Local banks in sub-Saharan Africa have real advantages over their foreign competitors. Their growth is leading to greater access to banking services and the emergence of leading companies. As demonstrated by the example of Nigeria, local banks’ recapitalisation will be key to strengthening the banking sector and to them playing their part in the regionalisation and democratisation of banking activities in Africa.

The past twenty years have seen sweeping changes in the African banking landscape. During the 1970s, state banks were established alongside the traditionally dominant large banks of the former colonial powers. These mostly failed, either through bankruptcy or liquidation as part of the structural adjustment programmes of the early 1980s.

In many countries, this collapse led to the emergence of the first privately owned African banks. Some of them, notably in East Africa, belonged to families already running businesses; their main role was to facilitate financial and banking operations for the companies within these family groups. Other banks arose from local private stakeholders’ purchases of the shares held by foreign banks withdrawing from the African market. Some banking establishments were completely new, thanks to the greater flexibility granted by the central banks, which had initially been very reluctant to award new licenses to local private capital. This trend was further boosted by states keen for the African continent to have its own leading banks, in a competitive environment dominated by branches of European banks.

Increased penetration of local banks

Traditionally, local privately owned banks focused on local customers. With their limited geographical coverage and capital, and their narrow range of financial services, they were not very competitive compared with the foreign banks, which also tended to manage the relationships with their major industrial customers remotely from their home countries. The foreign banks began losing interest in their African customer base – both personal customers and small and medium enterprises (SMEs). The development of microfinance institutions went some way to meeting the needs of personal customers; despite the high interest rates they applied to credit facilities, they were the only ones offering financing to them. The privately owned local banks soon took over the microfinance sector. More broadly, in many countries they contributed greatly to opening up access to banking services. In Kenya, it took Equity Bank less than ten years to reach the top rung of the Kenyan banking ladder. It is followed by Barclays Bank and Standard Chartered, which has been established in the country for almost a century. In Cameroon, Afriland First Bank became the country’s number one bank, both in terms of customer numbers and its depositor base.

The presence of more local privately owned banks has led to a significant increase in the number of bank branches and in the deepening of their networks. Consequently, it is easier to access banking services, and the traditionally very high minimum amounts required to open an account have been lowered. More recently, the rapid penetration of mobile telephony in Africa1 has further improved access to banking services. Local mobile telephone operators as well as some start-ups providing mobile banking have been agents of change, making an effective contribution to the increase in banking penetration. For example, it has been estimated that in Kenya a third of the country’s bank deposits are processed by the M-Pesa mobile telephone payment system.

Local privately owned banks have clear comparative advantages. The first advantage is a better knowledge of local banking habits. The success of Afriland First Bank, for example, is largely linked to its detailed knowledge of the tontines system, which forms a parallel banking network in Cameroon. The bank has developed specific products for making this system secure and supporting its deposits, through a conventional banking infrastructure. The second key advantage of local privately owned banks is their flexibility. Historically, foreign operators have tended to transpose the operating modes of their home countries, without always knowing how to adapt to the local situation (lack of infrastructure, prevalence of the informal sector, illiteracy). Local privately owned banks have often succeeded in coming up with innovative solutions, with low-cost agencies located in remote, densely populated areas and banking standards better suited to the situation on the ground.

Improved access to finance for local large businesses

Lack of access to banking services has in many cases been a serious obstacle to the development of locally owned industrial groups. Many of these groups have long mistrusted foreign banks, suspecting them of favouring companies from their home countries. The locally owned banking groups naturally focus on local business customers. Their credit risk assessment differs fundamentally from that of foreign banks, whose decision-making processes regarding credit generally require consultation with their head office. They take into account, among other factors, country-wide risk, which is an alien notion for a bank operating only locally. Many African groups that have become local or regional leaders owe their success to the support of their local privately owned banks.

Through internationalisation, local banking groups have sought to support and grow with their customers who have become regional players, as have the foreign banks. This internationalisation has allowed them to increase their credit limit to any counter-party within regional monetary zones, such as the Economic and Monetary Community of Central Africa (CEMAC) or the West African Economic and Monetary Union (WAEMU). This in turn has enabled them to use resources gathered in countries with excess deposits to grant credit in countries with asset needs that are in the same monetary zone. Last year, for example, the Ecobank group syndicated a loan of over USD 300 million to the OLAM group,2 drawing on the resources of its sub-regional branches plus those of several local privately owned and multilateral development banks. This example illustrates the dynamic expansion of local banks and shows how far the banking sector has evolved in recent times. Previously, a transaction of this size could only have been handled by a foreign bank, supported by its parent company.

