Pan-African Banking Model: Balancing Risk and Reward

LAGOS (Capital Markets in Africa) – Africa-originated banks are increasingly becoming dominated players across the financial landscape in Africa. This is happening at a time when some western-based banks are scaling back their activities in the region. For the most part, these pan-African banks originate from large African economies (based on income) such as Nigeria (United Bank of Africa), South Africa (Standard Bank), Morocco (Attijariwafa Bank) but also small economies such as Togo where Ecobank is headquartered. Fueled by recent economic prospects, and rising middle class across the region, these banks have more than double their operations in Sub-Saharan Africa within a decade (IMF, 2014[1]).

On the positive side, they are contributing to providing access for financing to a large share of the region’s population that would otherwise not have access to financial services as well as providing both the technical support and in some cases filling the financing gaps that African governments need to finance infrastructure development. However if such banks are not properly regulated, they may pose a significant challenge to the region’s financial system going forward.

How did pan-African bank emerge?
The answer in part lies in the geopolitical landscape that prevailed in Africa in the mid-1990s to early 2000s. In South Africa, the end of apartheid brought new opportunities for South African banks with excess capacity to take advantage of new opportunities abroad. Indeed Standard Bank South Africa started its expansion in the region by acquiring operations in 8 African countries in 1992, followed by further strategic acquisitions in Tanzania and Uganda in 1995 and 2002 respectively. For many pan-African banks, the end of numerous civil wars in Africa and the rise of more democratic regimes meant that political risks were low. From early 2000 the continent also registered strong economic growth, averaging 5% and increasing cross-border trade. Indeed, intra-African trade went from 10% in 2000 to 15% in 2015. These resulted in new markets and with them, opportunities for banks that were financially and strategically ripped to take advantage of the new economic prospects elsewhere on the continent.

But the biggest wave of cross-border expansion took place following the global financial crises. As some large western based banks scaled back their global ambitions (FT, 2014[2]) including in Africa, pan-African bank’s expanded to take their place. This has further been bolstered by the recent oil crises that started in mid-2014 and the scaling back of unconventional monetary policy in the west.  Falling commodity prices have curtailed growth opportunities in emerging and developing markets and the prospect of a significant rise in treasury yields in many developed markets has also reduced the need to reach for higher yield in developing countries. Hence most global banks continue to scale back their activities across Africa. Early this year, Barclays bank, a bank that has maintained a presence in Africa for over a century, announced its decision to pull its operations out of Africa, citing the difficult economic conditions in Africa, potentially providing further opportunities for pan-African banks to fill the gap

What are the expansion strategies?
A number of strategies are helping pan-African banks to expand. To minimize entry cost and risks, in some cases, they have partnered, through merger and acquisitions, with long established local counterparts (either foreign or locally owned) with local knowledge of the business environment to take advantage of existing local customer base and networks in difficult markets, such as Eco bank’s acquisition of Trust Bank in Ghana and Standard bank’s acquisition of ANZ Grindlays Bank in eight African countries. In others, they have also partnered with those from other emerging markets willing to inject new capital to establish a presence in Africa. These partnerships help infuse new technology, capital, as well as governance strategies that are aiding pan-African banks to compete successfully across Africa.

Pan-African banks have also benefited from a strategic combination of using brick and mortar expansion as well as modern banking and communication technology. First banks often need to time markets and enter when it is profitable to do so. Brick and mortar banks require significant investments and branching. Hence in more populated areas where businesses and jobs are expanding, these banks are willing to sink the initial cost of entry to have a physical presence. In others where markets are thin, a combination of mobile banking and networks of agents are used to source customers from otherwise unattractive and underserved markets.  

Move towards infrastructure finance and technical support
A major benefit for African governments with the emergence of large pan-African is the technical and financial support they provide in the finance of large investment and infrastructure projects. Increasingly, Africa-originated banks are playing significant roles in filling the financing and technical needs, of various governments, including the financing of large infrastructure projects that are in most cases co-financed with multilateral banks. There is evidence that large pan-African banks such as the Standard bank, Attijariwafa and Ecobank are increasing playing mandated lead arranger and syndicating roles in major investment and infrastructure finance projects across Africa. Few examples include the international airport in Mali and the highways in Senegal.

