The African Banking Sector and Sino-African Financial Cooperation

The African banking sector (here mainly referring to the banking sector in sub-Saharan Africa), which is crucial to the overall African financial system, has experienced robust development in recent years. The African financial sector was not severely hit by the international financial downturn or the European sovereign debt crisis in terms, given that it is not yet fully integrated into the international financial system. Many international organizations remain optimistic about the prospects for the African banking sector due to overall African economic growth and reforms conducted in the sector. The study of the African banking sector is of great significance to further deepen Sino-African financial cooperation,especially cooperation between central and commercial banks.

Development Status Quo of the African Banking Sector

The African banking sector is composed of central banks and deposittaking financial institutions. Due to discrepancies in economic,social and cultural development, there are certain developmental differences between central and commercial banks in Africa.

Development and the role of central banks

In general, central banks in African countries are not controlled by the central government, but they maintain close contact with respective finance ministries, and they mainly assist in planning and implementing the governments’ macroeconomic policies. There are slight functional differences among central banks in different parts of the continent.

The West African Central Bank, jointly established by the Francophone countries in West Africa, is the only authorized entity to issue currency to all West African countries. It typically holds discussions with regional cooperation partners in the African Financial Community on such issues as the reform of insurance business, the supply of social security, mobilized savings and trade laws.

There is no unified monetary union in Anglophone West Africa,and each country has set up its own central bank and independent monetary policy. Central banks have also been established in other African countries with the exception of Cameroon, the Central African Republic, and the Republic of Congo, three African countries that belong to BEAC. BEAC’s central bank is headquartered in Cameroon and uses the Central African CFA franc as its currency,which is pegged to the euro.

Given that mid-eastern African countries are, to various degrees,affected by high inflation, the top priority of their central banks is to maintain monetary stability and supply. In the southern part of Africa, Botswana’s central bank mainly functions to tame inflation,maintain monetary stability and prevent devaluation. Comorin’s central bank regulates financial departments and foreign exchange,in addition to managing demands of capital transfer for other government agencies. In Namibia, the central bank mainly manages the money supply, currency and financial institutions. Seychelles’central bank mainly aims to stabilize prices and maintain the value of the currency at home and abroad. The South African Reserve Bank, which is the main central bank in South Africa, focuses on stabilizing prices, regulating banks and managing official gold and foreign reserves. The main function of the Bank of Zambia is to formulate and implement monetary policy, maintain overall financial stability and regulate commercial banks, non-bank financial institutions and micro-finance institutions.

Deposit-taking institutions - commercial bank development and effects

African commercial banks can be divided into four categories:local banks, such as South Africa’s Standard Bank, which now has operations in sixteen African countries; branch offices of large banks from former suzerain states, which constitute a main component of African banks; the United States’ Citigroup, which entered the African market in the late 1960s; and banks from emerging economies such as China.

The development and major achievements of contemporary African commercial banks can be summarized in the following way:

First, new loan models, income growth, and technological improvement have helped banks broaden their financial channels and facilitated the overall development of the African banking sector. In the 1980s, the African banking sector was largely in the hands of state-owned banks. At the time, the sectors development was constrained by strict rules such as interest rate ceilings and credit lines, among other restrictions.

The Forum on China-Africa Financial Cooperation hosted by the Export-Import Bank of China opened in Beijing on July13, 2012.

Nowadays, the banking sector has extricated itself from such fetters and engaged in financial liberalization, regulatory reform and globalization, three forces that have contributed immensely to Africa’s strong economic growth. The financial systems of African countries have grown in both width and depth, as indicated by the growing ratio of broad monetary and private credit relative to GDP,even though the base number remains at a relatively low level. A recent Oxford University research paper indicates that indices like the ratio of loans and deposits to GDP have significantly increased in many African countries over the past decade.1Thorsten Beck and Robert Cull, “Banking in Africa”, CSAE Working Paper WPS (2013).Currently, over 80 percent Kenyans engage in mobile banking and the country’s Equity Bank shows that inclusive banking remains a sustainable and profitable business model.2Ibid.

