Headquartered in Johannesburg, the Standard Bank Group has a presence in 18 African countries. Sim Tshabalala is deputy CEO of the Group and also heads up the Bank’s South African unit. In this in-depth interview with Goldman Sachs’s Hugo Scott-Gall he discusses a range of issues, from how the lender is embracing mobile banking to South Africa’s diminishing competitive advantage on the continent.

Hugo Scott-Gall: How do you identify the countries in which you’d like to expand?

Simpiwe Tshabalala: We first think about the business environment. If we consider the environment complicated and difficult, we begin by opening a rep office or a joint venture, and then perhaps an acquisition. Angola is an example, we went in greenfield and applied for a rep office. We followed that by applying for a banking licence. Then we entered into a partnership with locals. We now have a banking licence and are rolling out operations organically.

When we have knowledge of the environment, and consider it less risky, acquisition is more straightforward. Take Uganda: we had a small operation coming out of the ANZ Grindlays network, and we knew Uganda very well. We bought the largest bank in Uganda, and merged it with our entity there and we now have high market share.

In thinking about the various countries, we also look at demographics. There are interesting demographic stories to be told in Africa. The demographics of Nigeria for example are fascinating; life expectancy is improving, health and education are improving, the work force is getting bigger, and it is getting better educated. So consumer-facing businesses are going to do really well there. And therefore, over time retail banking in Nigeria is clearly going to do very well.

Likewise infrastructure is an issue. In most of sub-Saharan Africa infrastructure has all but collapsed, or is limited. It has to be rebuilt, so there are massive opportunities in project finance. A lot of infrastructure will be refurbished, mainly with support from the Brazilians and the Chinese. The link we have with ICBC also helps us identify opportunities and execute on them. In our case, ICBC is a 20% shareholder. We have a cooperation agreement to identify Chinese corporates and SOEs that are looking for opportunities on the continent, and we have businesses and people on the ground who can react to that.

Hugo Scott-Gall: How quickly is it going to change? Can banking penetration increase fast enough to provide sufficient deposits versus the demand for capital?

Simpiwe Tshabalala: The rate of penetration increase will be different country by country. Some countries have better credit bureaus, and better legal systems, so you are able to foreclose if you need to, whereas in other countries it is impossible, meaning that your lending strategy will always lag your liability strategy. In some countries it will take time to improve the legal systems, and to have the capital markets to be able to absorb that rate of growth. Having said that, the margins are quite thick and the return on equity is high. The risks are obviously commensurate with the returns, but the returns and the increase in the customer base taken together with GDP growth are stunning.

Hugo Scott-Gall: What could you do as a very large player to change penetration. Does the fact that mobile phones are so ubiquitous make that easier?

Simpiwe Tshabalala: The rate of growth of mobile and internet penetration is staggering. And that obviously creates an opportunity, first to reduce the cost of product and service delivery. This puts us in a position to include a larger number of people in the banking system at a faster rate than we could otherwise.

In countries like Kenya for example the speed with which people entered the banking system from the moment M-Pesa was launched is mind boggling. We think in a couple of years the penetration of mobile phones in Africa will be close to 100%, and the implications of that for payment, advancing credit through mobile phones, etc. are amazing. Inside Standard Bank we have a division called inclusive banking, which does precisely that. We’ve set up mobile banking to provide distribution channels and community structures that give us an ability to generate savings, deposits, and loans far more cheaply than bricks and mortar prices.

Our traditional branches and our legacy distribution networks are changing as a result of communications, and also changing because it’s too expensive to have branches that carry cash. So everybody is moving towards cashless branches, having self-service at those branches and reducing infrastructure requirements.

In addition, because you can use agency banking or other people’s shops and distribution networks, all you need is a point of sale terminal and a card and you can do the same things as you would in a branch. The consequence of that is that the capital intensity of these businesses is much less than traditional banks.

And that is the story of Africa. The ability to distribute product and services through agency or correspondent banking using point of sale terminals and mobile phones is revolutionising banking.

Hugo Scott-Gall: Do you have a view on the sophistication curve of people’s saving? How quickly can it change, so that there is more demand for more sophisticated products?

Simpiwe Tshabalala: At the risk of making big generalisations, in many countries people have had appalling experiences with banks, for example banks collapsing because of fraud. The consequence of that can be that a lot of the money sits outside the banking system. In addition, in many countries banking infrastructure is inadequate and capital markets hardly exist.

