LexAfrica network of leading

Competition among financial institutions is intensifying in Africa as more governments relax barriers to entry and open their countries’ banking sectors to new players. The flurry of fresh entrants in some countries is credited with helping to drive down banking charges, improve access to banking services and spark off a wave of new products and services.

In most countries, however, it is still far easier for companies to gain access to banking services and credit than it is for ordinary consumers, according to members of Lex Africa, a network of leading law firms in 30 African countries.

“When it comes to banking access, it is important to distinguish between corporate transactions and services for the man in the street,” says Richard Roothman, banking and finance specialist and director at Werksmans Attorneys, the South African Lex African member. “There is often a vast difference between the two.”

He says that in the business markets of the continent, an influx of foreign banks is behind the proliferation of corporate banking services such as project finance. “Many African countries have a huge desire for big mining, power, roads and water projects, and project finance is the only way to finance these transactions. Almost all of them are financed by foreign banks, which is why a lot more international banks are busy looking at Africa,” says Roothman.

Another reason for their interest is that banks are hungry for business in the aftermath of the global financial crisis. “Africa is not a safe haven but other avenues have dried up or are in limbo,” he says. “Foreign banks see that they can make more money by taking a little bit more risk in Africa.”

While corporate banking services are growing strongly, many African consumers are turning to microfinance, mobile phone and retail companies rather than banks for access to financial services, Roothman says. “Micro financiers and other non-banking lenders tend to be more accessible to the man on the street, who is often not seen as bankable. Still, as the purchasing power of Africans grows, there will be more scope and opportunities for banks to service them.”

Kenyan banks galvanised into action

In Kenya, where less than a quarter of the population have bank accounts, banks have been spurred into action in the consumer market by the success of the mobile money transfer services.

Money transfer services were first launched by Kenyan mobile operator Safaricom in 2007 via M-Pesa and other mobile operators now provide similar services.  This is one of the main catalysts that have triggered far-reaching change in the country’s banking and financial services landscape, says Binti Shah, partner at Kaplan & Stratton, the Kenyan Lex Africa member. 

According to studies by Enhancing Financial Innovation and Access (EFInA), a non-profit organisation that promotes financial inclusion, around 20% of Kenyans had bank accounts and about eight percent had access to other forms of formal financial services in 2006. By 2009, the percentage of people with bank accounts had crept up to 23% but those using other formal services, particularly M-Pesa, had shot up to 17%. Today’s figure is likely to be even higher because the number of M-Pesa subscribers using the service to deposit and withdraw cash and do money transfers has reportedly increased to 10 million.

This success has galvanised the banks into action. “Banks now have much lower entry fees, which means that less wealthy individuals can now afford to open accounts,” says Shah. Recent changes in legislation has also made it possible to introduce agency banking, which means banks no longer need to follow the traditional ‘bricks and mortar’ model, she says. Banks are now allowed to recruit other businesses – notably telecommunications companies and retailers with a nationwide presence - to offer banking services on their behalf on an agency basis.

Shah notes that one of the latest boosts for financial access in Kenya is the partnership between mobile operators and commercial banks which, over and above doing away with account-opening fees and monthly charges, pays interest and offers account holders access to emergency credit and insurance facilities.

“As a result of all these changes, the sector has become very competitive,” she says. “Access to banking and financial services has improved greatly and charges are coming down. The greater circulation of money also means more businesses are coming up and helps investors feel a little bit more comfortable about investment prospects.”

Nigerian uptake on the increase
Although Nigeria lags behind Kenya in consumer access to financial services, there is “abundant proof of increased access to banking and other financial services in our country,” says Osayaba Giwa-Osagie of Nigerian Lex Africa member Giwa-Osagie & Co. He points to EFinA surveys showing significant increases in access between 2008 and 2010.