Second, financial reforms in African countries have spurred development potential for the banking sector. From 2009 to 2013,mergers and acquisitions spread across the African banking sector.During the restructuring process of the banking sectors in Nigeria,Tanzania, Kenya, Ghana, Zambia and Ethiopia, some small-sized banks were merged into powerful big banks like Standard Bank,Standard Chartered Bank, and Barclay’s Bank.3http://finance.sina.com.cn/roll/20090727/16232973527.shtml.

According to the “Regulation Report of South African Banking Industry 2012,” the South African Reserve Bank maintained healthy development in 2012, with a normal market capitalization level and strong liquidity, as well as continuity in high-quality growth.The gross assets of the South African banking sector increased by 6.9 percent in 2012, and the average capital adequacy reached 15.9 percent, which was far above the 9.5 percent minimum requirement for the sector. In addition, credit businesses, the riskiest businesses in the financial system, were managed properly by the South African banking sector, with its impaired loans decreasing by 5.1 percent in December 2012. According to the report, despite heavy nonperforming loans in the South African banking sector, there are no systemic threats to the sector’s overall stability when compared with the scale of its gross assets.4http://www.ocn.com.cn/free/201306/jinrong071403.shtml.

Ghana’s banking sector has also been developing rapidly, with its gross assets reaching more than 36 billion Ghana Cedi by the end of 2013, a year-on-year increase of 32.8 percent, which accounted for almost 17 billion USD, if calculated according to the December 31, 2013 exchange rate.5http://cccla.mofcom.gov.cn/article/i/jshz/rlzykf/201403/20140300515988.shtml.

Third, African countries are adopting various measures to further stimulate the development of their banking sector. The African Development Bank is forming a strategy to support remittance flows by drafting immigration and development plans, cutting down remittance costs, raising remittance utilization, and creating business and employment opportunities at the grassroots level so as to maximize the effect of remittances on economic development. A trust fund will also be set up to support this effort.

Moreover, the African Development Bank is cooperating with the World Bank to undertake a research project on relations between immigration and remittances, aiming to deepen understanding on their connection, strengthen the work of policy-makers, researchers,banks, financial institutions and donation institutions. The financial measures adopted by African countries have helped safeguard their financial stability and improved real economic elasticity during periods of crisis. As a result, they have effectively complemented the African Development Bank’s consulting function.

Development Trends in the African Banking Sector

From a macroeconomic perspective, the future growth of African economies will become the most important force driving the banking sector. A United Nations report, entitled “2014 World Economic Trends and Prospects,” revealed that the rate of economic growth in Africa will be 4.7 percent in 2014 and 6.4 percent the following year. The growth rates of the economies in southern Africa are expected to rise from 3.6 percent in 2013 to 4.2 percent in 2014.The rate of economic growth will rise from 6 percent to 6.4 percent in East Africa and from 6.7 percent to 6.9 percent in West Africa.

Africa’s economic prospects have benefited from the turnaround of the global and regional economy, and the further development of infrastructure construction and trade investment between Africa and other emerging economies. Increasing domestic demand and the improvement of management and governance have also played a positive role in the development of the African economy. Mr.Devarajan, chief economist at the Africa Region at the World Bank,believes that if leading industries in African countries maintain stable development and foreign investment continues to grow, Africa could maintain growth for as long as two decades.6http://www.china-insurance.com/news-center/newslist.asp?id=164231.Secondly, improved trade terms and strengthened global economic ties are also fundamental factors behind Africa’s economic development, given that 70 percent of Africa’s exports are bulk commodities.

The thriving growth of the bulk commodity market throughout the past ten years has greatly improved trade terms for Africa.Emerging economies have developed robust demand for bulk commodities. At the same time, Africa has been increasingly making use of international capital. According to “Africa’s Economic Outlook Report,” foreign investment in Africa jumped from 186 billion USD in 2012 to 204 billion USD in 2013, an increase of 9.5 percent, and a large percent of this capital flew to sub-Saharan African countries.

