The contradictions of African banking

On March 1, 2016, Barclays’ chief executive Jes Staley announced that the bank planned to exit its African operations in the following two or three years. It was a big shock to bank employees and customers across the continent.

David Hodnett, deputy chief executive at the time, maintained that senior leadership at Barclays Africa Group Limited (BAGL) was kept in more or less the dark about the announcement. So much so that, just a couple of weeks before Staley’s statement, an internal message to bank employees mentioned that rumours the bank would exit its African business were unfounded.

So, after Staley’s announcement, panic ensued. In South Africa and Botswana, there were stories of people queuing at ATMs and at local bank branches to close their Barclays’ accounts. In South Africa, some disgruntled bank tellers tore down Barclays Bank signs in shopping malls and high streets, leaving only the Absa bank logo visible.

An advertising campaign broadcast via local radio in South Africa declared that Absa – a strong African brand in which Barclays took a controlling stake in 2005 – was here to stay. It was a message in stark contrast to that made by a British bank about to end its 100-year presence across the continent. BAGL has since been transformed into Absa Group – with new Africa-inspired branding.

In South Africa and along its borders, people were asking the same questions: Why was Barclays, a bank with a long history in South Africa and the continent, leaving? Was the continent being excluded from the international community?

Absa chief executive Maria Ramos retired at the end of February this year and was not available to speak to Euromoney. But other bank chief executives and analysts that Euromoney spoke to were outspoken on what international bank retrenchment from the continent means.

“Where international businesses run into financial trouble, their African subsidiaries are usually the first to go,” says Segun Agbaje, chief executive of Guaranty Trust Bank in Nigeria.

“This is largely due to the perception of risk attached to the continent. In reality, each African country should be looked at and assessed individually because there is a lot to be gained there.”

Following the global financial crisis and the introduction of Basel III rules, higher capital-adequacy ratios, strong anti-money laundering and know-your-customer policies forced banks to retreat to their core markets.

Africa was initially heralded as one of the areas least affected by the global financial crisis, not least because sub-prime wasn’t a factor in Africa. But there were consequences, and banking retrenchment would affect Africa disproportionately.

Recently, BNP Paribas said it was looking for buyers for its business in Tunisia and Gabon. Towards the end of 2018, there were reports that Credit Suisse was to close its South African banking business in the next couple of years. Since 2015, HSBC has pulled back from a number of African countries, including Egypt and Libya. Also in 2015, RBS said that it would sell its corporate debt and debt capital markets business in the Middle East and Africa. At the moment, Société Générale is one of the few European banks that appears to be strengthening its African presence.

Mike Brown, chief executive of Nedbank, one of the big four South African banks, says: “It only makes sense to have a network of banks across a broad range of geographies if there is a competitive advantage in doing so, if there are economies of scale that can be realized or if there are growing trade and customer flows between these geographies that more than offset any additional capital and other costs of owing such a network of banks.

“Building a banking presence in Africa for purely geographical diversification is not a good strategy – there need to be synergies, network effects and sustainable economic logic.”

James Formby, chief executive of Rand Merchant Bank based in Johannesburg, says: “Making mistakes has become so costly that global banks want to avoid them by any means. This meant scaling back business in non-core areas – no matter what the untapped opportunities might be.” International banks have also started to close correspondent banking relationships in some African countries.

“It has a lot to do with cost,” says Akintunde Majekodunmi, bank analyst at ratings agency Moody’s in London. “Working with a small local bank to facilitate business in what some might consider an obscure African country might not justify the compliance costs. It’s just not worth their while.”

The commodities downturn hasn’t helped Africa’s cause, while across the continent the devaluation of many local currencies has meant that returns in terms of dollars, euros and sterling have fallen. Over the last two decades the currencies of Zimbabwe, Nigeria, Angola, Mozambique, South Africa and others have collapsed against the dollar.

