Reflecting on the crisis around the collapse of both Silicon Valley Bank (SVB) and Credit Suisse, the CEO of JP Morgan, Jamie Dimon, warned that “there will be repercussions from it for years to come.” Many have expressed fears that contagion could spread damage across systemically-important financial institutions – and even threaten the stability of the global economy. But how has Africa felt the effects of banking instability in the US and Europe?
According to Carl Mbao, managing partner at Frontier Capital Partners in Lusaka, Zambia, Africa has largely avoided the worst possible effects of the recent volatility in global banking – at least so far. He tells African Business that there is “a little bit of wait and see” in terms of assessing the potential impacts, but that there have not yet been any major “direct” knock-on effects in African markets.
Felix Ochieng, analyst at Nairobi-based fintech Hisa, says that while “the collapse of Credit Suisse has sent a shockwave across the global financial sector and Africa was not left out, it is wise to note that Africa experienced a minimal impact compared to the United States and other global markets”. Moody’s, the international credit agency, has similarly noted that the fallout is likely to affect emerging market economies only “modestly”.
Cautious banking staves off crisis
Ochieng attributes this to the fact that “African banks are managed with a more cautious approach, meaning that enough measures have been put in place to prevent Africa’s financial system from experiencing a crisis or collapse” in response to international events. African banks are widely acknowledged to be more cautious when it comes to lending money to customers or deploying capital.
However, it is the case that several of Africa’s biggest tech firms had funds in SVB – and could have been in serious trouble had the authorities not moved to guarantee deposits. “The fact that some of Africa’s largest unicorns had their funds stored outside the continent was a challenge and could have been catastrophic, had the Federal Deposit Insurance Corporation (FDIC) not provided the depositors insurance for their funds, and provided timely access,” Ochieng notes.
While African banks largely avoided the instability afflicting US and European counterparts, Mbao argues that jitters in the international banking system have “definitely affected the supply of investment dollars” and made it even harder for African companies, particularly fintechs and tech startups, to raise cash.
Investment in such companies has already been on the decline, owing to the global environment of higher interest rates and sluggish growth, as well as the rout in tech valuations around the world. This has made access to capital more difficult and more expensive, with venture capital funding becoming more limited.
Mbao notes that the fall-out from the SVB and Credit Suisse drama has “been most quickly felt in the sectors that go to market for capital frequently”.
Perhaps most significantly, the global volatility has reinforced widespread investment sentiment that now is not the time to deploy capital. “People are just not raising as hard right now,” Mbao says.
Risk on the horizon
There is also the potential for this crisis to spill over into African capital markets and foreign exchange. The Federal Reserve’s response to banking sector malaise, which has involved reinforcing the need to stick to higher interest rates, could see capital move out of African financial assets and into “safer” products, such as US government bonds. Higher rates in the US would also potentially encourage further moves out of African currencies and into the US dollar.
Mbao fears that there could be some “knock-on effects” in treasury markets. Referring to Zambia in particular, Mbao tells African Business that “historically speaking, our treasury market has a significant foreign component to it and is a big determinant for foreign exchange. A lot of our treasuries are held by foreign funds across the world.”
“When there’s a banking sector crisis, that liquidity tends to dry up a little bit and there’s a flight to safety,” Mbao adds. “I would say that is where the crisis could hit us most.” Lower market liquidity can cause greater swings in market prices and higher volatility, in turn creating wider risks to financial stability.
Some African stock markets have also experienced elevated levels of volatility in response to increased risk globally. This has been felt mainly on the continent’s larger exchanges, rather than smaller markets with smaller trading volumes. Indeed, Mbao outlines that, in Zambia, “our local market is not heavily liquid, so it doesn’t respond very quickly to information, especially international information.”
Volatile bank prices
That said, exchanges such as the Nairobi Securities Exchange (NSE) and Johannesburg Stock Exchange (JSE) did see significant moves in banking stocks in response to international events. Absa Bank Kenya on the NSE was trading at Ksh12.76 ($0.95) on 10 March, the day that Silicon Valley Bank collapsed, but had lost almost 10% in value by 22 March – although the bank’s shares had risen back to Ksh12.55 at the time of writing.
Kenya’s Diamond Trust Bank saw similar moves, also declining in value by almost 10% between 10 and 22 March before making a recovery. The share price of Standard Bank Group in Johannesburg fell by about 11% in the initial aftermath of the collapse and has yet to recover in full.
Discussing volatility on Kenyan exchanges, Ochieng says that “bank stocks oscillated in speculatory mode, but mostly trended lower as investors pulled out of stock markets and into safe-haven assets such as gold.” However, he notes that other factors may also have been at play, since “banks in Kenya began releasing their financial results for the 2022 financial year during the time when these banks collapsed.”
While the instability in global financial markets and international banking has undoubtedly increased the risks on the continent and elsewhere, some believe that this could also be an opportunity for African banks. The fact that this crisis emanated from the US and Europe has arguably underlined the need for Africa to create a more independent system on the continent that is more able to resist external shocks of this kind.
Some opportunities for African banks
Ochieng tells African Business that “the longer-term opportunity and challenge for African banks is to create a stable continental banking system which can be resilient to global pressure, but also can be trusted by global venture capitalists to commit funds, for Africa and in Africa.”
Mbao also says that “although the situation is a bad thing overall,” there could be pockets of opportunities for smaller entities such as fintechs. He believes that, as international banks reconsider how and where they are to deploy capital, African countries could “bolster their local banking sectors” in response.
“In the case of Zambia, only a small minority of banks are locally held,” Mbao points out. “Arguably one or two of about 17 are domestically owned. The way banking conglomerates are structured means that groups take a multi-country view and allocate their liquidity in line with regional strategies. To the extent that there’s a global freeze on capital [in light of the banking turmoil], these regional zones could take a more stringent view towards the extension of credit. That could then provide an opportunity for local players to step up to the plate and fill in some of the gaps.
“There are potentially some micro sectors of opportunity for nimble players that have the capital to extend to domestic SMEs and other entities.”
The instability in global banking has had an impact on African banks and the wider African economy. The risk for Africa is that this instability aggravates pre-existing trends, encouraging the US Federal Reserve to retain higher interest rates and therefore prompting ongoing weakness in treasury and foreign exchange markets. This could weigh on economic growth and, in particular, limit the amount of investment available to fintechs and startups across the continent.
However, it is also true that Africa’s banks have proved largely resilient to the shocks felt in America and Europe. Banking stocks saw some volatility on regional exchanges but have largely recovered. This perhaps suggests that the current banking environment could present an opportunity as much as a risk for Africa.
As international banks become more cautious in deploying capital, now could be the time for local financial institutions to play a larger role in African banking.
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