For a time, I had the enormous privilege of working in financial services in West Africa and I gained exceptional insight into the workings of this market – and why it is so exciting to be in it. I think that to understand it better, you need to think of banking in Africa as a river-rafting adventure - there are going to be very scary moments to navigate and you need to be ready to face risks all the time.
But why am I telling you all this? If risk is such a critical factor to consider, what then are the pull factors drawing financial services providers to the continent and what do we need to know about this market to succeed in it?
Rapid economic growth
The draw card is primarily economic. Wherever there is rapid economic growth, there will be significant development of a country’s banking sector. Growth in African economies is impressive; more than one-third of Sub-Saharan African countries posted 6% or higher growth rates, and another 40% are growing at 4% to 6% per year. The World Bank expects that most African countries will reach "middle income" status (defined as at least US$1 000 per person per year) by 2025, if current growth rates continue. Hence, the need for financial services on the continent will likely not slow down anytime soon.
Banking profits are directly linked to the economic performance of a country, which makes Africa so attractive. Mozambique, for example, is experiencing 8% GDP growth. This means that its deposit base will grow as more individuals start saving and companies make profits. Banks then take these deposits and lend to individuals and companies or buy government bonds, which in turn leads to increased economic activity and directly improves the performance of a bank.
The rest of Africa is all about small banks
Banks moving into the continent should keep in mind that Africa’s banking sector is distinct as it is built on a small/local bank model. Unlike South Africa, most other African countries do not have a few large banking groups that dominate the market. Sometimes a country may have a state bank, but there is a great deal of private- and foreign bank ownership in the banking industry as more countries become democratic. These smaller banks, and there are quite a lot of them, are fully-fledged financial services providers that offer all the facilities one would expect from a bank. When I lived in Ghana some years ago there were already 23 banks operating there.
The market is competitive but I believe that there is a real need for consolidation in this sector. Because these economies are growing at a rapid rate, every bank wants to build a large footprint to create a presence to be able to open new accounts and raise deposits. In some countries, a single bank could have as many as 150 branches. In West Africa, if you add all the branches of every bank together you are probably sitting with around 50% too many branches in the region. With consolidation, you will see branches being closed, economies of scale being achieved, and the efficiency ratios of the banks will improve.
However, small banks should not be underestimated as they can be, and often are, highly successful and profitable. Ecobank is a good example. It was established by a group of West African business people who wanted to set up a bank to facilitate trade in the region. In less than 30 years (and after many challenges), Ecobank became the largest Pan-African bank, now operating in about 30 African countries. It is the leading independent regional banking group in West- and Central Africa (serving wholesale and retail customers).
What can we learn from each other?
It is important to remember that South Africa is part of Africa and that there is a great deal that we can learn from the rest of the continent’s local banking models.
From a service point of view, the African way of banking makes it possible to build really strong, personalised customer relationships. Ubuntu (or 'I am what I am because of who we all are') or a regionalised version of this concept is applied throughout Africa. That kind of stakeholder relationship management is a significant differentiator in the South African market.
From an employee and management perspective, the small/local bank model is arguably one of the best ways to train for end-to-end banking experience. Working in a large bank in South Africa, most employees would only gain experience in one, or a few, particular aspects of banking. However, in a small bank, you have to be involved in every part of the business.
This is what I loved most about my time in Ghana. As a banker, you are involved in every facet of running the business - you design your own products, you sell those products, you get involved in credit decisions, and then go and collect if the customer does not pay you!
You are responsible for dealing with regulators, doing the marketing, building the brand, etc. As an example, when I arrived in Ghana, we were running a savings account campaign where one lucky new customer would end up winning a new C-Class Mercedes-Benz. This beautiful car was displayed at the main branch in Accra for some months and, while looking back I admit I might not have gone for the idea up-front, with a bit of managed risk-taking and some savvy, the campaign was an enormous success. This is how banking leadership gains the respect and confidence of the customer.
This model also challenges leadership and staff to adapt to new ways of thinking. Innovation is key because the environment welcomes creative thinking to draw in customers. One need only look at the success of the innovative M-Pesa in Kenya vs traditional bricks and mortar banking.
Where does South Africa fit into this picture?
South Africa has undoubtedly set the benchmark when it comes to systems development, governance and compliance and it has one of the most sophisticated banking sectors in the world. I would like to see more knowledge-sharing between South Africa and its neighbours because there is a great need for improved regulation and governance of banks in the rest of Africa.
Skills transfer is also another area where countries on the continent can collaborate. When I worked in West Africa, because of the rapid expansion of the banking industry, the average experience for staff in the branches was around 1.5 years. Lack of experience and skills is a huge risk for any financial institution because it often translates into operational losses. Compare this with Mercantile Bank, where the average experience of an employee in the branch network is close to 15 years.
In terms of technology development, South Africa also leads the way and could contribute to other countries on the continent growing in this space. Ghana, for example, only went live with code-line clearing in 2009, while it has been used in South Africa for about 30 years. Point-of-sale machines are only going live in many other African countries now.
There is also an opportunity to improve Africa’s loan-to-deposit ratio, which is much lower than South Africa’s mainly as a result of lacking credit skills and the relatively poor quality of security backing up the loans. If a country does not have a sophisticated legal system and a formal deeds registry, it will be very difficult to perfect security or call on sureties when a customer is in default. This results in the loss given any default being extremely high. We are very fortunate to have a robust legal system in South Africa.
Africa is ready and waiting
It is important to be aware of the different nuances of doing business across Africa. Factor in that the rental market is expensive – landlords often require tenants to pay five years’ rental in US dollars up-front. Add to this the cost of setting up shop as well as bringing in expatriate staff. Some banks have run into serious problems by not being aware of local conditions and expanding too quickly.
South Africa can help other countries on the continent improve the way they do banking, but we can also learn from our neighbours. We have world class banking systems and expertise that we can share, but we should also be looking to Africa’s banking model to see what we can adopt locally to improve our offering and service to customers. This is particularly true at the lower end of the market, which is traditionally not well-served in South Africa.
I believe this market will continue to grow – Africa has high-growth economies, banking offers good returns on equity, there is a massive unbanked market, and technology and innovation in banking are on the rise.
Regardless of the challenges, it makes business sense to expand into Africa, provided that the risks are properly assessed and managed and an un-blinkered estimate of the returns far outweighs the risks.
I recall lying on the beautiful Ghanaian beaches on Sundays, sipping a cold local beer, and watching a regular hawker walking past saying: “Hey Bafana! Africa is great!”... I couldn’t agree more.