The International Monetary Fund's (IMF) Financial System Stability Assessment (FSSA), published in 2003, indicated that the Central Bank of Morocco (BAM) was committed to reforming the supervision of the financial sector. In October 2008, the IMF conducted an update of its FSSA, and concluded that Morocco either complied or largely complied with 21 out of the 25 Basel Core Principles (BCPs) for Effective Banking Supervision, and was materially non-compliant with four. The 2008 IMF Update was conducted based on the revised (2006) BCPs and its accompanying methodology. The Update notes that improvements are still needed with regards to supervisory approval of major acquisitions by banks, country and transfer risk, anti-money laundering and combating the financing of terrorism framework, and cooperation between home and host supervisors. The new Banking Law, which was put forth in 2006 to replace the 1993 Banking Act, strengthens BAM's regulatory powers, and provides for close coordination among financial sector supervisors, improving the regulatory framework for banking supervision, notes the IMF's 2008 Article IV Consultation. The European Commission's 2006 European Neighborhood Policy report adds that the law relative to the statutes of the BAM was adopted in 2005, in line with the BCPs, to strengthen the regulator's independence and supervisory role. Morocco has made progress towards implementing the Basel II Standardized Approach to credit risk. Furthermore, starting January 1, 2008, the BAM requires that all banks and similar financial institutions adopt the International Financial Reporting Standards, as reported on the Deloitte & Touche IAS Plus website.

General Overview

In July 2003, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Morocco, including an assessment of the country's compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision. The FSSA is based on the work of the Financial Sector Assessment Program (FSAP) team, which visited Morocco during January-February and May 2002. The report found that the Central Bank of Morocco (BAM), was committed to reforming the supervision of the financial sector in Morocco. It further indicated that significant efforts had been undertaken towards this end over the past years. Key recommendations of the IMF FSAP included implementing additional legal, regulatory, and organizational measures to bring the country's financial supervision standards closer to international norms, namely the BCPs.

The Moroccan authorities welcomed the IMF assessment in 2003 and started implementing the IMF recommendations through a government financial sector reform program that is supported by the World Bank. In a 2005 report, the World Bank reported that it had approved a Financial Sector Development Policy Loan to Morocco in order to "strengthen the enabling legal and institutional environment for financial intermediation and risk management, and to increase private sector role and participation in the provision of financial services" (p. i). The same report added that there were three supporting elements to this objective: "(1) improving the legal, regulatory and supervisory framework for the financial industry; (2) restructuring the public financial institutions; and (3) strengthening financial sector infrastructure" (p. 12). In the banking sector, the reforms aimed to align the legal, regulatory and supervisory framework with international standards.

In October 2008, the IMF conducted an update of its FSSA, and concluded that substantial progress has been achieved since the 2003 FSSA in upgrading the Moroccan banking regulatory and supervisory system. The IMF states that Morocco either complies or largely complies with 21 out of the 25 BCPs, and is materially non-compliant with four. Areas which need improvement include supervisory approval of major acquisitions by banks, country and transfer risk, anti-money laundering (AML) and combating the financing of terrorism (CFT) framework, and cooperation between home and host supervisors. The 2008 IMF Update was conducted based on the revised (2006) BCPs and its accompanying methodology. As the Basel Committee on Banking Supervision itself remarks in a 2006 consultative document, the new principles "do not in any way call into question the validity of previous work already conducted, not least country assessments and reform agendas based on the 1997 framework" (p. 1), the 1997 BCPs and the 2006 BCPs are in this case reconcilable.

The BAM was established in July 1993 as the unified regulatory framework for all credit institutions, pursuant to the 1993 Banking Act. In 2006, the Decree No. 1-05-178 Promulgating the Law Related to the Establishment of Credit Institutions and Affiliated Organizations No. 34-03 (hereafter referred to as the "Banking Law") replaced the 1993 Banking Act. In its 2008 Article IV Consultation, the IMF notes that the new Banking Law strengthens BAM's regulatory powers, and provides for close coordination among financial sector supervisors, improving the regulatory framework for banking supervision. The European Commission's 2006 report on Strengthening the European Neighborhood Policy adds that the Decree No. 1-05-38 Promulgating the Law Relative to the Statutes of the BAM No. 76-03 was adopted in 2005, in line with the BCPs, to strengthen the BAM's independence and supervisory role.

A 2007 Working Paper published by Amor Tahari et al. for the IMF indicates that the banking industry in Morocco is composed of commercial banks, publicly owned specialized banks, and offshore banks. As of 2007, according to the BAM's 2007 Annual Report, there were 76 credit institutions in Morocco, including 16 banks, 37 finance companies, 6 offshore banks, 14 microcredit associations, the Central Guarantee Fund, the Deposit and Management Fund, and the Financial Services of Barid Al-Maghrib. The IMF's 2008 FSSA Update views the Moroccan banking sector as "stable, adequately capitalized, profitable, and resilient to shocks" (p. 5). While Morocco has one of the most liberal banking systems in North Africa, as reported in the U.S. Department of Commerce's (DoC) 2009 Country Commercial Guide, the banking system remains highly concentrated, with the six largest banks accounting for 85 percent of total banking sector assets.

