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Banking on Africa

Published: 02/06/2014 - Filed under: Home » Archive » 2014 » June 2014 » Special Reports »

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The good thing about ATMs in West Africa is that, invariably, they’re housed in air conditioned booths, providing a welcome respite from the sun.

The downsides? Well, cash machines are few and far between, stationed only at the swankiest banks or hotels in the chicest sections of the region’s capitals. There are many ATMs in Dakar; several in Bamako; only one that I recently found in Monrovia.

And sometimes (often) they refuse to work, or – as in my case, one sweltering afternoon at EcoBank in Dakar – swallow your card. I was left with little choice but to ask the security guard stationed outside (another hint that ATMs are still considered a luxury for the very rich) to watch the machine while I asked the staff to retrieve it. They refused.

After a Kafkaesque argument in which I explained that I wouldn’t have to prove my ID if their machine had not swallowed my card in the first place, I was obliged to take a taxi to my apartment, retrieve my passport, come all the way back and present it for inspection before the woman at the desk would return my impounded credit card to me.

So it goes for bank customers in Africa. Then again, it’s hardly surprising that ATMs don’t work when some 80 percent of sub-Saharan Africa’s adult population – that is, 326 million people – do not use financial services. Only 24 percent have an account at a formal financial institution. In other words, only one in four adults has a bank account, and the rest are more likely to be stashing cash beneath their proverbial mattresses.

Yet this belies the fact that the rise of Africa’s financial services industry in recent years has been extremely buoyant. An emerging middle class is fueling growth, meaning more assets to be invested by individuals and more projects to be financed for corporate customers.

Indirectly, this also means there are more multinational companies requiring greater transparency in banking. This is good news both for foreign investors and, more importantly, for Africans. As one analyst puts it, the banking industry always reflects the wider economic climate, and a thriving one is one of the surest ways to achieve long-term poverty reduction across the continent.

Room to grow

According to Anthony Thunstrom, chief operating officer of KPMG’s Africa financial services team, a number of factors underpin the sector’s growth. “These include Africa’s rapidly emerging middle class and a sharp increase in urbanization, which, combined, has led to a higher demand for services in general,” he says.

Significant development and reform of the financial sector, as well as a tightening of banking regulations in a number of economies, have also helped, Thunstrom says, as has a reduction in barriers to entry into the retail banking sector.

Today, Africa’s economy is much stronger than it was ten years ago, helped by improving democracies, deepening trade links with the rest of the world, and investment in infrastructure projects, with booming emerging markets including oil-rich Nigeria and Ghana.

The scope for banks is enormous, with penetration so low in some countries that it leaves a wide open market for investors. The 326 million people currently not using financial services are the industry’s future consumers. While Mauritius, South Africa and Botswana lead with more than 50 percent penetration, the rest of the continent veers between 20 and 50 percent. Tanzania, Mauritania, Senegal, Ivory Coast, Somalia, Eritrea, Cameroon, Sudan and the Democratic Republic of the Congo all lag behind with a penetration rate of less than 20 percent.

There are many reasons for this low level of inclusion. Delivering products to remote, poor customers is difficult. Insufficient funds, unstable incomes, high transaction costs and people living vast distances from financial institutions all contribute, as does a widespread distrust of formal banking structures among poorer people.

Volatile local currencies, occasional corruption, fraud and political instability, and a lack of infrastructure can also be risks, although these are balanced by the fact that brands with a solid reputation are highly valued.

The challenge for banks is tapping into these huge lower-income and unbanked sectors of societies. It requires educated, socially aware innovations and thoughtful tailoring of products to the consumer.

“By some estimates, 95 percent of the almost 500 million adults in sub-Saharan Africa earning less than $10 a day have no access to bank accounts,” Thunstrom says. “If this group were to become part of the formalized banking sector, this could lead to a significant increase in new deposits.”

Where It’s At

Banking hotspots include South Africa, where many of the principal pan-African banks are based, Kenya, Egypt, Morocco, Algeria and Nigeria. Mauritius has also lately emerged as a tax haven and is clearly taking advantage of its location in the middle of Indian Ocean to become a banking hub and connection point for trade between Africa and Asia.

“Today, GDP per capita in terms of purchasing power parity is at $15,649 in Mauritius,” says David Gyori, managing director of Xallis Consulting, which advises banks and insurers with a particular focus on Africa. “Meanwhile, Kenya has a banking system that is modernizing quickly. Mobile payments using cellphones are surging, Kenyan banks are expanding cross-border and banks are growing their branch networks.”

The largest global banks are also the most active on the continent. Citibank, HSBC, Societé Générale, Standard Chartered, BNP Paribas, ABN Amro and Barclays are frontrunners, while three of the four biggest Chinese banks are showing increasing activity as well – Bank of China, China Development Bank, and the Industrial and Commercial Bank of China.

African banks, although smaller, arguably have an advantage – they understand their local markets very well, and many are installing efficient electronic systems that may even be more technologically advanced than existing ones in the West.

The largest African bank is Standard Bank Group. A South African company, it has been operating for 151 years, is active in 20 countries and has close to $200 billion of assets. Sim Tshabalala, its chief executive, says: “Our positioning in Africa reflects our confidence in its economic prospects.”

