Banks in Africa ranked second most profitable after those in Latin America.
Banks operating in African countries are the second most profitable globally after those in Latin America, a new report by consultancy McKinsey says.
The lenders had an average return on equity (ROE) — a measure of profitability — of nearly 15 per cent last year.
Those in Kenya registered a higher figure of 24.6 per cent on average on the basis of data from 2016, the year when a law capping interest rates was passed.
The caps are however expected to adversely affect the lenders’ profitability for 2017, without changing Kenya’s ranking in ROE globally.
“Kenya’s capping of interest rates in 2016 provides a taste of the impact of increasing consumer protection. If unmitigated, the impact on Kenyan banks’ ROE could be as high as four to 4.5 per cent,” says McKinsey.
This means that the 24.6 per cent registered in 2016 could come down to about 20 per cent, which is still above the African average of 15 per cent.
The overall African banks’ profitability level is also more than double that in developed markets in Asia, Europe and the United States, according to the report.
A 2016 Central Bank of Kenya (CBK) report put the ROE of Kenyan lenders at 24.6 per cent, data on the 2017 full-year performance for the local banks is expected to be released latest March 31.
“Three of the 11 largest banking markets — Algeria, Cote d’Ivoire, and Kenya — have shown strong profitability through the cycle, delivering ROE above cost of equity (COE),” says the McKinsey report titled Roaring to Life: Growth and Innovation in African Retail Banking.
“Africa’s banking markets are among the most exciting in the world. The continent’s overall banking market is the second-fastest growing and second most profitable of any global region, and a hotbed of innovation,” says the study.
The study notes that Kenyan and other African banks are doing well because they are innovating on how they are meeting huge unmet needs among consumers.
The study cites Kenya’s Commercial Bank of Africa (CBA) for its M-Shwari product, offered in partnership with Safaricom , Equity Bank for its digital innovations, and KCB for its M-Shwari product, also offered in partnership with Safaricom, as having fuelled the lenders’ growth.
According to the report, Tanzania and Ethiopia are among African countries that present the biggest challenge for foreign players seeking positive returns.
But McKinsey notes that due to their large populations these markets are fast growing representing outsized potential for banks that can negotiate regulatory approval to enter and create winning business models.