The argument by the Organisation for Economic Cooperation and Development (OECD) that tightening South Africa’s wealth tax regime would rebalance ... generational inequality has a fundamental flaw: it targets a “flighty” base, says an expert from the African Tax Institute.
Banks in Africa’s most competitive environments are streamlining their operations, shoring up their procedures and training their employees to adapt to changing local and international environments
Our yearly list of Africa’s Top 200 banks paints a picture of a continent on the march – a larger asset base, more profits, expanding branch networks and new customer-centred operations. African banks are also attracting a great deal of external interest as shown by capital flows into Nigeria in 2007 or the attraction that North African banks have for their French and Spanish counterparts.
But getting bigger is no longer an end in itself: Africa’s banks have to get better, too. Be it in their corporate governance, their information technology (IT) systems and back office, their training and human resources management or their ability to enforce compliance, Africa’s banks are getting healthier and more productive. Compliance, the necessity for a bank to follow the internal and external rules that determine the ‘safe’ range of actions a bank can and cannot take, is of particular importance.
Good banks are based on good people. For Mustafa Rawji of Rawbank in the Democratic Republic of Congo (DRC), the growth of his organisation was down to the ability to pick up talent: “We had a major advantage when we started. From 1991 to 2002, the Congolese economy was constantly in decline. There was hyperinflation. The major banks at that point were laying off staff. They were going from 3,000 to 200 people. So what all of a sudden happened was that we had access to a pretty large talent pool. The likes of Citibank were cutting back on staff, the likes of ING, which had a presence over there. In terms of people and human resources, we were able to tap into a few people that had long banking experience.”
Top-level banks are using new methods to evaluate their staff, to identify talent – and to root out incompetence. Some use an automated scorecard that measures an employee’s progress. Looking directly at, for example, revenue targets for the year, the programme goes into the bank’s data, sees how much is tagged with the employee’s name and reveals straight away if targets have been met. These data points can be cross-referenced with more intangible and qualitative appraisals from line managers.
Driven by consumer lending, local banks are pushing ahead all over the continent. The asset growth caused by demographic change makes Africa more attractive than ever for investorsThe banks that have shot up the list fastest are riding on the two great drivers of the African economy: natural resources, and the emergence of sustained consumer spending – what the African Development Bank hesitantly calls the ‘floating’ middle class. Kenya’s Investment & Mortgages Bank has taken advantage of the latter dynamic, holding out the dream of home ownership. Mozambique’s BCI and Ghana’s Agricultural Development Bank are examples of another positive trend across the continent, the harnessing of agricultural potential.
But sometimes good people are hard to find and need to be shaped instead. South Africa is a continental leader in its push to provide skills to an entire generation shut out from education and training. The Banking Sector Education and Training Authority (BANKSETA) links banks and education providers with government money to help them train employees either with in-house courses or in classroom environments. BANKSETA CEO Max Makhubalo explains how the organisation is moving to fill previously ignored niches: “We have a very popular focus on Islamic banking now, and many of those attending these courses have said that they have benefited greatly, especially as many South African banks are moving into countries where Islamic finance is growing fast.”
Ecobank Transnational Inc. (ETI) is building a training complex at its new Lome headquarters to close the skills gaps in its mid- and senior-level management. Folusho Mike-Fadayomi, group head of strategy and human capital management, explains what Ecobank is doing to ensure smooth transitions in management:
“At some point you move from managing yourself to managing people, then you move to managing teams of people. Then you move to managing a subgroup of a business, then a country, then managing things across a group. Those are the kinds of structures we have across the organisation, and the challenges are different.”
She cites Ghana as a good example of how well-trained executives can help a company achieve long-term strategic goals such as compliance. “From a human capital standpoint, it’s one of our best practice models in organic human capital development: people come straight from school, they train for the jobs they are in, they train for the next jobs and then move consistently from one position to another throughout the organisation.” This sort of development reduces grey areas where mistakes can be made and helps to maintain strategic discipline because employees know what is expected from them and those in other positions. ETI’s Ghana operations have grown solidly, avoiding the stop-start growth that characterises other banks. “It’s a naturally conservative, compliant business,” says Mike-Fadayomi.
For Evelyne Tall, the chief operating officer of ETI, compliance is not a luxury. “Our subsidiaries who are the most compliant are the most profitable,” she says, pointing to Ecobank Ghana’s success and its contribution of 40% of ETI’s profits.
The Basel Committee on Banking Supervision, part of the Bank for International Settlements, puts it thus: “Compliance laws, rules and standards generally cover matters such as observing proper standards of market conduct, managing conflicts of interest, treating customers fairly and ensuring the suitability of customer advice. They typically include specific areas such as the prevention of money laundering and terrorist financing, and may extend to tax laws that are relevant to the structuring of banking products or customer advice. A bank that knowingly participates in transactions intended to be used by customers to avoid regulatory or financial reporting requirements, evade tax liabilities or facilitate illegal conduct will be exposing itself to significant compliance risk.”
But some in the banking industry – particularly those on the sales side – can see compliance as something holding back a bank from greater profits. Tall prefers to see her unit as clearing the road ahead, removing the obstacles that might derail the organisation. “It is only when you are on a road that is well-paved, that you can travel at speed,” she says.
