On 26 September, KPMG hosted the seventh in its Africa Conversation Series. The focus was on Financial Services as an enabler of African development. The discussion was chaired by Alishia Seckam of CNBC Africa, and the panelists were:
Bisi Lamikanra, Head of Management Consulting, KPMG Nigeria; Dave Cooke, Director, Actis; Junior Ngulube, Chief Executive Officer, Munich Re of Africa; and, Nicholas Young, Chief Operations Officer for Africa Citi Bank.
Opening remarks
The growth of the financial services sector is inextricably intertwined with its country’s economic growth. As such, this sector plays a critical role in unlocking Africa’s full potential.
Africa is no longer just a curiosity – it is a big source of profit. Africa boasts GDP growth of more than 5 percent over the past decade, a population of over 800 million, and a total purchasing power of US$1,9 trillion.
Focus of the discussion
There are currently two broad themes shaping the African economy, which are the basis of many investments made by financial services.
· Consumer spending is a fundamental driver, with increasing disposable income after a decade of positive growth.
· There is a growth in government and private infrastructure spending.
Strategically significant
The fast-emerging African middle class and growing trade links within Africa have raised the strategic importance of financial services on the continent. There is now a stronger demand for formalized financial services institutions. According to Junior Ngulube, “Insurance and reinsurance companies have historically oiled the wheels of commerce in terms of the provision of risk services.”
With the growth of disposable income, there has been an increase in the purchase of assets, and, consequently, in the need to protect them. So, the consumption of financial services and insurance penetration have increased dramatically. Infrastructure growth on the continent will open up intra-Africa trade, providing additional opportunities for insurance firms. An increase in infrastructure spending also provides opportunities around insurance for these projects.
Poised for explosive growth
Increasing urbanisation and the rapid digitisation rate on the continent are fundamentally changing the way people do business and are driving different behaviours. Natural resources also play a fundamental role in what is happening in Africa. The big oil producing countries, as well as those countries with an abundance of other natural resources, have massive foreign exchange balances. The overlay of all of the above, in addition to the increased interest and demand from India, Brazil, Russia and China, sets the scene for explosive growth of financial services opportunities on the continent. Bisi Lamikanra commented, “With 160 million people in Nigeria, for example, we have only scraped the surface of opportunity. How many of these are included in the formal banking sector?”
Many investors in Africa are starting to take a regional approach to investment, creating more opportunities for return on investment. There are, however, still challenges to investing in Africa. There are 55 countries in Africa, all with their own, unique environments. Investment strategies need to be flexible, able to adapt to the specific realities of each market. Dave Cooke explains, “Africa is an enigma to many investors – it is broken into geographic entities, and a tailored approach is required for each.” Local partners are often essential due to their ‘on-the-ground’ knowledge of the investment climate. A partnership with a local firm can often be an important differentiator for an investor. Lamikandra adds, “This is the time to learn, to make mistakes and to understand how to play in Africa. You have to redefine the ways you play in order to be successful.”
What about regulation?
Regulatory oversight is still a challenge facing the financial services sector. The African banking sector is, however, generally well regulated and fairly consistent on a regional basis. With the expansion of international players into Africa, regulators seem to be becoming more cautious. The Central Banks in Africa have aligned themselves to global standards and there is a level of cohesion in terms of financial regulation; Francophone West Africa, for example, subscribes to one code and has one currency, and former English colonies have a similar regulatory framework. Ngulube’s opinion is that the current wave of over-regulation may be well-earned, but that “the pendulum is swinging to the other extreme.”
Tighter regulation increases the costs of compliance for players in the financial services sector. The cost of compliance tends to be greater for global banks. Local banks have more flexibility in terms of the products they can offer and, more importantly, the time to market. The G20 are leading the drive to change banking regulation across the globe. The impact of these changes for smaller players could
be punitive, and additional capital might be needed. Tighter capital requirements often lead to a consolidation trend amongst those institutions that cannot comply. Nicholas Young offered some positives regarding compliance: “People think differently about how they allocate capital. They also need to understand who their clients are and be more thoughtful and consider how they operate.” In addition, he says that, from a banking perspective, it is crucial to work with the regulator so that corporates are secure and allow the development of more sophisticated lending and insurance products.
Where are the opportunities?
Significant opportunities exist in the retail banking sector, and successful institutions will be those that can build a successful retail banking offering despite the challenges facing this sector. Cooke explains, “These opportunities are developing quickly, and there is a need for nimbleness. Think of the Indian private sector: they understand how to service their customers in a more informal market segment. This may be a challenge for traditional western models.”
As African economies grow, there is an increasing demand for sophistication within the financial services sector. “The benefit of globablisation,” said Young, “is that many think along the same lines; for example, in banks, the focus may be on liquidity and protection against risk. So, many people leap-frog from Basel I to Basel III. The rate at which people can adopt new ideas is evidenced by technology.”
In developing markets with a young financial services sector, it is the smaller balance sheets that are harder to leverage off in terms of chasing opportunities within the consumer market and in catering to major financial investments. This is where the developmental nature of reinsurance companies plays an important role. Reinsurance companies support insurance companies in the growth of their balance sheets.
In the initial stages, the reinsurance company will write off some of the company’s business onto their own balance sheets. Although the role of the reinsurance company diminishes as these companies grow, the increased risk-taking capabilities of these firms results in continued reliance on the reinsurance company. Financial services can play a key part in the development of an economy. The banking sector, in particular, can play an important role in the development of the market into
a more sophisticated environment for consumers. The banking sector can also play a key part in the development of regulations. This will enable the development of a regulatory framework wherein the consumer can operate with greater certainty. Cooke says, “There are many precedents in East Africa – operate, and we will develop regulation afterwards.”
Most financial services companies tend to take a sectoral approach when identifying countries within which to invest. The DRC, for example, has a struggling economy but has a booming mining industry, which represents numerous financial services opportunities. Another determining factor for most is the enabling framework of the country (the regulatory environment, the basics in terms of rule of law, and so on). The sectors that offer the greatest opportunity for financial services are natural resources, mining and metals. Cooke comments: “Our job is to find the best investment opportunities; therefore we identify sectors where we think the most growth will happen. The financial services and consumer sector are the biggest areas for our investment.”
Alternative Distribution
“The key challenge is getting access to the unbanked, so perhaps alternative distribution is part of the agility of which we have spoken,” says Young. Lamikanra concurs: “The next generation is more attuned to the non-traditional ways of operating, for example, social media is used in different ways, so this drives innovation. Banks have to get their brands to this new generation and so have to adopt new ways of doing banking.”
Ngulube concludes, “The mobile phone is going to change financial services on this continent. Some mobile operators now have their own insurance licences – this is a small step to the mobile operator becoming a bank. Africa has the fastest growing mobile population.”