The Basel III banking accords mark the latest step in the process of harmonising financial regulations across markets, but the nature of their focus – and some of the problems they seek to solve – mean that their relevance to Africa’s emerging and frontier markets can sometimes be limited.
The majority of the banking sectors in African economies – South Africa aside – are far more straightforward, with activities focused on the fundamentals of loans and deposits. As the Basel accords were primarily designed for large banks in advanced economies involved in a wide variety of complex activities with significant cross-border operations, the application of rules on funding long-term assets with long-term capital, for example, can be difficult, given that the majority of deposits in Africa’s banks are short term.
Basel III, released in 2010 in the wake of the global financial crisis, sets out to accomplish three major goals by 2019. First, it seeks to strengthen banks in order to reduce the risk of a 2008 repeat, and, in the event of a new banking crisis, reduce knock-on effects to other sectors and countries. Second, Basel III puts in place measures to improve risk management techniques within the financial industry. Lastly, the accords aim to strengthen the industry’s governance, transparency, as well as disclosure rules and practices. One way in which the Baselbased Bank of International Settlements (BIS), which formulated the accords, sought to accomplish these goals was by more narrowly defining what constitutes Tier-1 capital reserves, a bank’s first line of defence against defaults. Other concrete measures include enhanced stress testing, a reassessment of the calculations of the fair value of an asset, strengthening corporate governance and keeping a more watchful eye on how executives are compensated.
While Basel III is viewed as a global accord, many countries have chosen not to abide by all of its prescriptions, or to only adopt the aspects of the rules that suit their particular needs or development level. Nowhere is this truer than in Africa. Some countries, such as South Africa and Tunisia, have committed to the accords in their entirety. Others, including Egypt, Kenya and Nigeria, are slowly integrating the aspects that banking supervisors have determined to be well suited for their jurisdictions. In fact, the African Development Bank (AfDB) urged its members in 2011 to “move towards Basel III, albeit cautiously” in recognition that full implementation or the prescribed implementation timeline may not be a perfect fit for every African country. As Kwame Baah-Nuakoh, head of marketing, research and corporate affairs at the Ghana-based Royal Bank, told OBG, “The Basel regulations must be modified to suit the jurisdiction without compromising the objective.”
Among African countries implementing Basel III, South Africa has the most developed banking sector. As Africa’s only G20 member, the country has set itself on a pathway to full adoption of Basel III by 2019 alongside its G20 peers. Having already fully implemented Basel II and 2.5, South Africa began implementation of Basel III on schedule in January 2013, and has released a transparent and well-documented path towards full application.
As part of this process, South Africa submits data to monitors at the BIS on a bi-annual basis. While some countries have opted to implement capital adequacy at levels below those prescribed by the accords, the South African Reserve Bank has taken the opposite approach, setting capital requirements for its banks in excess of the levels dictated by Basel.
There is some concern in the economy, however, that these requirements could lead to a significant increase in the cost of capital. This could negatively impact the provision of specialised financing programmes, such as the government’s Black Economic Empowerment programme, which seeks to redress the economic inequalities created under apartheid.
The progress of most other major African banking sectors in adopting Basel III is significantly more limited. Egypt only declared in 2012, for example, that it had successfully implemented Basel II. More recently, in December 2016 Tarek Amer, the governor of the Central Bank of Egypt (CBE), stated that on the heels of the float of the Egyptian pound in November 2016, Egypt was ready to move towards the implementation of Basel III, the Egyptian press reported. However, the CBE has yet to announce an official timeline, plan of action or level of implementation.
The AfDB urged caution in implementing Basel III, which it views as a one-size-fits-all policy, in Egypt. In a 2012 policy brief, the development bank warned, “Since [Egypt has] introduced timely reforms [ following the global financial crisis], the costly measures required by Basel III might unintentionally inhibit the ability of emerging economies to deepen and develop their financial sectors.” The AfDB went on to question whether limited government resources in Egypt and similar countries could be better invested in what it deems as more immediate and important concerns, most critically health and education.
Implementation in other large African economies is equally challenging. After a successful implementation of Basel I, Nigeria has begun implementing Basel II and III concurrently. The Central Bank of Nigeria (CBN), however, has made it clear that while the two accords as a whole have merit, it views some aspects of the recommendations as out of step with the realities of the Nigerian economy. The CBN will therefore exercise discretion regarding which aspects of the accords will be implemented. One instance in which this policy of discretion has played out in practice involves the capitalisation of domestic systemically important banks (SIBs) as stipulated by Basel. Faced with the possibility of recession in mid-2016, the CBN delayed the implementation of new capital rules for SIBs in the hopes of boosting lending in the economy.
Following a similar path of discretionary implementation of Basel III is Kenya. The Central Bank of Kenya (CBK) issued guidelines in 2012 that called for the concurrent implementation of some, but not all, of Basel II and III regulations based on a phased-in approach starting in January 2013. Through these guidelines, the CBK has opted for stricter regulations in some areas, but more lenient terms in others. Most notably, the CBK called for higher Tier-I and Tier-II capital requirements relative to Basel guidelines. Elsewhere, the CBK has adopted Basel’s liquidity coverage and net stable funding ratios, for example, but allowed banks an additional two years and one year, respectively, to meet the minimum requirements.
Taking a look at the effect that the Basel accords have already had on the Kenyan financial system, a study undertaken by the Nairobi-based Jomo Kenyatta University of Agriculture and Technology published in 2015 found a link between the Basel liquidity requirements and interbank lending rates in Kenya. As liquidity ratios rose in line with Basel recommendations, interbank lending rates tended to fall. This is an important development in an emerging economy such as Kenya, because lower interbank lending rates are often associated with lower commercial lending rates throughout the economy.
In other countries, such as Côte d’Ivoire, the impact of new Basel regulations is likely to be even more pronounced. The frameworks for Basel II and Basel III were adopted by the The Central Bank of West African States in the summer of 2016. However, banks were given an ambitious deadline, with the new framework due to be put into place starting in January 2018 and phased in over the following five years. The new regulations will, among other things, force lenders to increase their capital adequacy ratio to 11.5% of riskweighted assets, some 3.5 percentage points higher than current levels a move that is likely to result in consolidation among smaller private banks.
Using the Basel accords as a foundation, many African countries will continue to chart their own course in regard to strengthening their financial systems. With the exception of South Africa, which is bound by its membership in the G20 to implement the accords in their entirety, many African countries are picking and choosing specific aspects of the accords that make sense for their economies, and either adjusting or ignoring those aspects that may not be appropriate for them at this time.
One of the primary concerns African governments are grappling with in relation to the implementation of Basel III is the potential for significant increases in the cost of capital as banks are required to hold higher capital buffers and maintain strict adherence to financial ratios and metrics. In African economies where the provision of credit is already well below levels necessary to accelerate growth, the stringent capital requirements of Basel III have the potential to further limit the supply of credit, especially to small and medium-sized enterprises, which arguably are in the greatest need of reliable access to bank financing.