Business Forum East Africa – Securing the Future
At the second SWIFT Business Forum East Africa, discussions covered the key topics for the region including compliance and cybercrime, economic growth and banking innovation.
Denis Kruger, head of sub-Sahara Africa, SWIFT, opened the Business Forum and announced impressive SWIFT traffic growth for the East African Region.
He noted that data from SWIFT shows that FIN traffic growth in East Africa has outperformed the total growth of SWIFT globally. In the year to date, total message traffic volumes grew by 20.1% versus 8.2% growth for SWIFT worldwide. This clearly illustrates the increasingly important role that East Africa plays in SWIFT’s global business, he said.
The data also shows that intra-regional FIN payments traffic is up 19.8% from 2015, and now accounts for 69% of FIN payments traffic in the region. The average daily number of messages has almost double since 2013 from 15,234 to 27,907 in 2016, which could be a reflection of the success of the East African Payments System, established by the East African Community in 2013.
“East Africa holds some of Africa’s fastest growing economies and is a significant growth area for SWIFT,” said Kruger. “We are committed to supporting the community in the region, including through the East African Payments System, which is delivering more efficient payments across East Africa.”
Stopping money laundering and terrorist financing in East Africa
Mr Kennedy Nyoni, Director of Banking Supervision at the Bank of Tanzania, delivered the keynote address. He stressed that the East African region is implementing financial inclusion strategies to provide formal financial services to marginalised communities. “SWIFT has been part of these initiatives by facilitating the exchange of financial messages across East Africa,” he said. “The Bank of Tanzania will continue to work hand in hand with SWIFT and all our other stakeholders to take forward our financial inclusion goals.”
Nyoni added that SWIFT is also supporting the local community when it comes to addressing the challenge of financial crime compliance. “East Africa, like other regions, is exposed to money laundering and terrorist financing activities,” he said. He noted that through its compliance portfolio, SWIFT is facilitating the identification of beneficiaries of finances from untrusted sources.
“It is important for all financial sector stakeholders to work together with SWIFT to ensure that money launders and terrorist financiers are stopped from accessing our financial systems,” he stressed. “This will make East Africa a safe place to live and do business.”
Collaboration key in financial crime compliance
Our first panel looked at de-risking: a critical challenge for many African banks. De-risking, when correspondent banks choose to restrict or terminate their relationships with local banks in a variety of markets because of a higher perceived risk, has had a major impact in Africa. According to recent SWIFT data, there is a clear trend that the number of correspondent banking relationships has been reduced in the region, especially in the last 12 months.
Ezekiel Herman, Head of Compliance at Standard Chartered Bank Tanzania, explained why international banks are choosing to reconsider their relationships. “Many people believe that it comes down to revenue,” he said. “However, that is not the main motive. It is because of the complexity of managing relationships in jurisdictions with different regulations and enforcement. It is about managing risk as well as the cost of compliance.”
Herman stressed that Standard Chartered intends to stay in the region and is therefore carrying out many activities to ensure that it can maintain its relationships. This includes the establishment of a correspondent banking academy, workshops with local banks that explain its expectations around compliance and the sharing of best practices.
“This is not something that one bank can achieve alone,” he said. “We need to work together as an industry: correspondent banks, clearing banks, regulators and policy makers need to come together to address compliance.”
Evarist Muhaya, Head of Compliance at NMB Bank, agreed that compliance is a shared responsibility. Local banks in Tanzania rely on the support of correspondent banks such as Standard Chartered Bank to raise awareness and educate, he said, adding that central banks also play a role. “The central bank in Tanzania is adapting a risk based approach,” said Muhaya. “For example, the bank is carrying out annual reviews at the end of each year to understand how we are managing risk, our policies and procedures around compliance, and how we are categorising our customers’ risk. The central bank then provides constructive ideas of what can be done to improve.”
Roy Akalah, Director of Operations at Kenya Commercial Bank, added that as a regional African bank with subsidiaries across the region, the regulators want to understand the governance structure. “The regulator wants to know who is responsible for compliance, how frequently compliance procedures are updated and who carried out the updates,” he said. “The penalties can be very heavy if you do not comply. The regulators will make an example to send a message. They make banks a part of their own reputational risk.”
Good, but fragile, economic outlook for East Africa
Dr Kimei, CEO of CRDB, gave a presentation on the economic outlook for East Africa. He noted that while Africa’s real GDP growth slowed to 2.2% in 2016, mainly due to the continued fall in commodity prices and weak global economic growth, East African figures were significantly higher, at 5.3%. This, he argued, is a result of relative political stability in the region, which provides a conducive environment for business, and well diversified economies.
However, while each of the East African economies is trying to industrialise, Kimei stressed that it is critical they do not have competing strategies. It is important that individual countries leverage their competitive advantages, he said.
