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Finance: Closer to the customer

By Nicholas Norbrook in Lagos
Posted on Friday, 17 September 2010 00:00

Technological change and new ways of thinking about business ?mean that Africa’s banks can now go the extra distance to serve their ?retail, government and commercial clients wherever they are.

For the latest ranking of the Top 200 Banks in Africa search our interactive ranking now.

Accompanied by large men with big guns, the bank girls of the Niger Delta have a great deal of courage. Stepping daintily from twin-engine speedboats, they process payments into accounts for cash-rich militants and sign up new customers. As long as no one gets ripped off, everything goes smoothly. It might seem bizarre, but it makes sense: militants in the Niger Delta receive large amounts of money that are better kept in a bank account.

Whether ‘creek banking’ is apocryphal or not – and given the implied money laundering, one can only hope not – Nigerian banks are adjusting to the reality of the marketplace, chasing down business wherever it is. This is a far cry from a decade earlier, and African governments deserve some credit.

By bringing down inflation and therefore interest rates, they have changed the equation for the banks. Financing the domestic deficit is no longer as lucrative as it was, forcing banks to cast themselves into the real economy to protect their margins.

The bankable facts on the ground have changed in Africa. The future will belong to the banks that change with them. Small but growing middle classes have created demand for things like mortgage and consumer ?finance, and crucially, they now have income levels that can sustain repayments.

Helped by a changing business environment and new technology, banks are getting closer to their retail, corporate and ?international customers. Mobile phones are bringing down the transaction cost of serving low-income customers, bringing in a tier of people previously excluded from accessing formal banking services.

This closing of the distance between banking institutions and their clients is not limited to the retail sector. Surveys by the Boston Consulting Group on the top 30 African corporations only touch the tip of the iceberg. Despite barriers, African companies are flourishing in diverse sectors, from ?web startups in Nairobi like to property developers in Accra like Trasacco. They are only able to do so because a new generation of bankers is taking the time to understand their business segments and offer appropriate financing options.

Nigeria may have some way to go, but bankers there realise the necessity of reaching out. In reference to the potential purchase of one of Nigeria’s rescued banks, Fidelity Bank CEO Reginald Ihejiahi told CNBC Africa: “We need more distribution, we need more contact points with our customers. The institutions we are interested in are institutions that have the retail network.”?

Local banks are tapping into new growth in regional trade. The Co-operative Bank of Kenya reported a 61% increase in profit after tax for the first six months of the year. For managing director Gideon Muriuki, this is down to a larger customer base, created by greater regional trade.?African banks are also moving into areas previously denied them because of problems of scale, such as the oil sector – traditionally the lucrative reserve of foreign banks. They are also tackling Africa’s largest and most under-served sector, agriculture.

International investors have noticed the change, too. Private equity activity from firms like Zephyr, Emerging Capital Partners and Actis helps heavyweight investors guage country risk more effectively. Increasingly, perhaps because of the experience that time brings, they are engaging in a more coordinated fashion.

Expanding frontiers

Investment banks now see ?Africa as the last frontier. Russia’s Renaissance Capital has been a fervent proselytiser for the emerging opportunities in Africa. Speaking at an investor conference in São Paulo in July, Renaissance Capital CEO Stephen Jennings said: “Before the crisis there were probably 40 people or groups establishing Africa funds. In three to four years, you’ll have 100 Africa funds and the biggest one won’t be $2bn, it’ll be $20bn.”?

The changing structure of the global economy is playing its part. South Africa’s Standard Bank is pushing its global strategy with partnerships in China, Brazil and Russia. Global banking giants are under pressure from their Asian customers who want to do business in Africa; in late August HSBC was negotiating the purchase of a majority holding in South Africa’s Nedbank. The process of stitching Asia and Africa together will lead to an acceleration in economic integration between the world’s two fastest-growing regions.

Our exclusive ranking of Africa’s Top 200 banks pays testament to these dynamics and provides a snapshot of the progress of African banks. The emerging consumer class in North Africa has been matched by their banks, which have been steadily climbing up our list over the decade, now making up 28 of the Top 50 banks on the continent. Nigerian banks have also rocketed up the list, with UBA and First Bank 12th and 13th respectively. South African consumer power has boosted niche banks like Imperial, which taps into demand for asset financing, especially for cars. This year, Imperial Bank has risen 16 places in our survey.

Getting to retail customers in Africa is difficult and expensive, but financial services are much in demand. “What do communities want to do?” asks Herman Singh, CEO of Beyond Payments at Standard Bank in South Africa. “Move cash around? Pay utility bills? Pay merchants? Save? Receive social payments and benefits?” Banks have focused merely on savings as a core activity, opening the door to many non-conventional players, “much to the banks’ chagrin”, says Singh.

Safaricom’s M-PESA scheme allows the transfer of small amounts of money between phones and has already been a runaway success. It allows more than 10 million customers to send money from phone to phone, but the problem remains one of disintermediation. The strength of banks is that they can channel collective savings into productive areas of the economy. Money in the M-PESA system is money disconnected from the rest of the economy.

