By Carlitos Fortes, Member of the Board of Directors, BCN–Banco Caboverdiano de Negócios
Financial depth is one of the main indicators of an economy’s level of development, reflecting the financial system’s capacity to mobilise savings, transform available resources into financing and allocate capital efficiently among households, businesses and productive sectors. In small, open economies such as Cabo Verde (Cape Verde), this concept is particularly relevant, given the decisive role of external flows, namely tourism, foreign direct investment (FDI) and remittances from the diaspora. These flows not only influence economic growth but also shape the dynamics of financial intermediation.
Over the past few decades, Cabo Verde has made significant progress in developing its financial system. The main indicators of financial depth show a consistent growth trajectory, placing the country above the Sub-Saharan African average. Even so, this progress coexists with a set of structural limitations, mainly associated with the small size of the domestic market, the degree of concentration in the banking sector and the still-limited diversification of available financial instruments. This combination of advances and constraints makes the Cabo Verdean case particularly relevant: The financial system shows a relatively high intermediation capacity within the regional context, but it operates in an environment in which prudence, credit quality and the strategic allocation of resources are as important as the quantitative growth of financial aggregates.
Among the indicators most commonly used to assess financial depth are credit to the private sector and total credit from the financial system, both expressed as a percentage of gross domestic product (GDP). In Cabo Verde, the most recent data indicate that total credit from the financial system reached approximately 70 percent of GDP in 2024, while credit to the private sector stood between 53 percent and 55 percent of GDP over the same period. These figures place Cabo Verde in a relatively favourable position compared with many African countries, where credit to the private sector often does not exceed 30 percent or 40 percent of GDP. These ratios provide insight not only into the relative size of credit within the economy but also into the level of confidence placed in the formal financial system, the capacity to mobilise domestic savings and the importance of the banking sector as the principal financing channel.
International comparisons reinforce Cabo Verde’s specific position within the global financial landscape. With a private-sector credit-to-GDP ratio between 50 percent and 60 percent, the country stands solidly above the average for low-income economies and Sub-Saharan Africa, where financial intermediation remains limited, reflecting institutional constraints, low levels of access to banking services and shallow markets. By contrast, it is closer to the patterns observed in middle-income economies and, more significantly, in Small Island Developing States (SIDS), such as Mauritius, Barbados or Fiji, where the banking system plays a dominant role, and credit tends to be concentrated in services, tourism and real estate. Even so, Cabo Verde remains below the levels typical of advanced economies, in which the credit ratio often exceeds 100 percent of GDP, supported by developed capital markets and greater financial diversification. This intermediate position reflects a relatively high degree of financial development for the country’s income level and economic structure, but it also confirms the existence of structural limits that distinguish the convergence paths of small island economies from those of larger and more complex economies.
In developed economies, this ratio tends to exceed 100 percent of GDP, reflecting a high level of financial intermediation and robust capital markets. However, this indicator should be interpreted with caution in the context of Small Island Developing States. In these countries, structural characteristics, such as small market size, economic concentration and high vulnerability to external shocks, mean that the “optimal” level of credit is generally lower than that observed in larger and more diversified economies. A low ratio should, therefore, not automatically be interpreted as a sign of financial underdevelopment; on the contrary, it may reflect a prudent adaptation to the characteristics of an economy in which the capacity to absorb credit is constrained by market size, sectoral concentration and exposure to external shocks.
BCN – Banco Caboverdiano de Negócios’ branch in Mindelo, São Vicente, Cabo Verde
Within this framework, Cabo Verde presents a particularly interesting profile. With a private-sector credit-to-GDP ratio of around 50–60 percent, the country stands clearly above the Sub-Saharan African average while remaining within the range typical of emerging economies. More importantly, its position is broadly consistent with that observed in other small island states, particularly in the Caribbean and in some middle-income island economies, such as Mauritius or Malta. This suggests that Cabo Verde’s level of financial depth is not only relatively high in the regional context but also structurally consistent with the type of economy the country represents. The consistency of this position is important, particularly in a context in which financial stability must be preserved without compromising the banking sector’s ability to support investment, responsible consumption and the economy’s gradual modernisation.
An analysis of the structure of credit reinforces this interpretation. The loan portfolio of Cabo Verde’s banking system is distributed relatively evenly among business, housing and consumer credit. Financing to the business sector accounts for approximately half of total credit and is heavily concentrated in activities linked to tourism, trade, construction and services. This configuration directly reflects the nature of the country’s productive structure, characterised by the predominance of the tertiary sector. At the same time, it shows that the country’s financial depth is closely linked to the composition of the real economy; the sectors that contribute most to economic activity are also those that tend to generate the greatest demand for bank financing.
