3.1 SADC convergence performance against MEC targets for 2012 11
3.2 Required reforms to meet targets in 2012 14
3.3 Consistency of the SADC MEC targets with COMESA and EMU MEC targets 15
4. Identifying and analysing lessons learnt from the financial integration of the European Union (EU) 17
4.1 Failure to apply agreed qualification criteria 18
4.2 Failute to enforce the law against defaulting member states 19
4.3 Single Euro Payment Area (SEPA) 19
4.4 Migration of bank customers 21
5. Lessons learnt from the COMESA journey 21
5.1 Multiple memberships 22
5.2 Fears over distribution of integration gains 23
6. The South African banking sector’s readiness for change 24
6.1 Readiness for financial integration 24
6.2 Readiness for change 25
7. The impact of financial integration on the big four South African banks according to PESTEL 26
7.1 Single Payment System 27
7.2 Single Currency 28
7.3 Loss of sovereignty 29
7.4 Competitiveness 29
7.5 Infrastructure 30
8. Recommendations 35
8.1 Review of process flow 31
8.2 Scenario planning to mitigate membership risks 31
8.3 COMESA and EAC involvement 32
8.4 Private sector partnership 32
9. Conclusion 35
10. Bibliography 38
Africa is a continent characterised by diverse socio-economic and political challenges and immense opportunities, whose ultimate vision is to become a truly, fully functional united continent. One way to realise this vision is to ensure the effective regional integration of financial systems, something Africa and African leaders have acknowledged as a necessity and are already pursuing.
According to the Economic Commission for Africa (ECA) and the World Bank, Africa is the most subdivided continent in the world. Almost 170 borders divide 53 African countries. Among other things, these divisions have led to limited economic growth and development and have allowed for the creation of small markets with limited or no bargaining power. In response, the continent has embarked on a journey to promote regional integration and economic development through various programmes and trading blocs, of which the Southern African Development Community (SADC) is one example.
Established in 1992, SADC’s main aim is to ensure deeper economic integration in the region and to facilitate the socio-economic development of member countries. A number of programmes have been put in place, with one of the key targets being financial integration and a single currency in the region by 2018. Financial integration will have a huge impact on how business is currently being conducted in SADC and even more so, on the banking sector.
This paper is a study of the proposed integration of financial systems across SADC. It seeks to investigate and analyse the potential impact of the proposed integration on the South African banking sector; in particular, the readiness of the big four banks, namely Standard Bank Ltd., Absa Bank Ltd., FirstRand Bank Ltd. and Nedbank Ltd., for the integration. It will highlight challenges and constraints the South African banking sector faces as a result of the impending integration.
Recommendations will be made through this paper, covering tings that the South African banking sector, specifically the aforementioned banks, can do in order to minimise the impact of the envisaged integration while maximising the opportunities and benefits thereof. The PESTEL model, which takes into consideration the Political, Economic, Social, Technological, Environmental and Legal implications of integration,
will be used as a tool to evaluate the possible impact of the envisaged integration.
The paper will also draw on lessons learnt in the integration of the Euro Zone and the Common Market for Eastern and Southern Africa (COMESA)
The basics of economic integration were promulgated by Hungarian economist Bela in the 1960s, which indicated that as economic integration increases, barriers to trade amongst countries diminish, which in turn could lead to economic development. Wakeman-Linn and Wagh (2008) define economic integration as a process, whether market driven or institutionalised, which broadens and deepens financial links within a region, which, at the very least involves eliminating barriers to cross-border investments and differential treatment of foreign investors.
As shown in figure 1 below, economic integration, according to Zyuulu (2008), can be categorised into four stages:
Figure 1 Data Source: Zyuulu (2008):
Stage one: this involves a Preferential Trade Agreement (PTA) whereby countries either agree on low tariffs for certain products or agree to eliminate tariffs amongst themselves, maintaining their own external tariffs on imports from the rest of the world.
Stage two: this involves a Free Trade Area (FTA) or common market where there is free mobility of labour, goods, services and capital.
Stage three: speaks to an Economic Union (EUN), with free trade, a set of common external tariffs (custom union), common market and some regulation on the fiscal spending amongst the member states.
Stage four: is about Monetary Union (MUN) whereby stages one to three features are present, including a common currency among the group of member states, which entails the formation of the Central Monetary Authority (CMA).
