Financial Stability & Governance Back

Banking Supervision and Regulation

African countries have made considerable progress in reforming banking regulations and their supervisory processes in the past two decades. The African financial sector is becoming more integrated with global markets, innovation is leading to the adoption of more sophisticated financial products, and the importance of non-bank financial services is increasing. These improvements contributed to the resilience of African banking systems during the global financial crisis and led to higher capital ratios, stronger profitability, and higher liquidity among African banks.  The far reaching reforms have created a conducive environment for expanding access to banking and non-bank financial services. However the deepening of the banking sector in Africa also comes with additional risks emanating from new product and service offerings, more complex financial markets, regional financial sector integration and deeper links with global financial markets. Indeed, Banks are therefore likely to be subject to more volatile capital flows, heightened credit risk, and liquidity risk.

As a result, African governments and regulators face increased pressure to upgrade and align financial regulatory and supervisory frameworks with international best practices (e.g. BCPs, Basel II, Basel III, IFRS, and FATF Recommendations[1]). Therefore, given global developments and the rapid evolution of African system, building regulatory and supervisory capacities in the region is essential to maintaining system stability and public confidence in this rapidly changing environment.

Challenges

African policy makers have made consistent efforts to align with international regulations and best practices. Basel II and III remain the most contentious issues for the continent, as illustrated by the different levels of implementation.

Basel III is an internationally agreed comprehensive set of reform measures developed by the Basel Committee on Banking Supervision (BCBS),2 to strengthen the regulation, supervision and risk management of the banking sector. These measures raise the bar relative to the supervision framework that was in effect before the 2007 global financial crisis (Basel II), essentially, by introducing more stringent capital and liquidity requirements for commercial banks, with the objective to improve the banking sector’s ability to absorb shocks arising from financial and economic stress (BCBS, 2011). The new requirements aspire to make the banking system safer and more resilient, but there are some concerns about the potential adverse effects on lending for African Banks. For example, the stronger capital and liquidity requirements may also force banks to increase their capital and funding stocks, and take some risks off their balance sheets, with potential adverse effects on the cost, volume, and maturity of bank loans (BCBS, 2016).

In view of these considerations, some African countries have chosen not to move towards full implementation of the new Basel III framework. For example, Nigerian authorities have decided to implement only the aspects that their bank supervisors have determined to be well suited for their country. In contrast, South Africa have committed to the requirements in their entirety, while the Central Bank of West African States (BCEAO) has not only adopted Basel III requirements, but also decided to apply a capital ratio some 3.5 percentage points higher than the level required in Basel III. Even though the new Basel III regulations are meant to strengthen the stability of the banking system, these regulations may actually lead to negative effects on bank credit supply and pricing of loans. Notably:

  1. A higher cost of bank credit (lending rates and fees);
  2. Lower bank lending volumes;
  3. Reallocation of lending from high-risk to low-risk borrowers; and
  4. Shortage in long-term bank lending.

These adverse effects may result from the strategies banks will adopt in order to comply with the tougher capital and liquidity requirements (Oxford Economics, 2013; Cohen and Scatigna, 2016; and Barnejee and Mio, 2017). For instance, banks might choose to raise additional capital and liquidity and pass on the associated costs to their borrowers. This would lead to higher lending rates or fees, which in turn could reduce loan demand. Banks might also choose to shrink the size of their assets to meet the requirements, especially if they face either difficulty or high costs in raising new capital and liquidity. This would essentially imply a downward shift in loan supply by banks.

Whilst there are expectations internationally that all countries should follow the Basel II/III route, African priorities in some cases differ from the international agenda. Higher capital requirements as envisioned in Basel III for example, are not a priority in most African countries where capital adequacy ratios are already comparatively high. Also the difficulty to allocate additional human resource capacities and deficiencies in information technology does not allow many African banking institutions to follow the Basel framework [2]. In addition, operating at different levels of banking regulation and supervision implies access to international financial markets will become progressively difficult, as foreign controlled banks implement Basel III.

