Finance: Opportunity knocks again
Some gentle teasing went awry when Nigeria’s Sterling Banklaunched an advert in July that showed itself heading towards the stars and its peers resolutely stuck on the ground.This kicked off a vicious Twitter war and the Central Bank of Nigeria eventually waded in to force an apology from Sterling Bank on the grounds of ‘demarketing’. But, by squabbling over small beer, the elephants of Nigeria’s financial sector may miss a new set of challenges and opportunities set to reshape Africa’s banking landscape: the exit of large international banks, the arrival of ever more entrants driven by technology, and the rise of regulators driving change.
Opportunity has returned in the African financial sector. Our ranking of Africa’s Top 200 banks shows that banks got back to business in 2017, after two years during which more than a decade of asset growth stalled. In 2017, the top banks reported total assets of $1.74trn, compared to $1.47trn in 2016. That was matched by a similar jump in profitability: total Top 200 bank profits grew from $21.6bn in 2016 to $25.2bn in 2017.
Of course, while African regulators are happy to see banks return to growth, they are even keener for them to help finance the private sector. But not all governments are up to that task. Many pay lip service to the idea and then lean on domestic banks to fund their budget deficits.For banks in Ghana, for example, the choice is simple when presented with the options of a risk-free loan to government that pays 17%interest or a tricky manufacturing project where the returns will come far later down the track.
Some governments have tried to legislate problems away. In 2016 Kenya placed a cap on loan interest rates – at 4% above the central bank’s main rate – to try to spur lending by lowering its costs. Despite the uproar,which led to a substantial drop in the amount of lending, the cap has not hit the profitability of Kenya’s big banks: Equity Bank Group, for example,posted 2018 Q1 profits up 21.7%.
Meanwhile, for many borrowers this has meant being forced into the arms of app-based micro finance lenders,despite “these platforms[being]worse than the village shylocks”, according to Kenya’s central bank governor, Patrick Njoroge. Other governments, including that of Ethiopia, have tried a more Asian-style channelling of money to industry through policy banks.And although Prime Minister Abiy Ahmed has already pointed to abuses in the system he does not appear to want to change the current mode lradically. But he may be open to greater liberalisation of a very attractive sector – pricking ears in bank boardrooms across East Africa. Many of the country’s privately owned banks are recording strong growth.Awash Bank (#152), for example,saw profits rise 44% in 2017.
A gracious move
Nigeria, too,wants to use the strength of the public balance sheet to offer cheap loans to economically productive sectors like agriculture and manufacturing, according to new central bank guidance. Under the scheme, launched in August, some of the money commercial banks are required to keep in the central bank – under the cash reserve requirement – can now be used to finance building factories, a move that Segun Agbaje, the chief executive of Guaranty Trust Bank (#37), called “gracious”.
Finally, the most effective way to encourage lending at low rates is through tougher macroeconomic discipline – less wasteful borrowing and a better organised tax base. But all that also requires much higher savings rates.
Morocco is a bright spot, having combined all three strategies. As a result, its private sector banks are riding high: witness their steady rise in our Top 200 over the past decade.There are now seven Moroccan banks in the Top 50. Their growth has provided a stable platform for their African expansions. Attijariwafa Bank (#8), Banque Central Populaire (#10) and BMCE Bank of Africa (#13) made Dh2.7bn ($283m) in profit from their African subsidiaries in 2017.
Contrast this to the ‘sugar high’ expansion of Nigerian banks, which, flushed with capital after their consolidation in 2007, rushed into markets they were ill-equipped to deal with. Diamond Bank (#63) is the latest to come home chastened, selling its West Africa operations to Côte d’Ivoire’s Manzi Finances for $61m in late 2017.
Diamond says it wants to use technology to target retail customers – following a trend across the continent. Servicing the ‘bottom of the pyramid’ is now back in vogue and increasingly possible given the leaps forward in both mobile-phone adoption and the software banks are able to lay on top of them.
Kenya is birthing the next great rapprochement of telecoms companies and banks, beyond simple mobile payments. New bank accounts are held by phone customers, who can use their mobile devices both to save and to take out loans.There are now 20 million M-Shwari accounts in the country.
M-Shwari is a joint venture between Commercial Bank of Africa (CBA, #123) and telecoms giant Safaricom. Both companies have done well out of it. CBA’s net profits rose 87% in 2016, a couple of years after the widespread uptake of M-Shwari. And technology may also help boost savings rates too. Studies show that only 30%of M-Shwari accounts are used to borrow. The rest serve as a store of value for Kenyan consumers.
The growth of tech and the focus on serving poorer segments has led to upstarts upsetting the old order. In South Africa, Capitec (#44) has challenged the established ‘Big Four’ of Standard Bank (#2), Absa (#5), Nedbank (#7) and First National Bank (FNB, #14) by offering cheaper services that are more tailored to the needs of the many– through technology, certainly,but not always online. Capitec has recently introduced a cashpoint that accepts coin deposits, a first in Africa.
Other South African upstarts are chipping away at valuable market segments. Insurer Discovery is now also providingbanking services. Tyme Digital,which in August became wholly owned by Patrice Motsepe’s African Rainbow Capital, plans to launch a full-service digital bank by the end of the year, and former FNB chief executive Michael Jordaan is set to launch the entirely digital, 45% black-owned Bank Zero.
If new entrants are targeting even the continent’s most developed market it is because, despite the bumpy macroeconomic conditions of the past few years, Africa is an attractive market. Tunisia-based AfricInvest fund has just bought a 17m ($19.5m) stake in Kenya’s Prime Bank. Investors have piled into Nigerian bank stocks since the beginning of the year,despite non-performing loans averaging at about 15%at the end of 2017.
There is growing space on the continent, as Basel III regulations make it increasingly expensive for global banking franchises to retain outlets in Africa. Citi, HSBC, Société Générale and BNP Paribas are all headed out of the continent at a retail level, and local banks are seizing the opportunities being left behind. Attijariwafa Bank’s 2017 purchase of Barclays Egypt has given it a huge asset. Elsewhere, South Africa’s Standard Bank is continuing its expansion, having moved into francophone areas like Côte d’Ivoire and Senegal.
More broadly, however, the drying up of international liquidity provoked by global regulatory changes and anti money- laundering laws remains problematic. The African Development Bank and Afrexim bank are helping where they can, with the latter pledging to inject a further $25bn over the next five years to support intra-African trade.
The increasing difficulties that African banks face in completing international payments add to the exorbitant costs of doing business on the continent, says the chief executive of MCB Group, Alain Law Min. “Inter-country trade is very expensive because you have to go through so many steps before you can complete a transaction”. But, for those who can crack it – the nimble, the tech-enabled and those attuned to the needs of the market – there are substantial opportunities for the taking.
This article first appeared in the September 2018 print edition of The Africa Report magazine