macroafricaintel | Banks in West Africa: Struggling amid tighter regulatory grip

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Banks in West Africa have been in the news for the wrong reasons lately. In Nigeria, four banks, of which three have foreign affiliations, namely Standard Chartered, Citibank and Stanbic IBTC Bank and Diamond Bank, were in total fined 5.65 billion naira by the Central Bank of Nigeria (CBN) for illegally facilitating the transfer abroad of $8.134 billion for MTN, a South African telecoms firm. The Nigerian central bank has also increased its scrutiny of some of the practices of banks that are clearly exploitative. In September, for instance, it instituted a fine for erring banks that fail to reverse failed electronic transfer transactions within 24 hours. In neighbouring Ghana, five banks, namely Unibank, Sovereign Bank, Construction Bank, Beige Bank, and Royal Bank, failed and had their licenses revoked by the Bank of Ghana, the central bank, in early August. The failures were largely due to weak corporate governance systems, with widespread fraud and insider dealings alleged. In Unibank, for instance, hitherto Ghana’s sixth largest bank, directors and their associates availed themselves of depositors’ funds to the tune of $1.1 billion, according to the BoG. Consolidation Bank Ghana, a resolution vehicle set up by the Bank of Ghana, to assume the assets and liabilities of the failed banks, is believed to be adequate to prevent a crisis, however. Stringent punitive measures against the directors of the failed banks are also expected. Nonetheless, poor banking supervision by the BoG is also a reason why the banks failed. That said, remedial measures by the central bank have proved to be effective. S&P Global Ratings, a rating agency, seems to think so, at least. In September, it raised Ghana’s sovereign rating to B from B- in part because it assessed the country’s banking sector to be largely stable. Regardless, there is a general lack of confidence by Ghanaians in the banking sector at the moment. It is also important to note the continued divide in the banking sectors of anglophone and francophone countries. “In West Africa generally, there continues to remain a deep divide between the banking systems in English and French West Africa,” says Andrew Nevin, chief economist at PwC, a consultancy, in Lagos. “Apart from Ecobank – a truly pan-Sub-Saharan African bank, the players are different in the 2 regions, and certainly, English-speaking banks have not had great success when they entered Francophone markets,” he adds.

De-risking, increased mobile banking, and tighter regulations
So what are the notable banking industry trends in the region over the past year, especially in Nigeria, Ghana, and Ivory Coast? “We have noted three trends,” says George Bodo, head of banking research at Ecobank, a pan-African bank, in London. First, we have generally seen a balance sheet de-risking trend in West Africa, where banks, in Ghana, Nigeria and UEMOA, increased the pace at which they purchased Central Government debt compared to lending to the real economy. In 2017, the share of Central Government debt to total banking sector assets rose sharply by 400bps y-o-y to 21%. In the same period, the share of customer loans rose by 200bps y-o-y. This is largely a risk-off trend informed by the elevation in credit risks (as gross NPL ratio rose to 16% in 2017, from 11% in 2015).”

“Second, there is an increasing adoption of mobile phone as a distribution channel-especially in Ghana and UEMOA. In Ghana, the value of mobile money transactions (primarily deposits and withdrawals) hit USD35bn in 2017, from USD18bn in 2016. In UEMOA, the value of mobile money transactions hit USD21bn in 2016, a sharp growth from the USD2.9bn transacted in 2013.”

“Finally, regulations seem to be tightening. In Ghana, commercial banks have until end of 2018 to increase their minimum fully paid-up share capital to a new regime of GH¢400mn (from GH¢120mn). In UEMOA, the regional central bank, BCEAO, has, effective January 1, 2018, rolled out a mix of Basel II and III inspired regulatory reforms. Some of the key reforms include: (i) introduction of operational and market risks in the calculation of risk-weighted assets; (ii) a capital conservation buffer surcharge – mainly 2.5% surcharge of core capital; (iii) a reduction in the single large exposure limit to 25% of core capital; and (iv) regulation and supervision of financial holding companies on a consolidated basis by the BCEAO and the Banking Commission.”

PwC’s Nevin provides additonal views on the Ghanaian banking sector: “With respect to Ghana, the number of banks was very high in a small market and it is not surprising there is a consolidation. The costs of banking technology – particularly with the Fintech challenge – and the increasing demands of regulatory compliance mean that small banks are going to be more and more uncompetitive. In the Ghana market, you have Ghana Commercial Bank as a huge player, and a number of very successful African Banks (GT, Ecobank, UBA, Absa for example). So it is not a surprise that small, poorly capitalized players cannot survive. The Bank of Ghana is doing an excellent job of resolving these banks and making sure the banking system in Ghana is robust.”

