28 May 2021 / Article

Will the AfCFTA dramatically change Africa's financial industry?

 

During a closed session at the Africa Financial Industry Summit, held on 9 and 10 March 2021, some 20 African financial decision-makers took stock of the challenges that need to be met to boost the financial industry.

 

The recent launch of the African Continental Free Trade Area (AfCFTA) represents a unique opportunity to rethink Africa’s financial industry. Negotiators’ decisions are expected to accelerate the emergence of continental champions. “The AfCFTA is set to bring about a growing number of supply chain finance opportunities in the coming years,” said Paul-Harry Aithnard, Managing Director and Regional Head for the WAEMU region at Ecobank, expressing his thoroughly optimistic outlook as to the free trade zone’s potential impact on the industry.

Insurance companies are equally enthusiastic regarding what lies ahead. For Coenraad Vrolijk, Regional CEO of Allianz Africa, who also attended the meeting, “The trade area will be able to bring products and services to market that would otherwise go unserved due to their scale. If we really get the whole process to work well, it will scale up trade and help deliver products to customers for less.”

While not untrue, all who participated in this fascinating discussion, which gathered nearly 20 prominent financial industry figures, agreed that this is not a given. When it comes to the AfCFTA’s potential impact on financial services, many developments are expected regarding the potential for future investment in cross-border payment infrastructure, the trade offerings that could drive deposit growth, the regulatory and risk management implications (for example, harmonising standards) and the opportunity to develop SME banking.

Currency, a topic raised repeatedly by participants, is also a key issue for the industry. According to Isabelle Lessedjina, Senior Vice President at TCX: “We should focus on trading with African currencies, which would help decrease reliance on the US dollar, soften the impact to the SME ecosystem in the region and allow regional champions to enjoy a competitive advantage in their local markets. But proceeding in this way depends on the top 5 or 10 international banks that have easier access to liquidity. Also, concerning central bank regulation, we need to make sure that both capital and exchange control measures are in place to help financial sector businesses grow and avoid debt.”

 

In Mr Aithnard’s view, the AfCFTA is an opportunity to seize: “This is a chance for us to think forward and to come up with alternatives to US dollar-based initiatives, as well as to expand intra-African trade using African currencies.”

 

But the hottest topic of the session revolved around the establishment of a pan-African payment system.

 

“Cross-border payments are going to be central for the AfCFTA,” said Veronica Njore, Head of Corporate Strategy and Investor Relations at Co-operative Bank of Kenya. In her opinion, regulators need to provide African countries with liquidity support to ensure that they have the resources needed to facilitate capital flows across the continent. She added: “The AfCFTA is all about logistics and payments. Today, the majority of payments are facilitated through the SWIFT [Society for Worldwide Interbank Financial Telecommunication] system, but most African businesses are not part of the SWIFT network. The AfCFTA can create opportunities by leveraging regional banks such as Orabank, Ecobank and Netbank – which are present in 30 to 50 countries on the continent – to create SWIFT solutions that are available to corporate financial institutions and even SMEs.” Ms Njore also stressed the idea that African banks “can promote non-SWIFT solutions as well”.

For Ibrahim Sagna, Global Head and Director of Advisory & Capital Markets at Afreximbank, “With the Pan-African Payment and Settlement System [PAPSS] initiative, the African Union already has some pilot tests under way.” He added: “W­­e as a bank structured this initiative in a novel way, as the equity owner and the regulator are one and the same.”

 

“The integration of the payment system is really going to come through conversations and collaborations between various actors, such as banks, and insurance companies,” said James Kasuyi, Head of Financial Institutions at Bank One, before raising a few questions: “How can we include other stakeholders, whether banks or insurance providers, in the financial inclusion debate?”

Closing out the conversation, Serge Ekué set the following objective: “If we set up a common payment system, it has to be standardised. The world is full of liquidity, but we have to make sure that when we talk to investors, when it comes to the payment system, what we have put in place is standardised.”

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