Financial systems generally develop along the lines of economic structures and relationships. Given the colonial past of most African countries, there have historically been little economic linkages among such countries. In fact, most African countries have much more links to the colonial and Western powers than to their neighbouring African states. Based on the above, African countries would have been ideal candidates for infection by the global financial crisis. Thankfully, as has already been mentioned, the financial systems of most African countries are unsophisticated and thus were unable to absorb the subprime financial instruments that facilitated financial system contagion. Damage control in most of these African countries has therefore been restricted to dealing only with the indirect impact of the global financial crisis.
The financial system architecture of Africa has however begun to change from the inside. This is essentially being driven by the gradually increasing intra African trade and regional economic cooperation and integration. All over the continent, regional integration bodies and free trade agreements are coming into place. The 1991 Treaty which established the African Economic Community made explicit the direction of expected financial and economic integration and cooperation in the continent. Specifically, it stated thus:
Member States shall, within a time-table to be determined by the Assembly, harmonize their monetary, financial and payments policies, in order to boost intra-community trade in goods and services, to further the attainment of objectives of the Community and to enhance monetary and financial co-operation among Member States… To this end, Member States shall: (a) Use their national currencies in the settlement of commercial and financial transactions in order to reduce the use of external currencies in such transactions; (b) Establish appropriate mechanisms for setting up multilateral payments systems; (c) Consult regularly among themselves on monetary and financial matters; (d) Promote the creation of national, regional and sub-regional money markets, through the co-ordinated establishment of stock exchanges and harmonising legal texts regulating existing stock exchanges with a view to making them more effective. (e) Cooperate in an effective manner in the fields of insurance and banking… Member States shall ensure the free movement of capital within the Community through the elimination of restrictions on the transfer of capital funds between Member States in accordance with a timetable to be determined by the Council.
Also, the African Union Charter states that “The Union shall have the following financial institutions whose rules and regulations shall be defined in protocols relating thereto:(a) The African Central Bank;(b) The African Monetary Fund;(c) The African Investment Bank.” Across the continent, various sub regional economic groupings are gradually being strengthened. Despite the above, very little has been done with respect to the design and operationalisation of an effective continental financial system regulation structure for the region. Although technical meetings are ritually organised among bankers and central bankers from the various countries of the continent, no effective regional financial operations and regulatory framework has been developed.
While the above status quo had not mattered in the past especially given the not very substantial economic and financial linkages between the various African countries, recent developments now call for a change in direction. Arguably the single most important factor that has promoted intra African capital movement was the establishment of the New Partnership for Africa’s Development (NEPAD) in 2001. The NEPAD scheme was essentially championed by the business community in Africa’s largest economy: South Africa, with the objective of using it as a spearhead to expand South African capital to other parts of the African continent. Given its origins, it is not surprising that NEPAD adopted a neo liberal economic approach that emphasises the supremacy of market forces in economic dealings within the continent.
Partly as a result of the above development, South African banks have either been established or strengthened in several African countries. Absa Bank for example have subsidiary/ associated banks in Mozambique, Tanzania and Angola while Standard Bank has subsidiary/ associated banks in thirteen sub-Saharan African countries. First Rand Bank also has subsidiaries/ associated banks in Botswana, Swaziland and Mozambique. The bank has also been cleared by both the South African and Zambian regulatory authorities to establish a full fledged bank in Zambia.
Private Banks from Nigeria, which is the continent’s most populous country, with no explicit strategic framework, have also been expanding their operations and capital to other parts of the African continent. This has no doubt been boosted by the recent consolidation exercise in the Nigerian banking sector. Access Bank, for instance, has subsidiaries in Cote D’Ivoire, Democratic Republic of Congo, Gambia, Rwanda, Sierra Leone and Zambia while Zenith Bank has subsidiaries in Sierra Leone and Ghana. The magnitude and speed of Nigerian banking investments abroad has made one commentator to enthusiastically assert thus: Nigerian banks have become major players in the global financial market with many of them establishing subsidiaries and branches outside the country.
The race for Nigerian banks to establish subsidiaries and branches abroad is on. The banks are gradually breaking into foreign countries, especially in the Economic Community of West African States, ECOWAS, Southern and Central Africa, Europe and America. As at September 23, ten out of the 24 licensed commercial banks in Nigeria own at least a full-fledged licensed bank in a foreign country. These Nigerian banks are First Bank of Nigeria, FBN, Union Bank of Nigeria, UBN; Bank Intercontinental; Access Bank; Platinum Habbib Bank; Bank PHB and the United Bank for Africa, UBA. Others are Guaranty Trust Bank, GTB; Zenith Bank and Oceanic Bank. The last to make the list is FinBank, formerly First Inland Bank, which announced on September 22, presence in the Gambia through the acquisition of the Arab Gambian Islamic Bank.
A consequence of the above developments is the increasing financial linkages of the African countries. The stark implication of such cross border financial investments is that it is now becoming increasingly easier to transmit financial viruses from one African country to the other. There is thus an urgent need to develop a robust regional framework for the regulation of these multinational African financial institutions. This is even more critical given the wide variations in the economies of some of the various African countries.
To be continued
By Chibuike U Uche
Alexander von Humboldt Georg Forster Fellow, Institute for Asian and African Studies, Humboldt University, Berlin and Professor of Banking and Financial Institutions, University of Nigeria Enugu Campus, Nigeria.
Presentation at the international conference on Central Banking, Financial Stability and Growth, organised by the Central Bank of Nigeria to commemorate fifty years of central banking in Nigeria.