“It becomes a sort of self-fulfilling prophecy,” says Binta Touré Ndoye, chief executive of Oragroup, a pan-African bank based in West Africa. “International investors read that banks are pulling out of Africa and they follow suit.”

The geographical retreat is in stark contrast to the opportunities that Africa offers, its advocates argue.

“Africa’s banking markets are among the most exciting in the world,” says Joshua Oigara, chief executive of Kenya Commercial Bank. “The continent’s overall banking industry is the second-fastest growing, the second-most profitable of any global region and a hotbed of innovation.”

But no matter how strong the business case in Africa is, sometimes it just doesn’t translate. Foreign investors still engage with sensationalist headlines without delving into the detail – where the real opportunities lie.

“We don’t do ourselves many favours,” Standard Bank chief executive Sim Tshabalala tells Euromoney from his office in Johannesburg. “In some African countries rules and regulations are not up to scratch, levels of compliance aren’t what they should be – but this is changing fast.”

Nevertheless, Barclays’ retreat from Africa is a blunt example of how the international financial community’s engagement with the continent is changing.

“The fact that international banks are leaving Africa is a form of exclusion,” says Tshabalala. “If they don’t want to take part in the African value chain – that’s exactly what it is – exclusion.”

George Bodo, an independent bank analyst based in Nairobi, Kenya, says: “International bank retreat from Africa? We see this as the latest event in the African banking cycle.”

Well into the second half of the 20th century, for many countries in Africa, banks were merely an extension of their colonial roots. Banking networks across Africa were largely integrated with the global banking system – supporting colonial interests.

“Independence led to the indigenization of the banking sector across the continent, and locally owned banks crowded the sector,” says Bodo.

Banks began building their own national identities. And there were hundreds of them. Consolidation is now a big theme in Africa. This is happening in tandem with the international bank retreat.

In 2005, Nigeria’s 89 banks where whittled down to 24 almost overnight when capital adequacy requirements rose from N2 billion ($5.5 million) to N25 billion. The change in policy “transformed Nigeria’s banking sector for the better and strengthened the country’s overall economic stability,” Euromoney reported at the time.

Other African countries haven’t been as hasty. Angola, Ghana and Tanzania are all going through a much longer period of consolidation. In Kenya, one of east Africa’s most developed countries, consolidation is moving at a snail’s pace.

“Kenya has over 40 licensed commercial banks, against a population of over 45 million people,” says Oigara at KCB. “The general feel is that the country is overbanked when compared to other African countries, let’s say Nigeria with only 21 banks yet nearly 200 million people.”

In an attempt to encourage lending to the real economy, Kenyan regulators implemented an interest rate cap on the lending rate at 4% above the base rate. But rather than encourage cheaper and more accessible lending, banks decided against taking on the risk at all. Profits fell.

“Investors hope that the price cap on loans will eventually be lifted,” says Rahul Shah, global head of financials equity research at Tellimer in Dubai. “At the moment, banks are focused on larger, safer customers, and a huge portion of the economy has been excluded from bank finance. Credit growth has slowed to single digits and NPLs [non-performing loans] have risen because corporates are struggling to pay bills due to the sluggish economy.”

Consolidation may be the only way out and there are signs it is picking up in Kenya as some smaller players struggle under the low interest rate regime. Chase Bank was recently bought by the State Bank of Mauritius, while Kenya Commercial Bank is mulling an acquisition of Imperial Bank.

“It’s a necessary process,” says Brown. “Without stronger, bigger banking institutions, there is only so far the banking sector will grow – and that will be the case for the entire continent.”

Looking at the evolution of Africa’s banking sector – from colonialism to consolidation – African countries appear to have more in common than not. However, understanding the nuances that define each country across the region brings the underlying opportunities to the surface.

It is in this light that Africa’s new regional banks assess the continent and weigh up opportunities. Ecobank, United Bank for Africa, Standard Bank, Orabank and Attijariwafa are just some of the African players looking beyond national boundaries.

