Can Kenya’s runaway success in mobile banking be replicated all over Africa? The need to bank the unbanked is as acute in the rest of the continent as it is in Kenya but is the banking environment suitable for extended mobile banking, for example, in South Africa?
While mobile banking is now part of the business landscape in many African countries, few people outside the industry are aware of the invisible underlying technology, the platform or interface that turns a mobile phone into a mobile wallet or even a virtual bank branch. To find out more, we went behind the scenes to talk to Srinivas Nidugondi, the vice-president of Comviva, a mobile financial solutions provider. By Alexa Dalby.
The East African Community, comprising Kenya, Tanzania, Uganda, Rwanda and Burundi (and soon to be joined by South Sudan), is emerging as one of the most dynamic growth poles in Sub-Saharan Africa. The pace of investment and trade expansion has accelerated over the past three years as the wider market has become more easily accessible to importers and exporters. In tandem, banks across the region have also been growing and generating record profits. But competition is fierce and a consolidation of some sort is very likely in the near future.
The latest Rwandan Central Bank financial sector report shows that the country’s commercial banks accrued an impressive consolidated net profit in the first quarter of 2011. The availability of private sector credit also increased by a healthy 10% in the same quarter. Overall, the sector is currently well capitalised with strong liquidity and solvency. Asset quality is also advancing, along with banking sector publicity.
The most recent individual growth figures for the country’s largest banks indicate that gains are fairly well distributed across the sector. The Bank of Kigali (BK), Rwanda’s largest lender by assets, recorded a 17% hike in profits over 12 months to $10.2m, following an 18-month push to increase its number of branches from 18 to 33. “We have proven yet again that we can continue our growth without sacrificing profitability,” said James Gatera, the bank’s managing director.
Similarly, Rwanda Commercial Bank (BCR), the country’s second largest private bank, with more than 30% of the market share in the country, posted a year-on-year net profit increase of 35.2% to Rwf1.3bn ($2.2m) during the second quarter of 2011. The bank also reported a 12% drop in Non Performing Loans (NPL) to 13.05% as of June 2011. Another leading financial institution in the country, KCB Rwanda, a subsidiary of Kenya’s KCB Group, is projecting “a very big profit margin” for the end of this year. Such optimism is ostensibly justified; KCB recorded a healthy profit of Rwf54m ($91,000) in the first quarter of 2011 and Rwf34m ($57,000) in the second quarter.
Such encouraging figures confirm that the sector is making a robust recovery from the painful losses that it incurred in 2009 and 2010, in the wake of the global financial crisis. During these two years, dangerous discrepancies between bank deposits and loan disbursements led to toxic debt levels and inflated interest rates. The outcome was eye-watering financial losses, which are estimated to have been as high as Rwf300m ($505,000) in 2010. Analysts largely attribute the turnaround in the sector’s profitability this year to a healthier overall economy, advancements in financial risk management and more prudent Central Bank policies, aimed at encouraging banks to expand their private sector lending.
Key players in the financial industry are nonetheless anxious not to exaggerate recent successes, but instead view them within the context of the sector’s rocky trajectory since 2009. When commenting on the recent expansion of available credit in Rwanda, Sanjiv Annand, managing director of BCR, is circumspect: “In inflationary terms and real terms, in the last two years, the credit had actually declined; for it to go up now, is a good thing but in a sense it is also a catch up of credit that fell down in the last two years.”
Yet, despite the fact that the attitudes of bank executives are inflected with caution, it is difficult to ignore the government’s rising hopes for the sector; although only 17% of Rwandans were reported to own bank accounts in 2008, the government’s intention is that figure should rise to 80% by 2017.
Furthermore, appetite for competition is increasingly palpable across the financial sector. Rwanda’s financial domain is steadily generating regional interest. In November 2011, Equity Bank, Kenya’s second-largest retail bank, which already has operations in South Sudan and Uganda, commenced operations in Rwanda, opening four branches in Kigali, Muhanga, Musanze and Rubavu. The bank aims to increase this figure to nine by the end of the year. They are the third Kenyan bank to commence business in the Rwandan market, following the earlier entries of KCB and FINA Bank.