Now the rate at which capital markets develop, and people increase their disposable income are two big factors in increasing banking penetration and deepening financial activity. How long that takes again depends on the level of sophistication in the countries. So South Africa is far down that path while Nigeria far behind, but the pace at which the banking system and the capital markets in Nigeria are developing is phenomenal, in large measure because the authorities are quite determined to change the legal and regulatory environment for the better as quickly and effectively as is possible. They are working towards building yield curves, disposable income is increasing, they have introduced laws and regulations that compel contractual savings, and the pension fund system is improving.

Hugo Scott-Gall: Is it a worry that when things are going well consumer credit might grow too fast and prove destabilising?

Simpiwe Tshabalala: Excluding South Africa, in most markets consumer credit hardly exists, so most banks operating on the continent are liabilities banks. They take deposits, they would typically buy government paper, and they provide people with the ability to save and make payments. But consumer lending is hugely underdeveloped. And it will take some time in my view for consumer lending to become a large component of banks’ balance sheets on the continent.

For example, it’s only recently that Uganda has created a deeds registry and upgraded its courts; mortgage lending is starting to accelerate as a consequence. As authorities build the infrastructure, the legal, regulatory and market infrastructure, lending will pick up.

In South Africa the story is slightly different and lending is highly penetrated at about 80%. South Africa has credit bureaus, it has a very sophisticated legal regime, it is easy to foreclose, and the capital markets are well developed. The components one needs to have proper consumer lending in South Africa are there and they are quite strong.

Hugo Scott-Gall: What is the funding mix for infrastructure on the continent?

Simpiwe Tshabalala: Africa needs about US$93 billion a year to deal with its infrastructure backlog. At the moment it is raising about US$72 billion. This is coming from a combination of sources: taxes, the banking system, and a large chunk is coming from outside – risk capital. The banking system in each of those countries does not have the capacity to fund all of those activities, so there will be a lot of reliance on international capital markets and the international banking system.

At Standard Bank, we are trying to position ourselves as intermediators by having operations in London, New York and Hong Kong. There is momentum building, as an example we have just assisted Tanzania raising a syndicated loan of US$250 million. We are assisting some sovereigns to raise bonds. For example, we have taken the South African sovereign to the international capital markets and we are doing the same for several others. And there is interest from insurance companies and pension funds to invest in government bonds, which are created to finance infrastructure. People who are willing to take direct exposure to projects.

Hugo Scott-Gall: What do you think is stopping more capital coming to Africa? Do you think people are becoming more comfortable with the risk?

Simpiwe Tshabalala: There probably isn’t enough knowledge of the magnitude of the opportunity on the African continent. Also, the perceptions of risk are still inconsistent with reality. We think that over time people’s expectations will become more consistent with the real risks. However, the reality is that Africa needs to upgrade its own infrastructure, fix its own governance and fiscal policy, and rule of law; and then educate people about it. It’s true that governance and financial management on the continent has improved. But there is still quite a way to go.

Hugo Scott-Gall: Is there enough talent in the employee pool?

Simpiwe Tshabalala: There is not enough right now, but if trends continue then it may become quite exciting. The number of school age children that are actually at school is increasing, and the education system is improving. More people are coming back from the diaspora. One has to draw the conclusion that, in due course, the workforce will improve, putting Africa in a position to attract employees.

Hugo Scott-Gall: What worries do you have?

Simpiwe Tshabalala: A number of things worry me. First, the challenges in Europe. They have a materially adverse impact on this continent. More than 25% of South Africa’s bilateral trade is from the EU. If GDP in Europe slows that would mean fewer goods on the high seas from the African continent, and we are going to feel it.

Second the magnitude of the regulation that we have to cope with. For example, we have operations in New York and so we are having to grapple with the Dodd Frank Act.

Third the sophistication of financial crime is mind boggling and it is something that one worries about, particularly in a big complicated multi-jurisdiction and multi-product organisation.

Finally, we also worry about losing our head start here in Africa. We worry about how much longer we can enjoy the heritage we have in the face of the environment getting ever more competitive.

Hugo Scott-Gall: On the topic of competition, have you seen South Africa starting to lose its competitive edge as an entry point for investment into Africa?

Simpiwe Tshabalala: As a South African I would love to believe in the sustainability of the country’s national competitive advantage as an entry point to the African continent. Increasingly, people are able to go directly to Kenya and Nigeria, for example, without going through South Africa, because these countries are building the necessary hard infrastructure and the required financial and legal infrastructure. So people will be able have their head office in Nairobi and use Nairobi as a base to compete in Africa.

That said, we do think that South Africa retains competitive advantages, it does have the infrastructure, the roads, the financial structure, the legal structure and the people that make it possible for people to be able to compete on the continent. But the competitive advantage is diminishing as the rest of the continent develops.

This article was first published in Goldman Sachs’s Fortnightly Thoughts