Stephen Chisadza

In the 1990s many SADC countries liberalised their banking sectors as part of the economic structural adjustment programmes prescribed by the International Monetary Fund and World Bank. These reforms included the removal of barriers that hindered competition from either new domestic banks or foreign banks. Tanzania for example, had no foreign banks before implementing these market reforms, yet by 1998 there were five foreign banks. Following the lifting of economic sanctions on South Africa in the early 1990s, South African banks entered regional markets aggressively, and rapidly gained a substantial regional footprint. International banks also re-entered the South African market in a big way.

In a region characterised by small economies and markets, it is generally acknowledged that in order to deepen the gains from these market reforms, regional economic integration was a desirable development strategy. Hence in 2012, the SADC launched negotiations on the liberalisation of trade in services for six priority sectors, including banking and other financial services. It is expected that these negotiations shall be finalised within three years.

The liberalisation of trade in banking and financial services refers to the removal of entry barriers to foreign owned/controlled service providers. The main argument for the liberalisation of trade in financial services is that the introduction of competition from foreign banks places downward pressure on pricing and forces domestic banks to be more efficient. Banks will therefore look to improve the quality of their products, be more innovative and explore opportunities in untapped markets. Domestic banks can also benefit from the entry of a foreign bank through spill-over effects as they learn from the better or different techniques and technologies introduced by the foreign entrant. The liberalisation of trade in banking services is therefore expected to improve service quality as well as access to banking services. The reasons for this are multifold.

Traditional banking is a high fixed cost industry. As such, the cost of renting, equipping and staffing physical branches accounts for a large proportion of operating costs regardless of the volume of business or revenue they generate. A good ATM and branch network is important in terms of creating a positive perception of the bank, as nobody wants to put their money in a bank that does not look solid (or is easily robbed). The large fixed costs mean that large banks have cost advantages as they are able to spread their fixed costs out over more units of output. Studies show that for commercial retail banking in emerging markets, these cost advantages at the point where a bank has between US$1 billion and US$10 billion in assets[1]. Most African countries however report real gross domestic figures of less than US$10 billion. This suggests that in the absence of trade, the relatively small size of African economies would prevent domestic banks from being able to spread their fixed costs and risks over a large number of customers and take advantage of the economies of scale seen in larger markets. The result is that the only way in which consumers in these countries can obtain access to a wide range of low cost financial services, might be through the entry of a large, foreign bank; or some form of regional consolidation.

Other advantages to allowing large international banks to enter a market include access to cheaper capital. Large international banks have access to a larger and more diverse pool of capital. For small economies with limited capital, the entry of a large international bank can therefore expose borrowers to more and cheaper credit. In practice, the experience of many Southern African countries does not always stand up to the theory.

A study by Claessens and Horen (2012) using various banking databases, reported that in 2009 just over a third of all banks in Sub-Saharan Africa were foreign-owned, and that in four SADC countries more than 80% of banks were foreign-owned. Yet various FinScope studies conducted between 2009 and 2011 on access to financial services in 14 sub-Saharan countries (9 of which were SADC countries) showed that access to banking services remained generally low and unequal. The studies also showed that foreign banks were reluctant to provide banking services to less profitable poor areas that remained largely unbanked. This raises questions about the true benefits of financial liberalisation, for the majority of the population.

In order to gauge whether the presence of foreign banks has had the desired effect of increasing access to banking services, we constructed a simple two-way scatter plot for 13 of the countries covered by the FinScope’s access studies. Contrary to the theoretical view, the plot shows that access to formal banking services declines as the number of foreign banks as a percentage of the total number of banks increases. Similarly, a comparison of foreign bank presence against the percentage of the population not served (by either formal financial institutions or informal financial groups such as savings clubs) shows that the presence of foreign banks does not necessarily result in improved access to banking services.

Figure 1: Two-way scatter graph of access to banking services and number of foreign banks

The scatter plots suggest that the presence of foreign banks is not sufficient to improve access to finance for individuals. This should not be interpreted to mean that foreign competition is bad, but rather, that there are many other factors that may be preventing the expected increase in access. For example, rolling out banking infrastructure and services to non-urban centres reduces a bank’s efficiency by increasing its fixed costs whilst the units of output, upon which the fixed costs are shared, do not increase proportionately. For this reason, countries with large areas that have low population densities and low levels of disposable income are unlikely to attract the interests of traditional banks, even if they are foreign. Rather, additional and alternative banking methods may need to be considered in such contexts.

In Malawi and Mozambique microfinance institutions such as Opportunity International and SOCREMO have experienced some success in rural and farming communities, providing banking services to individuals with little collateral that had not been able to access traditional banking services. These microfinance institutions have filled the financing gap using creative and unconventional mobile banking solutions such as mobile banking halls. On the back of these successes, both institutions have transitioned from being donor funded institutions to deposit taking institutions with banking licenses. Drawing on the experiences of these microfinance institutions, it is possible that private sector innovations, regulatory reforms and the liberalisation of trade in financial services could together be mobilised to provide access to financial services, even to the most marginalised.