Equity Bank evidently has its sights on the country’s burgeoning SME sector and has committed $6.5m of investment aimed specifically at boosting lending to this group. Industry experts are confident that the company’s entry will add value to the market by driving competition. Claver Gatete, governor of the Central Bank, said: “The coming of Equity Bank adds competition. When there is competition there is always improvement in terms of how [banks] perform.” Analysts also believe that Equity Bank’s entry will increase the banking sector’s overall reach into Rwanda’s rural areas, large swathes of which are still largely unbanked.
There are already strong indications that other banks operating in the country are responding to new competition from Equity Bank by expanding their operations and diversifying their product portfolio. BCR is a case in point. The company is making a big push to expand its national reach in coming months, by setting up more Automated Teller Machines (ATMs) and opening several new branches. BCR also unveiled its new e-banking platform in November, which will enable customers to make banking transactions online or on their mobile phones. “The market is still there and competition makes you more innovative,” said Isaiah Chindumba, Chief Operating Officer of BCR. “Now a client can pay for their bills, buy electricity, purchase airtime and also transfer funds to other bank accounts through the platform.” BCR also hopes that its new internet banking services will generate investment by facilitating the inward flow of migrant remittances.
Other competitors are taking similar steps. In the autumn, KCB Rwanda announced that it will shortly launch a new portfolio of mobile and internet banking products. Banque Populaire du Rwanda (BPR) will also increase its ATMs to 100 by the end of the year and is continuing to develop its mobile and internet banking services, which it initiated in July.
However, experts attest that Rwanda’s financial sector still has to overcome formidable obstacles before it can reach its full potential. For example, uptake of electronic banking will depend to a large extent on the ability of banks to resolve problems with the low efficiency of the national switch operator, which has a direct impact on the functionality and availability of ATMs – frustrated customers finding that ATMs they approach on the street are out of order is still a too common occurrence in Rwanda. Nonetheless, some banks such as BPR and BK have sought to obviate this problem by buying their own switches.
Other capacity-building challenges are more intractable. Financial experts cite the need to tackle fundamental legislative, institutional and organisational quandaries. It is true that an important package of banking regulations was passed last autumn, which included measures concerning the oversight of bank inspections and loan classifications. Some progress has also been made in overhauling other important aspects of the legislative framework, such as with the Pensions Law, which was promulgated in March, and a number of insurance laws, which will be approved by the end of the year. However, much of this is yet to be properly implemented and important facets of the legislative framework still need updating.
Moreover, the country’s accounting and auditing systems have been criticised as inadequate; the shortage of chartered accountants in Rwanda is a particular shortcoming, which makes it more difficult to ensure that companies prepare accurate annual financial statements. In addition, experts highlight the need for Rwanda’s financial sector to invest greater sums into human resource development, so that higher quality and more frequent staff training is established and modern corporate governance principles can be successfully incorporated into operations at all levels of the command chain.
Rolling out banking services to less wealthy Rwandan citizens, including those who reside in rural areas, faces particular challenges. Based on 2009 estimations, around 60% of the population live beneath the poverty line. Approximately 90% of the population is also engaged in rural agriculture, which is largely subsistent. At present, the majority of banking transactions still happen in Kigali and loans are largely given to manufacturing, trade, tourism and property development companies. Agriculture, the largest sector of the Rwandan economy by far, receives a derisory proportion of direct bank credit. Getting to grips with this issue will require the commercial banking sector to improve their portfolio of microfinance products. Microfinance institutions will also need to radically build their capacity in a wide range of areas, including management, training and product development.
Finally, it is worth noting that appraisal of any aspect of Rwanda’s economy, which is detached from analysis of the country’s recent history and political dynamics, has limited usefulness. Although some attest that political stability, and thus economic achievements, are precarious, a more optimistic interpretation is that the determination of Rwandans not to relive the country’s genocide nightmare adds much-needed fire to the economic fuel tank. The requisite steely determination is certainly discernible within the financial sector and, given the sector’s impressive performance this year, its progress over the course of 2012 is definitely one
Kenya, which has the largest and most developed economic infrastructure in East Africa, also has the subregion’s widest spread of banking and finance institutions. Kenya has 43 commercial banks, one mortgage finance company, six deposit-taking microfinance institutions, three representative offices of foreign banks, 121 foreign exchange bureaus and two credit reference bureaus to showcase its financial muscle in the East African region.
Kenya’s latest strategy to reach the huge population of the unbanked – rolled out in 2010 as the Agency Banking Network – saw the number of banks approved by the CBK to undertake agency banking reaching 10. Collectively, the 10 banks have 7,999 agents registered across the country. The banking sector accounts for 40% of the country’s GDP.
