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Gravatar: Florian Léon

How does the expansion of regional cross-border banks affect bank competition in Africa?

01.06.2015Florian Léon

African banking sectors have witnessed significant changes in their structure over the past several decades with the penetration of regional cross-border banks. We have investigated whether these changes have led to more competition in the banking industry.

The entry of foreign banks increases the number of players and therefore, is likely to increase competition in the banking sector. Moreover, cross-border banks have a comparative advantage when entering new markets in terms of better access to capital, risk diversification, scale economies, skill and management expertise. In particular, foreign banks that originated from Africa have an additional competitive advantage in dealing with countries sharing similar institutional, cultural and economic characteristics. These banks could thus adopt more aggressive strategies to gain market shares.

Several factors, however, may limit the ability of African cross-border banks to increase competition in host markets. The effect of foreign banks entry on competition is conditional to market strategies and the degree of engagement of the regional banks in host countries. For instance, the entry of new banks can exert no effect on competition if these banks follow their clients abroad or focus on a fringe demand that is not financed by domestic banks. Thus, a foreign bank might become a dominant player and reduce contestability. In addition, the multi-market contact theory documents that firms interacting in several markets have more incentives to collude. Therefore the fact that cross-border banks interact in different national markets may reduce their willingness to compete.

To investigate how the expansion of regional banks in Africa has affected banking sector competition, we compared the evolution of competition and the market share of African cross-border banks over the period 2002-2009 in a sample of seven West African countries (Benin, Burkina-Faso, Côte d'Ivoire, Mali, Niger, Senegal, Togo). We used 3 different measures of competition: the Lerner index, the Panzar-Rosse H-statistic and the Boone indicator. Countries under consideration in this study, which are all members of the West African Economic and Monetary Union (WAEMU), have a major advantage for our purpose. Since the mid-2000s, the WAEMU banking landscape has changed dramatically with the arrival and expansion of new banks from Africa. African cross-border banks began their expansion in the WAEMU ten years ago, whereas this change has occurred very recently elsewhere in the continent.

The findings of this study reveal that the penetration of regional banks goes hand-in-hand with more competition among banks. The results show that the degree of competition has increased since the mid-2000s.

Put differently, the expansion of regional banks seems to spur competition in Africa. These preliminary results should be confirmed by a more rigorous test including more African countries. In addition, further research should analyse the consequences of the development of cross-border banks on banking efficiency, stability and inclusion in Africa.


This blogpost is based on the paper "Has competition in African banking sectors improved? Evidence from West Africa", prepared by Florian Léon from the University d'Auvergne - CERDI.

Gravatar: Paola Granata, Katie Kibuuka and Yira Mascaro

Reducing the Cost of finance and Enhancing Financial Inclusion in Africa: Policy Options

18.05.2015Paola Granata, Katie Kibuuka and Yira Mascaro

On average, lending spreads are higher in Africa than in other developing countries. Several government have reacted by establishing lending rate caps, yet these administrative measures can be counterproductive because interest rate ceilings do not ensure lower long-term lending rates and can adversely affect financial inclusion. In fact, lending institutions can react by simply increasing other service costs to recoup lost income. Moreover, lenders can stop servicing riskier segments of the market (such as MSMEs) if the cap does not adequately compensate operating and other costs.

In a recent paper "The Cost of Financing in Africa: Policies to Reduce Cost and Enhance Financial Inclusion", we analyse the main components of spreads and explore a wide set of reforms that can help lower the cost of finance and ultimately increase financial inclusion while avoiding the negative effects of interest rate controls.

In a nutshell, we found that operating costs and mainly personnel costs tend have the lion's share of spreads in African countries (akin to other developing countries). This may be the result of combination of typical features of African financial systems such as concentrated banking systems, high lending risk premia, and higher upfront investment requirements to expand outreach. We also found that investment patterns have a significant effect on lending spreads. African banks tend to invest relatively more in government securities, perhaps reflecting higher profitability compared to lending operations that inherently incur much larger expenses and carry more risks, particularly in some African countries. Therefore, lending interest rates can be driven upwards to compensate for the opportunity cost of investing in securities.