Challenges for pan-African Banks
While the recent economic slowdown in Africa has contributed to the expansion of Africa originated banks across the region, it has also brought significant challenges for those that succeeded in penetrating other regional markets. One of the biggest challenges is the concentration of assets in commodity and minerals sectors. This is not surprising since, in most economies, these sectors account for a larger share of economic activity. However, volatility in commodity and mineral prices means that pan-African banks with significant assets in these sectors can face sudden crises as was recently the case in Nigeria, Angola and Ghana with non-performing loans in some cases reaching as high as 16%. In Nigeria alone, some estimates suggest that oil assets account for close to 25% of total bank loans. For those that provide direct support to governments or public sector entities, fiscal challenges by these governments as a result of falling commodity prices means that these public sector entities may find it difficult to honor repayment obligations with potential negative effects on the banks’ balance sheets.

Regulations of the Banking Sector:
As banks begin to spread beyond their home country, there is the need for a concerted effort to harmonize banking laws to avoid systemic risk. Since the mid-nineties, the continent has registered a single systemic risk (Bempong and Sy, 2015[3]), yet the expansion of pan-African banks calls for more scrutiny. More efficient coordinated regulations will be a win-win situation for both banks and regulators alike.  On one hand, it will make it easy for banks to do business across countries and minimize their political risk while allowing regulators to enforce banking rules and share information more effectively. Not doing so could allow pan-African banks to take on excessive risk elsewhere on the continent and could pose risks to regional financial stability.

Yet in most African countries, this has not happened and banking regulation continues to lag behind global best practices.  Already most African countries continue to rely on Basel I supervision frameworks while the rest of the world has moved on to more modernized frameworks of Basel III and IV (exception include South Africa, Morocco, and Mauritius). But as banks emerge and conduct more complex regional transactions, countries need to be able to harmonize and coordinate supervision frameworks.

Regulating Pan-African banks at the regional level is a significant challenge. The recent difficulty by regulators across the developed world in mobilizing cross-country support for reforms to minimize excessive risk taking by global banks after the global financial crises only highlight the challenges ahead.  Regionally enforced regulations can face significant backlash from banks themselves, as well as political elements in countries that stand to disproportionately gain from lax rules but may bear only a small share of the risk the system implodes. Further, regulations are not only supposed to be robust in terms of the legal framework and content, there is also the need to have the resources to enforce them. But an often unorganized difficulty is that the expansion of regional banks has come along with the birth of small banks as well. This means that regulatory resources are being stretched thin within countries, making it difficult to focus resources on cross-border reforms even in cases where the political will to do so exists.

But pockets of bold reforms are emerging to control large regional banks in some countries albeit at a slow pace. Just this year, Nigeria has labeled 8 large banks systematically important banks. These banks, including Ecobank Nigeria, United Bank of Africa, and Skye Bank are required to maintain a minimum of 16 per cent capital adequacy ratio relative to the 8 percent required banks under Basel III. While this may be a small step in the broad scheme of things, the recognition that large banks have to face more stringent oversight is a step in the right direction, and in the medium to long-term, could encourage other countries to move towards regional best practices. 

[1] IMF (2014), “Pan-African Banks: Opportunities and Challenges for Cross-Border Oversight”, International Monetary Funds, Washington DC. 
[2] Financial Times (2014), “Big banks giving up on their global ambitions” by M. Arnold and C. Hall. 
[3] Bempong E. and Sy M. (2015), “The Banking System in Africa: Main Facts and Challenges”, African Development Bank, Africa Economic Brief, Volume 6, Issues 5.

This article features in the February 2017 edition of INTO AFRICA Magazine, insights on Africa’s economic prospects for 2017.

Contributors’ Profiles
Eugene Bempong Nyantakyi is a Private Sector Development Specialist at the World Bank Group (WBG). Prior to joining the WBG in July 2016, he worked as an Economist at the African Development Bank and before then, was an assistant professor of economics at Whitworth University in Spokane, Washington. He holds a Ph.D. in Economics from West Virginia University/

Mouhamadou Sy is an Economist at the African Development Bank (AfDB). Prior to joining the AfDB, he worked as an Economist in the French Prime Minister’s Economic Policy Planning Office (CGSP) in Paris. He holds a Ph.D. from the Paris School of Economics (PSE), which won him a prize for the best Ph.D. thesis on “Monetary, Financial, and Banking Economics” awarded by the Banque de France Foundation jointly with the French Economic Association in June 2014.