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Arab Banking Systems: Towards a Common Model?

19.06.2011Estelle Brack

Despite their differences and heterogeneity, Arab countries have much in common: Arabic as official language and dominant culture, as well as political, economic and legal influence from neighboring Western European countries and the United States. Another common feature is their banking systems which, although deep, are still vulnerable and play an insignificant role in financing the local economy. The political changes underway in some Arab countries could provide a justification for in-depth reform.

The region’s countries embarked on banking and financial sector modernization almost at the same time, firstly, following the opening up of trade for natural resource-exporting countries or at the time of their independence. This was followed, in the 80s and 90s, by macroeconomic and structural reform programs implemented within the framework of the Washington Consensus. Their gradual integration and adherence to international rules (such as those of the Basel Committee) also contributed to the modernization and development of banking sectors in Arab countries, to the extent where, today, we are talking of a convergence towards global systems. The extension of banking services, governance, risk management, development of retail banking and the financing of SME are today the primary concerns, and solutions are derived not only from the West, but also from within the region. The regional and international expansion of Arab banks, especially towards the African continent, illustrates this, with Moroccan and Lebanese banks serving as examples.

In many countries, the public sector still plays a dominant role within the banking sector, be it in terms of banking institutions or businesses that are beneficiaries of bank financing. And, even in countries where most institutions are privately-owned, competition remains low. As a result, even when stable, the financial system performs poorly, with high rates of bad debts compared to countries with similar income levels, with a large proportion of the population having limited or no access to banking services.

Furthermore, the demand for and supply of finance for small and medium-sized enterprises are not in equilibrium, and this is due, in part, to a lack of trust between the banker who does not have reliable information on the company’s health and the SMEs that are not always able to present a coherent business plan and are not always inclined to seek external financing. These are some of the priority areas that are common to countries within the region. Major initiatives have been taken to bring bankers closer to SMEs, which represents over 90% of local production.

The subprime crisis has led Gulf States to redefine the global distribution of their investments in favor of the Mediterranean region whose recent gains are higher than potential losses, with real risk estimated at only 2%. Since 2007, the Maghreb region is once more benefiting from a surge in investments from Gulf States. A testimony to this is a listing of investment projects in Maghreb countries by financial and banking institutions of Gulf States.

Arab banking systems are today still heterogeneous, but they have more in common than with other regions of the world. Bank financing is very much geared towards affluent businesses and segments of the population, concentrating the majority of their assets in countries where a significant proportion of the population lives below the poverty line. Islamic financing represents a small proportion of the financial assets; rather developed in Gulf countries, it accounts for 34%, at the most, in Saudi Arabia, and it is still marginal throughout the Mediterranean region. Given its size, it serves as a “proximity solution”, alongside microcredit which, for its part, serves very small businesses on more expensive terms and with fewer guarantees for the client, compared to the banking sector. There should therefore be a “mesocredit” solution there are many initiatives to find a solution to this dilemma; extending banking services to capture savings, refocusing credit decisions on the cash flow potential of the project to be financed in the first place and, if guarantees are needed, building a public guarantee system.

However, we should certainly not copy models tested in the West and apply them to distinctly different development goals and economic fabrics, half of which fall within the informal sector. We need to innovate, indeed re-invent, certain aspects of banking.

Handicapped by restrictive offers and a lack of confidence, the full potential of banking in the Arab region is yet to be attained in order to properly allocate considerable resources for projects that are likely to ensure the pursuit of economic and social development.

Considering that it follows a relatively homogeneous trend gives development policies a regional dimension potential, including across the entire African continent.

Systèmes bancaires des pays arabes

Estelle Brack, Assistant delegate in charge of international affairs & Senior economist for the French Banking Federation / Professor at Université Paris 2 - Panthéon Assas in the LLM in Arab Business Law.

