Daniel Mminele: Shaping cross-border banking integration in Africa
Address by Mr Daniel Mminele, Deputy Governor of the South African Reserve Bank, at the
Association for African Central Bankers (AACB) Roundtable on "Cross-Border Banking In
Africa - A Force for the Good?", Washington DC, 11 April 2014.
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1. Introduction
Good afternoon ladies and gentlemen. Thank you to the conference organisers for inviting
me to deliver a few remarks this afternoon on shaping cross-border banking integration in
Africa. This is an area which has seen tremendous growth in recent years, particularly with
the rise of Africa-based regional lenders.
I will divide my remarks into four parts: I will first reflect on the drivers of cross-border banking
within the region; then highlight the benefits of cross-border banking; consider the challenges
of integration and finally, consider the role of regulators.
2. Drivers of cross border banking in Africa
Against the backdrop of robust growth on the African continent over the past decade, Africa
has become an increasingly sought after and active destination for investment and banking
activity. The year-on-year growth in Africa's gross domestic product has consistently
surpassed that of the global economy, and that of advanced economies, benefitting from
high commodity prices of recent years, as well as rising domestic demand in alignment with
trends of increased urbanisation and disposable income within the region1. According to the
International Monetary Fund April 2014 World Economic Outlook, Sub-Saharan Africa (SSA)
is forecast to grow by over 5 per cent in 2014, up from 4.9 per cent in 2013.
SSA saw substantial capital inflows in 2013 totalling US$30 billion2, with countries such as
Ghana, Nigeria and Zambia in particular benefitting from an increase in portfolio inflows,
reflecting growing positive global business sentiment towards Africa. There has also been
robust loan demand within the region, according to the Institute of International Finance's
survey on emerging market bank lending conditions. It would seem then that despite slowing
demand for commodities from China, growth could remain supported by improved investor
sentiment towards African financing and an increasingly conducive business and debtor
environment in the region driving financial deepening and cross-border banking.
Another reason for the rise in cross border banking, particularly in Africa, is the wide-ranging
international financial regulatory reform agenda adopted after the global financial crisis. The
new and stringent regulatory requirements imposed by jurisdictions such as the US and
European Union on their banks have meant that these international banks are doing less
business within Africa, opening up an opportunity for larger African based banks to enter new
African markets. The integration process is however slow and not without its challenges, as I
will elaborate on shortly.
3. Benefits of cross-border banking
Growth in African cross-border banking has not been confined to South Africa's four largest
private banks. Banks from Nigeria, Morocco and Kenya, including banks such as Ecobank
and the United Bank of Africa, have also taken advantage of emerging opportunities. The
resulting increase in the availability of banking services to segments of the African population
previously excluded from formal banking, has contributed to enhancing the culture of savings
and entrepreneurship with obvious benefits for economic growth and development within the
region. With this, Africa has taken significant steps towards having a relatively mature
banking system and has increased the resilience of the region to systemic risk3.
The arrival of regional African banks has improved the efficiency of the banking sector in host
countries. They stimulate competition, and increase the diversity of available financial
services, generally at transactional lower costs, improved quality and potentially lower
interest rates4. This in turn positively affects household savings and consumption and the
availability of credit to businesses, leading to gains in employment and standards of living.
Furthermore, cross-border integration has the significant benefit of forcing the domestic
banking regulatory and supervisory systems to modernize as larger capital flows within a
country necessitate improved regulatory frameworks, technological innovation and efficient
payment systems5. These modernizations also create opportunities for greater financial
inclusion, both with regard to individuals and SMEs.
4. Challenges for integration
While cross border banking creates significant benefits, it also is associated with challenges
which need to be considered. Unlike the Euro area, where most banks have made relatively
similar progress in implementing the Basel III framework, African jurisdictions are still at
varying stages of implementing the various Basel capital standards.
First, operating in multiple countries creates supervisory and compliance challenges. The
banks are expected to report to both home and host country supervisors who may use
different regulatory standards or may interpret similar standards in different ways. In many
cases, the same information is reported to different supervisors in different formats as per the
relevant supervisor's requirements, which often causes duplicate reporting or banking
entities operating in different jurisdictions may have to provide reporting on potentially all
three Basel standards. These differences become even more pronounced when considering
the operational and business impact. Although African regulators have been notably
increasing their level of training and understanding of all Basel frameworks, it remains
necessary for banking groups to appoint staff members with different skills to address the
various elements between the Basel frameworks, and to implement systems that have the
capacity to cater for all the different regulatory and reporting requirements. This can be both
time consuming and resource intensive for a bank.
Second, the differences in the roles and responsibilities of home- and host-country
supervisors can create challenges. More specifically, a home-country supervisor is
responsible for the solvency of the banking group, while the host-country supervisor's role is
to ensure that there is sufficient liquidity to meet all obligations and to protect depositors in its
jurisdiction. Such differences can lead to both overlaps and gaps in the regulatory framework
applicable to a bank, thereby creating problems of regulatory coordination. One way to
address these challenges is through the establishment of cross-border supervisory and crisis
management groups for systemically important banks in Africa. I will elaborate further on this
topic later in my remarks.
Third, these banks can become means for transmitting risks from one jurisdiction to another
and thus can reduce the authorities control over their economies. This can cause authorities
to introduce protective regulations that complicate cross border banking.
