Under-banked and under-insured

The banking sector in Africa is poised for take-off and is providing great growth opportunities to those organizations that are bold enough to climb aboard.  Up until recently, global major banks like Barclays and Standard Chartered have led the way but mostly through focusing on safer and high-margin activities in corporate and business banking. This has been very lucrative; the average return on capital in Africa is heading towards 25%, the highest rate available in the world.

Not much has been done to support the man-in-the-street. African-based banks and insurance companies with Pan-African ambitions have the potential to transform the lives of millions of consumers across the continent. Their identified markets are the under-banked sector, i.e. lower income people, and the under-insured, both areas are still relatively unexplored, apart from in South Africa.

Risk vs Reward

The faint-hearted or risk-averse companies need not apply. Reasons why global banks and insurance companies have not expanded at great speed into African countries has been because of political instability, economic disruption and over-regulation as well as perceived limited profit potential.

The former head of Barclays, Bob Diamond and the Ugandan entrepreneur Ashish Thakkar co-founded Atlas Mara in 2013. CEO John Vitalo said in an interview, “We’re building the premier sub-Saharan African financial institution by making a number of acquisitions to establish our geographic footprint, then will integrate and grow those acquisitions.”   So far Atlas Mara has operations in seven African countries, including Rwanda, Zimbabwe, Nigeria and Botswana. They have just announced their first profit for the last financial year at US$4.1m.

Pan-African initiatives

South African based banks still dominate the upper reaches of the Top 50 African banks table. Ecobank, with its origins in Togo, is the Pan African bank with the broadest geographical reach followed by the Standard Bank of South Africa which has the biggest asset base.  Nigerian banks figure highly also, the Central Bank of Nigeria and the First Bank of Nigeria are both present in more than 10 countries. Much of Nigeria’s growing population lacks access to basic banking services such as deposit and savings accounts, consumer and car loans, and credit.  Nigeria presents a huge banking opportunity for investors.

Five Kenyan banks are among the ten African banks with the highest return on assets. Kenya leads micro-lending (loans to small and medium enterprises) by value in Africa – higher than South Africa.  Its main business bank, Kenya Commercial Bank is expanding now into South Sudan.  Outside sub-Saharan Africa, banks from Morocco such as Attijariwafa Bank and some from Egypt are pursuing Pan-African strategies.

Technology

A big opportunity for the banks is using technology to obtain access to the under-banked: online banking, mobile money, cell phone banking. The telecommunications sector has been the leader in these innovations, developing the solutions for banks to implement, particularly in East Africa.

Kenya’s Safaricom launched the hugely successful M-Pesa mobile money transfer platform. M-Pesa now has more than 18 million active users, but Kenyans also use rival services such as Zap and yuCash. Equity Bank, Kenya’s largest bank by customer base, is hoping to provide some competition to M-Pesa to attract new customers and encourage more transactions.

The under-insured

The level of penetration of insurance in Africa is very low even in relatively affluent countries. Outside Southern Africa, only 1.5% of the population on average has insurance, one exception being Kenya which is an insurance success story at a coverage of >3%.  Some African countries with a large Muslim population may support Takaful, a risk management approach based on Shari’ah principles, which is not yet fully available. Insurance penetration in Ethiopia is <1%.

Insurance CEOs are seeing more opportunities in the industry than a few years ago. “The fact that people have a longer life expectancy and have more wealth to protect presents insurers with an opportunity,” says Victor Muguto, Long-Term Insurance Leader for PwC Africa.  Most insurers seem to be opting for low risk solutions such as joint ventures and alliances especially in heavily regulated countries rather than investing directly.

Micro-insurance is an opportunity for traditionally conservative insurers to enter the African markets.  It is a way to protect poor people against risk (accident, illness, funeral cover for death in the family, natural disasters, etc.) in exchange for low insurance premium payments.

Private Equity

As a result of a decline in perceived risks in Africa, the private equity sector is enjoying a mini-boom.  Consumer-focused businesses are attractive propositions especially telecoms and food production, and even financial services.

The consensus is that development in the financial services sector will come from the consumer and retail banking sectors where the projected growth is 15% year-on-year due to urbanization and a rapidly emerging middle class. The insurance sector is expected to follow suit, albeit at a slower rate.