Africa: Homegrown Banks Push For Growth

As multinationals exit or downscale, African-based institutions are taking the lead on the continent.

For many years, Societe Generale (SocGen) was the most unwavering of European banks in its commitment to African markets. While its peers were rattled by a tough environment and repeatedly opted to exit or downscale, the French giant remained resolute.

Yet in June, SocGen announced it will exit four African markets: Congo Brazzaville, Equatorial Guinea, Mauritania, and Chad. The bank also intends to undertake a strategic review of its Tunisian operation. Going forward, it said it will focus resources only on markets where it can position itself among the leading banks.

Following in the footsteps of other multinationals either exiting or downscaling operations in Africa, Pan-African lender Vista Group is acquiring the Congo and Equatorial Guinea operations, while Coris Group is buying the Mauritania and Chad businesses.

That the ground caved in for SocGen only means that the longtime contrarian finally joined the trend. Exits and downscaling have become familiar among multinational banks in Africa. Since 2017, six have walked away from the continent or clipped operations significantly.

SocGen completes a cycle of transformation for the African banking industry. The era of European dominance of the sector appears to be over. Today, it is firmly in the hands of Pan-African banks, regional and semiregional lenders, and niche country-focused banks. “The survival of multinationals in Africa has largely become untenable,” says Ndubuisi Ekekwe, chairman of Tekedia Capital, a US-based venture capital firm.

Factors including weak and volatile currencies, unfavorable cost models, regulatory complications, competition from homegrown African banks, emergence of a vibrant fintech ecosystem, and economies in a constant state of crisis have made their survival on the continent increasingly difficult.

Weak currencies have made nonsensical African subsidiaries’ asset valuations and profits. When converted to pounds and dollars, the impact is substantial erosion. Case in point is the UK financial conglomerate Atlas Mara. When it exited in 2021, it cited currency volatility and a drying up of liquidity for ravaging its books. Currency depreciation, in particular, caused a $145 million decline in the dollar value of its assets.

Operating costs are another land mine. For multinationals, failure to evolve and craft strategies to cut down on noninterest expenses denied them economies of scale. Shunning the retail mass market and opting to concentrate on corporate, treasury, merchant, and investment banking and high-end clientele exacerbated a model with built-in high operating costs.

These realities, coupled with bleak growth prospects and the introduction of the more stringent Basel III regulatory framework, including higher capital adequacy ratio requirements, strong anti-money laundering regulations, and know-your customer policies, have made it increasingly difficult to hang on in Africa.

“Most multinationals realized that as long as they remain in Africa, the task of complying with international banking obligations will be tough,” says Mohamed Hashish, managing partner at Soliman, Hashish & Partners, an Egyptian-based international corporate law firm.

A New Order Emerges

No factor has been more lethal, however, than homegrown African banks’ determination to wrestle control of the sector.

Looking forward, the battle for dominance will likely not involve multinationals. African banks will push for growth either organically or through mergers and acquisitions, technology and innovations, customer-centric service delivery and cost management. 

The emergence of formidable Pan-African banks like Standard Bank, Absa Bank, Ecobank, Attijariwafa Bank, Bank of Africa, Access Bank, and UBA Bank has systematically dismantled the multinationals’ dominance when it comes to offering high-end products and services like private banking, treasury, corporate, deal-making, payments and wealth management. Moreover, Pan-African banks have amassed strong capital bases that give them the muscle to finance big infrastructure projects and even take the frontline in arranging dollar-dominated syndicated loans.

“There is no service you cannot find in the indigenous banks,” says Ekekwe. The locals can provide elite services cost-effectively owing to their diversified operations and geographical reach. 

While Pan-African banks provide scale, footprint and coverage, regional and semiregional lenders have dismantled the status quo in key regions. In West Africa, banks like GT Bank, Zenith Bank, Vista Bank and Coris Bank have become major players. In East Africa, aggressive expansion has helped KCB Bank and Equity Bank edge out competition, while Nedbank and FNB Bank have built strong bases in southern Africa.

For banks that have opted to concentrate on their home markets, cultivating a winning formula such as serving niche markets in retail, small and midsize enterprises and budding corporates, and deploying strategies to drive financial inclusion, have also emerged as channels to success.

“It is evident that banks are deploying local knowledge to shield off competition,” says Hashish. North Africa banks especially have succeeded with this approach. Apart from South Africa-based Standard Bank, few sub-Saharan lenders have ventured successfully into the region.  

Further Consolidation Looms

While many African banks have found a formula for survival, others that have clung to their traditional modus operandi have struggled. A majority of banks at the bottom of the pyramid are considered candidates for acquisition, while others risk collapse.

The consensus, including from regulators, is that further consolidation is coming, and may be beneficial if the creation of formidable financial institutions is seen as critical to anchoring the continent’s growth, including the success of the African Continental Free Trade Area.

That said, expansion via both M&A and organic growth comes with risks for African banks. The continent remains a highly fragmented market. Besides divergent regulations, political and socioeconomic disparities are rife. In some countries, worsening economic crises, political instability and security risks, ballooning public debt, runaway inflation, depreciating currencies, and rising interest rates are applying pressure to banks, resulting in rising provisions for bad loans and slowing profitability.

Case in point is KCB Bank. The lender was forced to more than double its loan loss provisions to $70.5 million from $29.8 million for the 2023 half-year period, leading to a 20% decline in net profit to $107 million, from $134.7 million in the preceding similar period.

The continent’s patchwork of economic conditions mean that banks pursuing expansion can return impressive profits in some markets while struggling elsewhere. Some, like Ecobank, have managed to find a balance. With operations in 33 countries, Ecobank posted $1 billion in net revenue in the first half of this year. During that first period, the Central, Eastern, and Southern Africa region contributed 32% of the group’s revenue, Francophone West Africa 28%, Anglophone West Africa 23%, and Nigeria 13%, while its international subsidiaries contributed 3%.

“Our results demonstrate the benefits of our diversified business model, resilient balance sheet and our commitment to serving our customers,” Ecobank Group CEO Jeremy Awori said in late July.

Massive investments in technology, digitalization—including internet and mobile banking—and other innovations are meanwhile enabling African banks to overcome cross-border challenges.

Unfortunately, bankers complain that a complicated maze of regulations is stifling deeper innovation, exposing traditional full-service banks to new threats from fintechs and telcos. In Nigeria and many other African nations, rigid controls and checks mean that traditional banks cannot run fintech units unless they create a holding company that guarantees customer deposits are not used to run the unit.

Considering that the DNA and the future direction of banking will be built on technology, this stance denies African banks huge opportunities Ekekwe warns. “The best banks in the future could be technology companies that offer banking services, and not banks that use technology,” he says.

For homegrown African banks, being alert is paramount if they want to build on the positive results that many of them are starting to enjoy. Failure to evolve, be alert, transfuse, and change their operational models to remain competitive could allow fintechs to apply the same deadly dose to them that they appear to have dispensed to the multinationals.