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Banking for Africa’s growth

By Gemma Ware
Posted on Tuesday, 8 October 2013 10:09

While it may be riding on the back of a prolonged African economic upswing, the continent’s banking sector – dominated by Southern and North Africa – is still in recovery mode.

Alongside innovations in banking led by mobile technology and agency banking models in East Africa, structural problems persist, including a paucity of long-term capital and an addiction to the easy returns of government treasury bills.

The global financial slump was tailor-made to hit the South African economy, where the mining, manufacturing and tourism sectors are struggling to grow in the face of troubles in the eurozone and fears over waning Asian demand for commodities.

Political turbulence in North Africa has also depressed growth in the region, while in West Africa Nigerian banks are facing the prospect of having to wean themselves off high fees and find ways to cut costs.

Set against this backdrop, 2012 was a year of recovery in our annual rankings of Africa’s Top 200 banks. After their total assets dropped slightly in 2011, the continent’s banks bounced back in 2012.

The total assets of banks in our 2013 rankings, based on banks’ 2012 results, stood at $1.4trn, up 5.7% from 2011. In 2012, 14 banks posted net interest income of more than $1bn, up from 10 banks at the $1bn mark in 2011.

The longer-term story is one of sustained growth, with the assets of Africa’s Top 200 banks growing by 34% over the past five years.

CENTRAL AFRICAN GROWTH

Over the same period, there has been 40% growth in the loan books of Africa’s Top 200 banks. However, at $748.9bn in 2012, it is still below 2010 levels. Deposits grew slightly slower, up 34% over the same period.

Although still the smallest region in terms of bank size, the most pronounced growth was in Central Africa, where total loans more than doubled from $4.9bn in 2008 to $11.9bn in 2012.

Central Africa has also recorded the biggest growth in deposit-taking, up 136% since 2008. Three of the top five biggest climbers by total assets in 2012 were from Central Africa.

Some regions have seen a slower recovery than others. Total deposits in Southern African banks in our Top 200 rankings stagnated, registering an increase of less than 1% in 2012. Total loans for the region stood at $410.3bn, still below the $440.7bn of 2010.

North African banks also recorded a dip in deposits, which were down 1%. Despite the prolonged political instability in the region, they continued to grow their asset bases, which increased 2.2% between 2011 and 2012.

ROBUST PROFITS

Research by The Banker Database for 2013 shows that Africa’s banks are the most lucrative in terms of return on assets (ROA). African banks have 2.1% ROA, compared to 2% for Central and Eastern Europe.

High fees and good returns on government debt have led to robust 105.8% profits. But some African regulators are pushing banks to treat consumers better.

“Regulators have become more aggressive in bringing out new legislation or regulations to protect the consumer and force banks to reduce the charges and fees and the margins for lending,” says Emilio Pera, a partner specialised in financial services at accountancy firm Ernst & Young in South Africa.

He points to South Africa, Tanzania and Nigeria in particular. The impact will be to force banks to operate more efficiently and to cut down their costs, says Pera.

He identifies worrying signs, like the higher level of impairments that banks are reporting, particularly in South Africa, where he says the level of consumer indebtedness is impacting growth.

Regulators are also becoming stricter about capital requirements.

“In many African countries the banking regulators are trying to increase the minimum level of capital. Some went very far, asking for very large amounts on the basis that it would help local banks finance infrastructure and other projects,” says Jean-Louis Ekra, president of the African Export-Import Bank (#194) (Afreximbank).

Higher capital requirements also encourage consolidation. In Tanzania, where there are 52 banks, the government is raising capital requirements for community banks from TSh250m ($155,000) to TSh2bn by 2017, while commercial banks will have to meet a target of TSh15bn.

Zimbabwe is also raising capital requirements to $100m, which Pera suggests could be aimed at ensuring banks have enough capital to cover the costs of the Basel II banking regime that the country is implementing.

Raising long-term capital from abroad remains difficult for many African banks. This means they will struggle to meet the demand for long-term lending for infrastructure finance and consumer mortgages.

