Download An overview of banking systems in the COMESA member states and

AFPA SNAPSHOTS…
THE BANKING SECTOR IN COMESA AND SELECTED AFRICAN COUNTRIES1
WHY IS THE BANKING SECTOR SO IMPORTANT?
Africa has experienced impressive growth in the last decade and with this growth a large
consumer market is emerging. Many African countries are expected to reach middle income
status, on top of the real income per capita growth of 3.2% experienced on the continent in
the five years (2003 to 2008) preceding the global financial crisis. In the last 10 years,
Cameroon, Ghana, Nigeria and Zambia rose to lower middle income from low income status.
If countries continue to grow at the same rate in the next decade, most will reach middle
income status by 2025. So although there may still challenges in a number of areas in the
business environment, Africa is becoming increasingly attractive for investors.
As part of the financial sector, the banking sector is still very important in ensuring that the
economy runs like a well oiled machine. But African banking sectors still face a number of
constraints. The banking sectors are still relatively small with low loan to deposit ratios, low
levels of financial depth, large interest rate spreads and the prevalence of short term credit,
with 60% of loans maturing in less than in year. A significant proportion of the population
still remains unbanked. Two-thirds of Africans do not have a bank account, let alone access
to savings, credit or insurance. Poor people have to rely on their own limited resources to
invest in entrepreneurial activity. Less than ¼ of African businesses have a loan or line of
credit. In Nigeria, a survey by the World Economic Forum identified access to credit as the
biggest hurdle, ahead of corruption and infrastructure. Inclusive finance plays a very
important role in economic development, as does a developed banking system.
But not all hope is lost. Developments in the banking sector are resulting in positive changes.
The rapid expansion across borders of pan-African banking groups such as Ecobank,
headquartered in Togo, with a presence in 33 African countries, is increasing competition in
national banking systems, facilitating innovation and the spreading of new technologies.
Information and communication technologies (ICTs) advancements are changing the
landscape in the provision of financial services, increasing the products and delivery channels
available, especially for rural populations. The phenomenal growth in the use of mobile
telephones and internet usage in Africa has improved the lives of millions of people. The
growth of mobile banking, both mobile phone banking and agency banking, has provided
opportunities for banks to expand their operational reach while also introducing new
competitors in the form of telecommunications companies. Consumers are benefitting
greatly from these developments.
By providing access to 500+ financial institutions, the AFPA directory aims to assist
entrepreneurs in benefitting from these positive developments by helping enterprises identify
those financial institutions that provide the most appropriate services and products best
1
The COMESA member states are Burundi, Comoros, DRC, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius,
Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. The selected other African countries are South Africa, Nigeria,
Ghana, Togo, Tanzania and Morocco.
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suited to their needs.
Introduction
Sub-Saharan Africa (SSA) is growing, and continues to grow, despite the financial crisis of
2007/2008. This growth is spread over a number of countries, from commodity rich
countries to those not considered rich in raw materials, such as Ethiopia and Rwanda.
Improved macroeconomic management and increased political stability have underpinned
strong public spending, especially on infrastructure and services. These investments have
been strong contributors to growth.
The consumer market is growing as a result of a fast growing, increasingly urbanised
population which is experiencing a youth surge. Demand is expected to rise with many SSA
countries expected to reach middle income status and urban areas becoming potential
centres of innovation and employment. This is on top of the real income per capita growth
of 3.2% experienced in the five years (2003 to 2008) preceding the global financial crisis.
In the last 10 years, Cameroon, Ghana, Nigeria and Zambia rose to lower middle income
from low income status. Angola, Gabon, Namibia and South Africa are already in the upper
middle income group; and Botswana, Equatorial Guinea, Mauritius and the Seychelles are
classified as high income countries. So although there are still challenges in a number of
areas in the business environment, Africa is increasingly attractive for investors.
An overview of banking systems in the COMESA member states and selected African
countries
Despite these developments, most banking systems in African countries remain relatively
small, with low loan deposit ratios and a large proportion of assets held in government
securities and liquid assets. The ratio of private credit to GDP, an indicator of financial
depth, is relatively low with the ratio averaging 31% in lower middle income countries. In
Uganda and Zambia, the ratio is lower than 20% and in Chad, the ratio is 5%.
The banks’ insignificant role in African economies is reflected in the large difference
between financial institutions’ borrowing rates and lending rates. This large difference
matters for a number of reasons. Low interest rates for deposits discourage savings. The
high interest rates charged for finance and the prevalence of short term credit limits
investment opportunities. Approximately 60% of loans in Africa mature in less than a year.
Although there may be different reasons for the large differences in interest rates charged
in the different countries, the main reasons are as follows. Firstly, market structures are
usually concentrated with the 3 largest banks, often foreign owned and catering to a very
small portion of the population, account for a significant share of total banking sector
assets. This concentrated market structure tends to limit competition.
