Unlocking the potential of Africa
The potential of new technologies to transform financial services in Africa has long been heralded by the likes of Kenya’s M-Pesa and others.
But services for corporates have remained relatively under served – until now. From the sands of the Sahara in the north to the Limpopo river which marks the border with South Africa to the south, economic, political and technological changes are emerging that favour new opportunities for banks.
Excluding South Africa and the Arab-Berber countries of North Africa, the continent is home to 880 million inhabitants. Most senior financial services executives that have dealt with the region are familiar with the low penetration of bank accounts across much of the continent. They are also aware of the widespread adoption of mobile phones in virtually every country. For example, 57% of the population in Uganda had a mobile phone subscription in June 2014, while in Zimbabwe the figure is 97%, and in Ghana in West Africa it is 110%, according to figures provided by the World Cellular Information Service.
However, what is less known is the increasing impact of the technology on the corporate side – affecting not just individual consumers, but companies, institutions and even governments. Giant US corporation Cargill is a significant African corporate investor. The company is active across Africa offering cotton and maize smallholder farmers a range of services, including crop inputs, fertilizer and seeds. It has around 4,000 employees based in 10 countries: Algeria, Côte d’Ivoire, Egypt, Kenya, Ghana, Morocco, Mozambique, South Africa, Zambia and Zimbabwe. The company also trades in energy, steel and transport, and supports businesses raising livestock and producing feed, producing food ingredients, for processed foods and industrial use. It also has a large financial services arm which manages financial risks in the commodity markets. Cargill is currently working with Barclays on a pilot project in Zambia to pay farmers for their cotton and maize crops using mobile phone technology. The system is designed to offer more secure payments for farmers and to reduce the risks of carrying physical cash.
“Regulators have helped by having clear guidelines in place, and it is an open environment, meaning that authorities are often open to new players that may not be the traditional banks,” said John Owens, senior policy advisor, digital financial services and financial inclusion policies at the Alliance for Financial Inclusion. “At the same time, public and private uptake of mobile is increasing and there’s an opportunity to leapfrog the traditional brick and mortar services by mobile. How do you connect with people spread out remotely? There are no ATMs and branches, and the cost to put in that kind of infrastructure is quite challenging. Mobile gets around that. Electronic money is an important channel and opportunity for basic transfers and payments. It brings more people into the fold than anything else.”
Barclays is also working with the United Nations in Uganda to disburse salary payments via mobile, which the bank says is a necessary and helpful tool to ensure payments reach more remote areas effectively. The development of mobile wallets in sub-Saharan Africa has a real potential to affect consumer’s lives according to both the bank and its customers. For example, Cargill says it has invested in businesses including cocoa, grain and oilseeds, cotton, food ingredients and animal nutrition that “support African farmers and local agriculture and enable us to provide products and services to customers across the continent and around the world.” In addition, the US corporation says it has partnered with international and local organisations to help improve the education, health and livelihoods of African communities through better access to schools, basic healthcare, clean water and nutrition.
In the recent past, concerns have been raised among the banking industry that the rise of quicker, nimbler firms such as PayPal and micro-lending companies together with the proliferation of mobile devices might conspire to disintermediate traditional banks. The fears were originally stoked by the rise of examples such as M-Pesa, which was owned by telecoms operators Safaricom and Vodafone. However, today banks are just as likely to benefit. For example, Commercial Bank of Africa partnered with Safaricom’s M-Shwari business, which offers a savings account to customers of M-Pesa. The service initially had just 35,000 customers. Within less than a year, the service opened seven million new accounts and became the biggest provider in Kenya.
“They couldn’t have done it without the bank partnering in the background,” said Owens. “Banks are not being disintermediated. Each player has a role. Financial services are being unbundled. Those services are often sold by one firm together with branding, but actually when you look closer you find there is a bank behind it.”
The sense that banks have a role to play is shared by Barclays, which operates in Ghana, Kenya, Uganda, Tanzania, Zambia, Mozambique, Zimbabwe, Botswana and the islands Mauritius and Seychelles. Part of the appeal of investing in Africa is the higher returns available compared to the developed world. For example, Chris Kotze, head of corporate transactional services at Barclays Africa estimates that GDP growth can be up to four times higher – around 7-14% in some countries – compared to around 3% at best in the developed markets. He added that intra-Africa trade is picking up. Previously, much of the region’s imports and exports were traded with Europe and India or China. But now African countries are starting to trade a lot more with each other, which creates opportunities to grow the market.
Kotze is responsible for transaction services to corporate clients, which include services such as payments, collections and loans, as well as short term investments, trade finance, letters of credit, guarantees and supply finance. He acknowledges that the level of bank sophistication in these different markets varies widely. For example, only around 81 million adults from a population of 880 million use financial services of any sort, according to research by McKinsey.
In markets such as Kenya, there is a well-developed banking system with perhaps 20 competitive banks and 100 in total, but smaller countries such as Botswana typically feature less competition and many processes are cash-centric and paper based. Retailers have a strong need for physical cash collection and disbursement at the store level, and a lot of trading still happens in cash.
Kotze notes that Kenya is starting to see more card transactions, but card penetration remains low in most places, including countries such as Uganda and Tanzania.
