Kenyan Banks’ Suffer High Transaction Costs as Global Correspondent Banking Relationships Drop by 25%

Summary:

• Accuity, the global financial crime compliance, payments and know your customer (KYC) solutions provider has revealed that between 2009 and 2016, correspondent banking relationships have reduced globally by 25%.
• Since the global financial crisis of 2008, regulators have imposed requirements for greater transparency, established higher liquidity thresholds for banks as well as stepping up enforcement actions on institutions that violate anti-money laundering (AML) regulations.
• Stringent regulations and high penalties for non compliance has led to de-risking by major correspondent banks hence cutting out some geographical regions like Africa since the financial reward of correspondent banking does not compensate compliance penalties risks.

Correspondent banking is a situation where one financial institution provides services for another financial institution in a different geographical area to allow cross-border payments.

Kenyan banks rely on correspondent banking relationships to settle foreign transactions and allow importation of goods to the local market.

Local banks have been having difficulty in finding or retaining global correspondent banks as de-risking by international banks in Europe and the US hit emerging market regions. De-risking is the process where an international bank terminates correspondent banking relationships when the threat to the bank of doing business in the high risk geographic areas outweighs the benefits of services to their client.

With AML penalties clocking as high as 10 billion dollars in 2014, doing correspondent banking in high risk geographical areas has become impractical.

Lack or loss of correspondent banks has increased international transaction costs for local banks. Many local banks have to use more than one intermediary which significantly increases transaction costs and decreases transaction efficiency.

Third tier banks have been largely affected as their risk compliance levels fall short of international standards while their portfolios do not support acquisition of advanced AML and KYC automated systems.

Local banks have to look now beyond Europe and the US for correspondent banking services to retain their international customers. The East may be a good place to start especially China which seems to be unaffected by the current global correspondent banking restructuring.

While global correspondent banking relationships decreased by 25%, Accuity research revealed China experienced a 133% increase in the number of banks since 2009 and an astounding 3,355% growth in correspondent banking relationships during the same period.

In terms of currency denomination, Chinese Renminbi (RMB) correspondent banking relationships increased by 8%, US dollar (USD) correspondent banking relationships decreased by 15% while Euro (EUR) correspondent banking relationships decreased by 23% according to the same research.

What options do local banks have to solve this issue?

Apart from looking beyond US and Europe in finding correspondent banks, the local banks can pursue one of the stated below options.

• Bite the bullet and upgrade to internationally accepted standards in terms of personnel and systems.
• Alternatively local banks may opt to merge hence making it more economical to equip their staff and update their systems.
• Smaller local banks may also be acquired by larger banks which do not have correspondent banking difficulties or already have an international presence.

As global regulations and penalties increase, high risk regions may be locked out of the international market if they fail to evolve. Kenyan banks and the regulator should ensure international standards are met locally to enable easy transaction of business payments and increase visibility of Kenya as a financial hub.