African banks are waking up to a new reality following the
global financial crisis as firms downsize their budding
investment banking divisions, scale back regional businesses
and focus on core products and services.
Loan defaults, falling stock prices and increased funding costs
have brought the industrys bull run to a screeching halt
while the ongoing western financial meltdown has triggered a
wider debate on the resiliency of the regions business
Banks are now going to be focusing on the core of the
business, and the marginal businesses such as investment
banking will not be that active now, Arnold Ekpe, group
chief executive of the pan-African bank Ecobank Transnational
told Emerging Markets.
Despite their limited exposure to toxic assets and relatively
robust capital levels, many banks across the region before the
crisis had begun dipping their toes into less conservative
models. Banks, particularly in West Africa, had started to
diversify treasury investments out of government bonds into
higher-returning securities while flirting with investment
banking to service corporate activities during the recent run
of credit growth.
But Ekpe noted that lower demand from companies for debt and
equity operations as well as mergers and acquisition advice
would drive banks to concentrate on traditional commercial
banking activities and maintain conservative balance sheets. As
a result, banks are likely to concentrate on vanilla products
such as lending, cash management and trade finance, he
But others warned of the dangers of a regulatory backlash.
Yassine Benjelloun, head of treasury and capital markets at
London-based investment bank MediCapital said: There is a
risk that financial supervisors will overshoot and investment
banking-related products will be relegated, just when Africa
needs to develop its financial system.
Ekpe said African banks must learn the mistakes of their
western counterparts. The basic rules of banking
having basic risk management, not growing too fast, having a
clear business model, strategic discipline and good cost
controls apply whether you are in Africa or in the
Benjelloun predicted scarce funding sources would lead to
banking consolidation across the continent as firms look to
boost their financial firepower and efficiency. In addition,
banks who just expanded to develop a pan-African band for
the sake of it rather than due to any meaningful business sense
in the previous bull run will now have to retreat to their home
markets, he said.
The Nigerian market has been the most impacted by the financial
crisis and banks have incurred losses of around $5.3 billion in
bad loans related to margin loans for purchases of stocks,
according to the central bank.
The country has been hit by reduced liquidity as foreign
banks reduce lines of credit, said Onche Ugbabe, chief
strategy officer at First Bank of Nigeria.
Benjelloun said risk-averse and liquidity-starved foreign
institutions may pull out of the region entirely, a scenario
which would hike trade finance and borrowing costs, while
reducing the investor base for primary market investment
banking deals in Africa.