2009:Banking Perspectives on the Financial Crisis: A View from Africa


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2009:Banking Perspectives on the Financial Crisis: A View from Africa

  1. 1. Banking Perspectives on the Financial Crisis: A View from Africa Keith JefferisEgyptian Banking Institute – 3rd Annual Banking Conference Cairo, November 22-23, 2009
  2. 2. Impact of the Global Crisis on Banks in AfricaBanks in Africa are affected, of course, but not in the same wayas banks in developed countriesDepends on level of financial development and integration withglobal financial marketsDirect impacts: Bank balance sheets Vulnerable financial institutions & systemsIndirect impacts: Arising from broader economic developments Changes in international supervisory standards
  3. 3. Direct impact of the crisis has been quite limitedFinancial institutions & systems Little evidence of institutional or systemic vulnerability Little need for central bank or government interventions (rescue packages, liquidity support, bank recapitalisation or nationalisation) Limited contagion from developed country problems Main exception: Nigeria – vulnerability to oil sector and stock market lendingWhy is this? Nature of balance sheets Supervision and capital Resilience resulting from macroeconomic & financial reforms
  4. 4. Balance sheets are low riskLending Mostly deposit-funded Limited use of wholesale funding Low leverageLiquidity High Moderate loan-to-deposit ratiosRisk Limited exposure to high risk/exotic assets Limited off balance-sheet operationsInternational links Limited reliance on foreign funding Limited integration with int. capital markets In some cases, assisted by exchange controls
  5. 5. 40% 0% 10% 60% 90% 20% 30% 50% 70% 80% S Africa Swaziland Nigeria Kenya Burundi GhanaSource: IMF SSA REO Oct 2009 Zambia Niger Ethiopia Côte dIvoire Angola Mauritius Chad Tanzania Botswana Gabon Very liquid banks Liquid assets as % of total assets, 2007 Rwanda Mozbique Liberia Congo, Rep. Congo, DR
  6. 6. Supervision & capitalQuality of supervision has been improving in SSA FSAPs -> financial sector development programmes International standards: Basel core principles Investment in skills & infrastructureBanks are well capitalised Generally highly profitable CARs often above international minimum
  7. 7. 15 0 10 25 20 30 5 Mali C. dIvoire Rwanda C. Verde Cameroon Congo, DR S Africa Niger Burk. Faso MauritiusSource: IMF SSA REO Apr 2009 Burundi Senegal Guinea Lesotho Mgascar Mozbique Eritrea Seychelles CAR Namibia Ghana Congo, Rep. Gabon Tanzania Average Malawi Kenya Botswana Zambia Regulatory Capital/Risk-weighted assets, 2007 Ethiopia Nigeria Robust Capital Adequacy Swaziland Angola Zimbabwe Liberia
  8. 8. Indirect Impacts – more important in longer term Global risk environment Trade flows & growth Remittances Exchange rates Credit slowdown Supervisory changes
  9. 9. Global risk environmentVolatility in price/appetite for riskVolatility in short-term capital flows for EMs short-Higher equilibrium price for risk when dust settlesTightened risk assessment criteria in global banking groupsRestricted access to capital (esp. credit lines to domestic banksfrom international banks)African debt & equity markets adversely affected by sell-offs by sell-international investors
  10. 10. South Africa EMBI+ spread
  11. 11. Total financial flows to Africa … volatile but recovering Annual flows Quarterly flows35,000 3,50030,000 3,00025,000 2,50020,000 2,00015,000 1,50010,000 1,000 5,000 500 0 0 2004 2005 2006 2007 2008 Q308 Q408 Q109 Q209
  12. 12. Slowdown in trade flows & economic growthMost African economies highly export-dependent export-Export sectors badly hit due to weak demand/prices (esp. commodities)Trade finance less accessible (more expensive, shorter tenors)Banking vulnerability from sectoral loan concentrationWeakened household sector -> credit riskRising arrears and deteriorating quality of collateralLarger current account deficits and constrained access to capital marketsleads to exchange rate volatility, adding to uncertainty and balance sheetrisks
  13. 13. RemittancesMajor contributor to FX earnings and household income inmany African countriesVulnerable to economic slowdown in developed countriesReinforces balance of payments weakness and householdbalance sheet problemsBanks handle most remittance payouts – source of fee incomeLatest estimates suggest modest decline in remittances toAfrica – around 6% in 2009
  14. 14. Tighter credit conditions restrict business opportunitiesReduced risk appetite and higher regulatory cost of riskStricter lending criteria (collateral/deposit requirements)Flight to qualityLimited appetite for new businessWider deposit-lending margins deposit-Reduced fee income (fx, remittances, arrangement fees)Need to be innovative in developing/pursuing business opportunitiesSlowdown in credit growth could exacerbate economic difficulties
  15. 15. Changing regulatory regime will have an impactReview of Basel II (-> Basel III?) (- Imposes many needs on AfricanIncreased regulatory capital vs banks & regulators:risk surveillance/early warningMore complex regulatory HH and corporate balanceregimes posing challenges for sheets, indebtedness,regulators vulnerabilities high frequency/timely dataCountercyclical capitalrequirements contingency plans/bank resolution mechanisms Problems in deposit insurance? calibrating/identifying turning points supervisory co-operation co-Macroprudential supervision mapping of financial sector interlinkages Stress tests Banks – improved risk management & internal stress- stress- testing
  16. 16. Main risks facing African banking systems going forwardDelayed impact of financial crisis via economic linkages & slow global recoveryExport/trade problems -> banking problems -> wider economic impactBank credit slowdown - > wider economic impactWeak surveillance, limited contingency plans, weak cross border supervision ifconditions to deteriorateWeak risk management within banksStructural changes in global risk parameters making capital – raising more difficultMore complex regulatory regimes making it more difficult to achieve internationalstandards
  17. 17. Closing RemarksAfrican banking systems came through global financial crisislargely unscathed, but longer term impacts may be adverse,with uncertain time lags and depth of impactMain concerns emanate from interaction of economicdevelopments and financial conditionsBanks will need to be vigilant with regard to risks and respondto new supervisory demands, while pursuing new lines ofbusinessRegulators need to improve surveillance, improve contingencyplanning and supervisory co-operation, while governments co-pursue longer term reforms
  18. 18. Thank youkeith@econsult.co.bw