Title: Africa offers growth potential on a vast scale / Dated: 15-12-13
After a long and largely successful career in banking, Bob Diamond, former head of Barclays, could probably have his pick of markets and institutions at which to stage his comeback – whether in investment banking, hedge funds or at one of the fast-growing Chinese lenders. Business:
Instead, the American banker is opting for sub-Saharan Africa, long neglected by mainstream investors. Unlikely on the face of it, perhaps, but if there is one developing region of the world that still excites bankers confronted with stuttering faith in the traditional emerging markets of Asia and Latin America, it is Africa.Whatever the fate of Mr Diamond’s venture – which is expected to involve buying a bank in Africa – his decision is symbolic of a renewed interest in the continent, particularly its financial sector. The demographics of the continent are breathtaking.
Sub-Saharan Africa alone has a population of about 1bn,
which, on many estimates, is set to double over the next three decades. The potential is obvious.
Sim Tshabalala, joint chief executive of Johannesburg-based Standard Bank, says banks are benefiting from economic growth and increasing banking penetration. “Both are growing in Africa very fast,” he says, adding: “The continent is becoming very attractive.”
McKinsey, the consultants, estimates that three-quarters of Africans still do not have a bank account. Industry executives estimate that only 5 per cent of the region have a credit card. The so-called “unbanked”, which in bleak times might seem a symbol of economic hopelessness, are viewed by many Africa watchers as a key to unlock a virtuous circle of economic growth.
“Sub-Saharan African financial and banking systems remain underdeveloped,” Pim van Ballekom, vice-president responsible for sub-Saharan Africa at the European Investment Bank, said in a report this year.
Mr van Ballekom explained in the report that the relatively stable macroeconomic and financial environment of sub-Saharan Africa, together with the current reform momentum and expected strong growth in many countries in the region, did indeed “bode well for further development of the banking system”.
The region is dominated by a handful of banks, with four institutions from South Africa leading the pack. Standard Bank is by far the largest by assets, with $182bn, followed by FirstRand, with $100bn, and Barclays Absa and Nedbank – controlled by London-listed Old Mutual – with $95bn and $80bn, respectively.
Outside South Africa, banks are far smaller in terms of total assets.
Ecobank, a Togo-based bank with business across the continent, is the largest with assets of about $20bn, followed by Nigerian lenders First Bank and Zenith, and United Bank for Africa, a Nigeria-based lender that is focusing on a few big African markets, rather than trying to cover the continent.
Standard Bank also dominates in terms of profits – its pre-tax income last year roughly equalled the combined profits of the 10 largest banks in sub-Saharan Africa outside South Africa, where rivals FirstRand, Barclays and Nedbank are also very profitable. International banks are following Standard Bank and Barclays into Africa. Standard Chartered has expanded across the region, along with Citigroup, Société Générale and HSBC.
Investment banks, including JPMorgan, Deutsche Bank, Goldman Sachs and Credit Suisse are becoming more active, helping countries raise funds through sovereign bonds, and playing a bigger role in mergers and acquisitions in the region.
The influx of foreign banks, plus the expansion of local lenders, comes as Africa enjoys its strongest economic growth in a generation, leaving behind the stagnation of the 1980s and 1990s.
The International Monetary Fund forecasts that sub-Saharan Africa will grow by 6 per cent in 2014 – roughly the same rate as in the past 10 years – second only to developing Asia at 6.5 per cent and well above the global rate of 3.6 per cent.
Both local and international banks are increasingly focused on the opportunities such growth gives them. Yet, although bankers see opportunities across Africa, most say they are focusing on a handful of markets, including South Africa, Nigeria, Kenya, Tanzania, Mozambique, Ghana, Angola and Zambia. Bankers would love to enter the Ethiopian market, but it has remained largely closed to them.
Bankers and government officials believe that as ordinary workers gain access to basic banking facilities, and the emerging middle classes tap into sophisticated financial services, there should be a feedback loop to greater spending and consumption, and hence further economic expansion.
“The growth is healthy,” says Diana Layfield, head of Africa for Standard Chartered, the emerging markets bank. “It’s not just about banking either. Insurance is emerging as a financial product in the region.”
African banks often achieve returns-on-equity, a typical measure of profitability, in excess of 20-30 per cent, significantly above the 10-15 per cent more common in developed markets and more mature emerging economies. Yet, there are dangers exemplified by a nasty banking crisis in Nigeria in 2008-09. And regulation, particularly of banks with operations across borders, is in its infancy.
High operating costs and infrastructure are also problems. The lack of branches in many countries has made it difficult for individuals to open an account, even if they have the funds and income. In some cases, lenders such as Standard Bank have tried to bypass the issue by partnering with corner shops to create mini-branches.
And the dearth of cross-border operators, which made life difficult for businesses wanting to expand, has been changing. Lenders such as Kenya’s Equity Bank are rolling out branches aggressively.
And many business banks are operating across large chunks of the continent, such as Nigeria’s UBA and Togo’s Ecobank, spurred in part by the advent of cross-border infrastructure deals. Mergers and acquisitions is another area that is booming, albeit from a low base.
The same is true for sovereign bond issuance in hard currency, which this year is set to hit a record of roughly $10bn across Africa, up from $1bn a decade ago. But it is in mobile banking that African finance can really claim to be ahead of the game. M-Pesa, the mobile payment service operated by Safaricom of Kenya, is reckoned to be responsible for more than half of all mobile remittances globally. Even if most Africans still do not have formal bank accounts, the profusion of mobile phones and payment technology has “done a lot for financial inclusion”, says Ms Layfield, with 70 per cent of adults now able to make such basic payments, up from 7 per cent a few years ago.
While many western banks struggle with ancient IT systems and a top-heavy branch network, African banks may well have sounder foundations for the financial services of the future.
Paulina says: I know I come here day in and day out to expose my ignorance but really....... I had no idea Ecobank was Togolese owned -did you?