The transformation of Africa’s financial sector

by Johan Burger

STATE-OWNED BANK IN SOUTH AFRICA IN DIRE STRAITS

The government-owned Land Bank in South Africa provides 28% of its agricultural debt to emerging and established farmers. Sadly, the operational performance of the Land Bank has gone from bad to worse as its financial losses grew by 211% to R2.8 billion (±US$191 million) for the financial year ending 31 March 2020, compared with a loss of R902 million (±US$62 million) for the 2019 financial year. Its non-performing loans almost doubled to 18.1% from 9.6% in 2019. The Land Bank’s cash reserves fell nearly 80% to R700 million (US$48 million), down from R3.2 billion (±US$219 million) in 2019. Its capital adequacy ratio (without financial support from the government) is fell to 4.2% from 9% in 2019. Even with the R3 billion (±US$205 million) government bail-out package in September 2020, the bank’s capital adequacy ratio fell to 9.3% from 14.3%.

Even worse, the Auditor-General’s office cast doubt on its ability to survive for the foreseeable future or continue trading as a going concern. The Auditor-General could not obtain enough evidence to sign off the accounts with a clean bill of health. The Auditor-General was also concerned about the lack of internal control measures by Land Bank management to properly account for credit losses or impairments related to farmers' extended loans.

This ongoing Land Bank crisis intensified in 2020 when capital payments on a R45 billion (US$3.1 billion) debt load became due to its lenders. The financially-challenged Bank could not service these payments and suspended the extension of new loans to its agricultural clients.

The Land Bank’s financial problems are reportedly caused by “an exodus of executives, lack of oversight from the National Treasury (representing the SA government as the bank’s sole shareholder), junk downgrades of its credit rating by Moody’s, and drought conditions which have made it difficult for farmers to pay back their loans.”^[1]

POINT OF INTEREST

• South Africa’s Land Bank has been poorly managed, with senior executives coming and going. It provides an excellent case of how not to run a bank. It is also a clear indication that governments should not be running private enterprises. It is also not the only state-owned enterprise in South Africa that weak management has run into the ground. Others include Eskom (electricity supplier), SAA (national airline), Denel (arms manufacturer), Post Office, SABC (broadcaster), Transnet, and South African National Roads Agency (SANRAL), to name but a few.
  

FINTECHS AND THE BANKING SECTOR NEED TO MOVE CLOSER

Nvalaye Kourouma, head of Ecobank’s Digital Channels and Innovation group, observes that only the most agile players benefitted from the accelerated digital transformation brought about by Covid-19. He believes only those African banks that adapted quickly to the uncertainty due to the pandemic benefitted from the shift in customer preference from traditional banks to digital financial services. Kourouma feels that while most banks knew that the conventional bricks-and-mortar model was unsustainable, not all could take advantage of the turmoil to transform digitally.

While bank regulators created an environment for banks to lead in flexible payments and other areas, Kourouma urged banks to use all the digital technologies to which they had access to improve the customer experience. Titi Odunfa Adeoye, MD of Sankore Investments, notes that fintechs now show banks what can be done in customer service. While the debate once centred on whether fintechs were going to put banks out of business, this did not occur. The entire fintech industry in Nigeria contributes less than 1% of the retail banks’ revenue. Adeoye believes the more exciting and relevant subsectors of fintech, “such as regtech, tools and data,” have yet to be addressed.

Adeoye points out that half a billion dollars poured into the fintech space over the last three years, which led to a significant impact on the market in terms of capacity, use, and technology reliability. Some banks will partner with fintechs, benefit from their capacity and leverage the public trust in these platforms. These banks will have a profound effect on the industry.

According to Wayne Hennessy-Barrett, CEO of 4G Capital, which operates in 90 locations across Kenya and Uganda, there is not enough investment in the fintech industry to take it to the next level. While the IFC showed the sub-Saharan Africa financing gap remaining at US$331 billion, Hennessy-Barrett saw a growing sense of urgency to see fintechs, banks, and other players within the ecosystem come together to create an exponentially accelerated effort to close this financing gap.^[2]

POINT OF INTEREST

• The banking sector’s reaction to fintech companies, frequently from the telecoms sector, is fascinating. In the early days of the fintech revolution, banks condescendingly wrote them off as irrelevant. In Africa, however, fintechs grew to become dangerous alternatives to retail banks, who found themselves in the unenviable position of being faced with the threat of disintermediation. About five years ago, banks started taking mobile money seriously. They announced in the media how vital mobile money is as if they were the originators of this idea. Now we see a plea for fintechs and banks to move towards each other. This may not be in the best interest of the fintechs, as they would now fall within the bureaucratic rules of the formal banking establishment. Here, governance is the focus rather than customer service or flexibility. We now see banks creating separate digital banks as subsidiaries to target this market that has hitherto been the domain of telecoms companies that drove mobile money services to their millions of customers. This is because the digital bank's culture and mindset are significantly different from that of the formal banking sector. Banks would undoubtedly love to remove these fintechs as a threat to their business while obtaining access to their many millions of customers. Unfortunately, banking regulators would probably play a decisive role in paving the traditional banks' path toward gaining an advantage over the fintechs, at least in some markets.

