Banking: Why the small customer matters this time

Monday March 5 2018

Customers in a banking hall.

Customers in a banking hall. Banks face the risk of reduced revenues and loss of business in the next five years due to the high cost of loans and large commissions on banking transactions. FILE PHOTO | NATION 

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East African banks face the risk of reduced revenues and loss of business in the next five years due to the high cost of loans and large commissions on banking transactions.

A new survey by McKinsey & Company shows that the retail market — people who earn less than $417 per month — will be the driving force of African banks from 2017 to 2022.

The survey shows that retail customers are sensitive to prices of financial products and select banks that offer them convenience in access and services. These customers, reveals the survey, will reject expensive banks.

It is estimated that African banking revenues will grow 8.5 per cent per annum from 2017, bringing the continent’s total banking revenues to $129 billion in 2022 of which $53 billion will be from retail banking.

Last year, revenues generated from the retail customers in Africa were $35 billion.

According to the study Roaring to Life: Growth and Innovation in African Retail Banking, more than half of the retail banking customers sampled singled out pricing as their primary reason for selecting a bank, followed by convenience in terms of quality of services and proximity of the bank to customers.

Interest rates

The high cost of loans reduces credit to the productive sectors of the economy, thereby slowing down economic growth.

In East Africa, Uganda has the highest lending rate at 21 per cent, followed by Tanzania and Rwanda averaging 18 per cent.

Kenya, which controlled its interest rates in September 2016, has a fixed rate of 14 per cent.

This compares unfavourably with other countries in the region. According to data by the US-based research firm Trading Economics, Morocco has lending rate of four per cent, interest rates in South Africa average 13 per cent, Egypt (12 per cent) and Nigeria (11 per cent).

According to McKinsey, deposits, both from transactional and savings accounts held by retail customers will be the greatest source of revenue generation for African banks contributing an estimated $11 billion to the top line over the five years.

Deposits are expected to grow, fuelled by an expected increase in the number of people added to the banking system.

Africa’s banked population is expected to grow by more than 150 million people, from 298 million in 2017 to 450 million by 2022, and much of this growth will be at levels of income lower than $5,000 per year.

The number of individuals in the world without access to banks is estimated at between two billion and three billion.

According to the survey, the high cost of funding through interbank markets, with rates as high as 10 per cent, has made deposits a lucrative product for banks.
In Tanzania, the growth of credit to the private sector fell to 1.7 per cent last year from 7.2 per cent in 2016.

In Kenya, banks have introduced tighter credit standards after the introduction of interest rate capping, which has locked out smaller borrowers and SMEs from credit to their perceived credit risks.