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Abstract
This chapter explores the role of Information and Communication Technologies (ICTs)
in the international development of South African banks. It is argued that South African
banks derive important advantages from the use of ICTs in their expansion into
neighbouring countries. Using Dunning™s (1989, 1988) eclectic approach as a
mechanism with which to assess the evidence supporting this argument, ICT is explored
both as an ownership specific capacity, as a locational specific factor influencing the
geographical pattern of international expansion, and as a facilitator of the
internalization of cross-border banking networks. Through an investigation of the
significance of digital technologies in the cross-border expansion of South African
banks, including case studies of Stanbic and ABSA, this chapter highlights the
opportunities and challenges confronting such organizations. In so doing, the chapter
will contribute to the understanding of intra-African foreign direct investment in the
banking sector and the emerging digital economy in developing countries.




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Digital Technologies and the Cross-Border Expansion of South African Banks 253


Introduction
The financial sector is central to the economy. Economic activity must be financed, thus,
as economies grow so to do their financial sectors. Indeed, developments in the
economic, political and technological environment over the last 30 years have intensified
the impact of financial-sector activity on the economy as a whole. For example, in the
current era, financial market integration is a major aspect of the ongoing process of
globalization (Held, McGrew, Goldblatt & Perraton, 1999). The increasing intensity of
competition since the 1970s, together with deregulation of the financial markets and the
internationalisation of financial services, has driven the application of digital technolo-
gies in the sector. In particular, innovations in the field of Information and Communica-
tion Technologies (ICTs) have fundamentally influenced the sector, especially in terms
of the speed with which financial services may be produced and delivered (Strange, 1998).
However, the impact of digital technologies combined with the deregulation of financial
markets has led to a growing concentration of financial service activity in global cities,
such as New York, London, and Tokyo (Sassen, 2001; Castells, 2000). Consequently, the
enormous flows of capital circulating around the globe, including, for example, the daily
foreign exchange market turnover, which amounted to US $1,500 billion in 1998 (BIS,
2002), largely by-pass the developing countries of Africa, including South Africa.
Nevertheless, digital technologies do influence the financial services sectors in these
countries, both in terms of the availability and cost of capital, consumer access to
services and the organisational development of service providers. While digital tech-
nologies are having a significant impact on the global financial markets, this chapter
focuses on the impact and role of ICTs in the expansion of financial services organisations
in the developing countries of Africa and, in particular, on the international development
of South African banking organisations.
To exploit the opportunities arising from the adoption of liberal economic policies and
privatization of state-owned companies by many African countries, South African
banking organizations have sought to extend their international networks throughout
the continent. The aim of this chapter is to explore the role of digital technologies in
facilitating this cross-border expansion of South African banking organizations. The rise
of ICTs since the 1970s and, in particular, the growth of the Internet since the mid-1990s,
has influenced the organization of economic activity (Castells, 2000). The banking sector
has experienced significant organizational change resulting from the adoption of ICTs
(Bryan, 1993; Jones, 1993). However, specific challenges do exist for financial-sector
organizations operating in Africa. For example, compared to most other parts of the world,
Africa has a poorly developed ICT infrastructure (Mansell & Wehn, 1998). Even so, it
is argued here that South African banking organisations derive important advantages
from the use of ICTs in their expansion into neighbouring countries.
Through an investigation of the significance of digital technologies in the cross-border
expansion of South African banking organizations this chapter highlights the opportu-
nities and challenges that confront such organizations. In so doing, the chapter will make
a contribution to the understanding of intra-African foreign direct investment in the
banking sector. Furthermore, by examining the use of ICTs by developing countries™
multinational organizations this chapter will contribute to an understanding of the



