Banks’ collapse in West unlikely to impact Africa: Experts

The crisis in the United States and European banking sectors triggered by the collapse of the Silicon Valley Bank alongside Signature Bank and the crisis at Credit Suisse is unlikely to impact Africa’s banking system or its broader macroeconomic stability, experts have argued.

The collapse of the US technology sector-focused lender Silicon Valley Bank sent shock waves among investors and the financial sector worldwide, including Africa, where experts and analysts have had to rethink the systemic risks emerging due to bad banking practices.

In the latest development, First Citizens BancShares in the US will acquire all of Silicon Valley Bank’s deposits and loans from the Federal Deposit Insurance Corporation, according to the regulator. The purchase by First Citizens Bank & Trust Company includes the purchase of about $72 billion of Silicon Valley Bank’s assets at a discount of $16.5 billion, the FDIC said.

Despite the collapse witnessed in the West having had a spillover effect on markets worldwide especially banks across the US, Europe, and parts of Asia, African experts believe that the African banking sector will not see a collapse of this nature.

According to Aly Khan Satchu, a leading African investment banker based in Kenya, African banks are more conservatively managed than their US and European counterparts. As a result, banking in Africa has sufficient rail guards to ensure that its banking system does not get derailed in a manner similar to what was witnessed in the US.

“Whilst African banks have lower absolute tier-one capital baselines, they do not pirouette the multiples on those capital bases that their Western counterparts typically do. However, we are encountering a sovereign credit crunch on the continent and African banks have been the biggest buyers of local currency sovereign bonds,” Satchu said.

Izak Odendaal, a South African wealth investment strategist, agrees that most African banks are tightly regulated and well-capitalized under the watchful eye of their own central banks.

“In South Africa, for instance, interest rates increased modestly compared with developed countries, and local banks have long operated in a higher interest rate environment,” Odendaal said.

He, however, noted that even though African banks are not directly vulnerable to the kinds of stress experienced elsewhere, local markets cannot fully escape global upsets, noting that the Johannesburg Stock Exchange fell in sympathy with global equities last week. He also suggested caution in analyzing the situation in Africa and the long-term effects of the US banking crisis on the continent.

According to Satchu from Kenya, the effect on African economies could be more pronounced in other areas like a significant slowdown in foreign direct investments.

“I expect emerging markets to actually benefit from the turbulence in Western markets but that Africa will remain under some pressure. This is, in part, because of policymaking naivete and disjuncture, for example, multi-tier forex regimes which are suboptimal and hold back foreign direct investment,” Satchu said.

Since Africa indulged in heavy borrowing in the last decade, Satchu believes that the continent entered the COVID-19 period from a position of weakness and this is the main challenge facing Africa’s financial sector.