In the spirit of seeing a silver lining, when you are a small bank with an asset base of almost nothing when compared to the big banks on Wall Street and London, an economic downturn is shorter and less painful. Bankers in East Africa humorously equate the global financial crisis in local terms: “my bank is three stories high; if I fall out the window, I will break a leg or an arm, and I will survive. On Wall Street, the fall is higher, and survival is less certain.” Maris Strategies surveyed 131 senior bankers at the recent AITEC conference in Nairobi, Kenya, concluding that there is a remarkable level of confidence that East African bankers are prepared to weather the global financial storm. When asked how much the global economic crisis is influencing their revenues, surprisingly 54.2 percent of the bankers surveyed said “only slightly” or “not at all”.
African bankers admit that there has been a slow down in the receipts of foreign remittances. Another area of concern is the possible risk of expats living abroad who have purchased local houses as investment or retirement properties losing their jobs and not being able to make mortgage repayments or property maintenance investments. However, the majority of bankers interviewed were confident that the regional economic climate and banking systems are managing the direct effects of the global crisis.
African bankers are seeing their size as a positive aspect of their ability to compete; simply the reduced number of management layers makes smaller banks more agile than their larger global counterparts.
Challenges for African Banks
When asked which banking management issues pose the greatest challenge for African banking in the foreseeable future, African bankers indicated that reducing the cost of distributing financial services was their most important challenge (43.5 percent of the responses). Foreign competitors, which happen to plague bankers in the Middle East, for example, are a minor concern. Regulatory changes and compliance are a small concern, compared to the need to establish a robust technological infrastructure. The good news is that without the old systems to discard of, African banks are well placed to acquire and implement technology at a more efficient pace than, for example, some European or North American banks, whose technological legacies are more complicated to thrust aside when necessary.
At matter of Risk Management
Not surprisingly, for African bankers the major risk is the lack of information in which to build meaningful customer intelligence. Few—if any—credit rating agencies exist across Africa, and data sharing between lending institutions is problematic, which overall increases bank’s risk and costs. Banks which are using credit risk modelling technologies to build their own customer credit profiles often exclude between 80 and 96 percent of a local population because customers do not meet lending criteria constructed based on Western demographic models. As a result, a large percentage of the population of Africa remains unbanked (230 million unbanked households, roughly 80 percent of the continent’s population) not only because of lack of customer confidence in the banking industry and high charges, but also because banks cannot afford to take a risk. Ironically, as now Western European banks and North American banks are finding this to be an area of potential and actual problems, as some of the credit rating systems have proven to be inaccurate. More seriously, while African banks seem to think that credit rating systems will be helpful in helping manage and mitigate risk, what banks outside Africa have learned is that even with sophisticated credit rating and risk management systems, customer behaviour is unpredictable, as customer attitudes fluctuate at times of crisis or economic boom and boost, sometimes leading to further economic boom, but sometimes leading to more severe crises.
Banks Move into the Bottom half of the economic pyramid
Traditionally, African banks have provided financial services to the wealthy and customers with high earning power. Now, as slowly more information is becoming available on the remarkably good credit habits of the poor, the bottom of the pyramid has been advertised as potentially a good source of new revenue for a variety of reasons, some more ethical and humanitarian and long-term (financial literacy and well-adjusted financial behaviour leads to national and global economic growth) and some more self-serving and short-term (unbanked populations are more likely to accept fees), African banks have also turned their gaze to the unbanked. Small businesses, in particular, are the foundation of many African states’ economies, and micro payments and micro lending show themselves as particularly attractive products and services for these groups.
Innovation in African Banking
Innovation in African banking is not about buying the latest technology. Rather, as African bankers see it, innovation is about taking risks and applying technologies in new ways. Senior African bankers believe that their lack of risk taking is acting as a damper when it comes to capitalizing on innovation. This might explain why joint ventures by non-bank entities like the M-Pesa/Safaricom (peer to peer payments) are usurping one primary bank product line: payments. Payments are the front-line of banking as they primary mechanism for consumers to interact with business and for businesses to facilitate commercial activities. Pauline Vaughan, Head of M-Pesa explained that the penetration rate (10,000 new registrations per day, 5.5 million customers since 2007) and popularity of peer to peer money transfer is based on a simple value proposition: convenience, safety, easy to use, secure and perhaps most important easy to comprehend.
However, African bankers are not singularly conservative; through carefully orchestrated experimentation, they have developed new product designs and new ways to engage local populations with banking services. Numerous banks across the continent have discovered the secret hidden economic power behind the finances of African households: women. Women banking accounts for the rise in new banking products designed specifically for the needs of working women and women who run the household’s finances.
On the Horizon
Banking and financial services in Africa during the next ten years has the potential to be the most influential force in facilitating socioeconomic change. African bankers, although perhaps more conservative in their risk taking than they wish to be, are conversely commissioning numerous experiments in financial engineering in retail and commercial banking. Building new financial infrastructure, creating new products, engaging technology to reduce the high cost of distribution, improving financial literacy and revising regulatory statutes are amongst the challenges and opportunities which will be on the competitive agendas of most senior management teams.