The World Bank has approved a $200 million loan to Rabat to support the modernisation of the kingdom's banking sector. The approval comes ahead of the restructuring of the majority state-owned bank Credit Immobilier et Hotelier (CIH), set for early 2006.

'The World Bank loan will help Moroccan banks comply with the risk management recommendations of Basel II by the 1 January 2007 deadline,' says Amine Bentaleb of the local Upline Securities. 'The majority of local banks have been making an effort to improve their risk management procedures and information systems since the end of 2004, but it is an expensive process.'

The funding will be used to bolster the role of specialised public financial institutions and support efforts to reduce the ratio of non-performing loans to 14-18 per cent from an average of 20 per cent. It will also help to modernise the banking payments systems, strengthen measures against money laundering and the financing of terrorism, and enhance the quality of financial information.

In particular, the funding will help the restructuring of state-owned Banque Nationale pour le Developpement Economique (BNDE) and CIH.

'BNDE has taken on larger losses than it should have done,' says Bentaleb. 'Its problems have been caused by financing extremely big projects that should not have been taken on without syndication to dilute the risk. When the recovery effort began, it was about to go bankrupt.'

CIH is on the cusp of a major restructuring. In early 2006, it will undergo a simultaneous reduction in paid-in capital and a rights offering. Under the capital reduction, the number of shares will be reduced by a factor of 10, while the value of those shares will increase by a factor of 10, lowering the bank's capital to MD 332 million ($36 million) from MD 3,320 million ($360 million). The freed-up capital will be used to reduce the bank's accumulated losses to MD 1,400 million ($152 million) from MD 4,000 million ($450 million).

CIH's net equity will remain the same after the reduction but will then be increased through the rights issue, which will introduce 11 new shares for every two existing shares and raise the bank's equity to MD 1,120 million ($121 million). The target share price following the issue is MD 189 ($20.50); its current price is MD 60-70 ($6.50-7.60).

'The restructuring of CIH began two years ago, and in 2004 it returned profits of MD 80 million [$8.7 million], compared with losses of MD 2,250 million [$243.8 million] in 2003,' says Bentaleb. 'Up until then, loans were given out without rational risk analysis, leading to lots of defaults.'

Following the restructuring, France's Caisse d'Epargne is expected to take a 25 per cent share in CIH, although state holding company Caisse de Depot et de Gestion (CDG) is expected to retain a majority interest. CDG, which also owns BNDE, in 2005 bought a 57 per cent stake in CIH and it is understood that the two banks will eventually be merged.