Banking in Africa: financing transformation amid uncertainty

Bank

1

Results from a survey of African banking groups

Jean-Philippe Stijns[1]

Summary

This chapter takes stock of trends and strategic issues affecting banking groups in Africa, based on the results of the fourth edition of the European Investment Bank’s survey of banking groups in Africa (see Appendix 1). Our survey’s coverage has been extended to include the whole African continent, and the sample size has been increased in this edition from 25 to 46 banking groups operating in Africa. The 2020 sample of banking groups is composed of a mix of pan-African banks, sub-regional banks, foreign banks operating in Africa and national banks. A continental approach has the advantage over a regional approach of better encompassing banking group relationships that span multiple sub-regions. The overall message coming out of responses to this year’s survey is one of cautious optimism about a gradual return to growth and stability in African banking markets.

In line with the generally improving economic conditions in most African countries, most groups are in expansionary mode, mostly thanks to organic growth but also due to greenfield and brownfield investments. Nevertheless, some groups are still in consolidation mode, especially in the short term. The banking groups report improvements in terms of loan origination and funding conditions. Non-performing loans (NPLs) seem to be coming under control in most banking groups but they are still on the rise in some groups. Efforts to comply with Basel II and Basel III standards are also reported.

The groups are planning to expand their loan books, identifying manufacturing and agriculture as their top sectoral focuses at the moment. In addition, most banking groups report putting a very high priority on SME financing as a growth area. However, the banking groups identify some specific constraints to lending to SMEs: a shortage of bankable projects, a lack of effective collateral, a lack of managerial capacity, informality and a high default rate amongst SMEs. Most banking groups consider portfolio guarantee products as important but, unfortunately, guarantee needs are still predominantly unmet. Similarly, banking groups report a strong demand for local currency financing. Some groups also report that their most important technological needs concern credit risk management and lending technology.

In terms of products and service focus, African banking groups are still emphasising investment on e-banking and mobile banking services. Some groups are also deploying or planning the development of fintech, with the main focus on facilitating mobile money, electronic transfers and back-office operations. Banking groups view telecom companies primarily as partners rather than as competitors for the provision of mobile money services. It is commercial banks that banking groups consider as their most direct competition. A fair proportion of groups are also investing in lending-related fintech, including data analytics and blockchain technology.

Introduction

This chapter takes stock of strategic issues affecting banking groups in Africa and attempts to provide a snapshot of banking sectors. The analysis relies on the results of the fourth edition of the EIB’s survey of banking groups in Africa. For this purpose, an attempt is made to reflect in our sample the wide variety of banking groups operating in Africa’s banking markets. Three groups of foreign banks competing in the region can be distinguished: foreign affiliates of global banks from developed countries; foreign affiliates of banks from emerging countries, in which we can include the foreign affiliates of banks from South Africa; and foreign affiliates of regional African banks (multinational banks from Africa). The term pan-African banks is used when grouping banks operating across several African markets, based in an African country, including South Africa. Regional African banking groups are headquartered in a variety of countries and some enjoy a significant presence in a large number of countries.

The EIB survey questionnaire and its sample of banking groups are in their fourth edition in Africa thanks to the ongoing collaboration of many banking groups, national, regional and global. A first pilot edition of the survey was launched in 2015 (European Investment Bank, 2015) covering pan-African banks operating in sub-Saharan Africa (SSA). The second edition of the survey (European Investment Bank, 2016) was expanded in two ways. First, the sample of banking groups that agreed to participate in the survey grew from 10 to 17 banks and it included some global banks with a wide footprint in SSA. Second, the number of questions put to banking groups was expanded from 10 to 20 questions, covering an enhanced set of strategic issues, including demand and supply of local currency loans and technological deployment. We estimated using BankFocus data that these 17 banking groups (and their African subsidiaries) represented on average around a third of total assets in SSA (including South Africa) over the 2006-2015 period. In the third edition of the survey (European Investment Bank, 2018), the sample of banks and the questionnaire were further expanded, with a net gain of eight banks. An effort was also made to broaden the sample to include a larger number of African regional banks. The result was a sample comprising 25 banking groups. The number of questions increased from 20 to 25, with new questions focusing on SME lending, fintech, collaboration between banks and telecom companies, banks’ competitors, regulatory capital, subordinated debt and strategic sectors for lending.

