Why Bank of Uganda reinforces regulation of pan-African banks

To guard against risks that may arise from pan-African banks, Bank of Uganda (BoU) has signed various Memoranda of Understanding (MoU) with supervisors of commercial banks with presence in the country to enable regular and proactive interaction and sharing of information on these institutions.
Africa-based banks are expanding across the continent and now dominate the banking sector in many countries. These pan-African banks are establishing cross-border networks and overtaking the European and US banks, which traditionally dominated banking on the continent.

Unlocking the potential
The new pan-African players are driving the expansion of financial services and economic integration in helping unlock the huge potential of a fast-growing region. The advantages related to pan-African banks are numerous in the sense that the economies of both host and home countries receive numerous benefits from cross-border banking.
Increased efficiency
The International Monetary Fund (IMF) says the rise of the pan-African banks has increased competition and efficiency, introduced product innovation and more modern management and information systems, and brought higher skills and expertise to host banking sectors. A number of pan-Africa banks have exported innovative business models and delivery channels, such as mobile banking by Kenyan institutions, to host countries.
These advances have helped expand the availability of banking services and products, in what is called financial deepening. Pan-African banks have also extended banking services to the previously unbanked population.
In an interview with Prosper Magazine recently, the executive director supervision at BoU, Ms Justine Bagyenda said regulators routinely share information on the shareholders, directors, and senior managers of supervised institutions; key information pertaining to the performance of associates or holding company; giving the list of shareholders, directors and officers; details of the Group management structure which clearly indicates the allocation of Group senior management responsibilities, among others.
According to Ms Bagyenda all supervised financial institutions are required “to establish in country primary data and disaster recovery centres in order to ensure business continuity in cases of closures of related parties in foreign jurisdictions.”
This peer-to-peer learning effect is further reinforced as host regulators benefit through joint on-site supervisory visits of foreign subsidiaries with home authorities and as they participate in supervisory colleges, which bring together regulators for individual banking groups.
Ms Bagyenda stated that while pan-African Banks do not necessarily present a risk to the soundness of the banking sector, they have unique inherent risks by virtue of their connections to a wider banking Group and which can impact on the performance of the local subsidiary.
Ms Bagyenda said: “There is close collaboration with the Home Supervisor right from the licensing process and on an ongoing basis to ensure timely communication of emerging issues about the institution and its affiliates and timely intervention should problems arise.”
Pan-African banks can also help host countries raise their financial standards. This is because banks from more advanced African economies use higher home-country standards in their subsidiaries, and host authorities are exposed to more sophisticated reporting and supervisory practices such as capital standards recommended by the Basel Committee (an international group of bank regulators) and the International Financial Reporting Standards issued by the International Accounting Standards Committee.
“This cooperation is complimented by periodic Supervisory Colleges and Joint Cross-border inspections, aimed at strengthening the supervision of cross-border banking groups. BoU conducts consolidated supervision which looks at the overall group structure of any bank so as to identify risks to the bank arising from its group relationships,” she said.
Ms Bagyenda explained that Supervised Financial Institutions (SFIs) are required to submit an Annual Return, showing the relationship between the local subsidiary and its affiliates of parent bank/subsidiaries, as well as information on material non-compliance issues or issues of an adverse or potentially adverse nature that may affect the operations of the bank.

In her recent insights on the pan-African banks, the IMF managing di rector, Ms Christine Lagarde, stated that the expansion of cross-border banking has been impressive.
Ms Lagarde said 10 African banks now have a presence in at least 10 countries on the continent, and one is present in more than 30 countries.
“This expansion inevitably has brought a host of new complexities. With varying regulatory regimes across countries at different stages of financial sector development, it should not be surprising that effective oversight of cross-border banking presents immense challenges,” she said.
Ms Lagarde was uncomfortable, saying: “Unified accounting and reporting standards are absent. Data weaknesses abound (and) national secrecy laws and constraints on information flows impair cooperation among supervisors in home and host countries.”
She said bank holding companies are headquartered in one country and have subsidiaries across the region that operates under their hosts’ rules and regulations and this places an important burden on supervisors who have primary oversight of the holding companies.

Host countries essential
Ms Lagarde stressed that it is also essential that host countries are informed and consulted, and for host country supervisors to be involved.
Since financial sector development is an integral economic development of a nation/region, Ms Lagarde says IMF policy advice consistently focuses on financial issues, including under the Financial Sector Assessment Programme; with IMF regional centres across Africa delivering training and technical assistance related to consolidated and cross-border supervision.

Working examples
Some banks now operate across Africa with quite a number claiming sizeable market share already.
In a telephone interview with Prosper Magazine on April 5, the general manager business development at Bank of Africa (BoA), Mr Calve Serumaga, said the bank which has 35 branches in Uganda and employing 450 people, covers many countries in Africa.
“We are operating in 18 African countries. We are in Burundi, Rwanda, Uganda Tanzania and Kenya. We employ local citizens and we do a lot of training at the group level to the existing staff to improve on their technical competence,” he said.
Mr Serumaga said the reason why BoA employs the local talent is because they understand the environment they work in better than imported labour.
“We think that with the introduction of Agency Banking and integration of telecommunication companies, and the mobile money banking services, there is need to bring in new technologies to bring equipment that matches with the market trend,” he said.
Head of marketing and corporate communications at United Bank of Africa, Mr Stephen Kasambeko, said told Prosper Magazine that they have eight branches and employ 160 people. “We do both corporate and retail banking services,” he said.

unique risks
The risks include: Poor domestication of strategy leading to weak market penetration; complex reporting structures and interference from the Group; significant expenses on expatriate staff; disruption in business continuity arising from interruptions.
The others are Intra-Group exposures; delays in capital allocation owing to capital restrictions on the parent company; contagion risk - loss of confidence or interventions such as closure of related entities in a foreign jurisdiction can trigger problems for the local subsidiary, even if the local bank itself is sound.
At times there are also complex management structures which impair effective supervision and cause corporate governance issues.