Africa 2017 | Super Regional Banks Fill Finance Gaps

With major multinationals scaling back in Africa, regional players of all sizes are embracing the opportunities left behind.

While financial inclusion is growing in many countries, there is still, observes Kenny Fihla, chief executive of corporate and investment banking at the South Africa–based Standard Bank, a long way to go. “The African continent has the lowest penetration of banking services in the world,” he notes.

Combined with the rapid growth of the middle class and increasingly diversified economies in many countries, this underdeveloped market presents a huge opportunity for banks. As Fihla points out, “In many countries, the provision of home loans and credit cards for consumers, or derivative instruments for corporates, is still at a very early stage.”

But the structure of individual markets and national regulatory regimes differ enormously across the continent. Chris Steward, head of financials at South Africa–based Investec Asset Management, notes that “banking in Africa is not homogenous, each of the national markets being highly idiosyncratic.”

That naturally feeds through to risk/reward assessments of individual markets. “The highest growth potential over the long term,” says Steward, “is in countries like Nigeria, with low penetration of financial services coupled with superior GDP growth prospects.”

The rapid expansion of mobile technology across Africa is speeding up financial inclusion—particularly in countries with only rudimentary banking infrastructure. The success of M-Pesa and other companies that offer money transfers and other financial services through mobile apps has led to “a transformation of banking in East Africa,” says Fihla. “The interface between banking and telecoms has been much slower elsewhere, especially in South Africa, with its more developed branch and ATM networks.”

Recent years have seen a flurry of mobile and fintech start-ups hoping to use technology to leapfrog traditional banks. “Various groups are trying to launch digital banks, but there is strong resistance from regulators—both in Nigeria and across Africa—to allowing them to take customer deposits,” says Idris Alubankudi Saliu, co-founder of Vanso, a mobile technology solutions start-up that was acquired by Interswitch, Africa’s largest digital-payments company. “So while there are lots of digital lenders extending payday loans, for deposit-taking and most longer-term lending you need a banking license.”

Traditional community-based lending, particularly in West Africa, is also embracing new technologies. “Alternative forms of lending, using pools to crowd in deposits, are currently less sophisticated than blockchain but are fast catching up,” says Fihla. And the incumbent banks are not going to be left behind. “All of the major banks have their own in-house fintech development,” says Steward. “And to keep a leading edge, they have been acquiring new start-ups in their infancy.”

There has also been a significant shift among existing bank customers from conventional fixed infrastructure branches and ATMs to alternative channels like smartphones. This is driven less by fintech, says Fihla, than by rising access to smart devices and the development of mobile apps. More Africans own mobile phones than smartphones, so mobile operators have the largest footprint across this segment and the big push is for better mobile apps.

“Eventually we will see collaborations between mobile operators and banks,” he says. But for the time being, the right frameworks and businesses models to extend financial inclusion still need to be developed.

Technology is also extending the range and sophistication of banks’ offerings. Fihla points to recent growth in platforms through which exchange-traded products such as foreign exchange, securities and index-linked investments can be aggregated. “We need to embrace these changes and include them in our product offerings,” he says.

For those who can afford to invest in new technology, it opens the way to greater internal efficiencies. “Incumbent banks usually have a high cost base and need to develop new retail platforms that take out as much cost as possible,” says Fihla.

This is likely to result in further consolidation of smaller local banks, he says, particularly in East and West Africa, because they lack the scale either to invest in the technology needed to meet the demands of more-sophisticated customers, or to maintain sufficient capital to absorb risks and comply with the increasing demands of global regulation.

The chief beneficiaries of these trends are Africa’s super-regional players, most of them based in South Africa. Steward notes that Standard Bank (in which China’s ICBC holds a 20% stake) has been increasing its footprint across the continent: “Around 30% of its profits are now generated outside South Africa, and that is likely to grow.”

The Togo-based pan-African Ecobank, which has a presence in nearly 40 countries across the sub-Saharan region, is investing heavily in digital platforms while closing physical branches to increase profitability.

But that alone doesn’t address the issue of Ecobank (key shareholders include Qatar National Bank) being a dominant player only in smaller countries, while lacking sufficient presence in what are likely to remain key markets—Nigeria, Kenya, Morocco and South Africa. “The super-regionals need to take care in deploying capital to where it can generate an appropriate return,” says Steward.

There have also been moves toward consolidation and broadening regional coverage in North Africa—particularly among Moroccan and Egyptian banks—with new investors from the Middle East filling the gap left by the withdrawal of international banks like Citi and BNP Paribas. Control of Egypt’s second-largest private bank, NSGB, has passed from Societe Generale to Qatar National Bank.

Barclays’ selling down its majority shareholding in its African operations in June leaves only two international banks, Standard Chartered and Societe Generale, committed to a universal banking model across the continent.

Steward points out that “as Barclays discovered with its highly profitable African business, more stringent regulatory capital requirements make it difficult for a global bank to have a majority shareholding in Africa. And while multinationals like Citi and Standard Chartered have developed a broad footprint, their focus is more on corporate and investment banking rather than building up the infrastructure on the ground needed for expanding as a universal bank.”

Increasingly, these major multinationals are focusing on big infrastructure and energy-related deals, where expertise in structuring complex financings and syndications gives them an edge over local banks. But in terms of loan volumes, it is the Chinese banks—along with governments and big corporate investors—that now dominate many African markets.

Global banks that have a significant presence in Africa also face increasing regulatory demands to fight corruption, money laundering and the funding of terrorism, and must be able to manage these risks. For many, the risk of punitive fines or reputational damage outweighs potentially high returns on capital.

“Clearly they have been scaling back in Africa,” says Fihla, “and this opens up opportunities for African banks, which have developed systems to deal with specifically African problems and manage the associated risks.”