Most of the deposits in African banks are short-term and thus ill-suited to be set against a 15-year mortgage. This asset/liability mismatch may slowly be reduced by the growth of local pension funds and by banks tapping eurobond markets.

The World Bank and other international financial institutions are also trying to bridge the gap.

SME LOANS GAIN MOMENTUM

This difficulty in accessing long-term finance is also limiting banks’ abilities to extend credit to small and medium-sized enterprises (SMEs).

In an effort to increase the volume of credit for SMEs, the International Finance Corporation (IFC) has focused on providing long-term credit to banks.

Kariuki Thande, who works on financial markets at the IFC in Kenya, says that out of current commitments of $530m to 39 financial institutions in East Africa, $450m are loans for SME financing.

“SME financing has picked up steam quite well in the past five or so years, it’s gathering momentum,” says Thande. “It’s proving to be quite commercially attractive in terms of the margins the banks can make there.”

Yet challenges remain. “The big issues are lack of quality information and in- adequate guarantees,” says Manzi Rwegasira, chief executive of mobile payment firm Zoop, who has written a report on the Tanzanian banking sector for Dar es Salaam-based Serengeti Advisers.

Rwegasira laments the lack of innovation in the SME lending sector, with standardised products based mainly on collateralised lending.

In the meantime, interest rates on loans remain higher than 20% across much of Africa. Managing these rates is complicated for large corporates, so they can be crippling for SMEs.

The spread of credit reference bureaus could help to bring down the risks associated with unsecured lending.

But rates are mostly driven by macroeconomic factors, particularly the high interest rate on government treasury bonds, a quick and easy way for bankers to make money instead of risky lending to small businesses.

Some countries are trying radical methods to correct this. In Sierra Leone, the government has decided to stop borrowing domestically, a strategy that pulled treasury bill rates that had stood at more than 20% down to less than 10% in June.

The government insists that this will make banks lend to the private sector. The central bank governor Sheku Sesay says there are signs it is working, but sustaining these low rates will be a challenge.

With economic growth also driven by emerging consumer classes, banks are looking at new ways to reach these customers. Comparisons by Paris-based DEVLHON Consulting show that most African countries had around five branches per 100,000 adults in 2011 and are now expanding at a low rate.

In Africa, only Morocco, Tunisia and South Africa have more than 10 branches per 100,000 adults. In East Africa, innovations such as agency banking – where banks partner with third parties, such as mobile airtime sellers, to offer basic services – is encouraging financial inclusion without the capital expenditure of branch expansion.

A report from the Central Bank of Kenya says that since the launch of agency banking in 2010, just under 20,000 agents are now offer- ing services for 13 commercial banks and have facilitated 59m transactions totalling KSh310.5bn ($3.5bn).

RISE OF AGENCY BANKING

Kenya’s Equity Bank (#75) allows customers to set up an account, to deposit and withdraw cash and to pay utility bills through its partners.

In its results for the first half of 2013, it said agency banking is now its most popular banking channel – overtaking ATM and branch transactions.

In Tanzania, the government established guidelines on agency banking in September 2012. CRDB Bank (#101) launched its agency banking network Fahari Huduma this June.

The network uses petrol stations and the Tanzania Posts Corporation as third parties for transactions.

Alongside this consumer-led growth, banks are focusing on the more structural shifts necessary for the continent’s economies to grow.

Afreximbank’s Ekra says that while total trade has grown five-fold in the past 10 to 15 years, “it’s still dominated by commodities […] which puts countries at risk. We need five to seven years to transform [the] export base, that’s what has been driving our five-year bond [issues],” he says.

But banks are keeping a keen eye on what is happening in emerging markets as the United States Federal Reserve talks about beginning to taper off its programme of quantitative easing (QE).

The South African rand fell to a four-year low against the US dollar in mid-August.

“Obviously that has an impact on any corporate or bank operating in that environment,” says Ernst & Young’s Pera, pointing to the currency risk facing banks that have clients doing cross-border operations.

Even in the cheap money era of QE, it has been difficult for banks to access long-term capital.

Now, with pressure on emerging markets, those African bankers without solid credit lines could find themselves relying even more heavily on development finance institutions to fund their expansions. ●

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