The coming year for African banks

Operating conditions for most African banks are likely to be similar in 2024, but there are signs that things could improve. Neil Ford takes an in-depth look at the outlook for Africa’s banks in the year ahead.


The health of the African banking sector in 2024 will be marked by two very different trends, both of which were also big influences in 2023: increased competition, mainly driven by the digital revolution; and global economic and geopolitical instability. The former is a long-term trend that is gaining momentum, while the latter is hopefully a shorter term threat to bank profitability and more general economic health on the continent.

African banks and national economies more generally have suffered from the long-term fallout of the Covid-19 pandemic and from the impact of the Russian invasion of Ukraine on food and energy prices. “These factors have been compounded by… pockets of political instability across the continent, weak export demand due to tepid global growth, monetary policy tightening and associated increased cost of borrowing”, said the African Development Bank (AfDB) in a statement in late November. The sector has recovered strongly since the pandemic and African bank revenues are now higher than before the crisis, although return on equity is still slightly lower in some markets.

Operating conditions for most African banks are likely to be similar in 2024 to those in 2023, with high inflation and interest rates, rising debt levels and the depreciation of many African currencies continuing to pose challenges to both commercial banks and their customers. Moreover, most African governments have been unable to turn to the international debt markets because of high interest rates since the start of 2022, and so have relied more heavily on financing from African banks.

However, there are signs that the situation could improve over the course of 2024. Despite international geopolitical instability and weak global economic growth, the AfDB forecasts that African continental growth will recover from 3.4% this year to 3.8% in 2024. At the same time, the IMF forecasts that average African annual inflation will fall from 16.2% at the end of 2023 to 10.5% by the close of 2024.

The pool of banks competing for custom in African markets is growing, partly through the expansion of established banks into neighbouring markets, but mainly through the creation of new players keen to exploit opportunities created by new technology. Aside from the cost of developing digital platforms, banks can make huge cost savings through automating services, including bank transfers and loan applications. This can also provide banks with huge amounts of data on their customers, allowing them to tailor loan offerings.

The Covid-19 pandemic played a role in accelerating the digital transformation by a couple of years but the benefits for both banks and customers appear to make the process inevitable. Improved internet access is allowing customers to access bank services through mobile and internet platforms, reducing costs for banks and giving customers more flexibility over when and where they use financial services, at least for those able to access them. According to McKinsey, African banks currently have double the average global cost-to-asset ratio of 4-5% but greater adoption of digital banking could help reduce that figure.

Fintech is the financial technology used to speed up, automate and otherwise improve the delivery and consumption of financial services, principally through new software and algorithms, and its use is likely to continue growing in 2024. The biggest African centres of fintech innovation, in South Africa, Kenya, Nigeria and Ghana, are likely to continue growing as new applications for digital technology are developed. According to McKinsey, just under half of the 5,200 tech start-ups in Africa in 2021 were fintechs. The trend of different financial service providers working together is also likely to accelerate, with fintech piggy-backing on established banks or working with telecoms firms.

Even the banks with the biggest branch networks, such as Standard Bank in South Africa or Nigeria’s Access Bank are without branches in many rural areas. These are also the areas with the lowest rates of internet access and so the lowest adoption of digital banking services. Yet the average cost of 1 GB of data fell by a third in Africa between 2018 and 2021, which could make digital banking more attractive, particular given the low-cost of some mobile handsets.

Penetration rates

Figures vary but the tipping point at which over 50% of adult African have some form bank of account should either have been reached in 2023 or will be attained at some point in 2024. The race to secure more customers will increase the penetration of financial services but as in the mobile telecoms sector, more attention is now being paid to increasing average customer revenue through the provision of additional financial services, such as insurance and personal investing.

The impact of the fintech revolution is most often characterised through the rise of digital-first banks that rely entirely on mobile apps and internet banking platforms without the need for physical bank branches eroding the positions of traditional banks with more established reputations and big branch networks. There is an element of truth to this depiction but existing African digital-first banks – that is, those that were launched on digital platforms and continue to focus there – are concentrated in Nigeria and South Africa. More are likely to appear during 2024 but perhaps an even bigger trend is that of traditional banks migrating their operations over to digital platforms, with every big African bank now offering digital services.

Once mobile money and agency banking are thrown into the mix, it is clear that the African banking ecosystem is becoming steadily more sophisticated and diverse. Another element is provided by Islamic banking, which has long had a strong presence in North Africa but which is now making inroads further south. In September 2023, the Bank of Uganda issued its first Islamic banking licence to Salaam Bank Uganda, a subsidiary of a bank based in Djibouti. Other parliaments look set to pass the necessary legislation to follow suit.

