Africa's middle class stimulates growth of retail banking

by Masahudu Ankiilu Kunateh
Demand for retail banking services in Africa has picked up in recent years, spurred largely by the emerging middle class on the continent, which has tripled over the past 30 years to 355 million, or more than 34% of the continent's population.

To this end, domestic, regional and international banking groups are re-focusing their efforts to expand the menu of services to meet the growing needs of this newly-found affluent class.

According to recent African Development Bank (AfDB) estimates, retail banking in sub-Saharan Africa is projected to grow by 15% per annum by 2020, bringing the sector's contribution to GDP to 19% from 11% in 2009.

High growth African countries posted the largest demand for retail banking services between 2004 and 2010. The gains were especially greater in two of the 25 countries for which data are available.

In Rwanda, the number of deposit account holders increased to 218 per 1000 adults in 2010, from a mere 7.5 in 2004, representing a phenomenal annual average growth of 174%. Over the same period, the number of deposit account holders in Gabon increased by an average of 73% to 95 per 1000 adults up from 12 per 1000 adults.

In seven other countries demand for retail banking services also increased by an average of 36%, while only four countries had average annual growth rates of less than 2%.

Still faced with considerable post-conflict fragility and reconstruction costs due to population displacements, access to retail banking services decreased in the Central African Republic with the number of deposit holders dismally lower at 2.6 per 1000 adults in 2010, down from 3.4 in 2005, an average annual decline of 0.7%, the Tunisia-based AfDB stated.

The gains in demand for retail banking services reflect the accelerating economic pulse on the continent largely owed to prudent macroeconomic and structural policies aimed at stimulating private sector-led growth.

By and large, these policy measures have set the stage for the flourishing of service sectors, such as telecommunications, construction and retail banking6 industries.

While the focus of recent banking sector growth has largely benefitted from the growing middle class, emphasis is now shifting towards expansion of innovative banking services through mobile technology to capture lower income segments and the 'unbanked' shut out from formal financial institutions due to high transaction costs and distance to financial institutions, among other factors.

A recent study  shows that, in Africa, 70% of adults earning less than $2 per day are 'unbanked' or do not use a formal financial institution. For instance, recently a number of African countries have made giant strides in expanding mobile banking services to a wider income customer base.

Kenya's M-PESA service launched in 2007 now caters to more than 14 million customers (more than 70% of the country's adult population) and is widely regarded as a successful mobile banking model in Africa.

With an agent outlet base of 28000, the M-PESA processes more transactions domestically within Kenya than Western Union does globally.

Similarly, South Africa's First National Bank (FNB) reported a rapid uptake of mobile banking in Southern Africa with estimated annual growth rates of 277% in Botswana, 204% in Namibia, 473% in Swaziland and 376% in Zambia.

According to FNB estimates, subscribers in Botswana, Namibia, South Africa and Zambia carry out a total of 1.2 million mobile banking transactions per month with an estimated value of $14 million.

Whereas only a little more than 16% of the population in sub-Saharan Africa (SSA), including Ghana, have access to retail banking services , about 40% now own mobile phones and this number is projected to rise to 70% by 2020. This broadens the scope for innovative banking services in many African countries.

The expansion of retail banking services to the 'unbanked' population is also taking on new initiatives.

In Malawi for instance, only 2% of the rural population has access to banking services mainly due to, inter alia, prohibitively expensive Identity Card (ID) schemes.

An innovative banking program administered by Opportunity International Bank of Malawi is however attempting to reverse this by providing easier access to banking services for rural households through issuance of Biometric smartcards that serve as efficient IDs.

As the private sector pioneers new and innovative retail banking products, some Governments are also taking steps towards reduction of barriers to entry into the retail banking sector.

For instance, to encourage entry and competition in the Angolan banking sector, the gap in minimum capital requirements for international and domestic banks is only USD1 million ($6 million for international banks vis-à-vis $5 million for domestic banks).

This is comparatively lower than the proposed minimum capital requirements in Zambia of $20 million for local banks and $100 million for foreign banks, yielding a gap of $80 million.

The authorities argue that the new capital requirements will attract additional resources into the industry and encourage lending to the private sector whilst strengthening the banks' resilience to economic shocks.

In Angola, competition among commercial banks is expected to lower the minimum deposit requirement of $200 which has limited access to banking services to 10-20% of the adult population.

Similarly, revamping non-traditional financial intermediaries such as cooperative societies and credit unions could widen the breadth of banking services by bringing more people into the formal financial sector.

Botswana, Tanzania and Namibia have 360 bank branches between them (with 56% of these in Tanzania) but with limited penetration compared with 800 post offices present in some of the remotest places.

Post offices can provide more than half of the physical point of access for financial services and therefore reforming them to meet current technological standards could expand financial inclusion among a large segment of the 'unbanked' rural population.

As the current trend has shown, robust economic growth and financial deepening could widen opportunities to satiate large unmet needs for basic financial services in Africa. The same could be true of new and more innovative technologies aimed at enhancing access to financial services.