Challenges Facing the Banking Industry in African Countries Do - - PowerPoint PPT Presentation

Challenges Facing the Banking Industry in African Countries

“Do banks have the right lending and risk policies, credit processes and skills in place to advance banking development?” Chris Newson

17th February 2020

Giving Context to African Banking

African banking markets are diverse…

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Multispeed continent

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Size of markets matters − large banks in SA, Nigeria, Kenya vs rest of Sub-Saharan Africa

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Retail vs wholesale markets-not just about Retail growth

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Emergence of regional banking groups vs domestic champions with mixed results

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Banking infrastructure development varies widely

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Funding pools – interbank liquidity, pension reform, capital markets

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Shallow financial depth/low banking penetration (66% of African people unbanked or Retail banking penetration is just 38% of GDP, half global EM average) – fit for purpose

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Regulations and their development impact on financial inclusion

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Digitisation and technology adoption varies

3 Challenges facing African banks

Yet there is a high concentration of assets

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Top 5 countries represent 70% of total banking assets

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65% of profitability (ROE) and 94% of revenue growth is seen as being driven by specific geography

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Rest of the markets are fragmented; which is indicative of the prevalence of low income levels in many countries

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Challenge of building scale vs a balanced portfolio

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SSA financial inclusion lags Asia, Latam….65% SSA unbanked

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Emergence of regional banking groups vs domestic champions

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Lack of diversity in a number of economies

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Sovereigns crowding-out private sector (inverted yield curve on T-Bills)

4 Challenges facing African banks

However, African banking markets are fast-growing and profitable

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Achieving second-fastest growth of banking sector vs global peers; but remains a small market in global terms

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Banking market revenues valued at USD 86 billion in 2017, but expected to grow by 50% in five years

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Impact of volatile currency markets – could halve expected growth

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Margins 6.8% African banks vs 3.8% global

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Average ROE at 15% is second only to LATAM region and compares to global returns of 8-10%. However a significant %

• f banks are not delivering ROE > COE

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Notably average cost to assets ratio of 3.6% among African banks is considered high in global terms

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McKinsey study for period 2011-2016 indicated no trade-off between profitability and growth …

5 Challenges facing African banks

Challenges facing African banks

Comparing SSA top performers vs laggards

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Performance Indicators (Sector average) Top Quartile Banks Fourth Quartile Banks Revenue Growth 23% 9% Return on Equity 37% 9% Cost-to-income Ratio 40% 57% Credit Loss Ratio 1.1% 2.2%

Divergence is significant

Other realities impacting banking development

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Cash remains king! 90% of transactions in African countries still cash-based

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Lack of banking infrastructure – ATMs, branch network, POS terminals (distribution capacity issues)

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Prevalence of short-dated, illiquid and costly domestic funding markets – maturity and currency mismatches

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Global capital has choices - mobile

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SO… given market dynamics – high cost to asset ratios, challengers, scalability from digitisation, onerous and changing regulation – the need for continued structural transformation is obvious

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Specifically focus on approach and skills gap across:

• Credit and risk
• Infrastructure
• Governance

7 Challenges facing SSA banks

Credit Extension: SSA banks continue to lag global peers, but opportunities abound

The lag…

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Cost of risk and NPLs remain relatively high

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• Avg. loans to deposits ratio: Global > 100% vs SSA <

75%

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SSA customers with access to loans – < 20%

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Banks are largely risk averse – focus on lending to the corporate segment + Govt crowding out

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Pricing of risk is imperfect. Perceived vs real risk

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Missing segment – lack of credit provision to the retail and SME markets.

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Term lending tough to fund in many markets

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Concentration risks within lending books – need for diversification and scale

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Credit bureaux and data collection processes still need development in most markets

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No effective national ID in some countries – AML/KYC requirements

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Foreclosure process cumbersome – impact on cost and availability of credit

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The opportunities

❑ Credit bureaux play an important role in lowering the cost of credit and its availability ❑ Closing the mismatch (term + currency).Capital market development ❑ Risk sharing. Alternative providers of funding/capital ❑ Credit scoring leads to development of innovation in credit provision ❑ Advancement in machine learning ❑ Innovations include behavioural/data-based credit and payroll lending ❑ Digitisation can translate to significant advancement in efficiencies (cost + turnaround times+access) ❑ Embracing the power of partnerships - Fintechs ❑ Clear target market definition and product design, significantly enhance success ❑ Development of fit for purpose processes

Challenges facing SSA banks

Credit and risk processes need further transformation

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Banks require increasing levels of regulatory and/or growth capital- cost and supply

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Bank’s risk appetites are aligned to the dictates of capital

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Development of regulations to support banking markets- capital regs, interest rate caps, KYC, digital marketplace, treating customers fairly, banking ombudsman….

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Reduce possible arbitrage between sectors e.g. telcos vs banks vs non bank financials

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Focus on localisation of policies and processes but leverage best practice – Think global but act local!

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Development of legal, regulatory and supervisory framework

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Enhances credit recovery process and NPL resolution

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Leads to lower cost of credit and risk and increased appetite

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Transformational role of technology. Productivity and distribution

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Turnaround speed/accessibility- key differentiator

9 Challenges facing SSA banks

The importance of developing infrastructure to advance banking development

The banking infrastructure gap: how can banks help close it?

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Enhanced interoperability (domestic vs cross border).Shared infrastructure

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Developing payments systems, corresponding banking relationships…..

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Need for government support critical to an enabling environment

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Sustainability- economic, environmental, social…..

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Infrastructure challenge generally not money, but rather feasible projects

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Cloud based banking - blockchain, technology leapfrog

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Value of development finance - Term, Capacity building + gap financing

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Realities of embedded FX risks with most LT financing

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Size does matter particularly for large projects

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Developed world best practice vs local solutions

Challenges facing SSA banks 10

The importance of enhanced Governance to banking development

▪ Governance is a culture more than a process ▪ Governance not just a government/regulatory responsibility ▪ Poor governance has a very tangible price. ▪ Without trust and integrity banks have to “incentivise” clients ▪ Poor governance has a very tangible price. ▪ Accountability + Discipline in execution ▪ Well-functioning banking sector leads to stability and growth ▪ Multi-jurisdiction organisations have to find appropriate cross-border operating models ▪ Compliance complexity – home vs host ▪ Diversity and independence of skills imperative, particularly at Board levels

Challenges facing SSA banks 11

Is there a skills gap inhibiting banking development in Africa?

▪ Divergence of performance suggests that there are the skills just not enough thereof ▪ World class innovators in certain areas ▪ Banks and financial institutions need to take ownership – development of own talent and support 3rd parties ▪ Creation of learning organisations ▪ Partnerships – banks should not strive to be all things to all people ▪ Execution is everything! ▪ Capacity building within the ecosystems including governments ▪ Value of experience – offshore solutions valuable BUT… ▪ …time and time again the sustainable solutions are locally driven

Challenges facing SSA banks

There are those who are getting this right in whole or in part

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Thank You