Bank Regulators in Africa in the wake of the financial meltdown: When Ignorance is Bliss.

While answering questions from a panel of journalists about the risk exposure of Financial Institutions (F.I) in Cameroun and Countries of the BEAC region to the financial crisis, the finance minister of Cameroon said with such bravado that the risk was non-existant. He further explained that there was no risk whatsoever because banks in the BEAC zone were not allowed to invest in all those toxic assets that brought major financial institutions down.

However, he failed to mention the exposure of the Central Bank to the same toxic assets that translated in a huge loss in million of Euros. But the explanation given by the Finance Minister was applauded as some kind of foresighting of the upcoming trouble. That type of Monday morning quarterbacking is somewhat intriguing because it makes it seems that  Banks in the BEAC Zone and elsewhere in the SSA region were not allowed to invest in those types of vehicles because the regulating body (COBAC) already knew they were toxic (highly doubtful). Or was it simply because the regulators could not understand them to begin with, since those complex financial instruments required a high level of monitoring and risk assessment structures ?

In hindsight, we can all appreciate financial institutions all over the World that while able to comprehend and have access to some very complex financial instruments, chose very carefully when and what to invest in.  But I cannot co-sign ignorance being used as a sign of wisdom when it’s obvious African F.I didn’t participate in the feast because the regulators couldn’t figure out what the hell was on the menu.

It’s funny how things often turn out.

You know all those sayings people have:  how only a leader shines in time of crisis. How it’s harder to be different when everyone else is doing the exact same thing. How daring to go against the herd always reveal a winner etc… If those sayings apply to the current situation (crisis) and the financial sector in Emerging Countries (E.M), we could have new leaders at the end. Given how some financial companies have performed under the tough business environment in E.M, shouldn’t they be the new models ?

Indeed, what I’ve actually found out is that some E.M deserve more credit than they get for staying put and sticking to their accounting practices when everyone else adjusted theirs ! The change and modifications that were allowed under new accounting rules created a mess more complex than complexity itself (!). There is not a firm out there capable to effectively deconstruct what’s what: where the junk assets are, who they belong to, how much they’re worth. Sometimes, the underlying asset attached is just non-existent !

Don’t get me wrong, before trying to nullify my remarks by reminding me of all the structural differences between the West and E.M, all I’m saying is all should be fair in warfare. If the top executives and leaders in management are picked from their OUTSTANDING performance despite the hostile environment, then the best are no longer in the West ! Bottom line.

I’m just saying…

THE LONG PREDICTED EXPANSION OF NIGERIAN BANKS IS SHAPING UP THIS YEAR .

Because of their strong market cap compared to non-listed large banks on the continent, Nigerian Banks could no longer rely on domestic or neighboring countries for growth in earnings. Sooner or later, they had to expand beyong their usual landscape. It also will help that the foreign (US /UK, FRA) banks are in the process of adjusting their presence in Sub Saharan Africa (SSA). That in itself could create a new area that might possibly culminate with the take over of financial services in Africa by regional institutions.

In SSA (West, Central and East), the buying spree or strategic alliances in the financial sector we are about to see in 2009 is to be dominated by Nigerian Banks ( at least from SSA to the limits of the South African region where S.A bankers are also on the prowl).

The Truth About the Banking Industry in the Sub-Saharan African Region*   

Some have been wondering why the Sub-Saharan African Region has largely been under-banked over the years. Few people are able to make the co-relation between local banks closures (bankruptcies) in the last 20 years and the current reticence vis-a-vis financial institutions.

But the streets didn’t forget. People that lost their savings anytime during the last 2decades are still wary about banks in general.

Unlike the banking regulation in the U.S or elsewhere, there is still no Deposit Insurance to speak off in most countries in Africa. So in case of banking liquidity failure, there is no Government intervention to expect – as it was the case recently with Northern Rock in Uk-. On top of that, there are usually less tools available via the central banks. Either the regulators don’t have complete autonomy over the central bank’s policies  (zone CFA), or intervening on behalf of depositors could create a “moral hazard”.

You could advocate either position using personal judgement. I for example think that when one takes a risk and makes an investment decision, and the investment goes bust, one must assume the consequences. But in poor or developing countries, the difference between letting banking investors and clients learn their lessons from their mistakes (by letting the financial institution go bankrupt) and averting systemic failure is that former customers or clients of bankrupt banks in Africa are more likely to create systemic failure by staying completely away from bank in general for a long time.

There may be other ways to explain the current disregard people in sub-Saharan Africa still have for their financial institutions. But being worried about whether your savings are still going to be there the next time you walk in, is a concern anyone can understand. To this day, I believe it has a lot to do with the underlying behavior affecting the psyche of people in Sub-Saharan Africa.

*Re-upped from archives