IMF raises concerns over supervision of Pan-African banks

Ecobank Rwanda welcomed a new Managing Director early this week at a time when pan-African financial institutions’ rapid expansion came under scrutiny by the International Monetary Fund (IMF). Ndiaye Mereme arrived in Rwanda to take over as the bank’s new managing director, replacing Gilles Guerard who moves to Liberia. Mauro Mecagni, assistant director of IMF’s African department said that the while the emergence of pan-African banks is a welcome development given the need for financial deepening and inclusion in Africa, their rapid cross-border expansion raises regulatory and supervisory challenges. “If left unaddressed, could pose systemic and spillover risks,” he said. But Ecobank reacted angrily to the claims that were contained in an IMF analysis released early this week alleging that the bank’s “poor” governance issues could be a threat to the continent’s financial stability. “For the past year, Ecobank group was rocked by a series of accusations on fraudulent governance and questionable transactions on bad debt and bonus awards,” IMF said. But Richard Uku, Ecobank Group spokesperson, slammed the IMF report labeling it out-dated. “The governance issues were from 2013. It is unfortunate that IMF has released this report regarding developments of over a year ago. We have taken care of those governance issues.” Sunday Times understands that the IMF has since issued an apology to the bank and withdrew the remarks. However, analysts say that even if the IMF got its analysis on the current situation at Ecobank wrong, it doesn’t annul the general concerns that the rapid expansion of cross-border banking in recent years poses oversight challenges. East Africa’s financial sector is deeply anchored on these Pan-African banks that include the likes of South African Stanbic Bank, Nigeria’s Access Bank and the Togolese based Ecobank, which has a presence in 36 African countries, including Rwanda. There are also regional banks such as KCB, Equity Bank and Crane Bank that are also crossing borders in the wake of regional integration . The IMF’s analysis notes that such banks , some of which now have a presence in about 40 countries, have become ‘more important than the continent’s long-established European and American banks.’ Some observers quickly picked on that statement to suspect that perhaps the allegations are stemmed in a long standing development of emerging African banks whose fast expansion is eating into a market previously dominated by European based banks, such as Barclays. It was a praise and hit moment when IMF noted that while the pan-African banks were improving competition in host countries with small markets, driving innovation, and bringing new opportunities for diversification for the home countries, they also pose risks born out of weak supervision. Independent financial analysts say that IMF is simply pointing out food for thought for Central Banks in the host countries on how equipped they’re at ensuring their regulatory role on banks whose administration is run from headquarters abroad. Sunday Times put the question to Françoise Kagoyire; the Director Bank Supervision at the National Bank of Rwanda, but got no answer before we went to press as she was out of office for the weekend. But a source at Ecobank Rwanda said that the lender was not in any kind of trouble with the regulator; reiterating that IMF’s analysis was off the mark. Expansion The IMF explains that a convergence of factors explains the recent fast rise and expansion on the so called Pan-African banks. For instance, it notes that the end of apartheid in the mid-1990s opened the door for South African banks to extend their expertise abroad. For Nigeria’s case, IMF says the large increase in minimum capital requirements pushed banks to consider expanding abroad to make use of their new capital bases. Within East Africa, there’s a surge of Kenyan-born financial institutions such as KCB with a presence in almost all five EAC countries. “The renewed impetus for regional integration, coupled with the success of mobile payments in Kenya was propitious to the expansion of Kenyan banks in East Africa,” notes the report. It’s understandable why financial media reports chose to focus on Ecobank as the victim in IMF’s analysis which was otherwise a general comment on cross-border banks on the continent. With a presence in more than 35 countries, Ecobank, which was founded in 1985, has registered rapid growth in the last 29 years to make it, undisputedly the largest pan-African bank. In 2011, Ecobank acquired Nigeria’s Oceanic Bank and Trust Bank of Ghana to give its continental expansion plans a lift and helped jump from being Nigeria’s number 14 lender by assets to number five, positioning it to become a top-three bank in Africa’s largest economy. Recommendation Erik Heinrich of global Finance magazine noted in 2012 that the continent-wide economic boom is shaping a new breed of pan-African lenders. But while a good development, the IMF analysts point to a possibility of transmission of macro-financial risks and other spillovers across home and host countries which central banks across the continent must watch out for. “As these groups (banks) develop in reach and complexity, significant supervision gaps, governance issues, and questions about cross-border regulation have emerged,” IMF analysts said. What seems to worry IMF is that the expansion of these cross-border banks has created a network of systemically important financial institutions, whose financial health in some cases is not fully known due to gaps in consolidated supervision. As policy recommendations to circumvent these risks, the IMF advises African governments to implement consolidated supervision, enhanced cooperation on crisis management and resolution and put in place effective supervisory colleges for all the pan-African banks. The Fund’s experts also call for the creation of an oversight committee of main cross-border bank regulators to drive the agenda towards these reforms. Regulatory oversight for Africa’s cross border banks is urgent, the experts point out, but they also caution that without a clear cooperation plan for resolution mechanisms, supervision alone may have limited effectiveness. “The recent global financial crisis has demonstrated the costs of not having a workable cross-border resolution framework in place, and the difficulty of constructing one, hence underscoring the need for sustained efforts in this area,” the report said. On January 12, IMF experts briefed the Fund’s Executive Board on the report and its key findings were discussed with the governors of central banks involved during the 2014 IMF-World Bank Annual Meetings in Washington, D.C. “This work was just the first step of a project to better understand growing cross-border financial linkages and systemic risks in Africa and reinforce financial oversight,” said Paul Mathieu, regional advisor for Africa in the IMF’s Monetary and Capital Markets Department. Currently, the IMF is exploring ways of carrying out ‘stress tests’ on major pan-African banks to better understand the interconnection of cross-border linkages and associated vulnerabilities.

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IMF raises concerns over supervision of Pan-African banks