In a bold move to bolster the African Continental Free Trade Area (AfCFTA), financial experts are calling for the establishment of an African Banking Union (ABU). This proposed union could be the key to unlocking the full potential of the continent’s ambitious free trade agreement, which aims to create a single market for goods and services across 54 African nations.
AfCFTA: A Milestone in African Economic Integration
The AfCFTA, launched on January 1, 2021, represents a significant step towards economic integration in Africa. Covering a market of over 1.3 billion people with a combined GDP exceeding $3.4 trillion, it has the potential to become the world’s largest free trade area in terms of participating countries. However for AfCFTA to truly succeed, it needs a robust financial infrastructure to support it. This is where the concept of an African Banking Union comes into play.
The success of AfCFTA depends on African leaders adopting a pragmatic approach that goes beyond historical grievances. Rather than relying on shared colonial histories or skin color as a unifying factor, a business-focused win-win strategy is essential. For example, rather than importing sunflower oil from Ukraine, African nations could source it from countries like Cameroon and Tanzania, where sunflowers are cultivated in abundance. This shift could stimulate local production and the establishment of processing plants, benefiting the entire continent.
A significant obstacle to trade in Africa is the prevalence of informal and often criminalized cross-border trade. Goods such as used engine parts, foodstuffs, and fabrics frequently move across borders without proper documentation. Despite official intra-African trade accounting for only 18% of total African exports in 2019,substantial informal trading continues. AfCFTA aims to formalize and streamline these transactions, enhancing trade ties and promoting industrial growth. History shows that economic integration can drive growth; for example, the European Union has achieved sustained economic growth and political cohesion through similar measures.
The Case for an African Banking Union
A banking union involves integrating banking systems under a unified regulatory framework to ensure financial stability and facilitate cross-border transactions. Without this, businesses will continue to face challenges such as currency exchange volatility and regulatory differences, which increase transaction costs and risks.
A banking union would also align with the African Union’s financial integration agenda, potentially leading to a single African currency in the future. An African Banking Union is not just desirable, it’s necessary for realizing the full potential of continental free trade. A banking union would address key challenges facing cross-border trade, including currency exchange volatility, regulatory differences, and uneven access to credit.
The proposed ABU would consist of three main pillars: a single supervisory mechanism; a single resolution mechanism; and a common deposit insurance scheme. These elements would work together to enhance financial stability, reduce the likelihood of banking crises, and create a level playing field for banks across the continent.
A fully realized banking union would include three main components: a single supervisory mechanism, a single resolution mechanism, and a common deposit insurance scheme. The experience of Europe’s banking union, the U.S. federal banking system, and the Gulf Cooperation Council’s financial integration efforts offer valuable lessons for Africa. Key strategies for implementing an ABU include phased development, balancing national and union interests, and prioritizing regulatory harmonization. Establishing an ABU will require careful planning, coordination, and a phased approach to achieve short-term goals such as building consensus and piloting financial integration initiatives.
Navigating Global Challenges
The ABU would need to navigate an evolving global financial landscape, including digital disruption from fintech and cryptocurrencies, cyber threats, and climate risks. However, it also presents opportunities for Africa to leapfrog older monetary systems and capitalize on its renewable energy potential to promote green finance.
Learning from Global Models
In developing the ABU, planners are looking to existing models worldwide, including the European Banking Union, the United States federal banking system, and the Gulf Cooperation Council’s efforts towards financial integration. There is no need to reinvent the wheel. The African Union Commission would need to learn from successes and challenges faced by other regions to create a model that works for Africa’s unique context.”
A Phased Approach
The implementation of the ABU is expected to be a complex, multi-year process. The proposed roadmap outlines a phased approach, with short-term goals focused on consensus building and piloting financial integration initiatives.
Key milestones will include:
Political commitments from participating countries
Harmonization of core banking regulations
Establishment of crucial ABU institutions
Increased supervisory coverage of significant banks
Challenges Ahead
Several challenges could arise, including political resistance, economic disparities, and diverse legal systems. To address these, flexible implementation timelines, technical assistance, and capacity building are necessary. Additionally, developing a continent-wide financial technology strategy and robust crisis management protocols will be essential for a successful ABU. By anticipating these challenges and preparing effective mitigation strategies, Africa can make significant strides towards economic integration, unlocking unprecedented levels of growth and development across the continent.
As Africa moves forward with its continental free trade ambitions, the establishment of an African Banking Union could prove to be the crucial next step in bridging borders and building prosperity across the continent. With careful planning and strong political will, the ABU could become a reality in the coming years, potentially transforming the landscape of African finance and trade.
Extracted from
Essia, U. (2024). African banking union: Bridging borders, building prosperity in the era of continental free trade: AfCFTA: Pathways to the largest common market in the African Continental Free Trade Area (AfCFTA) Book 2 https://www.amazon.com/author/uwemessia
Prof. Uwem Essia, a seasoned economist and academic with over three decades of experience in economic development, public financial management, and leadership, holds a PhD in Economics from the University of Calabar. His work has a global reach. He has an extensive consultancy background and authored several publications, making the audience feel connected to his global impact. He is currently engaged in personal studies and publishing.