The arrival of the partnership between Kenya’s Equity Bank and Safaricom marks a new chapter in the evolution of ‘mobile money’. The M-KESHO account gives an M-PESA user a bank account with Equity Bank, which is already Kenya’s largest bank by customer base. It has built on its reputation from its microfinance days and insists on getting closer to meet customer needs. Safaricom and Equity are converting around 5,000 of the 18,000 M-PESA agents into M-KESHO agents. In one fell swoop, they have 5,000 new bank branches across the country without having to invest in expensive branch building and staff.

Vodacom and Nedbank are to launch a version of M-PESA in South Africa, a shot in the arm for bank/telecoms synergy.

Orange Telecom is doing similar things in West Africa with Orange Money, leveraging the existing network of airtime resellers and upgrading them into banking agents. And far from seeing them as a threat, banks are hoping to serve the resellers. “The agents have to have cash and liquidity management is serious. They have to have a bank near them, either to drop off excess cash, or top up when they run dry,” says Rambert Namy, the director of mobile payments at Sofrecom.

Renaissance Bank predicts great things for Equity Bank’s bottom line, especially from 2011 onwards. But the benefit for Kenyans is far greater.M-KESHO tracks customer habits and after six months of showing that you keep a ?constant amount of money in your account, you can access micro-loans and micro-insurance products. The key problem for banks in Africa is client identity – you cannot lend to people when you can’t get a fix on who they are.

M-KESHO has created an answer: a credit history. Kenya’s regulators have made things even easier by forcing all banks to share the credit data for all customers with newly-created credit bureaus.

Where the middle classes are more pronounced and property rights more accepted by the courts, retail banks are introducing sophisticated products. Moroccan banks have been leading the way in mortgage lending. Interest rates of 12% used to be the norm in 2000, but rates have now fallen to under 5% for a 25-year loan.

Knowledge base

For this to work, countries need the legal system to handle the properties used as collateral. In late August, Nigerian finance minister Olusegun Aganga announced that the government was undertaking the creation of a system of commercial courts. Previously, defaulting debtors were easily able to appeal against any reclaiming of a house by a bank, leaving the bank with a bad loan and little recourse. As a result, banks are overly cautious in making loans, which hurts everybody.

But to be globally competitive, African banks need to be active in the sectors where the big money is made, such as oil and infrastructure, which requires scale and competence. African banks that want to be active in the oil sector face a big challenge in the cost of funds. Larger international banks are able to access cheaper money over longer time frames.

The knowledge base of ?African financiers has also been a barrier. Financing the downstream oil sector is a risky and low-margin business. Nigerian banks that got into the game at the end of the cycle are still paying the price. Developing in-house knowledge of the business sector is a key part of a bank’s growth path. Bernadine Okeke, business development manager at First Bank, says that “the lack of expertise was part of the ?financial meltdown.”?

As local players emerge in the energy sector, things are changing. Ecobank Ghana has the benefit of being part of a continental African banking group. It recently won a contract to restructure the Tema oil refinery’s outstanding debt. Nigeria’s Skye Bank is the sole financier of the Pan Ocean power plant. Nigeria’s Oando is one of the more successful local oil companies and, as it grows its business, it takes its local Nigerian banks with it. The more competent of them will hope to be involved in banking the upcoming oil boom in Ghana.

Ultimately, the leading optimists on Africa’s economic future are predicting a profound transformation that could greatly increase the number of big and small businesses. For them, Africa is on the tipping point of industrialisation which will be driven by attracting Asian investors. This mutation is the product of internal and external factors. There is a proliferation of infrastructure projects linking up African economies, including Algeria’s East-West highway, integrated road and rail projects in East Africa, trans-ocean fibre-optic cables, regional power pools and port improvements from Tangiers to Tema.

There is also a sustained and growing migration from the villages to the cities, creating the concentrations of labour that manufacturing sectors need. These concentrations are often in coastal areas like Lagos, Durban and Dar es Salaam, which are more attractive to exporters.

If urbanisation and improved infrastructure are the pull factors, then Chinese labour costs are a push factor. Strikes at the Foxconn plant in June are just the early signs of discontent in an ageing workforce, the beginning of a process that will see the number of Chinese workers aged 15-24 dropping by one-third over the next 10 years. To avoid the downturn, China pumped huge amounts of money into building up cities in the interior – these are now attracting workers from rural areas, a traditional source of low-cost labour for exporters.

And China itself is using a variety of carrots and sticks both to nudge businesses up the value chain and to encourage more domestic spending and consumption through measures such as forcing businesses to pay healthcare and pension costs. In short, Africa is now a serious destination for low-cost and labour-intensive manufacturers.

In this admittedly-hopeful scenario, Asian manufacturers will set up shop across the African continent and trigger the industrial future envisaged by wide-eyed development plans from Kenya’s Vision 2030 to Nigeria’s Vision 2020.If African countries were to pull in the financing needed for their optimum infrastructure outlay, and invest in a series of export-processing zones, it is possible that factories would bloom across Africa. The banks need to get their watering cans ready.

This article was first published in the October-November 2010 edition of The Africa Report.