Pan-African Banks - Opportunities and Challenges for Cross-Border Oversight

There has been a rapid expansion of pan-African banks (PABs) in recent years, with seven major PABs having a presence in at least ten African countries: three of these are headquartered in Morocco, two in Togo, and one each in Nigeria and South Africa. Additional banks, primarily from Kenya, Nigeria, and South Africa, have a regional presence with operations in at least five countries. PABs have a systemic presence in around 36 countries. Overall, the PABs are now much more important in Africa than the long-established European and American banks.

Abstract

There has been a rapid expansion of pan-African banks (PABs) in recent years, with seven major PABs having a presence in at least ten African countries: three of these are headquartered in Morocco, two in Togo, and one each in Nigeria and South Africa. Additional banks, primarily from Kenya, Nigeria, and South Africa, have a regional presence with operations in at least five countries. PABs have a systemic presence in around 36 countries. Overall, the PABs are now much more important in Africa than the long-established European and American banks.

Executive Summary

1. There has been a rapid expansion of pan-African banks (PABs) in recent years, with seven major PABs having a presence in at least ten African countries: three of these are headquartered in Morocco, two in Togo, and one each in Nigeria and South Africa. Additional banks, primarily from Kenya, Nigeria, and South Africa, have a regional presence with operations in at least five countries. PABs have a systemic presence in around 36 countries. Overall, the PABs are now much more important in Africa than the long-established European and American banks.

2. PABs have expanded mainly through subsidiaries, via the acquisition of existing banks. Only a few PABs have used greenfield investments to expand across countries. Subsidiarization reflects regulators’ wish to minimize contagion, particularly given the relatively high risks associated with banking activity in the continent.

3. The growth of PABs offers a number of opportunities and benefits. The expansion of these banks reflects the increase in economic integration within Africa more generally, and is contributing to improve competition, support financial inclusion, and give rise to greater economies of scale. In addition, PABs have been filling the recent gap left by European banks and are becoming the lead arrangers of syndicated loans (IMF, 2014b).

4. At the same time, the rapid expansion of PABs poses oversight challenges that if unaddressed, may increase systemic risks. Supervisory capacity is already constrained and under-resourced in most of Africa. PABs raise the importance of transparency and disclosure, good governance, strong prudential oversight, and a legal and regulatory framework that supports effective and comprehensive supervision and crisis management, particularly in the countries that are homes to major PABs. Progress is being made in most areas but efforts to strengthen oversight in some cases need to be intensified.

5. Governance challenges too should be addressed if the PABs are to emerge as strong institutions supporting the pan-African economy. Fitness and propriety of owners and shareholders, in particular of bank holding companies, is not always fully assessed and ownership structures in some cases are opaque. The recent case of Ecobank Transnational Incorporated (ETI), which played out in the public domain, was a wake-up call. Disclosure in Africa is also less extensive than elsewhere. The lack of a single accounting standard across the continent makes assessment of the banks’ overall situation difficult. And in many countries conduct-of-business oversight is only now emerging.

6. The lack of regulatory oversight of bank holding companies and their supervision on a consolidated basis in some home jurisdictions needs to be addressed urgently. At least two large PABs operate as subsidiaries of unregulated bank holding companies. While requiring separately capitalized subsidiaries reduces the extent of possible contagion, it does not eliminate it. Bank subsidiaries may well have exposures to their parents or to other bank or nonbank subsidiaries within the same group. Difficulties in a bank’s operations in one country may well lead to problems for the group as a whole, particularly if governance is a concern. Greater integration has benefits, but interconnectedness means that countries are more exposed to spillovers from cross-border shocks.

7. Cooperation on cross-border supervision has started, but enhanced collaboration is critical. The Central Bank of Nigeria (CBN) requires a Memorandum of Understanding (MOU) with home regulators before allowing a bank to be established in its jurisdiction. Quarterly meetings of the West African Monetary Institute (WAMI) include discussions of PAB issues. Several joint inspections have taken place and supervisory colleges established for a few PABs, and others are planned. Supervisory colleges need to be established for all PABs and meet at least once a year at the senior supervisory level. MOUs that ensure full exchange of information are needed between all homes and hosts.

8. Sustained efforts are needed on cross-border resolution. The recent global financial crisis (GFC) demonstrated the costs of not having a workable cross-border operational framework in place, as well as the difficulty of constructing one. Without a resolution mechanism, supervision alone may have limited effectiveness. Most African countries also need to enhance resolution at the national level. While some countries have sought to reduce spillover risks through ring-fencing approaches, this cannot avoid the need for cross-border collaboration. Ex-ante understandings are needed across jurisdictions as to respective responsibilities in the event of difficulties.

9. Regional currency unions, such as the WAEMU, face particular challenges on the interface of responsibilities between regional and national authorities. WAEMU operates as a single regional monetary and supervisory authority, but with a licensing and resolution role for national authorities. National responsibility for bank resolution, while supervision is conducted at the regional level, can seriously complicate the handling of bank problems. Given that WAEMU is home to two major PABs and host to many others, developing appropriate arrangements to reconcile regional and national interests is paramount. As seen in the euro area, the problems that emerge in crisis situations indicate a need to clarify regional responsibilities, powers, and institutions. Regional groupings that are homes or hosts of major PABs should examine the scope for establishing a single resolution mechanism.

10. The agenda is formidable; strategic oversight could assist implementation. Existing arrangements are either not specifically focused on PAB issues or may include too wide a participation for effective decision making. It is proposed that a new group be set up, a PAB Supervisory Oversight Committee (PABSOC) comprising the home regulators/supervisors and central banks of the major PABs (Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), the central bank for the West African Economic and Monetary Union (WAEMU), Kenya, Morocco, Nigeria and South Africa), with representation of the Association of African Central Banks, to drive the cooperative and harmonization agenda.