The need for recapitalisation in the banking sector

Currently, local privately owned banks are restricted by their low equity levels. Here, lessons can be learned from the recapitalisation of the banking sector in Nigeria, which is mainly dominated by local privately owned banks (Box). African banking groups’ growth, as well as their ability to finance major infrastructure projects and leading local businesses requires increased levels of capitalisation. This strategy is well understood and underway in English-speaking countries (Nigeria, Ghana, Zambia), but has been slow to spread to the Francophone countries. This could hinder these banks’ ability to tap into the opportunities afforded by vigorous economic growth in Africa. It also leaves the door open for the banking system in Francophone Africa to be dominated by the better capitalised banks from the Anglophone countries.

Recapitalising the banking sector also has indirect spinoffs, such as promoting the regionalisation of banking activities. For example, since the recapitalisation of the banking sector, the number of Nigerian banks in the CFA franc zone has risen slightly. In 2005, only the Ecobank group had a presence in Nigeria and in at least one CFA franc zone country. From 2008, almost half of the 25 Nigerian banks had at least one branch in a country in the CFA franc zone. Faced with this Nigerian offensive, the local privately owned banks have also been forced to react by increasing their equity and gaining a foothold in neighbouring countries. Locally owned banking groups such as BGFI, Atlantic Bank Group, Financial Bank (now Orabank) and Afriland First Bank have opened branches in neighbouring countries. In East Africa, banking groups such as Kenya Commercial Bank and Equity Bank have opened branches in countries within the Community of East African States. At the same time, the large banking groups in North Africa and South Africa have revealed a growing determination to break into the sub-Saharan banking sector, encouraged by the withdrawal of some foreign banking groups (Attijariwafa Bank’s takeover of the former Crédit Lyonnais’ branches in Africa), acquisitions (BMCE group’s increased stake in Bank of Africa, Attijariwafa’s acquisition of CBAO in Senegal) and privatisations. South African banking groups have shown themselves to be cautious, preferring to consolidate their regional expansion within the Southern African Development Community (SADC) zone. Only Standard Bank took advantage of the recapitalisation of the banking sector in Nigeria to gain a foothold there.
The future looks bright for the banking sector in Africa. With pan-African economic growth forecast to average over 5%, the banking sector should see double-digit growth fuelled by the emergence of a growing middle class.3 But with levels of banking penetration still low, the democratisation of banking services remains both a major challenge and a tremendous prospect for local privately owned banks. For these banks, the real opportunity lies in providing personal banking services. This applies, for example, to mortgage loans, which comprise the main banking service in more advanced countries but are largely non-existent in Africa, apart from South Africa and North Africa. It is offering these types of services, solidly based on local privately owned banks’ in-depth knowledge of the local situation that gives them an undeniable competitive advantage. Unfortunately, the development of these services, which are still vital for financing access to housing, is currently thwarted by the lack of long-term resources for the banks in sub-Saharan Africa, other than South Africa, as well as by banking regulations that are frequently inadequate. Despite the difficulties, the banks in some countries are gradually introducing these types of services into their markets (Kenya, and Ghana and Nigeria to some extent). Meanwhile, those in Francophone countries are lagging behind.

The forced recapitulisation of nigerian banks

In 2004, the Governor of the Nigerian Central Bank raised the minimum level of capital required to be an authorised bank, from USD 25 million to USD 250 million within one year, affecting more than 90 establishments. The objective was twofold: to get the sector in order and consolidate it, making it easier to monitor, and to expand the local banking sector’s capacity to provide finance, the lack of which was hampering the development of the Nigerian economy. Despite the excesses of the early years, this bold gamble contributed to the radical transformation of the Nigerian banking system. It stimulated competition, significantly increased the banking network’s coverage and service provision, and helped local banks become international. Nigerian banks are now in a position to finance most large local infrastructure projects without resorting to outside help. They have also been behind the emergence of African industrial leaders such as the Dangote cement group.



¹ The penetration level for mobile telephony in sub-Saharan Africa (excluding South Africa) averages 33%. This is much higher than the average level of access to bank accounts, which in some regions, is still only 10%.
² Olam International is a leading global supply chain manager and processor of agricultural products and food ingredients. It operates in 65 countries, through 16 distribution hubs.
³ According to McKinsey, the African middle class will number more than 200 million by 2020.