African Bank Research Articles

IT disclosures in integrated reporting within the South African banking sector

The current study sought to assess the banks in South Africa and their compliance with IT disclosures and narrating in their integrated reports for the 2021 financial year, as required by King IV. Empirical analysis was undertaken using a descriptive study based on secondary data from integrated reports of the five (5) biggest banks by asset size and market share. Data was analysed using both content analysis and descriptive statistical analysis. Findings showed no universal compliance with 80% compliance rate being recorded for various recommendations contained in Principle 12 of King IV. Thus, there remains non-compliance by 20% of studied banks with regards to various recommendations. The study recommends that banks strive to make the requisite IT disclosures in their integrated reports, particularly given the importance of such disclosures and related compliance. Further, the disclosure made by banks should be as material and comprehensive as possible and not just a tick-box kind of disclosure. This would enhance the utility of disclosures provided to stakeholders.

Derivatives use and the risk‐taking behaviour of African banks

AbstractEvidence has been presented that banks typically maintain risk‐exacerbating derivatives positions. Within the context of African economies, this paper focuses on the impact of derivatives activities on the risk‐taking impulse of banks. It also examines the risk‐taking impulse resulting from banks' business lending efficiency. Estimation was carried out using standard ROA—and ROE—based idiosyncratic risk metrics and two‐stage least squares regression. Results indicate unsustainable levels of banking stability and increased risk‐taking. The banks exhibit hazardous behaviour in the current climate of the rapid transformation of the banking systems, calling for regulatory vigilance to limit imprudent actions. [Correction added on 17 March 2023, after first online publication: This version has been updated with a truncated abstract as supplied by the author.]

Is the relationship between bank stability, competition, and intervention quality nonlinear? Evidence from North African countries

AbstractThis paper highlights the existence of a nonlinear relationship between bank stability and competition and analyzes the role that government intervention plays in shaping this relationship. We used a sample of 45 banks in North African countries over the period 2005–2019. We applied a semiparametric approach based on penalized spline estimation. The results unveil the specific shape of the competition–stability relationship at different levels of competition; banks reconsider their risk‐taking behavior at each level of competition. This nonmonotonic stability at different levels of competition is attributed to the quality of intervention, which is found to be an important determinant in shaping this relationship. Thus, we explain the dispersion of risk levels among North African banks in part by the quality of regulation in each country and conclude by recommending the strengthening of regulation, supervision and the macro‐prudential framework.

Competition–banking stability: the moderating role of government intervention quality in North African countries

PurposeThis study investigates how bank competition affects financial stability and whether government intervention contributes to shaping this relationship in North African countries.Design/methodology/approachA review of the literature on the subject was conducted, combined with an empirical analysis that used a two-step system generalized method of moments (GMM) and a sample of 45 banks operating in North African countries over the period 2005–2019.FindingsThe findings reveal a quadratic relationship between competition and banking stability in North African countries. Competition–stability view and competition–fragility view could be applied at the same time for North African banks. Additionally, in this context, results highlight a negative impact of government intervention on financial stability in a competitive financial sector. North African banks operating in a high government intervention quality environment tend to engage in high-risk investments. Robustness checks with alternative measures of competition and banking stability also show consistent results.Originality/valueTo the authors’ knowledge, this is the first time that the North African context has been explored to determine the role of the quality of government intervention in the relationship between competition and banking system fragility. This paper seeks to cover the shadow field in existing literature through further new information. Thus, it contributes to the emerging market banking literature by showing that both high and low levels of competition can improve financial stability in North African countries. Moreover, it expands its contribution by displaying the moderator effect of intervention quality on the bank competition–stability relationship.

Brand loyalty as a competitive advantage for South African banks

This study investigates the role of brand loyalty in South African banking. More specifically, the study identifies brand loyalty factors in South Africa’s banking industry. Brand loyalty can significantly impact a bank’s competitiveness. Loyal customers do not switch banks and use more banking products; this earns a better income for a bank in the long run (such as home loans). The study’s primary aim is to identify factors of brand loyalty in South African banks. Data were gathered from South African banking customers using a Google Forms digitized format questionnaire with a 5-point Likert scale. More than 1,000 questionnaires were distributed, and 150 completed questionnaires were returned (representing a 15% response rate). The results show that the data are suitable for multivariate analysis. It has an adequate sample (Kaiser, Meyer and Olkin measure > 0.70), acceptable sphericity (p ≤ 0.05), and satisfactory reliability (α ≥ 0.70). The exploratory factor analysis identified four factors explaining a cumulative variance of 55%. These factors are: 1) customer service and satisfaction (34%); 2) negative publicity (7.5%); 3) regulatory compliance and trust (7.1%); and 4) trust and reputation (6.5%). South African bank managers can use the results to focus their brand loyalty strategies on their quest to be more competitive to face the strong competition in the banking industry.

