New Partnerships



By Nick Kochan

Africa’s banks are looking to forge new links as they seek to expand across the continent.



The African banking industry has emerged from the global financial crisis largely intact and, in fact, with its reputation somewhat enhanced. The very limited and conservative approach to management of their reserves, with some notable exceptions in Nigeria, ensured that the continent’s key institutions fared well and did not need state bailouts. One investor in an emerging market fund explained the continent’s banks’ conservative approach: “African banks for the most part take deposits, they buy government bonds, and they pay low deposit rates. Their profit is made on the spread between the margin between the bonds and the rates. They don’t take risks by lending substantial amounts of their funds to businesses, other than to blue-chip companies—or indeed to customers.”

Banks in French-speaking Africa, as well as East and North African banks, have received plaudits for surviving the crisis in the best shape. Some have been helped by local conditions. For example, banks from Mali and Morocco, in particular the Moroccan Attijariwafa Bank and Mali’s Bank of Africa, have benefited from strengthening national economies. Another factor that some African banks are benefiting from is the performance of their countries’ sovereign bonds, some of which have been notably successful on the global markets. Jan Dehn, of investment manager Ashmore Group, has written, “Gabon and Ghana have shown the feasibility of opening the market for global bonds. Both countries issued benchmark-size sovereign bonds in 2007 at yields of 8.2% and 8.5%, respectively. Serviced impeccably since issue, these bonds now trade at yields of 6.25% and 6.70%, respectively.”

The growth in Africa’s sovereign bond market may create some opportunities for African banks with an international presence and corporate finance skills, but it will require some clever juggling of World Bank criteria, which typically exclude countries substituting grant aid with bond market exposure.

Corporate bond issuance is expected to grow in the region too, as many African banks look to tap markets for currencies and bonds outside their home market. In the vanguard here is GT Bank, described by one analyst as the Goldman Sachs of African banking.


Nigeria Lags Behind
One banking sector that has struggled as a result of the crisis is Nigeria. Banks were dangerously exposed to stock markets when the markets crashed in 2007. Most banks required a state bailout, and all cut back their lending. The worst performers were taken over by the government and had their management removed. A number of managers are facing criminal penalties.

Leading the charge against poorly performing Nigerian banks is Lamido Sanusi, the governor of the Central Bank of Nigeria, and a consistent advocate of improved risk management policies across Nigerian banking. He had formerly headed up First Bank of Nigeria, and that bank’s sound balance sheet owes much to Sanusi’s management. He has spoken scathingly about the investment policies of many Nigerian banks. Of particular concern was the cheap money they raised on international markets around 2005, which was invested in stocks on the Lagos Stock Exchange (many bank stocks were artificially inflated as a result) and in the highly volatile oil markets. The global collapse in stock markets wiped out much of this capital, sending banks’ balance sheets into freefall.

Sanusi has also trained his fire on sweetheart deals between some bankers and local investors. He insisted that a central bank report into the bankers’ dealings be published and is now campaigning for the imposition of severe penalties on errant local bankers. Sanusi is eager to encourage foreign investment for those local banks under state control. He has also said he expects Nigeria’s 23 banks to shrink in number by a third over the medium term.

Outside Nigeria banks may have weathered the crisis better, but they continue to be criticized for failing to invest in their local economies—particularly in countries that are likely to see cuts in aid flows in the very near future. Investors expect Western donors to trim their grant levels when fiscal pressures build in their domestic markets. According to Dehn, “It seems likely that donor flows to sub-Saharan Africa will be scaled back, possibly sharply, over the next five to 10 years.” The withdrawal of aid funds may lead to pressure on countries to issue bonds, he says.

Dehn’s view is supported by World Bank data, which show that 35% of sub-Saharan Africa’s gross 2008 government consumption expenditure—a total of $43 billion—was funded by overseas development assistance disbursements. Dehn observes that most African countries will be “heading for a potentially devastating financing shock, not unlike that faced by the private sector during the 2008 credit crunch.”

China Marches In
As in so many other aspects of Africa’s economic development, China has stepped in to help out. Chinese financial interest in Africa provides one of the greatest talking points across the continent, as Africans examine their future. The Chinese pioneer in African banking was ICBC, which spent more than $5 billion on a 20% stake in South Africa’s Standard Bank in 2007. Goolam Ballim, group chief economist at Standard Bank, says, “Africa needs to reconstruct its infrastructure, and if a Chinese bank can facilitate that, it is welcome.”

Another African bank to have sought to harness Chinese capital for the continent is South Africa’s FirstRand. Its CEO, Sizwe Nxasana, says “We saw that it was important for us to be aligned to a Chinese bank. We have no desire to have a presence in China itself, but we would like to be able to serve our clients, particularly corporate ones, who have a presence in China. We also saw an opportunity to work with the increasing number of Chinese companies that are either state-owned or privately owned, and who are now doing business in Africa.” FirstRand’s joint venture with China Construction Bank is likely to facilitate the movement of Chinese into many other African markets, says Nxasana.

Another African bank to form a link with China is Ecobank, which recently teamed up with Bank of China. Ecobank Group CEO Arnold Ekpe said in a statement at the time, “We shall open dedicated desks at selected Ecobank branches across Africa. In return the Bank of China will be our primary conduit in our business dealings in China.” Ecobank Group executive director, corporate banking, Albert Essien added, “The pact will allow the Bank of China to cater more pointedly to their clients in Africa using the Ecobank platform, while it also enables Ecobank to grow its China business.”

While some are looking for growth opportunities overseas, a more universal tendency of African banks is to enter other local African markets. GT Bank, Zenith and Access, for example, have taken lead roles in expanding their activities across West and Central Africa. The Togo-based Ecobank has also expanded its reach across Saharan Africa.

The confidence of Africa’s banks is demonstrated by this new pioneering spirit. This bodes well for a continent, which will place an increasing burden on its capital raisers and capital distributors. The continent’s new friends in China seem ready to help.