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

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

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)

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.

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

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.

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

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

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: 1. Split monobank 2. Sell majority of shares in commercial bank to foreign investors 3. Government participate in the creation of new bank 4. Foreign shareholders of the 2 banks merge 5. 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.

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.

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