The continent’s financial services industry has a huge role to play in the African Continental Free Trade Area (AfCFTA). After all, it is African banks that will enable all the trade that will determine whether the block is a success.
Yet African banking is also an active economic sector in its own right that can benefit from the erosion of national barriers and the creation of a single market – but this requires agreement on common rules and regulations.
As we examined previously (p. 16), the banking sector can benefit the AfCFTA by enabling financing for intra-African trade, including through the new cross-border payment, clearing and settlement platform, the Pan-African Payment and Settlement System (PAPSS), which allows payments to be made in African as well as international currencies. It is hoped that all of the roughly 600 banks operating in Africa will eventually join the system.
The 2024 Pan-African Private Sector Trade & Investment Committee (PAFTRAC) survey found that African financial services companies would like the AfCFTA to focus on two main areas with regard to their sector: 67% of respondents favoured banking and financial services regulatory harmonisation across all member states, with 65% keen to see the creation of Pan-African open banking systems. These were favoured ahead of the promotion of digital financial services and the creation of a single African currency, and far ahead of the creation of a pan-African capital markets strategy. (See figure overleaf.)
The desire for banking harmonisation and open banking systems ultimately comes down to the same ambition: the creation of common financial services regulations that will result in an open banking system.
At present, national legislation and regulatory frameworks force banks to operate in national industry silos, as they have to apply for separate banking licences under different rules in each jurisdiction. This adds costs and complexity to their operations, including by requiring the construction of separate digital infrastructure for each market and slowing the expansion of digital-first banks across the Africa. It reduces competition and thus almost certainly depresses the number of people with access to banking services and increases the cost of transactions.
Lessons from East Africa
Harmonisation is planned for consumer protection laws, data-handling regulations, competition policy, intellectual property and digital trade. Yet while it is easy to discuss harmonisation in a vague way, actually achieving it is a far more difficult proposition.
The process is usually long and complicated, with many stakeholders participating. It is achievable given sufficient political will but the number of countries involved makes this a huge challenge – although the AfCFTA can learn from regional blocks that have already embarked on banking sector harmonisation.
The East African Community (EAC), for instance, is already working to create common regulations for cross-border digital payment and banking regulations. EAC member states have agreed to set up a regional central bank and also the East African Financial Services Commission, which is one of the main steps on the road to monetary harmonisation.
However, progress on the process as a whole has been slow, with disagreements over where to locate key institutions. The timetable for implementation has repeatedly slipped and it has been predictably challenging to achieve the agreed macro-economic convergence criteria.
The big fear is that the Kenyan banking sector, which is one of the most developed in Africa, will overwhelm banks in neighbouring states. Yet this is perhaps less of an obstacle to financial services harmonisation in the region than in the past, because Kenyan banks are already expanding across the region, even under the existing regulatory framework.
Kenya Commercial Bank and Equity Bank operate in other EAC member states. Tanzanian and Ugandan banks in particular are having to face much greater competition but the likes of Tanzania’s NMB Bank and CRDB Bank, plus Stanbic Bank Uganda, are responding strongly.
Even once harmonisation has been achieved, separate national banking licences will still be required but the creation of similar or even standard regulations will greatly speed up the process for banks and regulators alike.
A harmonised financial system with greater competition should also reduce transaction costs for customers. The
AfCFTA could reduce the cost of cross-border bank transactions, encouraging more traders to move from the informal to the formal sectors, prompting them to make greater use of official financial services.
Can the AfCFTA benefit African banks?
The AfCFTA should benefit African banks in various ways, including by increasing the volume of cross-border payments that they handle. Lifting tariffs, simplifying customs procedures, facilitating greater foreign investment and eroding barriers to the creation of cross-border supply chains should all encourage more intra-African trade.
The AfCFTA Secretariat forecasts that the new single market of 1.3bn people in 54 countries will boost intra-African exports by more than 20% within a decade of its launch in 2022, while boosting Africa’s exports to the rest of the world by 32% by 2035.
Higher levels of economic growth and greater intra-African trade should result in bigger African businesses to generate banking activity, while AfCFTA member states have called for improved market access for SMEs, women and young people, which would help increase banking service penetration rates.
The free trade zone should also help create millions of new jobs, many of them well paid, with new employees adding to the pool of potential bank customers. Banks involved in payment clearing and settlement should also experience decreased liquidity requirements, freeing up more money for other initiatives.
The AfCFTA aims to harmonise regulations for digital financial services, such as mobile money, crowdfunding and blockchain-based activities, which should promote growth across these sectors.
The AfCFTA’s Digital Trade Protocol can encourage the uptake of digital products by increasing legal certainty, fostering collaboration across different markets and increasing confidence in the sector.
A goal of aligning financial reporting standards has also been agreed, which would simplify information-sharing between regulators and make it easier for providers to pursue cross-border business.
It also aims to establish a common set of rules for consumer protection across all parts of the financial services sector. While Africa will still comprise a patchwork of national banking markets, there should be more integration than at present.
Most countries do not currently permit financial services to be sold to their residents by companies based in other states because of difficulties in determining regulatory responsibility. Changing that will help boost competition.
The creation of common – or at least more unified – banking rules could help Africa as a whole comply with international regulations on tax evasion and money laundering. Illicit financial flows are a substantial problem in large parts of Africa, costing the continent $88.6bn, according to a United Nations estimate in 2023. Moreover, the Financial Action Task Force (FATF) included 13 African countries on its latest grey list in June 2024, up from 10 a year earlier: Burkina Faso, Cameroon, Democratic Republic of Congo, Kenya, Mali, Mozambique, Namibia, Nigeria, Senegal, South Africa, South Sudan, Tanzania and Uganda.
This means that these countries have “committed to resolve swiftly the identified strategic deficiencies within agreed timeframes” and are subject to increased monitoring, according to FATF. Bringing all jurisdictions up to the required standards will increase confidence in the African banking sector as a whole.
Africa’s main multilaterals are providing support for African banks to make the most of the AfCFTA. For instance, the African Development Bank (AfDB) approved a $40m trade finance transaction guarantee facility for Ethiopia’s Dashen Bank in August to support local companies’ import and export trade finance.
Dashen will provide guarantees to confirming banks of up to 100% to cover non-payment risk attached to letters of credit and other trade finance instruments issued by Dashen. The company is one of the biggest private sector banks in Ethiopia, with a network of 860 branches, and can benefit from the ongoing liberalisation of the Ethiopian economy as well as the AfCFTA.
The AfDB’s Director General for East Africa, Nnenna Nwabufo, said: “Supporting trade in Africa is a key priority at the African Development Bank. Trade finance is an important driver of economic growth and is critical for cross-border trade, particularly in emerging markets. We are delighted to work with Dashen, a strong partner with extensive knowledge and networks in Ethiopia, on a shared ambition to support the region’s trade.”
Banks are working with other stakeholders to encourage greater trade within Africa. For instance, Ecobank has partnered with the AfDB and other development and multilateral finance institutions to provide trade finance services. Last year it agreed a $200m trade finance facility with the AfDB to support cross-border trade for SMEs and local corporates.
Afreximbank has also set up a $10bn Adjustment Fund to help member states cope with economic dislocation caused by lifting trade barriers that will inject more money into the system, with much of it due to be funnelled through the African banking system.
