Like banks everywhere, those in Africa have had to weather the worst economic crisis in living memory as the Covid pandemic spread globally. The continent, as a whole, has suffered its deepest recession in at least half a century, though the picture varies widely from economy to economy.
In aggregate, GDP in South Africa, Nigeria, Morocco and Kenya — Africa’s four most important banking centres — fell by roughly 6 per cent in 2020, pushing corporate borrowers into distress and forcing banks to ramp up their provisions for bad loans.
And, with highly vaccinated western nations struggling to combat the new Omicron variant of the virus, economies in Africa — where vaccination rates in most countries are below 10 per cent — seem certain to be hit harder, and to recover more slowly.
Unlike in richer countries, where central banks have bought up debt and governments have funded generous furlough schemes, banks in Africa — outside a few countries such as Morocco and South Africa — have had to go it pretty much alone.
6%
Aggregate fall in GDP in South Africa, Nigeria, Morocco and Kenya — Africa’s four most important banking centres — in 2020
“Most African countries don’t have the room to expand from a monetary and fiscal perspective as other countries do,” says Alain Nkontchou, chair of Ecobank, a Togo-based pan-African lender with operations in 36 countries.
But, despite a tough macroeconomic environment, an analysis from McKinsey suggests that average returns on equity at African banks have borne up relatively well.
In the world’s developed markets, it says average ROE will fall below 1.5 per cent in 2021 against pre-crisis levels of around 9 per cent. In Africa, by contrast, banks’ ROE has fallen by a more modest 50 per cent, from an average of 14 per cent in 2019 to around 7 per cent in 2020.
Depending on the pace of economic recovery, McKinsey predicts that African banks’ ROE could return to pre-crisis levels within three years.
“There’s no question that Basel III gave rise to healthier and stronger banks,” says Sim Tshabalala, chief executive of Standard Bank, referring to the Basel international banking regulations. “That’s definitely been the case in South Africa and on the African continent, with the result that, though there was a massive shock inflicted by Covid, banks have come through well capitalised.”
However, the banks’ survival has come at a cost to businesses on the continent, especially the smaller ones, which have often struggled to borrow. Even when they can, the lending rates are usually prohibitively high.
“The depressing part of this is that most banks have restricted lending to the private sector and have bought government debt as deficits widen,” says David Cowan, chief economist for Africa at Citibank. “In terms of economic development, it’s not very good.”
But, if traditional banks have hunkered down, a plethora of fintechs, so-called “neobanks” and non-traditional financial service companies have expanded their activity during a pandemic and accelerated a move to online services.
“The landscape is evolving fast,” says Yvonne Ike, head of sub-Saharan Africa at Bank of America. She notes the structural shifts catalysed by technology as well as a push from mobile money providers and algorithmic lenders to expand financial inclusion.
“Technology is literally the most important driver of change in financial services,” she says. “The commercial banks are fighting to retain their leadership role and they are being challenged by the mobile network operators and fintech companies. Things are definitely evolving away from the traditional commercial banking model.”
In a recent sign of the change, in November, the central bank of Nigeria gave provisional approval to MTN of South Africa and Airtel of India to operate payment service banks in the country. This change opens up a market of nearly 40m unbanked Nigerians to the telecom giants’ respective payment platforms: MoMo and Smartcash.
“The final operating licence will enable us to reach the millions of Nigerians that do not have access to traditional financial services,” says Segun Ogunsanya, Airtel Africa chief executive.
Local telecoms operators Glo and 9mobile already have licences. Even big commercial banks, such as Access and FirstBank, have a network of tens of thousands of agents to replace traditional bank branches in parts of the country where the rate of the unbanked is high.
Neobanks, which operate entirely online, have also proliferated, though none has reached the scale of Brazil’s Nubank, which become the most valuable financial group in Latin America with a valuation of almost $50bn after its initial public offering in New York this month.
Still, a number of Africa-focused neobanks are making headway. In August, Kuda Bank, a London-based start-up operating in Nigeria, where it has 1.4m registered users, raised $55m in a funding round, valuing the company at $500m.
Other examples include Carbon, a Nigerian fintech with a microfinance bank licence, and TymeBank, a South African neobank that raised $110m this year to fund expansion into the Philippines.
Similarly, services such as PiggyVest, a Nigerian savings app, and payments companies, such as Paystack and Flutterwave — a fintech “unicorn” with a market capitalisation of more than $1bn — are thriving.
“I’m a big believer in fintech,” says Makhtar Diop, managing director of the International Finance Corporation, the commercial arm of the World Bank. “Fintech would be really what allows us to be able to deliver to more people in the economic process. We have seen the impact we have had in a country like Kenya with M-Pesa,” he adds, referring to the Kenyan mobile money service. “Today, we are seeing innovation in fintech in Nigeria.”
Ike of Bank of America says another challenge for traditional banks is the squeeze on foreign exchange in many markets. This constraint has encouraged the widespread use of cryptocurrencies as businesses try to get around restrictions. Nigerians are among the world’s biggest users of cryptocurrencies such as Bitcoin, despite a central bank ban on their use by banks and financial institutions since February.
Now, Nigeria’s government is showing signs of wanting to get in on the act. Its central bank recently became the first in Africa to launch a digital currency, the eNaira, though precise details of its scope — including whether it is readily convertible to physical naira — remain unclear.
Standard Bank’s Tshabalala says that telcos, fintechs and neobanks will not have it all their own way. “The fintechs are discovering that financial services is a business of scale, requiring vast resources,” he says. “The moment you start having to deal with anti-money laundering, anti-terrorist financing, and having to comply . . . that requires lots of risk managers, lots of resources. Banks are particularly good at that in a way that fintechs and telcos aren’t.”
Still, Standard Bank recently decided to partner with Flutterwave to offer digital payments services — in a sign that the different models could eventually converge.
The landscape is shifting in other ways, too. Moroccan banks, some of the largest on the continent, have moved aggressively into west Africa, partly in search of faster economic growth lacking in their home market. Egyptian banks such as Commercial International Bank, a private lender, have dipped their toe in Kenya. South African banks are also moving north.
Despite all this, foreign banks including Barclays, Credit Suisse and Deutsche and UBS have opted to reduce their exposure to Africa. Henry Wazne of Sofibanque, a private bank in the Democratic Republic of Congo, attributes this to a misperception of African regulatory risk over issues such as illicit money flows. “Because of compliance, due diligence, you need to cut some accounts,” he says. “And so they cut Africa.”
Tshabalala questions this reticence among big foreign players, arguing that the African Continental Free Trade Area, which went into effect this year, has re-energised the case for banks with a continental reach. “If you want to take advantage of the movement of capital, goods, people and ideas, it’s going to make sense for you to have a pan-African proposition,” he suggests.
Regulation still makes that difficult, with most national regulators insisting that capital and, increasingly, data are ringfenced at the sovereign level. Even so, Tshabalala says obstacles can be overcome through technologies such as cloud computing as well as through persuasion.
“I think it’s important for us to engage [regulators] and continue the engagement to show them why it’s important for the African competitive advantage,” he says of the case for seamless cross-border banking. “Our African regulators are rational . . . So I’m not despondent.”
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