Starting June 2007, according to the IMF's 2008 FSSA Update, Morocco has made progress towards implementing the Basel II Standardized Approach to credit risk. The Advanced Internal Ratings Based Approach, where banks use their own internal estimates to determine credit risk exposure, is under consideration by the Moroccan authorities, and might be applied to credit risk in 2010. Starting January 1, 2008, per the February 2009 update available from the Deloitte & Touche IAS Plus website, the BAM requires that all banks and similar financial institutions adopt the International Financial Reporting Standards (IFRSs).

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

II

At the time of the IMF's 2003 FSSA, it was recommended that the powers and independence of the regulator be strengthened. The 2007 report by Tahari et al. points out that the Banking Law has significantly increased the supervisory powers and autonomy of the BAM, enhancing its information-sharing capacity. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle

1.(2) Operational independence and adequate resources.

II

At the time of the IMF's 2003 FSSA, it was recommended that the independence and powers of the regulator be strengthened. Pursuant to the Banking Law, according to the IMF's 2008 FSSA Update, "BAM and its Governor are operationally independent in making decisions on banking supervision" (p. 12). The IMF further states that the BAM has "a clear mandate, reinforced independence and an adequate budget and staff" (p. 33). The 2007 report by Tahari et al. corroborates that the Banking Law has significantly increased the supervisory powers and autonomy of the BAM, enhancing its information-sharing capacity. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

II

According to the IMF's 2008 FSSA Update, "the legal framework provides BAM with sufficient powers to exercise supervision" (p. 34). In addition, laws and regulations are publicly disclosed. The IMF goes on to note that the BAM has the authority to issue regulations. In addition to conducting on-site and off-site supervision, per the same report, the BAM is empowered to require banks to submit periodic and ad hoc reports. However, the report does not explicitly address Morocco's compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

II

See Principle 1.(3).

1.(5) Legal protection for supervisors.

II

According to the IMF's 2008 FSSA Update, the BAM's staff is protected from being held "personally liable for actions taken in the discharge of their duties, except in case of personal fault" (p. 34). However, the report does not explicitly address Morocco's compliance with this principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

II

The 2007 report by Tahari et al. points out that the new Banking Law has significantly increased the supervisory power and autonomy of the BAM, enhancing its information-sharing capacity. The Banking Law provides for cooperation among domestic and foreign supervisors, reports the IMF's 2008 FSSA Update. The IMF goes on to note that the BAM has concluded memoranda of understanding (MoUs) with foreign counterparts. Finally, a Commission has been created for coordination between domestic supervisors. According to its 2007 Annual Report, the BAM signed agreements relative to banking cooperation with the Central Bank of Mauritania and the Central Bank of Tunisia in 2007. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

II

Banking supervision applies equally to all banks, banking groups, formerly specialized banks, and majority domestic/foreign-owned banks, states the IMF's 2008 FSSA Update. The IMF clarifies that only registered banks are authorized to take retail deposits. Per the same report, the "unauthorized use of the word "bank" is reserved for licensed institutions" (p. 34). However, the report does not explicitly address Morocco's compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

CP

The 2003 IMF assessment notes that "licensing procedures are largely consistent with the Basel principles" (p. 42). The IMF's 2008 FSSA Update corroborates this finding by stipulating that "the licensing requirements meet good international practice" (p. 34).

4. Authority to review and reject transfer of ownership.

II

The IMF's 2008 FSSA Update indicates that, pursuant to the Banking Law, mergers and takeovers of banks must meet the same initial criteria as for licensing. In addition, the identity of shareholders must be reported on an annual basis. However, the report does not directly address Morocco's compliance with this principle.

5. Authority to review major acquisitions and investments.

NC

The IMF's 2008 FSSA Update indicates that, pursuant to the Banking Law, mergers and takeovers of banks must meet the same initial criteria as for licensing. However, prior approval by the BAM is not required for major acquisitions by banks and therefore the 2008 FSSA Update rates Morocco's adherence to this principle as materially non compliant. In this regard, the IMF recommends implementing "a prior approval requirement for acquisitions by banks of non-financial interests in other companies" (p. 36).

