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BANKING in africa.

Economic growth walking hand-in-hand with financial liberalisation is bringing a smile to the normally blank facades of the international financial institutions. They can see reason for renewed optimism. The international financial institutions have been encouraged by signs of tangible recovery and political reforms across Africa, with the World Bank stirring itself enough to enthuse, "Financial sector reform is critical to Africa's development and competitiveness."

Somewhat more upbeat is the International Finance Corporation (IFC) observation, "Prospects are clearly brightening as many sub-Saharan economies have consolidated their recoveries.

Many countries are expanding private sector activity by fostering a conducive business and investment climate including the development of capital markets. The International Monetary Fund (IMF) projects real GDP growth at 5% for sub-Saharan Africa in 2000. This compares with 3% last year, or the annualised 3.8% growth between 1995 and 1999.

The World Bank projects real GDP growth of 4.5% in 2000 and reminds the world that this is well above the average of 2.5% of the past two decades. "In the longer term, Africa will benefit from the strong reforms that have spurred growth and created the foundations for sustained future growth in most countries," says the Bank.

Besides South Africa, which boasts a sophisticated banking system on a par with the OECD countries, emerging economies, notably Nigeria, Cote d'Ivoire, Ghana, Gabon, Botswana, Zimbabwe, Mauritius and Kenya are seeking to develop modern efficient banking systems.

Benefits of increasing deregulation

The mid-nineties were a period of much needed financial rehabilitation across much of sub-Saharan Africa. Financial liberalisation and deregulation have revolutionised the capabilities of prime indigenous banks. Deregulation measures in most countries are being reflected in the significant relaxation of credit ceilings and directed, or subsidised lending in favour of government-approved projects.

Positive real interest rates on savings accounts are now the norm (with a few exceptions) and even this simple and startlingly obvious banking fundamental provides greater national value. But there is some way to go. The IMF estimates Africa's domestic savings ratio at 15.9% in 1999, compared with 32.5% for Asia.

The more advanced countries on the liberalisation road are using the core principals of effective central control as laid down by the Basle-based Bank For International Settlements (BIS). Chief among these are higher capitalisation requirements, the stringent reporting of balance sheets, careful monitoring of loans, stricter criteria for loan-classification, risk-weighting including the reduction of risk exposure and bad debt provision.

Restructured and recapitalised

In over 25 countries, banks have been restructured and recapitalised, or privatised and liquidated, as in Kenya during 1998-99. Capital and liquidity requirements are now better enforced. The Central Bank of Nigeria has imposed upon new banks a minimum capital limit of Naira 1 billion. Meanwhile in Kenya, following the banking crisis of 1998, the central bank is increasing minimum capital requirements to Kenya shilling 500m by end-2002, from the current Ksh200m. Higher capitalisation ensures bank solvency, encourages mergers among small banks, reduces fees and helps to upgrade services through greater inputs of economies of scale.

New banking laws such as banking secrecy rules have been introduced, further protecting users.

This deregulation is also fostering a competitive culture, with management expected to be more professional and, in turn, forcing them to be innovative in new products and service offerings. At the same time demand for these products comes from a new group of sophisticated corporate and retail clients.

Prime banks, especially those with foreign share holdings, such as Union Bank of Nigeria -- the seventh largest in sub-Saharan Africa -- or the Ghana Commercial Bank, are already appearing leaner and fitter, with a focus on competitive marketing, product-ranges, pricing and technology. Top-tier banks have vastly increased their respective market shares and improved their diversified capabilities, from retail/corporate banking to investment banking. Banks are focusing on niche markets such as stockbroking, mortgages, insurance and leasing.

IT systems in operation

Banks in Nigeria, Ghana, Kenya, Mauritius and Zimbabwe are improving their payments systems, helped by increasing usage of automated teller machines (ATMs) and payments through electronic funds transfer at the point-of-sale (EFTPOS), as well as credit and debit cards.

There have been sizeable investments in information technology systems. The Union Bank of Nigeria and the Kenya Commercial Bank, for example, have improved productivity and services in this way. The Union Bank of Nigeria is currently spending N1.5bn towards upgrading its technological infrastructure, with the aim of linking its 70 major urban branches. ATMs expedite service delivery, minimise delays and queues in banks.

