By Christophe Jocktane-Lawson, Managing Director of EBI (Ecobank Group)
African banks need to seize the huge long term potential offered by the sector across the continent, starting with necessary consolidation and targeting the development of home-grown banking Champions.
Africa remains noticeably under-banked but the growing demands of its relatively young, urbanising population, of vital infrastructure spend, and the gradual implementation of new international prudential standards is prompting many local banks to accelerate intended changes and come together to support the growth of the continent.
The recent decision by a major British bank to leave the African market has certainly raised questions. However, the move says more about the situation of one international group seeking critical mass in each of its markets, than the market overall. Leaving aside that firm’s specific issues, the role banks have to play in Africa’s overall development is critical and the possibilities open to them are immense.
There is much to do. The uptake of banking services among African households is still very low. Only 25% of the continent’s population has a bank account, compared with 90% in the OECD countries, according to statistics from the African Development Bank. But the uptake range varies greatly across the continent: it is just 14% in West Africa but rises to 36% in Southern Africa, the home region for South African banks.
Similarly, Africa’s infrastructure financing needs are enormous and can not be met by state and institutional funding. There are private equity funds active in the market but the mainland banks are simply not of a sufficient size to provide the necessary funding. Local capital markets, which are an alternative, are still in an embryonic stage. The creation of a strong African banking sector is thus urgently needed. At this point it is highly fragmented: one hundred banks share the market in West Africa, for example. Clearly, there is very considerable potential for consolidation.
Credit extended to the private sector reached 24% of sub-Saharan Africa’s GDP, and 43% of Southern Africa’s GDP, compared with 134% in OECD countries. Moreover, very few retail banks have set up technological platforms enabling them to offer banking solutions, especially in mobile banking, which meet customer expectations. Africa’s emerging middle class has developed steadily, partly due to the massive use of the tools offered by the digital revolution, such as smartphones.
The penetration rate of mobile telephony is very high in Africa — close to 100% in many countries. At present, banking services are delivered largely via mobile banking. In East Africa, there are banking partnerships with telecom companies, but West Africa still lags behind in the field of payment and access to populations. The investment levels required to deliver such technological solutions are high, and therefore not within the reach of smaller establishments.
To these requirements of scale and reach add new regulatory constraints: Africa’s local regulators are pushing banks to meet the new prudential standards (Basel III) alongside their Western counterparts, and thus greatly strengthen their capital base.
Finally, the current slowdown in the expansion of African banks is connected to wider economic difficulties. Recent weakness in export earnings is mainly due to lower commodity prices, while the opportunities of the Chinese market have reduced, resulting in less available foreign currency. The ability of African banks to finance their customers, especially in dollars, has therefore diminished.
But the vagaries of short term trends and challenges should not call into question the bright prospect for the longer-term development of the banking sector in Africa. The continent’s financiers should formulate regional or even pan-African strategies, as some in East Africa have already done, thus producing and nurturing African sector champions. This movement will come from local institutions, rather than Western or even Asian players, who are confined mostly to niche activities with their home-nation clients, and who cannot afford a long-term strategy the African market.