Africa has faced an uphill battle to cut the number of unbanked citizens – key to driving economic development. But momentum is building and innovation is revolutionising the banking sector.
New technologies and initiatives are encouraging banks in Africa to rethink how they do business. They are introducing new models along with novel approaches to business process, all aimed at increasing banking services’ penetration, boosting liquidity, driving profits and cutting costs.
But they are also having to pay attention to the basics, as Stephen Mwaura Nduati, head of the national payments system at the Central Bank of Kenya, explains: “You have to provide stability. Once you have that you can use technology to lower transaction costs and enhance financial inclusion.”
While there are plenty of innovative customer-facing technologies, we should not forget the work taking place in the back office, enabling banks to increase their footprint. Ecobank, for example, has been going through a period of growth. Its 7 million-plus customers are serviced by a 1,100-strong branch network using Oracle’s Flexcube platform, which enables the bank to standardise operations across the region with a scalable platform that can be used for multi-currency and multi-lingual banking applications.
In 2010, banking giant Standard Bank decided to focus its growth strategy on Africa. Terry Moodley, its chief executive of personal and business banking, explains: “Africa represents a growth market for banks, which are expected to benefit from rapidly growing economies and relatively low levels of private sector credit to gross domestic product. Growth is expected on the back of increasing commodity trade flows between Africa and the rest of the world, and particularly Asia.
“We continue to build world-class, on-the-ground banking franchises in key chosen markets on the continent, investing in people, branch networks and systems,” he adds. “We expect that future revenue flow will justify the investment in infrastructure in those countries.”
Mr Moodley says Standard Bank Africa’s personal and business banking division passed three major milestones in October 2011: opening its 500th branch in Africa (outside of South Africa) in Nigeria, and chalking up 2.5-million signed-up customers and 3 million active accounts across its operations in 17 countries.
Keeping costs down is vital, says Mr Mwaura Nduati. “We’ve really promoted a reduction in transaction costs since the financial crisis. Government infrastructure provision has helped. Additionally, mobile phone companies want to use their own infrastructure, which helps drive them down. As a central bank, we have established credit reference bureaus whereby you can identify customers, helping improve security as well as cutting costs. Plus we have set up currency centres to make it cheaper to transfer money from one side of the country to the other. These have reduced cash in transit costs.”
With penetration of banking services in Africa among the lowest in the world, there are opportunities for banks to tap into this market. “Retail banking is very important to Kenya’s banking sector,” says Mr Mwaura Nduati. “We had a 2.5 million banked population in 2005, but by 2011 this had risen to 14.5 million. This growth has been driven by the banks themselves which have increased the number of branches and reduced costs. Furthermore, mobile technology has enabled even the poorest sections of society to access banking services. We’ve also licensed 9,000 bank agents.”
Technology has played an increasingly important role in Africa’s growth story, enabling consumers to use mobile phones to pay bills, move cash and buy basic everyday items. “The majority of Africa’s populations lack non-cash methods of payment and this has been holding back development for decades, acting as a high friction brake on any form of business,” says Paul Makin, head of mobile money at Consult Hyperion.
“So a new form of payment, that offers cheap, near instantaneous transactions to any consumer or business, has the potential to take those brakes off business development and improve the prospects of ordinary people. Of course, this is not to say that it will transform the fortunes of those countries – Africa has many other problems – but it will help.”
“The benefits of mobile financial services are not limited to the consumer,” says Aletha Ling, COO at Fundamo, a Visa company. “Countries which adopt the technology will also reap the benefits. Mobile financial services add measurably to economic growth. Evidence over the past five years shows that Celpay in Zambia processes funds that equate to roughly 10 percent of the country’s GDP, illustrating the impact that these services can have on a national economy.”
In Kenya, where regulators have worked hard to create an enabling environment, mobile money platform M-Pesa has revolutionised payments by providing people with a cheap alternative to carrying cash. In 2010, Safaricom and Equity Bank launched M-Kesho, an interest-bearing savings account giving M-Pesa users access to mobile microsavings, microinsurance and other banking services, crucial to creating a savings culture in the country.
Speaking at the launch of the service, James Mwangi, CEO of Equity Bank, said: “Now, Kenyans will have self-service savings accounts on mobile phones. When these accounts are linked through M-Pesa, we will be the most-banked country in Africa and the developing world.”