Cross-border payments for overseas and intra-regional trades are channelled via the SWIFT network.

Chief Joseph Sanusi, the governor of the Central Bank of Nigeria confidently said: "In terms of quality of service, personnel and infrastructure, Nigerian banking competes very well with other parts of the world."

According to the African Development Bank, the number of private banks have risen by 50% between the late 1980s and 1998 and their respective share of total banking assets exceeded 40%. The Ethiopian and Tanzanian government for example, have recently granted licences to new private banks.

This is much to the liking of the World Bank which maintains that private banks are more efficient at financial intermediation than nationalised banks. New institutions such as Ecobank, owned by 1,200 institutional shareholders from 14 West African countries, or HSBC Equator Bank - a joint venture between Nedeor of South Africa and British giant HSBC - are providing intense competition to older established banks in the region. New merchant banks being formed in Ghana and Nigeria are now headed by western-qualified bankers.

Reasonably high returns

A vibrant banking sector can be assessed in terms of improved earnings, better portfolio quality and credit allocation, as well as operational efficiency. The returns on assets and capital by prime banks in Nigeria, Mauritius, Zimbabwe and Ghana are reasonably high by international standards.

The downside is that many banks operate in heavily-dependent commodity economies and are vulnerable to risks arising from a severe deterioration in terms of trade. Since last year, the earnings and asset-quality of Ivorian banks have been undermined by a slump in world cocoa prices, the country's major industry. Major banks like SGBCI (a subsidiary of Societe Generale) and BICICI (the Banque Nationale de Paris's affiliate) are also affected by reduced business for international trade-related services such as letters of credit and guarantees.

On the other hand, sustained strong oil prices in the range of $20-25 a barrel will improve the outlook for Nigerian banks (in theory) because of higher government and private sector consumption and investment, leading to a revival of imports.

In most countries, declining fiscal deficits and new growth areas in manufacturing, services and agri-business are enabling prime banks to shift their emphasis from chronic deficit financing to private sector lending, targeting local blue-chips and wealthy individuals. Therefore, private banks are experiencing fewer bad debts because of prudential lending and improved credit-risk procedures.

Most importantly, the top banks have made adequate provisions for possible non-performing loans (NPLs), a marked turnaround from earlier years. Of course this is not the case all over Africa. Some Kenyan banks are burdened by bad debts and this problem is becoming a noticeable feature of the Zimbabwean banking system. The Central Bank of Kenya's figures show that 30% of total bank loans (Ks240bn) were classified as NPLs in early 1999.

The role of foreign banks in Africa

The globalisation of the financial industry is contributing to more efficient markets and financial institutions in the emerging world. In general, a host country has certain expectations from an influx of foreign banks. Foreign institutions generally do help new domestic markets by bringing technology, managerial expertise and new product ideas which boosts domestic savings and promotes international trade and foreign investment.

The British banks, led by Barclays PLC & Standard Chartered, dominate Anglophone countries. French banks, Societe Generale, Credit Lyonnais and Banque Nationale de Paris, have strong operations in Francoph-one Africa.

Citigroup operates a truly 'Pan-African strategy' with offices in over 14 countries and since the mid-1990s, Standard Bank Investment Corporation and Nedcor have been building regional businesses focusing on trade financing.

Foreign banks concentrate almost exclusively on corporate and private banking services. They have created niches in syndicated lending, corporate financing, structured trade finance, cash management and custodial businesses, as well as asset management and treasury services.

The long-established major foreign banks have had beneficial effects in their host economies in terms of upgrading the quality of services by importing advanced risk-management standards, regulatory practices and competent bankers. Tougher foreign competition forces the indigenous banks to be more innovative.

Standard Chartered Bank (Ghana) has pioneered electronic banking, including payments of clients' bills via ATMs. In Nigeria, Citibank and Credit Lyonnais (in 1998) introduced an electronic payment system, using smart card technology. Citibank is also developing commercial paper markets. In Cote d'Ivoite, it had arranged three to five year bond issues and the issuance of commercial paper for Shell and Unilever in Kenya. More corporate deals are anticipated in future.