11. Pursuing the reform agenda expeditiously will require extensive technical assistance. The IMF is prepared to continue to provide assistance in its areas of responsibility and, if helpful, to liaise with other providers to help ensure a comprehensive program to safeguard financial stability.

Table 1.

Summary of Key Recommendations

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I. Introduction: Financial Stability Aspects and Rationale for Study

12. Pan-African banking groups have expanded rapidly across sub-Saharan Africa (SSA) (Figure 1).2 Seven banking groups dominate in terms of their geographic footprint (Attijariwafa Bank, Groupe Banque Centrale Populaire (GBCP), and Banque Marocaine du Commerce Extérieur (BMCE)/Bank of Africa (BOA)3 from Morocco; ETI and Oragroup from Togo, Standard Bank from South Africa, and United Bank for Africa (UBA) from Nigeria).4 About 35 percent of their subsidiaries are systemically important in the host countries, in particular subsidiaries of Ecobank, Standard Bank, and BMCE/BOA. In addition, Kenyan banks have expanded rapidly primarily in the EAC. Notwithstanding the rapid expansion, only partial information is available for all these groups.

Figure 1.
Figure 1.

Major PABs: Cross-Border Expansion, 2002–14

(Number of subsidiaries in SSA)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: Bank websites and annual reports.1/ BMCE is a majority owner of Bank of Africa Group since 2010.

13. The timing of the rise of the PABs reflects a convergence of a number of idiosyncratic factors (Appendix I). The end of Apartheid in the mid-1990s opened the door for South African banks to extend their expertise abroad. The ending of several civil conflicts in Africa, recovering growth and macro-stability, and the opportunities from large unbanked populations across Africa was fertile ground for the expansion. In Nigeria, the large increase in minimum capital requirements, following a banking crisis in the mid-2000’s, pushed banks to consider expanding abroad to make use of their new capital bases. Moroccan banks also saw opportunity to extend their networks south in the face of a more saturated banking market at home. A renewed impetus for regional integration in the EAC, coupled with the success of mobile payments in Kenya was propitious to the expansion of Kenyan banks in east Africa. Increasing trade linkages between African countries induced banks to follow their clients abroad (Box 1). The GFC and associated regulatory stiffening, especially regarding risk-based capital, along with high costs of small-scale operations, accelerated the retrenchment of European banks from the continent (Figure 2).

Increasing Intra-Regional Trade Linkages in Sub-Saharan Africa

Historically, intra-regional trade in SSA has been low and trade links with Europe, the United States (U.S.), and Asia still outweigh intra-regional trade. However, the intra-African trade and financial linkages that have been expanding rapidly in recent years are bound to grow further in the coming years (IMF, 2012b). The recent cross-border expansion of PABs has been partly influenced by increasing trade flows and expansion of companies into new markets in SSA. In particular, cross-border banks from different countries such as Kenya, South Africa or Nigeria cited as one of the reasons for expansion following corporate clients abroad (for example, see IMF (2012b) for a list of South African companies operating in SSA).

The share of SSA trade in total trade has increased in four PAB home countries since 2008. The share of trade with SSA is highest in Kenya with around 35 percent, of which the largest part is trade within the EAC. In Morocco, the share of trade with SSA is the smallest of the four countries, but exports to the West Africa Monetary Zone (WAMZ) and WAEMU countries have increased strongly in the last few years. Nigeria’s exports to SSA are recovering from a low of eight percent in 2011, which might be mostly driven by oil prices.

uA01fig01

Selected PAB Home Countries: Share of exports to SSA, 2008–13

(In percent of total exports)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Source: IMF, Direction of Trade Statistics.
uA01fig02

Selected PAB Home Countries: Exports to Selected Economic Regions, 2008–13

(Millions of U.S. dollars)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: IMF, Direction of Trade Statistics.
Figure 2.
Figure 2.

Selected PABs and Foreign Banks: Systemic Importance by Country, 2013

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

14. Growing pan-African banking groups offer opportunities, but pose supervisory challenges (Box 2). Anecdotal evidence suggests that the expansion of these banks has improved competition and given rise to economies of scale especially in host countries with small local markets. The PABs are driving innovation, offer opportunities to enhance financial inclusion, and in some cases have contributed to lowering costs (for example in the EAC). African banks have also become lead arrangers for syndicated loans filling the recent gap left by European banks (IMF, 2014b and Figure 3). The expansion of PABs increased diversification effects for home countries and provided further growth opportunities. However, as these groups developed in reach and complexity, significant supervision gaps, governance issues, and questions about cross-border resolution have emerged. In addition, countries are on different levels of implementing international standards, for example some countries have implemented Basel II standards, whereas for others it is still work in progress (Box 3 and Figure 4). These issues could pose risks to national and regional financial stability. Against these developments, IMF technical assistance (TA) efforts on banking supervision and regulation including strengthening of legal frameworks to SSA have increased in recent years, including through the regional technical assistance centers (Box 4).

Figure 3.
Figure 3.

SSA: New Syndicated and Large Bilateral Loans for Infrastructure by Lender Nationality, 2006–13

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: IMF, 2014 (Dealogic Analytics; and IMF staff calculations).
Figure 4.
Figure 4.

SSA and Morocco: Basel II Implementation by Country

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: Financial Stability Institute Survey on Basel II, 2.5 and III implementation (Financial Stability Institute, July 2014) and IMF country team information.Note: The Financial Stability Institute conducts a survey on the current status report on implementation of Basel II, 2.5, III for non-Basel Committee on Banking Supervision (BCBS)/non-European Union jurisdictions and publishes unedited responses. The figure is based on answers to Pillar 1 (Standardized approach for credit risk, basic indicator approach and standardized approach for operational risk), Pillar 2 and Pillar 3.