QE to the rescue?
And how does Ecobank’s Bodo see the banking industry in the region evolving over the next year or so; especially in the key countries Nigeria, Ghana, and Ivory Coast? “In Ghana and UEMOA, we are anticipating increased partnerships between traditional banks and mobile network operators (MNOs) especially in regards to liability mobilization. In Nigeria, we still anticipate increased risk-off liquidity deployment strategies.” How so? “In 2017, banks bought FGN-issued debt securities worth NGN245bn, while only lending NGN183.6bn to the real economy. This kind of asset allocation was bound to concern the CBN. However, we broadly believe that for balance sheets to grow, banks have to move up the risk curve. But this risk spectrum, which holds the right price incentives, still lacks the right ingredients that banks are looking for.” To push them along, the CBN announced a number of stimulus measures in August. It offered to release some of the funds kept by banks with it as reserves for lending to agricultural and manufacturing firms at the single-digit rate of 9 percent. Additionally, it offered to buy long-tenored bonds of corporates that demonstrate their activities would create jobs. But would these be enough to nudge the banks towards more lending to the real sector? Ecobank’s Bodo is sceptical: “CBN’s direct intervention in deposit intermediation will still not avail the ingredients.”

Innovate, innovate, innovate
“In the [Nigerian] banking sector, the environment remains very challenging. The uplift in oil prices has taken some pressure off non-performing loans in the oil & gas sector (but not the power sector). [And] there continues to be a widening gap between the major banks and the middle-tier banks in terms of return on equity and cost-to-income ratios. [Therefore,] middle-tier banks will need to find distinctive strategies to create value because if they do what other banks do, they will not earn adequate returns,” says PwC’s Nevin. Besides, banks all over the world and indeed Africa, are facing disruptions from new technologies at the behest of industry outsiders. At their current pace, financial technology companies could easily displace banks in the very near future. For the Nigerian experience, PwC’s Nevin provides some perspective: “all [Nigerian] banks (even the top tier banks) are challenged by FinTechs and they need to create new, innovative products if they want to appeal to a very young, connected population in Nigeria. FinTechs are very strong in the payment space – Interswitch, Paga, [and] Flutterwave, [for example] – and are increasingly strong in the consumer credit market. There are also new players trying to create savings vehicles for retail clients. The banks carry significant legacy costs and the FinTechs will find ways to take revenue at a much lower cost.” Clearly, short of innovation, banks in Nigeria and broader West African region, might find the times even more challenging yet.

An edited version was published in the Q4-2018 issue of African Banker magazine

macroafricaintel Weekly | 13 Nov

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

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Date Data / Event Period Forecast Previous
14 Nov South Africa Retail Sales, % yy Sep 2018 2.5 2.5
Nigeria CPI, % yy (mm) Oct 2018 11.5 (1.0) 11.3 (0.8)
Botswana CPI, % yy (mm) Oct 2018 3.0 (0.1) 2.9 (0.0)
Namibia CPI, % yy (mm) Oct 2018 5.2 (0.5) 4.8 (0.8)
Ghana CPI, % yy (mm) Oct 2018 9.0 (0.2) 9.8 (0.0)
South Africa CPI, % yy (mm) Oct 2018 5.0 (0.4) 4.9 (0.5)

macroafricaintel | Ghana: Need for stronger banking supervision

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

After the failure of a couple of banks recently, the public is on edge. That is, even as the Bank of Ghana, the central bank, has provided assurances that depositors’ funds are safe. Not that a banking crisis is at hand. Far from it; although some might argue otherwise. But there is definitely a lot more that the BoG could and must do to restore confidence. For instance, culprits behind the failure of Unibank, hitherto Ghana’s sixth largest bank, where directors were found to have helped themselves to depositors’ funds to the tune of $1.1 billion, about 75 percent of the bank’s assets, should in addition to being relieved of their positions, also be prosecuted to the full extent of the law. Loan defaults have also become rampant, with non-performing loans (NPLs) accounting for 21.3 percent of all loans in August 2018; albeit largely unchanged from the same period last year when they were 21.9 percent of loans. Naturally, banks are reluctant to lend, preferring to buy government treasuries and bonds instead. Consequently, the government accounts for a great deal of banks’ exposure. And although private sector credit extension (PSCE) has been growing in real terms, at 5.4% in August 2018 from -5.0% in same month last year, it is not the case when compared to GDP in nominal terms; based on Bank of Ghana data. In August 2018, nominal private credit extension was 14.7% of GDP from 15.2% in the same month last year. A great deal of regulatory drive would be required for a turnaround. Thus, the central bank’s directive in September 2017 for banks to beef up their capital base to a minimium of 400 million cedis from 120 million cedis hitherto should be pursued with the utmost determination. And there should not be a shifting of the end-December 2018 deadline. Better capital adequacy reporting via Basel II at the direction of the central bank in July is also laudable.

