World Bank says Foreign Banks in Developing Nations are restricted in Impact

The Global Financial Department of the World Bank (International Bank for Reconstruction & Development) released its 2017/2018 annual report on the state of international banking. It says “Growing restrictions imposed on foreign banks operating in developing countries since the 2007/2009 financial crisis are hampering better growth prospects by limiting the flow of much needed financing to firms and households”. The report says that even though Ex Ante ring fencing, which is a form of regulatory supervisory practice used during extraordinary times to ensure:

  • Higher capital or liquidity requirement
  • Tighter dividend restriction
  • Limitations on liquidity flows

The downside is increased capital requirements as it relates to capital adequacy and capital reserve ratios of subsidiaries of foreign banks in host countries, limits the lending pool to businesses and household of host countries by a whooping 6%. For instance, Ecobank Transnational Corporation (ETI) a Togolese Bank with 1,239 branches in 33 countries, of which 512 branches are domiciled in Nigeria, 40% of total assets are based in Nigeria, and only 12% of its $2.1bn annual revenue for the 2015/2016 fiscal year came from its host country in Togo, has its benefits to the Nigerian economy and other African Economies where its registered as a subsidiary of its parent company not fully felt, as the increased reserve requirements of a foreign bank in a host country restricts the lending capacity by 6%.

The Banking without Borders Report says “Emerging economies are more likely to adopt such policies than others, even though borrower based macro prudential tools such as limits on loan-to-value and debt-to-income ratios are associated with slower credit growth in all countries, the relationship is stronger for developing countries. Similarly institutional based tools such as dynamic provisioning, limits on leverage and counter cyclical capital requirements are negatively associated with credit growth in developing economies. Finally, limits on foreign currency lending are negatively related to credit growth in all countries, but especially in emerging markets and developing economies. Macroprudential policies can help host countries manage financial cycles, though the evidence also indicates that they are more effective in boom and bust phases. These policies are also associated with increased cross border lending, suggesting that some lending that would otherwise occur in host countries is diverted to avoid them.”

The World Bank is urging developing nations all around the world with particular emphasis on West Africa & Nigeria to adopt a proactive regulatory model to the capital requirement and operational structure of foreign banks in host nations as a way to maximize credit on local businesses and household, that systematically avoids buffers that should only be in place in extreme times of a financial crisis or the peak of a financial boom. In its opening statement, the World Bank says “Successful international integration, supported by sound national policy and effective international cooperation has underpinned most experiences of rapid growth, shared prosperity, and reduced poverty.”

Kelvin Emmanuel

About Kelvin Emmanuel

The Oil producing Angola in the Southern part of Africa faces what Nigeria faced 12months ago; a distortion in its exchange rate with a difference between the official markets and the parallel black markets. One dollar through the official window buys you 166 kwanza, while one dollar through the black market buys you 400 kwanza. Nigeria faced the same challenge 12months ago, when the distortion between the official and black markets was as much as the official markets trading at 306 with the parallel market ranging from 450 through to 510. The Central Bank Governor of Angola, Jose de Massano Junior announced in Luanda “We will stop having a fixed foreign exchange, we will adopt a floating regime of foreign exchange”. Angola faces exactly the same challenges and has been applying the exact same responses to an exchange rate crisis like using its foreign reserves that was sitting at $26bn to defend the currency kwanza, with no success so far, even though the external reserves has dropped to $14bn. Angola relies on Oil receipts for 80% of its government revenue, 90% of its inflow and 50% of its GDP. Angola is a $194bn economy that has been growing at an average of 10% on the back of rising oil prices since 2002 when its 27 year old civil war that started in 1975 ended. The state national oil company Sonangol reports that it produces up to 1.8m barrels of crude oil daily, however the government that until now has being led by the family dynasty Jose Eduardo dos Santos until recently when succession saw power transferred to Joao Lourenco, reports that the oil price rout in 2015/2016 that saw prices drop to as low as $28 per barrel caused ripples across the economic structures of the government, upsetting government revenues, its ability to fund its budget, capital project funding, foreign direct investments into the economy as a result of a currency crisis that was driven by the widening of gap between the official and street window of the kwanza, that until now has been pegged in a fixed exchange rate regime to the US Dollar.