15. Well functioning financial infrastructure both on a national level as well as cross-border is important for reaping the benefits of the cross-border expansion of PABs. This includes efficient payment and settlement systems, credit rating agencies and credit information systems, including comparability of credit information across countries, as well as dispute resolution and consumer protection mechanisms. With further cross-border integration and expansion of PABs, payment and settlement systems need to be consistent across countries to avoid payment difficulties with adverse effects for financial stability. Examples of cross-border integration of payment and settlement systems include the WAEMU region (as a currency union) and the East African Payments System launched in 2013 as well as the recent introduction of a settlement system for regional transactions in the Southern African Development Community (SADC) (Box 11).

Benefits of Cross-Border Banking1

The expansion of cross-border banking groups across the African continent offers opportunities and benefits for the economies involved. Cross-border banks have also expanded in other regions of the world such as Latin America or Central and Eastern Europe leading to a rich literature analyzing the benefits and risks of cross-border activities. While specific evidence for the African case and in particular for the benefits of the expansion of pan-African banking groups (as opposed to other foreign banks) is still rudimentary, benefits can be categorized into three main areas: competition and efficiency, financial deepening and inclusion, and stability.

Competition and Efficiency

Cross-border banks benefit the host countries’ banking sector by increasing competition, increasing access to higher skills and expertise, better access to capital, and economies of scale. More broadly, they can also have a positive effect through improving governance structures. However, whether the effects are positive or not depend on country circumstances and existing market structures. For example, in a crowded market the effects of higher competition might not materialize. In the African context of underdeveloped banking systems, the arrival of more skilled, better managed and better funded competitors can have a significant positive impact on host economies.

Empirical studies using cross-country comparisons generally found a positive association between foreign bank entry and efficiency and competition as measured by net interest margins, profitability, and cost efficiency. In the EAC, EAC-headquartered banks or their subsidiaries have lower spreads and are more efficient than other private domestic banks or subsidiaries of foreign banks headquartered outside of the region (World Bank, 2013).

Financial Deepening and Financial Inclusion

By bringing in special expertise from their home markets, cross-border banks foster financial inclusion, if they reach out to previously underserved market segments. On the other hand, if foreign banks focus on the high end customers only (“cherry picking”) or rely too much on formal information, thereby precluding the lower end of the market, this could result in a limited impact on financial inclusion.

Empirical studies on the effects of cross-border banking for financial inclusion do not give a consistent picture; instead results depend on countries and regions as well as data sources used. For example, a higher foreign bank share can be associated with a lower number of loan and deposit accounts per capita (Beck, Demirguc-Kunt and Martinez Peria, 2007), but also with lower barriers to deposit service access (Beck, Demirguc-Kunt and Martinez Peria, 2008). In the African context, there is anecdotal evidence that PABs are serving under-banked parts of the population, have led to an increase in branches across the host countries (one example are Nigerian banks in the WAMZ) and are exporting innovative business models from their home markets (for example, Moroccan or Kenyan banks).

Financial Stability

Cross-border banks can contribute positively to financial stability through diversification benefits both for the banks themselves and their customers, in particular if business cycles are not synchronized. Indirect effects on stability can stem from upgrades in quality of supervision and regulation in host countries induced by the foreign banks and their home supervisors, who often introduce higher standards (e.g., IFRS accounting and Basel II/III standards). However, potential contagion effects can offset stability benefits as cross-border banks can also more easily propagate shocks from their home countries across the host economies.

Empirical evidence based on data prior to the GFC supports the positive impact of cross-border banking on financial institutions and economies through risk diversification (e.g., Arena, Reinhart, and Vazquez, 2007). More recent studies find that while cross-border banking can help mitigate effects of local financial shocks, global financial shocks are propagated (e.g., Popov and Udell, 2012, and de Haas and Lelyveld, 2014 for bank level analysis and Kalemli-Ozcan, Papaioannou and Perri, 2013 for macro analysis). However, the effects of contagion also depend on the structure of the local subsidiaries as the differences in contagion impact of the global financial crisis on Eastern Europe and Latin America show (Cull and Martinez Peria, 2013).

1 This box is adapted from chapter 2 of Beck and others (2014).

Financial Sector Supervisory Standards in Sub-Saharan Africa and Morocco

Countries in SSA are at different development levels with regards to their financial sector regulation and supervision standards and operate at varying stages of implementation of international standards. Whereas a number of countries have moved to IFRS accounting standards, implementation of Basel II standards has only been completed in a handful of countries. An important part of depositor protection, namely depositor insurance, is missing in the majority of countries.

Summary of Supervisory Standards by Country

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Sources: IFRS.org (jurisdiction profiles, April 2014) and PwC report “IFRS adoption by country” (April 2013); FSI Survey on Basel II, 2.5 and III implementation (Financial Stability Institute, July 2014); Standards and Codes Database; Demirgüç-Kunt, Kane and Laeven (2014); World Bank Survey on Bank Regulation 2012; IMF FSAP and TA reports; Information from IMF country teams.Notes:

The Financial Stability Institute conductes a survey on the current status report on implementation of Basel II, 2.5, III for non-BCBS/non-EU jurisdictions and publishes unedited responses. The column is based for Basel II on answers to Pillar 1 (Standardized approach for credit risk, basic indicator approach and standardized approach for operational risk), Pillar 2 and Pillar 3.

This category shows percentage of compliant or largely compliant BCPs and is based on assessments against the 2006 Basel Core Principles methodology undertaken as part of FSAPs during 2007–12.

This category indicates the threshold of ‘number of days in arrears” after which loans are classified as nonperforming loans.