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254 Roberts & Mukonoweshuro


emerging digital economy in developing countries. The chapter will be of interest to
policy-makers, academic researchers and business managers in developing countries
seeking to appreciate the role of ICTs in the promotion of economic activity.
The use of digital technologies in the cross-border expansion of South African banking
organizations is examined through a review of relevant literature and evidence. A number
of case studies, elaborating on the cross-border expansion of South African banks, will
be used to investigate the role of ICT in the internationalization of African banking
organizations. Dunning™s (1989, 1988) eclectic approach, which is one of the most widely
used frameworks to analyse the international development of the firm, is applied as a
mechanism with which to assess the evidence supporting the argument that the use of
ICTs give South African banks an advantage over their regional competitors in the cross-
border delivery of banking services. Within this analysis ICT is explored both as an
ownership specific internal capacity, as a locational specific factor influencing the
geographical pattern of international expansion, and as a facilitator of the internalization
of cross-border banking networks. The chapter begins with a review of banking in Africa
with particular attention focused on South Africa. This is followed by an analysis of the
internationalization of South African banking organization. The use of digital technolo-
gies in the delivery of services and the organization of banking networks is then explored
before their role in the South African banking organization networks is investigated.
Finally, conclusions are drawn regarding the role of digital technologies in the interna-
tional development of South African banks as well as the challenges facing these banks
in their efforts to maintain a leadership position in the supply of banking services in
Africa.




Banking in Africa
The colonization of Africa allowed countries like the United Kingdom, France, Germany,
and Belgium to build up significant financial networks across the continent between 1880
and 1914 (Darroch, 1992; Jones, 1990). These financial networks were generally linked to
domestic banking institutions in their home economies and focused on trade and the
relatively undeveloped capital markets. The earliest indigenous African banks were
established in the 1920s. Although initially plagued by failure, indigenous banks became
more prolific in the 1940s and 1950s (Jones, 1993). From 1950, the indigenous banking
sector experienced greater stability and continued to rise in prominence, particularly
during the 1960s. The Second World War marked the end of the era of European
dominance in Africa. Moves toward independence resulted in the growth of nationalist
feelings, which brought about sweeping regulatory changes, the accelerated rise of
indigenous banks and pressures for localization of ownership. Despite this, British banks
retained their prominent positions in the domestic banking systems particularly in the
Southern hemisphere. For example, in Southern and Central Africa British banks held
more than 50% of the market share in 1971 while in South Africa, 73% of local deposits
were still held by two British banks “ Standard and Barclays (Jones, 1993).




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Digital Technologies and the Cross-Border Expansion of South African Banks 255


Notwithstanding the radical changes seen in banking structures throughout the conti-
nent, colonial banks retain their influence today and a significant number of subsidiaries
of large institutions such as Standard Chartered bank and Barclays still dominate.
Nevertheless, indigenous African banks continue to increase in sophistication and
expand their roles, even though in terms of Tier 11 capital and assets they remain small.
According to The Banker, in 2001 the top 100 Sub-Saharan banks (excluding South
Africa) had combined total assets of US$29.6 billion and total pre-tax profits of US$888
million, which amounts to a middle-size bank on the world stage (“Minnows still,” 2001).
Despite the negative image of the African continent today, growth is starting to occur.
While only a small number of African countries continue to be involved in civil conflicts,
many others have undergone significant economic reform (“Minnows still,” 2001). A
number of countries are casting off their reputations for economic mismanagement,
liberalizing their markets and promoting the private sector (Cockerill, 2000). Significant
efforts are being made to improve national financial infrastructures because a sound and
well-structured banking sector plays a key part in maintaining growth and stability.
African countries adopting “structural adjustment” policies at the instigation of the
International Monetary Fund (IMF) and World Bank have generated a great need for
more rigorous financial standards (“Minnows still,” 2001; Moore, 2000). In addition, the
privatization of businesses and liberalization of markets arising from the adoption of such
policies has resulted in the takeover of many local banks by foreign investors. Overall,
the continent has seen vast improvements in services and accountability to a previously
un-competitive, state subsidized, and heavily bureaucratic financial sector (Manson,
2002a).
A key factor in the development of the banking sector is profitability. International banks
and investors claim that their African operations are extremely profitable. WPA Consult-
ing (2002) confirms that the average return on equity in Sub-Saharan Africa is 15%
compared the rest of the world at 7%. Not surprisingly then, more investors are crossing
national borders to establish a presence in African countries. Today, domestic South
African banks have emerged as the leading investors on the continent followed by a
number of European groups. It is, then, to the international development of South African
banks that our attention now turns.




