A commodities downturn and increased regulatory scrutiny are threatening the growth of banking in Africa. Banks should respond by investing in compliance systems and people, writes John Kiptum
At a glance, the African banking sector looks to be in good health. Mobile banking has exploded on the continent, particularly in Sub-Saharan Africa. Investment banking is also booming, with a record 244 M&A deals across the continent in 2016, worth a total of $39bn.
As a result, growth rates have been impressive. M-Pesa, Kenya’s most successful mobile banking product, has signed on 30m customers in 10 countries in just 10 years, while Commercial Bank of Africa, also based in Kenya, posted an 87 percent increase in profits last year, aided in part by its mobile lending business M-Shwari. Meanwhile, in Tanzania, mobile accounts totaled 18.08m at the start of 2017, according to Oxford Business Group, up 1.4m in just one quarter.
But there are gathering clouds. Commodity prices have suffered throughout the globe thereby reducing economic growth, hitting resource-rich Africa hard and curbing investment and growth. Earlier this year, the World Bank downgraded growth forecasts for Sub Saharan Africa from 2.9 per cent to 2.6 per cent, blaming “insufficient policy responses to the commodity price crash”, according to the Financial Times. Inevitably, this is taking its toll on Africa’s banks.
As if the global financial crisis weren’t enough, regulators responded to the 2008 crash by tightening rules, with MiFID II and Basel III just the latest in a long line of regulation. Smaller banks have been hit disproportionately hard. To remain compliant in a tougher regulatory environment requires technology and training – neither of which comes cheap. For many Tier 3 African banks, the costs associated with stricter controls have become a drag on profitability and growth.
Correspondent banks pulling away
Many smaller African banks originated as community banks or credit unions. Their work is vital for the continued development of rural areas and small enterprises. But if they fall behind on compliance, these local banks will have problems finding correspondent banks with which to settle international transactions.
Compliance is now a global responsibility. This means that it is not enough for a bank to ensure it is enforcing all the current rules – it must be confident that its partners are doing so too, or risk fines and censure. As a result, correspondent banks are de-risking – striking off banks they fear might not be compliant. This in turn has limited the range of counterparties available for enabling trade and investment.
A study by the IMF in 2016 noted Liberia, Angola, Botswana and North African countries had all been affected by de-risking. It noted that the withdrawal of correspondent banks had reached “a critical level in some affected countries, which could have a systemic impact if unaddressed”.
Problems raising funds
A further complication is that banks that do not meet global regulatory standards will find it harder to raise funds, limiting loan growth and the health of the overall economy.
For all these reasons, it is vital that banks, big and small, adhere to international guidelines and regulations by investing in people and systems. The cost of not doing so will be measured in lost customers and lost business opportunities, leading ultimately to opprobrium and isolation.
Meeting the challenge
Unfortunately, too many banks in the region view compliance as a drag on business, rather than as a bridge to the outside world. This must change.
One organization that is helping to turn around attitudes to more onerous regulation is the Association of Certified Compliance Professionals in Africa. It has set itself the goals of helping Africans to interpret global regulations and raising anti-money laundering standards. If successful, its work will have been invaluable in helping banks open new lines of business and keeping those lines open.
Governments are also drafting laws to legalize and support global regulatory standards. Uganda is currently working through new legislation, while South Africa, Kenya and Nigeria already have laws in place. For example, in their annual reports, banks must now specify what measures they are taking to meet international regulatory standards.
Transaction monitoring and fraud detection systems
Specialist FinTech solutions and systems such as NetGuardians’ enterprise risk management platform, address anti-money laundering concerns, stop fraud, and mitigate cyber risk. And by bringing technology to the fight against fraud, banks can not only cut risk but also costs.
NetGuardians’ solution, for example, allows the bank to monitor every transaction, spot patterns and block suspicious activity. Data analytics also picks up on suspicious behavior from account holders – say on the misappropriation of funds – and from activity on accounts whose data has been compromised. And all this can be done in real time, preventing fraud before it happens and stopping banks falling foul of regulation.
From a legal and business point of view, investing in compliance is a no-brainer. It is the passport to membership of the global banking community, investment, trust, business opportunities and renewed growth. Without it, banks risk punitive, limitless fines, reputational damage and costly continuous audits – all of which slow down business and limit opportunities for growth.