Increasing regulation set to improve financial stability of African

02Feb 2017
The Guardian Reporter
The Guardian
Increasing regulation set to improve financial stability of African

INCREASED regulation and improved supervision in the banking sector across the continent have strengthened the financial stability of African banks.

According to the latest Moody’s Investors Service Global Credit Research however, progress has not been uniform and gaps remain, especially in the areas of enforcement and cross-border coordination.

The January 2017 report, entitled “Banks -- Africa: Gaps in Banking Regulation and Supervision Are Progressively Being Addressed” said African regulators have focused on strengthening corporate governance rules, updated banking laws to extend regulatory and supervisory powers.

The report pointed out that African regulators are also enhancing their stress testing capabilities while macro-prudential tools are increasingly being deployed to mitigate systemic risks.

It stressed that despite the progress however, further improvements are warranted in some areas. The report names South Africa as the only African country to have implemented Basel III.

“The implementing of Basel III would be a catalyst for improved capital and liquidity management and internal risk management procedures across the continent,” said the report.
Similarly, plans for resolution regimes in Africa are still evolving and the implementation of resolution frameworks trails the rest of the world.

“Evolving resolution regimes mean the cost of any systemic crisis could be substantial since many countries are unable to identify and deal with rising banking risks promptly,” said Constantinos Kypreos, Moody's Vice President.

Kypreos who is also a Senior Credit Officer of Moody’s said that African countries have broadly adopted international standards on anti-money laundering and counter-terrorism financing, but compliance is still evolving.

According to Kypreos avoiding sanctions is important for most African banks, especially in partly-dollarized systems where banks require US or other foreign banks to clear dollar transactions. According to the report, the overall 2017 outlook for the African banking sector is stable.

The stable outlook balances the banks' resilient earnings, high capital buffers and ample local currency funding against high asset risks and some challenging operating environments.

While the overall picture is stable, there is considerable regional divergence, with East Africa likely to be the most resilient African region and West, Central and Southern Africa facing a range of challenges.

For Moody's rated African countries, the credit rating agency projects average Gross Domestic Product (GDP) growth of 1.9 per cent in 2016, rising to around 3.5 per cent in 2017.

Growth will be supported by domestic demand, stabilizing oil and commodity prices, structural reforms, and competitiveness gains.

However operating conditions will remain challenging, affected by Africa's undiversified economies, high inflation, and cuts in government spending.

Moody's expects credit growth of around 10 per cent in 2017, while longer-term growth prospects remain robust, supported by mobile technology which is fuelling financial inclusion, rising banking penetration and a deepening of local capital markets.

Rising credit risk is a major concern and loan quality pressures are likely to persist in 2017. Moody's expects non-performing loans to rise in 2017, but with significant country deviations.

“Accelerating GDP growth in Africa will partly mitigate the risks stemming from challenging operating environments,” said Kypreos adding that the rating agency expects ongoing loan quality pressures in 2017, driven by continued low but stabilising commodity prices, the impact of significant currency depreciation, high inflation and structural issues.

Moody's notes however, that high asset risks will be partly mitigated by banks' broadly stable profitability and capital metrics.

For the countries in which Moody's maintains bank ratings, it expects pre-tax return on equity to average around 18 per cent, with the equity-to-assets ratio typically above 8 per cent to 9 per cent.

Similarly, stable customer deposits will continue to be the main funding source - typically more than 70 per cent of total assets - while reliance on more volatile foreign or short-term market funding will be minimal.

Foreign currency shortages will remain a concern for partly-dollarised systems, although Moody's expects such risks to gradually subside as commodity prices stabilise.

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