16. Past experiences of cross-border banking in Africa have resulted in costly failures. The International Bank of West Africa and Meridien, both of which had pan-African aspirations, failed in the 1990s, as did Bank of Credit and Commerce International, which also had extensive branch operations on the continent. In all cases, SSA countries suffered significant losses, setting back financial integration. More recently, although the GFC had relatively limited effects on Africa, it demonstrated the difficulties in managing and resolving cross-border institutions, even in advanced economies where the supervisory infrastructure is most developed.

IMF TA on Banking Supervision and Regulation to Sub-Saharan Africa

The IMF has been progressively increasing its TA activities in banking supervision and regulation (including cross-border and consolidated supervision as well as strengthening of legal frameworks) throughout SSA. The contribution of the IMF Regional Technical Assistance Centers (RTACs) has been instrumental in this regard. Out of the nine RTACs that the IMF operates around the world, five are based in various parts of SSA. These are the: Central AFRITAC (AFC) based in Gabon, West AFRITAC (AFW) based in Cote D’Ivoire, East AFRITAC (AFE) based in Tanzania, South AFRITAC (AFS) based in Mauritius, and the recently opened WEST AFRITAC 2 (AFW2) based in Ghana. The IMF has also recently opened an African Training Institute (ATI) in Mauritius that will contribute to building capacity of African authorities including on banking regulation and supervision issues. The charts below show the increase in TA delivered to Africa on banking supervision and regulation by the IMF in general and by the AFRITACs in particular.

uA01fig03

TA to SSA on Banking Supervision and Regulation

(Full-Time Employees (FTEs))

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Source: MCM Technical Assistance Tracking System
uA01fig04

TA by IMF TACs on Banking Supervision and Regulation

(FTEs)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Source: MCM TechnicalAssistance Tracking System

The AFRITACs have been and are increasingly involved in building capacity of African supervisors including on issues related to cross-border supervision of PABs. Most of these centers have organized seminars and workshops on consolidated and cross-border supervision to better familiarize supervisors with the importance of this supervisory aspect and the implications for financial stability in the region. In addition, many hands-on TA activities targeted the practical application of consolidated supervision.

With the growing importance of cross-border banking activities, some AFRITACs are assisting in enhancing the cross-border supervisory framework and establishing supervisory colleges. One particular success story in this respect is the TA provided by AFE in assisting the Central Bank of Kenya (CBK) in organizing a first East African supervisory college for a cross-border bank and continuing the establishment of such colleges for other Kenyan banking groups. Another TA helped the CBK to develop a structured approach to assess the regulatory and supervisory framework of the host authorities of Kenyan banks’ subsidiaries. This provides a good example on how Fund TA and the regional approach to TA (as represented by AFRITACs) can be usefully mobilized to deal with the challenges related to PABs’ oversight and to enhance collaboration among various supervisory authorities in the region.

17. This exercise is in line with the IMF’s institutional priority of sharpening the focus of surveillance by strengthening the assessment of financial sector interconnectedness. The purpose of this exercise is to take stock of these developments, identify regulatory, supervisory and resolution gaps, and determine how the Fund can help the authorities address these challenges. The project focuses on the countries and regions with a high presence of PABs, with the objective of better understanding PABs’ activities and vulnerabilities. It has involved missions that discussed with the main home and host regulatory and supervisory authorities the challenges they face in overseeing these groups. Namely, this has involved assessing: (i) how supervisors monitor the business plans and governance of the PABs; (ii) the coverage of consolidated supervision, and the extent of cross-border collaboration; and (iii) the level of crisis preparedness (modalities of liquidity backstopping and bank resolution) among supervisors. The missions also met with each of the main cross-border banking groups, to assess their business plans and their risk mitigation strategies.

Macro-financial risks

18. Unprecedented growth in SSA provided the backdrop for the expansion of PABs. The region’s average growth rate has risen from 2½ percent in 1980–94 to about five percent during 2008–13. SSA has become the second fastest growing region after emerging Asia, and two-thirds of the countries in SSA have enjoyed ten or more years of uninterrupted growth; indeed, a quarter have grown without interruption for 20 years. Real GDP per capita doubled in the median SSA country and slightly more in the average country.

19. The global financial crisis had a lower impact on SSA, but the region is not immune to spillovers from the rest of the world. A one percentage point growth slowdown in the rest of the world has been found to lead to an estimated half percentage point slowdown in SSA (Drummond and Ramirez, 2009). In addition, a 100 basis point increase in the spread of 3-months LIBOR vs. U.S. Treasury bills reduces growth in SSA countries by an estimated half percentage point. This implies that while SSA economies suffered the negative impact of the global financial crisis, this was partially offset by lower global interest rates.

20. There are several key macroeconomic risks that could give rise to financial stress in SSA. The main risk factors are a slowing of global trade, sustained lower commodity prices, and the financial impact of the tightening of monetary policy in advanced countries. The materialization of these risks would adversely impact economic activity and external and fiscal balances in SSA with attendant impact on bank profitability and rising non-performing loans. In addition, banks in some countries have significant direct and indirect exposures to the sovereign (Appendix V).

21. Interactions between the real and the financial sector could take place through other mechanisms as well. The financial sector is inherently pro-cyclical, in the sense that it generally amplifies the business cycle via changes in the value of assets and leverage (Canuto and Gosh, 2013). During booms, bank capital is usually reinforced by increased bank profitability or by capital gains implied by increasing asset prices. Thus, increased demand for assets raises their prices, further fuelling the cycle and leading to a generalized expansion of credit. During an upturn, the financial system as a whole may build up vulnerabilities, e.g., due to increasing liquidity, maturity, and foreign exchange mismatches or by concentrating exposures to particular types of assets (e.g., real estate). In the downturn, this may trigger system-wide problems, even in the case of a small shock, through declining collateral values as financial institutions’ balance sheets become weak, capital is insufficient to absorb losses, credit is reduced and depositors’ confidence may impact banking liquidity.

