Download 1 The Cross Border Expansion of African LCFIs Implications for

The Cross Border Expansion of
African LCFIs
Implications for Stability, Growth and Regulatory
reforms
by
Inutu Lukonga and Kay Chung
October 27, 2010
Africa Economic Conference/AfDB
Tunis
1
Discussion Outline
I.
II.
III.
IV.
V.
Introduction
Characteristics of African LCFIs
Performance and Soundness
Risks and Vulnerabilities
Implications for Regional Financial
Stability and Growth
VI. Policies to Mitigate the Risks and Ensure
Contribution to Growth
2
Part I:Introduction
Background to the Study
3
Background
 The
recent global financial crisis has renewed
attention to risks posed by LCFIs and re-ignited
policy discussion of “too-big-to-fail” institutions;
 It has also drawn attention to how risks from less
regulated sector could transmit to banking
institutions
 The crisis also underscored the two way linkages
between the macro economy and the financial
sectors.
4
Introduction (cont…)
 However,
focus has been on LCFIs in
industrial countries;
 The growth of LCFIs in Africa and their
stability implications has escaped scrutiny;
 Yet stress in these financial groups can have
major destabilizing effects on the region
5
Objectives
 To
take inventory of the cross border
expansion of African LCFIs and their
regulatory framework;
 To draw attention to the potential risks for
financial stability and economic growth;
 To identify policies that will contribute to
greater stability and ensure sustained
improvements to intermediation and growth
6
Part II
Characteristics of African LCFIs
7
Banks in Africa have increased their
cross-border operations …
Sub-Saharan Financial Groups: Snap Shot of the Geographical Coverage of African LCFIs
As of December 2009
Country of
Incorporation
Number of Countries in which Bank has subsidiary or branch operations
Total
Africa
Americas
Europe
Asia
Middle East
Global Banks
Standard Bank of South Africa
First Rand Bank
United Bank for Africa (UBA)
South Africa
South Africa
Nigeria
33
13
20
17
8
16
3
0
2
6
2
2
5
2
0
2
1
0
Pan African Banks
Ecobank Transnational International (ETI)
Bank of Africa (BoA)
Access Bank
Togo
Mali
Nigeria
30
11
9
29
11
8
0
1
*
1
0
0
Sub-Region Banks
Bank PHB
ABC
Guaranty Trust Bank
Nedbank
Oceanic Bank International PLC
Zenith Bank
Kenya Commercial Bank
Afriland Bank
Mauritius Commercial Bank
Financial Bank Togo Plc
ABSA
FOTSO group
Nigeria
Botswana
Nigeria
South Africa
Nigeria
Nigeria
Kenya
Cameroon
Mauritius
Togo
South Africa
Cameroon
7
5
6
5
5
5
5
4
5
5
4
4
7
5
5
4
5
4
5
4
4
5
3
4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
1
0
1
0
*
*
0
1
0
0
0
0
0
0
0
0
*
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Memorandum Item
Blue Financial 1/
South Africa
9
9
0
0
0
0
Note: The information does not include affiliate companies
* Indicates Representative Offices
8
.. and this expansion occurred mostly
during the last three years…
Number of countries in which the banks’ have operations
9
…and most of the groups are conglomerates
with operations in several sectors ….
Sub-Saharan Financial Groups: Snap Shot of the Geographical and Sectoral Coverage
Position at end December 2009
Country of
Incorporation
Type of Group
Banking
Capital markets Insurance
Global Banks
Standard Bank of South Africa
First Rand Bank
United Bank of Africa (UBA)
South Africa
South Africa
Nigeria
Mixed activity 1/
Mixed activity
Mixed financial
X
X
X
X
X
X
X
X
X
Pan African Banks
Ecobank Transnational International (ETI)
Bank of Africa (BoA)
Access Bank
Togo
Mali
Nigeria
Mixed financial
Mixed activity
Mixed financial
X
X
X
X
X
X
X
Sub-Region Banks
Bank PHB
ABC
Guaranty Trust Bank
Nedbank
Oceanic Bank International PLC
Zenith Bank
Kenya Commercial Bank
Afriland Bank
Mauritius Commercial Bank
Financial Bank Togo Plc
ABSA
FOTSO group
Nigeria
Botswana
Nigeria
South Africa
Nigeria
Nigeria
Kenya
Cameroon
Mauritius
Togo
South Africa
Cameroon
Mixed activity
Mixed financial
Mixed financial
Mixed activity
Mixed financial
Mixed financial
Mixed activity
Mixed financial
Mixed activity
Mixed financial
Mixed activity
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Note: The information does not include affiliate companies
1/ Mixed activity combines financial and non financial subsidiaries.
Operations in other financial sectors
Pensions Micro Finance Leasing
Non Financial Sectors
Money Transfers Other
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
10
…other characteristics are…..