Developing an e-payment system in Africa: Issues and Challenges

08.05.2011Blaise Ahouantchede

I. Low banking services in Africa: a constraint on financial services development

The banking rate in Africa is still low, making it hard to overcome the challenge of developing financial services necessary to strengthen African economies. In the eight West African Economic and Monetary Union (WAEMU) states which have eighty-four million people and some one hundred banks, this rate - which is less than 10% - does not allow for the establishment of a solid and sustainable development strategy for a mass financial system.
Several initiatives are however underway to reverse this trend. These include adapting regulations, sensitizing various actors, educating the population on the financial culture, providing adapted and accessible services at reduced costs, and ensuring the security of financial transactions to instill confidence in clients.

II. The role of actors and strategy type

Central banks have an important role to play in improving the banking and financial landscape by adopting proper regulations designed to foster the development of banking and financial activities in Africa. As a result, in the WAEMU zone, the Central Bank of West African States (BCEAO), through Order No. 08/2002/CM/UEMOA, promotes access to banking services and the use of electronic payment systems. Following this directive, WAEMU member states were  also expected to adopt similar laws in line with the directive.
These measures are necessary to sensitize various segments of the society on the use of encrypted means of payment, including e-payment which is playing a prominent role.
GIM-UEMOA”, the e-payment governance and supervisory body within WAEMU, has established an interbank e-payment system in the region by providing world-class technical and operational infrastructure, making it possible to meet cash withdrawal and payment needs through bank cards.
Strategic partnerships have also been established with international issuers to enable GIM-UEMOA member banks to offer valuable services both within and outside the WAEMU zone while respecting BCEAO regulations for operations conducted within WAEMU, in particular, balancing and settling electronic financial transactions conducted in local currency. The establishment of a unified zone regarding the processing and management of interbank operations, a sign of real financial integration, is therefore one of the major achievements in the WAEMU zone.
Banks also promote the development of financial services through an innovative and differentiated approach based on their marketing and sales strategies.

III. E-payment’s contribution to the expansion of banking services and the promotion of financial inclusion

Electronic banking is and will remain an essential element in efforts to expand banking services to the population given that it targets people with or without payment means. The major challenge facing banks is therefore to establish and provide competitive electronic payment systems to the continent’s increasingly demanding population. This will imply controlling investments and operation costs which are relatively high.
The creation of the “GIM-UEMOA” in the WAEMU zone therefore meets a key objective of pooling investments by adopting a sub-regional interoperability strategy for e-payment operations enabling banks to provide local services at reduced costs.
The establishment of these regional champions such as the GIM-UEMOA in West Africa, OMAC in Central Africa, and a soon to be active inter-banking system for ECOWAS, and the need for an interconnection of these systems, should one day enable Africans with payment instruments such as credit cards or other electronic payment facilities to easily conduct financial transactions anywhere in Africa, without thinking about foreign exchange issues.
Africa will therefore become a unified zone, facilitating trade and strongly fostering financial and economic integration.

IV. Future challenges

New Information and Communications Technologies are enabling major players such as banks to provide high value-adding banking and financial services to their clients, based on payment methods such as bank cards, the Internet and mobile phones.
With a fairly high penetration rate of about 50% in Africa, mobile phones will, within the next years, undoubtedly become a payment method that will revolutionize the continent’s financial and banking landscape. The bank will be electronically connected and it will be close to its clients. This will also enable banks to innovate and earn new commissions from financial services, thereby increasing their net banking revenue. This is a great challenge for all stakeholders such as central banks, regional champions such as GIM-UEMOA, Banks, financial institutions, microfinance institutions, etc.

Blaise Ahouantchede, GIM-UEMOA’s Director General since 2003, has more than fifteen years of experience in finance, banking and project management. A polytechnic engineer and a holder of an MBA from Paris Dauphine, he also has two graduate degrees in information systems and in business and project management from Paris XII, France.
Before becoming the director-general  of GIM-UEMOA, he was, for more than eight years, a banking and finance project manager with ‘Crédit Agricole du Sud et au Crédit Agricole Indosuez’ in France, where he was in-charge of retail services and back-office operations, financial products research, as well as mergers and acquisitions operations.  He was also project director at the deposits and consignment office in France responsible for bank projects and payment methods.