For this fourth, 2019 enhanced edition, the geographical coverage of the survey was expanded to the whole African continent and some of the questions were enriched and fine-tuned. This helped to bring the number of banking groups participating in the survey from 25 to 46. The intent is to match the geographical coverage of the overall report this chapter is published in, and of the EIB’s Africa Day, the annual event where the report is launched and discussed. Obviously, a continental approach also has the major advantage of better encompassing the banking groups that are more and more joining the banking sectors of Africa’s sub-regions. Finally, many of the market dynamics, challenges and opportunities characterising North African banks are relatively similar to those of their southern neighbours. This is confirmed by the fact that extending the survey’s coverage to the whole continent has not altered the main structural observations made in the earlier editions of this survey. The sample of banking groups is a mix of global and pan-African banking groups and a few national groups. The sample includes many EIB clients but not all and not exclusively.

The rest of this chapter discusses the strategic positioning of banking groups in Africa and their perceptions of market conditions, both on the lending and funding side. The next section discusses how banking groups are positioning themselves in terms of growth and acquisitions, sectors and implementation of Basel principles. This is followed by a discussion on how banking groups in Africa perceive the challenges of financing SMEs and what development partners can do to help. The chapter then examines how banking groups in Africa are positioning themselves in terms of investing in new technology, including mobile money and fintech. Finally, we report on how banking groups assess recent and current funding conditions. Appendix 1 documents in detail the questionnaire used in the EIB survey.

Overall strategic positioning

In the short run, most banking groups are in an expansion mode but consolidation is not over in parts of the sector (Figure 1). Within the next 12 months, the vast majority of the banking groups (77%) plan to expand, mostly organically, although acquisitions and greenfield and brownfield investment will also play a role. In contrast, some banking groups (16%) have been in consolidation mode over the past year and some others (11%) plan to consolidate over the coming 12 months.

Figure 1: Short-term strategic approach (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Question 16 (see Appendix 1).

In the longer run, the trend towards expansion is even stronger and the banking groups expect that consolidations have largely run their course (Figure 2). Only a small minority (3%) of banking groups are planning to scale down beyond the next 12 months. Around three-quarters of banking groups report an intention to expand operations on a long-term basis, as in the 2018 edition of our survey.

Figure 2: Long-term strategic approach (beyond 12 months - share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Question 4a (see Appendix 1).

The surveyed banking groups plan to accelerate the expansion of their loan portfolio and they are reporting interest in the primary and secondary sectors (Figure 3). Nearly three-quarters (74%) of the banking groups indicate that they expect the ratio of their loan book to their deposits to rise. They also report that manufacturing (27%) and agriculture, forestry and fishing (22%) are the most attractive sectors for lending. Service sectors are also mentioned but with less frequency than would be expected - in 2018, they were cited by 15% of banking groups as the most attractive sectors - perhaps indicating some sectorial saturation. These responses do not match the types of loans that are usually found on the balance sheets of banks in the region. This therefore calls for research on whether this reflects rising potential offered by the primary and secondary sectors in Africa, compared to the tertiary sectors. Chapter 8 in this report explores ways the financial sector can indeed support the development of the primary sector.

Figure 3: Lending policy focus (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Panel a refers to Question 2 and panel b to Question 17 (see Appendix 1); the category ‘others’ comprises the sectors favoured by 2% or less of the banking groups.

