting of guarantees or guarantees to foreign lenders is not limited in principle, subject to compliance with the substantive and procedural rules laid down in the OHADA Uniform Act on Securities.
There are restrictions and controls regarding foreign currency exchange limits in relation to the following:
There are no restrictions on the borrower's use of loan products or debt securities except for obligations relating to the payment of taxes on the repatriation of such products.
Agent and trust concepts are recognised in Senegal under the OHADA Uniform Act on Securities. The common practice is that the agent role is often played by banks.
The most common loan transfer mechanisms used in Senegal are bank transfers.
Debt buy-back by the borrower or sponsor is permitted.
Regarding “certain funds” with respect to public acquisition finance transactions, the WAEMU rules are applicable, and the provisions of this community organisation upon the BCEAO are in a good standard. The documentation is specifically used by the specialist even if these are publicly filed.
Payments of interest or other payments made to lenders are subject to withholding tax.
VAT, stamps duties and corporate tax are relevant to lenders making loans to or taking security and guarantees from entities incorporated in Senegal.
There are usury laws and rules that limit the amount of interest that may be charged.
The legislation applicable to security in Senegal mainly comes from the OHADA Uniform Act on Securities. This law applies to all 17 states of OHADA.
According to Article 1 of the above-mentioned Act, “a security” is an assignment for the benefit of a creditor, of a property, of a set of goods or assets to ensure the enforcement of an obligation or a set of obligations.
Under OHADA law, there are three main types of collateral: personal securities, security interests on personal property, and mortgages.
These consist of suretyships, independent guarantees and counter-guarantees.
Suretyship is an agreement whereby the surety undertakes to perform an existing or future obligation contracted by the debtor in the event that the debtor defaults.
The suretyship must be evidenced by an agreement signed by the surety and the debtor and contain a hand-written annotation by the surety, in all letters and digits, of the maximum secured amount covering the principal, the interest and other fees.
Independent guarantees and counter-guarantees may not be subscribed by natural persons, under penalty of nullity. As with suretyship, they must be written and contain certain legal information under penalty of nullity.
According to the provisions of the OHADA Uniform Act on Securities, non-compliance with the formal and substance requirements will lead to the nullity of the security.
Security interests on personal property
These consist of: right of retention, retention or assignment of title as security, pledge over tangible assets, and pledge over intangible assets and liens.
Security interests on personal property must be registered at the Register of Commerce and Securities by the creditor.
A mortgage is the transfer of a determined or determinable real property owned by the grantor to secure one or several existing or future debts provided that they are determined or determinable. The mortgage can be statutory, contractual or judiciary.
By law, only existing and registered real properties may be subject to a mortgage.
Moreover, the following may be the subject of a mortgage:
The mortgage shall confer the resale and preferential right to the holder.
These securities are registered within a timeline of 15 days and the costs depend on the amount of the loan.
The OHADA Uniform Act on Securities permits security interest over all present and future assets of a company.
Under OHADA laws, there are no restrictions upon a target being acquired from granting guarantees or security or financial assistance for the acquisition of its own shares.
The granting of securities or guarantees is subject to the approval of the shareholders of the company.
The typical forms of security released are the following:
In case of plurality of creditors, the order of priority of competing security interests is determined according to the time of registration in the Trade and Personal Property Credit Register, oldest first.
The creditors can freely decide to vary the priority of the security interests through an agreement concluded between them. Moreover, the provisions of the agreement will survive the insolvency of a borrower incorporated in Senegal.
A secured lender can enforce its collateral in case of non-payment of debt.
Several situations may explain this payment default.
It could be a non-respect of the contract due to a deliberate refusal, economic difficulties or any situation such as non-execution of the contract.
Methods, procedure, restrictions
In this situation, the creditor can use the enforcement proceedings as set out by the Uniform Act on enforcement proceedings.
According to article 28 of this law, “absent voluntary enforcement, any creditor may, irrespective of the nature of his claim, under the conditions provided by this Uniform Act, compel his defaulting debtor to perform his obligations towards him or may implement an interim measure for the protection of his rights. Unless it is a mortgage or preferential debt, enforcement measures shall first be applied against personal property, and in the event that personal property is insufficient to cover the debt, the creditor may proceed against the real property.”
The first thing the creditor has to do is to claim before a court in order to have a judgment.
And after a decision, he can use the enforcement proceedings described above.
