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Financial Services in Africa

December 6, 2007


The current sub-prime lending crisis in the U.S. demonstrates why financial institutions are generally best served by being risk averse. That is one reason that banks seldom find themselves operating among the poor. When Nobel Laureate Muhammad Yunus asked Bangladeshi banks why they didn’t serve the poor, they thought he was joking. He wasn’t, of course, and it was his work as “banker to the poor” that won him the Nobel Peace Prize. When mainstream banks begin penetrating poor nations, it should be taken as a good sign that things are looking up. According to The Economist, that is exactly what is happening in Africa [“On the frontier of finance,” 17 November 2007 print issue].

“Not so long ago, a cruel joke among international bankers was that sub-Saharan Africa was less an emerging market than a submerging one. Local bankers had no reason to change that impression; for all the political and economic turmoil, tiny and informal markets, and shabby infrastructure, they mostly made good money doing very little. Using low-cost deposits to buy high-yielding government bonds, they harvested some of the best net-income margins in the world. The corollary, of course, was that most Africans had no access to financial services. Nowadays, the thinking is shifting.”

The thinking is not shifting because international banks have suddenly caught Yunus’ vision but because economic conditions are improving.

“According to the IMF, Africa is enjoying its best period of sustained economic expansion since independence. Real GDP growth is expected to rise from 5.7% in 2006 to 6.1% this year and 6.8% in 2008. This good performance is partly driven by high commodity and oil prices. Foreign aid has also helped. But it is also due to better economic management, more openness and more stable politics. Such policies mean banks have to work harder to make a profit, but also help them to grow. That is encouraging them to reach out to new customers—and so they should. A report from the World Bank on November 13th argues that promoting access to financial services in Africa should be a priority, as it boosts growth and helps reduce the income gap between rich and poor.”

Getting banks to change their thinking is one thing; getting potential customers to change their minds is quite another. In many areas around the world, banks are not trusted or are considered institutions only for the wealthy. The services banks offer often don’t match the needs of poor communities and paperwork is a barrier where illiteracy is a problem. Statistics bear this out.

“Only 20% of families in Africa have bank accounts. Small and medium-sized firms struggle to borrow; private credit accounts for 18% of GDP in Africa—and less than 5% in Angola, Chad, Congo, Guinea Bissau and Sierra Leone—compared with 30% in South Asia. Ethiopia, Uganda and Tanzania have less than one bank branch per 100,000 people. Opening an account in Cameroon requires $700—more than many of its people earn in a year. In Swaziland, a woman needs the consent of her father, husband or brother to open an account or take a loan, and 75% of adults do not have a verifiable address. Even in South Africa, where the financial sector is far more sophisticated, almost half of adults do not have bank accounts. Millions of Africans stash money under their mattresses or keep their savings as cattle. In countries such as South Africa, Kenya and Uganda, many turn to informal services, such as burial societies or savings clubs. Microfinance outfits have filled some of the gap. But they are small, and banks are usually much better equipped to provide financial services on a large scale.”

With the economic picture improving, however, banks are seriously considering doing business in countries they have previously shunned.

“In many countries, not only are better and more predictable monetary policies improving the environment for banking; privatisation of state-owned banks has also created opportunities, and better regulation has helped too. In 2004, Nigeria’s central bank raised the minimum capital requirement for banks from 2 billion nairas ($15m) to 25 billion, and it limited government ownership in banks to 10%. The number of banks has shrunk from 89 in 2004 to 25 today, but the number of branches has increased by over 600. So far, experts say, placements on the red-hot stock exchange have provided most of the increased capital. Some banks’ returns on equity are believed to be shrinking. But ATMs have become so much a part of life in Nigeria’s big cities that lines sometimes stretch down the street. There are also welcome signs of prudence: one Nigerian bank, United Bank of Africa, promises no ‘wahala’ loans. All Nigerians know wahala means ‘trouble.’ The improving climate has caught the attention of foreigners. The Industrial and Commercial Bank of China, in the largest ever single investment in Africa, has offered $5.6 billion for a 20% stake in Standard Bank, of South Africa, which has operations in 18 African countries. In 2005 Barclays, a British bank that has been working in Africa for over a century, bought a majority interest in ABSA, another South African bank.”

Like bathers at the beach, however, banks want to test the waters before leaping body and soul into a bad situation. The best place to test the waters is South Africa, which has a better economic foundation than most African countries.

“South Africa serves as the Petri dish for the trans-African experiment (although its economy is so much larger than its neighbours’ that results may not be perfectly replicable elsewhere). In the post-apartheid era, the government has nudged banks into creating simpler and cheaper products. They have taken branches to the unbanked, either in prefabricated form, or in vans that make regular visits to under-served areas. Other countries are doing the same. In remote areas where delivering cash is hard, mini-machines have been installed in corner shops where customers print out a slip confirming they are in the black and present it to the shopkeeper, who provides the cash. Some rural branches and ATMs rely on solar energy and satellite phone connections.”

Another way that financial services are reaching the poor is through new technology, like mobile phones — a subject I’ve written about before [Mobile Phones in Africa]. The Economist also notes that this is a growing part of the financial sector.

“New technology also helps. Few Africans have a bank account, but many have mobile phones: in Kenya and Botswana, for example, 17% of those who are unbanked own a mobile phone, according to the FinMark Trust, a research group seeking to make financial services more accessible. In South Africa, Congo and Kenya, financial services are offered over mobile phones—though it is not always clear whether they can be called banks or not. Subscribers can open accounts, check their balances, pay their bills or transfer money by typing a few commands on their mobile phones. In Kenya, where 3m people have bank accounts, as many as 1m use M-PESA, a mobile-payment scheme.”

The article goes on to discuss other innovative approaches that are being tried.

“South African banks, having learned lessons in their home market, are pioneering innovations elsewhere in the region. Standard Bank supplies an isolated branch on an island in Uganda’s Lake Victoria by having planes drop bags of cash from the air. The bank credits its mobile sales force and its rapid roll-out of ATMs in Uganda—an extra 128 since it bought a local bank in 2002—to its success there. … ABSA, meanwhile, is developing modern credit-scoring techniques for customers who have never been granted loans before. By keeping costs down and building up scale, it reckons micro lending is at least as profitable as its other services. But competition among banks is growing. In Ghana, Barclays works with susu collectors, who gather money from small-scale market traders and keep it safe for them for a fee. The collectors’ clients are typically too small for high-street banks, but Barclays reckons that they collectively represent a market worth £75m ($154m). The bank offers savings accounts, loans and training to the susu collectors, and says they have helped it reach 200,000 market traders. In two years, there have been no defaults.”

While all of this is good news, the article concludes that there is much left to be done and millions of mattresses continue to be stashed with cash. All sectors have to function to make an economy grow, the political, economic, the security, the transportation, the telecommunication and so forth. In most of those areas things are getting better. The one probably lagging the worst is the political.

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