It’s March Madness and betting on U.S. college basketball games can be a tricky transaction. There are strong teams with potential that live up to expectations and many who never come close — a lot of surprise victories and losses for spectators and bettors or investors.
Some teams will shock you with an amazing performance in one quarter but fall flat in another quarter. Nothing is a sure bet. This line of thinking can best summarize banking in West and Central Africa.
The regional growth opportunity
A commodity decline is dulling the African economic shine, stirring up investment concerns in local and global markets. But the financial services sector deserves not to be wrapped up in the anxiety. The sector remains a key investment opportunity in the slow-growth times. As an integral part of economies, it provides broad access for investors to a consumer-focused expansion play, underlined by continuing income and consumption growth as well as urbanization.
A big country such as Nigeria is a perfect example of the diversity in growth strategies among banks. As some banks dived deeper into Africa’s largest economy for expansion opportunities, other banks have become worried by a commodity — and now currency — downturn. These vexed local banks and their foreign investors have turned further toward regional ambitions and the markets of neighboring West and Central African countries.
Nigerian banks began the consolidation and regional expansion process in 2004 when regulation significantly raised the minimum capital requirements. Today these banks and their West and Central African counterparts continue to evaluate new market prospects in neighboring countries based on a similar combination of prerequisites—big population, capital deficit for lending, a robust commodity market, and high economic growth.
Countries such as the Democratic Republic of the Congo and Ghana fit the mold of an intriguing regional market prospect with strong mining markets, high growth upside, growing populations and a capital-starved lending market. Local cash-strapped operators and entrepreneurs are the apparent investment opportunity in these markets in the short term. For example, supplying cash to the players in the logistics and transport sectors around natural resource mining and production taps into the growth.
In the long term, mobile money for West Africa remains the lucrative opportunity for banks, particularly as a way to access consumer spending. A sub-20 percent and sub-10 percent penetration rate for mobile money in Nigeria in Ghana respectively, according to an Ernest & Young report, underscore the early stage nature of this financial services subsector in West and Central Africa.
The regional growth opportunities are expensive endeavors for local players, regardless of the obvious upside in some countries. Cash must be poured into localizing brands, market integration and product offering. Consider mobile banking where the entry strategy differs significantly across sub-Saharan Africa.
Large mobile operators dominate the East African market. M-Pesa, as the best example, was launched in 2007 by Vodaphone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania respectively. In southern Africa, the big four-to-five banks partner with mobile and IT companies to get their service on the market. In West Africa, banks generally partner with mobile operators, who can equally partner with more than one bank.
Arguments exist on both sides about whether M-Pesa can be replicated because of the differing natures within the market structures. But penetration rates—Gabon, Sudan and Kenya with 50-percent-plus penetration rates compared to sub-30-percent rates in Tanzania, Uganda and Angola—suggest success is explained by more than Kenya giving Safaricom a less regulated path to becoming a financial provider (in addition to its mobile services).
The complaints from operators also show the diversity of challenges. South African operators in mobile finance claim expansion is expensive. West African operators in mobile finance argue that the markets are not integrated and operate with significant discord from each other. East African operators in mobile finance thank cross-border cooperation and information sharing among East Africa’s major players, such as Kenya and Tanzania. Altogether the branding, market entry and offering differentiation is not straightforward and begs significantly more efforts (in money and patience) than new entrants can expect. They have the time but not the money.
…and capital starved
The requirements of Basel III — a comprehensive set of reforms designed to improve regulation, supervision and risk management in the banking sector — weigh heavily on bank balance sheets in the region. Banks requiring capital infusions are opening their books and records to potential investors, particularly cash-laden private investment firms and Middle Eastern banks.
Mergers and aquisition deals in the space are estimated near $8 billion in the last five years. The low asset prices in 2016 should further encourage deals in this space. Tighter global regulations and changing global dynamics will also require more regional and sophisticated operations to achieve solid growth, of which foreign bank investors and operators can bring to the table.
Focus on the fundamentals
The commodities downturn and consequent slowing in growth instills fear in some investors. But the underlying fundamentals of West Africa and Central Africa are certainly positive indicators for the long term. Nearly one third of adults in West Africa have a bank account. Throw in a very young population (nearly 44 percent of West and Central Africa is 14 years old or younger). Mobile banking becomes a massive opportunity if you digest these demographics in the long term.
Technology upgrades and product diversification will become important to economic development — supporting small businesses and entrepreneurs — and financial inclusion (small money transfers and cash advances). As the thinking goes within boardrooms, the Africa banking terrain is fertile, and the seeds have been planted. Investors need only to bring the water and food for the long days in rising sun.
Author: Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.