The entire Kenyan banking sector attracted 13.65m customer account deposits and a network of 1,114 branches countrywide. The Kenya banking industry balance sheet grew by 5.3% from $21.1bn in June 2011 to $22.2bn in September 2011. Loans and advances, government securities and placements were the key drivers of this balance sheet.
In a country with a population of 38m, one could easily jump to the conclusion that Kenya is overbanked – but the World Bank estimates still show that only 10% of Kenyans have access to formal banking services. Mobile services, provided by institutions such as Equity Bank and the advent of m-banking pioneered by telecoms provider Safaricom, have vastly increased the number of people who can now access services, such as money transfer, usually provided by the formal banking sector.
The major Kenyans still dominating the scene include Equity Bank, Kenya Commercial Bank (KCB), Barclays Bank of Kenya, Cooperative Bank, Standard Chartered, National Bank of Kenya (NBK), Diamond Trust Bank (DTB), NIC Bank, Commercial Bank of Africa (CBA) and CFC Stanbic.
According to the Central Bank of Kenya (CBK) Governor Professor Njuguna Ndung’u, “despite the local and global turbulences experienced over the past year, the banking sector remained stable and exhibited resilience. The sector has continued to grow and expand both locally and regionally to new markets within East Africa and beyond.” Ndung’u added: “Our appeal to the banking sector is to put up strategies that will support and stimulate the private sector. Banks stand to benefit from a strong and vibrant private sector.”
Over the years, Kenyan banks have recorded impressive profit margins, steady growth in assets and even deposits despite the sharp fall of interest rates, a weakening shilling and spiralling inflation triggered by high food and fuel prices.
Even though daring Kenyan banks dominate the subregion, the country’s highly innovative landscape has seen banks facing stiff competition for their traditional market by new upstarts in the financial sector where they once dominated. A key plank cited by financial analysts in the overtly competitive nature of Kenya’s financial sector is the robust and adaptive financial regime that has seen a constant stream of new products rolled out almost every quarter. According to the International Finance Corporation (IFC) in its Doing Business in East Africa 2011 report, Kenya has some of the most business friendly regulations in the region.
“Banks in Kenya are fighting for market share with existing players, responding to the influence of non-banking players such as microfinance institutions and mobile banking products.” The 2011 Risk Survey by PwC reveals. “With the introduction of fully-fledged Sharia banks, there is more competition for customers who seek services compliant with Islamic Sharia law. Interest rates on government securities have declined in recent years and banks have lent more to customers so as to earn higher returns, increasing competition among banks.”
The competition offered to banks has mainly been associated with M-Pesa (mobile banking platform offered by cellular phone operator Safaricom). It is this competition which has seen the major banks, notably Equity Bank, KCB, Barclays and NBK seeking to raise extra funds to boost their expansion plans. Standard Chartered Kenya has already revealed that in 2012 it will be raising extra capital. Currently the bank is mulling over issuing a bond or selling additional shares to current shareholders.
“We are currently considering a number of capital-raising options in 2012 in order to bolster our core capital,” Richard Etemesi, managing director Standard Chartered, says.
While Equity Bank is still riding high from the $180m injection by Helios and KCB is still undertaking its ‘Transformation Programme’ courtesy of its 2010 rights issue, CFC Stanbic has indicated that it is also planning a capital-raising rights issue later this year.
The Tanzania banking sector has seen an intensification in liquidity, an upsurge in deposits and loans and higher assets growth in 2011. In Tanzania’s financial market, the banking sector dominates with a 75% per cent share.
Three banks control around 40% of Tanzania’s banking sector: Federal Bank of Middle East (FBME), National Micro-Finance Bank (NMB) and CRDB Bank. These banks account 45% of its loans, 48% of its assets, half of the industry’s employees and 52% of deposits.
Both the larger and smaller banks posted higher profits in 2010 compared to previous years. Investment in government securities, advances, loans, foreign exchange dealings and transactions contributed to the overall positive performance of Tanzanian banks.
However, like the other East African Community (EAC) members, Tanzanians are also hit by high interest rates and rising inflation stifling their financial participation. Tanzania’s domestic interest rates currently swing between 16% to 35%. These high interest rates are a stumbling block to most of the economy’s productive sectors. High interest rates do not appear to have affected the overall positive performance by banks.