The macroeconomic impact of Basel III on African economies

25.04.2011Pietro Calice

Africa escaped the recent global financial crisis relatively unscathed. While the region could not avoid the spillover effects of the ensuing global economic downturn, its banking sector proved generally resilient. This was mainly due to the structural reforms implemented over the past decade, including strengthening the relevant regulatory and supervisory systems, within a sounder and more flexible macroeconomic management framework.

Against this background, countries in the region need to advance their financial sector reform agenda. While financial deepening and access to financial services remain the main policy objectives, sustainable and inclusive economic growth rests ultimately on financial stability. In this context, the recent global regulatory response to the financial crisis, in particular the Basel Committee on Banking Supervision’s reform package known as Basel III offers a valuable opportunity to reexamine Africa’s financial sector reform agenda.

Basel III introduces a comprehensive set of measures which complements the Basel II and Basel I frameworks, with the aim to improve the resilience of banking systems. The cornerstone of Basel III is higher and better quality capital, mostly common equity, with improved absorption features, complemented by newly introduced liquidity requirements.

Africa is making important efforts to move to Basel II and might benefit from implementing Basel III. In spelling out a strategy to move to new standards however, it is important to assess the implications of regulatory reforms on economic performance, particularly of higher capital requirements, given their potential impact on macroeconomic outcomes. The existence of a “bank capital channel” through which changes in bank capital regulation have macroeconomic effects is well documented in the literature.

In a paper coauthored with Giovanni Caggiano from the University of Padua, we estimate the long-run impact of tightened capital ratios on African economies. Adopting a methodology used in similar studies, we quantify the gross benefits in terms of gains in African GDP resulting from a reduced probability of future banking crises. Based on existing data on the historical frequency of systemic banking crisis and associated output losses in Africa, we map higher capital ratios into reductions in the probability of crisis using a multi-variate logit model for a panel of 19 countries over the period 1980-2008. We then estimate the long-run economic costs of higher capital requirements on output assuming that an increased cost of funding is passed on fully to final customers through higher spreads. We employ two panel data for 22 countries over the period 2001-2008. In the first model, we analyze the long-run relationship between capital requirements and lending spreads. In the second model, we examine the long-term relationship between lending spreads and GDP. We finally combine the calculations so derived to quantify the net effect of higher capital requirements on the output of African economies.

We find positive net benefits from regulatory capital tightening. Starting from different levels of capitalization of the banking sector reflecting different initial conditions, net benefits for Africa are however found to be lower than those estimated for advanced economies. This is due to both lower expected gross benefits and costs for African economies, suggesting that with an already strongly capitalized banking system the marginal benefit of higher capital may be relatively moderate.

Our findings would suggest that heightened capital requirements under Basel III are not a priority for Africa. Therefore, as African countries advance their financial sector reform agenda, they might want to emphasize other areas which are equally critical to financial stability. These might include, among others: i) improving timely disclosure of high quality information, including comprehensive and internationally accepted accounting principles; ii) promoting the adoption of a sound corporate governance framework in order to achieve and maintain public trust and confidence in the banking system; iii) increasing compliance with the Basel Core Principles for Effective Banking Supervision, particularly with those requirements with which many countries are materially non-compliant, namely the independence of the supervisor and its capacity to enforce regulation and take corrective measures; iv) strengthening the relevant legal and institutional framework, introducing a crisis management system and resolution process, including a carefully designed deposit insurance system.

As a caveat, it is important considering that our results are subject to substantial uncertainties. Data and model limitations as well as the difficulty of mapping capital ratios in reductions of the probability of banking crisis are factors which inevitably affect our results. Moreover, we have omitted several elements from our analysis which may be important. Specifically, our assessment would benefit from considering the impact of higher capital requirements on African GDP volatility. Another dimension which would enrich our assessment is the expected impact on African macroeconomic performance from tightened capital rules in the rest of the world. With this in mind, our study provides a broad overview of the long-term economic impact of higher capital requirements on African economies.