Application of forensic accounting techniques in the South African banking industry for the purpose of fraud risk mitigation

The purpose of this study is to investigate the application of forensic accounting techniques in relation to fraud risk mitigation. This study employed an explanatory research design and a qualitative approach accompanied with a purposive sampling method. A primary data source was devised with a focus on the 17 licensed commercial banks registered in South Africa. By obtaining a true reflection of the situations in the banks, a conclusion was drawn following the outcome of the inferential statistical analysis. The research was conducted at the individual and organisational levels, with the bank consultants presenting their views. One hypothesis was formulated and non-parametric statistical analyses involving the use of Chi-square test, Fisher's Exact test and Spearman’s correlation were carried out. The results obtained substantiate that the loopholes created as a result of non-effective application of forensic techniques are partly responsible for some cyberfraud incidents in the banking industry. There is no sufficient evidence to ascertain whether the fraud risk assessment and management in the banking industry has a relationship with the effective application of forensic accounting techniques in terms of the identified causes of cyberfraud. However, the findings establish a positive correlation between fraud risk assessment and management as it relates to forensic accounting implementation. This study provides an insight into the significance of forensic accounting applications for fraud risk mitigation. There is still a death of information regarding the forensic accounting for fraud risk mitigation; hence, it is envisaged that this study will add to the existing literature in this regard.

The accounting treatment of expected credit losses by South African banks during COVID-19

Orientation: The coronavirus disease 2019 (COVID-19) pandemic negatively affected borrowers’ ability to repay debt, which is expected to influence banks’ calculation of their expected credit loss (ECL) allowance. Comprehensive disclosure regarding the application of managerial judgement in calculating ECLs would produce decision-useful financial information.Research purpose: This study explored the effects of the COVID-19 pandemic on the measurement and disclosure of ECL allowances by South African listed banks.Motivation for the study: It is unknown whether decision-useful financial information regarding South African banks’ ECLs was produced during the pandemic, mirroring developed countries.Research approach/design and method: Content analysis of quantitative and qualitative data from annual financial statements was employed for a sample of listed banks.Main findings: Banks employed a variety of relief measures to accommodate borrowers, but these relief measures did not automatically trigger a significant increase in credit risk. More loans were subject to lifetime ECLs, causing the ECL allowance to increase substantially during the first year of the pandemic. Forward-looking information as well as postmodel adjustments were employed to measure the ECL allowance.Practical/managerial implications: The ECL allowances of South African listed banks increased during the pandemic. Disclosure in the annual financial statements and identifying ECLs as a key audit matter provided evidence of adequate consideration of the credit risk and forward-looking information influencing ECLs by banks and their auditors. Improved disclosure regarding postmodel adjustments is required.Contribution/value-add: During the COVID-19 pandemic, decision-useful financial information regarding the calculation of banks’ ECL allowances was available for South African banks, mirroring developed countries.

What drives bank income smoothing? Evidence from Africa

We investigate whether banks use loan loss provisions to smooth income and whether this behaviour is influenced by foreign bank presence, ownership and institutional quality differences across African countries. We examine 370 banks from 21 African countries from 2002 to 2021. We find evidence that African banks use LLPs to smooth their income when they are more profitable during economic boom or recession. Income smoothing is persistent (i) among banks with a widely dispersed ownership, (ii) among banks with strong government ownership and (iii) among banks with weak government ownership. Income smoothing is also persistent in African countries that have greater corruption control, better regulatory quality and political stability. In contrast, moderate concentrated ownership reduces bank income smoothing. Bank income smoothing is also reduced in African countries that have strong rule of law, high government effectiveness, strong foreign bank presence and strong voice and accountability institutions. The implication is that effective corporate governance and institutional quality can constrain the extent of income smoothing by African banks.

The assessment of the impact of cyberfraud in the South African banking industry

PurposeThe purpose of this study is to assess the impact of cyberfraud in the South African banks with the aim to provide recommendations to effectively mitigate it.Design/methodology/approachThe study uses a qualitative approach involving the use of structured questionnaires. The questionnaires were made available to the staff of 17 licensed banks in South Africa who deal with management, operation, administration and banking services. Two hypotheses were formulated and non-parametric statistical analyses involving the use of Chi-square test, Fischer’s Exact test and Spearman’s correlation were carried out. The two hypotheses formulated were tested to draw a conclusion.FindingsThe results obtained indicate that the impact of cyberfraud in the South African banking industry is highly significant and has affected the reputation of some of the banks. This calls for the need to review the diverse ways of curbing cyberfraud to lessen their impact and that of associated fraud risks on the banking operation.Practical implicationsThis study provides an analysis on the relationship cyberfraud occurrences and the reputation of South African banks. The implementation of the recommendations may reinforce the existing security measures in the fight against cyberfraud.Originality/valueThe novelty of this study lies in the fact that the assessment of the impact of cyberfraud on the banking industry in South Africa has not been sufficiently highlighted by the existing literature.

