Growth of mobile money transfer a threat to traditional banking

Saturday December 1 2012

By Mwaura Kimani

Banks in Africa are under pressure to make money even in the wake of a slowdown in economic growth as well as political pressure to reduce lending rates and growing bad debts. The EastAfrican’s Mwaura Kimani spoke with the Barclays Bank Africa managing director, head of corporate and investment banking on the continent’s banking sector and trends. Excerpts:

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Africa is going through massive infrastructure transformation. Traditionally, it has been the preserve of development institutions like the World Bank to finance such projects. Are commercial banks now capable of playing a bigger role in financing projects?

Commercial banks are increasingly getting into financing big projects. With East Africa increasingly becoming a hotspot for oil and gas, banks are playing a key role be it in providing funding, arranging big financial transactions or offering advisory services on such deals.

There is a lot of focus on energy, road and railway infrastructure. Most African economies are growing, presenting financing opportunities for banks.

Local businesses require financing to grow. Barclays was among the financiers of the $900 million Bujagali hydropower plant in Uganda. Other big projects Barclays has been involved in include Thika power project, and advisory work for Kenya’s power firm KenGen.

What are the next growth drivers in Africa’s banking sector?

The key drivers of growth in the sector will be a deeper focus on infrastructure, resources, agriculture and consumer services. The middle class is quickly driving up consumption and as such, they too need banking.

In Africa, the unbanked population remains high at an average of over 80 per cent save for countries like South Africa and Kenya. Banks will also ride on growing demand for new products like deepening risk management, documentary trade and currency risk management.

While some of these products exist in bigger markets, in Africa, the demand is growing. The clients we serve in the global markets are getting to Africa and as such requiring support in navigating the continent.

As a business, our biggest focus is these clients whom we already serve in the global markets. The shifts we are seeing are that more businesses are seeking services to boost their ability to manage liquidity and payments.

Agriculture is now a big bet for commercial banks. What is Barclays game plan in this field?

Agriculture is a key growth driver. Across Africa, Barclays has an exposure of £400 million invested in agriculture outside South Africa.

There is room for growth. We are keen to finance the sector at an organised level with commercially viable projects.

We are in discussions with several partners and development organisations to work together in this sector. It may not be dealing with farmers directly but also getting into actual farming. In Kenya, we are into tea and flower farming.

Banks are facing increased regulatory scrutiny. How would you rate the African banking framework? Are we likely to see a focus on these banks given that Africa is becoming more interconnected with global economies?

The way banks have been doing business is shifting with increased regulatory spotlight in regards to financial reporting, capital requirements, risk and customer management and Know-Your-Customer regulations.

While global banks are already facing tougher rules, local regulators are responding to best practice. Governments in Africa will roll out more regulations in the coming years to force companies to observe certain levels of governance which will require banks to respond by crafting survival strategies.

The companies we deal with have a certain level of governance they require and as such the local banks have to respond to this.

Kenyan banks, and by extension those in East Africa have been posting improved profits over the years, defying an economic slowdown in the region. What is the outlook for the next year in light of the central banks’ push for lower lending rates?

Banks will continue to be profitable in the foreseeable future, drawing from the huge number of unbanked people in the region. The profits are sustainable but the growth rate might not.

The profit lines consist of transactional banking fees, foreign exchange, risk management and other products. The push for lower lending rates is obviously a challenge for banks.

Rates are likely to go down further as competition rises, credit reference regulations work and risk management improves. The uptake of mortgages in the region is dismally low. This is an area that provides banks with room to grow.

Who will make the best bank in the continent now that almost all lenders are expanding across regions, rolling out almost similar products and getting into all frontiers of banking from retail to corporate to project financing and advisory?

The best bank will be the one that looks at consolidation. This is three-pronged: having a hands- on customer service, operational efficiency (delivery of products) and the best talent.

The winner will also be the bank that has the depth of products for all customers. Customers no longer need to go to several banks to get the services they need. Regional expansion will also define the future of banks.

As companies expand beyond their domestic market, say into the EAC, any serious bank must be in a position to service them in these markets.

What are your thoughts on agency banking as a means to financial inclusion in Africa? Is Barclays considering this in coming years?

For years banks have struggled with ways to reach the unbanked people where it’s too expensive to set up a branch. Agency banking will go a long way to help. There are several risks to this, however, especially in terms of regulations.

Barclays however has not embarked on this yet.

What do you see as the biggest threats to Africa’s banking sector?

Top on the list is mobile money transfer, which is challenging traditional banking. Banks are under pressure to take advantage of the growing use of mobile phones and telecoms firms are rolling out products similar to M-pesa.

Tighter regulations too are testing the ability of banks to continue making money as the political class, uncomfortable with the thought of banks making “high” profits, push through new regulations.

For African banks, the biggest threat is the entry of big deep-pocketed global lenders into the continent’s banking arena. Such global lenders have more cash to fund expansion and follow clientele across the region.