We argued that policy makers have a wide set of policy reforms at their disposal to lower the cost of finance (and increase financial inclusion) while avoiding the negative effects of interest rates controls. In the paper, we group these policies into seven categories: (I) production/operating costs, (II) regulatory costs; (III) credit risk; (IV) alternative banking business; (V) profitability and return on capital; (VI) macroeconomic stability and country risk; and (VII) enhancing financial inclusion. The list of reforms presented in the paper (and related country examples) is not exhaustive, but it is intended to illustrate the wide array of options available when seeking to lower the cost of finance.

Policy makers aiming to reduce financing costs should prioritize reforms that promise the biggest impact based on country circumstances. Policies related to operating costs and profits could potentially have a big impact given their large share in the interest rate spreads. Accordingly, the following measures are crucial: improving the business environment to reduce transaction costs, such as: improving insolvency/creditor rights and suitable collateral frameworks; promoting agency and mobile banking to reduce costs associated with increased access in rural and scarcely populated area; reducing the cost of borrower information (e.g. through effective credit information systems). Reducing infrastructure costs and insecurity are also key measures to reducing operating costs in Africa. And, increasingly relevant, promoting non-bank financial institution growth enhances competition and contestability within the banking sector while directly increasing financial inclusion of underserved segments (for a more complete list please see paper).


This blogpost is based on the paper "The Cost of Financing in Africa: Policies to Reduce Cost and Enhance Financial Inclusion", prepared by Paola Granata, Katie Kibuuka, and Yira Mascaró from the World Bank.

Gravatar: Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu, and Etienne B. Yehoue

Status and Development of Islamic Finance in Sub-Saharan Africa

09.03.2015Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu, and Etienne B. Yehoue

The Islamic finance industry has been growing rapidly in various regions, and its banking segment has become systemic in some countries, with implications for macroeconomic and financial stability. While not yet significant in Sub-Saharan Africa (SSA), several features make Islamic finance instruments relevant to the region, in particular the ability to foster SMEs and micro-credit activities. In a recent paper, we provide a survey on Islamic Finance in SSA where on-going activities include Islamic banking, sukuk issuances (to finance infrastructure projects), Takaful (insurance), and microfinance. Should they wish to develop the market, policy makers could introduce Islamic financing windows within the conventional system and facilitate sukuk issuance to tap foreign investors. The entrance of full-fledged Islamic banks would require addressing systemic issues and adapting crisis management and resolution frameworks.

The financial sector in SSA has been growing rapidly in the past two decades. New products have been introduced and financial institutions are playing an increasing role in financial intermediation, including cross-border financial intermediation.

However, Islamic finance remains small, although it has potential given the region's demographic structure and potential for further financial deepening. As of end-2012, about 38 Islamic finance institutions-comprising commercial banks, investment banks, and takaful (insurance) operators-were operating in Africa. Out of this, 21 operated in North Africa, Mauritania and Sudan, and 17 in Sub-Saharan Africa.

Botswana, Kenya, Gambia, Guinea, Liberia, Niger, Nigeria, South Africa, Mauritius, Senegal and Tanzania have Islamic banking activities. There is also scope for development in Zambia, Uganda, Malawi, Ghana and Ethiopia, as all but Zambia has relatively large Muslim populations-Zambia is interested in using Islamic finance instruments to fund investment in the mining sector. In Uganda, the central bank has started the process of amending its banking regulations to allow for the establishment of Islamic banks and three Islamic banks have applied for a license.

