This is the last in an AFKInsider series on banking in Africa. Our previous pieces on East Africa banking and West and Central Africa banking highlight the challenges as well as the opportunities for growth and investment.
The financial sector on the African continent remains largely underdeveloped but Southern Africa is different. It enjoys key advantages which enable it to surpass some of its regional counterparts.
Literacy rates are higher – more than 85 percent in South Africa, Namibia, Swaziland, Mauritius, Zimbabwe and Botswana.
Population growth in this sub-region remains largely flat, representing the demographic change in a couple of Africa’s largest economies, Botswana and South Africa. And oil and gas production as well as significant mining in the region have long forced the banking sector to mature quicker than other sub-regions of sub-Saharan Africa.
The level of development is diverse between the various countries in Southern Africa. South Africa is the clear front runner in the region, especially as Africa’s second largest economy. Other countries like Botswana and Namibia have benefited from strong relationships with South Africa as well as significant connections to the international markets via their mining industries.
Mauritius, on other hand, matured through extensive relationships with other countries by way of its tax-friendly status with private investors and its connection to Asia through a mixed Indian-African heritage.
Madagascar and Malawi struggle to overcome poor economic histories and an ongoing low interest in their financial sectors. Mozambique maintains strong commodity upside, including oil and gas, especially if prices rebound. The varying differences beg investors to constantly consider the application of models in each country and how they can (or should) be replicated.
The Angola banking system may be the model for Mozambique. But the system is highly concentrated with five banks representing north of 75 percent of total banking assets. Significant growth in the past couple of decades remains limited to Luanda and the coastal regions by way of the oil and gas companies. Non-performing loans dropped to around 6 percent in 2014 but slowly crept back up to around 8-to-9 percent in 2016. A lack of diversification in sectors and product offerings is also limiting. Those with a knack for addressing these types of challenges are welcomed in Angola and, for that matter, Mozambique.
The Zambia banking system is the model most reflective of Namibia and Botswana. The banking sector remains highly concentrated with the four largest banks accounting for north of 60 percent of total banking assets. Electronic banking has boosted account access in the country, however it is severely limited to the urban areas. The rural population remains significantly unbanked. Those with an ability to boost financial inclusion and create product portfolios for the rural (and generally poorer) areas are welcomed in Zambia, and for that matter, Namibia and Botswana.
South Africa is the poster child for a currency in ongoing struggle, at least for this region. Other African sub-regions have glaring problem currencies, such as the Nigerian naira and Ghanaian cedi.
South Africa is set to grow by less than 1 percent, according to the International Monetary Fund, maybe even less than 0.5 percent. The South African rand has plunged more than 30 percent since early 2015 with no great rebound in sight. A 7 percent rally is underlined by the broader rally in commodity prices. But projections suggest that prime South African commodities, including platinum, coal and gold, will likely feel more pain in the second half of 2016. Some commentators go as far as to argue that a potential sale of Barclays Africa is influenced by the significant drop in its value as related to the South African rand and the subsequent effect on the Johannesburg Stock Exchange.
Regional players and investors in this region must be clear about two things: scaling and customers.
One challenge for regional banks is growing assets and reach — understood as scaling. Acquisitions are hard in markets where total banking assets are concentrated in a few hands. Thus regional players must boost their capabilities to grow organically through furthering financial inclusion.
Customers are part of that financial inclusion story. A significant rural populace requires a specialized portfolio of assets that differ significantly from aggressively expanding urban population. Addressing the needs of the two vastly different consumers should not be in opposition to each other.
Customers in Africa, at the end of the day, all want better access to financial services. To achieve this, regional banks must really be efficient and competitive with the goal of reducing the cost to the retail customer in mature and immature markets as well as everything in between. That effectively would benefit entire continent, not simply Southern Africa.
Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.
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