We can list two restrictions:
As a contract legally concluded is like a law between the parties, Senegalese law recognises the choice of a foreign law as the governing law, submission to a foreign jurisdiction and a waiver of immunity.
A foreign judgment or an arbitral award can be enforceable without a retrial of merits after an enforceable proceeding before the court.
In our jurisdiction, outside of insolvency proceedings, some technical restructuring is available in order to rescue companies such as mergers and acquisitions, the increasing of shares, and restructuring plans.
For all of these practices, the vote of the shareholders is needed.
The consequences of the commencement of insolvency processes are the suspension of any action against the debtor until the decision of the judge about the insolvency.
It means that any action cannot be introduced before the court, even those which were introduced yet will be stopped because they will be inadmissible.
As soon as the insolvency process starts, there is no stay or moratorium, and the creditors cannot enforce their security.
After the judicial liquidation, the court has to proceed to the sale of the assets of the debtor.
The order of payment depends on the nature of the debt and whether the money comes from the sale of real property or of a movable property.
The proceeds of the liquidation of real property shall be distributed in the following order to:
(1) Creditors of court fees incurred in order to achieve the liquidation of the real property sold and the distribution of proceeds;
(2) Creditors with super-privileged salaries;
(3) Creditors holding a contractual or forced mortgage and separatist creditors registered within the legal time limit, each according to the rank assigned to its registration in the register of real estate registration;
(4) Creditors with a general lien subject to registration, each according to the rank of its registration in the Register of Commerce and Securities;
(5) Creditors with a general lien not subject to registration according to the order established by article 180 of the Uniform Act on Bankruptcy Proceedings;
(6) Unsecured creditors in possession of an enforceable title when they intervened by way of seizure or opposition to the procedure.
In case of insufficient funds to pay off creditors of equal rank referred to in paragraphs (1), (2), (5) and (6) above, they shall distribute proportionally to their total debts on a pro rata basis.
The proceeds from the liquidation of personal property shall be distributed in the following order to:
(1) Creditors of the court fees incurred in order to achieve the liquidation of the property sold and the distribution of its price;
(2) Creditors of costs incurred for the preservation of the property of the debtor in the interest of the creditors whose title has an earlier date;
(3) Creditors with super-privileged salaries;
(4) Creditors secured by a general lien subject to registration, pledge, or suretyship, each on the date of its enforceability against third parties;
(5) Creditors with a special lien, each according to the personal property on which the lien is attached; in case of conflicts between secured debts for a special lien on the same personal property, preference is given to the first petitioner;
(6) Creditors with a general lien not subject to registration according to the order established by article 180 of the Uniform Act on Bankruptcy Proceedings;
(7) Unsecured creditors in possession of an enforceable title when they intervened by way of seizure or opposition to the procedure of distribution.
To our knowledge, Senegal does not have this concept.
The major risk for lenders is the non-payment of the debt because the assets are not sufficient to pay all the creditors or because the nature of the debt is not super-privileged or not in a good order according to 7.3 The Order Creditors Are Paid on Insolvency.
Senegal has a good track record of PPPs.
Public-private partnership transactions are not new to Senegal and the positive experience of both governments and investors have created a good environment. Good experiences with this kind of transaction have led to the development of sensible laws to support future investment.
Thus, a PPP was established in 1996 in the water subsector between the Sénégalaise des Eaux(SDE),a private operator exclusively in charge of the drinking water facilities, the State of Senegal and the Senegalese National Water Company, a public entity in charge of managing the assets and controlling the quality of the operation of this public service. The original ten-year contract has since been extended by various amendments.
In the rail transport sector, the State of Senegal together with the State of Mali carried out the concession of the Dakar–Bamako railway by the company Transrail SAin 2003.
A concession contract relating to the financing, the build and the maintenance of the toll road linking Dakar to Diamniadio was signed in 2009 between the State of Senegal and SENAC SA. An amendment to this contract was signed in June 2014 for the extension of this highway to Diass and Blaise Diagne International Airport.
GENI & KEBE recently advised Jindal Power on the USD900 million, 350 MW coal power plant to feed into the national grid in a PPP with the State electricity company (the largest ever electricity project in Senegal).
We also advised American Capital, the lenders to the Taiba Ndiaye Wind Farm Project (renewable energy), in a PPP with the Senegalese electricity company.