Standard Bank Group of South Africa is the second-largest bank on the continent, followed by Absa Group, Firstrand and Nedbank. The sixth-largest is the National Bank of Egypt, followed by two Moroccan companies, Attijariwafa Bank and BCP. The famous Togo-based, pan-African EcoBank, which operates in 13 countries, is only the 14th-largest bank in Africa, with total assets in the $20 billion range. The First Bank of Nigeria leads in that country with assets of $18 billion.

Such banks are still small fry on a global scale. “A striking number is that the total assets of the Nigerian banking system are around $152 billion, while HSBC alone is more than 20 times larger,” Gyori says.

Still, international card companies are showing interest. MasterCard is especially active in Africa, ahead of Visa and American Express in terms of investments. Bob Diamond, former chief executive of Barclays, also has his eye on the continent. In December last year he asked investors for $250 million to be allocated to investment in the sub-Saharan African banking sector. 

A Matter of Trust

While banks remain the backbone of Africa’s financial systems, a number of alternative financing options exist, which are more affordable for poor people and are easier to be eligible for than ordinary banks. This is so important on a continent where millions of low-income people live in villages far from the nearest city, without access to a bank or ATM. Many of the older generation are illiterate and need help to understand and trust financial systems.

Nick Hughes, founder of M-Pesa, a mobile-based money transfer service from Safaricom (Kenya) and Vodacom (Tanzania), says this consumer has particular saving and borrowing requirements. “Many consumers not currently in the formal banking sector do not need traditional banking services,” he points out.

“They require products that deal with real-life issues like managing irregular cash flows, helping them respond quickly to changing circumstances and finding ways to grow small savings – not good old-fashioned fixed loans that quickly default when payments are missed.”

Some international non-profit organizations run “savings groups,” a low-risk form of microfinance based on members’ own savings rather than credit from external financial institutions. The groups typically comprise 15 to 30 people who pool their money during regular meetings. Globally, by October last year, savings groups were estimated to have reached more than 8.6 million people, primarily women, the large majority in sub-Saharan Africa.

Plan International is a non-profit organization that works with Barclays’ Banking on Change project to demystify banks, deliver training in financial literacy and business skills, and help savings groups to establish commercial relationships.

In a recent report from Plan, Yale microfinance economist Dean Karlan argued that such initiatives could do the groundwork in convincing the poor to trust formal financial institutions. In this way, he said, the non-profit community was clearing the path for formal institutions to provide services to hard-up people in Africa.

Gyori agrees that the key for banks to succeed is to help these rising consumers on their way to banking by offering advice and education about their options. “A constructive and profitable role that an international bank can fulfil in Africa is to help the African consumer rise to become a middle class citizen,” the consultant says. “75 percent of the population is unbanked. They need more than products – they need tools to become citizens with elaborate banking needs and the knowledge to articulate these,” he adds.

“This road to financial literacy is a win-win journey if done in a patient, responsible and professional way.”

Phone Home

Perhaps the most important innovation to come to personal finance in Africa recently has been mobile banking. Mobile phone subscriptions in sub-Saharan Africa have risen from 90 million to 475 million in seven years. In some African countries, more people have access to a mobile phone than to clean water, a bank account or electricity.

Africa, which has always had limited landlines, now has an array of inexpensive mobile networks, and the continent has vigorously embraced technology and social media. According to the World Bank, 16 percent of adults in Sub-Saharan Africa report using a mobile phone to send or receive money in the 12 months prior to May 2013.

Most noteworthy is M-Pesa (M for mobile, pesa for money in Swahili), widely considered to be one of the most revolutionary technological developments anywhere in recent times. The service had reached 10.5 million users by May last year, and in 2014 most of Kenya’s population uses it, according to Hughes.

It provides rural residents with access to affordable financial services, allowing users to deposit, withdraw and transfer money via text message. It means they can send money to relatives and pay for shopping, utility bills or a taxi home, all on their mobile devices. Many “unbanked” Africans will go straight to having an electronic wallet – a development of enormous significance in a region where transport infrastructure is so poor.

“In Kenya and Tanzania, the platform does millions of transactions each day now,” Hughes says. “We are starting to see similar schemes get to scale in other parts of Africa. I predict that in ten years, most financial services [in Africa] will be delivered over the mobile channel – it’s the only low-cost way to reach people on low incomes in any part of the continent.”

Mobile banking is so important that big institutions that do not make it part of their product for the continent will be left behind. “Look at Senegal,” Gyori says. “While bank penetration remains low, at 12 percent, its mobile phone penetration is 77 percent. It has three mobile network operators providing money transfer and wallet services in partnership with banks. I believe that big institutions will later transfer back the knowledge gained in mobile banking in Africa to their mature home markets.”

It is certain that mobile banking is the way forward for Africa, making the continent an exciting and lucrative space for the banking industry. And, as young people become financially educated and experienced, they will become ambassadors for the sector. Gyori says: “My estimation is that when penetration hits 50 percent or so, banking will become kind of chic.”  

By Jane Labous

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