The State Of Financial Services In Africa: An Industry Snapshot
Growth in the financial services sector in Africa has been breathtaking, outpacing GDP in many markets. Where is the industry going? What are the risks and opportunities?
McKinsey & Co., the consultancy, credits much growth to financial reform. One example is Nigeria, where banking reforms in 2004 led to bank asset growth of 59 percent per year through 2008.
Others note a rising sophistication amongst African banks as they court investors.
“There’s almost a recognition that there’s a new game being played that’s much more global,” says Roman Zyla, senior corporate governance officer with the International Finance Corporation. “We’ve noticed a rise in the sophistication of banks [in terms of] what investors need and what kind of transparency they require.”
Financial services is indeed a hot investment area, and one that is particularly dear to private equity firms operating in Africa. An Ernst & Young study found that the sector accounted for by far the highest incoming investment values and the highest proportion of exits in the past five years. All in, financial services captured 13 percent of private equity investment capital in Africa in 2013.
It doesn’t look like the pace will let up. Bob Diamond, for example, former head of Barclays (owner of ABSA Bank in South Africa) recently partnered with Ashish Thakkar of the Mara Group to start a listed investment company focusing specifically on financial services in Africa.
Graham Stokoe, private equity head at Ernst & Young, says the influx of investment in Africa’s financial sector may be contributing to the raising standards of internal controls.
“They bring a level of professionalism, corporatization, corporate governance — doing the right things by having an independent chairman, an independent board,” Stokoe said, adding that “When you have more eyes on a business you can see weaknesses and strengths and help [those] businesses grow further.”
However, change has come organically as well. “It’s not just foreign investment that’s driving changes in the area,” says Zyla. “There are homegrown [investment] funds popping up all over Africa and they’re applying those same principles.”
“You’ve got a lot of funds with an understanding of corporate governance, and they see the business case for it. It’s a model that’s been widely accepted, and they’re pushing it on their companies.”
The result is improved governance, and improved performance. With growing appreciation for, as Zyla puts it, the business case for corporate governance in the industry, one can imagine that investment in these areas will only continue.
The difficulty: Labor shortages
But when it comes to improving governance and risk controls, a major hurdle has been access to personnel. Zyla points out that oftentimes there can be a simple issue of finding qualified people to do the work, such as those with training in audit and risk.
Whether in “Sierra Leone, which is a fragile, conflict-affected state, or Nigeria, the challenges tend to be similar, but the implementation might vary. Where you have good business schools, or people getting experience in Western businesses, a lot of those people come home and transmit the lessons they’ve learned. [On the other hand], smaller countries don’t necessarily have the same access to information or an appreciation for its value.”
This, of course, is where firms with access to broader networks of talent might be particularly better off. Stokoe points out that private equity firms investing in Africa “bring a lot of human capital resources — they find ways to help grow their businesses.”
In the meantime, many banks are struggling to find the talent that can develop risk management and governance capabilities.
Other gaps also remain. A glowing KPMG report on financial services in Africa points out that “with the exception of a handful of developed financial markets, many other African countries’ financial markets are still in [their] infancy.”
Notably absent from the financial sector are the poor and “unbanked” — World Bank research estimates that only about 24 percent of Sub-Saharan adults have an account with a formal financial institution. Over 80 percent of those surveyed say they don’t have enough money to justify one. Cost, distance, and documentation are also barriers.
Delivering banking to the currently unbanked is a difficult prospect for financial institutions due to lower margins and the logistical challenges of delivering products to widely dispersed customers. KPMG, for its part, thinks that innovation will be the key, with much of the growth in this area from “beyond the realm of ‘traditional banking products.’”
In other words, the market is thus wide open for more tools like Kenya’s hyper-successful M-PESA — tools that can provide those outside of the formal banking sector with access to funds, credit, and financial services.
The demand is certainly there: The World Bank reports that in Kenya, 68 percent of adults now use mobile money, and 43 percent of those customers don’t have a bank account. Demand is growing across Sub-Saharan Africa as people adopt the technology.
The World Bank points out that “inclusive financial systems — allowing broad access to financial services, without price or non-price barriers to their use — are especially likely to benefit poor people and other disadvantaged groups” by providing access to credit for investment or education.
It could also help businesses invest in themselves. Only 22 percent of companies in Africa have a loan or line of credit, compared with 43 percent in other developing nations. Forty-five percent of firms report that a lack of access to financing has been a major constraint to growth, and small firms are particularly affected relative to their bigger peers.
As the World Bank puts it, “Firms in Africa, with similar growth opportunities as firms in other developing countries, are more dependent on internal funds and more credit constrained.”
If access to finance can help people invest in themselves and businesses invest in their growth, we could see significant returns to the sector over time — not only in terms of share prices, but in terms of real, sustainable returns to people.