Iedp 2010 Action Learning Project Regional Integration of Financial Systems

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    1. Review of process flow

The European Union embarked on attaining a single currency which was then followed with the single payment system, whilst SADC is planning to do a single payment system prior to a single currency. Integrating economic and monetary markets without having one currency has proven to be possible. However, having one currency is believed to further strengthen the internal market by allowing for a smoother and free movement of goods, services, capital and people. This was the main reason the Euro was introduced in 1999 as the accounting currency, and in 2002 Euro banknotes and coins were introduced into the Euro Zone. The approach taken by SADC to integrate the financial systems first is therefore workable, but with lots of technology and infrastructure changes.

The implication for the big four SA banks is that they will be pulled into work team to develop the various requirements to enable the payments environment as soon as 2011. Given the technology and infrastructure challenges for a single payment system without a single currency, the big four should start building up specialised resources to face these challenges, while still providing in-house support.

    1. Scenario planning to mitigate membership risks

The European case study is a classic example of how politics reigned supreme over agreed economic principles. Countries failing to meet the MEC criteria were allowed to join the EU, and when the economic crisis of 2008 hit, countries were bailed out, which is against the principles of the European Union treaty.  The consequences of these decisions are still unfolding today.

It is recommended that SADC does a detailed scenario plan with possible economic and political scenarios, and draw up an action plan to mitigate this risk. The big four SA banks would then need to translate these risks into individual balance sheet risks. For example, rapid expansion strategies into Botswana might be at risk, should Botswana decide not to become a member of SADC.

    1. COMESA and EAC involvement

Currently, SADC, COMESA and EAC are competitive regional programmes, despite multiple member overlaps. Many countries are using “wait and see” tactics before making a final call on their preferred partners in trade or regional bloc. For example, Tanzania is a member of the EAC as well as COMESA and they do not seem to be in a hurry to cement their allegiance. From a legal as well as technical point of view, based on available literature, a country cannot apply two different common external tariffs and therefore cannot be a member of more than one customs union. It is therefore clear that SADC cannot embark on the journey towards a monetary union alone.

It is recommended that SADC seeks consultation and involvement from COMESA and EAC. Should the three entities continue to exist in their current format, it will have severe implications on South African Banks. South African banks are embarking on aggressive expansion strategies into Africa, and three different RECs will add substantial complexities in payments systems, regulatory requirements and customer relationship on the banks.

    1. Private sector partnership

The current SADC roll-our plan is centrally organised by the central banks of each member. The corporate, business and retail banking sectors have been involved to a very limited extend, although the changes required from them are substantial. It is recommended that the South African Reserve Bank embark on a greater inclusion strategy, for private sector expertise to be utilised more effectively.

Lessons learnt from the European integration project were a combination of different and potentially contradicting factors. According to (Kühnhardt, 2008) the following two factors should be taken cognises of by the big four banks:

  1. The recognition that a joint will requires compromises which are not always based on a speedy “return on investment” but need to be understood as a long term commitment of all partners.

  2. The understanding that different interests can be coupled through mutual trust in the overall usefulness of a project in spite of existing differences in motivation and objectives.

  1. Conclusion

This paper explored the definitions and meaning behind both economic and financial integration, including some background on SADC as an economic region and what the union seeks to attain. Analysis on the progress to date in all the SADC initiatives and set targets was undertaken and documented as part of this paper.  Lessons learnt from the Euro Zone economic integration process and other economic integration initiatives in the African continent were investigated. On the basis of the Euro zone case study in conjunction with other current economic integration initiatives studies done as part of this research paper, economic integration could be a complex and a lengthy process, which requires political will and commitment from all the parties involved.  Economic integration requires the parties involved to have a common drive and interest; benefits should be visible and attainable to all the parties involved.  The economic integration process is also characterised  by lots of fears from parties involved, in many instances fear of loss of economic value by the countries with bigger economies whilst the smaller countries have the fear of ‘big brother’; taking over. Most countries also demonstrate the fear of losing their sovereignty, particularly where a monetary union is envisaged.

Financial integration as a subset of this process is by and large impacted by the economic integration broader processes. It is largely dependent on the agreements reached by the head of states and the head of central banks.  This makes financial systems integration an even more complex process mainly because of the dependences and the minimum control the parties required.

This also holds true in the case of SADC, the discussions and the processes towards economic integration have been ongoing from as early as the mid-1990’s yet the implementation strategy and plans are yet to be finalised.  As a result as recent as July 2010, the SADC central bank only unveiled the road map towards the financial system integration with an expectation that the commercial banks should be ready for the monetary union in 2016.  This does not give the stakeholders, mainly commercial banks much time to work.

Therefore the commercial banks have limited time to undertake necessary steps towards meeting the 2016 monetary union vision.  The key for the big four banks in South Africa is to work very closely with the Reserve Bank through the defined structures to ensure that their input is taken into account as the strategy and plan towards financial integration is being defined.  Their commitment and partnership with the South African Reserve Bank will make the process much bearable and will give them a platform to influence decisions and plans.

Given the technological, infrastructural and operational impact the financial integration brings; the banking sector needs to start prioritising initiatives towards financial integration such that they are included in as early as their 2011 budgets.  Programmes to drive the process should be established to ensure an integrated means of driving the process.  The scoping process to establish the required initiatives should be one of the big four bank’s priority programme’s in 2011, clarity on the costs and the effort involved at an early stage will allow them for better planning and even better collaboration wherever required and possible. 

Based on the discussions held with different stakeholders in the banking sector, it was clear that the current structures set out to achieve the financial integration are not yet utilised to their capacity.  The payments committee came up as the only committee that is currently active in pursuing its goal towards financial integration whilst others are not yet that active in the process.  The SADC central bank needs to ensure that these committees are well established and driven to ensure progress and buy in from all the parties involved. 

It is safe to conclude that most, if not all, SADC stakeholders are not oblivious of the challenges and opportunities presented by the expected integration of financial systems across the region. Certain milestones have already been achieved en-route to full integration. In the words of Mshiyeni Belle (The Times, Times LIVE, 21 July 2010), the head of the secretariat of the SADC's committee of central bank governors, though the task may be daunting, it is not impossible, as shown by the amount of preparatory work currently underway. However, coordinating the work being done and communicating al actions appropriately remains a challenge.

As stated earlier, SADC planned to have a single currency by 2018 and a single central bank by 2016. Already, 12 countries have implemented real time settlement and 12 countries have implemented at least one electronic clearing system. About eleven of the 15 countries have real time gross settlement systems. Challenges remain especially around the harmonisation of banking supervision regulation, general banking laws, ensuring uniform IT systems and a framework that engenders good corporate governance.

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