Kenya, Uganda and Tanzania are among African countries where international lenders have cut-off correspondent banking relationships for fear of being exposed to charges of money laundering and terrorism financing.
"The withdrawals of correspondent Bank relationships (CBRs) could result in longer payment chains, an increasing number of intermediaries involved in processing the same payment, an increasing number of restrictions, and higher concentration on the correspondent and respondent side," said the International Monetary Fund in a statement.
The IMF said this action was likely to increase the cost of doing business and disrupt economic activities, especially in countries that receive high diaspora remittances such as Kenya.
Some international banks have been fined heavily over money laundering charges originating from failure by their correspondent banks to make payments and in order to protect themselves, the risk-averse ones chose to cut off relationships used for international payments.
Large withdrawals from Kenya are bound to arouse suspicion given the stringent measures put in place by the Central Bank to ensure compliance with international anti-money laundering (AML) standards.
Last year, several banks were penalised for laundering money associated with the multibillion National Youth Service scandal.
Uganda and Tanzania have also been strengthening their AML regulations, with Uganda convicting its first money laundering suspects in June.
Correspondent banks act as agents of foreign institutions and complete transactions originating from abroad locally. For example, a Ugandan bank making payments on behalf of its customer to a person in the US will issue instructions to its correspondent bank in the US to pay the customer through their bank in the US. The Ugandan bank will then credit the account of the correspondent bank, held in its books, with the amount paid out.
Banks are required to carry out due diligence on each other before entering into such relations to ensure minimum exposure. International lenders have however opted to end some of those relationships altogether.
Instructions to make international payments are passed across banks through the SWIFT system.
SWIFT data, which captures a meaningful share of correspondent banking activity, shows that Uganda was among the countries that experienced the largest drop -- 38 per cent -- in SWIFT transactions in value terms in the five years between 2016, putting it in the same league with Angola and Mozambique.
"While CBR exits were initially limited to Angola and smaller jurisdictions, for example -- Comoros or Liberia, where all commercial banks have lost at least one CBR in the past three years -- more recently, banks in other economies (Democratic Republic of the Congo, Côte d'Ivoire, Kenya) have also seen CBR exits," notes IMF.
The banks in Kenya that have reduced their correspondent relationships include Family Bank, which was hit by accusations of money laundering last year. It cut links with South Africa's Standard Bank.
And lenders that have been fined due to failings by their correspondent banks include Turkish Bank and Bank of Ireland.