Islamic Banking Customer Engagement and Awareness: Exploring an African Context

The Islamic banking industry is a niche market within the South African banking industry. Information is needed on the profile of customers and their level of awareness concerning activities at Islamic banks. Thus, the objectives of this study are to identify the banking engagements and level of CSR awareness among customers of Islamic banks in South Africa. The study used non-probability sampling to collect data via a questionnaire from 163 respondents throughout South Africa, which was analysed using descriptive statistics. The results indicate that respondents sought out Islamic banking for themselves; they also had a long-standing relationship with the Islamic bank and mainly used saving, current, and investment accounts. The findings also showed that respondents needed to be made aware of the CSR activities undertaken by the Islamic banks, and they could have engaged in CSR activities more regularly. Thus, those in management at Islamic banks are encouraged to engage in proactively making their Sharia-compliant offerings and CSR activities visible.

The Governance and Disclosure of IFRS 9 Economic Scenarios

Extraordinary economic conditions during the COVID-19 pandemic caused many IFRS 9 impairment models to produce unreliable results. Severe market reactions, resulting from unprecedented events, prompted swift action from the regulatory authorities to maintain the financial system’s stability. Banks managed the uncertainty and volatility in the models with expert overlays, increasing the risk of biased outcomes. This study examines new ways of enhancing the governance and transparency of the IFRS 9 economic scenarios within banks and suggests additional financial disclosures. Benchmarking is proposed as a useful tool to evaluate the IFRS 9 economic scenarios and ensure effective challenge as part of a model risk governance framework. Archimedean copulas are used to generate objective economic benchmarks. Ideas around benchmarking are illustrated for a set of South African economic variables, and the outcomes are compared to the IFRS 9 scenarios published by the six biggest South African banks in their annual financial statements during the pandemic.

Influence of interest rates and performance of lending institution in Africa. A Critical Literature Review

Purpose: Financial performance is a key determinant of assessing organization success. The financial performance is geared toward determining whether the firms have generated enough income for maximizing shareholder’s wealth as opposed to the mere maximization of the firm’s net profit. The overall objective of this study was to examine influence of interest rates and performance of lending institution in Africa. A critical literature review
 Methodology: The paper used a desk study review methodology where relevant empirical literature was reviewed to identify main themes and to extract knowledge gaps.
 Findings: The study also concluded that interest rates on loans and advances became significant in affecting performance in terms of profits before tax and exceptional items (PBTEI) and also returns on equity (ROE). This conforms to the study by Kibuthu (2005) that those who borrow from lending institutions are sensitive to interest on loans, borrow more when rates are low and favourable allowing banks to make more in profits.
 Unique Contribution to Theory, Policy and Practice: The study recommends that since majority of African banks continued making huge income from loans then the information on total cost of loans to the borrowers should be made very clear on all platforms that hold this information. Diversification to other non- interest revenue sources is a way to reduce banks’ overreliance on interest income.

The Impact of Bank Regulation on Bank Performance: A Novel Analysis of the Pre-Covid Era with Cross-Country Evidence

Banks play a pivotal role in all economies by bringing balance to the economic flows of surplus and deficit. As a result of this, they are heavily regulated by national and globally accepted regulations such as the Basel III Accord. This research aims to ascertain the impact of the prudential Basel III regulations on the financial performance of selected listed African banks before the advent of Covid-19. The study used the fixed effects and random effect estimator to fit the static panel data established for the study. A panel of 45 listed banks from six African nations were used, covering the period from 2010 to 2019. The study concludes that the adoption of tighter and higher Basel III regulatory requirements has a double-edged-two-face implication on African banks’ financial performance. This conclusion is based on the findings that the capital adequacy ratio has a positive effect on the financial performance of African banks while the liquidity and minimum capital requirement have a negative effect.

