The structure and composition of these nonperforming loans comprises of investment in speculative projects, loans extended to real estate development and short-term loans to finance investment projects that could not generate enough income in the short run to cover interest payments. During the economic crisis fueled by the deterioration of terms of trade and exogenous shocks (falling commodity prices), which affected numerous countries in the 1990s, banks accumulated a sizable share of impaired loans to agricultural and export sectors in the form of credit facilities for trade and direct investment. For instance, banking and financial institutions, which suffered heavy losses, were the leading cocoa and coffee exporters in Cameroon and Côte d’Ivoire, two agrarian-based economies which derive a sizable share of export earnings from agriculture. These countries experienced a significant deterioration of terms of trade during the crisis period.<sup>24</sup> There are several other explanations for the rise of impaired loans in the 1990s: the chronic fiscal deficits and balance of payment difficulties in numerous countries, the mismatch between the maturities of assets and liabilities, which led numerous banks and financial institutions to resort to highly-priced short-term financing in the form of interbank loans. The demand for highly-priced short-term loans further exacerbated the crisis and the accumulation of impaired loans. In some of the most affected countries where governments were the main shareholders, a sizable share of impaired loans was owed by state governments and government agencies and institutions. This was quite common across Sub-Saharan Africa during most of the 1980s and 1990s where commercial banks were heavily involved in the financing of government fiscal deficits and loss-making public enterprises [Basu (1998)].

The depth of the banking crisis is further illustrated by the deterioration of banks assets, proxy by the capital asset ratio, a measure of asset quality. This ratio provides the cushion to absorb shocks in crisis periods; a large value of this ratio is an indication of a relative soundness of banks and financial institutions. While the overall estimate for this ratio exceeds the 8 percent minimum requirement— set within the framework of International Settlement Standards— for a number of countries, this threshold is not met, especially in the CFA subpanel of countries where the overall average is about 7 percent. This ratio is slightly higher in the sub-panel of non-CFA countries which have an overall average above 15 percent (see Table I). The difference between the sub-panels of CFA and non-CFA countries is preserved when conditioned upon the ownership structure of banks (public versus private). For publicly-owned banks, the capital asset ratio is 29 percent for countries in the non-CFA subpanel, about twice the level in the CFA sub-panel of countries. Surprisingly, for privatelyowned financial institutions, these ratios are much lower, 14 percent for the sub-panel of nonCFA and about 7 percent for the sub-panel of CFA (see Table 2 in the Annex).

The relatively low capital to asset ratio among private banks illustrates the magnitude of credit risks to financial institutions and the relatively low level of equity, a constraint to the constitution of provisions against future losses and potential risks. Indeed, the ratio of nonperforming loans to loan loss reserves and provisions is much higher for privately owned banks and financial institutions across Sub-Saharan Africa. For instance, while these loans account for over 450 percent of loans loss reserves for all privately-owned financial

> 24 Terms of trade deterioration were estimated to about 56 percent in Cameroon in the late 1980s and over 27 percent in Côte d’Ivoire in the early 1990s.

8