Islamic finance is still at a nascent stage of development in SSA. The share of Islamic banks is small, and Islamic capital markets are virtually non-existent (there were small Sukuk issuances in Gambia and Nigeria). At the same time, the demand for Islamic finance products is likely to increase in coming years. At present, about half of the region's total population remains to be banked. Furthermore, the SSA Muslim population, currently at nearly 250 million people, is projected to reach 386 million in 2030 and financial activities are expected to rise as a share of GDP. Many countries are expected to introduce Islamic finance activities side-by-side conventional banking. Opportunities for the development of Islamic finance are expected to comprise retail products to small and medium-sized enterprises. The sub-continent's growing middle class, combined with its young population is an opportunity for Islamic finance to expand its services. SSA's large infrastructure needs will also provide an opportunity for Sukuk issuance to channel funds from the Middle-East, Malaysia, and Indonesia. For example, recent issuance of a Shari'ah-compliant bond by Osun state in Nigeria and South Africa could start a trend in favour of sukuk, especially if planned sukuk by Senegal.

Developing Islamic Finance in Sub-Saharan Africa

The development of Islamic Finance could increase the depth and breadth of intermediation, extending the reach of the system (e.g. extension of maturities and facilitation of hedging and risk diversification). At the same time, the much larger non-Muslim population could find Islamic financial instruments attractive in broadening the range of available options, particularly for SMEs and micro-credit. Moreover, financial deepening and inclusion could be further enhanced if new instruments are inspired from Islamic finance, but without necessarily being Shari'ah certified. The development of partial risk guarantees, as in Mauritius, could be seen as an example.

In addition, SSA countries could tap into growing Islamic financial markets to meet infrastructure financing needs. By opening doors to Islamic finance, SSA can seek to attract capital from Muslim countries whose savings rates are high and projected to grow. In particular, sukuk financing, which is expanding in other countries, could be a useful tool to finance infrastructure investments.

Lastly, Islamic financing can help develop small and medium enterprises and microfinance activities, given those African households and firms have less access to credit from conventional banks compared to other developing regions. Islamic banks can tap a segment of depositors that do not participate in interest-based banking. They can also promote SMEs' access to credit through expanding acceptable collaterals by extending funds on a participatory basis in which collateral is either not necessary or includes intangible assets.

Through its different forms-windows, full-fledged banking, investment banking, and Insurance-Islamic finance activities ensure appropriate leverage and help limit speculation and moral hazard. It should be noted, however, that they are also subject to constraints and risks, most notably the difficulties and costs involved in supervising and monitoring and the reputational risk implicit in some products that are not properly certified as compliant with Islamic principles.

For countries that want to develop Islamic finance in their jurisdictions, a strategy could contemplate the following steps: launching a public awareness campaign, providing the needed infrastructure (i.e. amending as needed laws and accounting and prudential frameworks), building capacity at the central bank (especially on supervision), and considering the need to set up an appropriate liquidity management framework and introduce adequate monetary operations instruments.

This blogpost is based on the academic study "Islamic Finance in Sub-Saharan Africa: Status and Prospects", prepared by Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu and Etienne B. Yehoue.

Gravatar: Greg Dobbels, Pascaline Dupas, Sarah Green, Anthony Keats, Jonathan Robinson

Access to Financial Services: Necessary but not Sufficient for Financial Inclusion

23.02.2015Greg Dobbels, Pascaline Dupas, Sarah Green, Anthony Keats, Jonathan Robinson

Until recently, the drive towards financial inclusion was commonly framed in terms of access. Yet as the explosion of digital financial services and simplified account opening procedures have begun to make financial services accessible to the poor, it has become apparent that access is only part of the equation. Despite these innovations, account ownership and usage has remained stubbornly low in much of Sub-Saharan Africa. As access expands, new research suggests that similar attention should be paid to improving the quality and affordability of financial services, as well as building trust in financial institutions, if we hope to achieve broader success in banking the poor.

In 2010, a group of researchers worked with Innovations for Poverty Action (IPA) to study the low level of financial inclusion near a set of market centers in rural Kenya. In these early days of Kenya's digital financial revolution, formal savings rates were low. Despite having at least one formal banking option within walking distance, just 20 percent of households had a savings account. Instead, most households relied on informal savings groups and livestock to store their wealth. Formal lending options also went largely unused.

