by Olawale Rotimi Opeyemi

Formal financial sector in Africa has been rocked with tough crisis over the recent decade; events of recent years have deepened the crisis. In all African nations, financial institutions are faced with at least one major national or continental crisis. Taking examples, since the uprising that toppled President Hosni Mubarak in 2011, Egypt banks have been faced with forex crisis to the extent that Egypt’s Central Bank abandoned its control over the Egyptian pound giving room for commercial banks to trade currency freely to end currency shortage and attract foreign inflows.

In a similar development, due to scarcity of foreign currencies at the forex market, Sudanese central bank started lobbying Sudanese in diaspora for foreign currencies by offering incentives to them. The prolonged shortage in the United States dollars has weakened the Sudanese economy and crippled big businesses across the country. The shortage has become so severe that some banks have not only stopped paying foreign exchange transactions but also pay-outs on local dollar accounts. Also, a surge in the benchmark interest rates has been announced by the Bank of Mozambique in a statement issued by the Bank’s Monetary Policy Committee with immediate effect. According to the statement, the Standing Lending Facility will increase by 600 base points, from 17.25 to 23.25 per cent, the highest charged after it declined to 7.5 per cent in 2014.

In Nigeria, forex crisis deepens in the Nigerian forex market; commercial banks have started halting the use of Nigerian Automated Teller Machine card services for international transactions. Stanbic IBTC Bank, Guaranty Trust Bank and Standard Chartered Bank Nigeria announced the development in a note to their customers disbursed via text message and email. This development implies that ATM card services such as Point of Sale payment in foreign currencies, ATM withdrawal abroad, online payment in dollars, pound sterling, euros and other foreign currencies will no longer be available.

In South Africa, as the economy faces sluggish growth, non-performing loans in four big banks will experience a rise in the next 12 to 18 months according to a report published by Moody’s Investment Service on 7th of November. Barclays Africa Group, FirstRand, Nedbank and Standard Bank were listed to be affected by this slow growth.According to Nondas Nicolaides, Moody’s Vice President and the author of the report, “sluggish economic growth in South Africa over the next 12 to 18 months will pose challenges for the country’s four largest banks.”

In Zimbabwe, customers make panic withdrawal to avoid repeat of hyperinflation. As President Mugabe signed a law legalizing the introduction of bond notes as legal tender, banks in Zimbabwe have continued to experience mammoth crowd as customers turnout to withdraw their money from the banks. The introduction of bond notes is designed to lessen the cash shortage crisis hitting the nation’s economy. Zimbabweans are reportedly afraid that the introduction of local money will bring the nation back to hyperinflation experienced between 2008-2009 where the currency became very unstable and was finally abandoned.

Major Causes

Government indebtedness: Taking Nigeria as example, according to the Debt Management Office of Nigeria, Nigeria’s total domestic debt stands at N10.6 trillion as of June 30, 2016 which excludes Federal Government bonds in the sum of N680.42 billion issued to restructure states’ commercial debt. This has continued to weaken Nigeria’s financial system. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria warned that the huge government debts is weakening Nigeria’s financial system and urged the Federal Government to assess the amount of its domestic indebtedness and create a framework for paying these debts.

Many African governments are heavily indebted to financial institutions in their nations; this accumulated debt thoroughly weakens and places the banks on stress.

Political instability and corruption: These are fundamental road blocks to financial sector growth in Africa. Many African nations are globally recognized as victims of political instability and high level corruption. Political instability is intrinsic to many African nations at various degrees.

This leads to quick change in banking and economic policies which usually have adverse effect on the system. It brings about inflation and sluggish economy. On the other hand, corruption practically cripples the growth of financial system. Many banks have folded up due to corruption; currently, non-performing loans are on the rise across Africa which weakens the financial system.

For example, Zimbabwe’s prolonged political instability has ridiculously weakened the nation’s banking system.

Conflict and Epidemic: Civil wars, ethnic conflicts, terrorism and spread of deadly diseases have weakened financial system in Africa. Civil wars in Sudan, Ivory Coast, and Liberia among other African nations are examples. The Ebola breakout in Liberia paralysed banking activities in the country for many months.

The recent outbreak of violence in Ethiopia has also affected operations of financial institutions in the country.

Solutions

Independence of financial institution: In as much as the government should regulate financial institutions to protect rights of consumers and regulate public utilities, financial institutions should be allowed to exercise good level of freedom in their operations.

Social and political stability: Without social and political stability, the financial system cannot experience growth. The financial system cannot thrive in crisis and sharp socio-political division. African nations must attain some level of social and political stability for financial institutions to thrive.

Boost production/employment: Africa’s industrial growth is still not encouraging; the continent relies more on importation than internal production. The unemployed represents a significant percentage of the continent’s population also. If production is encouraged, more wealth and employment will be created which will keep the financial system in good standing.

Encourage savings culture: Financial inclusion remains a major problem in Africa, particularly in rural areas. Some African nations have made significant progress in spreading financial services across their nation while some are sufficiently behind. Financial services should be extended to the unbanked in order to increase inflow into the formal financial system, thereby keeping financial institutions out of stress.

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Op–ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija

Olawale is a leading African writer/developmental journalist.