In its report entitled “Challenges of African Growth,
opportunities, constraints and strategic direction”, the World Bank
clearly points out that a key constraint to growth in Africa is indeed
the structure of African financial sectors as this generally influences
private sector activity, economic growth and poverty alleviation.
We would also concur with the World Bank that a vibrant, competitive and efficient financial sector
that reaches the majority of an economy’s population is a cornerstone
of sustained high levels of economic growth and development. In this
note, we have taken a broad look at financial sector developments across
sub-Saharan Africa. However, we have also centred our arguments on Zimbabwe; a country that we believe is currently facing serious liquidity constraints. The main constraints are outlined below:
Inefficiencies in the banking sector
It still remains a fact that African financial sectors, especially in
low-income countries, are among the least developed in the world. We
note that interest rate spreads throughout the region have largely
remained high, with little indication of converging with global levels
at a median of around 13% (Latin America 7%, South Asia 5%, South East
Asia 6%).
We opine that the main factors causing high spreads include high
operating costs (including energy), perceived risk from policy
frameworks and lending environments, lack of competition, and high
concentration.
In the case of Zimbabwe, the use of multiple currencies in the
economy (USD/ZAR/BWP) has simply meant a limited supply of liquidity in
the market and therefore high minimum lending rates (MLRs) of around 15%
per year. We also highlight that some banks remain largely
under-capitalised, thereby limiting lending activity. In addition, the
prevalence of non-performing loans in banks’ portfolios also adds to
costs as banks compensate for the cost of foregone interest income by
charging higher lending rates to performing loans.
Poor credit culture
The lending environment across Africa is also characterised by a poor
credit culture, poor contract enforcement, and lack of protection of
creditor rights.
Coupled with a lack of collateral and inability to prove
creditworthiness on the part of potential borrowers, these have resulted
in a higher perception of risk and higher external finance premiums. In
Zimbabwe, for example, good information is scarce in the absence of a
national credit bureau.
Furthermore, the value of the collateral, which is real estate in
most cases, tends to be overstated and inevitably harder to realise if
the need arise. Given the fact that the lender of last resort lacks
adequate funding capacity, default risk and more importantly, counter
party risk remain elevated.
Low levels of savings
Saving rates in Africa have remained far below that of other
developing regions. In the early 1970s, for example, the average savings
rate in sub-Saharan Africa was higher than in South Asia. However,
while the savings rate in Africa has trended downward, South Asia has
experienced a sustained upward trend so that by 2003, the average
savings rate had exceeded 20%, compared to a mere 9% for Africa. Even
though the saving rates for most countries bounced back in the following
decade, for some countries the falls were sustained. In Zimbabwe, for
example, as at 3 February 2012, total banking sector deposits were
US$3.5 billion (including inter bank deposits).
Low levels of banking penetration
It still remains a key feature that a disproportionately small
fraction of the population across the region is served by formal
financial institutions. Data on access to financial services is scarce,
and most conclusions reached are from anecdotal but compelling evidence.
Low penetration is partly a result of income levels, although an
increasingly affluent urban middle class is now emerging. The low
proportion of people with bank accounts also reflects infrastructure
problems that have resulted in the limited development of branch
networks, especially within remote rural areas. Few countries are served
by more than two branches per 100,000 people.
Despite the above-mentioned constraints related to banking in Africa,
we have begun to see some pockets of success across the African
continent, suggesting some improvements in a number of fronts. We
highlight our key findings as follows:
E-banking slowly driving financial inclusion
One of the biggest success stories with regards to financial
inclusion in sub-Saharan Africa is M-Pesa’s mobile wallet in Kenya. This
has successfully penetrated some of the most deprived economies and
simultaneously spurred unprecedented demand in a very short amount of
time. M-Pesa now provides international money transfers between Kenya
and other African countries and even the UK. Countries such as Kenya,
South Africa and much of the North African region are now facing 100%
m-banking penetration. However, in countries such as Burundi, the
Central African Republic, Eritrea, and Rwanda the penetration is far
less, standing at roughly 35%.
China-Africa partnerships yielding some rewards
We have also seen Chinese-African partnerships being extended to
banking activities. A good example is the US$5.5 billion acquisition of a
20% stake in Standard Bank by the Industrial and Commercial Bank of
China (ICBC). Along with other players like Stanchart, it is our view
that such partnerships are broadly cementing a financial services
gateway between Africa and China.
Regulation and liberalisation more developed
Some banking sectors, such as Nigeria, are benefiting from market
reform. Nigeria’s banking sector has gone through consolidations over
the years, leading to the emergence of streamlined, better capitalised
banks that have been able to enhance their services and are in a better
position to compete and meet customer demands, while seeking to develop
their international presence, both within the region and overseas.
In conclusion, we believe that the various constraints highlighted in
this note need to be addressed in order to reinvigorate economic growth
in sub-Saharan Africa. Nonetheless, banks in Africa are evolving and we
continue to see vast opportunities for emerging market investors.
Imara is an investment banking and asset management group renowned for its knowledge of African markets.
Source: How We Made In Africa
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