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The last ten years have seen a local banking sector emerge in Africa, alongside the European banks that have traditionally been present. While a development model based on these local resources seems more sustainable, the foreign banks must continue to play a role, particularly in helping to connect Africa’s economies to the rest of the world. In this changing environment, DFIs are adapting their strategies in order to contribute to the development of a durable and strong financial sector.

Sub-Saharan Africa has the world’s least developed financial sector. Excluding South Africa, its banking sector is around one tenth of the size of China’s leading bank and is comparable in size to Germany’s tenth-largest bank. Even taking gross domestic product (GDP) differences into account, Africa’s financial sector remains very underdeveloped, with a penetration rate2 of around 30% – less than half the average for other developing nations. For this reason, development finance institutions (DFIs) have made strengthening Africa’s financial systems their priority. In volume terms this sector represents more than half of their commitments in sub-Saharan Africa, i.e. around €3 billion in 2011. Recent radical changes in the banking landscape are prompting DFIs to rethink their strategy, in relation both to local banking groups – which are set to play an increasingly important role – and to the international banking players who are still reluctant to invest in the continent.

Complementarities of local banks and foreign banks
soutenir emergenceCompared with the world’s other developing regions, Africa has a high proportion of foreign banks operating in its territory – 45%, compared with a 30% average for developing countries (World Bank, 2006). Yet this proportion is declining. While the European banking groups, who have dominated the market since independence, have remained in their natural territories – French-speaking Africa for the French banks, English-speaking Africa for the UK banks – where they have in fact lost market share, local banking groups have developed rapidly since the late 1990s. The continent currently has a number of pan-African banks – Ecobank, Bank of Africa Group (BOA), Standard Bank, United Bank for Africa (UBA) – which are present in 10 or more countries, and a good number of fast-growing regional banks. These new players, pursuing more ambitious goals than the traditional banks, have helped to stimulate competition and have boosted banking activity levels observed in Africa over the last decade. Throughout the 1990s, loans to the private sector remained steady at around 10% of GDP; now they are in excess of 20%. This growth has mainly been driven by local banks (Figure 1).

The local banking sector, with its in-depth knowledge of the market environment, is driving the expansion of specific market segments – small and medium enterprises (SMEs), rural clients, low-income clients, etc. – which are, to a certain extent, overlooked by the foreign banks. In order to expand, the local banks need to penetrate these higher-risk markets, which constitute their primary growth drivers, given that the foreign banks dominate more easily accessible segments (large corporates, etc.). Moreover, the local banks have longer-term plans concerning their national markets than the foreign banks, as a result of which they naturally become more deeply involved in developing and structuring these markets. Unlike the foreign banks, local banks have no alternative but to grow within their national and regional markets first, since they lack the requisite scale to penetrate other markets beyond the continent.3 The development of a banking sector based on local capital therefore seems more sustainable and certainly more favourable to the penetration of new markets than development driven by the international groups. Such a pattern should therefore be encouraged.
Yet exclusively endogenous growth is not the most desirable solution either. The sector needs external resources in order to grow at sufficient speed and to make up ground – and foreign banks generally have more resources at their disposal than local banks. Most of them are backed by large groups, with expertise, easier access to highly experienced human resources, and a greater training and innovation capability, which enables them to play a key role in structuring the local financial sector. They also have greater intervention capacity – they can syndicate financing from within their group – as well as access to low-cost refinancing. Moreover, the African markets will naturally become increasingly integrated in the global economy, implying an increase in financial transactions between Africa and the rest of the world. This can only happen if there are connections between the African financial sector and the outside world – and the foreign banks are better positioned to connect African economies to the rest of the world. So although the development of Africa’s banking sector will probably continue to be driven by local players, it is essential that the continent remains open to the external financial sector too. DFIs definitely have a role to play in encouraging the expansion of both types of players.

Supporting the emergence of pan-African champions

The first stage in developing an effective local banking sector involves promoting the emergence of pan-African champions large enough to generate economies of scale. DFIs can assist the process through targeted initiatives designed to support specific banking groups that are well positioned to fulfil this role. In addition to groups that are already well established (Ecobank, BOA, UBA) – which have received substantial support from the DFIs – two types of players might prove to be suitable candidates here: regional groups that have already achieved a critical size and the major banks of Africa’s main financial centres. The former category includes banks such as Orabank and BGFI Bank in Central and West Africa; I&M, Equity Bank and Kenya Commercial Bank in Eastern Africa; and BancABC in Southern Africa. These banks have a thorough knowledge of the markets in which they operate, but are limited by the resources at their disposal. They can therefore usefully be supported by capital injections provided by DFIs – as did FMO (Netherlands) with Afriland First Bank, Proparco with I&M and Orabank, and the International Finance Corporation (IFC) with Equity Bank. Regarding Africa’s main financial centres, three countries might function as engines driving regional growth: Nigeria, Morocco and South Africa. Although the latter two countries do not belong, strictly speaking, to sub-Saharan Africa, this region is their natural expansion zone. Banks in these countries remained within their national borders for many years and have only recently embarked on pan-African expansions: Moroccan banks (BMCE, AttijariWafa Bank, BCP) have acquired existing banking groups; Nigerian banks have opted to create banking networks from scratch (UBA, GT Bank, Zenith Bank, Access Bank); South African banks have prioritised developing an existing network (Stanbic). This expansion into relatively unfamiliar markets remains tentative, however. The largest banks in South Africa (FirstRand Bank, Nedbank, Absa Group) and Nigeria (First Bank of Nigeria) still remain focused on their national markets. DFIs therefore have a role to play in encouraging and supporting these banks’ ventures beyond their national borders. Proparco and FMO, for example, have supported BMCE’s regional expansion by contributing to its merger with BOA Group, and IFC invested in BCP Maroc to finance the acquisition of the Banque Atlantique group in West Africa.