The huge and growing consumer market will further promote financial innovations in the African banking sector, so as to meet increasing demand for financial services. This will to some extent fill the gap between deposits and investment. The high-speed growth of Africa’s population, the rise of its middle class and the rapid rate of urbanization have together accelerated the expansion of African consumer groups. Africa’s population is already approximately 1 billion, and it is expected to reach 2 billion by 2050. There could be as many as 221 million rigid demand consumers in Africa by 2015,with more than 10 million consumer groups and 30 countries whose GDP will surpass 10 billion USD. At present, there are 22 middleincome countries in Africa, with another 10 countries due to join the ranks by 2025.7“Despite global slowdown, Africa economies growing”, All Africa, October 4, 2012, http://allafrica.com/stories/201210041419.html.Consumption from the lower- and middleclasses will rise from 680 billion USD in 2008 to 2.2 trillion USD in 2030.8http://www.twwtn.com/information/23_108515_1.html.According to predictions made by the London Economic Intelligence Organization, the growth speed of the banking sector in 16 major African countries will be more than 1.5 times the growth speed of their GDPs in 2020, while their gross assets will reach 1.37 trillion USD, increasing 248 percent, and deposits will reach 1.1 trillion USD, increasing by 270 percent. Nigeria, Angola,Uganda, Ghana and Tanzania will have the highest rates of growth,while South Africa, Botswana and Namibia will maintain relatively slow growth but remain at a high level.9http://www.twwtn.com/information/23_108515_1.html.Imbalance, however, will dominate the growth of the banking sector across the African continent.

The African banking sector will be supported by its development strategy. Although it has developed slowly, the sector still has huge business potential. Major measures that will be adopted by African countries in the future include: expanding the current financial products through innovative services and product channels;increasing the popularity of products; and exploiting potential client groups from the emerging consumption level.

To seize this opportunity, many African banks have pursued the following strategies. First, an expansionist strategy has been adopted,in which branches profit from customizing local financial products and services, such as shared financial accounting and human resources. Second, a market differentiation strategy has been used,in which the South African Capital Technology Bank has worked to attract potential client groups through a technology-driven and low-cost development model. Third, a product innovation strategy has been developed in which Bank of Africa, a small professional financial institution in South Africa, provides innovated loan and deposit products to low-income consumers. Fourth, a popularityboosting strategy has been implemented in which some African banks introduce such products as credit cards or overdraft services to meet clients’ changing demands and deepen their understanding of financial issues. Fifth, a channel innovation strategy has been used in which the Kenyan M-Pesa provided a mobile payment service and filled market demand. Sixth, a value chain expansion strategy has been adopted. The Guarantee Trust Bank of Nigeria has conducted self-expansion and self-cultivation in some areas typically dominated by foreign banks, such as enterprise banks and investment banks. The above strategies and measures are expected to have synergistic effects on different business departments.

The electronic banking sector is now booming on the African continent. The national banks and foreign banks in Africa are providing convenient services to customers by investing in the construction of mobile banking services that help expand consumer groups. In the financial market, mobile operators are also striving to expand their customer base and extend the value chain by offering value-added services.

African banking customers have enormous potential, given that the rural population, which accounts for more than 60 percent of Africa’s total population, does not yet enjoy regular banking services.The M-Pesa Bank in Kenya marks the epitome of innovation and rapid development of Internet finance in Africa. But it is not alone - there are at least another 12 similar mobile transaction systems, like Zap and YuCash. Vinnie Mi Tula, a prrofessor at the Institute of Development Studies at the University of Nairobi,conducted a survey that indicates that in Kenya, up to 71 percent of interviewees say that they have used mobile financial services. In Tanzania, Liberia and the Sudan, mobile financial service users run as high as 40 percent, 39 percent and 38 percent, respectively.10People’s Daily, 24 March, 2014.As the fastest growing field in Africa’s banking sector, retail business is expected to account for approximately 40 percent of African banking revenues by 2020. Following the successful promotion of the “mobile wallet” payment transfer business in Kenya and other regions, mobile banking is regarded as a powerful force that will boost the growth of the African banking sector.

