By Alexandra Born and Paul Mathieu | From Finance & Development

Africa-based banks, once largely domestic, are expanding across the continent and now dominate the banking sector in many countries. These so-called pan-African banks are establishing cross-border networks and overtaking the European and U.S. banks, which traditionally dominated banking on the continent. The new pan-African players are driving the expansion of financial services and economic integration in Africa, helping unlock the huge potential of a fast-growing region.

Pan-African banks originate mainly in the largest economies of Africa, such as South Africa, Nigeria, and Morocco, and from countries of influence within a region, such as Kenya. But one of the major pan-African institutions, Ecobank, is headquartered in tiny Togo. Ecobank emerged in the mid-1980s in the context of the 15-nation Economic Community of West African States, and although not the largest of the pan-African banks in terms of assets, it surpasses them all in geographic reach.

At a time when global banks have moved their business away from smaller-scale and higher-risk operations, the expansion of African players bodes well for financial sector development in Africa. These regional institutions are not only filling in the gaps left by the retreating global banks but are fostering financial development and economic integration. However, to be sustainable and to avoid raising systemic risks and the type of financial instability experienced elsewhere, this expansion of banks with significant cross-border networks must be accompanied by stronger supervision and heightened cross-border cooperation.

Taking off

South Africa’s Standard Bank has been active across borders for a number of years. But other banks began to grow their regional operations in earnest in the mid-2000s. The number of subsidiaries almost doubled between 2006 and 2010 (see Chart 1), from 48 to 88, as the cross-border expansion of banks from Morocco and Nigeria’s United Bank for Africa gained traction. This rapid cross-border expansion was aided by improved political and macroeconomic stability and robust economic growth as well as the following specific factors:

• The end of apartheid in the mid-1990s, which opened the door for banks headquartered in South Africa to extend their expertise abroad;
• Increased trade linkages among African countries—inducing, in particular, banks in South Africa and Kenya to follow their customers abroad;
• Decisions by banks in Morocco to establish a regional presence to the south because of more limited opportunities at home and in Europe—including by buying the local operations of retrenching European banks;
• The large increase in minimum capital requirements in Nigeria that followed a banking crisis in the mid-2000s, which motivated banks to consider expanding abroad to make use of their new larger capital bases; and
• Ecobank’s long-standing social ambition, dating to its establishment in the mid-1980s, to become Africa’s leading pan-African bank.

For pan-African banks, two basic business structures have emerged (see Chart 2). One is a traditional model of expansion from a dominant home base; the other was designed to be a diversified network structure from the get-go.