Developing a Sound Banking Industry in Africa: How could Development Financial Institutions Help?

May 07, 2013
Sub-Saharan Africa has the least developed financial sector in the world. With the exception of South Africa, the total African bank assets amount to less than USD 300 billion, which is nearly ten times less than the largest Chinese bank and about the size of the third largest Swedish bank. Even after taking into account the differences in GDP, the African financial sector remains very much underdeveloped, with a penetration rate
around 30
%, twice inferior to the average figure in developing countries. In addition to its very small size, the African banking sector remains very much fragmented: the largest banking group in SSA totalled USD
billion – three times less than the first Cypriote bank – and only a dozen banking groups have total assets in excess of USD 5 billion. Africa hosts more than 500 banks, including plenty of very small sized banks that are inefficient since they are unable to generate returns of scale, are not very innovative, and often display poor performances. These banks therefore cannot generate a healthy and competitive environment, and occupy low risk in very profitable niche markets, such as public debt, change or money transfer markets (Western Union, etc.), with hardly any impact on private sector financing. As a result of this underdevelopment in Africa’s banking sector, the amount of private sector credits does not exceed 20% of the African GDP, the lowest rate in the world. Furthermore, a significant portion of the financing needs of African economies – particularly in the areas of agribusiness, building and civil engineering, petrol and mining industries – are covered by external financial systems (donors, international banks, suppliers’ credits, etc.).
Fostering New Pan African “Leaders”
In order to fully benefit of the opportunities in the continent, the African banking sector should identify pan African “leaders” capable of carrying the pan-African capital-intensive operations. Development Financial Institutions (DFIs) can contribute, through targeted actions in order to support some banking groups that are well positioned to play this role. Apart from existing groups (Ecobank, BOA, UBA) – which already receive help from DFIs – two kinds of players are likely to prove good candidates: regional groups with an already critical size, and major banks in the African financial centres. Players in the first group include Orabank or BGFI Bank in Central and West Africa, I&M, Equity Bank or Kenya Commercial Bank in East Africa, and BancABC in South Africa. These banks have good knowledge of the markets but are limited in their means. They could benefit from capital injections by DFIs, such as FMO in Afriland First Bank, Proparco in I&M, and Orabank or IFC in Equity Bank. As for the main African financial centres, three countries could lead the way at a regional scale: Nigeria, Morocco, and South Africa. If the last two do not belong to sub-Saharan Africa, their geographical area represents their natural growth territory. Banks in these countries traditionally stayed within their geographical boundaries, and their pan African expansion is a recent development: Moroccan banks in Francophone West Africa, and Nigerian or South African banks in Anglophone Africa. However, their expansion over not well-known and not very accessible markets remains limited. The largest banks in these countries
remain still very much interested in their domestic markets. This is where DFIs have a role to play in encouraging and supporting these banks outside their borders. Proparco and FMO supported BMCE's regional growth in this very approach, by contributing to the establishment of closer ties with the BOA Group. In the same way, Société Financière Internationale (SFI) invested in BCP Maroc to finance Group Banque Atlantique's buy-back in West Africa.
Long Term Financing Needs
Given the fact that DFIs contribute to the development of a local, pan African banking sector, their main actions up until now were essentially based on very traditional funding based on long-term debt and equity, in order to provide banks with the missing long-term resources. Today however, other forms of support solutions that are more innovative should be considered. First of all, giving the banks access to international markets could permit to lower their long term refinancing dependency of DFIs. Groups such as Ecobank offer fundamentals, that would enable them to obtain good financing solutions in these markets, but that are too little known by investors outside Africa. DFIs could help by integrating African banks in the international financing systems, for example by guaranteeing their first bond offerings. DFIs could also help local banks to better exploit home market available resources. For example, insurance companies and other social security funds dispose of important long term capital but – due to their missing knowledge of the banking sector –may be reluctant to invest them long term with banks. A significant portion of these resources, when not invested in developed countries banking markets, are placed locally in government debt securities. By guaranteeing loans lent by these institutions to local banks, DFIs would contribute to feed these long-term resources to the banking sector and finance a more productive sector. Similarly, most African banking sectors have excess short-term resources, which although very stable, cannot be used to finance long-term investment due to cash banking regulations. In order to make better use of these resources, DFIs could explore the possibility of offering liquidity guarantees: providing banks with refinancing in case of a liquidity crisis, which would enable them to transform a greater share of short-term resources into long-term ones. Finally, in order to help banks increase their resources' maturity, DFIs should also consider stimulating long-term interbank market refinancing, or encourage banks to develop local bond markets.

Developing synergies between the various markets
Developing the bank's resources is not the only way to increase their response capabilities. Better use of resources would also overcome the constraints imposed by their limited size. Developing the syndication market could prove especially useful in this regard. As syndication develops on a per country base, “transnational” syndication remains very rare: only bank groups with subsidiaries in several countries (like Ecobank, BOA Group, Standard Chartered, Standard Bank, etc.) are able to initiate them and these syndications generally remain within the group. DFIs certainly have a role to play to organise this market and encourage increased bank cooperation. They could, for example, develop their coordination capabilities by offering local banks intermediation services. This path has been little explored by DFIs, whose syndication attempts are usually limited to the projects they are involved in, bankable in hard currency. Yet, it would stimulate local currency finance markets, over which DFIs have very little control. From a more general point of view, and always with a view to develop the capacity of local banks, it seems possible to increase cross-border cooperation by encouraging banks operating in different markets to develop synergies between them. There are very few partnership examples, such as the one developed between Nedbank (based in South Africa) and Ecobank (present in the rest of sub-Saharan Africa). Most Ghanaian banks, for example, have no partner banks in the WAEMU region, even though Ghana is located in the middle of the area, which greatly limits the scope of the operations they can perform with their active clients in this region. DFIs could, for example facilitate regional trade by guaranteeing African vis-à-vis their banking counterparts in neighbouring countries (as they do for international trade between Europe and Africa, for example). Generally speaking, a transverse DFI approach would enable them to gather banks likely to develop synergies, and thereby stimulating regional banking integration and dissemination of knowledge between different markets. Such support would allow banks to know their neighbouring markets, and thus contribute to strengthening the capacity of African banking systems. Julien Lefilleur joined Proparco in 2004, a French development financial institution that is a member of the French Development Agency Group. Having occupied a series of positions in Proparco - mainly in the Banks and Financial Markets department - he opened in 2010 Proparco's regional office for West Africa in Abidjan. Julien Lefilleur is also the Chief Editor of the Proparco magazine Private Sector & Development, which he founded. He graduated at École Centrale de Paris with a PhD in economics from the Sorbonne University.

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