“At this stage a lot of clients are still using electronic banking more to view important balances and a lot of payments happen by cash and cheque still,” he said. “When a corporate is interacting with a bank, a lot of the payments still happen very manually, either through a fax being sent to a bank to process a payment on their behalf, or physical cheques being used to make those payments. Even where we have electronic banking in countries like Tanzania, STP rates are low so you get a file being submitted via electronic banking capabilities and when it reaches some of those banks they physically print it out and then manually process the transactions. It’s a physical environment, both on the client side and the bank side.”
Part of the challenge for much of Africa is the relative lack of infrastructure such as roads, railways, communications and power supplies in many of these countries, which make it difficult and expensive to establish a viable traditional banking network. In addition, Barclays notes that some countries in Africa are very heavily involved in import and export business, while others are much more protected and don’t have advanced trading capabilities.
“Infrastructure remains one of the key constraints,” said Kotze. “Basic infrastructure like roads and railways don’t always exist. It’s sometimes very difficult if you manufacture goods in a certain part of the country to get them delivered and get them to export markets. From a technology perspective, the stability of telecoms infrastructure, the access to bandwidth and even the ability to get electricity and other power supplies to all areas and for it to be very reliable remain key constraints. The very heavy reliance on physical cash is also sometimes a constraint, especially given the difficulty of moving between different areas of the country.”
Fortunately, there are signs of positive change. The Alliance for Financial Inclusion is currently working with regulators and policymakers in an effort to promote access to financial services in Africa. To that end, it has a project called the African Mobile Phone Policy Initiative. According to Owens, the standard of regulation has changed dramatically in the last five years, as several countries introduced policies that support the development of mobile financial services. While he acknowledges that in some countries, “If you want to send money you give it to a bus driver and hope it gets through,” Owens also notes that Tanzania is now surpassing Kenya in terms of mobile money by monthly volume. “Africa is leading this mobile push, and Tanzania, Kenya and Uganda are the top three countries in the region,” he said.
According to telecoms body the GSMA there are nine African countries where there are now more e-money accounts than traditional bank accounts: these are Cameroon, the DRC, Gabon, Kenya, Madagascar, Tanzania, Uganda, Zambia and Zimbabwe. That compares to just four in 2012.
Optimism about the political and regulatory environment is also shared by some of the major banks as African countries abandon the economic policies of the past. “From a risk perspective a lot of these countries have stabilised their economies, they’ve got much better control of their macroeconomic and fiscal policies and are more in line with what you would expect from an IMF perspective,” said Kotze. “They are driving a much more capital-positive approach. We’ve also seen a massive improvement in the stability of the political environment in a lot of those countries. It’s much better than it was five years ago.”
Kotze added that government cooperation initiatives are also playing a role. The revenue authorities in Zambia, Zimbabwe, Kenya, Botswana and Tanzania have already begun working together to improve the efficiency of tax collection and governance. The advantage is that by encouraging corporates to submit payments electronically via government websites, these governments are effectively spreading e-filing. Meanwhile in South Africa, the revenue authorities have begun representing other governments in sub-Saharan Africa helping them implement the technology, which has the added benefit of cutting down on fraud and driving up general standards of efficiency.
Problems still remain – for example, tackling and eliminating fraud remains a priority, and sophistication on cost accounting and methodologies in some countries is not yet at the level Barclays would like it to be. In some markets, banks charge more for electronic banking versus paper-based processes, which could hinder adoption. In addition, the political environment is not immune from problems. The African Union’s recent endorsement of immunity for serving heads of state and other senior government officials has been severely criticised by legal body the International Bar Association, on the grounds that it “generates perverse incentives for abusive leaders to remain in power so that they are shielded from prosecution”, while ignoring the danger that those responsible for crimes would receive the greatest protection from prosecution.
However, despite the challenges it seems clear that the nature of financial services provision in Africa is changing for the better. In the six member countries of the Central African Monetary and Economic Union, French bank Société Générale is playing a major role in rolling out physical cash pooling, which enables clients to keep track of cash, pooling liquidity and reducing inactive cash positions. Initial roll-out will be in Cameroon. Meanwhile, the bank has also launched a global foreign exchange offering which aims to cover “exotic” currencies. Users will know in advance the exact amount that will be transferred into the relevant currencies in Africa and forwarded to the intended supplier.
“Africa is a region of great promise for international investors, corporates and local enterprises,” said Pascal Augé, head of global transaction and payment services at Société Générale. “We recently launched an action plan to further develop our offerings in Africa.”
For Rweyunha Kazaura, director of transaction banking at Standard Chartered, the best encouragement is further advancement in African politics, combined with further development of mobile banking services. Pointing to the vision of a fully integrated Africa through the African Union, Kazaura suggests that regional economic blocks offer the prospect of greater integration and evolution of viable standards that could form the basis of a successful move towards mobile banking across Africa.
“Free trade areas, ease of cross-border immigration, and even political and defence pacts between members of the West African Union, the East African Community and the SADC give comfort to the investor,” said Kazaura. “Within these regional blocks, some countries are drafting interoperable systems through their central banks, so that telcos won’t necessarily hold an exclusive position in each country. Moving forward, we have to look at these intergovernmental strategic partnerships as part of the picture.”