Casablanca – Morocco is preparing to establish a secondary market for distressed bank debt, a move that could change how financial institutions manage unpaid loans and how investors participate in debt recovery. The initiative comes as the stock of non-performing loans continues to grow and as authorities work on a legal framework allowing banks to transfer troubled assets to specialized investors.
The proposed market is gaining attention following plans by the International Finance Corporation (IFC) and German distressed-asset specialist EOS Holding to establish an investment vehicle dedicated to purchasing non-performing loans and certain real estate assets from Moroccan financial institutions. The project, known as DARP NPL EOS Morocco, has a proposed investment capacity of up to $69.7 million, with IFC and EOS each expected to contribute up to about $34.9 million in equity. The project remains pending approval, with an IFC Board review scheduled for October 15, 2026.
The proposed facility would target loans owed by households, micro and small businesses, medium-sized companies and larger corporations. It could also acquire real estate assets already owned by financial institutions following recovery or enforcement procedures. The structure would allow banks to transfer selected troubled assets rather than continue managing every non-performing exposure internally.
The initiative comes as Morocco’s banking sector faces a sizeable stock of unpaid loans. Bank Al-Maghrib data show that non-performing loans reached approximately $10.9 billion at the end of May 2026, up 4.9% from a year earlier. The overall non-performing loan ratio stood at 8.3%, although the quality of loan portfolios varied considerably across sectors.
The increase follows several years of rising distressed credit. At the end of 2025, non-performing loans were around $10.5 billion, after increasing by about 5%. Despite the rise, the banking system maintained substantial provisions and capital buffers. Bank Al-Maghrib reported provisions of around $7.2 billion at the end of 2025, while the overall provisioning coverage ratio was approximately 68%. These buffers provide protection against losses, but they do not eliminate the economic cost associated with keeping impaired loans on bank balance sheets.
For banks, non-performing loans create several problems. They generate limited or no regular cash flow, require provisions, consume capital and demand staff and legal resources for recovery. The longer the recovery process takes, the longer those resources remain tied up. A functioning market for distressed assets could give banks another way to recover part of the value of these loans and redirect resources toward new lending.
The proposed IFC-EOS investment fund is therefore smaller than the overall stock of distressed debt, but its potential importance lies in establishing a mechanism that could later be used by other investors. IFC’s project documentation describes the proposed facility as its first Distressed Asset Recovery Program investment in Morocco. EOS, which has more than five decades of experience in distressed assets, would bring specialized expertise in pricing, acquiring and managing non-performing loan portfolios.
A secondary market could also change the role of the creditor. When a bank sells a distressed loan, the borrower does not automatically see the outstanding debt cancelled or reduced. Instead, the right to recover the debt can be transferred to another entity. The purchaser then becomes responsible for managing the portfolio and seeking repayment under the applicable legal and contractual arrangements.
This distinction has become important because the development of the market has generated questions about whether the sale of distressed loans would provide debt relief to households and companies. The proposed framework does not provide for automatic cancellation simply because a loan is transferred. Any reduction, restructuring or settlement would depend on the terms negotiated in a particular case and the applicable legal procedures.
The price paid by an investor can also be significantly below the original value of a loan. A buyer may purchase a portfolio at a discount because recovery is uncertain, legal proceedings may take years, collateral may have to be sold and some borrowers may have limited capacity to repay. The investor’s potential return comes from recovering more than the amount paid for the portfolio, after accounting for legal, administrative and servicing costs.
A discounted sale price, however, should not automatically be interpreted as a corresponding reduction in the borrower’s legal obligation. For example, if a loan with a nominal balance of $100,000 is sold for $50,000, that transaction does not by itself mean that the borrower now owes only $50,000. A different amount could result from a restructuring, settlement or other agreement, but such an arrangement would be separate from the simple transfer of ownership of the claim.
This distinction makes borrower protection one of the central issues surrounding the creation of the new market. Households and companies can fall behind on payments for many reasons, including unemployment, declining business activity, delayed customer payments, lost contracts, higher operating costs or broader economic disruptions. A system focused exclusively on maximizing recovery could create additional pressure on borrowers who may still be viable if given time or an appropriate restructuring arrangement.
Morocco is consequently working on legislation intended to provide clearer rules for the transfer of non-performing loans. Draft Law No. 02.26 establishes a framework for the direct transfer of distressed loans held by credit institutions and similar entities. The proposed legislation addresses the conditions for transfers, the entities eligible to acquire such assets and the rights attached to transferred loans. It also seeks to provide safeguards concerning borrowers and personal data.
The regulatory framework will need to address several practical issues, including borrower notification, the transfer of guarantees, accounting treatment, taxation, data protection and the responsibilities of debt-collection companies. Bank Al-Maghrib is also expected to play a role in defining the prudential requirements governing the new market.
The development of a secondary market could be particularly relevant because Morocco currently relies heavily on banks to manage distressed loans internally. A specialized market would create a division between lending and debt recovery. Banks could concentrate more on financing households and companies, while specialized investors could focus on evaluating troubled portfolios, negotiating settlements, managing collateral and pursuing legal recovery when necessary.
The sectors with higher default rates demonstrate why the issue is broader than bank accounting. Recent Bank Al-Maghrib data show elevated non-performing loan ratios in trade, manufacturing, hospitality and construction, while household non-performing loans reached about $3.7 billion at the end of 2025. Agriculture and fisheries also recorded an increase in their default ratio, reflecting the financial pressures facing some borrowers.
At the same time, the banking sector remains capable of absorbing the current level of credit risk. Bank Al-Maghrib’s stress tests indicate that Moroccan banks would maintain significant capital buffers under adverse scenarios. This suggests that the proposed secondary market is less about responding to an immediate banking crisis and more about improving the system’s capacity to manage accumulated credit risk over time.
The frequently cited figure of around $11.3 billion should therefore be treated as an estimate of the broader distressed-debt market rather than the size of the IFC-EOS vehicle. The latest official figures put outstanding non-performing loans at roughly $10.9 billion at the end of May 2026, while subsequent market estimates have placed the stock slightly above $11 billion. These figures represent the underlying pool of potentially distressed assets, not the amount that banks will necessarily sell to investors.
The success of the reform will depend on how the market is structured. Investors need reliable information and predictable recovery procedures to determine what they are willing to pay. Banks need prices that make asset sales economically worthwhile. Borrowers need clear notification procedures, access to settlement or restructuring mechanisms where appropriate, and protection against abusive recovery practices. Regulators and courts need rules that provide legal certainty without weakening legitimate creditor rights.
The proposed IFC-EOS facility could provide an early test of these mechanisms. If approved, its relatively modest size compared with the overall volume of distressed debt could allow the market to develop gradually. Successful transactions could establish pricing references, demonstrate how portfolios can be transferred and managed, and encourage other institutional investors to participate.
For Morocco, the broader objective is to create a system in which distressed loans can move from banks to specialized investors without weakening financial transparency or borrower protections. Such a market could help banks recover capital tied up in difficult assets and potentially increase their capacity to finance new economic activity.
The creation of a secondary market will not eliminate bad debt, and it will not automatically solve the financial problems of borrowers. Its role would instead be to create another channel for managing loans that banks have difficulty recovering themselves. Whether the reform delivers that result will depend on the quality of regulation, the efficiency of judicial recovery, the transparency of portfolio pricing and the balance between creditor rights and borrower protection.
Morocco is therefore moving toward a new model for handling distressed credit, with the proposed IFC-EOS vehicle providing an early test of the concept. The challenge now is to build a market that can turn difficult loans into manageable financial assets while ensuring that the risks associated with them remain visible, regulated and properly allocated.
