Fintechs and “neobanks” aim to bridge the continent’s banking divide

Like banks around the world, those in Africa had to go through the worst economic crisis in living memory as the Covid pandemic spread globally. The continent as a whole has suffered its deepest recession in at least half a century, although the picture varies greatly from economy to economy.

In total, the GDP of South Africa, Nigeria, Morocco and Kenya – Africa’s four largest banking centers – fell by around 6% in 2020, pushing corporate borrowers into distress and forcing banks to increase their provisions for bad debts.

And, with highly vaccinated Western countries struggling to tackle the new Omicron variant of the virus, African economies – where vaccination rates in most countries are below 10% – seem certain to be hit the hardest and most likely to be hit hardest. recover more slowly.

Unlike richer countries, where central banks bought back debt and governments funded generous leave programs, banks in Africa – with the exception of a few countries like Morocco and South Africa – had to do rider alone.


Overall GDP decline in South Africa, Nigeria, Morocco and Kenya – Africa’s four largest banking centers – in 2020

“Most African countries do not have the possibility of developing from a monetary and fiscal point of view like other countries do”, declares Alain Nkontchou, president of Ecobank, a pan-African lender based in Togo and present. in 36 countries.

But, despite a challenging macroeconomic environment, a McKinsey analysis suggests that average returns on equity for African banks have held up relatively well.

In developed markets around the world, it indicates that the average ROE will fall below 1.5% in 2021, from levels of around 9% before the crisis. In Africa, by contrast, banks’ ROE fell 50% more modestly, from an average of 14% in 2019 to around 7% in 2020.

Depending on the pace of the economic recovery, McKinsey predicts that African banks’ ROE could return to pre-crisis levels within three years.

“There is no doubt that Basel III gave birth to healthier and stronger banks,” said Sim Tshabalala, Managing Director of Standard Bank, referring to Basel’s international banking regulations. “This has certainly been the case in South Africa and the African continent, with the result that, although there was a massive shock inflicted by Covid, the banks came out well capitalized.”

However, the survival of the banks came at a cost for businesses on the continent, especially the smaller ones, which often struggled to borrow. Even when they can, loan rates are generally prohibitive.

“What’s depressing is that most banks have restricted lending to the private sector and bought up public debt as deficits widen,” said David Cowan, chief economist for Africa at Citibank. . “In terms of economic development, it’s not very good.

But, while traditional banks have folded, a plethora of fintechs, so-called “neobanks” and non-traditional financial services firms have expanded their business during a pandemic and accelerated the shift to online services.

“The landscape is changing rapidly,” says Yvonne Ike, Head of Sub-Saharan Africa at Bank of America. She notes the structural changes catalyzed by technology as well as the push by mobile money providers and algorithmic lenders to expand financial inclusion.

“Technology is literally the most important driver of change in financial services,” she says. “Commercial banks are struggling to maintain their leadership role and they are challenged by mobile network operators and fintech companies. Things are definitely moving away from the traditional business banking model. “

In a recent sign of change, in November the central bank of Nigeria gave provisional approval to MTN of South Africa and Airtel of India to operate payment service banks in the country. This change opens up a market of nearly 40 million unbanked Nigerians to the respective payment platforms of the telecommunications giants: MoMo and Smartcash.

“The definitive operating license will allow us to reach the millions of Nigerians who do not have access to traditional financial services,” said Segun Ogunsanya, CEO of Airtel Africa.

Local telecom operators Glo and 9mobile already have licenses. Even large commercial banks, like Access and FirstBank, have a network of tens of thousands of agents to replace traditional bank branches in areas of the country with high unbanked rates.

Neobanks, which operate entirely online, have also proliferated, although none have reached the scale of Brazil’s Nubank, which is becoming Latin America’s most valuable financial group with a valuation of nearly $ 50 billion. after its IPO in New York this month.

Still, a number of Africa-focused neobanks are making headway. In August, Kuda Bank, a London-based start-up operating in Nigeria, where it has 1.4 million registered users, raised $ 55 million in a funding round, valuing the company at 500. millions of dollars.

Other examples include Carbon, a Nigerian fintech with a microfinance banking license, and TymeBank, a South African neobank that has raised $ 110 million this year to finance its expansion in the Philippines.

Likewise, services such as PiggyVest, a Nigerian savings app, and payments companies, such as Paystack and Flutterwave – a fintech ‘unicorn’ with a market cap of over $ 1 billion – are booming. .

“I’m a big fan of fintech,” says Makhtar Diop, managing director of the International Finance Corporation, the commercial arm of the World Bank. “Fintech would really be what allows us to be able to deliver to more people in the economic process. We have seen the impact we have had in a country like Kenya with M-Pesa, ”he adds, referring to the Kenyan mobile money service. “Today we are witnessing innovation in fintech in Nigeria.”

Bank of America’s Ike Says Another Challenge for traditional banks is the squeeze of currencies in many markets. This constraint has encouraged the widespread use of cryptocurrencies as companies attempt to circumvent the restrictions. Nigerians are among the world’s largest users of cryptocurrencies such as Bitcoin, despite a central bank ban on their use by banks and financial institutions since February.

Today the Nigerian government is showing signs of a will to act. Its central bank recently became the first in Africa to launch a digital currency, eNaira, although the precise details of its scope – including whether it is easily convertible into physical naira – remain unclear.

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Standard Bank’s Tshabalala says telecom operators, fintechs and neobanks won’t have everything in their own way. “Fintechs are discovering financial services to be a large-scale business, requiring vast resources,” he says. “The moment you start to deal with the fight against money laundering, terrorist financing and comply. . . it requires a lot of risk managers, a lot of resources. Banks are particularly good at this, unlike fintechs and telecommunications operators. “

However, Standard Bank recently decided to partner with Flutterwave to offer digital payment services, a sign that the different models could eventually converge.

The landscape is also changing in other ways. Moroccan banks, among the largest on the continent, have established themselves aggressively in West Africa, in part in search of faster economic growth that their national market lacks. Egyptian banks such as Commercial International Bank, a private lender, have dipped their foot in Kenya. South African banks are also moving north.

Despite all this, foreign banks including Barclays, Credit Suisse and Deutsche and UBS have chosen to reduce their exposure to Africa. Henry Wazne of Sofibanque, a private bank in the Democratic Republic of Congo, attributes this to a misperception of African regulatory risk on issues such as illicit money flows. “Because of compliance and due diligence, you have to shrink some accounts,” he says. “And so they cut Africa off.”

Tshabalala questions this reluctance of large foreign players, arguing that the African continental free trade area, which entered into force this year, has revitalized the cause of major continental banks. “If you want to take advantage of the flow of capital, goods, people and ideas, it will make sense that you have a pan-African proposal,” he suggests.

Regulation always makes this difficult, with most national regulators insisting that capital and, increasingly, data is confined to the sovereign level. Despite this, Tshabalala says obstacles can be overcome through technologies such as cloud computing as well as through persuasion.

“I think it’s important for us to get involved [regulators] and continue the engagement to show them why this is important for Africa’s competitive advantage, ”he said of the case for transparent cross-border banking. “Our African regulators are rational. . . So I am not discouraged.

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