KCB and Equity Bank continue to discover opportunities in east Africa, while large Nigerian banks, including Access Bank and GTB, are beginning to tap opportunities in Ghana, following their corporate clients across borders. Importantly, they can fill the gaps left by their international counterparts.

“There are a number of synergies between African countries, and cross-border trade is increasing, but these are especially strong among those countries that are in closer proximity to one another,” says Brown.

Collaborations are also part of the process. In 2008, Nedbank and Ecobank formed a strategic banking alliance creating the largest banking network in Africa, with 2,000 branches across 39 countries.

“Building an alliance like the one we have with Ecobank allows us access to a number of markets without the regulatory costs associated with going there alone and allows us to leverage the local knowledge that Ecobank has in the central and west African markets,” says Brown.

“Given the increasing amount of customer trade, stricter banking regulations and increasing costs of cross border acquisitions in Africa, I believe we will see a number of other strategic alliances like ours with Ecobank develop over time,” he adds.

But this doesn’t mean that local African banks are unnecessarily aggressive. Standard Bank, one of Africa’s largest, with a deep regional presence in 22 countries, still moves with caution.

“This is a major dilemma for us,” says Tshabalala. “At the individual level, we realize the need for banking products and services across Africa, because financial inclusion is still incredibly low. This becomes even more apparent when – at the corporate and investment banking level – international banks are pulling out of the continent.”

Standard – and many others with ambitions to grow throughout the continent – are obviously not willing to budge when it comes to standards.

“We decline customers and exclude business, sometimes at great cost to ourselves, to be part of the global financial network,” says Tshabalala. “It gives us a competitive advantage over other global banks that come into the continent just to take advantage of one or two high-level deals.

“We are forced to exclude some people and businesses from the banking sector because of the risks we see. Exclusion happens on so many levels.”

And herein lies the tension. Africa is a fragmented market of 54 nations, each with its own currency, regulations, culture, opportunities and risks that need to be assessed on a case-by-case basis.

While each country battles to be seen as an individual, every one also recognizes the benefits of working together more closely and of integrating more formally into the international financial system.

The African Union aims to formalize the networks and synergies between African countries and leverage this opportunity.

“For Africa to be turbocharged it needs to operate more like a single market,” says Michael Jordaan, former chief executive of First National Bank and co-founder of one of South Africa’s newest digital banks, Bank Zero.

“For banking customers, this would enable ease of cross-border payments and remittances,” he says. “For banks, it should enable them to operate across Africa without needing a new bank licence in every country.

The corporate and investment banking landscape in Africa is slowly moving into the hands of its indigenous banks.

“There has been a great shift over the last 50 years from banks serving solely colonial ties to banks supporting national champions,” says Ndoye at Oragroup. “As they go further beyond Africa’s borders, we will follow them.”

But when it comes to retail banking, the existing bank network in Africa still only serves a small percentage of the population. Access to basic banking products for the masses – payments, savings, loans and insurance products – is still limited.

The drive towards banking inclusion in Africa has forced financial innovation across the continent. M-Pesa, the Kenyan mobile money application run by Safaricom in collaboration with local and regional banks in country, is one of the best-known examples of this. Now it’s going global.

“M-Pesa customers can now send and receive money, shop and make payments internationally through PayPal, WorldRemit, AliExpress, Western Union and others,” says Bob Collymore, Safaricom’s chief executive based in Nairobi.

Home-grown ideas are connecting Africans with the global community – and it doesn’t always require a smartphone. A first-generation mobile phone with USSD technology is all that is needed for users to send and receive money, apply for bank loans or even request an overdraft facility. This is important if you are a low-income African, an internally displaced person or a refugee, for example.

“We know our customers,” says Collymore. “By analyzing big data, we can build up a picture of our customers’ needs and make the decision to extend a loan or overdraft.”

Banks, even indigenous African banks, might not be able or willing to take this risk.

Solar power company, M-Kopa, which leases out solar powered lights, television sets and other devices on a pay-as-you-go basis, has also launched a lending scheme to existing clients.