22. The expansion of PABs may increase the risk of contagion and raises concerns about financial stability in the region. This expansion has created a network of systemically important banks, whose financial health might not be known due to—in some cases—nascent consolidated supervision.5 In addition, PABs can lead to contagion across borders, in particular for countries without adequate financial safety nets. The channels of contagion could run both ways from the parent bank to the subsidiary and from the subsidiary to the parent bank, as well as across subsidiaries of the same group.6 For example, deficiencies in governance or perceptions of mismanagement at the group level as well as reputational risks coming from large macroeconomic disequilibria in the home country could lead to bank runs on subsidiaries. Subsidiaries could be affected if they are interconnected with the parent bank through the placement of deposits. Economic or financial problems in the host countries could, on the other hand, impact parent banks in case the subsidiaries’ operations are large relative to the whole group, particularly, as some subsidiaries of the major PABs seems to be weak (see Section II.C). Lastly, for some PABs subsidiaries are connected through syndicated loans across borders leading to potential spillovers between subsidiaries. As information on the amounts of these loans and further interconnections within the groups are not available, these risks could build up undetected. Subsidiarization and ring-fencing provides some level of protection.7 Subsidiaries are in principle separate entities and separately capitalized. Thus, in the event of problems elsewhere in the group, they may withstand contagion and could continue operations.

23. The analysis of cross-border contagion has—for the most part—not played a role in Financial Sector Assessment Program (FSAP) stress tests conducted so far. One reason is that the major expansion of pan-African banking groups is still relatively recent and thus has not been an important issue at the time of these FSAPs. For many of the PABs the size of their cross-border subsidiaries is still quite low compared to their overall assets, such that problems in subsidiaries might only have a limited impact on home countries. Lastly, even if cross-border contagion was analyzed in a stress test, the lack of data on cross-border transactions or intra-group exposures made it impossible to quantify the impact of cross-border contagion.

II. Systemic Importance of Cross-Border Banking Groups in Sub-Saharan Africa

A. Cross-Border Banking Groups in SSA

24. This section identifies and describes the increasing number of banking institutions headquartered in SSA with cross-border subsidiaries and branches. This exercise also includes banks from North Africa with a significant presence in SSA and describes the presence of subsidiaries from banking groups headquartered outside Africa for comparison purposes.8 In mapping the cross-border banking groups, this paper builds on previous work (IMF, 2012a).

25. While the number of PABs is increasing, the phenomenon is dominated by seven banking groups in terms of geographical dispersion. Of these aforementioned banks, Ecobank has the most widespread presence, operating in 33 SSA countries, while Standard Bank is the largest group based on the size of its balance sheet (Table 2). In addition, around 40–60 percent of the subsidiaries of Attijariwafa, BOA, Ecobank, and Standard Bank are systemically important in their host countries based on deposit shares (Table 3, Figure 9). While UBA has a widespread presence, its subsidiaries mostly only play a small role in their host countries’ banking systems, due to its relatively recent expansion.

Table 2.

Selected PABs: Main Information, 2013

(Millions of U.S. dollars)

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Sources: Annual reports, Bankscope, and bank websites.Notes:Nedbank has a cooperation agreement with ETI and acquired a 20 percent shareholder stake in ETI. It is a subsidiary of a British financial entity, Old Mutual.Keystone Bank belongs to the Asset Management Corporation of Nigeria.Banque Sahelo-Saharienne pour l’investissement et Commerce (BSIC) is owned by Lybia and SSA governments.Lybian Foreign Bank belongs to the Central Bank of Lybia.Oragroup SA belongs to emerging capital partners (ECP), a private equity firm specialized in investing in Africa. Subsidiaries/branches are defined as systemically important if deposits are larger than 10 percent of banking system deposits or if assets are larger than 7 percent of GDP.Data availability is based on data that is available for 2012 or 2013 and is categorized in the following groups: Group 1: Consolidated data and data for all subsidiaries available in Bankscope.Group 2: Consolidated data and data for the majority of subsidiaries available in Bankscope or annual report.Group 3: Consolidated data and data for some subsidiaries available in Bankscope or annual report.Group 4: No consolidated data and data for some subsidiaries available in Bankscope or annual report.Consolidation code definitions: C1 – From Bankscope: statement of a mother bank integrating the statements of its controlled subsidiaries or branches with no unconsolidated companion.C2 – From Bankscope: statement of a mother bank integrating the statements of its controlled subsidiaries or branches with an unconsolidated companion.U1 – From Bankscope: statement not integrating the statements of the possible controlled subsidiaries or branches of the concerned bank with no consolidated companion.C – From the Annual Report: consolidated statements integrating its controlled subsidiaries and/or branches.U – From the Annual Report: unconsolidated statements excluding any subsidiaries or branches.
Table 3.

Selected PABs, Share of Deposits by Country, 2013

(Percent)

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Figure 5.
Figure 5.

Major PABs: Size and Share of Cross-Border Subsidiaries, 2013

(Billions of U.S. dollars and percent)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: Annual reports, Bankscope, and IMF staff calculations.
Figure 6.
Figure 6.

Selected Foreign Banks: Size and Share of Sub-Saharan African Subsidiaries, 2013

(Billions of U.S. dollars and percent)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: Annual reports, Bankscope, and IMF staff calculations.
Figure 7.
Figure 7.

Selected PABs and Foreign Banks: Size and Systemically Important Operations, 2013

(Billions of U.S. dollars)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: Annual reports,Bankscope, and IMF staff calculations.1/ A systemically important subsidiary is defined as having a deposit share exceeding 10 percent.This chart shows the seven major pan-African Banking groups plus four selected foreign banking groups (sum of assets of SSA subsidiaries) for comparison.
Figure 8.
Figure 8.

