07 February 2015 – Rapid expansion of cross-border banking in Africa in recent years poses oversight challenges that, if unaddressed, may increase systemic risks, IMF staff said.
A recent report noted that pan-African banks have a systemic presence in around 36 countries and are now more important than the continent’s long-established European and American banks.
Pan-African banks are improving competition, especially in host countries with small markets, driving innovation, and bringing new opportunities for diversification for the home countries.
But the report highlighted that supervisory capacity is constrained and under-resourced in most of Africa. Progress is being made in several areas, but efforts to strengthen oversight in some cases need to be intensified.
“The emergence of pan-African banks is a welcome development given the need for financial deepening and inclusion in Africa. At the same time, the rapid cross-border expansion of these banks also raises new regulatory and supervisory challenges that, if left unaddressed, could pose systemic and spillover risks” said Mauro Mecagni, Assistant Director of the IMF’s African Department.
Drivers of the expansion
The rise of pan-African banks reflects a convergence of factors.
– The end of apartheid in the mid-1990s opened the door for South African banks to extend their expertise abroad.
– In Nigeria, the large increase in minimum capital requirements, following a banking crisis in the mid-2000s, pushed banks to consider expanding abroad to make use of their new capital bases.
– Moroccan banks also saw opportunity to extend their networks south in the face of more limited opportunities at home.
– A renewed impetus for regional integration, coupled with the success of mobile payments in Kenya was propitious to the expansion of Kenyan banks in east Africa.
More generally, increasing trade linkages between African countries induced banks to follow their clients abroad. The easing of civil conflicts, the significant improvements in macroeconomic performance, and the opportunities arising from large unbanked populations across the continent was fertile ground for the expansion
The presence of pan-African banks offers opportunities and benefits for the economies involved. In particular, cross-border activity brings new business opportunities and diversification for the home countries, while host countries benefit from
– Increased competition, access to higher skills and expertise, and access to capital;
– Diversification of sources of financing; and
– Possible upgrades in the quality of supervision and regulation induced by foreign banks that bring higher home country standards, such as those of Morocco and South Africa.
Anecdotal evidence suggests that cross-border banks are improving competition, especially in host countries with small markets. These banks are driving innovation, enhancing financial inclusion, and in some cases have contributed to lower costs.
African banks have also become lead arrangers for syndicated loans, filling the gap left by European banks. The global financial crisis and associated regulatory stiffening, along with high costs of small-scale operations, has accelerated the retrenchment of European banks from the continent.
Channels for risk
The rise of pan-African banks also opens new channels for transmission of macro-financial risks and other spillovers across home and host countries. As these groups develop in reach and complexity, significant supervision gaps, governance issues, and questions about cross-border resolution have emerged. This expansion has created a network of systemically important banks, whose financial health in some cases is not fully known due to gaps in consolidated supervision.
Supervisory capacity is already constrained and under-resourced in most of Africa, and the cross-border banks put additional pressure on home supervisors to ensure these groups are adequately supervised.
Progress is being made in most areas but efforts to strengthen oversight in some cases needs to be intensified. In one important case a large cross-border bank is not subject to regulation or supervision on a consolidated basis.
Charles Enoch, of the IMF’s Monetary and Capital Markets Department when the report was compiled, noted: “This project is an application of the institutional priorities of sharpening the focus of surveillance by strengthening the assessment on the financial sector, interconnectedness and spillovers and represents an example of excellent collaboration among IMF’s departments and with the authorities in the region”.
The paper included a set of policy recommendations, among which high priority is given to implementing consolidated supervision, enhancing cooperation on crisis management and resolution, ensuring effective supervisory colleges are in place for all the pan-African banks, and creating an oversight committee of main cross-border bank regulators to drive the reform agenda.
The lack of regulatory oversight of bank holding companies and their supervision on a consolidated basis in some home jurisdictions needs to be addressed urgently, the report added. And without a clear cooperation plan for resolution mechanisms, the report said, supervision alone may have limited effectiveness.
Most African countries need also to enhance their bank resolution frameworks at the national level. The recent global financial crisis has demonstrated the costs of not having a workable cross-border resolution framework in place, and the difficulty of constructing one, underscoring the need for sustained efforts in this area, the report noted.
On January 12, IMF staff briefed the IMF’s Executive Board on the report and key findings were discussed with the governors of the central banks involved during the 2014 IMF-World Bank Annual Meetings in Washington, D.C. Both the authorities and the Board welcomed the initiative as timely, important, and contributing significantly to addressing the issues, and strongly supported the recommendations. The innovative regional approach is already informing the new thrust on macrofinancial aspects of the Fund’s surveillance work.
Paul Mathieu, regional advisor for Africa in the IMF’s Monetary and Capital Markets Department noted that “this work was just the first step of a project to better understand growing cross-border financial linkages and systemic risks in Africa and reinforce financial oversight.”
The first step is to ensure that the findings and recommendations inform bilateral and regional surveillance. This has already begun with the IMF’s Article IV economic check-up consultations currently under way with Morocco and the West African Economic and Monetary Union.
The IMF staff is also exploring ways to deepen the analytical work through stress tests of major pan-African banks; and to better understand the interconnectedness of cross-border linkages, vulnerabilities and avenues of contagion. In addition, a dedicated technical assistance effort will be elaborated with IMF partners in Africa to support needed reforms across the continent.