There is a solid legal and regulatory framework to support PPPs in Senegal. With the aim of unrolling a number of ambitious projects through a PPP model, the Government of Senegal has put in place a solid legal and regulatory framework including Decree 09/2014 of February 2014 on Partnership Agreements.
There is also a Ministry of Investment Promotion and Partnership, a national PPP Committee and a PPP Unit.
For certain project finance transactions, it is necessary to obtain government approvals or to pay taxes.
The transaction documents also need to be registered in order to obtain certain approvals or authorisations from the Government.
With respect to the oil sector, the responsible government bodies for regulating oil exploration and production activities are the following:
The principal legislation is composed by:
With regard to the mining sector, the responsible government bodies are:
The laws regulating the mining sector are the following:
Senegal is a member State of the West African Economic and Monetary Union (WAEMU) and, as such, there are a number of legal requirements that apply to foreign exchange controls in terms of opening a foreign bank account and contracting foreign loans.
The Government of Senegal welcomes foreign investment and generally maintains a level playing field for foreign investors to participate in most sectors.
There are no barriers to 100% ownership of businesses by foreign investors in most sectors. There are some exceptions for sectors such as water, electricity distribution and port services where the government and state-owned companies maintain responsibility for most physical infrastructure but allow private companies to provide water distribution and port services.
In Senegal, projects are mainly financed through bank financing and project bonds.
With regard to structures, the most used are PPPs and concession agreements.
These following environmental, health and safety laws and regulations apply to projects:
As of 2014, there was only one Islamic bank, Banque Islamique du Sénégal (Islamic Bank of Senegal), which has yet to make all its products and operations Shari'a-compliant, and one Islamic window for a microfinance institution, PAMECAS (Partenariat pour la Mobilisation de l’Epargne et du Crédit au Sénégal).
At a private level, a growing demand for Shari'a-compliant products and services has been noted among the population.
Islamic Finance courses have been introduced into Finance programmes in many private business schools in Dakar, and seminars on Islamic finance have been held in different parts of the country.
As an alternative source of financing, the government's fiscal policy is to provide incentives that avoid distortions in comparison to conventional financing. Thus even if Islamic finance operations do not, for now, benefit from special incentives, they are however treated in the same way as traditional financing methods such as leasing, for example.
Another major Islamic finance-related event concerning Senegal is the signing of a tripartite memorandum of understanding in Kuala Lumpur between the International Centre for Education in Islamic Finance (INCEIF), the Islamic Corporation for the Development of the Private Sector (ICD) and the Centre Africain d’Etudes Supérieures en Gestion (CESAG), the Dakar-based training arm of the BCEAO, to set up an Islamic Finance Academy to build capacity in Islamic finance in French-speaking West Africa.
In 2012, the BCEAO signed a master agreement with the Islamic Development Bank (IDB) for the promotion of Islamic finance in the WAEMU whereby the IDB will provide technical assistance for the development of this alternative form of financing in the WAEMU zone.
With the IDB-BCEAO master agreement one may expect, in the coming year, some adjustments to the regulatory framework to accommodate the specificities of Islamic finance. This is particularly plausible as many demands for licences to establish Islamic financial institutions are arriving on the desk of the BCEAO.
The legal and institutional frameworkregarding the capital market in the WAEMU region is characterised by an absence of legislation specifically dedicated to the issuance of sukuk. There is no specific legal and institutional framework for the issuance of sukuk, and individual countries composing the WAEMU do not also possess such legislation.
The capital market is organised through the Regional Council for Public Savings and Financial Markets (Conseil Régional de l'Epargne Publique et des Marchés Financiers, CREPMF), which is the regulatory authority of the regional capital market.
The texts of the CREPMF do not specifically provide for the issuance of sukuk in the WAEMU region. The texts of Regulation No. 02/2010/CM/UEMOA and its various implementing texts, in particular Instruction 43/2010, constitute the benchmark regulatory framework for sukuk and debt securitisation in the WAEMU region.
Institutions involved in the issuance of bonds/sukuk
The main institutions involvedin the issuance of traditional bonds and sukuk within the WAEMU are the CREPMF, which is the regulatory authority of the regional capital market, the Regional Stock Exchange (Bourse Régionale des Valeurs Mobilières, BRVM), the Central Bank of West African States (BCEAO)and the Central Depository/Settlement Bank (Dépositaire Central/Banque de Règlement, DC/BR).