When EFinA released the results of its first Nigerian financial access survey in 2008, it found that only 21% of Nigerians were banked, while 2% were using micro financiers as banks and 24% were using informal facilities such as savings clubs. That left about 46 million Nigerians, or 53% of the population, without any access at all to formal or informal financial services.

Two years on, the percentage of banked Nigerians has increased from 21% to 30%, according to EFInA’s 2010 financial access study. Overall, the proportion of Nigerians without access to formal or informal financial services has dropped from 53% two years ago to 47% currently. 

Citing reasons for the improvements, Giwa-Osagie says: “The new generation banks have brought some level of competition into the banking industry, with the introduction of new banking technology and better and faster service delivery.” He says banks have also branched out from their traditional strongholds in centres such as Lagos into other geographical areas.

Interestingly enough, basic savings accounts and ATM cards are by far the most popular banking services in Nigeria. Only 1, 5 million Nigerians have credit cards, according to EFInA’s studies, and fewer than two million people have overdraft, mortgage loan or vehicle finance facilities. Furthermore, despite the high level of mobile phone penetration in Nigeria, the country has yet to introduce a mobile money transfer service such as M-Pesa, which is proving so popular in Kenya.

A long road to travel in Angola

In Angola, most banking activity is concentrated in the capital Luanda, says Natacha Sofia Barrados, an Associate specialising in banking law at FBL Advogados, the Lex Africa member in Angola. “Outside Luanda, there are only one or two banks and people still keep their money at home.”

Even in the capital, though, banking services are out of reach of many consumers. “To open an account, you must typically have $200, which for most ordinary people is too much,” she says, estimating that between 10% and 20% of Angolans have bank accounts. “It is getting easier now because a lot of new banks are opening and some do not require a minimum amount.”

Barrados says competition in the commercial banking market is accelerating and that the Angolan Central Bank has made it relatively easy, theoretically at least, for international banks to start operating. “The minimum capital requirement is $6 million, there must be a local shareholder and if you are non-resident, you must have authorisation from the Council of Members.”

Far more arduous than applying for a banking licence are Angola’s exchange control regulations, particularly around the expatriation of capital. “It takes a long time to issue a licence to export capital out of the country. In fact, this is very difficult,” she says.

“For a new bank to succeed, it is very important to comply with all the rules and to be aware of the exchange control regulations. It is also most important to understand the Angolan environment and to realise that this is not a normal business environment,” she says. “It is not at all like operating in America or Europe.”

Why Africa is so different
To be successful, international investors need a healthy understanding of and respect for African conditions and business culture, says Richard Wright, Head of Legal and Documentation Africa at Standard Bank of South Africa Limited, which has operations in 16 African countries.

“African markets are vastly different from those in Europe and America. In Africa, it is just not feasible to run your operations from afar; you have to be there on the ground, using local infrastructure and resources wherever possible,” says Wright. “Unless you are on the ground, you have no idea of the challenges of doing business in say, Nigeria, where you can be stuck in traffic for four hours if it rains. Also, the greater your dependence on head office, the slower your decision-making. Local infrastructure with a certain amount of autonomy can give you the ability to make faster decisions, which is important in an environment that is becoming increasingly competitive.”

Another compelling reason for establishing a local presence is that business in Africa is still strongly relationship-driven, he says. “In the United Kingdom, the focus will be strictly on the business at hand, with a very strong distinction made between work and personal life. In Africa, there is a lot more engagement and a lot more effort goes into building relationships.” This is important, says Wright, as it has a direct impact on who and how individuals and companies choose their bank. “In Africa, people do not go window-shopping for a bank; they go for familiar brands with which they have tried-and-trusted relationships.”

Pieter Steyn, Chairman of Lex Africa and a director at Werksmans says “This is the age of African Lions and increasing interest in the millions of African consumers.  African demand for financial services will increase in future and although banks with an established African presence have an inherent advantage, they will face increasing competition not only from their traditional competitors but also from novel and innovative ways of providing financial services.”