Determinants of Banks’ Risk-Taking Behaviours in Africa: A Regulatory Perspective

The intermediation role of banks between borrowers and savers exposes them to various risks which impact their risk appetite and behaviour. Using annual panel data for the period 2010 to 2019, this paper examines the determinants of risk-taking behaviours of banks within the African context. The study sampled 45 listed banks from African nations that have adopted the Basel III regulatory requirements and used the random effect estimator to fit the static panel data models established for the study. The study shows that minimum capital requirements, capital buffer premium and profitability were significant determinants of the risk-taking behaviour of the African banks. However, compared to other variables, the minimum capital requirement remained the most important factor in terms of determining the risk-taking behaviour of the selected African banks. This is because the minimum capital requirement determining measure is more significant across the three measures of the risk-taking behaviour of the African banks compared to others. The study recommends that African banks should establish risk limits, improve risk identification, and establish a platform for bank stress testing by using the key determinants of risk-taking behaviour in making strategic business decisions.

Asymmetric financial support and risk of non-repayment of bank loans: An analysis in the CEMAC context

The aim of this article is to determine the factors contributing to the increase in the risk of non-repayment of bank loans in financing relationships in the Central African Economic and Monetary Community (CEMAC) zone. Analysis of data from reports by the Central African Banking Commission (COBAC) has established these various factors. A summary of the analyses reveals that the presence of information asymmetry in the relationship leads the bank and the company to give priority to personal interests (Mbama, 2022). The proposed solution encourages both parties to promote reciprocal and benevolent behaviour in order to create mutual trust in the relationship and reduce the existing information asymmetry. Overall, solving the problem of loan default requires a multi-faceted approach (Porretta et al., 2020). This involves raising collective awareness, improving the regulatory framework, strengthening the financial management capabilities of businesses, and introducing more effective risk control systems by banks (Hertouch & Achibane, 2020). By taking these measures, it is possible to create a more favourable environment for businesses to prosper and contribute to the sub-region’s economic development.

Spillover effects in the banking sector of emerging economies: a South Africa case study

The aim of this article is to identify the presence of knowledge transfer and spillover effects and investigate the mechanism in which they materialise through efficiency and performance gained resulting from two foreign banks’ majority and minority ownership in the South African banking (SA) sector. To achieve these objectives, performance and efficiency indicators of ABSA and the Standard Bank are collected and computed using the t-statistics model. The results are analysed in light of interview outputs with several SA banking actors. The findings suggest that not only these two banks became more efficient after foreign participation in their ownership structure, but also the level of knowledge transfer depends on the type of ownership. In addition, the emergence of Capitec bank, a relatively new player in the SA banking sector contributed to the competition effect in the segment of retail banking whereas the new entity Barclays/ABSA, a majority FDI, became a catalyst to competition effect in the segment of investment banking.

A GENERIC COMPUTER VISION TOOL FOR RECOGNISING HUMAN ACTIVITIES

A prominent application area in the domain of computer vision is human activity recognition, which involves automatically detecting people’s actions from video footage. In this paper, a generic decision support tool capable of performing human activity recognition by employing computer vision is developed. The objective of the decision support tool is to facilitate the analysis of video footage by learning to identify human activities from video footage. The decision support tool facilitates the processing of raw data, the training of a computer vision model in respect of the processed data, and the deployment of the trained computer vision model in respect of unseen video footage. This paper details a computerised implementation of the decision support tool in respect of a benchmark data set and real-world data set involving the cash replenishment process of a South African bank.

Predicting stock market direction in South African banking sector using ensemble machine learning techniques

<abstract> <p>The ability to accurately predict stock price direction is important for investors and policymakers. We aim to predict the direction of daily stock returns for five major South African banks using ensemble machine learning techniques. Financial ratios were used as predictors in single classifier and ensemble models. The key findings were that the support vector machine performed best among single classifiers, with the highest accuracy for 4 banks ranging from 54% to 99% and produces fewer wrong classifications compared to its peer single classifiers. More importantly, the heterogeneous ensemble classifier, combining support vector machines, decision trees and k- (KNN) nearest neighbors, achieved average accuracy rates above 95% and outperformed all other models. This confirms that ensemble methods that combine multiple models can generate more accurate predictions compared to single classifiers. The results suggest that the heterogeneous ensemble is a suitable approach for predicting stock price direction in the South African banking sector. The findings imply that investing in banks may be a good decision and can assist investors. However, further research could expand the models to incorporate macroeconomic and other external factors that influence stock prices. Overall, we demonstrate the value of ensemble learning for a complex forecasting problem. The heterogeneous ensemble approach achieved high accuracy and outperformed single classifiers. However, future research incorporating additional factors and policy implications could build on these findings.</p> </abstract>

Behavioural Biases Influencing Technology Adoption by South African Bank Customers

Behavioural Biases Influencing Technology Adoption by South African Bank Customers

Estimating Long-Run Implied Growth Rates and Cost of Equity: Practical Application for South African Banking Stocks

Estimating Long-Run Implied Growth Rates and Cost of Equity: Practical Application for South African Banking Stocks