Local African institutions edging out foreign bank subsidiaries
Posted Saturday, June 29 2013 at 12:15
- Banking experts argue that lending to small and medium enterprises (SMEs) has been part of the reason for the success of African banks.
- In East Africa, despite coming at the bottom of the ladder among emerging African banking groups, Kenya Commercial Bank (KCB) leads the pack of homegrown brands followed by Equity Bank and I&M Group at $1 billion.
- Local banks’ flexibility is in the lower borrowing threshold they offer their customers as opposed to foreign banks’ lending threshold, which is as high as $7,807.
- Currently, Africa’s banking sector is the most profitable in the world.
However, the banking sector in Africa has remained profitable in spite of social and political crises. For example, profitability remains high, with average return on equity for Kenyan banks at 20 per cent, despite the post-election crisis of 2007-08.
“Ability to bounce back shows that African economies are highly resilient to this type of crisis. Profits are volatile, but the rebound effect compensates for periods of poor performance. This guarantees record returns on investment in Africa for investors who take a long term view and are able to diversity their assets geographically,” said Proparco executives Laureen Kouassi-Olsson and Julien Lefilleur.
The African banking model is all too aware of the political risks, hence the strategy to expand regionally.
“A bank will more easily absorb the shock of political and social instability if it has a presence in other countries. The 2007-08 post-election crisis in Kenya is a good reminder how quickly a situation can deteriorate and impact the economy. If a bank is too small, and only local, such a crisis can threaten its existence,” said Mr Shah.
Yet for all the negativity, the degree of risk in Africa is often exaggerated. Ms Kouassi-Olsson and Mr Lefilleur argue that the sensitivity of foreign banks to Africa’s risk factors outstrips their awareness of the profits that can be achieved.
Currently, Africa’s banking sector is the most profitable in the world. Between 2007 and 2010, average return on equity in Africa was 19 per cent, compared with 11 per cent in Europe. This was despite the higher capitalisation levels of African banks.
Very few foreign banks — either from the developed world or the developing markets of China and India, which are Africa’s main trading partners — have sought to establish a presence in sub-Saharan Africa (excluding South Africa) in the past 30 years. The Bank of India’s return to Uganda last year, after a 40-year hiatus, is an isolated case.
Allure of regional markets
Still, for the African banking model, the desire to grow regionally and thereby spread risk, is attracting more local players. One of these is Uganda’s Crane Bank, whose expansion into the region would make it the first Ugandan bank to do so.
“We are going regional with branches in Rwanda and DR Congo. We’ve secured the licence in Rwanda, to start operations on January 1, 2014. In Congo, we’ll wait for the country to stabilise. We are also looking at South Sudan,” the bank’s managing director A.R. Kalan, told The EastAfrican.
Despite its operations being restricted to one country, Crane Bank is profitable. Founded in 1995, and with assets of $345.2 million, it was ranked top in 2011, by The Banker magazine, among the lenders with the highest return on assets globally, at 8.70 per cent.
But all has not always been well. Towards the turn of the last century, local commercial banks in several African countries struggled to stay solvent, and suffered the ignominy of closure by their central banks.
In 1998, an Unctad study on Africa’s banking industry said the causes of financial distress had to do with the low minimum capital requirement to start a bank — $50,000 in Uganda and Zambia at the time. Central banks have since become stricter in their regulations.
But more critically, banks in Africa have struck up a relationship with development financial institutions (DFIs) in Europe to mobilise capital and bolster their financing capacities.