The vast majority of banking groups report being compliant with Basel I and II and most banking groups report to be either compliant or working towards compliance with Basel III (Figure 4). Despite broad compliance with Basel I, there is a lingering perception that single exposure limits/concentration ratios are not always respected. With respect to Basel II standards, close to four-fifths of banking groups consider themselves compliant, with most of the rest reporting that they are working towards compliance. When it comes to Basel III standards, less than one banking group out of three reports being compliant, while the majority of groups report working towards compliance and less than one-sixth of groups state that they do not consider Basel III a priority, compared to close to one group out of four (27%) in 2018. The responses to our survey illustrate the efforts undertaken by (i) regulatory and supervisory authorities to apply more rigorous international best practices; and (ii) banking groups in Africa to increasingly align themselves with the standards. However, it would be worth investigating why one sixth of the surveyed banking groups does not have an immediate concern to work towards compliance with Basel III standards, especially with respect to disclosure requirements, market discipline and access to capital markets.

Figure 4: State of Basel standard compliance (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Question 20 (see Appendix 1).

SME financing, challenges and opportunities

Although SMEs do not yet constitute a large proportion of bank portfolios in Africa, a majority of banking groups report a strategic focus on SMEs and most report that SMEs represent a high business priority for business development at the margin (Figure 5). Only a small minority of banking groups in Africa (12%) report a long-term market focus on large local companies, and none a focus on large multinationals anymore, compared to 8% back in 2016. Correspondingly, the vast majority (87%) of banking groups declare SMEs as a high business priority and only very few (2%) report SMEs not being a business priority at all. One-third report a market focus of groups on retail clients, in line with the importance of deposit financing for African banking groups (see section focusing on technological positioning, mobile banking and fintech). This strong focus on SME lending, as a growth area, is partly a reflection of growing competition among banking groups that is pushing them outside of their traditional comfort zone, large corporate clients, in an attempt to sustain portfolio growth and profitability.

Figure 5: Strategic focus and technical assistance (TA) needs (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Panel a refers to the second line of Question 4; panel b refers to Question 21 (see Appendix 1).

Banking groups in Africa report that the lack of adequate collateral (37%) and of bankable projects (40%) are key reasons that hold them back from lending more to SMEs (Figure 6). Two other important obstacles reported by banking groups are high default rates (17%) and lack of information (17%). The lack of managerial capacity in SMEs is yet another hurdle (11%) that is reported. The lack of collateral (33%), high default rate (33%) and lack of managerial capacity of SMEs (17%) were already mentioned as top constraints to lending to SMEs in 2018. The sharp competition amongst banking groups to finance SMEs is reported as an issue by very few groups (2%), confirming the notion that there is potentially a very wide scope for banking groups in Africa to expand in the area of SME lending.

These results suggest a number of ways in which development partners can support lending to SMEs. The lack of collateral suggests that incentive-compatible portfolio guarantees could have an important role to play (see below). The high default rates and lack of managerial capacity of SMEs suggest that managerial capacity building for SMEs is an important tool for development partners. Indeed, capacity building provided through dedicated TA programmes - both at the level of the intermediaries and of clients - have been highlighted as a highly desirable contribution to financial intermediation by development partners. With firms often operating informally and lacking proper accounting and financial reporting documents, it is difficult for banks to assess credit risk and to monitor borrowing entities. However, some banks are developing proxy data to overcome these challenges (see section about fintech below).

The lack of information on SMEs suggests that building the capacity of credit bureaus could play an important role. There is a need for better cooperation between commercial banks and domestic policymakers to enhance financial infrastructure, notably credit reporting systems and collateral registries to allow more SMEs’ financial inclusion. Credit reference bureaus help mitigate the asymmetry of information and increase transparency in the system. In addition, for good borrowers, positive information from credit reference bureaus can help them negotiate their borrowing rate, which is often in the two-digit bracket. However, few countries in Africa have fully functioning credit bureaus.

Figure 6: Demand and supply for SME financing (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Panel a refers to Question 23; panel b refers to Question 22 (see Appendix 1).

