Africa’s banking sector continues to see growth. Standard Bank joint Chief Executive Sim Tshabalala discussed the continent’s banking outlook for this year during a panel discussion at last month’s Africa Outlook 2014 summit, presented by Frontier Advisory. Below are the key outtakes from the session.
With sub-Saharan African GDP growth expected to exceed 6% in 2014 as forecast by the International Monetary Fund, Africa’s banking sector is estimated to expand faster than GDP. This is driven largely by the need to facilitate deposits and withdrawals, savings and investments, as well as an increasing need for insurance and wealth management services, given an expanding African middle class. Growth in insurance services has been twice the rate of GDP growth in many African markets, with a key barrier to growth in the industry being the lack of on-the-ground infrastructure.
South Africa’s sophisticated financial services sector dominates various aspects of the market, including most of the asset management activity in the financial sector in sub-Saharan Africa. However, Nigeria is rapidly becoming an important player in, for example, the unit trust industry.
Other parts of the sector witnessing growth include trade financing, with African banks expanding financing opportunities for companies. Also, retail banking in Africa is growing and diversifying. The growth of Islamic banking is one good example.
As Africa’s banking sector is stable, well-capitalised and liquid, and with the sector expected to experience further deepening and greater financial inclusion in 2014, there is a great deal of money to be made. Figures show that African banks realise a return on equity of 18%, whereas this is below 10% in other parts of the world. The return on assets of African banks is, on average, 40% greater than banks outside of Africa.
Post the 2008 global financial crisis, regulation in the banking sector has been tightened. For example, the minimum liquidity requirements and provisions for losses on loans have been increased. Despite this pressure, most African banks already hold more capital than required by global standards.
For banks in Africa to remain relevant in the dynamic African consumer market, growing collaboration, and to some extent, competition between banks and innovators in technology, including mobile service operators has become visible. This collaboration has resulted in tailor-made financial solutions that are compatible with technological devices which make banking in Africa easier and more accessible. Mobile banking spurs economic activity, reduces the cost of product and service delivery and eliminates the security risks involved in cash-based transactions. It furthermore enables individuals to undertake financial transactions effortlessly and cheaply, and thereby includes far more people in the formal financial system.
However, six concerns remain prominent for Africa’s 2014 banking outlook. Firstly, poor economic performance in the European Union and the potential negative impact on Africa’s growth remains a risk. Secondly, a need to balance and benchmark salaries of African talent and levels of productivity in the African banking sector will increasingly become a challenge. Thirdly, there is an emerging cyber-crime threat given the growing levels of technological inclusion. In addition, regulation and the cost of regulation, coupled with the problem of how to extend credit to Africa’s micro-enterprises and small and medium enterprises profitably and sustainably, in ways that help them to create jobs, are two further concerns. At the top of the list is the quality of institutions in Africa, and the need for zero tolerance for corruption inside businesses, which will be key to improving the quality of institutions.