In Africa, public-sector banks have more or less disappeared and international institutions have partially withdrawn from the continent – facilitating the emergence of pan-African banking groups whose success frequently reflects the talent of their senior executives. These groups are expanding, encouraging the growth of regional-level competition. Supervising these banks is inevitably a more complex matter, however – and the supervision in place does not yet appear sufficient to guarantee the effective management of systemic risks.
Private banking groups majority-owned by African shareholders occupy the forefront of Africa’s banking scene today. State-owned banks are more scarce and less well-positioned, while private banks owned by non-African shareholders have lost market share. The Nigerian banks and Ecobank group are good examples of the dynamism of locally-owned private banks (Kouassi-Olson and Lefilleur, 2013). Ecobank, established in 1985, currently operates in 34 African countries and grew its asset base ten-fold between 2004 and 2013 – from a balance sheet total of less than USD 2 billion to nearly USD 20 billion. Bank of Africa group (BOA) – established in the UEMOA (West African Economic and Monetary Union) zone in 1982 and now present in 15 African countries – is also a prime example of the emergence of a locally-owned pan-African bank.
This state of affairs raises a number of questions. What were the key factors driving the development of private African banking groups in a sector long dominated by state-owned banks and foreign-owned private operators? How the emergence of this new type of player impacted the banking landscape? And, more generally, what are the growth prospects for the African banking sector today?
The rise of private pan-African banking groups
The banking crisis that hit Central and Western Africa from the late 1980s through to the mid-1990s prompted the gradual decline of the state-owned banks. The catastrophic management of many of these institutions – largely due to their lack of independence from the political authorities (Nellis, 2005) – was a major contributory factor in their downfall. In many cases these banks’ directors, appointed by local governments, lacked the necessary expertise to manage their institutions and had very limited room for manoeuvre when it came to resisting political pressure. These public banks were largely used to finance the existing regime or to serve political objectives (financing electoral campaigns, financing lobbying, etc.). The deterioration in their operational and financial performance was therefore attributable to conflicting objectives – at once political and economic – and to poorly trained and inexperienced management personnel. When these banks closed they left a major vacuum, opening the way for the development of microfinance and then, in a second phase, of the privately-owned pan-African banks. State bank privatisations offered strategic acquisition opportunities to local investors. Although this wave of privatisations reached its peak in the early 1990s, it continues today – as evidenced by recent examples in Togo, Mali, Côte d’Ivoire and the Banques Régionales de Solidarité (BRS) network in West Africa.
The banking crisis of the 1990s affected the performance of foreign-owned private banks operating in Africa – and at the same time created conditions in which locally-owned private banking groups could thrive. Provoked in part by an accumulation of payment arrears (primarily on the part of state operators), the crisis prompted some private banking institutions to restructure their operations. It also weakened their confidence in African markets to some extent. This was the case with Société Générale, which had to restructure Société Générale de Banques de Côte d’Ivoire and Société Générale de Banques au Cameroun, with Standard Chartered Bank, which had difficulties with its Cameroon subsidiary in the 1990s, and also with Crédit Agricole and Crédit Lyonnais, which finally sold their African network in 2010. The difficulties encountered by non-African-owned private institutions led the European banks to adopt ultra-prudent strategies, leading to limited growth rates and a consequential loss of market share (Kouassi-Olson and Lefilleur, 2013). In some cases these banks quite simply withdrew from African markets – as was the case with Crédit Agricole, Belgolaise (owned by the Fortis group) and BNP in Togo and Cameroon. As international private banks withdrew, or proceeded with great caution, this created new and attractive business opportunities for private banks in African ownership. Thus Attijari Wafa Bank was able to acquire all the Crédit Lyonnais/Crédit Agricole subsidiaries, and Ecobank and BOA were able to emerge from their base in francophone Africa, capturing market share from the European banks.
Regional competition develops
Ecobank and BOA were the trailblazers – followed by a wave of emerging private African banking groups, operating in various countries, which has gathered momentum with the recent expansion of the Nigerian banks (GT Bank, UBA, Zenith Bank, Access Bank) and of smaller-scale regional banks (BGFI Bank, Oragroup, Afriland First Bank I&M, Equity Bank, Kenya Commercial Bank, BancABC, etc.). This trend reflects a degree of industrialisation and standardisation in banking services which has enabled banks to benefit from economies of scale. Competition in the industry today is cross-border and pan-African, playing out at regional level. Unlike those banks operating within individual national markets, the pan-African banking groups are able to offset losses recorded by their subsidiaries in some countries against profits generated in other markets. It is becoming very difficult for national banks to compete with these regional players – giving them a strong incentive to forge cross-border alliances themselves. Yet cross-border strategies still remain underdeveloped in many cases. In Ghana, for example, most local banks have not formed cross-border partnerships with banks of the UEMOA (West African Economic and Monetary Union) zone – even though Ghana is surrounded by countries belonging to this grouping.
