Commercial Banks Privatization Lessons from Sub-Saharan African Countries by Dan Mozes

1. Commercial Banks Privatization Lessons from Sub-Saharan African CountriesbyDan Mozes

2. Three main issues: • Why did parastatal banks exist and what when wrong with them • Potential solutions – facilitating/detrimental conditions • Lessons learned

3. 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)

4. 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.

5. What went wrong (cont’d) • 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

6. 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.

7. 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

8. 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

9. 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.

10. 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.

11. Commercial Banks Privatization Lessons from Sub-Saharan African CountriesbyDan Mozes