Correspondent banking relationships play a vital role in the economic development and trade of African countries. A strong correspondent banking network can help local banks in Africa to close the knowledge, technology, product and risk management gaps.
In recent times, banks around the world are seeing a strong necessity to assess their correspondent banks at other regions The act, which is referred to as de-risking, is leading many large international banks responding to concerns about money laundering and terrorist financing, regulatory challenges occurring due to withdrawing from certain relationships, products or even jurisdictions.
De-risking is increasingly widespread: a report published by The World Bank in 2015 found that 75% of the large international banks surveyed had reported a decline in their correspondent banking relationships, with the Caribbean most affected while Africa is also witnessing significant levels of de-risking, with some countries like Angola, Mauritius, and South Africa experiencing a dramatic reduction of 37%, 16% and 10% in the size of the international banking network available to them between 2013 and 2015 while Nigeria and Kenya saw an increase of 2.5% and 10% in the international banking network available to them during the same couple of years. However, this analysis provided by SWIFT also has it that, although Nigeria’s international banking network has not suffered de-risking, its local banks have at the same time been cutting their own relationships with other African banks, financial services providers or counterparties perceived to be more risky.
As much as these situations makes business difficult and unpleasant for individual banks, the effect affects the entire finance institutions globally. People must still make payments and if traditional banking windows are unable to facilitate that, then transactions are pushed to assess other options – using money remittance companies or asking someone to transfer it for them which also makes people more vulnerable ti criminals.
Although banks cannot be totally proof to risk, however, undertaking certain measures helps to reduce the chances of de-risking. The most notable cause for international banks to de-risk is lack of transparency over their respondent’s activity. It has become very clear that the market is moving towards more efficient and standardised approaches to data and document transparency.
Guy Sheppard, Head of Compliance Initiatives at SWIFT highlighted that, the best practice in handling transparency and to enhance good relation with correspondents is to have a single individual or department assigned with creating and maintaining a gold standard data set which can be shared with correspondents through data utilities or basic press. Utilities, such as SWIFT’s KYC Registry, also provides a shared platform for managing and exchanging standardised KYC data. KYC Registry has over 2,500 financial institutions already signed up, the Registry gives banks a means of sourcing and providing validated information from correspondents.
De-risking is having a significant impact on correspondent banking relationships around the world and there is an urgent need for the industry to solve these challenges while ensuring inclusion of affected markets in the financial industry.