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The good, the bad, and the ugly: Banking in Africa

In Africa, banking systems have undergone drastic changes in recent years. The rise of African groups and intensified competition have compelled the industry to pursue growth strategies focused on a more transformed client base. McKinsey estimates the African banking sector will be serving nearly half a billion people by 2022, up from 171 million as recently as 2012. Now, the sector faces new challenges to consolidate, grow, and support the continent’s growth overcoming all the challenges.

The financial structures of Africa continue to dominate commercial banks today. Significant reforms have steadily overhauled the financial structures of Africa for the past forty years. The advent of regional and, in some cases, continental African banking groups have fostered the development of regional markets. These various stages and continuous changes have influenced Africa’s existing financial structures and their strengths and limitations. In this post, we explore some of them.

Africa’s Banking: The Good 

Improved procedures and systemic improvements have been made, such as establishing the Francophone African regional banking commissions and improved counterparty risk regulation at most commercial banks. 

Today’s financial institutions show greater resilience and higher ethical performance and, therefore, have improved outcomes. Spurred on by the acceleration of economic growth to which they contribute, banks see their efficiency and operating metrics improving steadily. 

Depending on the regulations of the country’s economy, climate, and financial services, the situation differs considerably from country to country; and, irrespective of the geographic area, nation, or bank, the progress is undisputed and noteworthy. 

The overall improved health of Sub-Saharan Africa is expressed in banking systems while being compatible with the continent’s various economic spaces’ intrinsic characteristics.

Banking in Africa: The Bad and the Ugly Banking Crisis

Africa has experienced 43 systemic banking crises (vs 56 in the rest of the world). Its share of such events has dropped further over time. Since the global financial crisis (2008), the continent has experienced a single systemic crisis (Nigeria 2009), compared with 47 in the rest of the world. 

Honohan and Beck (2007) suggest that Africa’s banking crises were very different from those outside them because the continent’s crises got triggered due to governance problems in both the banking and regulatory structures. These crises have made regulatory bodies more conservative, but reforms have enabled the continent to boost its financial system’s stability. 

Covid’s effect on the banking system of Africa 

The economic structure for Africa is already radically exacerbated by the Covid-19 pandemic. Economic interventions have included lowering the base rate, which positively impacted aggregate demand and households’ willingness to service debts, but lowering bank cash reserve levels, purchasing government bonds, and banks’ debt moratorium. 

The stability of the banking sector in Africa, however, is challenged by the possibility that non-performing loans will rise sharply. Borrowers across industries and market sizes will be affected, as sales and revenue losses mean that they will not fulfil their obligations.

With good prospects for future growth and the emergence of large regional banking groups, African banking is at a stage of evolution. The emergence of digitisation in the sector has provided the requisite impetus for taking more of the continent’s population into the banking network, resulting in financial inclusion and increased access to financial services.

African banking is growing at a rapid pace, especially on the digital front. At Salt, where we’re working on similar goals of making digital banking easier for businesses and individuals, this is great to see. 

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