Africa’s Banks at a Crossroads

Sunday, May  17, 2009

By Bright B. Simons

UBA(L) ECOBANK(R)Africa’s banking sector, with 1% of global banking assets, has generally speaking, so far survived without the wholesale “corrections” being witnessed elsewhere (while European banks are on the average leveraged at 60, in most of Africa the range is between 10 and 15).

The general trend has been that strong export performers on the continent, and in particular those exporting countries that rely on hard (mainly industrial metals and oil) commodities, have seen more drastic effects on their banking sector than weaker exporters, or those that rely more on soft commodities.

Thus while Nigeria, South Africa and Zambia, in decreasing order, have all seen significant deterioration in banking indicators, Ghana, Uganda and Cote D’Ivoire have so far witnessed only mild adverse impacts.

The predictive power of using export-profile as the prism of observation can be much enhanced by adding macro-economic and regulatory oversight factors. That way it is easier to assess why North Africa, despite relatively high dependence on oil exports and
closer correspondence banking with western counterparts, has so far not experienced the savage torrents currently ravaging Nigeria. Thus even though exposure through oil-based sovereign wealth funds, which invested in western financial products, afflict most of the continent’s oil exporters uniformly, Kenya’s somewhat similar predicaments are likewise understandable in the same framework.

Nigeria’s specific case is a product of both sets of factors: export problems and macro-level instability, as well as the global financial crisis. Nigeria was on course to attain a high level of financial integration, with players in the capital and money markets, and the
traditional commercial banking sector, growing more and more entangled with equity and other funds, as liquidity surged through banks, funds, and trusts into the stock market and out again. This attracted more local issuers into Nigeria’s capital markets and more overseas institutional investors. When the flight from frontier markets begun, systemic pressures began to build, and Nigeria started to feel the heat.

We should not expect to see an end to the abominable intermediation spreads (i.e. the differences between deposit and lending rates, and between rates at different levels of the banking system) endemic to the sub-Saharan banking sector anytime soon.

Which brings me to a brief list of the key trends shaping Africa’s exposure/response to the global crisis, and which will define the continent’s post-crisis banking space.

   1. Macroeconomic Management and Sector Supervision

Inflation and Exchange Rate: It appears that during the food and fuel price hikes last year, many African central banks depleted huge chunks of their forex reserves in an effort to prop up national currencies and stabilize rising inflation. The direct effect of this policy is
not uniform in the countries where this took place. In Ghana politicians have taken the brunt of the backlash; in Ethiopia, as inflation breached the 50% line, government tightened capital controls; and in Angola the reserve requirement has been raised for
commercial banks, limiting their ability to expand credit, and implicitly to make profits. How the residual effects are managed should impact tremendously on the profit position of banks in countries forced onto the path of fiscal tightening.

Non-traditional Banking: A dangerous but increasingly fashionable trend is the tendency of African regulators to treat Nonbank Financial Instituitions (NBFI’s) as requiring the same type of oversights that traditional banks do. The collapse of America’s investment banking industry, uncritically blamed on lax sub-Basel regulation will no doubt further legitimize this trend. There is a clear risk of overdoing this and of killing the goose that laid the golden egg. NBFIs have been instrumental in taking financial services to the masses in Africa, venturing where traditional banks and the state have woefully failed. State-driven rural banking operations have almost universally failed to deliver the goods, and while recent deregulation in many countries has improved on their capacity, private sector participation in the form of NBFIs would continue to be vital to the process of financial deepening in Africa.

On a general note, de-liberalisation might offer itself as a tempting panacea to the uncertainties. There was barely a whimper when the Sulodo-led Central Bank of Nigeria recently took over WEMA, a struggling bank, from the control of its shareholders. But it is worth reflecting on the fact that just as liberalisation hasn’t overexposed Morocco’s banks, capital controls haven’t shielded South African institutions such as Investec and Old Mutual, among others.

2. Regionalisation and Globalisation

Both giant banking institutions, such as Nigeria’s UBA and EcoBank – the West African multinational, as well as mid-sized operators such as Kenya’s Commercial Bank, whose Tanzanian operation continues to grow from strength to strength, continue to demonstrate a throbbing hunger for “operational regionalization”. There is a strong belief amongst senior managers of this vanguard movement that the practice is of vital strategic advantage because of its risk-pooling and risk-diversification potential (for instance, quality of macroeconomic performance can be highly variable across Africa). Even financial institutions considered upstarts in their national markets are aggressively planning for cross-border expansion. Two of Ghana’s most respected NBFI’s Databank and UT Financial Services are to be counted amongst this number. Databank is paying more and more attention to its operations in places like Gambia, while UT has purchased a bank, BPI, which it plans to use in its “de-territorialisation” drive, perhaps through joint ventures in South Africa, even though the immediate focus appears to be entry into Nigeria [in Ghana, as in several African countries, non-bank finance institutions can buy banks, but banks cannot buy non-bank finance institutions].

Some, like UBA, have gone way beyond regionalization to globalization, by enhancing their capacity to raise funds in the global centres of capital and in the most vibrant of the emerging markets, such as the Pacific Rim. It also exhibits a surprisingly highly globalised approach to operations, with international hubs catering to markets defined in regional terms. Soon one in two countries in Africa will have a UBA presence, some of them connected to support offices as far away as the United States.

However, mid-capped banks such as Ghana’s Calbank will definitely have to go slower in their international fund raising efforts (even though the share of foreign funding for banking assets in Sub-Saharan Africa is very low – 5% in Ghana, for instance). Organic growth is unlikely to be any easier as a massive slow-down in global trade begins to hit
Africa’s tradeable sectors, with the attendant effects on retail borrowers hit by potential rises in joblessness.

      3. The China Factor

As the global economic crisis weakens the appetite and ability of Western companies to engage in risky projects in Africa, China has the opportunity to strengthen its hand in negotiations for African assets – to re-price its risk premium so to speak – and therefore to expand its market share, but only on the best terms and in the choicest deals. The banking sector will be no different.

    4. Asynchronous Trends

Islamic Finance: Sukkuk (an Islamic financial instrument that is similar to a bond) has arrived in Sub-Saharan Africa from the Gulf, and if its proponents work on their social marketing and branding mission well, the practice could send seismic shocks throughout the continent’s banking system. In Nigeria alone, at least 3 million of the country’s seventy million Muslims might be induced to experiment with the trend. What is surprising though is that North African banks do not appear keen to use the model as one of their differentiating strengths as they penetrate the South. One note of caution: sukkuk
banking, which bars interest payments, has not lived up to its full promise in the Gulf, its traditional home, despite much hype.

Mobile Finance: Mobile payment services are the new flavor in electronic banking on the continent. Some have suggested that as electronic currency grows in acceptability, telecoms will begin to pose a direct threat to banks, since the current model of using banks as intermediators will gradually decline as people become comfortable with just the electronic codes passing for money being exchanged from phone to phone. There is no indication though that this is imminent, and most mobile payment systems aren’t showing the level of growth in patronage that will suggest that the threat is plausible in the short term. In fact, the sudden enthusiasm of the major telecom carriers to themselves launch services, rather than just facilitate them, prompts many observers to predict a fragmentation that may confuse consumers beloved of common interfaces.

[Bright is a Development Analyst at IMANI : Center for Policy & Education, Accra, a think tank voted the sixth most influential in Africa by Foreign Policy Magazine.]