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

164 Fuchs, Losse-Mueller, and Witte
only if supervisory capacity is considered a precondition for lowering
capital requirements. Without a significant strengthening of supervisory
capacity in Africa, the implementation of Basel II is built on shaky
ground.
Implementing Basel II will carry significant costs for banks and regulators
alike. Building up supervisory capacity—including staff training, new
processes, and substantial investments in information technology (IT)
infrastructure—is beyond the budget scope of many regulators in African
low-income countries. For the European banking sector, Europe
Economics (2009) estimated that the introduction of new capital rules
would cause average one-off expenses of 1.57 percent of annual operating
costs for large banks and 0.92 percent for small banks. These figures
apply to the adoption of the equivalent European Union directives for
European banks. Costs for African banks are likely to be higher since the
initial IT and staff capacity is relatively low.
Yet many African supervisors look toward implementing Basel II with
a view to enhancing financial stability. In 2010, 15 out of 20 African
respondents to a survey of the Financial Stability Institute stated their
intention to implement Basel II, including four countries that indicated
their objective was to go beyond the Standardized Approach. These findings
are in line with other surveys in the region and the general thrust of
regulatory reform objectives underlying the policy dialogue in Africa.
African regulators state a variety of reasons why Basel II is so high on
the agenda, despite it not being mandatory outside the BCBS member
states. They are concerned that Basel I is coming to be perceived as an
inferior standard by international investors and that African markets may
be penalized by international market participants (Tran 2005) or that
African banks will be denied access to foreign markets in the future if
they do not comply with the latest Basel standards (Ward 2002).
According to a Financial Stability Institute (2004) study, the main driver
for non-BCBS countries to move toward Basel II is that foreign-controlled
banks or local branches of foreign banks operating under Basel II expect
low-income country regulators to adopt the framework as well. Whether
or not these concerns are justified, they have accelerated the dispersal of
the Basel accords in Africa and elsewhere.
Low regulatory capacity and the costs of implementation warrant caution
not rush in moving to implement the Basel II capital framework in
Africa. The BCBS itself encourages worldwide adoption, but recognizes
that Basel II “may not be a first priority for all non-G10 supervisory
authorities” and recommends carefully considering the benefits of such a