Only a handful of the big US and European names are still in the market. Finding a new relationship is tough, but new initiatives have sprung up to help. Welcome to the world of correspondent banking in Africa. Sarah Rundell reports.


Foreign banks in developed markets, the so-called correspondents, began cutting ties with Africa’s local banks, or respondents, a while ago. South African banks lost more than 10% of their foreign counterparties between 2013 and 2015, according to Swift, and in Angola the number of foreign counterparties willing to transact with locals fell 37% over the same period. It has left local banks bereft of bank-to-bank relationships and struggling to clear funds, access foreign currency, receive remittances and conduct cross-border payments.

As correspondents depart, they’ve taken access to trade finance with them, cutting credit lines and withdrawing finance.

The African Development Bank (AfDB) now estimates an unmet demand for bank-intermediated trade finance of between US$110bn and US$120bn in Africa.

But change is finally afoot. Local banks are beefing up their compliance to stall de-risking, as well as coming up with their own solutions. And a burgeoning array of new operators and payment providers are positioning themselves to offer remittances and payment services, important parts of correspondent banking.


The problem

De-risking is one factor behind the problem. Any lack of transparency over local banks’ activities and their compliance strategies leaves correspondents wary of breaching anti-money laundering (AML) and counter-terrorism financing (CTF) rules as the clearing bank. It can affect specific bank relationships, or even whole countries.

“If there is a weak link in the chain, the clearing bank as holder of the nostro and responsible for making the final payment, is at risk of fines,” says Minos Gerakaris, head of trade finance at Rand Merchant Bank (RMB), referring to the accounts held by correspondents and the banks they are servicing, which are called nostro and vostro respectively.

And fines are steep. BNP Paribas was fined US$8.9bn in 2014 by US authorities for violating sanctions against Iran, Cuba and Sudan. Deutsche Bank was recently fined £500mn by the financial authorities in the UK and US for breaching AML rules in its Russian business. A reprimand, perhaps, that informed the bank’s quick severing of its correspondent account with National Bank of Kenya over suspected financial misconduct at the African bank earlier this year.

But it’s not just about de-risking. Even in Botswana, the continent’s least corrupt country ranking 35 out of 176 in Transparency International’s 2016 Corruption Index, correspondent banks have all but disappeared. African economies hit by the commodity price slump and Chinese slowdown have added a risk premium correspondents don’t like. IMF growth forecasts for Kenya, Ethiopia and Côte d’Ivoire are a buoyant 6-8% over the next two years, but in countries like Angola and Nigeria it is a bleaker picture. South Africa, which is seeing its slowest growth since 2009, had its sovereign credit rating slashed to sub-investment grade earlier in the year. It dragged down the ratings of all local banks, limiting the number able to meet counterparty risk criteria.

“Non-performing loan (NPL) ratios of local banks have grown and in some cases we have also seen defaults of African governments and individual banks on their obligations. This negative experience, which is not related to compliance, did cause some banks to decide not to bank with selected counterparts,” says Christian Toben, regional head of Africa at Commerzbank.

The number of correspondents has also fallen as international banks rationalise their portfolios. For many it’s not worth acting as a correspondent for small banks that don’t provide sufficient volumes to cover the cost of transaction processing and compliance. Due diligence to maintain a high-risk counterparty can be as much as US$50,000 a year. It doesn’t sound like much, but it’s often more than the fees earned from the counterparty. “When it costs more to hold the account than what they make from those small banks only sending through a couple of hundred transactions a month, it becomes an economic equation,” says Gerakaris.

Where one correspondent leads, others tend to follow. In a race to the bottom, the departure of a major name spurs others to do the same. No bank wants the risk or exposure of being the sole provider of correspondent banking services to an individual institution, as Somalia’s money transfer group Dahabshiil found in 2013. When Barclays cut ties with Dahabshiil, the Merchant Bank of California, the only US bank with a correspondent banking relationship in Somalia at the time, also severed links.


The consequences

The problem has triggered various responses. Some smaller local banks in countries like Tanzania, Kenya and Angola that have lost their international dollar counterparts and are unable to change local currency into dollars are sending payments in a third currency. “These banks may no longer have dollar accounts, but they may have a euro, sterling or yen account,” says Gerakaris.

Worryingly, some transactions are being forced down alternative channels which may be less well regulated. Correspondent banks’ nostro agreements with banks on the ground don’t allow these local banks to clear for other local banks. Yet some experts believe more banks are being introduced into the chain, something that is very difficult to monitor.

A typical scenario could see a third-tier local name that has lost its dollar nostros approach another bank in-country that still has access to dollars. It would access dollars through them, rather than directly through the foreign correspondent. “You hope the bank in the chain is still doing its due diligence, but it is difficult to monitor. It means looking at your client’s client. Introducing another second or third bank into the chain obscures the true nature of the relationship,” says Gerakaris.

