Pause for thought: Basel III prompts emerging market banks to reassess the one- size-fits-all prescription and their own development goals

The Basel III banking accords mark the latest step in the long process of harmonising financial regulations across markets, but the nature of their focus – and some of the problems they seek to solve – means that their relevance to the Middle East and Africa’s emerging and frontier markets can sometimes be somewhat limited.

The majority of the banking sectors in the Middle East and Africa’s 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 the Middle East and Africa’s banks are short term.

Global Objectives

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 the Basel-based 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.

Africa Tailored

While Basel III is viewed as a global measure, 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 Middle East and 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, in 2011 the African Development Bank (AfDB) urged its members to “move towards Basel III, albeit cautiously” in recognition of the fact that full implementation of the accords or the prescribed implementation timeline may not be a perfect fit for every country on the continent. As Kwame Baah-Nuakoh, head of marketing, research and corporate affairs at Royal Bank, which is based in Ghana, 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 South African economy that these requirements could lead to an increase in the cost of capital that 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.

Cautious Approach

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 time-line, 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. 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, which started 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.


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, 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 most African economies, where the provision of credit is already well below the 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 and start-ups which arguably, in countries like Egypt, are in the greatest need of reliable access to bank financing (see analysis).