IMF warns banks on risks in Africa

THE rapid expansion of South African banks into the rest of Africa, as they chase growth, may increase risk to the financial sector, according to the International Monetary Fund (IMF).

Other African countries tend to have weak rules for money laundering and combating the financing of terrorism, raising the risk to SA, the IMF said after the completion of an extensive assessment of SA’s financial system earlier this year.

As a member of the Group of 20, SA agrees to this IMF Financial Sector Assessment Programme every five years. The assessment is intended to help countries identify risks to the financial system and implement policies to deal with financial shocks and contagion.

The fund sent a large team to SA from April to June to evaluate the financial sector, which included stress-testing major banks and insurers. The IMF found that banks operating in the rest of Africa might incur extra costs due to the less developed infrastructure on the continent, while their information technology platforms might not be able to cope with increased volumes from their African businesses.

SA’s four largest banks — FirstRand, Standard Bank, Barclays Africa Group and Nedbank — have all put emphasis on growing their operations in the rest of Africa, as it offers higher growth rates than their home market.

SA is expecting tepid growth of about 1.4 percent for this year, according to the IMF’s latest World Economic Outlook. In contrast, the IMF predicts sub-Saharan Africa’s economy will grow 5.1 percent for this year and 5.8 percent next year.

This makes Africa an attractive growth market for SA’s major banks. Standard Bank is the largest bank in Africa by assets, and operates in 20 countries, while Barclays Africa Group has a presence in 12. FirstRand, through RMB, also operates extensively across the continent.

Nedbank acquired a 20 percent stake in pan-African banking group Ecobank Transnational in October, giving it access to the bank’s operations in 36 countries. It also took a 36.4 percent stake in Banco Unico in Mozambique this year.

Consultancy PwC’s major banks analysis released earlier this year found that “while individual strategies are nuanced, the desire to incrementally enhance the earnings contribution of their operations in the rest of Africa remains a core area of focus for the banks”.

The IMF warned, however, that for SA banks “acquiring, or entering into partnerships with banks in Africa with poor credit quality or weak risk practices could result in capital losses to the group”. According to the IMF report, SA’s four largest banks have 46 foreign subsidiaries, of which 39 are in Africa.

The size of some of the subsidiaries is significant in some of SA’s neighbouring countries, including Lesotho, Namibia and Swaziland. The banks also have a sizeable presence in Botswana, Seychelles, Uganda and Zambia.

Nonetheless, the banks’ combined African exposure accounts for only 2 percent of banking assets, while most of SA’s banks’ assets are domestic, the IMF said.