More consolidation & liquidation
To date, the BoG has taken the following actions to clean up the banking system and restore confidence. It liquidated and gave control of UT Bank and Capital Bank to Ghana Commercial Bank in August 2017 “due to severe impairment of their capital.” A year later, it revoked the licenses of Unibank, Royal Bank, Beige Capital, Construction Bank, and Sovereign Bank and put them together under Consolidated Bank Ghana Ltd, a special purpose vehicle, which it capitalised to the tune of 450 million cedis. The authorities also issued a 5.8 billion cedi ($1.2 billion) bond to cover their liabilities. Considering when put together, the five banks have pending obligations that require funding of about 5.8 billion cedis, the measures put in place by the central bank should suffice for now. Much more funds would probably be needed in due course, however, as more information is discovered and perhaps other banks are found to be in less than ideal positions.

Not only were the failed banks found to be struggling but some obtained their licenses fraudulently; Sovereign Bank, Beige Capital and Construction Bank for instance. With the benefit of hindsight, the BoG was not quick to act. Unibank and Royal Bank were known to be significantly undercapitalized as far back as 2016. Almost 80 percent of Royal Bank’s loans were non-performing, it was discovered. It is certainly curious that it was only until 2018 that Unibank was declared to be “beyond rehabilitation.” Surely, there was no need to wait that long. The reason might not to too hard to determine. Unibank had some influential board members, including former Ghanaian finance minister and central bank governor Kwabena Duffuor, the founder. In early September, KPMG, an audit firm and receiver for the now defunct Unibank, asked a High Court to declare unlawful, loans made to Mr Duffuor, other named shareholders and their so-called related interests. KPMG is also asking Mr Duffuor et al. to pay back 5.7 billion cedis ($1.1 billion), about 75 percent of the defunct bank’s assets, of allegedly misappropriated funds of Unibank. According to Bloomberg, a news wire service, Nii Amanor Dodoo, a partner at KPMG in Accra, says Mr Duffuor and co. have committed to the repayment; albeit Daniyal Abdul-Karim, Mr Duffuor’s attorney, raises doubt about that when he remarks in the same report that “[KPMG’s] claims are extremely weak…[and]…are defeated both on facts and the law.” And in a report by Reuters in mid-August, Mr Duffuor disputes the figures: “We believe the figures the central bank is putting out are not right.

Other banks would definitely not want to become part of “Consolidated Bank.” Thus, there is almost certainly going to be more consolidation in the industry, as smaller banks or those not able to raise enough capital in time to meet the BoG end-December deadline, merge with bigger ones or come together to become bigger and stronger. Others are looking to raise capital on the stock market. But considering the supposedly lucractive 1.14 billion cedis ($238.5 million) initial public offering (IPO) of MTN Ghana, a telecoms firm, in late August underwhelmed below its 3.47 billion cedis target, there are doubts about how successful the banks looking to take this route would be. That is not deterring them, it seems. In September, just weeks after the MTN listing, Energy Commercial Bank secured approval from the Securities and Exchange Commission (SEC) to raise 340 million cedis via an initial public offering to enable it meet the new minimum capital requirement. There should probably be a few more before the December deadline. Additionally, a couple of merger talks are ongoing; some not so well, though. In late July, for instance, there were reports Premium Bank and BSIC Ghana were abandoning merger plans with GN Bank. A merger proposition between Sahel Sahara Bank, GN Bank and Premium Bank also fell through. Instead, Sahel Sahara Bank chose to go with Omni Bank in mid-August, making it the first potential merger since the scramble to meet the new capital requirements, having since received a no objection nod from the central bank.

Firm up oversight
The recent bank failures are evidence of poor banking supervision by the central bank. If confidence is to be restored, the prominent people found to be responsible for the mess in the banking sector should not only be required to pay back the depositors’ funds they misappropriated but also face the full wrath of the law. Their collaborators at the central bank should also be punished severely. It is heartening to know that the authorities’ rhetoric reflect this sentiment. In mid-August, the BoG told Reuters, a news agency, that it planned to prosecute the errant executives of the failed banks. More specifically, BoG deputy governor Elsie Awadzi said the central bank was “working very hard on submitting a dossier on each of these banks to the law enforcement agencies…to further investigate criminal behaviour or what could potentially be criminal behaviour and to prosecute,” adding further that the regulator was “going to ensure that integrity is returned to the financial sector by ensuring that persons whose conduct contributed to the banks’ failure will not be shielded.” According to Moody’s, a rating agency, the new state-owned bad bank would raise the already worryingly high indebtedness of Ghana to 70 percent of GDP from 64 percent in May. The authorities’ words must be backed by action to matter.