Meanwhile banks’ corporate clients are struggling. They could move to a larger bank with scale and sustainable clearing services. Yet, many companies are locked into relationships with their banks. Others have borrowed money, which makes moving to a different lender hard. Increasingly reliant on local lenders for trade finance, Africa’s companies battle with these banks’ limited experience when it comes to structuring deals.

“It is unusual for local banks to embrace structured trade finance and to accept security from transactional flows like stocks and receivables, which ends up leaving many good deals undone,” says Duarte Pedreira, head of trade finance at Crown Agents Bank.


The fight back

New trade finance funds backed by institutional investors have sprung up with an appetite to lend both directly to companies and to African banks whose credit lines with foreign banks have been cut. London-based Africa Trade Finance works with global banks to provide additional financing capacity to specific transactions with local African banks. Recent deals include a US$75mn one-year trade loan and a US$15mn two-year amortizing loan for banks in Nigeria and Ghana respectively.

In another trend, some of Africa’s biggest banks are filling the gap by offering correspondent services themselves. Ghana International Bank calls itself “the leading correspondent bank in West Africa”. Nigeria’s top-tier banks have embedded in foreign markets through subsidiaries and are now offering correspondent bank services. “From a group perspective we are providing more support to smaller banks in West Africa,” says Ayodipo Ogunmoyela, head of FBN Bank UK’s corporate banking unit.

Africa’s banks are also transforming their compliance to stop the de-risking trend. According to Swift’s KYC registry, its shared platform for managing standardised know your customer data, adoption numbers in 2017 have already doubled from 2016, with 127 entities signing up to the registry in Africa so far this year.

“Compliance has become more important for local banks; the days of doing things differently in Africa are over,” says Ogunmoyela, listing initiatives like improving procedures, hiring more compliance staff and investing in technology.

Crown Agents Bank’s Pedreira, who works with banks in Sierra Leone and Liberia, argues that compliance in these countries now takes centre stage. “One bank we worked with in Sierra Leone employed over 100 temporary staff to remediate client account files and was on-boarded by us in just over three months,” he notes.

Chinese banks are also stepping into the gap, explains Henry Balani, global head of strategic affairs at consultancy Accuity. Small African banks are pushing new relationships with Chinese correspondents, often with branches in the US. In 2016 the number of Chinese banks with correspondent banking relationships around the world had increased to 2,246 from 65 in 2009. Balani also believes that African banks will increasingly transact in renminbi rather than US dollars. Swift recently reported a jump in renminbi usage for payments in South Africa, yet barriers to its use remain. The renminbi was only the fourth most-used currency for global payments behind the dollar, euro and sterling in 2015, and corporations were put off by renminbi volatility following its sudden devaluation by the Chinese central bank in 2015. Offshore and onshore renminbi rates make for complexity and liquidity issues too.

Africa’s central banks are encouraging regulation and surveillance amongst smaller bank names. Some 10 central banks across Africa are working with their local banks to use Swift’s sanctions screening solution as a community, explains Denis Kruger, head of Sub-Saharan Africa at Swift. “Central banks are mandating more stringent KYC processes in their jurisdictions. We work closely with central banks and many of our national user groups are headed up by representatives from central banks.”

Bleming Nekati, chief trade finance officer in the AfDB’s trade finance division adds: “We spend a lot of time working with local issuing banks in order to help them raise compliance standards, and central banks in the respective countries are an important cog in that wheel.”

Central banks could extend their role further. This could include helping consolidate flows from smaller banks, clearing dollars directly with the Federal Reserve, or even endorsing an approved provider or authorised regional clearers in their market to ensure the blessing of the nostro. Such ideas are not without their challenges. It would require compliance from all parties in the chain, making it harder for small names to survive. Africa’s central banks aren’t set up to do the same level of KYC checks as big international banks and could struggle to handle similar volumes of transactions.

Meeting the compliance challenge could trigger local bank consolidation. Mergers would create stronger, better capitalised institutions able to put the controls in place that would bring the currency flows, and fees, to make it worth the while of a correspondent. In Kenya, which has around 40 banks, three of which failed last year, Kenya Commercial Bank is in the process of acquiring National Bank of Kenya.

New providers are also emerging to fill the gap. Like Nigeria’s ambitious startup Flutterwave, which plans to offer money transfer services to enable remittances and wire transfers from anywhere in Africa. Yet the risk profile of these emerging platforms is important; however currency flows across borders, it still requires compliance with national and international agreements – as Somalia’s Dahabshiil discovered – and they can’t provide clearing services.

“If you need to send a payment between two markets in dollars, whether facilitated by a bank or a fintech provider, the regulators need the same compliance requirements. Fintech is not a shortcut,” says Gerakaris. Countries also have local restrictions in terms of currency control that will exclude cryptocurrencies coming in and taking some of that flow, he says.

But with the help of technology and better compliance, Africa is finding solutions to its lost correspondents. When one door shuts, another usually opens, concludes director of Africa Trade Finance, Christian Karam. “When traditional channels are reduced, of course new channels appear.”