In 2010, Tanzania’s banking sector’s total assets stood at $10.4bn with $4bn lending to customers. The revenues raked in by Tanzanian banks have showed a marked growth in recent years: in 2006, they were $98m, by the end of 2010 they had increased to $223m.
With three banks holding 40% of market share, seven other banks account for another 40%. These are: National Bank of Commerce, Standard Chartered Bank, Exim Bank, Stanbic Bank, Barclays Bank, Diamond Trust Bank and Bank M. The remaining 20% is split between 31 banks.
The adage “small is big” fits FBME. Setting up in Tanzania in 2003, the privately owned Lebanese bank has built up an extraordinary level of financial strength with an estimated asset base standing at $2bn and has outperformed more established banks. On its own, FBME commands a 19.3% market share. The bank has deposits of $1.8bn although it has only four branches and 300 employees.
Coming second in the pecking order is CRDB Bank which, since establishment in 1996 has been making a profit. Listed on the Dar es salaam Stock Exchange (DSE) some two years ago, CRDB leads the pack in terms of lending and revenues. With over 61 branches across Tanzania, CRDB is now said to be looking at prospects in neighbouring countries with the first stop expected to be the Ugandan market.
Though ranked third, the National Microfinance Bank (NMB) is the most profitable in the country, registering $8.6m net profit in 2010. NMB not only leads in being the biggest investor in government securities, totalling $429m, it also has the widest reach in the country with 138 branches. The Tanzanian government still holds some 31.7% of the bank.
According to the Central Bank of Tanzania, the country’s banking sector has remained strong, stable and robust courtesy of the raft of reforms undertaken in 2009 when it established the Financial Sector Stability Department (FSSD). FSSD’s main task so far has been to undertake surveillance and assess the country’s financial system in order to give an early warning on financial imbalances and the risks they posed on the economy.
The Bank of Tanzania has identified agro-processing, infrastructure development, regional trade, mineral exploitation and tourism as some of the promising sectors needing heavy capitalisation and due attention.
The Economist Intelligence Unit (EIU) projects that by 2020, the banking industry in Tanzania will be worth $28bn, indicating that the sector is still far from saturation.
There is little doubt that the discovery of oil in Uganda has excited much interest in the country’s economy which has in turn largely impacted positively on “the pearl of Africa”.
With the independence of neighbouring South Sudan and its vast reserves of oil, Uganda’s economy is expected to reap handsome rewards given that Kampala is South Sudan’s largest trading partner.
With a GDP of $39.7bn and a population of 33m the Ugandan economy has been growing in the last five years albeit slowly and last year reached the 5.1%. This growth was attributed largely to telecommunications, financial services and construction which contributed some 54% of the total economic growth. The traditional economic drivers of agriculture and tourism now play second fiddle. With a young population, its membership in the expanded East African Community (EAC) and Common Market for Eastern and Southern Africa (COMESA), its own oil resources and as a gateway to South Sudan and Ethiopia, Uganda is all set to grow at an accelerated pace.
The country’s financial sector, hitherto under the shadow of neighbouring Kenya, is also likely to expand to cater for the increasing pace and volume of transactions.
Uganda’s financial system is still considered small and is dominated by the banking sector. Unlike Kenya, Uganda’s banking sector is dominated by three foreign banks: the South African majority-owned Stanbic and the two British multinational banks, Standard Chartered and Barclays.
Kenyan banks, namely Kenya Commercial Bank (KCB), Equity Bank, Diamond Trust Bank (DTB) and Fina Bank also have an imprint in the Ugandan banking sector. Nigeria’s United Bank of Africa (UBA) and the Togolese headquartered multinational, Ecobank, occupy important niches.
Of the 23 registered Ugandan banks only two local banks, Centenary and Crane Banks, make it in the top. Total assets of Ugandan banks stands at $4.78bn.
The Ugandan legislature has sought to make the country’s financial and general business environment freer by enacting investor and commercial friendly laws.
“The privatisation of Uganda Commercial Bank removed the dead hand of the state and its corrupt politics from the banking sector, opening the way to competition and product innovation,” says Andrew Mwenda, editor of The Independent newspaper.
Much of the banking business is still limited to Kampala and major towns serving 28% of the population. This means that 42% of Ugandans are only served by the informal financial sector and 30% are completely cut off from financial services of any kind.
It is this largely unbanked populace and the informal financial sectors that indicate a sector that still holds substantial growth promise.
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