Each of these institutions plays a specific role in the issuance of bonds and sukuk.
The Regional Council for Public Savings and Financial Markets (CREPMF) is the West African community organisation responsible for the protection of household savings invested in securities or any other type of investment through public offerings in the West African community.
The duties of the CREPMF are:
All issuances of public securities through public offerings or syndication are subject toCREPMF regulations. In order to fulfil its mandate, the CREPMF has set up the following two divisions:
The Central Bank of West African States (BCEAO) is the common central bank of the WAEMU member countries. It is an international public institution. Besides the sole right to issue currency in the member states of the WAEMU, the BCEAO is also responsible for the management of the monetary policy of the WAEMU member states, and its role in this area includes the determination of the regulations applicable to banks and financial institutions and the supervision of their activities.
The BCEAO manages sovereign securities issued through auctions by WAEMU countries and helps regulate the sovereign debt market, as well as commercial banks and non-bank financial institutions.
The Regional Stock Exchange (BRVM) is a specialised financial institution and the stock market for the WAEMU region regulated and supervised by the CREPMF. It handles matters related to the quotation and negotiation of transferable securities and provides market information to participants. Its primary role consists of gathering and processing stock market orders transmitted by Management and Intermediation Companies (Sociétés de Gestion et d'Intermédiation, SGI) authorised to negotiate securities quoted on the BRVM.
It is responsible for the organisation of transactions involving debt securities (bonds) and is entrusted with tasks including the organisation of the market, the promotion and development of the securities market, the dissemination of stock exchange prices and information, and the listing and trading of securities.
Common stocks and bonds are the two main financial instruments provided for at the BRVM.
The CREPMF requires that corporate bonds be guaranteed before they can be listed. The listing with the BRVM, for non-Central Government issuance, is based on the requirement that all corporate bond issues be guaranteed by an approved financial institution, a development financial institution, a guarantee fund, or the parent company.
Another entity that plays a substantial role in the issuance of securities is the Central Depository/Settlement Bank (DC/BR), a private division of the CREPMF.
The DC/BRcentralises the issuance, payment and delivery of securities, guarantees the settlement of transactions and uses a special guarantee fund to cover cases of default.
Obstacles and expected legislative changes or developments in Islamic finance
There are some challenges to the development of Islamic finance among which are the absence of a regulatory framework specific to Islamic finance and the use of a regulatory and supervisory framework for conventional finance which may not fit the precepts of Islamic finance.
The most appropriate legal approach for executing the Islamic finance initiative, which aims at boosting Islamic finance in our jurisdiction with an initial focus on the WAEMU region, is the adoption of a common legal and regulatory framework specifically dedicated to Islamic finance.
The standardisation of products, structures for sukuk and practices compliant with Shari'a principles is also necessary.
When the challenges faced in Islamic finance will be overcome, the creation of more Islamic banks will also help with the development and execution of the sukuk and other products that are Shari'a-compliant and distributed by local Islamic banks.
In addition, those involved in these transactions have to know the principles and rules underlying Islamic finance, hence the importance of adequate training for human resources capable of performing these types of transaction.
Shari'a non-compliance risk
Sukuk have to be Shari’a-compliant. Otherwise, they can be declared void in their entirety or in part.
Such a risk can be found in situations where Islamic institutions transfer the ownership of some of their customers’ assets to a mortgage status and not for an actual sale. If these institutions bond these assets to a form of “sukuk al-ijara” or “musharaka” or other kinds of available sukuk, those sukuk may be declared null and void because the institution sold to the sukuk holders something that they do not own, which is among the prohibited types of sale in the Shari’a.
Islamic finance and tax
The government's fiscal policy is to provide incentives that avoid distortions in comparison to conventional financing. Thus Islamic finance transactions do not benefit from special incentives but are sometimes treated in the same way as traditional financing methods such as leasing, for example.
This policy was reaffirmed through the tax reform of 2018 in Senegal, which has introduced a new exemption from land registration fees for institutions of Islamic finance. According to the new article 536 CGI, this covers the "formalities required by Islamic finance institutions, pursuant to a financing contract, whatever their names, when the contract provides for the final disposal of the property".
The main Shari'a-compliant products used in Senegal are:
In Senegal we have not noted any notable cases on jurisdictional issues or applicable law. We can note, one of the peculiarities of Senegal is that the country is not an Islamic Republic even though 95% of the population are Muslims.