Opportunities

There is a strong case for African regulators to focus on specific components of the international reform agenda that are most relevant to their countries’ context, and to treat Basel II/III as a long-term objective. For instance, in many cases, improving compliance with the Basel Core Principles (BCPs) is more of an immediate priority. There is merit in tailoring regulatory reform road maps which reflect priorities and the limited in-country resources, also considering that premature application of Basel II and III, regulations developed to address issues in developed country financial systems, could potentially carry unintended negative effects  as described in the previous section.

However, this could represent an opportunity for non-banking financial institutions (NBFIs). Indeed some credit activity may move from banks to NBFIs. (FSB, 2011; Elliot and al., 2012; Cizel and al., 2016). NBFIS could play an increasingly role in lending, allowing low-income earners to have a better access to credit. In this context, African regulators must commit to moving toward risk-based supervision, develop and retain critical skills, improve financial sector disclosure and governance and develop capacities in consolidated supervision. Progress will also require banks to strengthen their supervision of cross-border financial institutions, promote greater regional co-operation between regulators, and establish regulatory frameworks for non-bank financial institutions and new products such as mobile banking. Broadly, African banks must engage in a complete modernisation of their financial system infrastructure, including contingency plans for financial sector crises and resolution regimes; as well as developing the capacity for macro-prudential supervision.

Section 2: Highlights of our Activities

MFW4A promotes sound and efficient financial sector regulation and supervision to ensure stability and enhance resilience to potential shocks, whilst supporting growth and innovation. MFW4A works with the Association of African Central Banks (ACCB), to support the Community of African Banking Supervisors (CABS).

The Community of African Banking Supervisors (CABS) was established under the Association of African Central Banks (AACB) with the support of the Making Finance Work for Africa (MFW4A) Partnership, to contribute to ongoing efforts of strengthening banking regulatory and supervisory frameworks on the continent. Its membership consists of representatives / staff of African central banks and / or banking supervisory authorities. CABS was set up to:

  1. Assist national and regional supervisory bodies in developing their capacity;
  2. Strengthen cross-border supervisory cooperation;
  3. Undertake country-level roadmap diagnostics to prioritize reforms;
  4. Leverage the experience of African central banks that have implemented Basel II;  and
  5. Promote the collective voice of African regulators in the international arena.

[1] Basel Core Principles (BCPs) relating to bank supervision, Core Principles for Systemically Important Payment Systems (CPSIPS) developed by the Bank for International Settlements (BIS), the Objectives and Principles of Securities Regulation (OPSR) developed by the International Organization of Securities Commissions (IOSCO), the International Financial Reporting Standards and the Financial Action Task Force (FATF) Recommendations.

[2] Banking in Sub-Saharan Africa: Recent Trends and Digital Financial Inclusion (2016). EIB

Knowledge Management and Research

Webinars, Knowledge Briefs, Case Studies

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MFW4A and CABS Webinar Series

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  • Core Principle 8: Supervisory Approach
  • Core Principle 12: Consolidated Supervision
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  • Core Principle 15: Risk Management Process
  • Core Principle 17: Credit Risk Management
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  • Core Principle 25: Operational Risk

Networking and Advocacy Networks

High-Level Conferences and Roundtables

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Joint IMF/BCBS/MFW4A Conference: Cross-border banking and Regulatory Reforms: Implications for Africa from an International Experience in Mauritius

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2nd CABS Meeting, jointly organized by the AACB/MFW4A and hosted by the South African Reserve Bank (SARB)

Project Support and Capacity Building

Trainings and Marketplaces

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Macro-prudential Surveillance: Multiple Views, One Objective”, in Algiers, Algeria

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Cross-border banking supervision in Africa” in Cape-Town, South Africa

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Crisis Management and Banking Resolution”, in Abuja, Nigeria

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Publications

May 13, 2019 | S. Ben Naceur, B. Candelon & Q. Lajaunie | International Monetary Fund (IMF)
Mar 25, 2019 | T. Asonuma, M. Chamon, A. Erce et al. | IMF
Feb 28, 2019 | Banco de Cabo Verde (BCV) | BCV

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