After 167 years, Credit Suisse's dominance in the financial industry ended in March 2023. The bank's investment division, Credit Suisse First Boston (CSFB), was a big player in the initial public offerings (IPO) sector two decades ago.
Under Frank Quattrone, it underwrote some of the hottest IPOs like VA Linux in 1999. The hardware seller soared about 700% on the first trading day.
Another notable IPO was Google in 2004. CSFB was among the two lead underwriters, with Google allocating the Swiss investment bank and Morgan Stanley 5.3 million shares.
However, recent high-profile scandals and financial losses have led to its fall from glory. Credit Suisse's mismanagement also contributed to the current low investor confidence experienced at the bank's headquarters.
To help the course, the Swiss government brokered a deal for the bank's sale. The largest bank in the country, Union Bank of Switzerland (UBS), will take over its closest rival in a deal amounting to USD$3.24 billion.
But how will Credit Suisse's collapse affect Africa's economy? This article will discuss everything you need to know.
Understanding Credit Suisse
Alfred Escher found Credit Suisse in 1856 as Schweizerische Kreditanstalt. The bank's primary purpose was to fund Switzerland's rail system's development. It also financed the creation of the European rail system and Switzerland's electrical grid.
Competition from Julius Bar and UBS, fellow Swiss banks, fueled Credit Suisse's shift to retail banking. It partnered with First Boston in 1978 and bought a controlling share ten years later.
This partnership gave birth to the CSFB investment division, which was popular in the 1990s and early 2000s. As mentioned, this popularity was partly because of its involvement in the IPO industry.
Its dominance in the banking sector became more apparent during the global financial crisis. Credit Suisse was among the least affected banks in 2008, although there was more to its stability.
Investigations that fired up after the crisis found that the bank conspired with U.S. taxpayers to file false returns. The Swiss bank pleaded guilty to criminal charges in this tax evasion settlement.
One of the most recent charges involving Credit Suisse is a US$2.1 million fine by Switzerland's Federal Criminal Court. The court found the bank guilty of not preventing money laundering. It was the first criminal trial of any big Swiss bank done by the country.
These criminal charges and financial mismanagement deteriorated the bank's reputation. Investors in global financial markets lost confidence in Credit Suisse as customers withdrew their money.
The resignation of Tidjane Thiam as CEO in 2020 and Chairman Antonio Horta-Osorio in 2022 worsened the situation. Credit Suisse tried shoring up liquidity by borrowing USD$54 billion in March 2023, but the deal wasn't successful.
A few days later, UBS announced its intended acquisition of the Zurich-headquartered institution following negotiations with the government. The Swiss bank is still operational at the time of writing as the deal undergoes review.
The recent collapse of Silicon Valley Bank and Credit Suisse has led to a surge in cryptocurrency markets, particularly Bitcoin, as investors seek refuge from the uncertainties in the traditional banking sector.
Amidst these turbulent conditions, industries like online gambling are thriving, capitalizing on the increased adoption of cryptocurrencies for secure and transparent transactions. The largest crypto casino, Stake.com, has been experiencing significant revenue growth as it processes over 340 million Bitcoin bets per month, accounting for 6% of all Bitcoin transactions.
The online betting giant generated $2.6 billion USD in revenue in 2022 and continues to grow despite the credit crunch affecting the technology sector. The 7th biggest gambling company is available in 46 African nations, including Kenya, and showcases cryptocurrency-based businesses as a potential option outside of traditional banking - though outside of the gambling industry, it is still a very emergent field, especially in Africa.
Credit Suisse's presence in Africa
Credit Suisse had a significant presence in Africa until its recent exit from what it considered "non-core wealth management" markets. Some factors that informed this decision included the bank's ongoing restructuring efforts and low profitability.
Reputational risks also forced Credit Suisse to close down its services in Sub-Saharan Africa. Its operations in the continent were scrutinized following high-profile scandals in some countries.
For instance, it was allegedly involved in the Mozambique hidden debt scandal. The bank was accused of failing to conduct due diligence.
The fraudulent transactions led to the Mozambique government defaulting on its debt obligations. This corruption scandal involved several criminal charges against some former Credit Suisse executives.
The Swiss bank has since exited Ghana, Ivory Coast, Botswana, Kenya, Mauritius, Nigeria, Seychelles, Tanzania, and Zambia. It referred its private banking clients in these countries to Barclays but retained its South African operations.
Operations in the markets it exited
Despite all the recent struggles, there is no denying that the investment bank has grown its popularity in Africa.
For instance, it opened offices in Nairobi, Kenya, and Tanzania as regional hubs to support its operations in East Africa. The offices' primary provisions were investment banking, capital markets, and advisory services to regional clients.
Generally, operations throughout the nine markets were based on wealth management and private banking services. It's important to note that the bank's focus was mainly on high-net-worth clients.
What about South Africa?
Credit Suisse's operations in South Africa
Credit Suisse established its South African office in 1995. It has grown to become one of the leading foreign investment banks in the country.
The bank's operations in the country focus on investment banking, asset management, and private banking services. Its investment banking division in South Africa has been involved in numerous deals.
On the other hand, the asset management division offers a range of investment products, including mutual funds, alternative investments, and pension funds. The bank's private banking division provides wealth management services to high-net-worth individuals in the country.
These services are still available in South Africa even after the recent take-over by UBS. But it remains to be seen what will change once the deal goes through.
The impact of Credit Suisse's exit on African economies
Switzerland's growing wealth management credentials in Africa have undoubtedly been dealt a blow by Credit Suisse's departure. The economy in most markets it exited may also experience a notable shift.