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Secondly, a significant proportion of the population still remains unbanked. Two-thirds of
Africans do not have a bank account, let alone access to savings, credit or insurance. In
Mozambique and Tanzania, over half the population has no access to financial institutions.
Out of a population of 90 million, only 7 million Ethiopians have deposit accounts and only
112,793 reported having borrowed from a bank in 2012. Nevertheless, although still low
with a branch-population ratio at 3 to 100,000, the number of commercial bank branches
per head of the population is rising.
Thirdly, governments often implement policies that hinder the development of more
efficient and equitable financial systems. In Ghana, it is more lucrative to invest in
Government securities than invest in the private sector. In Ethiopia, banks are required to
hold 27% of their lending in national bank bills, forcing the banks to raise fees and
commissions to compensate for the lower returns from the bills. In Zambia, unprofitable
Government owned enterprises borrow from commercial banks with Government
guarantees. Because of this, many of the banks are designed to profit from trading in
Government securities rather than developing wider savings and lending systems.
Effects of the Global Financial Crisis
The reasons for the characteristics described above in African banking systems are many
and varied and include the small absolute size of banks and banking systems, low income
levels, large informal sectors, low levels of financial literacy, weak contractual frameworks
and creditor rights, inefficient judicial systems and relatively high political risk.
Because of the characteristics exhibited by the banking systems; specifically the ample
liquidity reflecting the fact that banks feel there is a scarcity of credit worthy borrowers, the
strengthening of banks’ capital bases and improvement of their risk management arising
from the reform programmes of the 1980s and 1990s contributing, in part, to their
strengthened financial conditions, and low dependence on external funding as banks rely on
the domestic economy for their funding, in addition to the low leverage levels, and little if
any, exposure to poor quality financial assets; the banking sectors in most countries were
pretty much insulated from the financial crisis.
The only country to suffer from systemic crisis was Nigeria. Nigeria suffered from capital
flight resulting in the collapse of a stock market bubble which had been fuelled in part by
margin lending by banks to equity investors. The Central Bank of Nigeria eventually took
control of 10 banks which accounted for one third of banking system assets. These banks
had suffered large losses on their loan portfolios. Some of the factors which contributed to
difficulties faced by the Nigerian banks included fraud and mismanagement, poor internal
governance and weak disclosure practices.
The banking systems were, however, indirectly affected by international trade linkages, as
the global economic downturn negatively affected exports and slowed domestic economic
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growth, which in turn adversely affected borrowers and contributed to an increase in
nonperforming loans. The overall effect of these developments on financial sector
soundness was marginal.
Current/future Developments
With the development of national economies over time, financial systems evolve in
response to the developments, with the pace of change heavily influenced by targeted
policy reforms. Although there may have been some minor setbacks resulting from the
global financial crisis, there have been a number of developments in the banking sector,
some of which are highlighted below.
The Emergence of Pan African Banking Groups
There has been rapid expansion across borders of pan-African banking groups, mostly of
Nigerian and South African based banks. Among few notable exceptions to this is Ecobank,
which is headquartered in Togo, but has approximately half of its business originating in
Nigeria. Ecobank has the broadest footprint with a presence in 33 of the 45 countries and is
one of the 5 largest banks in 18 of the sub-Saharan countries. Several Nigerian and South
African banks have also expanded aggressively, including United Bank for Africa (Nigeria)
and Standard/Stanbic Bank (South Africa). Also worth noting is the Bank of Africa group,
headquartered in Mali which operates in 11 sub-Saharan countries. Collectively, these 4
banking groups manage in excess of 30% of deposits in at least 13 SSA countries. The
spread of pan-African groups has increased competition in national banking systems and
facilitated innovation and the spread of new technologies. Advances in Information and
Communication Technologies
Advances in information and communication technologies (ICTs) have changed the provision
of financial services’ landscape, increasing the products and delivery channels available
especially for rural populations. In a recent survey by McKinsey, over 50% of urban Africans
reported having accessed the internet in the previous 4 weeks, similar to figures for urban
China and Brazil. Over ½ of urban consumers own internet-capable mobile devices and a
1/3 access the internet daily. Internet penetration in Kenya is 70%.
The phenomenal growth in mobile telephone use has improved millions of lives. ICTs have
transformed many industries including the banking sector. Mobile phone technology use
has resulted in “real-time” connectivity between cities and remote areas, provided
infrastructure for new payment systems and basic banking services and has served to
increase financial inclusion in several African countries. Mobile banking provides many
unbanked households with various financial services, such as saving, paying bills and
transferring money.
Kenya has been in the forefront of such advancements, with the rapid expansion of M-PESA
often being cited as an illustration of how new ICT can produce striking financial innovation.
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Launched in 2007, M-PESA enables customers to transfer money quickly and cheaply.