The Rise of International South African
Banking Organizations
In this section, Dunning™s (1988, 1989) eclectic approach is used as a lens through which
to view the international development of South African banks. The eclectic approach,
which draws together three groups of advantages arising from Ownership, Location and
Internalization (OLI approach), provides a useful framework with which to explore the
existence and development of multinational firms. Ownership specific advantages
include the firm™s unique assets such as brands, technology, knowledge base, reputa-
tion, economies of scale and domestic market conditions that give the firm an advantage



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256 Roberts & Mukonoweshuro


over foreign firms. Locational advantages relate to the characteristics of overseas
locations including those that are specific to the market, the availability of resources and
the general economic and political environment. Finally, internalization advantages arise
from securing ownership advantages within the boundaries of the firm, for example,
rather than licensing unique knowledge through contractual mechanisms the firm gains
greater advantage by internalizing such assets within the firm. Originally developed to
analyse the activities of manufacturing firms, Dunning (1989) later applied the approach
to service firms. Although Dunning™s eclectic approach has weaknesses,2 it does provide
a useful framework with which to analyse the international development of service
organizations, including banks.3
Despite enormous investment into South Africa in the period from the late 1800s to the
1960s, most foreign banks withdrew their investments in the South African economy
during the apartheid era, resulting in the development of a strong domestic banking
sector. Today the South African banking system is well developed, with a prudent
regulatory and legal infrastructure and good accounting standards and disclosure
practices. Due to South Africa™s colonial history, many of the institutions have First
World structures that would not normally be prevalent in an emerging market. The legal
system is mature, contractual rights are enforceable and creditor rights are well recog-
nized.
The South African banking sector is dominated by a few large groups, which are also the
largest banks in Africa. They overshadow most segments of the banking market, except
for resale and repurchase agreements, where some foreign banks or their branches have
a significant share of the market. In 2000 South Africa dominated The Banker™s list of the
top 100 African banks with 76.5% of the total Tier 1 Capital of US$11.3 million and with
seven South African banks among the top ten banks (“Minnows still,” 2001), (Table 1).




Table 1. Largest banks in Africa

Tier 1 Capital
Rank Bank
US$ million
1. Stanbic (SA) 2,333
2. Nedcor (SA) 2,111
3. ABSA Group (SA) 1,273
4. First Rand Banking Group (SA) 1,222
5. Investec Group (SA) 876
6. BoE bank (SA) 582
7. Mauritius Commercial Bank 234
8. State Bank of Mauritius 171
9. First Bank of Nigeria 150
10. Saambou Bank (SA) 149

Source: Compiled from “Minnows Still” (2001, p.17)




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Digital Technologies and the Cross-Border Expansion of South African Banks 257