Growing competition in the banking sector should reduce costs for customers and encourage banks to market products at those still without access to financial services. Digital banks such as Bank Zero, Discovery Bank and Tyme Bank are already reaching out to the unbanked in South Africa. This is a big change from the traditional image of African banks as focusing on serving large corporations and high net worth individuals, with opening balances of $1,000 often required. Yet even today, most lower paid employees, informal workers and SMEs fail to make use of financial services, partly because banks do not actively target them. In addition, even those individuals with bank accounts still do not use digital services, so there is still a long way to go for digital banking to become the norm.

M&A consolidation

At the same time as the number of banks in most national markets is growing, there has also been some consolidation through merger and acquisition (M&A) activity. Many central banks and other regulators are increasing their minimum capital requirements in order to improve the overall economic health of individual banks but also the reputation of their entire banking systems. It takes many years to create a cadre of strong, well capitalised, soundly governed banks but reputations can be eroded very quickly through a series of bank collapses, so central banks are acting now to prevent future crises.

For instance, at the end of 2022 the Bank of Uganda increased the minimum capital threshold for commercial banks from $6.9m to $40.7m, from one of the lowest figures in East Africa to now the highest. By way of comparison, Kenya’s minimum capital figure of $33m was previously the highest in the region. Again, this process is likely to continue into 2024 and beyond.

The number of banks operating in Tanzania has fallen from 59 to 44 since 2017, partly through mergers between Tanzania Commercial Bank and TIB Corporate Bank, and through the threeway amalgamation of Mwanga Community Bank, EFC Microfinance Bank and Hakika Microfinance Bank in 2020 to form the new Mwanga Hakika Bank. However, the Tanzanian market continues to be dominated by the six biggest banks. The Bank of Tanzania has not stated if it has a preferred number of banks in mind but it would not be a surprise for further M&A activity to continue reducing the number of banks in the country over the next couple of years.

Regulators and governments have also intervened to tackle rising bank debt levels. The Ghanaian government wants to reduce banks’ debt-to-GDP ratios below 55% and so embarked on a debt exchange programme that concluded in September 2023 to swap existing bond holdings for those with longer terms and lower coupon rates.

Cross-border opportunities

The African Continental Free Trade Agreement (AfCFTA) will offer more opportunities for African banks to expand. Although the free trade area was officially created in January 2021, implementation will be a long term process, as trade barriers are eroded gradually over many years. This should create more opportunities for trade that will require bank finance but the AfCFTA will also impact the banking sector directly as barriers to banks expanding into other markets are to be dismantled.

However, national banking licences will still be required, so banks will most often continue to enter new markets by buying up established banks. For example, Nigeria’s Umba, which is backed by fintech investors such as Costanoa Ventures, bought a majority stake in Kenya’s Daraja Microfinance Bank, allowing it to start operating in Kenya in early 2023.

Banks can also make use of the Pan-African Payment and Settlement System (PAPSS), which was developed by Afreximbank to facilitate payment, clearing and settlement for African cross-border trade. Although launched in 2022, the hundreds of African banks that have bought into the project are still ramping up their use of it. The ability to complete cross-border transactions using African currencies could have a huge long-term impact on financial flows and reduce the use of hard currency by African banks.

One of the biggest developments in 2024 will be the opening up of Africa’s second most populous country, Ethiopia, to foreign investment in the banking sector. The government has already agreed to liberalise the banking and telecoms sectors and now the National Bank of Ethiopia has granted Safaricom M-Pesa Mobile Financial Service the country’s first mobile money operating licence, in competition with the only existing operator, Ethio Telecom’s Telebirr.

Safaricom M-Pesa launched in Ethiopia in the second half of 2023 and it will be interesting to see how quickly it can build market share. The company is owned by a consortium led by Safaricom and including Vodafone, South African operator Vodacom and Japan’s Sumimoto. The government has pledged to issue between three and five banking licences in the country over the next five years.

Mobile money can fill the gaps where banking services have yet to reach but they can also become a bridging technology, with users moving on to digital banking once they are already comfortable using mobile wallets on the phones. Kenya is the obvious example here. It was here that the M-Pesa mobile money system was launched by Safaricom and Vodafone in 2007 and now most of the adult Kenyan population uses mobile wallets. As a result, the proportion of the population with access to any form of financial service has increased from 26% in 2006 to 83% by 2021.

Other markets with high financial services penetration rates demonstrate high popular acceptance of digital platforms. For instance, research from Boston Consulting Group in 2023 found that 87% of South Africans prefer to use mobile banking apps compared with 7% who favour visiting their branch.

The sector as a whole is expected to continue growing strongly over the next two years, with McKinsey predicting in 2022 that the African financial services market could grow by 10% a year to generate revenues of US$230bn a year by 2025. Steady progress will also be made on the uptake of electronic payments but these still account for just 6% of all transactions in Africa, by far the lowest rate of any region, partly because of limited card payment infrastructure and low use of point-of-sale networks.

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Neil Ford

Neil is a journalist, writer, editor and consultant, specialising in international and African affairs.