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An ever-increasing regulatory burden has severely constricted the global banking sector, with dire consequences for trade flows and development in emerging markets.
Deputy chief executive of Barclays Africa Group, David Hodnett, said that “There is no doubt in my mind that if regulatory reform continues to follow the trajectory we have seen so far, there will be no banks left that are truly global.”
While there is no doubt that enhanced regulation of the financial sector is well intentioned, a number of competing priorities have shaped the future of the financial services industry in Africa.
These include a decline in global banking and a reduction in correspondent banking relationships, which play an integral role in facilitating trade and investment and connecting Africa to the global economy.
The regulatory burden – deconsolidation and risk reduction
“The global financial crisis will remain a scar for years to come,” Hodnett told a gathering at the Gordon Institute of Business Science (Gibs).
Regulatory reform has forced substantial change on the sector in a relatively short space of time, and is not yet at an end.
“Many banks have become more resilient as a result, painful as it might have been.”
In response to new regulatory regimes, requiring banks to strengthen their capital and liquidity positions so as to reduce the risk of a recurrence of the 2008 financial crisis, global banks have reduced total assets and have shed non-core businesses.
Some were forced to sell assets as a condition for state aid, while “some see even tougher legislation down the road and are scaling back in anticipation.”
Barclays Plc is in the process of reducing its stake in Barclays Africa Group in order to achieve regulatory deconsolidation, and is also selling assets in Asia, Italy, Spain and Portugal.
Hodnett explained that the phenomenon is not unique to Barclays, as other global banks reduce their balance sheets and retreat from countries previously considered core to their strategy.
“If the ultimate aim is that no bank should be too big to fail, then there certainly has been progress in this regard,” he said.
Simultaneous regulatory measures have also been introduced to stop the illicit flow of funds for money laundering and terrorism.
This has lead to a decline in correspondent banking, as organisations look to reduce their risk in line with the guidelines.
“Africa is among the regions worst affected by the decline in correspondent banking, which raises concerns about financial exclusion on a continent where many remain excluded anyway,” Hodnett said.
Implications for African trade and development
Dr Leyland Hazlewood, chief executive of Dimpex and author of The Ultimate Guide to Doing Business in Africa said the simple financial transactions we now take for granted are still relatively rare in many parts of Africa:
“The global banking system is a symbol of globalisation and seeks to enable us all to benefit from its advantages. Global banking is a civilising force; to contemplate is demise is tragic.”
Trade has the power to be an important driver of development, when combined with the right form of financing, Hazlewood added.
With the pull back of global banks in the region, Hodnett said regional banks would need to become a bigger feature on the financial services landscape in Africa, as these are vital to ensure the continued connectedness of Africa to the global economy.
After the Barclays disinvestment, Barclays Africa will be a stand-alone African bank with 12 operations across sun-Saharan Africa.
The cumulative regulatory burden, although well intended, could have a detrimental effect on trade flows and development in Africa.
Legislation created in developed markets with more sophisticated lending environments can disproportionately disadvantage emerging regions, which are compelled to comply or damage their risk profiles.
Where regional banks are seen as “too big to fail” they might eventually have to follow the course of the global banks and make a strategic retreat where regulation proves too much of an economic obstacle.
While Hodnett explained that technological disruptions such as mobile and Blockchain “will absolutely change banking,” he believes the key to exploiting the potential of disintermediation will be through banking and FinTech partnerships to protect consumers and investors.
“It is important to ensure among all these competing priorities that policy makers and bankers find an equilibrium between managing systemic risk and allowing banking to responsibly facilitate economic activity.
"To grow, the African economy needs fewer, not more hurdles, however well-intentioned,” he concluded.
Top five points
•A decline in global banking and a reduction in correspondent banking relationships, which facilitates trade and investment and connects Africa to the global economy, have shaped the future of the industry on the continent.
•Global banks have reduced total assets and have shed non-core businesses in response to capital and liquidity regulations, selling off operations around the world.
•Measures introduced to stop the illicit flow of funds and the subsequent decline in correspondent banking raises concerns about financial exclusion in Africa, where many consumers are already excluded.
•Legislation created in developed markets with more sophisticated lending environments can disproportionately disadvantage emerging regions, which are compelled to comply or damage their risk profiles.
•Policy makers and bankers must find an equilibrium between managing systemic risk and allowing banking to responsibly facilitate economic activity.
