Financial Sector Development in Africa: Opportunities ... - World Bank

The Reform Agenda for Financial Regulation and Supervision in Africa 155
sectors went into the crisis with a cushion of high levels of capitalization
and liquidity.
This reflects a broader trend of enhanced financial stability in African
banking over the past decade. The 1980s and 1990s still saw a series of
costly systemic and nonsystemic banking crises in Africa. As discussed by
Honohan and Beck (2007), these banking crises of the late 20th century
had a different face than non-African banking crises. They were caused
mostly by governance problems, either on a bank or a regulatory level, or
simply by bad banking practices. This did not hold only for countries
whose banking systems were dominated by government-owned banks,
but also for countries with predominantly private banking systems—both
local and foreign banks.
Important steps have been taken in most countries to improve the
governance of banks (and regulatory entities), but these issues continue
to be a challenge in some countries. Privatization has helped in some
instances by reducing the conflict of interest that public authorities face
as both owner and supervisor of the same institution; in others, however,
the process was not smooth and at first exacerbated governance challenges
and fragility. Improved asset quality and increased capitalization
are the two dimensions where African banking systems have made the
most progress over the past two decades. Both have helped Africa
weather the financial crisis. As a result, Laeven and Valencia (2008)
report no single systemic crisis on the African continent between 2000
and 2007 (see figure 5.1).
However, underneath this rather benign picture lie a number of more
worrisome developments. The limited impact of the international financial
crisis should not blind one to the potential future risks in African
financial markets, which are largely homemade and not related to global
market developments. Africa experienced an unprecedented period of
credit growth when the international crisis hit. Throughout 2008 and
2009, the volume of credit to the private sector grew by over 30 percent
year-on-year in more than two-thirds of African countries. Once the crisis
hit, average credit growth cooled down, but remained positive, and many
banks continue to expand rapidly. Given the fast pace of growth, a
buildup of risks is not unlikely. Most prominently, a couple of African
banking systems—such as those of Nigeria and Ghana—have come under
considerable pressure in the past years. These domestic crisis episodes
occurred because of domestic structural and governance weaknesses,
which varied from country to country and highlight the need to reinforce
the regulatory and supervisory reform agenda across the region.