SSA: Compliance with Basel Core Principles

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Source: Standards and Cedes Database.Note: The figures are based on assessments against the 2006 Basel Core Principle ethodology undertaken as part of FSAPs during 2007–12. It includes 75> countries, of which 16 are African countries.
Figure 9.
Figure 9.

SSA and Morocco: Accounting Standards by Country

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: IFRS.org (jurisdiction profiles, April 2014), PwC report "IFRS adoption by country" (April 2013) and IMF country teams.

26. The presence of smaller African banking groups is concentrated in sub-regions. These smaller groups operate in three to nine countries and concentrate their operations in their sub-regions, with some groups starting to expand beyond. Examples include Nigerian banks focusing on Anglophone West African countries (e.g., Guaranty Trust Bank (GTBank), Skye Bank, or Zenith Bank), which are starting to expand to francophone West Africa or the EAC,9 and Kenyan banks operating in the EAC (Burundi, Rwanda, Tanzania, and Uganda), which have recently expanded into South Sudan.

27. In addition to African banking groups, several foreign groups have a large presence in SSA with the European banking groups clustered in regions reflecting the colonial legacy. Foreign banks with a strong presence in SSA include Standard Chartered (United Kingdom (U.K.)), Barclays (U.K.),10 and Société Génerale (France). These banks have operations in at least nine countries and more than one third of them have systemic importance in the respective host countries (Table 5). However, the number of operations of foreign banking groups is considerably smaller than those of the large PABs and they are less widespread. In particular, their presence is mainly concentrated on Anglophone countries for U.K. banks, francophone countries for French banks or lusophone countries for Portuguese banks. Other foreign banking groups mainly have smaller operations, however spread over a number of countries. This includes Citigroup (U.S.) and Bank of Baroda (India), with a presence in 11 and 8 countries, respectively.

Table 4.

Selected PABs: Assets in Percent of GDP by Country, 2013

(Percent)

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Table 5.

Selected Foreign Banks with SSA Presence: Share of Deposits by Country, 2013

(Percent)

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28. The PABs have expanded their operations across SSA mainly in the last decade (Figure 1). While some groups had subsidiaries since the 1990s or even earlier, the massive expansion of pan-African banking groups happened since the mid-2000s. Between 2006 and 2010, the number of subsidiaries of the seven largest PABs almost doubled from less than 50 to almost 90 operations. Ecobank, for example, added 15 subsidiaries between 2006 and 2010. Similarly, UBA added 17 operations since 2006. Some groups expanded via a mixture of greenfield investments and acquisitions if the opportunities arose, whereas others focused almost exclusively on acquisitions to expand rapidly. For example, the Moroccan banks build up their presence in francophone Africa mainly through acquiring existing banking groups: GBCP bought Banque Atlantique in 2012 and BMCE became the major shareholder in BOA in 2010. The retrenchment of some European banks also contributed to this process as Attijariwafa bought Credit Agricole’s African operations in 2008 increasing its operations to six.

B. Systemic Importance of Cross-Border Banking Groups

29. African and foreign banking groups often have systemic importance in their host countries. Absent more elaborate measures in light of data limitations systemic importance is measured in two ways: 11 (i) operations are deemed systemically important if the share of their deposits in total banking system deposits exceeds ten percent; or (ii) if their asset share exceeds seven percent of GDP.12 The results are shown by banking group and country in Tables 3 through 6 and Figures 10 and 11. However, in some cases the results need to be interpreted cautiously as some data is outdated or not available for some operations.

Figure 10.
Figure 10.
Figure 10.
Figure 10.

Selected PABs: Maps of Share of Deposits by Country, 2013

(Share of deposits, 2013, where data available)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: Annual Reports, Bankscope, Bankers Almanac, and IMF staff calculations.Note: Deposits data is as of 2013 if available or of 2012. Bankscope data may be outdated in some cases.
Figure 11.
Figure 11.
Figure 11.
Figure 11.

Selected PABs: Maps of Assets in Percent of GDP by Country, 2013

(Assets in percent of GDP, 2013, where data available)

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: Annual Reports, Bankscope, Bankers Almanac, and IMF staff calculations. Note: GDP data is as of 2013. Bankscope data may be outdated in some cases.

30. Almost 30 percent of the operations of PABs are systemically important (Table 3 and 4). Excluding domestic operations, this measure falls slightly below one quarter. In addition, around 30 percent of systemically important operations have a deposit share exceeding one quarter of total banking deposits in the respective countries. Most of the systemically important subsidiaries are concentrated in Attijariwafa, BMCE/BOA, Ecobank, and Standard Bank. In a few countries, subsidiary deposit shares account for more than half of total deposits (Table 3). For example, Standard Lesotho Bank manages 52 percent of customer deposits in Lesotho and Ecobank Centrafrique 72 percent of the deposits in the Central African Republic.

31. Similarly, around 30 percent of the operations of foreign banking groups are systemically important (Table 5 and 6). Of these subsidiaries, around 25 percent manage more than a quarter of customer deposits in their respective host countries. Similarly to African banking groups, there are examples of subsidiaries that have a deposit share exceeding 50 percent of host countries’ customer deposits, including the subsidiaries of Barclays in Seychelles and of Caixa Geral de Deposits in Cape Verde. Standard Chartered, Barclays, and Société Génerale have the largest number of systemic subsidiaries among foreign banking groups with four or more systemically important operations. The other British and French banks and most Portuguese banks also have at least one systemically important subsidiary.