Kimei highlighted some challenges that the banking sector faces in the region. “The region sees high interest rates and a high ratio of non-performing loans, which has put banks in a position where they cannot price things properly. This is a threat and needs to be managed since it could potentially impact growth rates.”
In the end, a consistent regulatory environment will prove critical, concluded Kimei. “The economic outlook is good but it is fragile. Growth and momentum will be maintained, but to increase investment we need more consistent policies.”
Innovation in correspondent banking
East Africa is well-known for its innovations in the payments space. The introduction of M-Pesa established new expectations in mobile payments, for example, but such innovations can struggle to get a foothold outside the retail sector.
Minaz Bhuiya, Director of Financial Institutions & Correspondent Banking and Head of Sub-Saharan Africa for Treasury & Trade Solutions at Citi, noted that the corporate model is very different to the retail model in that it requires an individual approach for each customer. “In retail banking, you can offer customers similar products from bank to bank. For corporates, our relationship manager gets to know the company and comes up with a bespoke product. It is difficult to create one solution to fit all.”
Christian Kothe, Head of the Market Initiatives Group for EMEA at SWIFT, added that innovation in the retail space is driven by the fact that devices allow for it. “The end points are the smart phones of today which allow for online banking, mobile payments and a host of other services that take advantage of increased automation and technological evolution,” Kothe said.
“The reason why it is arriving in wholesale later, or not at all, is that the environment and customer requirements are more complex and the difference between customers far greater,” he continued.
Bhuiya highlighted how banks have changed their approach to innovation over the last 10-15 years from a push model to a more collaborative approach. “The CEO and the board used to identify a trend and ask the bank to push it out. Now the environment is becoming more collaborative,” he said. “We involve innovation hubs, take ideas and try to make a business case. We come up with the technology and a go-to-market strategy, then test it with clients.”
Mohamedhussein Alidina, Relationship manager of Financial Institutions for NMB Bank, agreed that testing with customers is critical. NMB asks customers for feedback through online portals, he said, the innovation team assesses it to see if it is practical, and if so it is rolled out as a product.
Kothe argued that innovation and competition drive organisations to re-think how they do business. “At SWIFT we had a similar experience. We started looking at the challenges faced in cross-border payments – the time it takes to receive a payment, the uncertainty regarding costs and timing, or whereabouts in the chain a payment was. We realised that there was a lot that could be done to deliver a much improved service using existing technology. We brought the community together to develop SIWFTgpi, a service which will deliver faster, more transparent and traceable cross-border payments experience. This collaborative, community-led approach is already delivering benefits for banks and their corporate customers.”
Digitalisation: the customer is king
Japhet Justine, Managing Director at the Tanzania Women’s Bank, continued on the theme of digitalisation and innovation. He noted that digitalisation has had a significant impact on financial inclusion rates in the region and the move to mobile payments has changed the game. In Tanzania, 129 million transactions were done on mobiles in 2016. “The banks are no longer the transaction kings,” he said. To keep up with mobile, Justine argued that digitalisation should become embedded in every bank’s culture, and not just the responsibility of one department.
Banks also need to keep the customer top of mind when developing products, he continued, which means products are likely to vary from bank to bank. “My bank serves women that are not part of the formal banking sector,” said Justine. “Our experience is therefore different from a bank like Stanbic where customers are taking a lot of loans. In the end, it depends on how you segment your clients; but in everything you are trying to roll out, the customer journey has to be in the picture – you need to customise to meet your clients’ needs. My products, for example, need to be simple, easy and convenient.”
Education critical to fighting cybercrime
Cybercrime is a challenge facing banks across the globe. The threat has never been more pressing and the risk is not going away, said Sido Bestani, Head of EMEA South, SWIFT. “According to a recent report from Serianu, Africa lost $2 billion dollars to cyber criminals over the last year alone. With hackers becoming more and more sophisticated, it is important that banks continue to invest in fighting cybercrime.”
Panellists agreed that the human factor is the weakest link when it comes to cyber security. “Any staff with access to the internet or a critical system poses a risk,” said David Lusala, Head of Risk & Compliance at Exim Bank. “We have to make sure we train personnel adequately.”
David Kasori, Manager of ICT, Security and Compliance at CRDB, agreed that education is key “Everyone could be prone to an attack, through emails and phishing scams. For an attack, you only need one weak link. We need to create awareness around this,” he said.
Testing internal processes and systems is also critical. CRDB regularly checks its systems and carried out penetration tests, said Kasori. “We need to understand how vulnerable our systems are,” he said. “If you scan your system early enough you can identify a ransomware attack before it is too late.”
Lusala argued that the Tanzania banking community still has a lot to do in terms of preparedness, both from a regulator and banking side. “The regulator should engage more with the banking community to discuss cybercrime and understand the preparedness of different institutions,” he said. “It can also play a key role in ensuring information sharing within the community. An individual bank may not be ready to share information with other players as they don’t want to expose themselves. The regulator can act as a central point and share relevant information.”