Regulation: Which Way for Africa's Banks?

Published on 25th June 2009

One lesson of colonial banking in Africa is that there are sometimes differences between the expectations of home countries and host countries (and their regulators) from multinational banks.  Not surprisingly, a Ghanaian analyst, while commenting on the current influx of Nigerian banks into the country stated thus:

It is important to ask why the Nigerian banks have chosen Ghana and not any other country. Banks, as other businesses from the sub region are free to take advantage of Ghana's liberalized financial sector, but their activities should be regulated for the benefit of the country. The new banks, like any other banks should not just be allowed to be collecting deposits and making huge profits; they should be made to invest in tangible assets and devote a chunk of their profits for social services across the country. The banks must increasingly be looking to lending to small and medium-sized enterprises and farmers if the country is to increase productivity. No doubt, Ghana is an agricultural dependent economy and should welcome banks that are willing to lend to the agriculture sector rather than the import-export business as is the current practice. Public Agenda therefore calls on the bank of Ghana and the Ministry of Finance and Economic Planning to ensure that the entering of more new banks into the Ghanaian economy opens a new chapter for good corporate behaviour in the financial sector.

At another level, the need for the establishment of a robust financial regulation structure for the continent is further enhanced by the divergence in the experience, structure and method of regulation by regulators in home and host countries. This is because such divergence provides a fertile ground for all manner of regulatory arbitrage to take place. The diverse nature of the various African economies further complicates this problem. For example, foreign exchange transactions can be channelled to subsidiaries in African countries where regulation is less strict or developed. There is also avenue for indecent bank managers to engage in illicit activities like money laundering transactions. 

Given that the host countries of these African multinational banks are usually smaller and weaker nations economically, than the home countries, it is less likely that financial crisis/ scandals in such countries can be transmitted to the home countries of these financial multinationals. However, if the table is turned, the result could be strikingly different. In other words, it is easier for financial crisis / scandals in the home countries of multinational banks to be transmitted to the financial systems of the host countries of such multinational banks.

The implication of the above is that regulators in the home countries of these emergent African multinational banks must now realise that their actions and/ or inactions in local banking regulation may well have consequences for other African countries. While the economies of the home countries of these multinational banks may be able to withstand the consequences of its regulatory gaffes, the economies of tiny host countries may have more difficulties doing so.

I will illustrate the seriousness of the above point with the current speculations about the health of the Nigerian banks. In recent times, for instance, the Governor of the Central Bank of Nigeria has been persistent in his insistence that “the nation’s banks are healthy, sound and robust.”  The CBN has also specifically come to the defence of Intercontinental Bank Plc, which has recently been riddled with rumours of ill health. 

Despite such assurances, indications remain that Nigerian banks may not be as healthy as the CBN would want us to think. If recent press reports are to be believed, PricewaterhouseCoopers in a report to the Federal Ministry of Finance has said as much. According to the Report, some of the banks have already signalled interest in Government intervention or part takeover of their operations. Furthermore, various “industry commentators have reported that banks are struggling with non performing facilities in excess of N300 billion to N400 billion.”  

Given the history of the Central Bank of Nigeria in predicting bank failures in the past, it is not surprising to see why these rumours and uncertainties have continued to persist.  Also the inability of the CBN to walk its talk and discipline the parties behind such ‘rumours’ may have added fodder to the rumours.  Such uncertainties could lead to runs on the operations of the subsidiaries of such banks in other African countries. This will be so irrespective of the fact that most of these companies may be fully registered under the existing company laws of their host countries. The fact that many of these African countries have no explicit deposit insurance scheme in place to help depositors in the event of bank failure will no doubt exacerbate the problem.  Equally important is the fact that such crisis could lay the foundation for mistrust between home and host country regulators of these African multinational banks.

A related area where the CBN has not shown courage in enforcing policies that could help promote banking system transparency and possibly stability is in respect of the issue of introducing a uniform financial year end for banks and discount houses in Nigeria. The general belief is that Nigerian banks manipulate their books in order to get favourable ratings and that such practices are injurious to the health of the financial system. It was in a bid to reduce such practices that the CBN, on May 16, 2008 announced that with effect from December 31, 2008, all banks and discount houses should adopt December 31, 2008 as a common accounting year end.

The commencement of this policy was subsequently postponed via another CBN Circular dated July 31, 2008. According to the CBN, this was “as a result of the observed unhealthy trend/ development in the industry whereby some banks were mobilising deposits at very high interest rates that were inconsistent with economic fundamentals which was becoming a threat to market stability.” Another CBN Circular dated August 25, 2008 finally buried the idea because of “the developments in the economy and the misplaced perception that the interest rates trends are linked to the requirement of a common year end.”

This represents an unfortunate turnaround by the CBN which may have been occasioned by pressures from the financial institutions. The validity of the reasons given by the CBN for the policy reversal has been rightly questioned. It has for instance been asserted that:

We consider both excuses given by the CBN Governor as totally unacceptable and crassly untenable. It further goes to confirm our unassailable conviction that the Nigerian banking industry is not only weak, in dire state of distress but also desperately needing surgical operations to survive irrespective of the spurious splendid financial results that these fraudulent banks churn out from time to time (in active collaboration with the CBN) all in order to continually deceive the gullible unsuspecting Nigerians to invest their hard-earned money in the thrash shares of these sinking banks…It is a classic endorsement that the consolidation of the banking industry which the CBN carried out on December 31, 2005 has irredeemably failed if after telling Nigerians that it now has mega-banks; these same banks are still in hot pursuit of deposits at whatever costs not also minding the fact that these same banks had gone to the capital market times without number to mobilize funds. The question now is: what has happened to all the billion of Naira mopped up by Nigerians banks from the capital market from year 2004 to date? (sic) Nigerians need to know.

As intra African banking expands, home country regulators of financial institutions will need to show more courage in the face of the increasingly powerful African banks and interests. This is because most host country regulators will be no match for these increasingly complex African multinational banks. As already mentioned, the increasing intra-continental financial flows and entwinement could create enormous opportunities for operational and regulatory arbitrage. It could also create opportunities for sharp practices that could be exploited by any unscrupulous bank. Designing a financial system regulatory structure to take care of the growing integration of African financial systems has therefore become a matter of necessity. Any such financial regulation structure will also take into cognisance the specificities of the individual country needs and the unhealthy international practices that have resulted in the current global financial crisis. 

To be continued

By  Chibuike U Uche, Alexander von Humboldt Georg Forster Fellow
Institute for Asian and African Studies,Humboldt University, Berlin  

Professor of Banking and Financial Institutions, University of Nigeria
Enugu Campus, NIGERIA


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