27 Jan N’Gunu Tiny’s take on the challenges and potential of Africa’s banking market

Open Banking, the rise of consumer-driven fintech, purpose-driven ethical banking… the changes we’re seeing to global banking are multi-faceted and data-driven. Consumers are also aligning their buying choices with socially conscious financial providers. They’re expecting faster access to their banks.

Innovation is the watchword for the world’s banks, as traditional providers scramble to absorb, acquire or match challenger banks. And in Africa’s banking market, business and motivations are also changing.

Africa’s banking market is complex and rich with opportunity

My interest in Africa’s banking market is not only from the perspective of an investor, but also as a citizen and employer. I’m proud to build businesses that tangibly improve people’s lives. When the economic climate is tough and challenges abound, this is what drives me forward.

Africa is complex, complicated and, in many ways, fragmented. All of which can cloud the banking sector. Each of the 54 countries has its own culture, regulatory framework, risks, and opportunities. And each country wants to retain its own identity, while also ensuring seamless integrated banking within a formal financial system. This is what makes Africa’s banking markets some of the most interesting and exciting in the world.

Innovation, investment, and profitability in Africa’s banking market

As a continent, Africa’s banking industry is growing fast and is a highly profitable hotbed of innovation and development. A 2018 report from McKinsey confirmed almost 300 million Africans signed up with a bank, an increase from 170 million six years earlier. McKinsey predicts that by 2022 this number will increase to 450 million.

Nuances between different African nations affect the overall adoption of digital banking and mobile money. For example, while in Kenya digital banking has taken off, Nigeria lags behind due to opposition from traditional banks. However, no matter the opposition in some regions, there is no doubt that banking will all be mobile at some point. We’re seeing 4G usage go up across the continent at the same time as smartphone prices are dropping. This burgeoning access to mobile banking is forcing traditional and existing banks to step up digital innovation. But while traditional banks have strong infrastructures, they are also weighed down by their legacy systems.

In terms of Foreign Direct Investment (FDI), Africa has commonalities with many regions of North and South America and Europe. This differentiates the continent from general investment going into other markets, such as China. Investors from countries with shared languages, for example, are more likely to commit to Africa. For example, an announcement from International Development Secretary Alok Sharma ahead of the UK-Africa Investment Summit in London, promises millions of pounds of UK Government investment in Africa.

This will help investment flow from pension funds and private investors into the continent and make it more secure for investors. David Malpass, President of the World Bank Group says that “by 2050, one in four global consumers will be African”. Despite this Africa attracts less than 4% FDI.

Agility, accessibility and judicious analysis of regional opportunity

For me, it’s clear that the shift to digital banking in Africa should remain a symbiotic relationship between banks, telecoms, and fintechs. They should combine to offer cost-effective products to consumers. I believe we can expect to see a network of banking agents rather than branches from challenger banks. Existing banks are tied down by legacy issues and the huge job of digitalizing existing platforms in their entirety.

New entrants to the banking market in Africa will entirely focus on providing digital products and services. By offering slick, easily accessible, easy to use products they will gain the buy-in of a population that has no particular loyalty to any traditional financial services institution. At the Emerald Group, we expect to see the continuing rise of third-party non-banking platforms further integrating into the payment platforms.

In simple terms, businesses that exist in this sector, or those entering it, must adapt to technological advances. Without digitization, you cannot exist in Africa’s banking market, or indeed anywhere around the world. It’s not something that is some way off into the future, rather it’s here now across every business sector.

Profitability drives innovation

Africa’s banking sector is not only one of the fastest-growing in the world, but it’s also the second most profitable following Latin America. Profitability will, of course, remain the most important factor as it is the key driver of competition and innovation. The McKinsey report Roaring to Life: Growth and innovation in African retail banking breaks down the market segments within Africa in a way that shows why the combined sector has such growth potential both for investors and consumers.

‘Mature’ markets include countries such as Egypt and South Africa, followed by ‘transitional’ markets including the likes of Egypt and Ghana. Next comes ‘nascent’ markets such as the Democratic Republic of the Congo and Ethiopia that have low GDP per capita. Finally come the ‘sleeping giants’, including Nigeria and Angola. This final categorization is where there is huge potential for market share. For example, Angola has a high GDP per capita combined with a very low percentage of banking penetration, making it ideal for investment and growth.

Return on equity (ROE) for investors

As an investor keenly interested in, and supportive of the growing banking sector in Africa, one of the key benchmarks is the ROE. We want to know the rate at which companies can generate profit from the money we invest. Fascinatingly, the African banking sector is not subject to the same ROE limitations that exist in other markets.

The McKinsey report backs up our take that African banks and businesses in the sector set ambitious targets for profit. And more often than not they have increasing ROE, which makes it an effective market for aggressively strategic investment.

This blog is a very top line insight into Africa’s banking sector, which is by its nature vast and complex. At Emerald Group we believe that there are a number of key factors that should be considered by businesses entering the Africa banking sector:

1. Smartphone versus mobile penetration

Most people who are not attached to a bank in Africa do not use smartphones as their primary means of communication. The mobile penetration is higher, on average than access to the Internet. This creates a set of challenges for fintechs and challenger businesses unique to each region.

2. Access to valid ID

A large percentage of potential banking customers in Africa do not yet hold a valid form of identification. This presents onboarding challenges for banks. There are solutions out there, including the merging of biometric sciences with blockchain technology to create secure access to systems. These kinds of solutions offer a future-proofed means of inclusion for the banking sector, and as smartphone penetration increases there will be a corresponding increase with onboarding consumers seamlessly and quickly.

3. Formulation of an eventual single market

Africa is moving slowly towards a common market, which one day could rival the EU. However, we are not there yet and each region has its own regulatory framework, infrastructure needs and access to innovative products. For Africa to work as it could within the banking sector there needs to be a shift towards a single market. This would allow consumers to take advantage of simpler cross-border financial processes and allow banks to operate across the continent without separate licenses.

As it stands, the current retail banking sector in Africa only serves a small section of the continent’s population. Increasing access to basic banking services, such as loans, insurance, savings, and payment platforms, is the key focus. This movement towards inclusion across Africa is fuelling innovation and progress across the financial sector.

Even with all of these challenges, the African market is one of the most interesting and exciting regions for both banking and technology. I’m extremely proud to be part of the move towards bringing a more convenient, accessible and 21^st century way for consumers across Africa to live, work and bank.