FINANCIAL INTEGRATION IN THE

EAST AFRICAN COMMUNITY

Addis AbabaJune 2013

Outline

Rationale and risks of deeper financial integration

Case of the East African Community Current landscape Opportunities to deepen linkages Appropriate regulatory framework Technical assistance

Rationale and Risks

Rationale

Relevant to small financial systems Small either in population or per capita

income

Gains from scale Efficiency Sustainability Dynamism

Risks

Cross-border contagion Crisis in one country disrupts financial

markets in another

Undermines domestic financial markets/ institutions Competition from more sophisticated cross-

border financial players

Need to balance the two via an appropriate regulatory framework

EAC: Current Landscape

Market and Institutions

Market running ahead of institutional developments

Several FIs (banks, insurance companies) have established a presence in more than one Partner States

Typically, following their clients across borders

Banks

Banks have led the financial integration process in the EAC

So far mostly Kenyan banks Kenya is where reforms in the financial sector started

first in the region in 1990s Regional expansion followed in 2000s after efficiency

gains realized Generally, banks with cross-border presence have lower

overheads

Recently CRDB from Tanzania has set up in Burundi

Banks (contd)

Expansion through a parent-subsidiary model with strong operational linkages

Separately capitalized institutions, with separate liquidity buffers, boards, and managements

But several critical functions (IT, risk management, HR) hubbed in Nairobi

Efficient, cost-saving but raises questions regarding business continuity in case of crisis

Capital Markets

Combined market capitalization of the debt and equity markets in EAC is a third the size of Nigeria and 1/40th the size of South Africa

Kenya accounts for 80 percent of the EAC market capitalization

Several companies have cross-listed but trading in these stocks are limited

Capital Markets (contd)

Scale is an even more compelling reason to link up

Otherwise size and liquidity in market constrained by limited number institutional investors and issuers

Have had a number of “false starts”, especially with high-profile IPOs

Institutional Investors

Play important role in contractual savings and the demand side of long term finance

Do have insurance companies that have established a cross-border presence but penetration still low

Need to reform and professionalize pension funds

Opportunities to Deepen Ties

Deepen existing ties

Banks: Current model of expansion focuses on cross-

border servicing of a specific client

Despite competition not fully realizing the efficiency or financial inclusion benefits of increased competition

How best to transfer the skills and experience built on serving specific market segments across the region

Deepen existing ties

Capital markets:

Build political will and trust

Urgent need to resolve the issues relating to the linking up of infrastructure (CSDs)

Lower transaction costs and uncertainty of trading cross-border

New opportunities

Mobile payments: Region leads globally on mobile money but

cross-border potential not yet tapped Telecos already looking to voice traffic to

identify potentially high volume corridors Hesitant due to absence of regulatory

framework Huge opportunity for remittances and informal

trade payments Coordinated approach to filling the gaps in the

domestic regulatory framework a good first step

Appropriate Regulatory Framework

Home-host relations

Overarching goal should be to allow for the benefits of scale while managing the risks

Home-host information sharing and cross-border supervision needs to be strengthened

Prioritize and sequence the harmonization of regulatory framework

Need a crisis management framework that also includes the regional impact of a domestic crisis

Regulatory clarity

Tends to focus on banks because that is where integration is furthest

In other areas need to fill regulatory gaps to build market confidence

All comes down to enforcement

Critical that communication channels between regulators be open and active (MAC, CMPIC, EASRA)

Corridor Pilots

Consensus decision-making in the EAC

But corridor pilots offer opportunities for “learning by doing”

Test the risks of initiatives in a contained way

Can be scaled up to the EAC level when appropriate

Technical Assistance

Financial Sector Regionalization and Development Project being implemented by the EAC Secretariat

Supporting a wide range of activities to further regionalization Skills building through regional certification

programs Harmonization agenda of regulatory

framework Capacity building among regulators

THANK YOU!

QUESTIONS ?