The financial environment in Europe and the US may be discouraging, but the outlook for Morocco and its financial sector remains positive. The kingdom's banks are continuing to extend their retail market presence, seeking to service the increasingly affluent middle class and also attract less wealthy clientele.

Domestic business lending is fuelled by buoyant real estate activity, while several institutions are also beginning to reap the benefits of strategic investment in francophone West and Central Africa. The local offshoot of France's Societe Generale (SocGen) reports that last year it achieved a 66.2 per cent rise in net income.

Risk taking

Such is the pace of development that Bank el-Maghrib, the central bank, has injected a note of caution, with a marked reinforcement of regulatory frameworks.

"From a cyclical point of view, the accelerating growth of lending to the private sector over recent years has been fuelled by the dynamism of economic activity, with a boom in working capital loans, credit for capital investment and strong expansion in the property sector," says Abdellatif Jouahri, governor of Bank el-Maghrib, explaining the reasons behind a strengthening of its surveillance of banks. "The dynamism in the credit [market] increases the opportunities for risk taking by banks."

He says increased competition between banks is leading them to lend more. Credit volumes rose by 18 per cent in 2006 and 28.7 per cent in 2007, compared with 16 per cent average annual growth over the whole 2003-07 period, and an average of just 7 per cent a year over 2000-05. Off-balance sheet financing activities have also grown in volume.

Bank el-Maghrib is working towards the adoption of the Basel II international prudential benchmarks for regulation. It has issued rules on risk concentration and on banks' internal governance and risk management. It is also encouraging banks to plan for a potential downturn in the still favourable Moroccan economic climate.

Jouahri warns that inflationary growth could develop, driving the emergence of speculative bubbles that could then collapse, with the risk of damage to overall levels of economic activity. The central bank is asking commercial banks to establish codes of ethical practice for the financing of real estate and financial assets. But at the same time, the government continues to stress the importance of extending the reach of bank services. For example, it has been running a campaign promoting the provision of financing to small and medium-sized businesses.

This highlights the dilemma facing the Moroccan authorities. They recognise the importance of banking as a powerful tool for developing the economy, particularly the small business sector, but they are also trying to ensure that the expansion of financial services is solidly rooted.

These two goals can be reconciled. Indeed, the banks have been reinforcing their risk-analysis tools, such as credit scoring and the risk rating of companies, while in January 2009 Jouahri expects operations to start at a new national credit bureau, which is thought to be one of the first of its kind in the Middle East.

But precautions aside, the banks remain committed to a path of steady expansion. At the start of the decade, even the most dynamic institutions were only opening about 15 branches a year, but in 2006, the most active opened 50-70 outlets each. In total, 223 branches opened their doors for the first time that year, taking the industry total to 2,446, or an average of one for every 7,300 inhabitants.

Retail interest

"The big draw is the retail market, as levels of disposable income in the middle class are rising," says Darren Stuben, Morocco analyst at credit ratings agency Capital Intelligence. "The market has boomed in the past three years."

Mortgage lending, credit card business and car loans are all big growth areas, he says.

The increase in branch coverage is playing a key role in the banks' drive to enhance their lending capacity. To service local communities, the banks are opening small offices, typically with just three or four staff. In their early years of operation, these tend to take in far more in deposits from private individuals, professionals and small businesses than they lend out, thus generating a surplus of deposit funds that larger branches can then lend out to major borrowers.

This deposit flow has enabled banks to hold down their own financing costs and thus engage in fierce competition for new loans business.

It certainly seems to be fuelling growth in earnings and profits. Banque Marocaine pour le Commerce et l'Industrie (BMCI), a subsidiary of French group BNP Paribas, reports a 24 per cent rise in net income for 2007, with lending up 34 per cent and customer deposits up 36 per cent, producing a 19.9 per cent return on equity.

Despite opening 25 branches, the bank managed to hold the rise in its operating costs to just 7 per cent. And it was still able to raise provisions against non-performing loans by MD155m ($20.9m), to take the total level of provisioning cover to 90 per cent, from 80 per cent in 2006. This performance has earned the bank a triple-A long-term rating from credit ratings agency Fitch Ratings.

For SocGen, too, expansion of the branch network is a key driver, with 29 new outlets opening in 2007, contributing to a 32.2 per cent rise in client deposits. With net income up 66.4 per cent and return on equity at 21.3 per cent, Capital Intelligence now rates the bank at BBB-. "The banking sector is reasonably solid," says Stuben. "There is not a high level of non-performing loans.'

Competitive market

However, he warns, pricing is increasingly tight. "The market is competitive and margins have come under pressure. People are really fighting for market share."

The leader in that respect is Attijariwafa Bank, with a hefty 25 per cent slice of all domestic business. Its closest challenger is Banque Marocaine du Commerce Exterieur (BMCE), with 15-20 per cent.

As competition for domestic business intensifies, Moroccan banks looking for fresh markets have turned their attention to francophone sub-Saharan Africa.

Moroccan institutions ventured south of the Sahara in the 1980s and 90s, but primarily as part of a government drive to develop politico-economic influence. By contrast, the current wave of expansion is a private sector affair, driven by commercial motivations.

Near neighbour Senegal has been a prime target. BMCE Capital Dakar is now one of the country's major corporate finance players, while Attijariwafa first set up its own local offshoot in 2006 and then took over a Senegalese-Tunisian joint venture institution.

Moroccan banks are using their domestic strength to boost overseas ventures and are also active in Congo (Brazzaville), the Central African Republic and Mali, but the most significant strategic move came last year, when BMCE bought a 35 per cent stake in AFH/Bank of Africa, based in Abidjan, Cote d'Ivoire, and with a network encompassing 10 countries. Gabon and Mauritania have also attracted Moroccan interest and in the Maghreb itself, both Attijariwafa and BMCE have moved into Tunisia. More growth and expansion seems sure to follow.