Making Cross-Border Banking Work for Africa

May 26, 2014
While cross-border banking has been historically important in Africa, its face has changed over the past decade. African banks have not only substantially increased their geographic footprints on the continent (Figure 1), but have also become economically significant beyond their home countries and of systemic importance in a number of jurisdictions across Africa. Today, eight banks headquartered in Africa are represented through subsidiaries or branches in more than 10 African countries each and in at least 9 instances do these banks individually hold more than 30 percent of banking system assets in a host country. Figure 1: Cross-Border Expansion of African Financial Groups over Time, 1990-2013 This growth and expansion of African banks has in recent years reduced the relative importance of traditional, mostly European, banks on the continent and has shifted the onus of managing the risks and reaping the benefits of cross-border banking from the traditional home countries in Europe towards African policymakers. Yet there continues to be a lack of comprehensive research and analysis on this topic. "Making Cross-Border Banking Work for Africa", a new policy report sponsored by the Association of African Central Banks, the German Development Corporation and the World Bank, aims to fill this gap and to contribute to the on-going conversation among regulators, donors, and policymakers on the benefits and risks of further cross-border integration of banking in Africa. Authored by Thorsten Beck, Michael Fuchs, Dorothe Singer and Makaio Witte, the report documents the emergence of cross-border banking in Africa, reviews the literature on the benefits and risks of cross-border banking, assesses regulatory frameworks and current arrangements for cross-border supervisory cooperation in Africa, and provides policy recommendations for balancing the benefits with the risks of deepening cross-border linkages across Africa. Policymakers across Africa are faced with the challenge of pursuing two policy objectives with inherent trade-offs: leveraging the benefits from further financial integration while effectively safeguarding banking systems against fragility and cross-border contagion. In view of the low level of financial sector development in many countries, Africa stands to gain especially from further cross-border integration. The benefits for financial systems in Africa can take the form of financial innovation, more efficient intermediation and deepening of financial markets. Given the low levels of financial intermediation in most African banking sectors, considerable upside potential lies in the transfer of know-how, IT infrastructure, and risk-management skills relating to low-income, retail banking and products suited to small savers and enterprises. Most cross-border banks are still reluctant to engage in servicing the lower end of the market, but exceptions exist. Strengthening financial infrastructure, including payment systems and credit registries, can help deepen the benefits from cross-border banking, especially if undertaken in a coordinated manner across countries. A move towards allowing more integrated banking models, whereby integration of IT and risk-management systems, transfer of human resource skills and innovation are encouraged, in contrast to the 'fortress banking' of stand-alone subsidiaries preferred by many host country regulators for stability reasons, may also help by lowering the cost of doing business and thus making service provision to the lower end of the market more cost-effective and attractive. Finally, it may also be beneficial to encourage the entry of banks that are experienced in servicing underserved market segments. To effectively safeguard banking systems against fragility and cross-border contagion, the report calls for stronger national supervision and enhanced cross-border cooperation. The challenging, but essential task of establishing or improving frameworks for consolidated supervision tops the agenda in this respect. Improving the availability and regular exchange of relevant information is critical and can be fostered through Memoranda of Understanding and Colleges of Supervisors. While considerable progress is being made in Africa in establishing such formal structures, the true challenge is to make them effective and enable regular cooperation based on trust and mutual recognition. It is also important to look beyond these tools of cooperation in normal times towards crisis preparation. While there is again an important agenda on the national level - putting in place effective mechanisms for bank exit at the national level is a prerequisite not only for strengthening cooperation among African countries, but also for enhancing the effectiveness of banking supervision at the national level - measures to strengthen bank resolution frameworks and crisis preparation should be extended across borders and can include joint crisis simulation exercises and crisis management groups. The policy agenda on cross-border banking issues is extensive and action will be required both on the national as well as on the regional level. Given the widely varying circumstances of African countries, including in terms of financial sector development and intensity of cross-border linkages, policy recommendations need to be adapted to the context of individual countries. But an overarching conclusion arising from the report is that information exchange needs to be strengthened considerably in the face of expanding cross-border banking activity. The report therefore recommends establishing a platform for regular information exchange that makes publicly available a basic set of data about cross-border banking activities in Africa to address the lack of timely information in this area. This will not only be an important first step in facilitating better supervision of cross-border activities and thus contribute to the safeguarding stability and preparing for bank fragility but also in fostering closer collaboration between national authorities. The report will be launched in Dakar, Senegal on June 12, 2014 at the Making Finance Work for Africa Partnership
and will be available in print and as an eBook edition, on

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