Regulation and liberalization will continue to develop. Some African national banks have benefited from market-oriented reforms. The Nigerian banking sector, for example, after undergoing continuous restructuring, has largely realized capitalization and streamlined its operations, thus significantly increasing its service capacity, continuously enhancing its competitiveness and greatly improving its domestic and international image. Regulatory agencies and industrial associations have played a key role in preventing and controlling the risks faced by banks, and South Africa and Nigeria,the two largest African economies, now take the lead in this area.

In 2002, banks in South Africa coestablished a risk information center, which was launched and funded by the Amalgamated Banks of South Africa, First National Bank, Nedbank of South Africa and Standard Chartered Bank. Comparatively, the Nigerian banking system has undergone more thorough and far-reaching changes in the battle against malpractice and fraud. Regulatory reforms have given birth to the Nigerian Central Bank’s credit risk management system, and the central bank can now obtain relevant credit data from all banks, require banks to update monthly data and take punitive measures against defaulted loans. In addition to regulatory agencies and industrial associations, it is also important to further develop relevant risk management skills. More and more overseas African financial talents are returning to their own countries, and a growing number of young people have chosen to study finance and commerce in Africa, thus further strengthening the technological base of banking risk management on the continent.

Development Trends of the African Banking Sector and Sino-African Financial Cooperation

Emerging markets constitute an important part of the overseas development strategies of China’s financial institutions. When dealing with emerging markets, China’s business with African countries holds an important position. Cooperation between banks in China and Africa is now rapidly expanding and bringing about great benefits. Standard Chartered Bank’s report noted that the Industrial and Commercial Bank of China (ICBC) has purchased a 20 percent share in the Standard Bank of South Africa for 5.5 billion USD, thus strengthening the financial services channel between China and Africa.

In June 2011, the People’s Bank of China and the African Development Bank signed a bilateral cooperation agreement covering infrastructure, agriculture and clean energy, as well as other areas.11http://www.caijing.com.cn/2011-06-10/110742435.html.In March 2014, the China Development Bank signed a cooperation agreement with Barclays and Societe Generale, paving the way for their business expansion in Africa.12http://finance.qq.com/a/20140331/015177.html.Barclays Bank has set up branches in South Africa, Botswana, Kenya, Tanzania,Uganda, Zambia and Ghana and also conducts business activities in Mauritius and the Seychelles. Over the past decade, large-scale joint loans have been issued by Barclays Bank companies in South Africa, Egypt and Ghana. Meanwhile, Societe Generale’s business covers Tunisia, Algeria, Morocco, Mauritania, Equatorial Guinea,South Africa and most areas of West Africa, with a broader scope of participation on large-scale loans, such as a 1.5 billion USD loan to the Nigeria National Petroleum Corporation in 2013. Regarding the main issues faced by the African banking sector, China-Africa financial cooperation can undergo a few trials in the following areas:

First, China can sign investment and trade protection agreements with more African countries to create more convenient conditions for Sino-African financial investment. Currently, international capital flows are being enhanced by countries’ signing bilateral trade investment agreements.

Given that the People’s Bank of China plays a leading role,China can continue to promote cooperation with African regional and sub-regional financial organizations, actively use multilateral development bank mechanisms, deepen cooperation with regional and sub-regional financial organizations and major national banks in Africa, continue to guide large-scale policy banks and commercial banks to participate in financing business targeted at Africa, and further promote loan financing, cash management, cross-border RMB settlement, UnionPay cards and other intermediate business services. The methods of cooperation could also focus on equity participation and strategic cooperation.

Second, China can take part in Africa’s financial reforms and encourage Chinese financial institutions to jointly promote capacity building within African financial markets through equity acquisitions and strategic cooperation. Governments can extend more policy support to Chinese banks in order to further promote and expand their market in Africa. They can set up a communication platform,joint mechanisms and expert-support mechanisms to promote the Africa-related financial institutions, enterprises, projects and help them carry out information exchanges and cooperation.13Zhan Xiangyang, Zou Xin and Ma Suhong, “Study on ICBC’s market expansion strategy in Africa, China-Africa financial cooperation in the post financial crisis background”, West Asia and Africa, No.11, 2010, p. 23.China can also improve domestic regulatory policies, accelerate the approval procedures of mergers and acquisitions made by overseas Chinese banks, and create good conditions for these banks to have better and faster access to Africa. China can also effectively reduce native market access barriers in Africa through communication between Chinese and African governments and financial regulatory authorities on both sides, and give more policy support for Chinese banks to expand their business in Africa. Lastly, China can guide and encourage Chinese entities to fiercely compete with international banks in the African market in innovative ways.