Setting Down the Rules
By virtue of falling inflation and interest rates, and better macro-economic discipline by governments, African banks are increasingly financing the real economy rather than government deficits. A large swathe of African banks do not have much experience lending to the private sector, and a rule-based approach is necessary. A compliant bank would not, for example, grow the loan book in a particular sector beyond what its top management had agreed in order to avoid overexposure.
The need for discipline is clear. When Nigeria’s banking sector collapsed under the weight of bad loans in 2009, there were several parties to blame. “Sometimes the commercial section of a bank would run ahead of the documentation side of things,” says Theophilus Emuwa, partner with the Nigerian law firm AELEX, who explains that many of the banks found themselves struggling to recoup debts owed because of the failure to draw up proper contracts. Thinking that a customer was solvent and trustworthy, the banks would advance cash. “Then when these borrowers became distressed, it was impossible to recoup the money.”
Compliance can boost profitability if internal discipline is maintained. But for policy makers in charge of the financial sector, it is risky to assume that the players will necessarily have someone as tough to push directors and managers into line. The overly-risky decisions taken by large investment banks in the US and elsewhere, which were at the heart of the global financial crisis in 2008/2009, shows the extent to which policy makers and regulators have to pay much closer attention to the behaviour of the banks in their charge.
South African banks continue their annual dominance of our rankings, with $652bn of assets – up from $570bn in 2009 – and the top five positions on our Top 200 table (see page 108). Southern African banks are also the continent’s most profitable – posting $27.4bn of profits in 2010. By comparison, West Africa’s banks – dragged down by troubles in Nigeria (see page 110), netted a loss of $374m. Nigeria nevertheless rates third in assets with $112bn. In second place after South Africa is Egypt, with assets of $164bn.
As Rele Adesina, head of CIB research at Stanbic IBTC in Nigeria points out, “Petty loan malfeasance was not the issue in the toxic assets crisis, rather it was large loans to the big players, hence [central bank governor Lamido] Sanusi’s decision to publish the list of debtors,” which helped shame some into repaying their outstanding debts. Many bankers in Nigeria have complained about the heavy-handedness of Sanusi’s intervention and subsequent turning of the screws. But Adesina believes that given the entrenched and historic level of impunity throughout the sector, a clear and tough message had to be sent out to change mindsets.
This is in the banks’ own interest, particularly for multinationals, as ETI’s Tall points out: “The most important thing for us is compliance with regulators. We do not want to have any risk with the franchise. The smallest country breaking rules can endanger the whole network.”
It is not enough to have compliance as an abstract notion of corporate governance. It has to be enforced. A restructuring of a bank’s organisation can help this. “What makes it easy for me,” says Tall, “is that the board of ETI and the CEO had decided that the managing directors report to me directly.” If there is a problem, she can simply pick up the phone and call them. “And if it’s serious, I would just go there.” This new system was set up in August 2010 and was in part prompted by the difficulties encountered by Ecobank’s subsidiary in Nigeria.
Part of the problems faced by the Nigerian banks was that they did not always understand the sectors that they were lending to. Emuwa explains how law firms are increasingly filling a knowledge gap between their bank clients and prospective private sector players. “We are often holding conferences where we bring everyone round the table.” As banks mature they often build up their own in-house strengths. South Africa’s Standard Bank, for example, has built up a strong internal capacity to understand mining and other extractive energy deals, as well as work with BRIC partners.
The need for a strong IT platform is also clearly part of the arsenal of a more productive bank. Rawbank in the DRC had the benefits of being first mover. “We introduced SWIFT, the global payments system, back in 2003/2004 when there was no SWIFT access in DRC. SWIFT is the most basic bank-to-bank messaging and communications platform that exists. We were the first to launch ATMs and credit cards.”
In many other African markets, banks are looking at more cutting-edge technologies. Equity Bank in Kenya is leading the way in using mobile phones to provide far-flung customers with a bank account with its M-KESHO system. These will eventually act as credit histories, and use semi-informal banking agents, who might be shop owners or cellphone credit resellers, to link a much wider banking community to the central hubs in the cities.
Africa’s asset base climbs on and upward, untroubled by the financial downturn and subsequent global depression. A sign that, for banks at least, Africa is uncoupled from many of the struggles faced internationally, and driven by lending to an emerging class of African company and consumer, even if corporate banking still remains the preferred model for now. In a world beset by debt crises in Europe and the United States, it may well be that investors see emerging markets as less of a gamble and more of an opportunity.
For most banking customers in Africa, the experience is still a far cry from what the biggest institutions can provide, with bookkeeping done without the aid of machinery and queues of people gathering in hot and dusty teller-halls. So what should a small bank who wants to step up its activities do?
For Mike-Fadayomi, the answer is simple: standardise, standardise, standardise. “Standardise your training and your processes, and be consistent in the message you send across the institution. Whether there are five people in the bank, 50 or 500, people in regulated environments work better when they know exactly what to do and why. And the why is important because it allows them to innovate or adapt if the situation changes.”
In a volatile climate, African banks are finding that quality staff who are able to navigate choppy waters is exactly what they need.
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