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IMF highlights opportunities, challenges in Pan-African banks’ expansion

By on April 10, 2015

The International Monetary Fund (IMF) has noted the rapid improvement in Africa’s finance as a result of the strong expansion of pan-African banks across the continent in recent years.

It also pointed out that Nigerian banks are expanding their branch networks across their host countries, including in rural areas.

The multilateral agency stated these in its latest Global Financial Stability Report (GFSR) titled: “Navigating Monetary Policy Challenges and Managing Risks,” obtained on its website.

Some pan-African banks such as the United Bank of Africa Plc (UBA), Ecobank Transnational Incorporated (ETI), FirstBank Nigeria Limited, South Africa’s Standard Bank, amongst others had expanded rapidly in the years up to the global financial crisis, starting or buying operations across the sub-continent.

Continuing, the IMF stated that the number of operations of the seven largest business groups in the continent has more than doubled since the mid-2000s, noting that specific factors that contributed to the expansion of the groups included the increasing trade linkages between African countries, which have induced banks to follow their clients.

According to the IMF, the growth of pan-African banks offers a number of opportunities and benefits to the continent.

“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. Pan-African banks are driving innovation, offering opportunities to enhance financial inclusion, and in some cases contributing to lowering borrowing costs.

“For example, in the East African Community, Kenyan banks have introduced innovative business models such as agency banking into neighbouring countries. Similarly, Moroccan banks’ focus on small and medium enterprise development is being exported to francophone West Africa, while Nigerian banks are expanding their branch networks across their host countries, including in rural areas. African banks have also become lead arrangers for syndicated loans, filling the gap left by European banks,” it added.

Furthermore, the fund stated that from a home country perspective, the geographical expansion of pan-African banks increases diversification and provides further growth and profit opportunities for banks.

However, it noted that “as these groups have developed in reach and complexity, significant supervision gaps, governance issues, and questions about cross-border resolution have emerged that could pose risks to national and regional financial stability if unaddressed.

“With their rapid expansion, the largest pan-African banks have become systemically important in many of their host countries, raising concerns about spill-over risks. Most groups conduct their foreign operations through subsidiaries, which rely on local deposits for funding, somewhat mitigating potential contagion.

“However, with limited information about intra-group exposures and interconnections within pan-African banks and cross-border cooperation between supervisors just emerging, undetected risks could be mounting. In addition, pan-African groups have become more complex, encompassing nonbank activities that could give rise to additional contagion channels,” it added.