Commercial Banks Privatization Lessons from SubSaharan African Countries by Dan Mozes

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Commercial Banks Privatization Lessons from
Sub-Saharan African CountriesbyDan Mozes
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Three main issues

• Why did parastatal banks exist and what when
  wrong with them
• Potential solutions facilitating/detrimental
  conditions
• Lessons learned

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Reasons for the existence of parastatal banks

• Full or partial nationalization after
  independence
• Nationalization and consolidation after move to
  socialism
• Creation of new parastatal banks to fill gaps and
  to implement government policies
• Take over of banks in difficulties (seldom)

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What went wrong

• The developing economies were small with limited
  use of financial services, causing banks to
  remain small in assets and volume of
  transactions.
• Parastatal banks were small by international
  standards and therefore unable to develop
  expertise and IT systems as big banks in
  developed countries.
• Parastatal banks implemented government policy
  lending for imports substitution under heavy
  protection, as well as lending to real-sectors
  parastatals.

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What went wrong (contd)

• Parastatal banks were run by people with strong
  ties to government, not necessarily of high
  professional reputation.
• Parastatal banks lent to the wrong businesses for
  the wrong reasons.
• Parastatal banks were reluctant to go after
  defaulters with the right position or connection

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The results

• Large bad debt portfolios and inefficient
  operations caused huge deficits.
• Government had to reinvest in banks cash TBs and
  bonds to keep them solvent and liquid.
• Fiscal burden came at the expense of important
  alternative uses.

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The privatization solution

• Introduce well-established foreign bank(s) or
  local private sector entrepreneurs to the local
  banking sector.
• Stop the need for plowing additional budget
  resources into the banks.
• Stop politically motivated lending and
  corruption.
• Go after defaulters and create an atmosphere of
  financial discipline
• Adjust expenses, manpower and branch network to
  market needs.
• Reduce opposition to competition in banking
• Make IMF and World Bank happy to get large
  adjustment loans

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Problems with Bank privatization programs

• Impact of political and macro economic
  development
• Impact of legal, judicial and general business
  environment
• Ignoring other parastatal banks while privatizing
  the biggest
• Leaving government as major majority shareholder
• Creation of institutions that will be difficult
  to privatize
• Ignoring alternative solutions

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Some interesting cases

• Ghana no true privatization in more than a
  decade of privatization efforts
• Mozambique from monopoly bank in 5 difficult
  and expensive steps
• Split monobank
• Sell majority of shares in commercial bank to
  foreign investors
• Government participate in the creation of new
  bank
• Foreign shareholders of the 2 banks merge
• Merger of the 2 biggest banks authorized
• Tanzania from NBC to NMB, with PBZ unsolved,
  TPB and TIB expanding.
• Uganda foreign investors as a large fraud case.

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Lessons to remember

• Very small economy and very small financial
  sector with very few high level professionals
• Get government out of banking COMPLETELY
• Get high reputation foreign bank with IT, banking
  know-how and international connections
• If macro and political conditions are not
  favorable do not try to reform banks
• When private banks functioning consider
  liquidation of parastatal banks. Restructuring
  and privatization may be the wrong solution.

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Commercial Banks Privatization Lessons from
Sub-Saharan African CountriesbyDan Mozes