Standard Bank analyst Simon Freemantle recently produced a series of five research papers on the trends powering Africa’s economic growth. Over the past week How we made it in Africa examined these trends in more detail. In our fifth and last article, we look at Africa’s deepening financial sector.

Although Africa’s financial services industry has experienced strong growth in recent years, the majority of the population remains locked-out of the formal financial system.

Even in Sub-Saharan Africa’s more developed countries, a large percentage of the population remains excluded from all financial services. For example, in Zambia, only 25% of the population has access to banking or other formal financial services, while in Nigeria, 80% of the population access finance through informal means, or not at all. Even in South Africa, the continent’s most developed economy, one-quarter of the population lack access to financial services.

Supported by rising incomes, urbanisation and the innovative use of technology, the financial services industry is, however, likely to expand in the coming years.

“Considering the pace at which much of Africa’s middle class is accumulating wealth, it is clear that this will provide the most fundamental pretext for banking growth across the continent. Clearly, as Africa’s middle class population rises, so too will demand for more sophisticated banking services – providing tremendous support for the development of retail banking operations on the continent,” says Freemantle.

Africa’s rapid urbanisation is also expected to bring more people in contact with financial services products. It is estimated that about 60% of the continent’s population will live in urban areas by 2050. Freemantle notes that although various innovative products, largely through mobile phones, have been launched to give rural populations access to financial services, the majority of users are still based in urban areas. Urban workers often have higher incomes, while banks and financial services firms normally have a stronger presence in cities.

Technological innovation, such as mobile money solutions, has played a major role in giving Africans access to banking and financial services. This trend is likely to continue. “The manner in which rapid technological changes are reducing transaction costs, bridging geographical strains, expanding markets, and inspiring investment from large financial institutions is undoubtedly altering Africa commercial terrain,” says Freemantle.

Kenya’s M-Pesa mobile money transfer service has given more than 70% of the country’s adults access to financial services, up from less than 5% in 2006. According to Juniper Research, Africa’s mobile banking industry could be worth as much as US$22 billion by 2015.

“As a result of these trends, as well as generally supportive macroeconomic and policy environments, the pace at which Africa’s banking sector has grown in recent years is unlikely to abate. Indeed, an acceleration is plausible. Should growth remain at a similar clip between 2010 and 2020 as between 2005 and 2020, for instance, Africa’s financial services sector could make up around 20% of the continent’s collective GDP within the next decade, compared to just over 10% today,” says Freemantle.

He adds that, “The deepening of Africa’s financial sector is both a result of, and a driver of, the strong macroeconomic gains reflected across several of the continent’s core markets over the course of the past decade. That said, room for growth and improvement exists in abundance.”