Yet the regionalisation of competition is a major challenge for Africa’s banking sector. The limited size of African markets and the difficulty of implementing standardised strategies across different national markets increase the entry costs for each individual market. Knowledge of the local context, ability to adapt and capacity to build local connections are key factors driving the successful emergence of a pan-African banking group. In this respect the local banking groups – especially when they have a dual anglophone/francophone culture, as was the case with Ecobank – have a major advantage over European banking groups. Although some banks have expanded successfully (Ecobank, BOA, Attijari Wafa and more recently Oragoup, for example), others have not met with the same degree of success. In the mid-1990s, Zambia-based Meridien Bank was a strong performer when operating in Zambia, Rwanda and Burundi – but collapsed a few years after acquiring the French group Banque Internationale pour l’Afrique Occidentale. Access Bank, a Nigerian bank, recently announced its withdrawal from several West African countries. United Bank for Africa, also Nigerian, is finding it hard to get its business off the ground in francophone Africa. The group Banque Atlantique, despite establishing subsidiaries in several UEMOA markets in quick succession, ran into management problems which forced it to sell a 50% stake in the business to Banque Populaire du Maroc.
The role of African directors
The directors of African banking institutions play a key role. There is no doubt at all that the vision and enthusiasm of Paul Derremeaux, Arnold Ekpe and Paul Fokkam have played a critical role in the success of BOA group, Ecobank and Afriland First Bank respectively. If Société Générale has continued to invest in Africa – and it is one of the few international banks to have a clear, positive strategy for the continent – this is in large measure thanks to Jean-Louis Mattei. More recently, Patrick Mestrallet set Oragroup on a path to growth after the bank sold a majority shareholding to the Emerging Capital Partners fund.
These directors have successfully managed a situation in which the availability of qualified personnel is relatively low. They have surrounded themselves with highly competent colleagues – especially in the top management tier of group subsidiaries – who have maintained a high level of management quality and introduced efficient IT systems and effective internal controls. Ecobank and BOA have appointed African managers to key management positions – rather than non-African managers, as is generally the case with the European banks – and have encouraged management mobility between subsidiaries. This has facilitated the development of a strong corporate culture – an undoubted advantage in a competitive sector where employee turnover is high. These banks – led by managers who are better connected locally and more in tune with local realities – have a more pragmatic approach to local markets.
The directors of BOA and Ecobank were also quick to understand the importance of regional integration and have successfully developed an appropriate organisational structure. Rather than following the star-shaped organisational model adopted by the French banks in Africa – where subsidiaries communicate primarily with the parent organisation rather than with other subsidiaries in the region – BOA and Ecobank have opted for a network-style organisation which encourages interactions between group subsidiaries. This has led to the shared management of various functions, including cash management – in turn facilitating the growth of cross-border syndication. Moreover the network-style organisation has generated significant economies of scale – reducing both structural and refinancing costs. Regional integration also offers cross-border groups in Africa the opportunity to diversify their portfolio by operating in countries with diverse economic situations and growth prospects driven by diverse factors (different natural resources and different industries). This portfolio diversification enables cross-border groups to offset specific investments which may entail high levels of risk – but which are necessary nonetheless in order to expand their business. Thanks to their lower level of risk aversion these cross-border groups help to widen access to banking services and increase competition in Africa, reducing the costs of the services they offer.
Private, locally-owned African groups are now an established element of the African banking landscape – an industry in which competition will increasingly play out at regional or indeed continental level. Banks operating only within a single national market will find it difficult to compete successfully with the regional groups. They will need to consider partnerships with other banks, creating a cross-border network. The relative importance of the different groups may change over time – a process driven largely by the directors at their helm. The way the sector evolves will also depend on European banks’ interest in the African market – an interest that seems to be growing again now that the prospects for medium-term growth are good. We can, therefore, anticipate an increase in overall competition – which will benefit customers by delivering a more diversified, lower-cost financial services offering.
The rapid development of cross-border banking services in Africa does also present significant risks. Supervising cross-border banking groups, for example, is more complex than monitoring banks operating within a single national market. This oversight needs to be universal, requiring collaboration between the supervisory authorities. In the absence of overall supervision and the sharing of information between different supervisory authorities, Meridien group – for example – was able to conceal its difficulties by moving funds from one subsidiary to another. The quality of banking supervision and regulation in Africa remains well below international standards (Salah and Rajhi, 2012). A robust risk assessment and management system needs to be established, as a matter of urgency, in order to protect financial institutions from the risk of failure. The adoption and implementation of the Basel framework is a major challenge for the African regulatory authorities. Although some countries are leading the way – South Africa, Morocco and Uganda, for example – most countries on the continent still have a very long road to travel.
References / Kouassi-Olson, L., and Lefilleur, J., 2013. Supporting the emergence of a sustainable financial sector in Africa, Proparco publication – Private Sector & Development, 16. / Nellis, J., 2005. The Evolution of Enterprise Reform in Africa: from State-owned Enterprises to Private Participation in Infrastructure—and Back?, ESMAP Technical Paper no. 084, World Bank / Salah, H., and Rajhi, T., 2012. Vers une nouvelle approche de la supervision bancaire en Afrique [Towards a new approach to banking supervision in Africa], Chief Economist Complex, Vol. 3, Issue 6, December 2012, African Development Bank Group.