M-Kopa products are paid for by customers over time either daily or monthly via mobile money, and embedded mobile technology remotely controls individual systems if payments are missed.

Solapesa is the cash loan programme launched by M-Kopa in 2018 and it leverages these existing customer relationships to provide the service. Loans can be applied for via mobile phone and M-Kopa payment data is used to assess the viability of the applicant.

“Our products come with a financial plan that customers are obliged to stick to, and by and large they do,” says Julian Mitchell, managing director of M-Kopa in Uganda. “A cash loan product felt like a natural step for us to take. We understand the ways in which our customers pay their debts and the default rate is very low. We felt it would be the same way with cash loans.”

M-Pesa and Solapesa – as well as a myriad other micro finance banks and businesses – evolved to fit an African context. They have helped tackle the lack of financial inclusion across the continent at a time when banks are scaling back on their branch networks.

Innovation is paying off and financial inclusion is on the rise. According to a report published by McKinsey in 2018, there were almost 300 million banked Africans at the end of 2017, up from 170 million in 2012. By 2022, McKinsey predicts that the number of banked people in Africa will reach 450 million.

“Sometimes I look at what is happening in African banking and compare it with what I see in Europe and the US – and it is literally like some of these developed countries are stuck in the dark ages when it comes to fintech and mobile money,” says Bodo, the independent analyst.

Again, nuances between countries have a huge impact on the adoption of mobile money and its derivatives. While Kenya has embraced these developments, in Nigeria strong opposition by the banking sector has limited the banking capabilities of telecoms companies. As such, mobile money hasn’t taken off there as it has in east Africa.

Many of Africa’s banks, born in the immediate post-colonial era, face complex legacy issues. This, perhaps, is what makes them wary of new, nimble fintechs.

“Big telecoms companies have a large network, they have the reach and they offer great customer experience,” says Standard Bank’s Tshabalala.

“This is a global phenomenon, but I think the impact of this is much more acute on the continent because of regulation,” he adds. “At the moment, fintechs and telecoms companies have the ability to disintermediate the banks and create risks because banks are regulated and these institutions are not.

“I am all up for them taking part in the sector, but they need to be regulated – if they act like a bank, regulate them like a bank. Otherwise, there will be consequences,” he warns.

Jordaan from Bank Zero takes a slightly different view, however.

“Regulators have been liberal in allowing the ascent of M-Pesa but have insisted on bank backing for other mobile network operator-led payments initiatives. As elsewhere in the world, there are calls for policy to be amended to allow smaller players to access discrete parts of the overall value chain, for example permitting fintech players to offer only payments services.”

For Jordaan, there is a battle brewing between telecom companies, traditional banks and fintechs.

“The old, branch-based model is too expensive and cumbersome for the needs of most Africans, whereas the telcos currently offer only limited financial services,” he says. “The race is on to see who can come up with the best app-based solution, as ultimately all banking will be mobile.

“As 4G becomes more prevalent in the continent and as the cost of smartphones reduce even further, the battle will intensify.”

Barry Hore, chief executive of Discovery Bank, says: “In this current wave, most existing banks are trying to embrace the opportunity of ongoing digital innovation, and while traditional retail banks have strong infrastructure, their legacy systems are expensive.

“This means that banks are not as agile and disruptive as they could be to handle customers’ ever-changing preferences,” he says.

This battle between fintechs, mobile money providers and banks will be much more fraught in Africa than elsewhere in the world because the banking industry there is relatively new – on average 30 years old.

The continent is a place where people don’t have the same loyalty to a bank or brand that they do in the US or in Europe. There are still millions of people in Africa that have yet to open a bank account. They are just as likely – if not more so – to open one remotely via their mobile phone than in a bank branch. Where will their loyalties lie?

“We are in the midst of developing a fully fledged banking industry that serves all Africans at all levels,” says Ndoye. “It will take time for us to reach everyone, but I think we are coming up with new ways to do this – ways that more developed countries might eventually adopt.”