32. Some PABs also account for a large deposit share in their home markets. For example, the market in South Africa is very concentrated with the four largest banks (including BAGL) having almost 90 percent of total deposits. In addition, the unconsolidated assets of the four largest South African banks (including BAGL) together account for about 90 percent of South African GDP, while the consolidated assets are 114 percent of GDP. Similarly, consolidated assets of the three large Moroccan banks account for 108 percent of GDP in their home market and a large share of deposits. In contrast, the large cross-border Nigerian and Kenyan banks are smaller and together account for around 21 percent of Nigerian GDP and 28 percent of Kenyan GDP, with only one Nigerian and one Kenyan bank being systemically important in the home market based on asset size. The deposit share is also less concentrated among the large number of cross-border banks in these two countries.

33. While assets of cross-border subsidiaries account for a small part of the consolidated balance sheet of many PABs, these shares are higher in some cases implying considerable spillover risks. (Figure 5, Table 2). For the South African banks the asset share of cross-border subsidiaries in SSA is equivalent to less than 15 percent. This share is somewhat higher for Moroccan banks, in particularly for BMCE for which is reaches 24 percent. Similarly, for most Nigerian banks cross-border subsidiaries contribute less than ten percent to total assets with UBA being the exception with 15 percent. For Kenyan banks the share is somewhat larger with an average of 22 percent. However, for a number of banks incorporated in relatively small home markets, like Togo, cross-border subsidiaries represent the dominant part of these banks’ balance sheets. For both ETI and Oragroup, the asset share of cross-border subsidiaries in SSA exceeds 90 percent. Thus, for some banking groups spillover risks from cross-border subsidiaries could have a material effect on the parent banks. For comparison, subsidiaries in SSA only play a minor role for foreign banks representing less than five percent of total assets (Figure 7).

34. Standard Bank and Ecobank dominate the large cross-border banking groups in terms of size and number of systemically important subsidiaries (Figure 7). Standard Bank is the largest group in size measured by consolidated assets.13 Ecobank has the most systemically important subsidiaries, but its balance sheet size is small compared to the South African or Moroccan banks. The figure also shows that the banking groups from Nigeria and Togo are much smaller in asset size compared to the South African and Moroccan banks. Similarly, the foreign banks’ African business is relatively smaller as well.

35. The major PABs seem to have become more important in a number of countries compared to the foreign groups (Figure 2). The combined deposit share of foreign groups is higher than that of African groups in only a handful of countries. With few exceptions one of the pan-African groups’ subsidiaries has the highest deposit share when comparing their and foreign groups’ subsidiaries’ shares. For example, in the WAEMU region, Société Générale has an important subsidiary only in Cote d’Ivoire, whereas in all other WAEMU countries the subsidiaries of either BOA, Ecobank, or Attijariwafa are more important than Société Générale’s or other French banks’ subsidiaries. Overall, the share of systemically important subsidiaries in the total number of subsidiaries is somewhat higher for the foreign groups (28 percent versus 24 percent, excluding home markets), however the share of systemically important subsidiaries with more than 25 percent deposit share is a lot higher for the African groups (33 percent versus 25 percent).

C. Structure, Balance Sheet Expansion, and Financial Soundness of Cross-Border Banking Groups

Structure and operations

36. The major PABs generally have complex and in some cases opaque holding structures and cover a broad range of financial activities (Box 5).14 While the exact holding structures differ across groups, several operate with an ultimate holding at the top and several sub-holdings below, including complex cross-holdings across the different subsidiaries. The financial holdings in some cases are not regulated and only sparsely supervised. Banking is the dominant financial activity of the groups. Other financial activities include insurance (e.g., BMCE/BOA or Standard Bank), 15 microfinance through own operations or joint ventures (e.g., Ecobank or GBCP), investment activities and securities dealing, leasing and in some cases even non-financial activities (e.g., information technology (IT) or real estate companies). In addition, there have been increasing linkages— including cross-border linkages—between banks and non-banks of the same groups.

37. The shareholding structure of some groups is diversified. In particular, for ETI and Standard Bank the major shareholders have at most a quarter of shares each and include shareholders from across SSA as well as international shareholders (e.g., the International Finance Corporation (ETI) and the Industrial and Commercial Bank of China (Standard Bank)).16 The Nigerian cross-border banks also have a diversified shareholding structure. However, in other cases the shareholding structure is more concentrated. The major shareholder in Attijariwafa is SNI Group, which is controlled by the royal family of Morocco, whereas for BMCE the major shareholders are a multi-business Moroccan group (FinanceCom Group) and a French banking group (BFCM-Holding). Oragroup and Nedbank are both majority owned by investment companies, ECP and Old Mutual, respectively.

38. Major PABs conduct their cross-border operations mostly as subsidiaries, but with centralized business lines (Lukonga and Chung, 2010). The subsidiaries are separate legal entities in their host countries with their own banking license. However, in the WAEMU region two banks operate branches within other WAEMU countries out of a subsidiary in one of the WAEMU countries and requirements for these branches are based on a different formula than for subsidiaries.17 The parent bank or group holding provides a common framework and guidance on certain functions such as risk sharing or internal audit controlling that the subsidiaries follow the common policies of the group. In addition, the group provides certain centralized services such as a common IT platform and IT infrastructure or a centralized treasury (Box 6). One example is Ecobank’s treasury function, which is centralized in Paris. To disseminate group knowledge, personnel from headquarters are often sent to the subsidiaries or personnel from subsidiaries are trained at headquarters.

PABs’ Complex Ownership and Corporate Structure—Example of Bank of Africa

Like many other pan-African financial groups, the BOA Group has a complex corporate structure. BOA group’s subsidiaries in each country have very complex shareholding structures and the subsidiaries and group sub-holdings are interlinked through cross-holdings, which makes it difficult for the supervisors to have a consolidated view and assess the risks.

uA01fig05

BMCE/Bank of Africa Ownership Structure, as of June 2014

Citation: Policy Papers 2014, 090; 10.5089/9781498342452.007.A001

Sources: BMCE/Bank of Africa Group Network Presentation, June 2014; BMCE/Bank of Africa Group Annual Report, 2013Note: The figure does not include any outside shareholders.