Pietro Calice is a Principal Investment Officer at the African Development Bank.

Tunisian Banking System: Looking forward to bold reforms

24.03.2011Dhafer Saidane

I – The impasse: A banking system beset by bad practices

After twenty years of impasse, the Tunisian banking system should emerge from the doldrums

Today, considering the country’s size, it is not unfair to say that the Tunisian banking system is made up of a constellation of small banks. At the regional and international levels, they count for very little. With some US$ 30 billion in total assets, Tunisia’s major banks are far behind their African counterparts - South Africa: US$ 570 billion, Egypt: US$137 billion, Morocco: US$102 billion, and Nigeria: US$87 billion.

For over twenty years, no major reforms have helped stimulate the banking environment, especially with regard to restructuring. The banks are observing each other, and due to constraining private practices and the high stakes, they are unable to attain their real potential to finance the economy. Trapped by their capital structures and conflicts of interest, they have opted to live discretely off their investments. Cradled by the market, a degree of sluggishness has set in. What has therefore become of their mission of contributing to development efforts?

A demanding anti-economic environment and missed opportunities

During these times of financial and political crises, it is fair to denounce and condemn banks. No! Tunisian banks are not responsible for the issues facing the Tunisian society. They have respected the logic of the markets that was imposed and administered upon them. They have mobilized skills and capitalized on expertise. Unfortunately, their efforts were thwarted by an anti-economic environment characterized by « business » and private interests that were unfavorable to entrepreneurial initiative and creativity. The banker was incapable of playing their  role because they hadn’t the means or rather, the power to do so. As for the entrepreneurs, they could not express their talent because they neither had visibility nor hope. The lack of convergence between the Tunisian banker and the entrepreneur represents serious “economic failure”. We are unfortunately paying a huge price for this in terms of job creation.

II – Hope: Mobilizing resources through meaningful measures

Consolidating and reforming the banking system to enable it play its role as an engine of growth

Bold reforms are expected. Regardless of the situation, bank regroupings are essential. It is an opportunity to restructure and consolidate the capital of both public and private banks. Mergers are vital and even urgent. It’s the opportunity to introduce good practices. It’s also time to send a strong message to the international community, the rating agencies that are watching us, our historical partners, and investors. It’s time to finally rebound and restore the confidence that we henceforth deserve and which will mark our accession to a mature financial system.

Prudent financial liberalization which avoids excesses and unnecessary mimicry

We should not throw out the baby with the bath water. No! Ignoring the past and resetting the financial and banking sectors would be a serious mistake. Similarly, adopting a status quo would be the best way to discredit our economic and human potential in the eyes of the international community. Financial liberalization can be a source of efficiency if it is well managed. Opening up the economy, including the dinar’s convertibility, should be done without excesses and zeal. We are still a fragile economy. Seeking to please others amounts to putting in place conditions for chaos.

Dhafer Saidane is a professor at the Université de Lille III and the Skema Business School. He also acts as an expert for the United Nations Economic Commission for Africa (UNECA) and the United Nations Conference on Trade and Development (UNCTAD), and is an advisor to the Club of Banking and Financial Institution CEOs in Africa for the Maghreb region. He is the author of numerous works on the topic of finance, including such prominent publications as “La Finance Islamique à l’Heure de la Mondialisation” and “Les Banques, Acteurs de la Globalisation Financière”.

Lessons for Bank Regulation from the Impact of the Global Crisis in Africa

13.12.2010Louis Kasekende

The global financial and economic crisis exerted a serious macroeconomic impact on the economies of sub-Saharan Africa (SSA); average real GDP growth in 2009 fell by more than 4 percentage points compared to the annual average in the five preceding years. Nevertheless, the banking systems in most countries of SSA weathered the crisis without major damage. Unlike many of the advanced countries and some of the emerging markets, SSA avoided a systemic banking crisis. Banking systems in SSA remained both solvent and liquid. Many commentators have attributed this to the lack of integration of SSA banking systems into global financial markets; a somewhat incongruous conclusion given that international banks dominate the banking systems in many SSA economies.

