Banking in sub-Saharan Africa

Banks in Sub-Saharan Africa are on average more competitive internationally following the last global recession of 2007/08, new research by the University of Stellenbosch Business School (USB) suggests. The study, by USB Master of Philosophy in Development Finance student Steve Motsi, suggests that, despite low levels of financial intermediation, banks from Namibia to South Africa, Mauritius, Nigeria and Ghana, largely increased their degree of competition thanks to the effect of reform policies already embarked on prior to the crisis era. He also found that the perceived high risk of lending in many Sub-Saharan African economies could be reduced through effective intermediation. Motsi researched 83 banks south of the Sahara Desert between 2008 and 2013, a time in which he said substantial macroeconomic challenges and increased systemic risks materialised in the industry. “Naturally in the aftermath of the crisis competitiveness diminished in light of the crisis and system of instabilities, exposing deficiencies in bank management,” Motsi argued. “A significant recalibration of prudential policies followed as regulators sought to restore system stability which altered the competitive conduct of banks,” he said. Successes achieved throughout the region during this time, he said, include efforts at deregulating banking activity, privatising state-owned banks, permitting entry of foreign banks, easing cross-border capital flow, technological innovations and a liberalisation of interest rates. “The outcome was an increase in private sector credit, efficiency in credit and asset allocation and adoption of new technologies in product design and distribution,” Motsi said. Still lagging Suggesting a vast gap between countries which showed more sophisticated financial intermediation and the rest, Motsi suggested policymakers should remain focused on developing and promoting policies geared towards the development of financial intermediation and improved competitive conduct. Whereas countries like South Africa and Mauritius reflected post-crisis intermediation averages of 150% and 93% respectively, he said countries such as Chad, DRC, Sierra Leone, Congo Republic and Equatorial Guinea, exhibited very low levels of average private sector credit to GDP, at less than 10%. In addition, high lending interest rates averaging 52% reflected a high risk perception of countries like Madagascar, Malawi, Ghana, the DRC and Gambia. “In contrast, South Africa, Namibia and Mauritius, with more advanced financial infrastructures, exhibited average rates of less than 10%,” Motsis said. The average lending rate for the region stood at a declined 19% post-crisis, compared to 26% before. Key to growth Naming the banking sector’s “averseness” to extending their market beyond the traditional large corporate base as a key inhibitor to growth in the sector, Motsi suggested a modernisation of credit information systems, and leveraging off technological advancements, as ways to reduce the perceived high risk of lending, in Africa. “Product design would focus on affordability with minimum transaction cost, convenience through alternative distribution, flexibility by means of unsecured loans and security through non-conventional verification such as biometrics,” he said. “The national payment system, a backbone of effective financial intermediation, should continue to be modernised for increased processing efficicncy and security of transactions in line with global trends,” he said. STAFF REPORTER