BANK MERGERS IN TANZANIA

The generally profitable Tanzanian banking sector has recently experienced a wave of mergers. According to industry experts, Tanzania needed stronger banks to provide the financial services required to support its economic growth and development. While some banks have merged for business reasons, others have done so to meet the industry's regulatory minimum capital requirement.

Typical mergers involved the following: KCB Bank signed a deal with Atlas Mara Ltd and ABC Holding Ltd to acquire BancABC; Commercial Bank of Africa Tanzania Ltd (CBA) and NIC Bank Tanzania Ltd merged to form NCBA Bank; government-owned TIB Corporate Bank Ltd merged with TPB Bank; and Mwanga Community Bank Ltd, Hakika Microfinance Bank Ltd and EFC Microfinance Bank Ltd merged to form a new micro-finance bank known as Mwanga Hakika Microfinance Bank Ltd.

In addition to meeting the enhanced capital level, the merged banks would reach more clients due to an expanded network (more branches and alternative banking channels such as agent banking, ATMs, mobile money transfer services). They would reportedly have the opportunity to improve skills and service delivery and ultimately improve service to customers. The level of services also increased with mergers. TPB Bank, for example, extended its service offering from retail services to corporate banking after merging with TIB Corporate Bank.

The mergers created the potential challenge of increased costs to customers due to the possibility of creating monopolies, which could affect the pricing of products or services and reduce the quality of services. The loss of employment opportunities was also a possibility, which could create social challenges and reduced consumption. Should the larger merged entity fail, they would also have a more significant adverse effect on the economy.

Mergers with banks outside the country had not yet taken place as local banks could not attract FDI's. Commentators believe that going forward, more Tanzanian banks will look to expand their operations to other countries.^[3]

POINT OF INTEREST

• Bank mergers in East Africa are not new phenomena. In addition to those in Tanzania, many emerged in Kenya. Its Central Bank actually advised smaller banks with low market share to merge to avoid failure. This potential outcome is never good for a bank sector as it leads to mistrust of the formal sector and could lead to a run on even the healthy banks. As banks are heavily leveraged, even healthy banks cannot survive a run on deposits. Nigeria has also seen a significant number of mergers in the recent two decades. In addition to avoiding failure, some banks in the region are acquiring other banks in other countries to achieve a vision of becoming a Pan-African bank. Under the very competent leadership of Dr James Mwangi, Kenya's Equity Bank is such an example. What remains important is that countries have a strong banking sector to support economic growth.

PLATFORM BUSINESS MODELS FOR INSURERS

Africa’s insurance penetration is at a meagre 2.8% compared to the world’s average of 6.8%. In Kenya, penetration has decreased recently, and the GDP growth rate has outpaced insurance premiums. This situation exposes households and businesses to unforeseen shocks, such as those experienced during the Covid-19 pandemic. As most insurers in Kenya ignored the emerging customer segments, it has led to a shortage of customer-centric products targeted at this market. The Kenyan population has low awareness and understanding of insurance products.

The industry needs a creative new approach that would enable insurance companies to increase their client base and protect the underinsured. A platform business model may help achieve this goal. A platform business model refers to “economic activity (buying and selling) facilitated by digital platforms that connect inter-reliant groups such as providers and producers of services and products with users and consumers.”

In Africa, platforms like M-Tiba, Little Cabs and Twiga Foods have revolutionised the health, transport and agriculture sectors, respectively. They organised previously fragmented sectors

Platform models provide opportunities to financial service providers in general and insurers in particular. “Firstly, as aggregators they provide access to large groups, including emerging but underserved customers. Secondly, such platforms are an excellent source of demographic, financial and behavioural data that can support the design of relevant solutions. Finally, through technology, platforms can simplify key processes, making it easier and cost-effective to distribute insurance at scale.”

The industry needs several transformational changes to realise this potential. Insurance regulators need to make it easier for such platforms to offer services. Regulators should focus on consumer protection by ensuring that these platforms do not repeat predatory behaviour. Governments must step in because an increase in insurance penetration will protect vulnerable communities and develop capital markets to strengthen Africa’s financial sector. Platforms themselves need to be more open to insurance partnerships. Finally, insurers must design products and processes that suit the needs of the platform users.^[4]

POINT OF INTEREST

• The emergence of platform business models in Africa's financial services sector provides a fascinating window into the future. Platform business models gained prominence when corporations such as Apple, Amazon, Facebook, and Google adopted the model to fully utilise the technology at their disposal. Amazon, for example, began by selling books. Utilising a platform business model, it now sells physical products, professional and personal services, web services, and many more. African insurers do not need to reinvent the wheel, as they can emulate that which worked elsewhere. It is also not just the financial services sector that has been tapping into platform business models. While they did use electronic platforms, some farmers have actually used a physical platform such as a farm. For example, in the wine industry in South Africa, instead of only growing grapes and making wine, wine estate owners are now hosting restaurants, guest houses, industry events, weddings and conferences. Several also tap into the digital world by generating online sales and capturing data for use in marketing.