In this way, DFIs have contributed substantially to the emergence of a local banking sector with pan-African ambitions. However, to date their support has involved mainly relatively traditional forms of financing, in order to provide these groups with the long-term resources they lacked. Other, more innovative forms of support might be considered today. It may, for instance, be appropriate to help them access the international capital markets, where they currently lack visibility – by guaranteeing their first bond issues. Similarly, DFIs could assist in the organisation of the syndication market, as a way of encouraging local banks to work together in order to overcome the constraints imposed by their size. Another possibility would be to improve cross-border cooperation, which is very underdeveloped among banks belonging to different groups. Most Ghanaian banks, for example, do not have any partner banks within the West African Economic and Monetary Union (WAEMU), despite Ghana’s position at its heart, which limits the range of operations they can undertake with their clients active in this region. Just as they promote trade between Africa and other continents, by guaranteeing trade finance transactions, DFIs could also facilitate intra-African trade.

In general terms, therefore, while the local banks have faith in Africa’s markets and want to grow in them, they lack the necessary resources and they need the DFIs’ support. The situation is exactly the opposite for the foreign banks – whose sensitivity to Africa’s risk factors outstrips their awareness of the profitability levels achieved on the continent.

Overestimation of risk by foreign banks

Africa’s banking sector is the most profitable one in the world; yet, to date international investors have shown little interest in this market. Except for the traditional European banks – whose market share is eroding – and a few isolated banks from emerging markets, the only players driving the development of Africa’s banking sector are African. International investors still see these markets as too risky. In other words Africa suffers from a moral hazard problem, while the profitability levels of Africa’s various banking sectors confirm the gap between reality and perception with respect to the risk levels involved. Average return on equity (ROE) in Africa was 19% for 2007-2010, compared with just 11% in Europe, despite the higher capitalisation levels of African banks.4 Even so, the “country risk” deters investors. Yet it is rare that social and political instability reaches the extremes of Liberia or Sierra Leone. Even though numerous countries experienced major disturbances between 2007 and 2010, it is interesting to note that their banking sectors remained highly profitable during the same period (Table 1). The African financial sectors’ ability to bounce back shows that African economies are highly resilient to this type of crisis: profits are volatile, but the rebound effects compensate for periods of poor performance. This guarantees record returns on investments in Africa for investors who take a long-term view and are able to diversify their assets geographically.

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A recent Ernst & Young survey highlights the anti-selection phenomenon from which Africa suffers (Ernst & Young, 2011). It shows that Africa is the continent that appears the riskiest to investors, but that there is a significant difference between investors who have already invested in Africa and those who have not. The former are satisfied with their investments and are planning further commitments; the latter view the continent as overly risky and generally do not have plans to invest there. An overview of Africa’s financial sector illustrates these findings: the main international banking groups present in sub-Saharan Africa are indeed either French banks (Société générale, BNP) or UK banks (Barclays, Standard Chartered), i.e. those originally from the former colonial powers. These banks entered the African market at the time of independence and have since stayed there. Their continuous presence over 50 years has shown that risks are manageable and rewarded by adequate profits. By contrast, very few foreign banks have sought to establish a presence on the continent during the last 30 years. In particular, practically no banks from emerging and developing markets -China and India, for example, even though these countries are the continent’s main trading partners – have shown any inclination to move into sub-Saharan Africa (outside South Africa) in recent years.

In order to ensure that the African banking sector does not remain isolated, it is vital to mitigate the level of risk it inspires in the outside world. DFIs enjoy a special position, originating as they do in the Northern hemisphere but with a long-standing presence in the Southern hemisphere, and this gives them access to a broad spectrum of investors to whom they can promote Africa. Using this position to build a bridge between Africa and other markets would appear to be one of the main levers available to DFIs to channel private international investments towards the African banking sector.


¹ Except where a specific source is cited, the data in this article are based on calculations by the authors, drawing on the Bankscope (2011) and World Bank ( databases.
² The penetration rate is defined as the ratio of total banking assets to national GDP.
³ “We do not have a strategy for Africa, our strategy is Africa” (Thierry Tanoh, CEO of Ecobank, Investors Club, November 2012, Paris).
4 Moreover, these figures understate the real profitability levels of foreign banks operating in Africa, since they are influenced by the performance of Africa’s large state banks, which can have important market shares and very poor profitability.

References / Bankscope, 2011. Database./ Ernst & Young, 2011. It’s time for Africa. Ernst & Young’s 2011 Africa attractiveness survey. / World Bank, 2006.  Making Finance Work for Africa. The International Bank for Reconstruction and Development / The World Bank, Washington, DC.