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DRC’s banking capital requirements raise prospects of consolidation

By David Whitehouse
Posted on Tuesday, 30 April 2019 15:59, updated on Thursday, 2 May 2019 11:59

Small businesses and farmers are still missing from the formal credit system. Photo / REUTERS

Banks in the Democratic Republic of Congo (DRC) must raise their capital to a minimum of $50m by the end of 2020. That increase will force foreign banks to decide whether they are in the country for the long term.

The obvious options are to raise capital and comply, to merge, to become a micro-finance rather than a banking lender, or to look for an exit.

Local players are likely to benefit from the change.

According to Verdant Capital, the DRC’s five largest banks hold about 60% of the country’s banking assets, which, at $5bn, only marginally exceed the $4bn held by the Vatican Bank.

  • Verdant predicts “significant consolidation” amongst the two-thirds of the banks in the country holding the other 40%.

The DRC has 18 banks, five of which are local, four pan-African and nine foreign. According to a report from Imran Patel at Verdant in October 2018, the DRC’s shallow domestic financial sector is “perhaps the most important headwind to sustainable and diversified growth but also provides important opportunities for innovative financial services providers.”

  • The commitment of foreign shareholders to staying in the country is a key unknown, the report argues.

The DRC’s ratio of bank assets to GDP at 7% lags regional peers, while only 7% of the population holds a bank account, Verdant says.  Penetration is held back by charges for US dollar withdrawals and transactions which represents an “exorbitant” frictional cost.

Informal business

The Economist Intelligence Unit (EIU) rates DRC banking sector risk at CCC-.

  • Banks suffer from low profitability and high non-performing loan ratios, with growth hampered by low incomes and the size of the informal sector, the EIU says.
  • Major players include Rawbank, Banque commerciale du Congo, Citigroup, Standard Bank and Ecobank.

Lenders in the DRC need to be heavily focused on MSMEs (micro, small and mid-sized enterprises), according to research in March from DRC economist and banker Olivier M. Lumenganeso.

  • MSMEs contribute around 40% of GDP, 50% of employment and 70% of household revenues in the DRC.
  • The sector is largely informal because of high start-up costs and cumbersome registration requirements.
  • According to Verdant, only a small number of investment funds and microfinance lenders, backed by development finance institutions, are providing credit to SMEs.

The Banking cost-to-profit ratio is higher in the DRC at 94% than the African average of 53%, Lumenganeso  argues.

  • Local banks in the DRC have lower cost-to-profit ratios than foreign entrants, his research shows.
  • Bigger banks are not necessarily cost-efficient, and though cost-efficient big banks are more likely to be profitable, not all profitable banks are big.

Nor is mobile money a panacea.

According to a 2018 report from private sector development programme Elan RDC, while the number of mobile money subscribers in the DRC is impressive at 29.3m, active usage rates remain low, as banking crises have eroded trust in the system.

  • The DRC has less than 0.148 commercial bank branches per thousand square kilometres, the report says.

Market segmentation is key to extending penetration, according to Lumenganeso. Any incoming bank needs to understand not only the growth of its prospective market, but also the dynamics of customer segments.

  • Yet “few banks actually understand the most common economic activity in rural areas: agriculture.”

Microfinance institutions lack banking licenses, have very limited product ranges, and can’t afford modern technology-based distribution systems. Branch optimization and expansion into underpenetrated regions will be key to gaining volumes and generating value.

Bottom Line: Higher capital requirements will test the stamina of foreign players in reaching out to the DRC’s rural, informal client base.


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