Although international financial institutions (IFIs) have developed programmes to offer portfolio guarantees to commercial banks when lending to SMEs, a significant portion of the need for portfolio guarantees is still unmet, even though most banking groups consider such products as either important or very important (Figure 7). The good news is that only a minority (7%) of banking groups consider their needs to be largely unmet, as compared to 18% in 2018. However, only a third of banking groups report that their portfolio needs are met, and two thirds report them as being either unmet or partially met. In addition, four-fifths of groups consider that portfolio guarantees and other de-risking tools are important or very important. These answers suggest that more could be done by development partners, IFIs and development finance institutions (DFIs) to de-risk SME lending. The success of a guarantee programme depends on its design, incentive compatibility, etc. (see Section 6.4.1, EIB, 2016). Also, credit risk is not, unfortunately, the only risk affecting SME lending. Local currency volatility, should banks fund themselves in hard currency, can create currency mismatches on the balance sheet of banks and can also deter banks from lending to SMEs (see below).

Figure 7: Portfolio guarantees (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Panels a and b refer to Question 12 (see Appendix 1).

Banking groups are mainly (73%) planning to raise funds in the local currency, a continuation of the trend observed in 2018. Correspondingly, the banking groups perceive demand for loans in local currency to be either growing faster than (18%) or in line with (80%) overall market demand (Figure 8). Banking groups also report plans to raise funds in USD, albeit with less certainty than in the local currency. They also perceive loans in USD to be in demand, although less so than those in the local currency. More than half of the banking groups indicate that they are likely, to some degree, to raise funds in EUR and the majority (55%) of them report that demand for loans in EUR is in line with market demand. About a third of the banking groups are planning to raise funds in other currencies, although a large majority of respondents indicate that the demand for loans in other currencies is below market demand. Of course, there is a wide diversity of situations at subsidiary level, with some operating under a fixed exchange rate set-up (e.g. in the two Franc CFA zones, expected to be replaced by ECO in 2020 in WAEMU), some under a floating exchange rate regime, and some in a dollarised or quasi-dollarised environment (e.g. in the Democratic Republic of the Congo).

Figure 8: Local currency and foreign exchange funding and lending (share of survey respondents)

Source: 2018 EIB survey of banking groups in Africa.

Note: Question 11 (see Appendix 1).

Technological positioning, mobile banking and fintech

Banking groups are increasing their focus on IT and mobile banking technologies while declaring that the highest needs for technical assistance (TA) are related to credit risk management and lending technology (Figure 9). In 2018, only 5% of banking groups considered IT as a priority for TA, compared to 16% in this edition. Lending technology has also risen as a priority in this edition (16%) as compared to the 2018 edition of the survey (5%). This is consistent with the declared longer-term market focus, as growth areas, on SME financing and retail clients, as discussed above. A notable proportion of groups (44%) report being fully deployed in terms of mobile banking technology, illustrating how fast the deployment of this technology has been in Africa. In contrast, very few banking groups in Africa (14%) consider themselves fully deployed yet in terms of fintech, i.e. technologies used to automate and improve financial services. A large share of groups, however, are either in fintech deployment (42%) or planning such deployment (37%).

Figure 9: Technological positioning (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Panel a refers to Question 19; panel b refers to Question 18 (see Appendix 1).

Banking groups report having over the long term a product and service focus on e-banking services and mobile banking services (Figure 10). Again, this is consistent with a growing concentration on retail clients and also on SMEs, as in 2018. E-banking and mobile banking services reduce the cost of intermediating with smaller clients and provide deposit collection at a lower cost, as well as relieving some pressure on branch networks to serve professionals and self-employed individuals. Two new types of products are being reported as a strategic product focus by some groups: leasing (5%) and mortgage financing (3%). This is prima facie evidence that the range of products offered by African banking groups is expanding and is being tailored to address an expanding set of needs as the middle class grows in size in some markets (see also Chapter 7 concerning mortgage financing in Africa’s cities).

Figure 10: Product and service long-term strategic focus (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Question 4 (see Appendix 1).