Although South African financial institutions could not operate directly in neighbouring
states during the apartheid years, today they have become the most important investors
in Sub-Saharan Africa™s financial sector (Odenthal, 2001). One motivation for the
internationalization of South African banks is the rise of competition in the home market.
Since 1994, at least 50 foreign banks have entered the country (KPMG, 2000). The demise
of the siege economy fostered during isolation, rising competition in local markets, and
the dismantling of protective tariffs at home have forced the biggest local companies to
look abroad. Hence, South African banks are attracted by the locational advantages
offered by other Sub-Saharan African countries. In particular, they can benefit from using
their ownership advantages in terms of experience, size and strength as the banking
markets develop in these other African countries.
There are several other motivations underlying internationalization. Firstly, most of the
banks are fully diversified within the local economy. During the second half of the 1990s,
average return on assets was not as high as that in other emerging markets, reflecting
the maturity of the South African banking system. Interest margins are much smaller than
those of some Eastern European countries and have been following a downward trend
for a number of years. Operating costs remain high because of extensive branch networks
and electronic banking infrastructures. Therefore, geographical expansion in terms of
internationalization is necessary to sustain growth and profitability. Secondly, many
banks have large reserves, which they were unable to invest when the economy was
closed. These reserves provide an ownership advantage that the banks can exploit in
other markets. Thirdly, Theobald (2002) declares that the huge profits to be made on the
continent are a major attraction to financial investors. Hence, there are locational
advantages that attract South African banks to invest in other African nations. Fourthly,
evidence suggests that the banks are merely following their clients (“Standard Bearer,”
1996). South African firms in sectors such as brewing, mining, hospitality and retailing
are becoming international in scope, either in search of hitherto inaccessible resources
or markets in Africa. Relationships with existing clients in the home market can be seen
as an ownership advantage that the bank is able to take into another market when the
client firm moves overseas. Certain countries will then have locational advantages
because of the presence of existing clients. Fifthly, the banks may be seeking efficiency
and economies of scale and scope. Here efficiency gains may arise from cheaper
resources in other countries or through the more intensive use of existing resources such
as ICT networks. Finally, African governments are more inclined to work with other
Africans (“Standard Bearer,” 1996), particularly with the more sophisticated South
African banks. African identity is then another ownership advantage for South African
banks. It is also a locational advantage in terms of the attractiveness of African markets
for South African banks.
The key sources of ownership advantage for knowledge intensive service firms such as
banks are intangible assets. These assets take time to develop, they are difficult to
measure and value and importantly they are fragile and difficult to protect. They include
reputation, brand name, technical/specialized expertise, knowledge of clients and rela-
tionships with them, global scope of the service firm™s affiliate network, methodologies
for producing services, knowledge of the market for the services and management skills
(Aharoni, 2000; Grosse, 2000; Roberts, 1998). For banks, ownership advantages also arise
from the use of ICT networks as well as the level of their reserves. Economies of scale


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258 Roberts & Mukonoweshuro


arising from the size of the bank provide a source of ownership advantage as also does
access to international capital and financial markets. Furthermore, financial institutions
may acquire advantages from innovative activity. This type of advantage has become
increasingly important with the application of technology to the delivery of financial
services since the 1970s and the deregulation of the sector in many countries since the
1980s. Such innovative activity has given rise to many new financial products, including
derivatives - the most important product innovation since the mid-1980s.4
Ownership advantages also arise from the home environment of multinational firms. For
South African banks, this environment includes a well-developed banking system,
including effective regulatory and legal structures, a superior telecommunication infra-
structure and a technologically progressive environment. This environment gives South
African banks advantages that are not available to the banks of other African nations.
The strength, size and maturity of the South African banking sector would appear to be
an ownership advantage for them arising from the historical development of the sector
in their domestic market. South African banks are able to develop superior financial
services in their home market, which they can then deliver to other African markets. Such
services include the development and use of advanced technologies that improve
service quality and efficiency of provision. Additionally, South African banks have
knowledge and experience of operating in Africa giving them an important advantage
compared to non-African banks. In a sense, South African banks have the opportunity
to become first-movers in the delivery of banking services in other African markets.
The forces driving the internationalization of South African banks outlined above
suggest that the nature of internationalization is largely market-oriented. Furthermore,
psychic distance (Johanson & Wiedersheim-Paul, 1975) is a factor influencing the
locational choice of South African banks. By investing in other African countries, South
African banks are entering markets that are psychically close in the sense that their social,
cultural, political and economic development has similarities with that of the banks™ home
market. Although the poor technological infrastructures available in African countries
present many challenges, it also provides a locational advantage for South African banks
giving them the opportunity to exploit their technological expertise.
Multinational banks generally demonstrate a preference for overseas expansion through
wholly or majority-owned subsidiaries (Jones, 1993). This form of expansion allows
banks to control their ownership advantages by internalizing them within the boundaries
of the firm. South African banks have adopted two strategies to drive international
expansion (Theobald, 2002). The first is to buy controlling stakes in African banks. The
second is to take a minority stake, which increases profitability and directs business back
to the head office. African banks choose whenever possible to internalize their owner-
ship specific advantages in order to maintain control, which is particularly important in
unstable environments. The establishment of wholly or majority-owned subsidiaries
facilitates control over intangible assets that cannot be fully protected through formal
contracts and intellectual property rights. This is especially important in locations where
regulatory and legal systems are poorly developed, as in many African countries.
Furthermore, the knowledge-intensive nature of the ownership advantages of banking
firms discourages the exchange of such assets in the market. The transfer of knowledge
through market exchange presents a number of difficulties including those explored by
researchers studying the economics of information (Arrow, 1969, 1974; Stigler, 1961).5