Positive impacts
Here are some of the benefits that the African economy may enjoy following Credit Suisse's woes:
- Enhanced competition
The exit has created opportunities for other financial institutions to fill the void left by Credit Suisse. Many banks and financial service companies are trying to replicate the productive side of the Swiss bank.
As a result, it has increased competition, which could improve service delivery, reduce costs, and enhance innovation in the financial sector. Therefore, customers may enjoy better and more efficient services from existing financial institutions.
- Internal financial developments
This move has also forced African economies to look inward and develop their systems. Many regional markets have often relied on foreign banking for their investment plans. But focusing on their financial systems following the exit could lead to greater economic independence and self-reliance in the long term.
Negative impacts
Credit Suisse's exit also left a bitter taste in the mouths of many beneficiaries. So, how did it negatively affect parts of Africa's economies?
- Loss of jobs
Switzerland's second-largest bank set up offices in several regions across Africa. Hundreds of team members were running operations in Nigeria, Kenya, Botswana, and other markets where it had a presence.
But the bank's implementation of its reforms has rendered many jobless. This number could also increase, with South African employees having their jobs at risk following the imminent take-over. Remember, the new owner, UBS, already has active offices in the country.
The loss of income for these workers could ripple effect on other sectors. They'll reduce their spending power, which slightly blows the economy.
- May reduce foreign investment
Of course, everyone in the finance industry knows the main reason for Credit Suisse's departure. Although the senior management cited restructuring efforts, there was more to it. The Swiss bank was already struggling to keep up with demands, especially after the damage to its reputation.
However, the decision to exit nine countries while retaining operations in South Africa left onlookers with many questions. It may signal a lack of confidence in these markets, which prospective investors could use in future decision-making.
Consequences for clients
Credit Suisse had a long-standing presence in Africa. It was a banking partner to many businesses with high-net-worth individuals across the markets it exited.
The collapse of this Swiss bank has sent shockwaves throughout the African market, with many clients grappling with the fallout.
It's still too early to predict the full extent of the impact on the African market. But there's no doubt that this development has raised concerns among the bank's primary beneficiaries.
Perhaps the main consequence is that these beneficiaries must adjust their banking experience. As mentioned, the bank signed a client referral agreement in 2022 to refer its private wealth management clients to Barclays.
Of course, building a new banking relationship can be tricky, and that could potentially impact the users' financial plans.
The role of other banks
The banks and financial institutions in Africa have an opportunity and, to some extent, a responsibility to fill the void left by Credit Suisse. The following are some of the main implications of this event:
- Gaining market share
With Credit Suisse's exit, rival banks may capitalize on the chance to attract clients and expand their market share. Clients seeking an alternative to Credit Suisse may turn to other international banks which offer comparable services and products.
Barclays has already taken advantage of this development by signing a client referral agreement. It'll offer the same services (like wealth management) as Credit Suisse.
- Providing stability and continuity
As clients seek alternatives, other banks may ensure a smooth transition by offering services with similar terms, pricing, and accessibility. This helps displaced clients avoid significant business operations or financial plans disruption.
- Expanding services
Seeing an opportunity for growth, rival banks may expand their range of services to cater to the varied needs of clients leaving Credit Suisse. This could include services like investment banking, wealth management, and risk management, which are in high demand among Credit Suisse's clientele.
- Fostering competition
Rival financial institutions may also intensify their efforts in attracting clients and showcasing their financial strength and stability. The increased competition can benefit clients as they have more options. They'll likely enjoy better prices or more innovative services.
The role of central banks and governments
At the time of writing, there are no clear directives from African governments and Central Banks following Credit Suisse's exit.
However, it's worth acknowledging that Central Banks could increase regulatory oversight of their local banking partners. They may also reassess their risk management measures, including scrutinizing existing transactions and evaluating alternative banking solutions.
The role of governments in this situation is to reinforce financial stability within their national boundaries. Those in the affected markets could strengthen their regulatory framework and promote transparency to encourage foreign investment.
Possible steps include tightening capital requirements for financial institutions and aligning their regulations with global best practices. This move can help rebuild confidence in the region's banking industry.
Potential bailouts
The current scenario does not indicate an immediate need for financial bailouts among the affected markets. Of course, Switzerland and UBS came to the rescue of Credit Suisse, but that doesn't necessarily involve African governments and central banks.
The surge in cryptocurrency
The banking crisis emanating from Credit Suisse's collapse has created conditions conducive to a surge in cryptocurrencies. As investors lose confidence in traditional banking systems, they've viewed digital currencies as a safer alternative.
Driven by uncertainty in the banking industry, aggressive monetary policies have further fueled interest in cryptocurrencies. The adoption of crypto as an alternative risk asset may gather pace as investors prioritize the currency's decentralized nature.
Moreover, digital currency could buffer against potential financial shocks in volatile economic environments. The growing interest in cryptocurrencies reflects a broader shift toward decentralized finance in Africa, marking a turning point for the region's financial landscape.
Conclusion
Credit Suisse has been a critical player in the finance sector for many years. A bank founded to finance operations in Switzerland had grown to become a successful investment institution worldwide.
However, its plan to serve Africa's economy resulted in an unexpected outcome. The bank recently exited some markets, retaining South African operations. Of course, this positively and negatively impacted the regions.
South African operations could also end soon following the imminent take-over by the bank's closest rival, UBS. The Swiss government brokered the sale to save Credit Suisse from what looked like an inevitable collapse.
The writer, Sarah Johnson, is a financial analyst with a focus on emerging markets. She has been studying the impact of global economic events on Africa's economy for over a decade. Sarah has written extensively on the topic, including the potential impact of the recent Credit Suisse collapse on African economies. Her insights and analysis have been featured in various financial publications and media outlets. In her free time, Sarah enjoys playing tennis and attending cultural events in her city.
