Rethinking wholesale banking in Africa

Accelerating Africa’s development while building on the progress already made is a challenge for the continent’s governments and private sectors. So what are the catalysts and inhibitors to unlocking further growth and development? The private sector is the biggest potential driver of development, both in the short and long term, while the major inhibitor is access to sustainable funding.

Private corporates and governments rely primarily on the traditional sources of financing, which to date have proven to be insufficient even as the need continues to grow. According to Forbes Africa the funding gap for infrastructure development in Africa is estimated at $2.3tn and filling this gap will require new solutions and more innovation.

Factors stunting Africa’s development include onerous regulations, difficulty in accessing funding, political risk; the high cost of funding; and sub-optimal tenor of loans. Borrowers unfortunately cannot escape these constraints when using traditional bank funding. Furthermore, banks have limited access to deep, insightful and reliable information; many lack an understanding of the markets in the different countries; volatile currencies and commodity prices are a challenge; and they have to balance short-term thinking against long-term investments. However, banks have found ways around these obstacles through export credit agency (ECA) cover and other credit or financial instruments to support funding in countries perceived as high-risk.

As Africa’s funding options have largely been limited to traditional commercial loans, concessional loans, development finance institutions and capital markets. These have have proven to be insufficient while some are too costly to meet the continent’s needs.

Development finance institution (DFI) financing has been explored by both governments and companies in several countries. DFI financing is a good source for low- and middle-income countries where the commercial, political or regulatory risks are too high for private capital investment. However, proving that investments will have a positive developmental impact remains difficult for private businesses. A significant factor limiting access to support from global DFIs is that they have specific rules and regulations to which some developing countries cannot yet adhere to.

Africa has a friend in China. More than 35 African countries are engaging with China on infrastructure finance deals, according to the World Bank. Chinese president Xi Jinping mentioned at the Forum on China-Africa Cooperation (FOCAC) in 2018 that China will invest $60bn in the next three years in Africa. While Chinese financing has assisted Africa, critics of Beijing’s bilateral assistance projects cite existing high and unsustainable levels of debt and punitive consequences should countries be unable to pay. Governments are looking at Chinese funding as an alternative to traditional lending – in some case this means that China will fund in situations where banks believe the ceiling has been reached and the capital markets are not an option either.

Financing through public-private partnerships (PPP) has been explored in infrastructure projects, with investor appetite growing for PPPs, according to Forbes Africa. However, PPPs are usually for specific types of projects and often rely on a government guarantee to attract favourable financing terms. Corporates are looking to platforms that offer crowdfunding as an alternative as private equity funds do not offer deep liquidity pools for developing countries.

More corporates are exploring crowdfunding as this allows them to diversify their funding bases while gaining access to investors who take a longer view than most banks and bond investors. Africa’s young economies, large infrastructure needs and under-developed local capital pools, combined with a demographic dividend, make it a potential hotbed for innovation. However, the continent needs to find homegrown solutions to unlock its full potential.

The retail financial sector offers some successes. We have seen several innovations, in some instances stemming from non-banking industries, in places where there are minimal or no banking services but most importantly, regulatory and political support. The best-known example remains Safaricom’s M-Pesa, which was started in 2007 and has helped more than 59% of the Kenyan population access mobile money platforms, according to the GSM Association.

Wholesale banking in Africa is lagging in terms of innovation and is at risk of being disrupted by other industries if the sector does not become innovative – soon. Successful innovations are those that will help solve Africa’s most pressing needs: regulations, difficulty in accessing funding, political risk, the high cost of funding and sub-optimal tenor of loans, access to reliable information, and an in-depth understanding of the different African markets.

The question is, will banks be the catalyst for innovation or will we see wholesale banking disrupted by others? How do we ensure regulation in Africa is appropriate for Africa?

There is no doubt that those who are prepared to break the mould and adopt new platforms and technologies that address current constraints will hold the keys to unlocking the continent’s economic growth and development.

This article was paid for by RMB.