So why were households not taking advantage of the formal banking options available to them? One possible explanation was a lack of knowledge about the services themselves. While 60 percent of respondents knew of the bank branches in the area, almost no one knew basic details about the available accounts, such as the fee schedule. In this setting, the researchers wanted to learn what happens when people understand their options and account set-up costs are removed. To answer this question, the researchers conducted a randomized evaluation of low-cost savings and credit product offers for unbanked households.

Initially, trained IPA staff visited just over half of the unbanked households in the area. They informed them about the local banking options and gave them a voucher that effectively waived the account opening fee and minimum balance for a savings account.

The results were good: 63 percent of people opened an account. But not great: only 18 percent used the account at least twice over the next 12 months. It seems the design of the products and the quality of the services did not meet the needs of potential clients. When the researchers asked recipients why they chose not to use their account, responses tended towards three answers: fear of embezzlement, poor service, and withdrawal fees that made small transactions too expensive.

The researchers found similar results when they informed respondents about credit options and lowered the eligibility requirements for a small, collateralized loan. After six months, only three percent of people had applied for a loan. These numbers appear to be particularly low, since interest rates on the loans were considerably lower than the estimated profit that households could have made with the extra funds. Again the design of the loan did not meet the needs of the study participants, who cited fear of losing their collateral as a major reason for not taking a loan.

Clearly, access to financial services is just one piece to the financial inclusion puzzle. As the reach of formal financial services spread, the quality of services and trust in banking institutions must also improve to achieve broader success. At the same time, more rigorous research is needed to identify effective ways to improve product design to meet the needs of both financial service providers and the poor.


This blogpost is based on the academic study "Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province"

About the Study Authors:

  • Pascaline Dupas is an Associate Professor of Economics at Stanford University;
  • Sarah Green is a Senior Program Officer and Researcher at the High-Level Task Force for the ICPD and previously worked as a Research Manager at Innovations for Poverty Action;
  • Anthony Keats is an Assistant Professor of Economics at Wesleyan University; and
  • Jonathan Robinson is an Associate Professor of Economics at the University of California, Santa Cruz.

This blogpost was written by Greg Dobbels, Initiative Associate with IPA's Global Financial Inclusion Initiative, and approved by the study authors. Learn about Innovations for Poverty Action's Global Financial Inclusion Initiative here.

Investment banks in Africa

09.02.2015Estelle Brack, Economist, Groupe BPCE

Africa represents a small percentage of the global investment banking business, but the activity is expected to expand in the years to come in view of already apparent economic opportunities.

According to Thomson Reuters, the commissions generated by investment banking activities in Africa amounted to $318 million in 2013, of which $232 million was in South Africa alone. This is modest when compared to the levels in the rest of the world, which generated $82.6 billion in commissions in the same year, returning to its levels of 2007. Globally, the five largest investment banks are based in the United States, and their market share increased by 2.5% in 2013. JP Morgan is the leading global investment bank, generating $6.4 billion in commission (7.8% of the total), followed by Bank of America Merrill Lynch ($5.8 billion), Goldman Sachs ($5.1 billion), Morgan Stanley ($4.7 billion) and Citi ($4.2 billion). The investment banks operate mainly with major clients (companies, investors and governments) providing advisory services (mergers and acquisitions), intermediation (loans) and long term financing operations (IPO, issuing of debt in the form of bonds). Here, we distinguish between corporate finance, global capital markets and structured finance operations.

The continent's outlook for economic growth makes it an attractive place for investment banks

The continent's economic growth quite logically feeds financing operations, the development of the capital markets, and advisory services, all areas of which investment banks are actively involved in. Many activities will require the intervention of investment banks with the arrival of multinationals, the restructuring of the banking and telecommunications sectors, the exploitation of new mining deposits and the launch of major public investment programmes.