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

At the time of the IMF's 2003 FSSA, it was recommended that Moroccan authorities incorporate the risk profiles of individual banks in their calculation of capital adequacy ratios. Initiatives underway in 2003 indicated a significant strengthening of prudential norms by the authorities. The BAM's 2007 Annual Report indicates that, pursuant to Circular Related to the Minimum Capital of Credit Institutions No. 20/G/2006, banks are required to apply a risk-weighted minimum capital adequacy ratio of 8 percent. At end-2008, the BAM increased the capital adequacy ratio from 8 percent to 10 percent, states the IMF's 2008 FSSA Update. Subject to banks' risk profile, the ratio might increase to 12 percent at end-2009. The IMF goes on to note that starting June 2007, Morocco has made progress towards implementing the Basel II Standardized Approach to credit risk. The Advanced Internal Ratings Based Approach, where banks use their own internal estimates to determine credit risk exposure, is under consideration by the Moroccan authorities, and might be applied to credit risk in 2010. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

II

The IMF, in its 2003 assessment, noted that initiatives underway in 2003 indicated a significant strengthening of prudential norms by the authorities. The IMF's 2008 FSSA Update states that "Morocco has made very substantial progress in the prudential area" (p. 33). Non-performing loans (NPLs) have declined significantly and their provisioning has increased. At the end of 2007, according to the BAM's 2007 Annual Report, the total number of NPLs of credit institutions declined to USD4.6 billion, representing a 5 percent decrease from the previous year. Banks accounted for over 80 percent of total NPLs. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

At the time of the IMF's 2003 FSSA, it was suggested that Moroccan authorities revise the classification of loan loss provisioning. Initiatives underway in 2003 indicated a significant strengthening of prudential norms by the authorities. The IMF's 2008 FSSA Update states that "Morocco has made very substantial progress in the prudential area" (p. 33). Per the same report, provisioning percentages "broadly meet international practice" (p. 34). Furthermore, off balance sheet exposures are covered by the provisioning rules. The IMF points out that the BAM can, if necessary, impose higher provisions. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

II

The IMF, in its 2003 assessment, noted that initiatives underway in 2003 indicated a significant strengthening of prudential norms by the authorities. The IMF's 2008 FSSA Update states that "Morocco has made very substantial progress in the prudential area" (p. 33). Banks are subject to single borrower limits of 20 percent. In addition to monitoring large exposures by region, sector, category of borrower, and loan performance, the BAM oversees all exposures above 5 percent of regulatory capital. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

II

The IMF, in its 2003 assessment, noted that initiatives underway in 2003 indicated a significant strengthening of prudential norms by the authorities. The IMF's 2008 FSSA Update states that "Morocco has made very substantial progress in the prudential area" (p. 33). Connected lending is limited to 20 percent, and the Board of banks must be informed of such related exposure. However, prior approval by the Board of banks is not required for write-offs of related exposures. In this regard, the IMF recommends requiring the Board's approval for write-offs of related exposures. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

EN

The IMF's 2008 FSSA Update recommended introducing rules to regulate country and transfer risk, as no regulations were in place at the time the assessment was completed (July 8). A directive containing new rules on country and transfer risk was adopted on July 8 "in line with the FSAP Update recommendations" (p. 5), as reported in the IMF's 2008 Article IV Consultation. The directive is expected to be published shortly.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

II

The IMF's 2008 FSSA Update states that "banks are required to have market risk policies, approved by the Board of the bank" (p. 35). While stress tests and back-testing are performed at banks, the BAM does not follow-up on their results. The IMF has suggested introducing a methodology for on-site monitoring of market risk. However, the report does not directly address Morocco's compliance with this principle.

13. Comprehensive risk management processes.

II

The U.S. DoC's 2009 Country Commercial Guide notes that Moroccan banks are progressing towards the adoption of risk management guidelines in order to improve financial stability. Banks are required to maintain risk management systems approved by the Board, notes the IMF's 2008 FSSA Update. In order to comply with international standards, the IMF recommends establishing "a more explicit requirement for banks' governance bodies to understand a bank's risks and more detailed supervisory manuals" (p. 34). With regards to liquidity risk management, banks are encouraged to set up liquidity contingency plans. Liquidity risk management systems must be approved by the Board of the bank. The IMF goes on to note that the Board must oversee and approve interest rate policies. Finally, the BAM is responsible for the monitoring of operational risk systems. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

14. Adequate internal controls.

II

In its 2003 assessment, the IMF recommended clearly defining a methodology for internal controls. According to the same IMF assessment, initiatives were underway in 2003 that would significantly strengthen prudential norms in Morocco. The IMF's subsequent 2008 assessment indicates that "laws and regulations lay down the responsibilities of the governance bodies for internal supervision and risk management" (p. 35). It is recommended that more detailed guidance be provided regarding internal control regulation. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

NC

Due to the lack of legislation governing the participation of financial institutions in combating financial crime at the time of the IMF's 2003 FSSA, it was recommended that the Moroccan authorities "define a specific regulatory framework with respect to money laundering" (p. 46). The Law No. 43-05 Relating to the Fight Against Money Laundering was enacted on May 3, 2007. The 2008 FSSA Update rates Morocco's adherence to this principle as materially non compliant. According to the report, the Middle East and North Africa Financial Action Task Force (MENAFATF) has recommended a number of steps for strengthening the AML/CFT framework in Morocco, including a revision of the legal framework and the operationalization of the financial intelligence unit (FIU). The country's FIU was not yet operational at the time the IMF assessment was completed (July 8). The IMF's 2008 Article IV Consultation points out that the FIU is expected to be operational shortly, and that MENAFATF recommendations should be implemented to strengthen the AML/CFT framework.