Third, China can work to deepen cooperation between Chinese and African financial institutions, especially through the African Development Bank, with enterprises as the main body and large projects as the carrier. It can jointly create investment and financing platforms and focus on promoting African regional infrastructure construction. At the present, the African Development Bank serves as a major financier of infrastructure construction throughout Africa.According to the “Sub-Saharan Africa Regional Infrastructure Construction Market Business Conditions Index” (2013), Africa has exceeded Asia and Latin America to become the region with the most powerful potential in the infrastructure sector.

According to statistics from the World Bank and the International Energy Agency, African countries need 200 billion USD annually to be invested in the areas of energy, water conservancy facilities,roads and railway construction. From a medium- to long-term perspective, innovations to the financial model will serve as decisive factors that will help African countries attain sustainable and inclusive growth. In recent years, China has increased its investment in Africa in an attempt to support African countries and inter-regional infrastructure construction. This has significantly enhanced Africa’s financial capacity, expanded its financing model and been very significant for Africa’s long-term development. The projects, funded by the China-Africa Development Fund, mainly revolve around China’s comparatively advantageous industries and items that are urgently needed by African countries.

Such projects have offered a large number of jobs for African countries and effectively alleviated fund shortages in Africa. As of the end of 2013, the China-Africa Development Fund had decided to invest in more than 70 projects in 30 African countries with an actual investment of more than 2 billion USD, leading more than 1 billion USD in investment from Chinese companies in Africa.14Yuan Jirong, “African countries’ diversification finance tendency”, International Business Daily, February 24, 2014.

Fourth, China can robustly advance the internationalization of the RMB in Africa. Along with the all-round development of Sino-African cooperation, official and non-governmental RMB demands in the African continent are continuously on the rise. On the one hand, African countries need to strategically diversify their foreign exchange reserves. But on the other hand, African countries now face severe challenges - namely, a high risk of trade settlement and financial difficulties, due to the unstable value of their currency and their high borrowing rates.

These two factors have provided the RMB with a huge market space and the opportunity to achieve internationalization in Africa.Currently, national central banks in countries like South Africa,Nigeria, Angola, Tanzania and Kenya are already incorporating the RMB into their foreign exchange reserves. The central banks of South Africa and China signed an agreement, committing to a quota of 9 billion RMB of investment in the Chinese interbank bond market.15http://www.chinanews.com/gn/2013/05-17/4828305.shtml.Nigeria’s central bank recently raised the RMB-denominated reserve share from 2 percent to 7 percent, increasing RMB holdings by about 13 billion RMB. In carrying out the internationalization of the RMB in Africa, the Johannesburg branch of Bank of China has established a full range of products, including clearing, deposits, loans and settlements.

In 2013, the business covered about 20 African countries, with a value of nearly 13 billion RMB. The RMB clearance channel in Africa is crucial to the internationalization of the RMB on the continent. The highly efficient and low-cost clearing services that the Bank of China offers to African interbanks have played a positive role in promoting the RMB’s internationalization in Africa.

Driven by RMB clearing and settlement services, some African commercial banks have even started to offer RMB cash business.The Mauritius National Bank is now a financial institution with an RMB cash service. In addition, the Johannesburg branch of the Bank of China has bought more than 16 million RMB in cash accumulatively16Yu Meng, “African RMB demand on the sharp rise, Bank of China accelerate to expand”, 21st Century Business Herald, June 21, 2013.and started a wholesale RMB cash business for the South African financial market. Looking into the future, China should follow the development trend of the banking sector in Africa and accelerate the internationalization of its currency.