Africa, like the rest of the world, is experiencing a change in its strategy to financing for development. Traditional donor interventions are often inadequate to meet the financing needs for infrastructure, while the traditional means of mobilising resources at the country level (taxation, etc.) face major challenges. As a result, the continent is increasingly turning towards local and global capital markets to access new financial sources.

The world leaders in corporate banking (BNPP, SGCIB, Natixis, HSBC, Citibank and Standard Chartered) as well as investment banking (Rothschild, JP Morgan, Goldman Sachs, Deutsche Bank and Crédit Suisse) are very active on the continent. Alongside them, local players such as Standard Bank, Rand Merchant Bank, Renaissance Capital, EFG Hermes and Attijari Finances Corp are well established. These are followed by new players who have recently entered the market, including United Bank for Africa (UBA), First Bank of Nigeria (FBN) and Ecobank, all of which have created their own specialised subsidiaries (UBA Capital, FBN Capital and Ecobank Capital). Currently, African banks dominate the mobilisation of funds in local currency.

In order to adapt to market changes and the new opportunities presented, many banks have announced the repositioning of their investment banking activity in markets outside South Africa. Nedbank, for example, merged its corporate and investment businesses, while Standard Chartered Bank redeployed in Africa, and Barclays Africa has announced that it has high expectations of its African markets outside of South Africa, which remains the most attractive location to date.

Today, we observe that the international banks in Africa carry out their investment banking activities in Anglophone and Francophone countries, unlike the retail-banking sector where we see a certain linguistic preference in their regional expansion strategies.

Mergers and acquisitions (M&A)

The volume of announced M&A deals in the continent increased by 30% between the first half of 2012 and 2013. According to Mergermarket Group, M&As targeting sub-Saharan African companies totalled $26.7 billion in 2013, an increase of 20% over 2012. The traditionally targeted companies in natural resources, minerals, oil, gas and infrastructure were replaced in 2014 by targets in the telecommunications, media, banking, insurance and consumer goods sectors. 2013 was marked by a record level of operations, with the sale of 28.6% of ENI East Africa to the Chinese company CNPC for $4.2 billion, and the acquisition of 20% of the Rovuma Offshore Area 1 Block (off the coast of Mozambique) by Indian company ONGC Videsh for a total of approximately $5 billion. Alongside conventional industrial investments, private equity operations are expanding through funds such as Helios, Emerging Capital Partners, Abraaj and African Infrastructure Investment Managers (AIIM). In the first eleven months of 2014, the share of M&As carried out inside the African markets reached $29.2 billion for 413 operations, whereas M&A operations targeting Africa amounted to $40.7 billion for a total 730 operations. There were some major market operations in late 2014, such as the takeover of Pepkor, a south African retailing giant, by Steinhoff for $5.7 billion, in Chad, the state bought Chevron assets ($1.3 billion), the takeover of the South African and Nigerian assets of Lafarge by Lafarge Wapco (now known as Lafarge Africa Plc) for $1.35 billion, or the sale of several oil wells to Nigeria for $5 billion by Shell.

A necessary rationalisation

According to Konrad Reuss, in charge of the sub-Saharan Africa department at Standard&Poors, "the heady days of international bonds issued by new players or from frontier markets, such as those of the African countries over the past two years, are over. The periods when we witnessed oversubscription are no longer with us". The reduction of the quantitative easing policy of the US administration is also partly responsible. The new policy is changing the bond issue conditions for countries whose economies are in difficulty, according to S&P, which is anticipating an increase in the cost of eurobonds. For Miguel Azevedo, "The Africa of the past was more a land of pioneers and adventurers. Today, the major players are returning. It is becoming much more mainstream". Recent history has shown that governmental agencies are ready to intervene in Africa (World Bank, AFD, AfDB, EIB, KfW, etc.), as the risks in Africa are not, in the end, much higher than in other places (the United States or Europe). The profitability level remains very attractive for projects to be funded on the continent.

Dr Estelle Brack Estelle Brack is an economist, specialising in banking and finance in developed and in developing countries.


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