 Most
of the groups have complex corporate
structures with multiple holding companies
 Diverse and dispersed shareholding
structures
 Centralized business lines
11
…the sources of earnings are concentrated
despite the geographical expansion…
12
…and the larger geographical coverage of the
newer LCFIs has not translated into scale…
13
..but though African LCFIs are small
compared to traditional global banks…
14
…their operations in Africa surpass
traditional international banks…
15
…and African LCFIs are systemically
important in several SSA countries
Table 1b. Bank Deposits as a Percent of Total Banking System Deposit
Table 1b. Bank Deposits as a Percent of Total Banking System Deposit
Table 1a. Bank Assets as a Percent of Total Banking System Assets
Traditional LFCs
Barclays
Stanbic
LFCs of African Origin
UBA Ecobank
BOA
Traditional LFCs
Barclays
Stanbic
Benin
…
…
…
22.1
30.7
…
Burkina Faso
…
…
…
13.1
15.6
…
Burundi
…
…
…
3.0
…
…
Access
Benin
…
…
…
24.0
36.4
…
Burkina Faso
…
…
…
13.2
13.1
…
Burundi
…
…
…
6.0
…
…
Cote D'Ivoire
…
…
1.7
10.1
7.4
2.0
10.08
4.8
1.9
9.6
…
0.6
…
…
…
39.9
…
…
Kenya
13.4
6.4
…
1.0
1.1
…
Liberia
…
…
7.7
58.8
…
3.2
Mali
…
…
…
12.6
10.5
…
Niger
…
…
…
17.7
21.2
…
Nigeria
…
2.8
12.0
3.6
…
5.2
Rwanda
…
…
…
10.2
…
…
Senegal
…
…
…
8.4
3.2
…
26.0
…
…
…
…
5.6
5.5
…
…
1.5
0.1
…
…
…
26.3
…
…
Togo
13.8
19
21.0
0.9
0.4
2.6
…
Uganda
13.3
0.0
0.3
…
1.1
Ghana
Guine-Bissau
South Africa
Tanzania
Togo
Uganda
Zambia
LFCs of African Origin
UBA Ecobank
BOA
Access
…
…
2.7
9.0
6.0
1.8
6.93
5.3
2.2
8.4
…
0.1
…
…
35.4
…
…
Kenya
13.3
6.7
…
1.0
1.0
…
Liberia
…
…
7.1
67.1
Mali
…
…
…
11.6
10.2
Niger
…
…
…
18.8
18.5
Nigeria
…
1.5
12.0
2.7
…
3.7
Rwanda
…
…
…
9.7
…
…
Senegal
…
Cote D'Ivoire
Ghana
Guine-Bissau
…
…
8.3
3.9
…
22.0
…
…
…
…
5.6
5.2
…
…
1.6
0.1
…
…
…
25.3
…
…
15.6
16
27.3
0.2
0.4
2.1
…
14.8
0.0
0.2
…
1.2
South Africa
Tanzania
Zambia
0.7
16
..and
they play a significant role in
financial markets and payments systems
 Many
are primary dealers in t-bill markets ;
 Some are market movers in domestic and
foreign exchange interbank markets; and
 Some participate in the management of
foreign exchange reserves (UBA in
Nigeria).
17
Part III
Performance and Soundness
18
..African LCFIs registered rapid balance
sheet growth prior to the crisis…
19
…and the asset growth was underpinned
by strong deposit growth…
20
…as a consequence, leverage ratios are
generally low…
21
…the groups have been stable but asset quality
is deteriorating and profitability trending down…
Barometer of Financial Soundness
22
….(cont..)
Barometer of Financial Soundness
23
….(cont..)
Barometer of Financial Soundness
24
…market sentiment for the newer LCFIs
is waning…
25
Part IV
Vulnerabilities and Risks for
Financial Stability
26
Regulation and supervision has not kept pace
with cross-border and cross sector expansion
 Groups
not supervised on a consolidated
basis;
 Gaps in cross border supervision
 Limitations in supervisory capacity
 Deficiencies in regulation of MFIs and
NBFIs
 Slow progress in harmonizing regulatory
standards and practices.
27
..selected aspects of regulatory
frameworks of home countries…
Home Supervisory body
Banking Group
Regulatory Structure
CAR
South Africa Reserve Bank (SARB)
Standard Bank Group;
First Rand Group
Semi Integrated
Nigeria
UBA; Access Bank;
Fragmented along
functional lines
WAEMU 1/
Ecobank Group;
Bank of Africa
Fragmented along
functional lines
Luxenbourg 2/
Bank of Africa
Fragmented along
functional lines
Central Bank of Kenya
Fragmented along
Bank of Africa (Uganda) functional lines
LE Limit
10
25
10
10?
8
75
Prudential Regime
Intragroup
Provisioning Exposures
Consolidated
supervision
Liquidity
No limit but
monitored LAR 20%
Yes
No limit
LAR 25%
No
No limit
LAR 60%;
Transformation
ratio 75%
No
No limit
12
25
No limits
No
LAR 20%
No
1/ Enforcement of prudential rules and compliance by banks is very weak
2/ The parent bank of BOA is an industrial company registered in Luxembourg and it is unlikely that Luxenbourg therefore has group supervisory responsibilities
3/ BoA Uganda is a subsidiary of BOA Kenya thus the CBK has supervisory responsibilities for consolidated supervision of that portion of the group.
