Africa's central banks need to gradually raise capital requirements to reduce the number of banks that are too small to succeed.
It is often argued that having a stable banking sector is crucial for a country’s development. This may be true, but it only applies if lenders have the capacity to contribute to economic growth.
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In Africa, plenty of banks lack that capacity, owing to their small size. Across the continent, there are countries with far too many lenders for the size of their economies. Tanzania, with a gross domestic product (GDP) of just $35bn, has 34 commercial banks. Its northern neighbour, Kenya, has more than 40. Perhaps the starkest example is the west African CFA franc zone. Its eight countries, with a combined GDP of about $80bn, have 106 banks.
A lot of these institutions are banks in name only. Their low levels of capital and inability to create economies of scale mean they struggle to lend to companies in need of credit or to build extensive branch networks to reach most of the population they are meant to serve, or to invest in technology and staff training.
The solution is to encourage consolidation and the onus for this is on central banks. It is their job to increase capital requirements gradually, forcing lenders to find extra capital or merge with their rivals. In the countries mentioned, minimum capital requirements are paltry, which is the reason they have so many lenders. In the west African franc zone, banks can operate with the equivalent of just $20m of capital, while in Tanzania and Kenya the figure is roughly half that.
Central banks need to be careful. If they raise capital requirements too much, they could create banks deemed too big to fail or stifle competition by allowing too much consolidation.
Getting the balance right is possible, however. Nigeria, which has a minimum capital requirement of $160m and 24 commercial lenders, has seemingly done that. So has South Africa, where there are 16 banks. In both places, competition among top-tier lenders is strong, while even the smaller players, which tend to compete in niche markets, are big enough to function efficiently.
African countries will struggle to develop unless they have banks that are big enough to make meaningful differences to their economies. The sooner their central banks start working towards this goal, the better.