Within fintech, mobile money and e-transfers (21%), financial services software (21%) and payment and settlements (18%) are key areas for investment (Figure 11). Lending, data analytics and blockchain are also areas of focus for some groups, but less so. Fintech in Africa (as elsewhere) is still at an early stage of development and banking groups are not investing significantly yet on fintech for lending purposes. The main focus is still on facilitating transfers and back-office operations. Nonetheless, it is noteworthy that more than one banking group in four reports focusing its fintech investments on lending, data analytics and blockchain technology. In other words, while fintech is not yet being deployed extensively for lending, a quarter of banking groups are investing money in that direction.

Figure 11: Technological focus with fintech (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Question 24 (see Appendix 1).

Banking groups still view private domestic banks as their main competitors and most of them see the dominant model for providing mobile money as one of effective partnerships with telecom companies (telcos) (Figure 12). Foreign banks are considered a competitive threat by some banking groups (14%). Few groups (7%) consider domestic state-owned banks as their main competitors. Regarding telcos, these are seen more as partners (79%) than as direct competitors (11%). This is in line with responses from 2018 (78% and 17% respectively). Only a few banking groups (5%) consider telcos to be better positioned than them to offer mobile money. In a nutshell, banking groups in Africa do not seem to fear disruption from telcos and rather see their peers as their main competition. Of course, this can be partly explained by the fact that regulatory authorities often prevent telcos from gaining banking licences, and therefore from competing with banks. Banks are also generally blocked from gaining telco licences.

Figure 12: Competitive landscape for financial intermediation (share of survey respondents)

Source: 2019 EIB survey of banking groups in Africa.

Note: Panel a refers to Question 13; panel b refers to Question 25 (see Appendix 1).

Banking and funding strategy

Banking groups report that they are eager to expand their balance sheets and to boost the collection of deposits (Figure 13). The vast majority (91%) of respondents expect assets growth to accelerate in the short run, up from 88% in 2018. They also expect a pickup in their loans and deposits market shares, which is indicative of increasing competition, at least in some African markets. Expanding market shares for large banking groups, if they materialise, will come at the expense of smaller banks that are less covered by this survey, potentially signalling a maturing of the banking markets in Africa. Expectations of rising deposits market shares and loans-to-deposits ratios are indicative of sharpening competition also in terms of deposit collection.

Figure 13: Assets, loans and deposits strategy (share of survey respondents, as %)

Source: 2019 EIB survey of banking groups in Africa.

Note: Question 2 (see Appendix 1).

Although banking groups expect their cost-to-income ratio to rise, they have balanced expectations with respect to profitability and expect non-performing loans (NPLs) to slowly come under control (Figure 14). In 2019, less than half of banking groups (39%) still expect NPLs to rise going forward, as compared to 58% in 2018. Accordingly, more banking groups are planning to taper off the constitution of provisions (41%) than to increase them (20%). In contrast, in 2018 the same proportions of banking groups were planning to increase and to decrease provisions (26%). Less encouragingly, more respondents expect profit margins to come down (39%) than to increase (30%), a situation similar to that in 2018.

Figure 14: Assessment of profitability and portfolio risk (share of survey respondents - as %)

Source: 2019 EIB survey of banking groups in Africa.

Note: Question 2 (see Appendix 1).

On balance, the majority of banking groups expect rising access to funding at group level with a strong emphasis on deposits and, to a lesser extent, IFI funding (Figure 15). The vast majority (88%) of banking groups expect their reliance on deposit financing to keep on increasing in the near future. Forty-four per cent of banking groups intend to increase access to international financial institutions (IFIs) funding, up from 33% in 2018. Forty per cent of groups plan to increase access to other forms of long-term funding, roughly the same share (43%) as in 2018. Less than a fifth of respondents intend to increase access to the interbank market (18%) and about a seventh (14%) to increase credit from the central bank. More than one group in five (23%) is planning to curb the use of central bank funding. However, close