Of the ZAR75 billion profit made by South African banks in 2015, ZAR9.1 billion went beyond South Africa’s borders into other African countries, according to EY’s South African Banking Review 2015.

Although mineral-rich African countries have been hit by very depressed commodity prices, the rest of the region’s earnings for banks outpaced local growth.

For Standard Bank – which has operations in 20 African countries – the continent continues to bring great opportunities for lending.

‘The drivers of growth on the continent are positive demographic trends and a growing middle class with greater disposable income,’ says Victor Williams, Standard Bank’s head of corporate and investment banking for rest of Africa.

‘Investments in infrastructure, energy and power are also enormously exciting.’

According to KPMG executive partner Sipho Malaba, the ‘big five’ South African banks are making significant moves in some West and East African countries, as well as Southern Africa.

‘With the right strategic initiatives, these banks will do well in sub-Saharan Africa since the banking penetration is quite low in these areas. Corporate lending has largely been successful due to a lower risk of default and the size of transactions executed.’

According to EY Africa’s financial services sector leader Andy Bates, Standard Bank and Barclays Africa – which have the largest portfolios outside South Africa – are also moving deeper into lucrative markets such as Nigeria – sub-Saharan Africa’s second-largest banking market.

As Standard Bank and Barclays Africa have been operating in Africa much longer than some of the other banks, they have the edge in a few markets. There are also rising prospects in some countries that make up the East African Community – Kenya, Tanzania, Uganda and Rwanda – helped by increasing synergy.

‘A commitment to ease trade between these countries is a strong drawcard for business, including banks,’ says Bates.

Malaba agrees that despite difficult times, sub-Saharan Africa is ripe with possibility. Economic growth was down at around 3.7% in 2015, compared to 4.6% in 2014, but is expected to rise in 2016 and 2017.

Although mineral-rich African countries have been hit by depressed commodity prices, the rest of the region’s earnings for banks outpaced local growth

A recent report by the World Bank states: ‘The increase will be driven by domestic demand, supported by continuing infrastructure investment and private consumption fuelled by lower oil prices. External demand is also expected to support growth, because of stronger prospects in some high-income countries.’

‘Lending to mid-sized companies could also be a growth point. Certain sectors, such as energy and agriculture, are proving attractive to mid-size companies,’ says Jeff Blackbeard, Africa advisor at accounting and advisory firm, Moore Stephens. ‘During the past 12 months we’ve seen a rise in opportunities from renewable energy to large-scale rehabilitation of infrastructure for generation and transmission.’

Blackbeard sees potential for banks to support companies in the agricultural sector – from fertiliser, cold storage and transportation to direct commercial farming operations.

‘Large-scale housing, as well as the leisure sector are also opening up new prospects for mid-tier companies,’ says Blackbeard, adding that Moore Stephens is working with its international network of clients to identify potential technical partners, which would in many instances require funding, ranging from US$20 million to US$200 million.

KPMG has seen the value of SMEs on the continent. ‘By helping these businesses to start up and grow, banks contribute to the sprouting of businesses in Africa,’ says Malaba. He goes further to say that lines of credit and guarantees granted by banks have enabled exporters and importers to conveniently trade across international boundaries.

According to Malaba, banks have also been able to pool their resources to finance several extensive projects across Africa, which would have been difficult for individual governments to fund by themselves.

In addition, banks have offered support. ‘Business advice and support through seminars, tools, workshops and clinics are organised by some banks to educate and train their customers to grow their businesses and be profitable,’ says Malaba.

However, despite branching out in Africa, it’s often a challenge to do business across the continent. Navigating the complexity of emerging markets is not for the faint-hearted. Bates argues that, despite their lucrative markets, Angola and Nigeria ‘rank very low in terms of ease of doing business’.

Ordinary day-to-day business, taken for granted in many developed countries, can be a major headache in numerous African countries, with power supply sometimes dimming an otherwise confident outlook. ‘With limited power supply, some banks have had to identify ways to generate sufficient power for their branch networks,’ says Bates.

Williams believes that one of the biggest challenges is navigating the different regulatory regimes across countries, and that more could be done to make it easier for banks to do business across the continent. He adds that institutional reforms are also needed to facilitate cross-border flows. ‘Many African currencies are not easily convertible across borders, which restrains trade.’ He anticipates that all banks need to review the way they facilitate trade and transactions in the current volatile conditions.

‘The diminished access to foreign currency and the pull-back in correspondent banking relationships –where dollar- and euro-based global banks provide clearing services for transactions – are impacting the ease of doing business on the continent.’

This, says Williams, has created both challenges and opportunities that the best-prepared banks would be able to benefit from.

While understanding the need for regulation, Bates says that these should not be subject to frequent changes. He argues that banks are able to adapt as long as the rules are clear and achievable.

Malaba suggests that some regulatory changes have become ‘increasingly burdensome’ for financial institutions. He says the increase in capital adequacy requirements brought about by the gradual implementation of Basel III has resulted in banks gradually scaling down their operations in all areas that require large capital commitments.

South African banks often have the advantage when it comes to lending on the continent as they know the ropes.

‘Certain markets, especially in the SADC region, are very well-known to South African banks – some of which have been present in those markets for many years. In other African markets, South African companies are significant investors and provide a natural client base for South African banks,’ says Williams.

Through its footprint, says Standard Bank, it is able to provide access to the different trade corridors on the continent. ‘Our presence in South Africa and 19 African countries, and in major international financial centres – London, New York, Beijing, Dubai – enables us to play a leading role in facilitating trade and capital flows in multiple currencies between African countries, as well as between Africa and prominent international trade corridors.’

Williams is of the opinion that if a more favourable regulatory regime was introduced, growth in intra-African trade could become a major new theme that would shape the markets in the future. This boost could spur the emergence of more pan-African multinational firms that would evolve from competing in their domestic market to serving regional markets, and eventually grow to compete effectively in global markets.

‘This would lead to much more robust regional economic groupings, with an increase in positive interactions among African nations. It would bode well for economic development and create much larger, integrated markets for SA institutions to access,’ says Williams.

While the major commercial banks in South Africa have the lion’s share in the continent, development banks play a different role.

‘Most of the development banks deal with governments and other big organisations so an acceptable level of good governance, internal peace and security is required in the sub-region to be able to have an effective collaboration in development,’ says Malaba

‘Unfortunately, some countries in sub-Saharan Africa cannot benefit from development bank loans due to their lack of good governance and the acute shortcomings of their public administration systems.’

‘Some loans are seen to be contracted for political – rather than economic – reasons. Until these challenges are addressed, the impact of development banks in Africa may be minimal, if any at all.’

However, for commercial banks in Africa, there is room to progress. As banking moves into the future, Malaba explains that banks operating in Africa and globally will need to stay abreast of rapid shifts in technology. He expects that advances in technology will not diminish the role of banks, but rather alter it.

‘With rapid changes and a rise in new market entrants, the existing market leaders – the ‘big five’ – and to some extent the second tier of banks, will need to innovate in order to stay competitive,’ says Malaba.

By Kim Cloete
Image: Samantha Pinto/HSMimages