Challenges Facing the Banking Industry in African Countries “Do banks have the right lending and risk policies, credit processes and skills in place to advance banking development?” Chris Newson 17 th February 2020
Giving Context to African Banking
African banking markets are diverse… Multispeed continent ▪ Size of markets matters − large banks in SA, Nigeria, Kenya vs rest of Sub -Saharan Africa ▪ ▪ Retail vs wholesale markets- not just about Retail growth ▪ Emergence of regional banking groups vs domestic champions with mixed results ▪ Banking infrastructure development varies widely Funding pools – interbank liquidity, pension reform, capital markets ▪ ▪ Shallow financial depth/low banking penetration ( 66% of African people unbanked or Retail banking penetration is just 38% of GDP , half global EM average) – fit for purpose ▪ Regulations and their development impact on financial inclusion Digitisation and technology adoption varies ▪ 3 Challenges facing African banks
Yet there is a high concentration of assets ▪ Top 5 countries represent 70% of total banking assets ▪ 65% of profitability (ROE) and 94% of revenue growth is seen as being driven by specific geography ▪ Rest of the markets are fragmented ; which is indicative of the prevalence of low income levels in many countries ▪ Challenge of building scale vs a balanced portfolio SSA financial inclusion lags Asia, Latam….65% SSA unbanked ▪ ▪ Emergence of regional banking groups vs domestic champions Lack of diversity in a number of economies ▪ ▪ Sovereigns crowding-out private sector (inverted yield curve on T-Bills) 4 Challenges facing African banks
However, African banking markets are fast-growing and profitable Achieving second-fastest growth of banking sector vs global peers; but remains a small market in global terms ▪ ▪ Banking market revenues valued at USD 86 billion in 2017 , but expected to grow by 50% in five years Impact of volatile currency markets – could halve expected growth ▪ ▪ Margins 6.8% African banks vs 3.8% global ▪ Average ROE at 15% is second only to LATAM region and compares to global returns of 8-10%. However a significant % of banks are not delivering ROE > COE ▪ Notably average cost to assets ratio of 3.6% among African banks is considered high in global terms McKinsey study for period 2011-2016 indicated no trade- off between profitability and growth … ▪ 5 Challenges facing African banks
Comparing SSA top performers vs laggards Performance Indicators Top Quartile Fourth Quartile (Sector average) Banks Banks Revenue Growth 23% 9% Return on Equity 37% 9% Cost-to-income Ratio 40% 57% Credit Loss Ratio 1.1% 2.2% Divergence is significant 6 Challenges facing African banks
Other realities impacting banking development Cash remains king! 90% of transactions in African ▪ countries still cash-based Lack of banking infrastructure – ATMs, branch network, ▪ POS terminals (distribution capacity issues) ▪ Prevalence of short-dated, illiquid and costly domestic funding markets – maturity and currency mismatches Global capital has choices - mobile ▪ SO … given market dynamics – high cost to asset ratios, ▪ challengers, scalability from digitisation, onerous and changing regulation – the need for continued structural transformation is obvious ▪ Specifically focus on approach and skills gap across: Credit and risk - Infrastructure - Governance - 7 Challenges facing SSA banks
Credit Extension : SSA banks continue to lag global peers , but opportunities abound The lag… The opportunities ❑ Cost of risk and NPLs remain relatively high ❑ Credit bureaux play an important role in lowering ❑ Avg. loans to deposits ratio: Global > 100% vs SSA < the cost of credit and its availability 75% ❑ Closing the mismatch (term + currency).Capital SSA customers with access to loans – < 20% ❑ market development Banks are largely risk averse – focus on lending to ❑ ❑ Risk sharing . Alternative providers of funding/capital the corporate segment + Govt crowding out ❑ Credit scoring leads to development of innovation ❑ Pricing of risk is imperfect. Perceived vs real risk in credit provision ❑ Missing segment – lack of credit provision to the ❑ Advancement in machine learning retail and SME markets. ❑ ❑ Term lending tough to fund in many markets Innovations include behavioural/data-based credit Concentration risks within lending books – need for ❑ and payroll lending diversification and scale ❑ Digitisation can translate to significant advancement ❑ Credit bureaux and data collection processes still in efficiencies (cost + turnaround times+access) need development in most markets ❑ Embracing the power of partnerships - Fintechs ❑ No effective national ID in some countries – AML/KYC ❑ Clear target market definition and product design, requirements significantly enhance success ❑ Foreclosure process cumbersome – impact on cost ❑ Development of fit for purpose processes and availability of credit 8 Challenges facing SSA banks
Credit and risk processes need further transformation ▪ Banks require increasing levels of regulatory and/or growth capital - cost and supply Bank’s risk appetites are aligned to the dictates of capital ▪ ▪ Development of regulations to support banking markets- capital regs, interest rate caps, KYC , digital marketplace, treating customers fairly, banking ombudsman…. ▪ Reduce possible arbitrage between sectors e.g. telcos vs banks vs non bank financials ▪ Focus on localisation of policies and processes but leverage best practice – Think global but act local! ▪ Development of legal, regulatory and supervisory framework ▪ Enhances credit recovery process and NPL resolution ▪ Leads to lower cost of credit and risk and increased appetite ▪ Transformational role of technology. Productivity and distribution ▪ Turnaround speed/accessibility- key differentiator 9 Challenges facing SSA banks
The importance of developing infrastructure to advance banking development The banking infrastructure gap: how can banks help close it? ▪ Enhanced interoperability (domestic vs cross border).Shared infrastructure ▪ Developing payments systems , corresponding banking relationships….. ▪ Need for government support critical to an enabling environment Sustainability- economic, environmental, social….. ▪ ▪ Infrastructure challenge generally not money, but rather feasible projects ▪ Cloud based banking - blockchain, technology leapfrog ▪ Value of development finance - Term, Capacity building + gap financing Realities of embedded FX risks with most LT financing ▪ ▪ Size does matter particularly for large projects ▪ Developed world best practice vs local solutions 10 Challenges facing SSA banks
The importance of enhanced Governance to banking development ▪ Governance is a culture more than a process ▪ Governance not just a government/regulatory responsibility ▪ Poor governance has a very tangible price. ▪ Without trust and integrity banks have to “ incentivise ” clients ▪ Poor governance has a very tangible price. ▪ Accountability + Discipline in execution ▪ Well-functioning banking sector leads to stability and growth ▪ Multi-jurisdiction organisations have to find appropriate cross-border operating models ▪ Compliance complexity – home vs host ▪ Diversity and independence of skills imperative, particularly at Board levels 11 Challenges facing SSA banks
Is there a skills gap inhibiting banking development in Africa? ▪ Divergence of performance suggests that there are the skills just not enough thereof ▪ World class innovators in certain areas ▪ Banks and financial institutions need to take ownership – development of own talent and support 3 rd parties ▪ Creation of learning organisations ▪ Partnerships – banks should not strive to be all things to all people ▪ Execution is everything! ▪ Capacity building within the ecosystems including governments ▪ Value of experience – offshore solutions valuable BUT … ▪ …time and time again the sustainable solutions are locally driven There are those who are getting this right in whole or in part 12 Challenges facing SSA banks
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