Africa's banking markets 'outperforming' developed world
By Bertram Niles
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‍When it comes to profitability and growth in the banking sector, Africa ranks number two in the world, according to a new report.
In five years, the number of banked Africans has risen by three-quarters and total banking revenue has increased to about 86 billion US dollars from 56 billion dollars in 2012, said the report by management consulting firm McKinsey & Company.
The study projects that by 2022, there will be 450 million banked Africans, up from 300 million in 2017.  That's close to half of the population, compared to one-third today.
African banks are projected to grow at least 8.5 percent per year. /VCG photo

African banks are projected to grow at least 8.5 percent per year. /VCG photo

Revenue is expected to rise to 129 billion dollars, much of it driven by countries with large populations like Nigeria and Egypt. 
"African banks are roaring to life," the report trumpeted.
“Globally, the banking industry is facing disappointing returns and sluggish growth. Africa’s banking sector provides a refreshing contrast. Its markets are fast-growing and nearly twice as profitable as the global average.”
But the study also cited some challenges for the continent’s banking markets, including large numbers of low-income customers, high usage of cash, and low levels of physical distribution.
The growth is not evenly spread, either geographically or among income groups. The markets are also highly varied from the relatively advanced markets of South Africa and Morocco to the incipient markets of Ethiopia and the Democratic Republic of the Congo where both GDP per capita and asset penetration are still low.
Heavy use of cash is a challenge for the retail banking sector. /VCG photo

Heavy use of cash is a challenge for the retail banking sector. /VCG photo

 Meanwhile, heavy staff costs and labor intensive, paper-dominated processes hold back productivity.
McKinsey said the industry could grow faster but only with better distribution and assessment of credit risks, and simplified paper processes.
Some banks, it said, are already tapping into the opportunities inherent in these challenges, for example, harnessing widespread mobile phone coverage to create low-price offerings and innovative distribution models. The continent is already a leader in mobile money. 
The platform has been laid with the return of investment of African banks in 2017 more than doubling the six percent achieved by banks in developed markets and second only to Latin America.
Credit risk remains a concern, however, with non-performing loans accounting for more than five percent of African banks’ portfolios.
The report noted that the sector on the continent has the second highest cost of risk in the world, not least because of a paucity of credit bureaus combined with immature risk management practices in many banks.
Successful banks on the continent have been putting digital first and offering low-price options for mobile banking. /VCG photo

Successful banks on the continent have been putting digital first and offering low-price options for mobile banking. /VCG photo

When it comes to the fragmented nature of the markets, the top five banking nations – South Africa, Nigeria, Egypt, Angola and Morocco – currently account for 68 percent of Africa’s total banking revenue.
And about 60 percent of the total retail revenue growth expected over the next five years will be concentrated in South Africa, Egypt, Nigeria, Morocco, and Ghana.
“Where you are in Africa matters in a big way,” the report said. “About 65 percent of African banks’ profitability and 94 percent of their revenue growth are attributable to their geographical footprint.”
The report said leading banks in Africa are outperforming their peers in terms of growth and profitability as a result of their focus on one or more of five themes: drawing the right map; selecting the right segments and offering compelling propositions; offering leaner, simpler banking; putting digital first; and innovating on risk. 
"If more African banks were to focus effectively on these themes, we would expect retail banking to grow at 12 percent per year, versus the baseline projection of 8.5 percent," the report concluded.