Debt-Laden Africa Banks Piling Pressure on Economy

Africa’s many small and under-capitalized banks, laden with bad debt, are inflicting more pain on already embattled economies.

Regulators may have no choice but to force lenders to consolidate or close. A third of Nigeria’s 21 banks may be under-capitalized. Much smaller Uganda has 25 banks and last month suffered one collapse, Bloomberg reported.

Kenya has had three failures since August last year and with 40 lenders, boasts almost one bank per million people. Angola’s 30 or so banks may need to boost reserves by $4 billion, while a Mozambican lender was rescued by the central bank in September. Ghana is telling banks to combine and raise funds through the stock market.

“The consequences of inaction will be disastrous,” said Robert Besseling, a Johannesburg-based executive director at business-risk consultancy Exx Africa. “Uncontrolled bank failures pose significant contagion risks to other banks, state-owned enterprises and private businesses.”

Zombie banks, a term coined by Edward J. Kane of Boston College in 1987, are typically all but insolvent save for government support. They have injured economies from Japan to Europe and now it may be Africa’s turn. The continent has been battered by falling commodity prices, an enduring drought, weakening currencies and a slowdown in China, its biggest trading partner. A plethora of lenders edging toward collapse have governments nervous and central banks scrambling to find increasingly scarce liquidity.

 Death Spiral

“When banks get in tough times, often initiated by economic slowdown, they hold back capital, reinforcing the economic slowdown which bites down harder on bank performance,” said Adrian Saville, chief strategist at Citadel Investment Services in Johannesburg. “In its worst form, this takes the shape of a death spiral.”

Trying to save them may be an exercise in futility because zombie banks don’t have a reputation for regeneration, said Saville. After the Japanese bubble burst in 1990, a raft of zombie banks staggered along for the next 20 years, which hamstrung the Japanese economy, according to Saville. By contrast, he said, when US banks were allowed to fail it meant the lenders that emerged from the ruins were able to behave and perform functionally.

The threat of failing African banks is compounded by the fact that “there are some countries with far too many banks,” said John Ashbourne, an economist at Capital Economics Ltd. in London. “Kenya stands out as an example of this. Provided that problems continue to be centered in the region’s smaller banks, I expect regulators will intervene or force consolidation.”