An edited version was published in the Q4-2018 issue of African Banker magazine

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. https://www.businessdayonline.com/columnist/rafiq-raji/article/ghana-need-for-stronger-banking-supervision/

macroafricaintel Weekly | 15 Oct

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

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Date Data / Event Period Forecast Previous
17 Oct South Africa Retail Sales, % yy Aug 2018 -0.7 1.3
18 Oct South Africa Mining Production, % yy Aug 2018 -10.2 -5.2
Botswana CPI, % yy (mm) Sep 2018 3.0 (0.1) 3.0 (0.0)
Nigeria CPI, % yy (mm) Sep 2018 11.5 (1.1) 11.2 (1.1)
Ghana CPI, % yy (mm) Sep 2018 10.3 (0.4) 9.9 (0.0)
South Africa CPI, % yy (mm) Sep 2018 4.8 (0.4) 4.9 (-0.1)

macroafricaintel Weekly | 1 Oct

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

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Date Data / Event Period Forecast Previous
4 Oct Uganda Policy Rate, % 9.0 9.0
5 Oct South Africa FX Reserves, $bn Sep 2018 49.7 49.9
Seychelles CPI, % yy (mm) Sep 2018 3.0 (-0.1) 2.8 (-0.2)
Tanzania CPI, % yy (mm) Sep 2018 3.1 (-0.1) 3.3 (-0.4)
Botswana CPI, % yy (mm) Sep 2018 3.0 (0.1) 3.0 (0.0)
Namibia CPI, % yy (mm) Sep 2018 4.3 (0.3) 4.4 (0.0)
Nigeria CPI, % yy (mm) Sep 2018 11.5 (1.1) 11.2 (1.1)
Ghana CPI, % yy (mm) Sep 2018 10.3 (0.4) 9.9 (0.0)
South Africa CPI, % yy (mm) Sep 2018 4.8 (0.4) 4.9 (-0.1)
Mauritius CPI, % yy (mm) Sep 2018 1.4 (-0.4) 0.9 (-0.4)

macroafricaintel | Africa FX Monthly – Oct 2018

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Click here for PDF version

Currency   1 month

(31 Oct 2018)

3 month

(31 Dec 2018)

6 month

(29 Mar 2018)

12 month

(30 Sep 2019)

South African Rand (USD:ZAR) 14.3 14.1 13.5 13.3
Nigerian Naira (USD:NGN) 364.0 367.0 366.0 370.0
Ghanaian Cedi (USD:GHS) 5.0 4.8 4.9 5.1
Kenyan Shilling (USD:KES) 101.0 101.3 101.1 100.7
Ugandan Shilling (USD:UGX) 3,831.0 3,827.0 3,830.0 3,829.0
Tanzanian Shilling (USD:TZS) 2,285.0 2,289.0 2,285.0 2,281.0
Ethiopian Birr (USD:ETB) 28.1 28.3 28.5 29.0
Mauritian Rupee (USD:MUR) 34.3 34.5 34.9 35.0
Namibian Dollar (USD:NAD) 14.3 14.1 13.5 13.3
Botswanan Pula (USD:BWP) 10.5 10.3 9.9 10.1
Zambian Kwacha (USD:ZMW) 12.3 12.1 11.8 11.5
US Dollar Index (DXY) 95.0 94.5 94.7 93.5

macroafricaintel Weekly | 10 Sep

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Click here for PDF version

Date Data / Event Period Forecast Previous
11 Sep South Africa Manufacturing Production, % yy Jul 2018 0.7 0.7
12 Sep South Africa Retail Sales, % yy Jul 2018 0.8 0.7
13 Sep South Africa Mining Production, % yy Jul 2018 2.9 2.8
14-21 Sep Nigeria CPI, % yy (mm) Aug 2018 11.2 (1.0) 11.1 (1.1)
Tanzania CPI, % yy (mm) Aug 2018 3.5 (-0.1) 3.3 (-0.3)
Botswana CPI, % yy (mm) Aug 2018 3.1 (0.1) 3.1 (0.1)
Namibia CPI, % yy (mm) Aug 2018 4.7 (0.4) 4.5 (0.5)
Ghana CPI, % yy (mm) Aug 2018 10.1 (0.3) 9.6 (0.3)
South Africa CPI, % yy (mm) Aug 2018 5.6 (0.6) 5.1 (0.8)