Zom­bie banks stalk Africa with merg­ers

CityPress - - Business -

Africa’s many small and un­der­cap­i­talised banks, laden with bad debt, are in­flict­ing more pain on al­ready em­bat­tled economies. Reg­u­la­tors may have no choice but to force lenders to con­sol­i­date or close.

A third of Nige­ria’s 21 banks may be un­der­cap­i­talised, and much smaller Uganda has 25 banks and last month suf­fered one col­lapse. Kenya has had three fail­ures since Au­gust last year and, with 40 lenders, boasts al­most one bank per 1 mil­lion peo­ple. An­gola’s 30 or so banks may need to boost re­serves by $4 bil­lion (R54 bil­lion), while a Mozam­bi­can lender was res­cued by the cen­tral bank in Septem­ber. Ghana is telling banks to com­bine and raise funds through the stock mar­ket.

“The con­se­quences of in­ac­tion will be dis­as­trous,” said Robert Bes­sel­ing, an ex­ec­u­tive di­rec­tor at busi­ness risk con­sul­tancy Exx Africa. “Un­con­trolled bank fail­ures pose sig­nif­i­cant con­ta­gion risks to other banks, state-owned en­ter­prises and pri­vate busi­nesses.”

Zom­bie banks, a term coined by Ed­ward Kane of Bos­ton Col­lege in 1987, are typ­i­cally all but in­sol­vent save for govern­ment sup­port. They have in­jured economies from Ja­pan to Europe and now it may be Africa’s turn. The con­ti­nent has been bat­tered by fall­ing com­mod­ity prices, an en­dur­ing drought, weak­en­ing cur­ren­cies and a slow­down in China, its big­gest trad­ing part­ner. A plethora of lenders edg­ing to­wards col­lapse have gov­ern­ments ner­vous and cen­tral banks scram­bling to find in­creas­ingly scarce liq­uid­ity.

Adrian Sav­ille, chief strate­gist at Ci­tadel In­vest­ment Ser­vices, said: “When banks get in tough times, of­ten ini­ti­ated by eco­nomic slow­down, they hold back cap­i­tal, re­in­forc­ing the eco­nomic slow­down, which bites down harder on bank per­for­mance. In its worst form, this takes the shape of a death spi­ral.”

Try­ing to save them might be an ex­er­cise in fu­til­ity be­cause zom­bie banks did not have a rep­u­ta­tion for re­gen­er­a­tion, said Sav­ille. Af­ter the Ja­panese bub­ble burst in 1990, a raft of zom­bie banks stag­gered along for the next 20 years, which ham­strung the Ja­panese econ­omy, ac­cord­ing to Sav­ille. In con­trast, he said, when US banks were al­lowed to fail, it meant the lenders that emerged from the ru­ins were able to be­have and per­form func­tion­ally.

The threat of fail­ing African banks is com­pounded by the fact that “there are some coun­tries with far too many banks”, said John Ash­bourne, an econ­o­mist at Cap­i­tal Eco­nomics in Lon­don. “Kenya stands out as an ex­am­ple of this. Pro­vided that prob­lems con­tinue to be cen­tred in the re­gion’s smaller banks, I ex­pect reg­u­la­tors will in­ter­vene or force con­sol­i­da­tion.”

In the past, do­mes­tic con­sumer banks in Africa had a cap­tive mar­ket that for­eign lenders, hun­gry for govern­ment work and deal fees, weren’t much in­ter­ested in. That’s changed and it’s adding to the dif­fi­cul­ties.

– Bloomberg

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