16. Effective supervisory system consisting of on-site and off-site supervision.

II

A 2004 Working Paper published by Susan Creane et al. for the IMF indicated that "significant weaknesses remain in the supervisory framework, including the lack of efficiency in on-site and off-site supervision" (p. 36). It was recommended at the time of the IMF's 2003 assessment that the BAM clearly define its objectives for on-site and off-site supervision. According to the BAM's 2007 Annual Report, the implementation of the Support System for Credit Institutions Rating (CAMELs-type) has contributed to improving the effectiveness of on-site inspections and off-site supervision through the identification of credit institutions' areas of vulnerability. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

II

At the time of the IMF's 2003 FSSA, it was recommended that contact between the regulator and bank management be developed at "various levels" (p. 46). The IMF's 2008 FSSA Update indicates that "BAM meets regularly with bank management and the Board chairmen" (p. 35). Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

II

The IMF's 2008 FSSA Update states that "banks are required to submit periodic prudential reports, both on a solo and consolidated basis" (p. 35). The BAM further has the authority to require ad hoc information. The IMF goes on to note that shifts in the financial condition of banks must be reported by external auditors. However, the report does not directly address Morocco's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

II

At the time of the 2003 IMF assessment, a circular on internal controls and a circular on external audits were being finalized and were expected to help reform the architecture of the overall prudential supervision system and the overall supervisory strategy which includes off-site inspection, on-site inspection, and external auditing. The Circular Related to Internal Controls No. 40/G/2007 was promulgated on August 2, 2007. According to the regulator's 2007 Annual Report, the implementation of the Support System for Credit Institutions Rating (CAMELs-type) has contributed to improving the effectiveness of on-site inspections and off-site supervision through the identification of credit institutions' vulnerability areas. The IMF's 2008 FSSA Update indicates that the BAM meets regularly with external auditors, and intends to increase the frequency of its on-site inspections. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

20. Ability to supervise on a consolidated basis.

II

The 2007 report by Tahari et al. affirms that the Credit Institutions Chart of Accounts, established by the National Accounting Council (CNC), provides for better consolidated supervision by the BAM. According to the IMF's 2008 FSSA Update, "banks must report to BAM on a solo as well as consolidated basis" (p. 36). Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

II

As reported in a regulatory and standard-setting framework assessment published by the Moroccan Certified Public Accountants Association (CPAA) in December 2005, the accounts and financial statements of banks are prepared in conformity with the Credit Institutions Chart of Accounts, established by the CNC. The IMF's 2008 FSSA Update indicates that banks must prepare annual audited financial statements, as well as a management report, which are certified by an external auditor. Starting January 1, 2008, per the February 2009 update available from the Deloitte & Touche IAS Plus website, the BAM requires that all banks and similar financial institutions adopt IFRSs. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

II

According to the 2003 IMF assessment "the BAM has wide legal powers to force banks to take the necessary measures to comply with prudential regulations to protect depositors" (p. 44). The IMF's 2008 FSSA Update corroborates this finding by stating that "BAM has an adequate set of powers to require banks to take corrective and to impose disciplinary measures" (p. 33). Remedial actions against banks include fines that can be levied against bank management or Board members. Nevertheless, the available assessments do not directly address Morocco's compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

II

The IMF's 2008 FSSA Update views the requirement for on-site inspections abroad to be conducted in joint home-host teams as a possible impediment to effective cross border supervision. However, the report does not explicitly address Morocco's compliance with this principle.

24. International exchange of information with other supervisors.

II

According to BAM's 2007 Annual Report, the Banking Law enables the BAM to sign cooperation agreements with foreign banking supervisory authorities in order "to exchange information and to carry out on-site inspection missions of subsidiaries and agencies of credit institutions subject to their respective inspections, and operating in the territory of each one of these parties" (p. 37). However, the report does not explicitly address Morocco's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

NC

The 2008 FSSA Update rates Morocco's adherence to this principle as materially non compliant. According to the report "Moroccan legal requirement that cross border on-site examinations can only be carried out jointly can be an impediment for both the home and the host authorities and can therefore hinder effective cross border cooperation" (p. 33).