“We believe that innovation and costs are going to be the key drivers of competition in the future,” says Standard Bank’s Mr Moodley. “For example, by using innovative ways of making access to finance as easy as possible for millions of customers in the SME sector, we have rolled out the SME Quick Loans scheme, creating the technology to support it as well. This enables us to provide finance to SMEs that would ordinarily have been denied access to such finance by banking institutions. The scheme has already been a considerable success in several key markets, such as Tanzania Nigeria, Botswana and Ghana.”
Although a thriving banking sector is essential to the economic development of a country, this often does not exist. “A banking sector that is not able to meet the financial needs of a substantial proportion of the population must necessarily be holding back that country’s development,” Mr Makin says. “Unfortunately, the banks in many African countries do not have the infrastructure – branches, core banking systems and staff – to reach out to the mass of the populace, and have become set in their view of the world and their place in it.”
This is why mobile operators are taking this sector by storm, he argues. “It has taken new market entrants, particularly from the mobile sector, to change this. It is interesting to note that much of the reaction of the banking sector to the rise of M-Pesa was along the lines of ‘Hands off! This is our sector, our customers!’. But they had been ignoring those prospective customers up to that point and accepting that there was no way to deliver banking services to them economically. The new market entrants have changed all that.”
Equity has continued innovating and more recently has announced it can work as a payment switch and launched new services for retail customers, including acquiring EMV cards and interacting with M-Pesa mobile accounts.
“Retail banking remains a key pillar of the African banking industry,” says Mr Moodley. “In fact, much of the new industry growth will come from retail banking, which is expected to dramatically increase its contribution to total banking revenues by 2020.”
He adds that Standard Bank plans to play its part. “Our strategy is to make banking more affordable, simple, accessible and convenient. We plan on achieving this by offering customers value for money and quick and simple solutions, and by being easily accessible. Solutions for dealing with cash, payments, access to credit and foreign exchange are key to developing the banking sector across the continent. Retail banks are catalysts in the formalisation of economies, thereby increasing access to credit, and improving asset protection and cash management efficiencies.”
Many of the world’s major banks are taking an interest in the continent. The UK’s Barclay’s Bank, for example, holds a major stake in South African bank Absa Group, which announced strong financial results for the 2011 financial year with headline earnings increasing by 21 percent, pre-tax profits hitting $2.53bn and final dividends up by 70 percent on 2010. Of particular note was the company’s retail banking division, which saw earnings grow by 33 percent. Maria Ramos, Absa Group and Barclays Africa chief executive, says its African business, which accounts for more than 16 percent of Barclays’ adjusted group revenue, is making a significant contribution to its overall operations.
Citi has a presence in 16 countries, and has been operating in key economies such as Nigeria (since 1984), South Africa (since 1958, re-entering in 1995), Kenya (since 1974) and Uganda (since 1999). In August 2008, it launched its Direct Custody and Clearing services in Nigeria which will handle business transactions for clients and investors looking to do business in the country.
“The banking sector will undoubtedly benefit from the increased presence of international banks,” says Mr Moodley. “There has been a notable increase in interest in Asian and Western banks in servicing the African market. Apart from increasing the liquidity that’s available for projects on the continent, we expect the resulting competition to lead to an improvement in the services that banks provide to customers.
“We also expect consolidation to continue gathering pace in coming years, which will see some of the local banks become global players as a result of tie-ups with international counterparts. This is indeed an exciting and important time for the African banking industry.”
He adds: “International banks will play a vital role in implementing global best practice in the retail banking sector, facilitating the flow of international trade and the leveraging of global resources. Standard Bank has been investing steadily in its African footprint for the best part of 20 years. This experience has provided lessons that continue to help us understand how best to continue growing in Africa.”
All these good news stories are playing a big part in the continued economic and social development of Africa. “It’s a known fact that access to financial services has a high correlation with poverty reduction,” says Mr Mwaura Nduati. “We advised the Kenyan government on the development of financial services policy and have recently finished writing the national payments sector act. We are developing the tools that will facilitate financial development. We are also increasing our capacity to regulate these new channels. We have to oversee the whole sector so we don’t compromise on consumer protection, anti-money laundering safeguards, banking stability or anything that can mess up the financial system.”