Intra-group Integration and Centralized Group Services

A number of cross-border banks centralize certain activities and systems at the group level to reap economies of scale. These functions include IT services or treasury functions. While this brings down costs, there are also risks associated with these centralized services and supervisors fear that fees for these services might be used to circumvent restrictions on dividend or capital transfers between subsidiaries and parent banks.

Functions that are typically centralized include IT infrastructure and IT services or treasury operations. For example, in some cases all operations of a bank run on a standardized IT platform, for which the back office is located in one country, which does not necessarily have to coincide with the headquarter of the bank. This location services the entire group sometimes with backups in other locations. Other functions, e.g., internal control or risk management, are centrally overseen at the group level and have common and standardized manuals.

Centralized services can help achieving economies of scale of cross-border banking, but add operational risks and might cause problems when it comes to resolution. Operational risks relate to sensitive information being kept offshore, which could possibly be accessed by unauthorized parties, and to information that might not be accessible when necessary. Supervisors audit and check these systems carefully including their backup locations. Some supervisors are requesting banks to keep these information and IT infrastructure within the country. Centralized systems and functions might also pose a problem in case of resolution, e.g., if the functionality of the subsidiary depends too much on the parent bank or group wide services.

An additional issue in terms of centralized services arises from fees charged for these services. The parent bank or a specialized service subsidiary charges the subsidiaries for the centralized services. This could be used to circumvent restrictions on capital transfers or restrictions on dividend pay outs. Supervisors have started to scrutinize transfer prices more closely including with the help of consultants, putting bans on fees that cannot be explained with the value added by the services rendered.

Balance sheet expansion

39. Analyzing asset growth at the consolidated level shows that three major PABs (Ecobank, BMCE, and Attijariwafa) expanded their assets strongly since 2007.18 In contrast, only one of the foreign banking groups (Standard Chartered) had strong asset growth (Table 7). For the remaining banks, assets grew less than ten percent during 2007–13, or even declined. That said, for the big foreign banking groups, the African operations only play a small role in the global group (with a share of less than five percent of total assets) and, thus, the development of the consolidated group might be somewhat misleading. Therefore, Table 7 also includes asset and loan growth rates for the sum of all SSA operations.19 With the exception of Société Génerale and Barclays, the aggregated African operations’ data follows the same pattern as the consolidated data.

Table 6.

Selected Foreign Banks with SSA Presence: Assets in Percent of GDP by Country, 2013

(Percent)

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Table 7.

Selected PABs and Foreign Banks: Asset and Loan Growth, 2007–2012/13

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Sources: Annual Reports, Bankscope, and IMF staff calculations.Notes: Table shows asset and loan growth between 2007 and 2013. If 2013 data is not yet available, 2012 data is used.Aggregated assets/loans for SSA subsidiaries shows the growth of the sum of assets/loans for SSA operations, where data is available, except for BMCE and Barclays.For BMCE sonsolidated assets of Bank of Africa are used and for Barclays consolidated assets of Barclays Africa Group Limited.Colored cells denote systemically important subsidiaries, using both the deposit and asset share criteria.X denotes an existing operation where data is not available for the period 2007–2013.

40. The pan-African banking groups show a strong asset expansion across most of their subsidiaries. In particular, almost all subsidiaries of Ecobank show very high asset growth. Standard Bank and BMCE also have a large number of subsidiaries with strong growth, although asset growth seems to have been smaller in economies where the subsidiaries have a higher deposit share. A potential reason for the low growth of the consolidated assets of Standard Bank could be the relatively low asset growth in its South African home market, which is by far its largest operation, while the sum of assets of other SSA operations has increased more strongly.

41. For subsidiaries of foreign banking groups, asset growth has been somewhat smaller and more heterogeneous across and within different groups. For example, Standard Chartered had strong asset growth in some subsidiaries, but declines in others. Almost half of Barclays’ subsidiaries have seen decreasing assets, whereas asset growth has been diverse, though mainly subdued in the subsidiaries of French banks. Overall, in countries with operations of pan-African and foreign banking groups, pan-African banking groups had stronger asset growth compared to subsidiaries of foreign banking groups. Thus, it seems there has been less interest by foreign banks in certain markets; nevertheless, the share of SSA banking operations in total assets of the foreign banks has not declined strongly since 2007.

42. The pattern of loan growth has been similar to that of asset growth. Accordingly, subsidiaries of pan-African banking groups have expanded their loan book more strongly than foreign banking groups. All of pan-African banking groups had a strong expansion of their loan book from 2007 to 2013 across most of their subsidiaries. For foreign banks, on the other hand, the expansion had been much more subdued and for quite a number of subsidiaries the loan book had declined.

Financial soundness

43. Based on analysis of publicly available data, financial soundness seem to be an issue for some subsidiaries of the major groups and data gaps could be masking the true picture. The position of four pan-African banking groups, for which sufficient data is publicly available, and four foreign banking groups is analyzed using information on loan-to-deposit ratios, return on average assets (ROA), the total capital ratio, and non-performing loans (NPLs) for the consolidated groups as well as for subsidiaries over the time period 2007–13 (Tables 8 and 9).

Table 8.

Selected PABs and Foreign Banks: Consolidated Financial Soundness Indicators, 2007–13

(Percent)

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Sources: Annual Reports, Bankscope, and IMF staff calculations.
Table 9.

Selected PABs and Foreign Banks: Subsidiaries’ Financial Indicators, 2007–13

(Percent)

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Sources: Annual Reports, Bankscope, and IMF staff calculations.Note: Highlighted subsidiaries are systemically important subsidiaries, using both the deposit and the asset share criteria.