These challenges raise the obvious question of what can be done to minimize the negative
aspects of cross border banking and maximize their benefits. Clearly, the governing bodies
of relevant regional economies need to agree to co-operate in creating the regulatory and
policy frameworks for managing cross border banking and ensuring effective financial
integration. These arrangements should then address issues of common concern to various
banking groups and also provide a platform from which to discuss issues that the supervisory
authority believes are hindering financial integration in the region. Examples of such issues
of common concern, in addition to what has already been raised, include issues such as
localisation (where banking groups are of the opinion that they require at least 75% of the
voting rights and therefore shareholding, in order to effect a special resolution decision) and
capital protection (where banking groups may also be concerned about future restrictions on
the movement of capital within the group, including the impact of currency fluctuations).
In light of the challenges I just mentioned, the cross-border integration in Africa of
internationally accepted banking supervision standards, improvement of financial sector
disclosure and governance practices is therefore crucial not only to ensure the appropriate
and effective supervision of banking groups that are significant in an African context, but also
to limit the regulatory burden and associated cost burden on banks and consumers of
financial products.
However, it is important to recognise that these challenges also create opportunities to
promote regional financial integration. South Africa is therefore fully supportive and active on
committees such as the Association of African Central Banks, SADC Committee for Central
Bank Governors (CCBG), the FSB's Regional Consultative Group for sub-Saharan Africa
and the Community of African Banking Supervisors (CABS). The work of these important
committees all contribute towards the development and implementation of an effective
financial sector regulatory framework in Africa.
Promoting cross-border banking in Africa and implementing regulatory co-ordination
measures to address these concerns could have substantial benefits in promoting growth in
the continent.
5. Role of regulators and international and regional forums
Regulators have a particular role to play in the integration process as the success of
financially integrated markets starts with the regulatory authorities ensuring that the entities
allowed into their financial sector meet all the relevant requirements for access to the
relevant jurisdiction. For this reason, it is important to conduct rigorous assessments to
accurately determine the costs and benefits which arise from allowing a foreign bank into a
jurisdiction.
In order to ensure the African banking sector remains adequately integrated, with minimal
negative spillover effects felt from cross-border banking in both the home and host country,
regulators need to be appropriately equipped to deal with cross border banks. This requires:
• Staying abreast of the latest international regulatory developments: Those of us who
participate in regional and international financial standard-setting bodies have an
obligation to play a pro-active role, to use our strengthened voice, be ready to take
constructive positions on the various reforms and consider the views of those
countries that are not at the table. This highlights the importance of the Financial
Stability Board (FSB) regional outreach groups and the CABS.
• Encourage progress in the implementation of the Basel Capital Accords, so as to
create a level playing field, which makes it easier and more cost efficient to start-up
a business in a new jurisdiction. However, implementation of international standards
must be done taking into account country specific circumstances and should not be
at all costs, or to the detriment of the stability of the financial system.
Maintain the emphasis on information exchange: There is already a pronounced
•
effort to make existing mechanisms of information exchange more meaningful, such
as Memoranda of Understandings (MoU) between home and host countries. This
was a principal aim of the SADC Subcommittee of Banking Supervisors (SSBS)
initiated in 20066. Unfortunately, due to differences in accounting standards,
reporting requirements, off-site monitoring systems, regulatory frameworks and
supervisory practices, drafting and implementing effective MOU's is difficult and they
are not always used for their intended purpose.
• Efforts should be made to create databases that are useful and available to all
African regulators and regional workshops should be encouraged (such as the
Enhanced Data Dissemination for Africa regional workshop held in 2011). Such
initiatives contribute to skills development and information sharing, and create
opportunities to develop new connections between regulators and new means for
coordinating and standardizing the methods for compiling, processing and
disseminating data.
• Supervisory colleges have proven to be highly useful in ensuring information sharing
and relationship building between supervisors and are therefore valuable tools to
promote. Effective consolidated supervision of an international banking group
requires the home supervisor to have sufficient knowledge of the operations of the
group, both domestic and foreign, so as to monitor, assess and deal with risks faced
by the group. As noted by past Roundtable discussions on regional banks in Africa,
Regional Economic Communities (REC), in which most Pan-African financial
banking groups operate, can be very useful in this regard due to their specific focus
on building supervisory capacity and strengthening cross-border regulations7.
• Ensure that existing crisis management and resolution plans are enhanced and put
in place to withstand financial crises: Prompt and effective responses to potential
financial distress are important to avoid severe systemic disruptions and minimise
the risk of banking failures. If not properly managed, supervisory co-operation might
collapse when a financial crisis hits as protection of national assets will become very
important. Establishing upfront crisis management and resolution plans will facilitate
robust supervisory co-operation which should withstand the pressure of a
crossborder financial crisis.
6. Conclusion
In conclusion, financial integration in Africa has already had a positive effect on the growth
potential of the continent. It is, however, vitally important that the integration process
continues to be monitored by the regulatory authorities to ensure its success and
sustainability. Without an integrated regulatory authority environment, achieving a robust
integrated financial system would be difficult.
It is therefore important that we as regulators use all the tools at our disposal, implement new
and innovative ways to communicate, share information and ensure that we develop apace
with the market and its needs, because without doing so we cannot create and sustain an
effective cross-border financial integration.
I look forward to further informative discussions on the topic, such that we all may learn from
past mistakes, successes and achievements whilst also continuously striving to address the
challenges in unison with one another.
Thank you.