Despite regional and country risks, Africa offers rich pickings for foreign banks. Most multinational corporations, local blue-chip firms and high net worth individuals prefer to deal with foreign bankers. Thus, international banks are generating higher returns in Africa as compared to other regions. Another reason for robust profits is that prime banks are the only channels for capital raising because of under-developed domestic stock and bond markets.

Incomplete bank restructuring

Banking systems in the least developed countries are dysfunctional and need urgent overhaul. Many state banks are 'technically insolvent'. They possess negligible capitalisation, coupled with an overhang of bad debts and their reserves are insufficient for absorbing annual loan losses.

The main reasons for NPLs include excessive state lending to finance ballooning budget deficits, and funding parastatals and large uneconomical projects. Other irregular practices such as insider lending to bank shareholders and directors, or members of ruling elites, have also resulted in bad debts.

Institutional capacity is also weak, as regulators have little knowledge of risk-management techniques. The problems are compounded by outdated legal and regulatory frameworks.

Furthermore, because of poor telecommunications and a lack of automation, the payment systems are mostly manual. This results in long delays in bank transfers, verifications and settlements, as well as fraud in some cases. These problems undermine public confidence in the system.

Effective competition remains weak in countries where a few large state banks dominate the sector. An excessive concentration of deposits poses economic risk, in the event of bank failures. A monopolistic sector leads to cartelisation, poor efficiency and higher service costs.

So it looks as if many banks around the continent still have the formidable task of overcoming these problems to develop a viable banking sector.

Future challenges and prospects

The central banks of countries where most banks are insolvent, have to start phasing in the Basle Committee's 8% capital adequacy guideline. The World Bank could then fund recapitalisation programmes for state banks that implement genuine restructuring plans but this can be politically tricky. NPLs should be removed from balance sheets, either by swapping bad debts for interest-bearing government bonds, or transferring NPLs to state agencies, as in Ghana.

In the post-restructuring period, senior managers must be responsible for debt recovery and loan-loss provisions and held to that responsibility. Equally important is that banking supervisors receive comprehensive training in financial controls and risk-management procedures. The World Bank notes, "An effective regulatory regime creates an environment that encourages prudent risk-taking."

Finally, Africa needs to accelerate bank privatisation. Ending state controls relieves the pressures on management to fund unprofitable nationalised industries, or lending to government cronies, leaving funds to be channelled into productive investment.

Demand for corporate services will increase considerably if privatisation takes off. Medium-sized banks need to diversify their product ranges into new areas of corporate finance and consultancy services and improve their credit-risk analysis skills.

Top-tier banks should develop attractive new products to offer safe and healthy returns on long-term savings. These will also reduce capital flight out of Africa, especially from Nigeria, and help finance productive industrial sectors.

Usually, medium- and long-term capital is not easily available. Project financing requires a transparent and secure legal climate, whereby bankers have prompt recourse to the judicial system in event of default. "If Africa wants its banking system to develop, it must address competition law," concludes E. Hernandez-Cata, the IMF's associate director for Africa.

In most Anglophone countries, commercial and competition laws are poorly enforced and this constitutes a major obstacle to the provision of long-term venture capital. There is also a need for credit-rating agencies, as in South Africa, that can assist in the assessment of potential borrowers' credit-worthiness. Of course this also relies on honest corporate reporting and these rules also need tightening.

In some countries, clearing and settlement systems for processing inter-bank and cross-border payments remain inadequate. An upgrading of the technological infrastructure will need large external funding and technical support from the World Bank and the IFC. A prompt and efficient payments system is an important criteria for fostering a market economy.

Further restructuring and consolidation through mergers and acquisitions, as well as privatisations of African banks, are required if the industry is to withstand the challenges of globalisation. Most countries still have too many banks: Nigeria boasts in excess of 80. Central banks must encourage larger and more focused banks, thus increasing efficiency, cutting operational costs and leading to a more optimal utilisation of banking resources. This enables a few prime indigenous banks to compete with foreign banks on more equal terms.

The long-term viability of the banking sector can only be attained if the authorities are capable of developing stronger and well-regulated banks such as those in South Africa. An accelerated pace of banking reforms should be an important priority for the early 21st century.
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Author:Siddiqi, Moin
Publication:African Business
Geographic Code:60AFR
Date:Apr 1, 2000
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