Despite global politicians proclaiming their support of the development of African economies, current financial regulations are impeding social and economic growth on the continent by stifling its trade finance, a report has said.
The study entitled: “Emerging Banking Regulations Impact on African Trade Finance” and published in this month’s edition of “Capital Markets in Africa”, stated : “Promoting trade finance is the mechanism for social and economic development on the African Continent and swathes of well intentioned banking regulations are disqualifying African small and medium enterprises (SMEs) from the trade and working capital facilities needed for the development of their economies.”
It noted that while banks play a key role in facilitating Emerging Markets (EM) companies’ participation in international trade “Interference from exogenous regulation intended for investment banking endangers the free market operation of the Transactional Banking (TB) financing component of EM trade and economic growth.”
Specifically, the report stated: “Well intentioned controls” such as Anti-Money Laundering (AML) and Know Your Client (KYC) regulations; as well as regulatory capital, leverage and liquidity prudential regulations:”unintentionally divert international banks away from financing African trade through cost aversion.
AML and KYC regulations have caused a round of “derisking” by international banks. In an attempt to avoid the increasing cost of compliance of Swift Relationship Management Agreements (RMAs), KYC, Know Your Client’s Client (KYCC), particularly in far flung, ‘developing’ markets, prone to corruption and catastrophic fines of billions of euros or dollars, US and European banks are simply shutting down relationships with African banks.
“It is undeniably not worth the risk and each correspondent relationship can cost between $10,000 and $30,000 per year. Some prominent international banks, previously heavily invested in African trade, have halved their RMAs, many of them African, and effectively exited African trade,” the report added.
Furthermore, the study argued that while the Basel Committee on Banking Supervision (BCBS) have, as their sole aim, the implementation of prudential controls, to curb risk taking by banks to prevent a global systemic financial collapse caused by a banking failure, “the rules are inappropriately punishing for trade finance.”
The report however, adds :”The risks of trade are very well understood in the data in the ICC Trade Register – the actual, empirical product Default Rates are fantastically lower than the counterparty probabilities of default (PDs) that International Banks are forced to use in calculating their regulatory capital drag.”
In addition, the study noted that Basel III Leverage Ratio, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) will impact African trade finance as off-balance-sheet trade assets count equally with much riskier, off-balance-sheet assets that contributed to the global financial crisis in newly imposed leverage ratios.
“ LCR and NSFR regulations will effectively force bank Treasurers to increase the funding costs of short term trade assets as they spread these new Basel III costs of all banks’ tendencies of funding short and lending long to the tighter, shorter tenor assets like trade,” the report stated.
Indeed, the study noted that the African Development Bank (AfDB) calculated that of the $1.2 trillion of annual African trade, there was (according to the 2016 ICC Global Trade and Finance Survey), a $120 billion bank intermediated trade financing gap particularly impinging on African SMEs.
“At the ICC conference in Johannesburg in 2015, there was much ringing of hands over why Africa contained 15per cent of the World’s population and only scored 3per cent of the World’s trade finance – The answer to the question and the cause of the $120 billion financing gap, is largely due to the disincentivising of banks from critically important but delicate African Transactional Banking through imposition of blunt, general purpose global regulation intended for runaway Investment Banks.”
Stressing that what Africa needs is “trade not aid”, the report stated :”The life-blood of growth in developing economies is the trading activities of SMEs, which account for 95per cent of all firms, 60per cent of all jobs are a key component in today’s supply chains; providing the goods for consumption, employment, currency and output growth that is economic and social development.”
Noting that African corporates and SMEs can only function with access to hard currency (usually US dollars) to fund their cash conversion cycle, the report pointed out : “Despite the $50 trillion washing around the planet from years of Quantitative Easing (QE), significant liquidity crises and African country and counterparty credit qualities make these dollars very expensive and scarce.”
Besides, as the report points out, “African central bank interventions and currency controls have exacerbated the ensuing USD liquidity problems.”
It emphasised that the clear solution to the problem is for global policymakers: “to realise their unforeseen role in developing economies, make good on their podium promises and prioritize more appropriate transactional banking regulation.”
Interestingly, according to the report, banks from Asia and the Middle East, “with their less zealous regulatory enforcement”, are already replacing the Western banks, which have been forced out of Africa.
“There is feverish innovation at work in regional African banks to navigate the rules and provide their clients with appropriate trade solutions at appropriate prices, if regulatory lobbying is unsuccessful,” the report stated.
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