An FSVC Perspective on Changes to the Regulatory Framework Impacting Africa

J. Andrew SpindlerPresident & CEO

FSVCPrepared for FSI High-Level Meeting

Cape Town, South AfricaJanuary 26, 2012

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Presentation OutlineI. Background on FSVC

II. Key Regulatory Developments of Relevance to Africa

III. Banking Supervision: Needs and Challenges

A. Need for strengthened bank supervisory infrastructure

B. Need for strengthened implementation

IV. Conclusions

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I. Background on FSVC

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Background on FSVC• FSVC’s mission is to help build the sound financial infrastructure required

by countries seeking to develop transparent, market-based economies.

• FSVC is uniquely positioned as:

– Private-public sector partnership,

– Not-for-profit organization,

– Provider of unbiased, expert advice from active financial sector professionals serving as volunteers, and

– Source of timely input on key financial sector issues, delivered through short-term technical assistance that is sequenced to achieve long-term impact.

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Brief History• The organization was founded in 1990 by John Whitehead and Cyrus

Vance at U.S. Presidential initiative.

• FSVC has now operated for twenty-two years to deliver technical assistance.

• Since its inception, FSVC has engaged over 8,000 experts from the financial, legal and regulatory communities on over 2,200 missions.

• FSVC’s programs have reached over 34,000 counterparts in 50 countries.

• The organization has delivered over $200 million in technical assistance by leveraging the pro bono service of volunteer experts.

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Current Programs• During 2011, FSVC delivered 51 projects and programs in 18 countries

– Albania– Angola– Azerbaijan– Burundi– Cambodia– Egypt– Haiti– Iraq– Kazakhstan– Kenya– Kosovo– Lebanon– Rwanda– Russia– Tanzania– Tunisia– Uganda– Vietnam

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FSVC’s Work in Africa• FSVC is increasing its presence in Africa

• Major new FSVC programs are focused on East Africa– Program to promote financial integration of East African Community

(EAC) member states– Program to strengthen anti-money laundering (AML) and combat

financing of terrorism (CFT) in Kenya– Current work to promote AML/CFT regulation that is compatible with

financial inclusion

• Continuing work to strengthen capacity at selected commercial banks– Angola– Tanzania

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Establishment of FSVC regional office in Nairobi Financial Center

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II. Recent Regulatory Developments and Other Trends that Have Affected

Africa’s Regulatory Environment

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Regulatory Effects of the Global Financial Crisis

- Strengthening of global capital standards

- New emphasis on “macroprudential” risks and their supervision

- Greater concern for cross-border coordination among supervisors

- Continued concern for “subprime” origins of the crisis

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- Growing awareness of importance of financial integrity as foundation for a sound banking/financial sector

- New attention to the complex interaction among financial integrity, financial inclusion objectives, and effective banking/financial market supervision

Broader Trends

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The Growing Focus on Financial Integrity

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III. Financial Sector Supervision in Africa:Needs and Challenges

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Two Broad Categories of Needs

A. Infrastructure

B. Resources for Implementation

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A. Infrastructure Needs in Africa

- Higher capital requirements are NOT a pressing concern

- But moving to risk-based system of supervision is one

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Infrastructure Needs (cont’d)

Strengthening banking regulatory framework generallyis NOT a pressing concern

• Laws and regulations are largely in place

• Exception: legal frameworks in many countries need to be amended to give supervisors expanded corrective and remedial powers to intervene in failing banks

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Infrastructure Needs (cont’d)

There is a growing need to focus on macroprudentialissues:

- African financial markets are generally concentrated and thin

- Central banks are well-placed to assume greater role in this area

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There is also an urgent need to focus on financial integrity issues:

- Global and local concerns about money laundering and terrorist finance are on the rise

- Many African countries lack a Financial Intelligence Unit (FIU) and a full set of laws and regulations for anti-money laundering (AML) and combating the financing of terrorism (CFT)

Infrastructure Needs (cont’d)

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Need for improved coordination among regulators

- Within a country

- Between a country and its neighbors

- Between a country and parent jurisdictions of international banks operating in the country

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Need for more emphasis on financial inclusion

- A matter of not just social equity but also economic growth

- Are financial inclusion objectives embedded in legislation?

- How do these objectives fit together with effective financial sector supervision?

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Access to Financial Services Across Southern, Eastern, and Western Africa*

  Banked Other Forms of Inclusion Financially Excluded

South Africa 2010 62.5 14 23.5

Namibia 2007 45 3 52

Botswana 2009 41 26 33

Ghana 2010 34 22 44

Nigeria 2010 30 23 46

Kenya 2009 23 44 33

Uganda 2009 21 49 30

Malawi 2008 19 26 55

Rwanda 2009 14 34 52

Zambia 2009 14 23 63

Tanzania 2009 12 32 56

Mozambique 2009 12 10 78

  *Percent of survey respondents

Source: FinScope (database), FinMark Trust, Johannesburg

Reproduced from Beck, Thorsten, et al., Financing Africa: Through the Crisis and Beyond, The World Bank et al., 2011 Chapter 3: Expanding Financial Systems

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B. Resources for Implementation in Africa

- Urgent need for continued capacity building

- Financial infrastructure alone won’t address problems, and lack of capacity is often a bigger challenge

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Need for qualified staff and appropriate analytical tools

- Training of staff in bank supervisory authorities in:

• Fundamentals of on-site exams and off-site analysis

• New products and innovations

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Need for staff and analytical tools (cont’d)

- Financial innovations can help promote social equity and economic growth, as well as foster development of small and medium-sized enterprises (SMEs) and job creation

- Banking authorities that are resistant to innovation are not serving their countries’ broader interests

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Implementation Issues (cont’d)

- There is also a widespread need for more data and improved reporting processes

- However, costs of most of these improvements are beyond the means of many African countries at this time

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IV. Conclusions

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Conclusions

(1) Focus on building foundation for sound banking supervision, and NOT on developing more complex oversight schemes

(2) Regulatory framework needs to enhance both stability and appropriate access to financial services

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Conclusions (cont’d)

(3) Financial inclusion objectives can and should withstand fallout from the global financial crisis

(4) The case for access to financial services is not only a matter of social equity but also of economic growth – including development of SMEs and creating jobs

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Conclusions (cont’d)

(5) Risk-proportionate supervision must be implemented; this supervisory approach flows from careful risk assessments

• Will help ensure scarce resources are used effectively

• Will help promote financial inclusion objectives

(6) Quality of governance arrangements is critical

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Conclusions (cont’d)

(7) Consumer protections, as well as standards of disclosure and transparency, have to be developed and enhanced

(8) Supervisors need to facilitate innovation, as well as realize that today some financial services providers may not be banks

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Thank You!FSVC Contacts:

J. Andrew Spindler Silas Karuku President & CEO Country Director, Kenya jspindler@fsvc.org skaruku@fsvc.org

Financial Services Volunteer Corps10 East 53rd Street, 36th Floor

New York, U.S.A.Tel. + 1 (212) 771 1412Fax + 1 (212) 421 2162

www.fsvc.org