Technology and customer demands are just two factors behind an evolving business model for banking in Africa.
Global pressures on international banks, growing intracontinental cross-border trade and investment, customer demands, technology and regulation are all significant factors in shaping a new banking landscape in Africa.
Together they are encouraging banks to more fully assume their classic role in an ideal economy. “It has to start with appreciating the primary drivers of why we exist as banks,” says Thabo Makoko, head of Transactional Services at Absa Bank, a regional bank based in Johannesburg. As taught in college economics courses, banks collect deposits and allocate credit to help business create wealth, while providing financial services to customers.
“The message is that domestic banks are being asked to be more relevant to national development plans,” says Stefan Nalletamby, director of the Financial Sector Development Department at the African Development Bank (AfDB). “Governments are realizing that banks are for the allocation of resources.”
One outcome: “more vibrant” institutions that seek to uncover new sources of revenue, notes Nalletamby. Banking systems are moving away from the classic model, he believes, when banks “used to make a fortune basically by not doing much.” For instance, local bank books would customarily be top-heavy in government bonds with often-generous spreads, thereby crowding out more-productive investments.
Domestic banks are responding to consumer demand, especially from the middle class, Nalletamby adds. “African banks have either worked with governments or foreign companies, and a few rich people,” he says. “But the middle class is energized and has become more demanding.”
African Banking Revenue
Source: Coalition. Figures in US$ millions.
In many jurisdictions, banks are increasingly providing financial services that matter to the middle class, such as housing loans. The trend is more pronounced in East and Southern Africa. “West and Central Africa are getting there, but they’re behind,” Nalletamby notes.
Thanks largely to the expansion of mobile banking, Kenyans can use their phones to make small trades in government bonds or buy insurance. The peak in mobile operations in Africa is between 3 AM and 5 AM, notes Nalletamby. “And not because people are still at the bars; it is early-morning traders who are buying goods in bulk.” The traders are taking one-day loans to pay for produce at the central market; they will pay the loans back from the day’s proceeds garnered in their neighborhoods. “Now [the banks] realize that they can make money from everything, from every type of client,” adds Nalletamby. Nothing happens at once, but Moody’s Investors Service projects “a slight acceleration in loan growth to around 10%” this year, fueled in part by regulatory changes in Ghana and Angola, according to a recent report.
Despite Africa’s diversity and size, the trends can seem strikingly similar in many places. Noteworthy blue-chip international banks are retrenching on the continent. A decade ago, Barclays helped Absa cobble together its regional presence, especially in Southern Africa, and took a 63% share in the resulting conglomerate. Two years ago, it reduced its participation to 14%. Last year, France’s second-largest banking group, Groupe BPCE, announced plans to sell its subsidiaries in Tunisia, Cameroon, Madagascar and the Republic of Congo to Morocco’s BCP.
Global dynamics in a post-crisis regulatory environment drive these strategic decisions as much as anything in Africa itself. The fear of regulatory penalties related to the flow of illicit funds has led to restrictions on operations in many emerging markets, including some African countries, according to a World Bank report. “Over the last decade, global banks have been tightening operations to comply with regulations designed to curtail money laundering and terrorism financing,” the report states. “As a consequence, global banks have been limiting correspondent banking relationships (CBRs) with local banks in emerging and developing economies—a practice referred to as ‘de-risking.’ ”
Just as international banks fade away, African corporates are increasing cross-border trade and investment. Absa and Groupe BPCE are leaders among the regional banks vying to meet the needs of those potential clients. Lomé, Togo–based Ecobank Transnational, which operates in 36 African countries, also ranks among the biggest regional players. In addition to the corporate business, there’s a growing need to transmit remittances from one African nation to another. “Cross-border banking has been increasing in Africa,” states a World Bank report released last year. “As of 2014, there were 104 active cross-border banks with at least one branch or subsidiary outside their home countries.”
African central bankers are working to forge agreements to make regional operations easier, Makoko says. He cites the East African Cross-Border Payments System, instituted in 2013, as a prime example. “The cross-border business is going to occupy a lot of attention over the next five years,” he says.
Technology headlines out of Africa in recent years have focused on how the continent—especially East Africa, and specifically Kenya—have leapfrogged the rest of the world in mobile banking. People pay street vendors with their phones in Kenya—and not just there: Somalia, a consensus choice for “failed state,” along with its breakaway neighbor Somaliland, count among the world leaders in “mobile money markets,” according to a country-specific World Bank report. “That’s interesting, because Somalia doesn’t have a banking system,” says Nalletamby. Notes the AfDB official, “Access to financial services on mobile phones is a reality.”
Yet, many observers believe that the financial-inclusion part of the equation lags behind. Mobile-phone penetration numbers need to be readjusted because many upper- and middle-class individuals have more than one phone—one for work and another for personal use, for example. “The statistics have to be taken with a grain of salt,” says Makoko. He estimates that only about 30% of Africans are integrated into the banking system. “Much of the population is quite illiterate, and they are not familiar with the internet,” says Theophilus Tawiah, managing partner at Nobisfields, a law firm based in Accra, Ghana.
If financial inclusion lags behind, mobile banking is making its mark by disrupting the entire banking systems in many countries. When he joined Absa in the pre-digital era, Makoko recalls, clients gave their trust to bankers based on four things: reach, meaning a branch network; cost efficiency; speed-of-operations and responses; and information and transparency. “Mobile technology addresses all four,” Makoko says.
Branches are considered sunk costs and are being shut down everywhere. Legacy banks are scrambling to hire a “head of digital operations,” or as they’re called in Nigeria, a “head of e-business.” They’re trying to stay one step ahead of the fintechs and telecommunications companies—or both, depending on the regulatory environment.
The phenomenon isn’t confined to Kenya and East Africa. At least four digital-only banks are moving forward in South Africa, including two that are almost household names already: TymeBank and Bank Zero. French telecommunications firm Orange, drawing on its experience in Europe, is scheduled to launch Orange Bank Africa in Senegal and Ivory Coast this year.
This new reality has sparked a free-for-all among existing institutions—and another tussle between the old guard and the wannabes. In the past, a local bank might just sit on its far-flung fiefdom tucked away in some forgotten corner. Now everything is up for grabs. “In a digital world, [geographic] reach means nothing,” said Makoko. Nor does longevity: “The one who amasses the most customers will win.”
Regulatory regimes are changing. Nigeria, for example, is liberalizing rules about how telecommunications firms can operate in the banking realm. As mentioned above, Moody’s is optimistic about the new regulations in Angola and Ghana. Ghana’s increase in capital requirements and related adjustments provoked seismic shifts. Regulatory reforms sparked a fury of mergers and acquisitions. “Ghana just consolidated its banking system,” says Nalletamby. “It will come out with stronger banks.”