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Digital Technologies and the Cross-Border Expansion of South African Banks 259


Increasingly, control over intangible assets can be facilitated through the intensive
monitoring of independent partners enabled by the use of joint information systems. In
many sectors, such developments are leading to the evolution of networked enterprises
(Castells, 2000). Clearly, internationally active banks are benefiting from the monitoring
capacities of their international information systems. Nevertheless, control through
ownership remains important in this sector.




Digital Technologies and the Delivery of
Banking Services in Africa
The application of digital technologies to the production and delivery of financial
services has fundamentally influenced the banking sector. As Dicken (2003, p.442) notes,
“information is both the process and the product of financial services” (original
emphasis). The primary essence of all financial transactions is the collection, analysis
and dissemination of information. For this reason, the banking sector has experienced
significant organizational change resulting from the adoption of ICTs (Bryan, 1993;
Jones, 1993). Given the information intensiveness of banking services the effective use
of information systems by multinational banking organizations can be an important
source of competitive advantage (Kuljis, Macredie & Paul, 1998).
National and international interbanking transactions largely involve the flow of informa-
tion. Consequently, advances in ICT have transformed the speed and efficiency with
which such transactions are effected. For example, prior to 1977 the international
settlement of accounts between banks was largely carried out by mail or telex with each
bank having its own procedures. To increase the speed of these transactions groups of
banks joined together to create standardized telecommunications networks such as
SWIFT (Society for Worldwide Interbank Financial Telecommunications) (Wright &
Pauli, 1987). SWIFT was one of a number of proprietary data networks developed in the
1970s by financial service firms. The rise of the Internet in the 1990s presented new
opportunities for data networks and electronic payment systems. As an open network
infrastructure, the Internet disconnects the network from the proprietary infrastructure.
Moreover, with encryption technology highly secure environments can be created on
public networks. Hence, banks can take advantage of the Internet to supplement their
internal proprietary data networks and existing interbank networks to develop global
reach in the provision of a range of new electronic financial services.
Internet banking, for example, includes a range of retail and wholesale banking services.
Involving both individual and corporate clients, it includes bank transfers, payments and
settlements, documentary collections and credits, corporate and household lending,
card business and other activities (UNCTAD, 2002). According to UNCTAD (2002), Sub-
Saharan Africa, apart from South Africa, is the region that is most seriously lagging
behind in Internet banking. This is not surprising given that the continent of Africa,
compared to most other parts of the world, has a poorly developed ICT infrastructure
(United Nations Development Programme [UNDP], 2003; Mansell & Wehn, 1998). A
major problem for the adoption of Internet banking and e-commerce in developing


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Table 2. Access to communication technologies: A comparison between South African and various developed and developing regions
260




Cellular
subscribers
Telephone mainlines Internet users
(per 1,000 people) (per 1,000 people) (per 1,000 people)

1990 2001 1990 2001 1990 2001
South Africa 93 111 .. 242 0.1* 64.9
Developing countries 21 87 .. 75 .. 26.5
Least developed countries 3 6 0 6 .. 1.8
Roberts & Mukonoweshuro



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