The Exit of European Banks from Africa: Future Implications for the African Continental Free Trade Agreement

Introduction

The African Continental Free Trade Agreement (AfCFTA) is a landmark initiative that unites 1.3 billion people across 55 nations, collectively boasting a GDP of $3.4 trillion (1). This agreement aims to create the largest free trade area in the world, promising to significantly transform Africa’s trade and productivity landscape by dismantling trade barriers within the continent. According to the World Bank (2020), the AfCFTA is anticipated to result in a substantial increase in intra-African exports, with the manufacturing sector expected to benefit the most during the first ten years of its implementation (2). However, the infrastructure necessary for facilitating payments—a critical component of trade—is currently jeopardized by the recent withdrawal of European banks from Africa. Since 2022, major European banking institutions have been scaling back their operations in Africa, citing financial market tensions and macroeconomic uncertainty. This trend raises concerns about the potential impact on the success of the AfCFTA.

The withdrawal of international banks may pose challenges for trade finance, correspondent banking relationships, and the availability of foreign exchange. However, these developments could also create opportunities for local and regional banks to expand. This paper examines the potential implications of the exit of European banks on the implementation of the African Continental Free Trade Area (AfCFTA) and proposes policy responses to mitigate these challenges.

The article is intended for African governments, economic operators, multinational corporations, and the international development community. It is structured as follows: Section 1 provides an overview of the exit of foreign banks from Africa. Section 2 discusses the reasons behind the withdrawal of these banks. Section 3 outlines the implications of bank exits on the implementation of the AfCFTA. Finally, Section 4 concludes with recommendations for policy implementation.

1. Overview of European Bank Exits from Africa

In recent years, several European banks have been scaling back or exiting the African market, raising concerns about the continent’s economic and financial future. Among the major players departing are Barclays, Credit Suisse, BNP Paribas, and Standard Chartered, with French banks leading the exodus. For instance, in 2021, Standard Chartered announced plans to withdraw from Angola, Cameroon, Gambia, Sierra Leone, and Zimbabwe, while also reducing its operations in Tanzania and Côte d’Ivoire (3). Similarly, Barclays PLC decreased its ownership in Barclays Africa Group from 62.3% to 14.9% between 2017 and 2022 (4). Other institutions, such as Credit Suisse and BNP Paribas, have also significantly scaled back their African operations, leaving only limited activities on the continent. Société Générale followed suit by selling smaller subsidiaries and reviewing its stake in Tunisian banks.

This withdrawal by major European banks follows years of declining foreign investment in African markets. Local and regional banks now have the opportunity to fill the void left by these departing institutions; however, the absence of international banks presents new challenges for Africa’s financial sector, particularly in trade finance.

2. Reasons Behind Bank Exits

Several factors have contributed to the recent withdrawal of international banks from Africa, including the following:

Firstly, several foreign banks, including Standard Chartered, Barclays, Atlas Mara, and Credit Suisse, have withdrawn from the African market due to low profitability. They faced challenges in achieving long-term financial success in this region due to various factors, such as high operational costs, competition from local banks, and regulatory hurdles.

Secondly, risk management presents a significant challenge, as high rates of non-performing loans and rapid credit expansion are prevalent issues within African banking systems. Substantial amounts of government securities, particularly in less creditworthy nations, are concentrated on bank balance sheets, exacerbating this situation.

The potential for foreign banks to expand in Africa is significantly influenced by the quality of the host nation’s institutions. Inadequate institutional frameworks can lead to the failure of international banking operations. Additionally, macroeconomic shocks can adversely affect the performance of foreign bank subsidiaries, potentially resulting in their liquidation (5).

Moreover, banking crises in Sub-Saharan Africa frequently result in widespread insolvency, leading to the closure of overseas bank subsidiaries. International banks encounter heightened challenges when conducting business in Africa, particularly following the global financial crisis, which prompted stricter capital requirements and regulatory changes. For instance, Standard Chartered has reduced its operations in several African countries, citing regulatory obstacles and economic difficulties.

3. Implications of Bank Exits on AfCFTA

The exit of European banks from Africa has both positive and negative implications for the implementation of the African Continental Free Trade Area (AfCFTA). One significant negative consequence is the reduced access to trade financing and foreign exchange (Forex) services, particularly in countries with underdeveloped financial systems. For example, Standard Chartered’s decision to withdraw from markets such as Angola and Zimbabwe limits local businesses’ access to essential trade financing and foreign exchange services, which are crucial for the success of AfCFTA (6). Firms that lose access to trade financing often experience a revenue decline of up to 57% (7).

With the departure of large international banks, local banks may come to dominate the market, potentially stifling competition and innovation. As evidenced by Barclays’ reduction in its African operations, a few large local banks could gain disproportionate control, leading to higher costs for consumers and a decline in service quality. Furthermore, this exodus of banks creates regulatory challenges, as fewer international players remain active in Africa. Local regulators must adapt to maintain financial stability amid these changing market dynamics. For instance, the exit of Credit Suisse underscores the necessity for regulators to ensure that local banks can effectively assume trade finance and correspondent banking relationships while upholding sound banking practices.

Despite the challenges, local and regional banks have significant opportunities for growth. These banks can develop innovative financial products specifically tailored to businesses operating under the African Continental Free Trade Area (AfCFTA), particularly small and medium enterprises (SMEs). For instance, many local banks are currently exploring cutting-edge mobile banking solutions to better serve SMEs, which are a crucial sector for the success of the AfCFTA (8). African nations such as Kenya and Ghana are already enhancing their regulatory frameworks, which could lead to a more robust financial sector capable of supporting the goals of the AfCFTA (9). This progress could foster competition, increase financial inclusion, and drive efficiency within Africa’s financial sector.

The absence of European banks may encourage African nations to enhance their financial systems, thereby fostering resilience against external shocks. A more robust financial sector is essential for the success of the African Continental Free Trade Area (AfCFTA), as it would facilitate intra-African trade and investment. Additionally, the exit of European banks could motivate African countries to concentrate more on regional value chains, public procurement, skill development, and collaborative investment frameworks (10). This shift could help African industries become more competitive on the international stage, promoting greater economic integration across the continent.

4. Conclusion and Policy Recommendations

The exit of European banks from Africa presents both challenges and opportunities for the implementation of the African Continental Free Trade Area (AfCFTA). While local banks may expand and strengthen their positions, the departure of major international banks poses difficulties for trade finance operations, correspondent banking relationships, and foreign exchange (Forex) availability.

To address these challenges, African policymakers must take proactive measures. They should concentrate on establishing robust correspondent banking relationships and trade finance mechanisms through bilateral and multilateral agreements with stakeholders such as the AfCFTA Secretariat, the African Union, and Regional Economic Communities (RECs). African nations should prioritize enhancing regulatory frameworks to ensure that local banks can effectively fill the gaps left by departing European institutions.

Additionally, enhancing financial stability is crucial. African countries should consider adopting Basel III, an international regulatory framework that strengthens capital buffers and risk management practices in banks. Establishing a continental financial stability mechanism would provide liquidity support during economic shocks.

Finally, governance and transparency must be enhanced. African regulators should mandate regular audits, establish independent regulatory bodies to oversee banking operations, and develop digital platforms for compliance reporting. By implementing these measures, African banks can be held accountable, thereby promoting sound banking practices that are essential for the success of the African Continental Free Trade Area (AfCFTA).

In conclusion, although the exit of European banks poses challenges, it also offers Africa an opportunity to develop a more resilient, competitive, and inclusive financial sector that supports the long-term success of the African Continental Free Trade Area (AfCFTA).