Less attention has been paid to the strength of prudential regulation in SSA and the contribution which this made to maintaining banking system stability on the continent. It is now recognised that weaknesses in prudential regulation in the advanced countries contributed to the financial crisis. Regulators in advanced countries employed “light touch” regulation in which most of the emphasis was placed on capital adequacy requirements which proved vulnerable to “gaming” by banks, enabling them to ramp up leverage and operate with very little equity capital. In several important respects, SSA bank regulators imposed stricter prudential regulation than did their counterparts in advanced countries.  I will use the bank regulations in Uganda to illustrate these points but Uganda is not unique in SSA and its regulatory framework is qualitatively similar to that of many other SSA countries.

Many SSA countries impose higher statutory minimum capital requirements than do advanced economies; for example Uganda imposes minimum tier 1 and total capital to risk weighted asset ratios of 8 percent and 12 percent respectively, compared to the Basel minimum of 4 percent and 8 percent respectively which was the standard in advanced economies. In addition, SSA regulations impose much stricter standards in respect of the quality of tier 1 capital; for example, banks in Uganda must deduct all intangible assets when computing tier 1 capital, hence there is little scope for meeting the tier 1 capital requirement other than with paid up equity capital and retained earnings.

In contrast to bank regulations in the advanced countries, SSA countries did not put excessive emphasis on (an arguably flawed) capital adequacy requirement. Although capital adequacy requirements play an important role in bank regulation in SSA, they are complemented by other prudential regulations, in particular restrictions on the composition of banks’ asset portfolios and their business activities which are designed to curb risk taking. Uganda imposes restrictions on large loan concentrations, on the trading activities of banks (such as trading equities) and on foreign exchange exposures. Uganda bank regulations also restrict dividend distributions when a bank’s capital is impaired or close to being impaired. Loan loss provisioning requirements are stricter, with less scope for deducting collateral values (which are often difficult to realise) from the value of non performing loans which must be provisioned for and a requirement for a general provision irrespective of the performing status of the loan. Uganda also imposes a minimum liquidity requirement.

Stricter prudential regulations did not prevent dynamic growth in SSA banking systems in the 2000s, a period in which several SSA countries experienced credit booms. In the five years from 2004 to 2009, bank credit to the private sector in Uganda expanded in real terms at an average annual rate of 20 percent. However stricter prudential regulations did help to ensure that the rapid credit growth did not lead to financial fragility in the banking system and they also ensured that banks business activities remained focused on supplying traditional banking products, such as loans to the private sector, which are the priority for the development of SSA economies, rather than proprietary trading activities.

The Basel Committee on Banking Supervision has drawn up proposals for strengthening bank regulations at the global level which in some respects move the global minimum standards towards the standards already in force in SSA. Minimum tier 1 capital requirements will be raised, banks will not be allowed to count intangible assets towards tier 1 capital (to raise the quality of capital), a capital conservation buffer, a countercyclical capital buffer and a liquidity requirement will be introduced. In the United States, restrictions are being re-imposed on banks’ proprietary trading activities. Bank regulations in SSA are not perfect and will need to be upgraded in the years ahead to meet evolving challenges to financial stability, but it is fair to conclude that the stricter approach taken by bank regulators in SSA, compared to their counterparts in advanced economies, contributed to the resilience of the banking system in the face of the worst global financial crisis in more than half a century. African bank regulators got the basics right.


Dr. Louis A. Kasekende is the Deputy Governor of the Bank of Uganda. He began his five-year term in this position in January 2010. From May 2006 to 2009, he served at the offices of the African Development Bank (AfDB), in Tunis, Tunisia, as Chief Economist.


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