Without needing to have an expensive bank account, money can be loaded and withdrawn
from a network of agents and used for transfers, bill payments and the purchase of airtime.
A more recent development is the introduction of M-Kesho, resulting from a partnership
between a leading telecommunications company and a commercial bank, also in Kenya. MKesho is a mobile phone based deposit account that provides a savings vehicle with low
transactions costs to customers that do not have physical access to a bank. Mobile money is
gaining popularity in neighbouring countries such as Uganda and Tanzania, but at a much
slower pace.
Although the growth of mobile phone banking has enabled banks to increase their outreach,
it has also introduced new competitors, specifically telecommunications companies, a
development which greatly benefits consumers.
Agency banking
Agency banking (in contrast to mobile phone banking) refers to the provision of financial
services through a mobile bank branch or an agent, such as a spaza shop or post office,
which has partnered with a bank. The agent is usually provided with technology to provide
banking services through their point of sale (POS) system or a mobile, handheld terminal
which has all the functionality of the agency outlet’s POS system for the agent to provide
banking services in different (remote) areas of the country.
Agency banking is a fairly new phenomenon in Africa with scope for a lot of potential. In
Kenya, for example, agency banking was launched in 2011 and by March 2013, 11
commercial banks had contracted over 18,082 active agents were facilitating over 48.4
million transactions valued at $3 billion. In Tanzania, agency banking regulations was issued
in March 2013 and in Nigeria, regulations were issued in February 2013. Despite being one
of the first to recognise the potential for branchless banking having issued its regulations in
2008, the Bank of Ghana has not been successful and is currently revising its regulatory
guidelines.
Other considerations
Inclusive finance plays a very important role in development. Without access to financial
services, poor people have to rely on their own limited resources to invest in
entrepreneurial activity. SMEs are typically constrained in their access to finance. The
financial sector weaknesses noted above have far reaching implications for the real
economy as reflected by less than ¼ of African businesses with a loan or line of credit. In a
survey by the World Bank, over ½ the companies in Burkina Faso, Cameroon, the
Democratic Republic of Congo (DRC), Ivory Coast, Mozambique, Malawi, Niger and Nigeria
said access to credit was one of their biggest obstacles to investment. In Nigeria, a survey
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by the World Economic Forum identified access to credit as the biggest hurdle, ahead of
corruption and infrastructure.
The developments noted above, such as increased competition from pan African banking
groups and telecommunication companies, are forcing “local” banks to increase their client
base and become more competitive. For this reason banks are increasingly targeting the
SME sector in a quest to expand their client base. Furthermore, the EIB and other observers
have noted that “banking systems (in Africa) are characterised by significant liquidity,
reflecting the scarcity of what banks deem to be credit worthy borrowers”. This means that
banks are also seeking out profitable investments in which to invest this excess liquidity.
The Portal provides a vehicle through which both banks and SMEs can meet and transact on
mutually beneficial terms. The Portal has services that can help you package your project in
a manner that emphasises your project’s profitability, thus maximising its attractiveness to
potential financiers. Using the services provided on the Portal you can develop your profile
and present your needs to your prospective financiers whom you can select from the
Directory or publish your needs on the Portal and let prospective financiers find you.
Alternative resources
In addition to funding sources, the Portal also provides you with access to volunteer
mentors. The mentors listed on the Portal will guide and assist you by walking you through,
step by step, bringing your proposal for financing to a “bankable” state thus increasing
significantly your chances of securing funding. In addition to access to volunteer mentors,
the Portal also provides you with information on free web based resources that you can tap
into to, that will also help you in accomplishing this objective.
Even with these resources, the relative high interest rates charged in African countries,
coupled with the need to provide collateral, act as a major constraint in access to finance for
SMEs. The Portal makes it much easier, less time consuming and less costly for you to shop
around and compare the interest rates being charged by the different financial institutions
and their criteria with respect to qualifying for funding. This wealth of information puts you
in a stronger position to negotiate better terms than you would have been able to do
previously.
Conclusion
In conclusion, Africa is expected to continue to experience robust growth in years to come.
With the anticipated increase in the consumer base and spending power, together with the
policy initiatives being taken to improve the business environment, Africa is an increasingly
attractive destination for investment.
Despite the many negative characteristics exhibited by African banking systems, the banking
sectors, for a number of reasons, proved resilient during the global financial crisis with one
exception. In the wake of the crisis, the following developments are anticipated; the
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emergence of pan African banking groups; innovations in the types of products and service
delivery channels resulting from ICT advances and the promotion of agency banking,
amongst others. This has led to increased competition in the banking sector as a result of
the increase in the number of actors and financial services and products available forcing
banks to expand their client base. Consequently banks are increasingly targeting SMEs. The
Portal provides you with information on hundreds of sources of finance and resources other
than finance, information that will exponentially increase your chances of securing funding
to ensure your success.
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