IMF warns banks going regional risk shareholder funds

Fast-expanding regional banks face a daunting task overseeing subsidiaries, potentially risking billions in investor funds according to a new International Monetary Fund (IMF) paper.

The IMF says countries are at different levels of implementing global standards for their financial institutions, a situation that also risks national and regional financial stability.

Kenyan banks like KCB, Equity, Cooperative, DTB, I&M and Imperial have over the past five years aggressively expanded into neighbouring countries such as South Sudan, Rwanda, Uganda, Tanzania, Burundi and Mauritius. Nigerian banks have expanded all over the continent including to Kenya.

“The rapid expansion of African banks poses oversight challenges that if unaddressed, may increase systemic risks. Supervisory capacity is already constrained and under-resourced in most of Africa,” said the IMF.

“Whereas a number of countries have moved to International Financial Reporting Standards (IFRS), implementation of Basel II standards has only been completed in a handful of countries. An important part of depositor protection — deposit insurance — is missing in the majority of countries.”

Kenya has in place a deposit insurance system and has partially effected the Basel II capital-adequacy standards in the banking industry and accounting is fully under the IFRS.

The regional banking industries are operating at different levels of standards though, thus exposing subsidiaries to a different set of requirements altogether.

Other than Kenya only Tanzania and Uganda amongst East African states have a deposit insurance system in place.

Rwanda, Uganda and Tanzania operate under IFRS accounting standards, while Burundi plans to introduce the system. South Sudan does not.
Tanzania, Uganda and South Sudan have not started to implement Basel II standards.

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Standard Investment Bank head of research Francis Mwangi though said the risks need to be considered in relation to the level of contribution the subsidiaries make to the bottom line of the banks, still low compared to that of their Kenyan operations.

“The disparity in standards overall is not significantly huge. But in the case of South Sudan, we have to remember that it is still a relatively new market and banks have to wait for a lot of structures to be put in place,” he said.

The IMF said financial reports and disclosures of these banks based on different sets of accounting standards may not contribute to transparent disclosures and make comparison of performances difficult.

Political and regulatory risk also come into play for the subsidiaries, such as in the cases of South Sudan where banks were forced to shut down some branches due to civil unrest.