Housing credit, which represents approximately one-third of the portfolio, also plays an important role. It largely consists of long-term credit, associated with relatively low risk and concentrated mainly in urban markets. This pattern is common in island economies, in which the real-estate sector carries significant economic and social weight. Consumer credit, which represents approximately one-fifth of the total, has shown some momentum in recent years, driven by increased access to banking services, external remittances and the relative stability of household income. However, this segment has a higher risk profile, which justifies closer prudential monitoring by authorities. The coexistence of these three credit segments—business, housing and consumer—shows that the banking system simultaneously supports production, finances long-term assets and sustains domestic demand, requiring balanced management of the risks associated with each form of credit.
The central question is whether the current level of credit in Cabo Verde is insufficient, adequate or excessive.
The central question is whether the current level of credit in Cabo Verde is insufficient, adequate or excessive. The available evidence clearly points to a broadly adequate level. First, the country’s economic structure, which is heavily service-based and accounts for approximately three-quarters of GDP, naturally limits the need for capital-intensive financing. Second, the small size of the domestic market and the predominance of small and medium-sized enterprises (SMEs) constrain the capacity to absorb credit. Finally, the country’s high exposure to external shocks, particularly in tourism and climate, requires a prudent approach to credit expansion to preserve financial stability. Assessments of the credit level should, therefore, consider not only its aggregate volume, but also its suitability for the productive structure, the size of the market and the repayment capacity of economic agents.
International experience in small island states also shows that excessively high levels of credit, particularly above 70 percent of GDP, are associated with increased systemic vulnerabilities. These may take the form of real-estate bubbles, resource misallocation or weaknesses in the banking sector. In this context, Cabo Verde’s current level lies within an intermediate range that may be considered balanced, reconciling the need to finance the economy with the preservation of macro-financial stability. This balance is particularly relevant for a country with an economy that depends on sectors sensitive to external cycles, making it essential to avoid credit expansion that could amplify risks during periods of slowdown or economic shock.
Rather than promoting an indiscriminate increase in credit volume, available financial resources must be channelled efficiently towards sectors with the greatest potential for growth and value creation.
The implications for economic policy are clear. Rather than promoting an indiscriminate increase in credit volume, available financial resources must be channelled efficiently towards sectors with the greatest potential for growth and value creation. In this regard, particular importance should be placed on strengthening financing for productive activities, such as export services, the blue economy and renewable energy, while seeking to reduce concentration in lower-productivity activities. The priority should, therefore, be the quality of financial intermediation. This means directing credit towards purposes that contribute to increased productivity, the gradual diversification of the economy and the creation of stronger foundations for sustainable growth.
In addition, it is essential to improve access to credit for small and medium-sized enterprises by developing guarantee mechanisms, strengthening financial-information systems and promoting business formalisation. In the consumer-credit segment, the adoption of appropriate macroprudential instruments is crucial to mitigate risks, particularly by establishing limits on household debt-service burdens and strengthening lending criteria. These measures will ensure that credit expansion, when it occurs, is supported by more robust information, improved risk assessment and closer alignment between borrowers’ financial capacity and the obligations assumed.
Another relevant strategic priority is diversifying the financial system, particularly by developing capital markets and introducing alternative financing instruments, such as leasing, venture capital (VC) or blended-finance solutions. These initiatives may help reduce dependence on bank credit and increase the resilience of the financial system as a whole. For a small economy, this diversification should be understood as a necessary complement to broaden the range of available financing options, adapt instruments to the specific needs of businesses and households, and reduce the concentration of risks within a single intermediation channel.
Looking ahead, evidence suggests that a private-sector credit-to-GDP ratio in the range of 50–60 percent represents an appropriate medium-term objective for Cabo Verde. A possible increase to levels between 60 percent and 70 percent may be viable, provided that it is accompanied by greater economic diversification, an increased share of productive credit and effective financial supervision. However, expansion beyond this threshold could entail additional risks incompatible with the economy’s size and structural vulnerabilities. This perspective points to a gradual approach in which credit growth follows the economy’s effective capacity to generate income, absorb investment and maintain adequate levels of financial stability.
In summary, Cabo Verde demonstrates that in small island economies, more credit does not necessarily mean better economic performance. The current level of financial depth is aligned with the country’s economic structure and with the patterns observed in comparable economies. The fundamental challenge, therefore, lies not in expanding the volume of credit but in improving its quality, efficiency and strategic direction to support sustainable, inclusive and resilient economic growth. In the context of international recognition in the banking sector, this interpretation is particularly relevant: It demonstrates a financial system that has achieved appreciable depth while maintaining a prudent approach compatible with Cabo Verde’s specific characteristics and the stability requirements of a small, open economy.