SADC economic integration
The commitment to economic integration as an economic and socio-economic growth strategy in Africa can be seen in the amount of regional integration efforts currently taking place on the continent. Other than SADC and the Common Monetary Area (CMA) there is also the East African Community (EAC); COMESA; the West African Monetary Zone (WAMZ); the Economic Community of West African States (ECOWAS) and the Middle East and North Africa (MENA) regional blocs. Refer to figure 2 below.
Figure 2 - Data Source: SADC (2009)
The formation of SADC in 1992 saw member states recommitting themselves to concerted efforts to achieve deeper regional integration as a means of attaining socio-economic development. SADC member states include Angola, Botswana, Democratic Republic of Congo (DRC), Lesotho, Madagascar (suspended), Malawi, Namibia, Mozambique, Mauritius, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.
Refer to figure 3 below, depicting the current SADC member states and the states that are members of multiple regional economic integration initiatives, which could pose as a challenge for the SADC financial integration.
Figure 3 – Data Source: SADC (2010)
According to the SADC Regional Indicative Strategic Development Plan (RISDP), there are a number of initiatives that have been put in place aimed at ultimately achieving Monetary Union as referenced earlier in this paper. A SADC free Trade Area was launched in 2008, with the intention of progressing to a Customs Union in 2010 and a Common Market by 2015. It is envisaged that by 2016 monetary union will be formed with the intent to introduce a regional single currency by 2018. (See figure 4 below).
Figure 4 - Data Source: SADC (1999)
SADC member states have set themselves primary targets for four macro-economic indicators to measure macro-economic convergence. Macro-economic convergence (or stable levels at least) is needed before Monetary Union can be formed.
The chosen four primary indicators and their targets are:
Fiscal Deficit/ GDP
Public Debt/ GDP
Current Account/ GDP*
Table1 Data Source: SADC (1999) *SADC intentions are to reduce the primary indicators to three, by demoting the status of the current account to a secondary indicator. However, this awaits the imminent ratification of the Protocol to legalise the revision.
Economic integration for SADC is geared towards creating larger markets with favourable investment and business environments to allow for sustainable and equitable economic growth in the region. It further aims at fostering socio-economic development and improving the livelihoods of the citizens of the region. FIP (2006). Below are the main economic integration benefits as depicted by SADC:
Creation of wider competition and increased foreign investment.
Opening up of economies to the rest of the world.
Strengthening of regional credibility through lock-in policy mechanisms.
Strengthening of the region’s negotiating and bargaining power with the international communities.
The concept of financial integration
Financial integration is a subset of broader economic integration. It could be defined as the removal of any barriers to an integrated market for financial services. Financial systems are seen to be integrated once the regional financial markets agents face identical rules, having equal access to financial instruments or services in the market and equally treated when active in the market. ECB (2004)
The integration of financial systems is crucial for effective Monetary Union, since monetary policy is implemented through the financial systems. Therefore, financial systems are to be as efficient as possible to guarantee a smooth and effective transmission of monetary policy. ECB (2004)
Financial integration further involves the structuring of the financial intermediaries and institutions within the region and can thus be seen as the convergence of the financial structures. Furthermore, financial integration requires that the same access is given by financial institutions, to clearing platforms, among other things, to both the demand and supply sectors. ECB (2004).
SADC financial integration
In August 2006, SADC states entered into a finance and investment protocol (FIP), which provides the legal framework towards the operationalisation of financial integration in the region. FIP was deployed as tool to ensure harmonisation of investments and financial policies in SADC. FIP (2006)
FIP aims at formulating and implementing stability-oriented macro-economic policies towards the attainment of macro-economic convergence and development, as well as the strengthening and deepening of financial and capital markets. It also seeks to harmonise the policies, legal and regulatory frameworks relating to the financial and investment environment. It further seeks to promote SADC as an attractive investment destination. FIP (2006)
With reference to figure 5 below, SADC has defined a programme structure towards an effective implementation of financial integration across the region. Different working committees have been set up by SADC to drive and to oversee regional financial integration. There is involvement of both the public and private sector. The public sector is engaged through the SADC states, SADC committee ministers and the Committee of Central Bank Governors, while the private sector is represented by the SADC Banking Association of which South Africa is a secretariat. The private sector is also involved in a number of committees within the Committee of Central Bank Governors.
It is envisaged that regional integration of financial systems will yield various benefits for South African Banks, despite these benefits, consideration needs to be given to the implications on liquidity and capital adequacy, the implications on treasury and other related matters, principles and operational company-specific policy considerations, retaining a competitive environment as well as legal and regulatory matters. The human element also needs consideration and includes issues like the management of shared resources and the integration of cultures.