28
..opaque ownership structures also impede
effective supervision…
 Most
of the banks have complex corporate
structures that impede supervision;
 Some of the banks are registered in
jurisdictions that do not lend themselves to
supervisory oversight
 Disclosure practices remain poor despite
listing on stock exchanges
29
Risk management by commercial banks
remains weak…
 Internal
controls improving but still
deficient
 Risk management exhibits important gaps,
including credit risk management
 Board oversight still work in progress
30
..Surveillance of systemic risk has not
received adequate attention
 Mapping
of financial conglomerates has not
been done in any of the countries;
 Data on intra-group exposure is not
monitored;
 Slow progress in harmonizing regulatory
standards and supervisory practices
 Institutions to facilitate systemic risk
analysis just developing
31
In addition….
 Institutions
to facilitate systemic risk
analysis are mostly not yet in place;
 Data inadequate (intragroup exposures; no
mapping of financial linkages so far);
 Disclosure practices are poor, despite listing
on stock exchanges; and
 Data integrity remains an issue.
32
..Crisis management arrangements are
evolving, but are still poor
Characteristics of the Crisis Prevention and Intervention Frameworks
Home Supervisory body
Banking Group
LOLR
Contigency Crisis Arrangements
Coordination
Domestic
Cross Border
Financial Sector contigency
Forum created in 2003 and
there are regular meetings
between Governor and
Framework still evolving
Minister and other
through regular exchanges
subcommittees
with host supervisors
Bank Distress Resolution
Deposit Insurance
South Africa Reserve Bank (SARB)
1. Standard Bank Group
2. First Rand Group
Yes; SARB can provide
Exceptional Liquidity
Assistance against pledged
collateral or a government
guarantee
Nigeria
1. UBA
2. Access Bank
LOLR authorised in CBN Act Contigency framework
but no clear policies,
proposals not
guidelines or procedures operationalised
WAEMU
Ecobank Group
No framework in place, but
Lending facilities available reforms in train
No framework in place
No
Luxenbourg??
Bank of Africa
MOUs signed with
domestic regulators but
information sharing
arrangements yet to be
operationalised
No
Central Bank of Kenya
Bank of Africa (Uganda)
No framework in place
Framework in nascent stage
There is no framework for
resolving insolvent but
systemically important
banks, thus decisions are
ad-hoc
No
Yes, but not functioning well
Yes
33
…financial Infrastructure require further
reforms..
 Insolvency
and creditor rights
 Credit registries
 Accounting and auditing
 Deposit insurance schemes exist in few
countries
34
Part V
Implications for Regional Stability
and Growth
35
African LCFIs have potential to cause
regional instability and curtail growth …
 Broad
geographical coverage of the banks
increase potential for regional contagion;
 Large impact given the systemic importance
of the banks in deposit mobilization,
lending and in financial markets;
 Asset deterioration could lead the banks to
curtail credit and focus on big corporates;
 Inadequacies in the information sharing thus
policy response could be slow;
36
Part VI
Mitigating the Risks and Ensuring
Sustained Contribution to Growth
An Agenda for SSA Countries
37
Strengthening supervision of LCFIs will entail
legal reforms and capacity building...
 Legal
reforms to give supervisors powers to
undertake consolidated supervision
 Strengthening supervisory capacity in undertaking
consolidated supervision;
 Enforcing prudential regulations on a consolidated
basis
 Expanding the regulatory perimeter to strengthen
supervision of nonbank financial institutions, in
light of the increased linkages;
 Improving coordination of domestic regulators
38
Cross border supervision needs to go
beyond signing of MOUs..
 Cooperation
in the exchange of information
 Processes to facilitate the information
exchange
 Data provision to ensure availability
 Expedite harmonization of regulations
across the different countries;
 Set up joint committees for developing
regulations and for inspection of the banks;
39
Enhancing surveillance will require
resources and a different skill mix
A
mapping of the interconnectedness of the
system to understand the risk transmission
channels; and
 Adequate numbers of staff and staff trained
in macro prudential analysis to assess
systemic risks.
40
Contingency Crisis Management Arrangements
are needed to minimize economic and fiscal
costs…






Policies, actions and processes for prevention,
management and containment of banking system distress
and crisis;
Identification of systemically important LFCs;
Predefined composition and functions of a Crisis
Management Unit
Improve bank resolution mechanisms; and
LOLR facility to provide Emergency Liquidity Assistance
Deposit Protection Schemes to protect depositors.
41
Second generation reforms are needed to
strengthen financial infrastructures…
 Addressing
operational constraints with
respect to credit registries
 Enforcing accounting principles
 Insolvency and creditor right regimes need
further strengthening
42
Key Messages
 The
cross border expansion of African LCFIs have
contributed to more competitive banking systems
and encouraged financial innovation
 However, their expansion without commensurate
efforts to strengthen consolidated supervision and
cross border supervision is a recipe for instability.
 To avoid boom and bust cycles and ensure their
sustained contribution to growth, efforts should be
intensified to strengthen the regulatory oversight
and surveillance of these financial groups.
43
End of Presentation
 Thank
You!!
 Please see background
paper for more
detailed analysis
44