Banking in Africa: on the back of the rising consumer class

Africa's rising consumer class is beginning to establish firm ground for long-term growth. Given the growing labour force and urbanization are expected to boost household income, the growth prospect for Africa looks brighter. What can banks do to benefit from this trend? A combination of positive trends has been supporting the growth potential in Africa: the recent commodity boom has attracted a significant volume of investment funded by numerous resource-thirsty developed and emerging economies to the continent; the governments in many countries have managed to stabilize the political and economic conditions, which enabled many of them to enjoy increased access to international capital. This trend is forecasted to be maintained thanks to Africa's social and demographic pattern, in particular growing labour force and urbanisation. It is therefore widely recognised that Africa's rising consumer class is beginning to establish firm ground for long-term growth. In these circumstances, what can banks with operating interests in Africa do to benefit from the emerging opportunities?

According to a recent study by McKinsey Global Institute, McKinsey & Company's economics research arm, Africa's household spending was recorded at US$ 860 billion in 2008, which means that Africans are already spending on goods and services more than Indians or Russians spent. African household spending is projected to increase to US$ 1.4 trillion by 2020. With increasing household income, consumption will grow faster and various retail-oriented businesses will be benefited from this trend. With a compound annual growth rate of 6.2%, banking is forecasted to grow more rapidly than other categories (see figure below).


Some multinational banks, both global banks and home-grown giants, have already been busy establishing a foothold in the ground. Standard Chartered is now operating in 14 African nations, Société Générale in 15, and Barclays in 12. The regional giants are also expanding their presence in numerous African countries: Ecobank has operations in over 30 African countries, UBA in 19, and Standard Bank in 17.For those new entrants, M&A seems to be the favourable option as an entry strategy. A recent acquisition made by a Chinese bank proves to be a case that buying a stake of local institution can be a cost-effective strategy. By buying 20% of Standard Bank in 2008, ICBC is now able to facilitate business activities of Chinese companies in 17 African countries through the distribution channels that Standard Bank operates in those countries.

As consumer preferences vary greatly across the continent, it is also crucial for banks to build market intelligence. Still most of the population has low incomes and lack access to credit, and designing suitable products and services for target segments will be key to success. For example, Blue Financial, a pan-African financial services group operating in 17 African countries, managed to establish a thriving business by finding a niche in 'gainfully employed but under-banked and under-served population' and addressing their financial needs.

Perhaps the biggest threat in Africa that banking institutions face is ever-present political uncertainties. Building partnerships with local leaders and the influential communities therefore will be essential for them to mange operational risks. As many African governments heading to the right direction of building a more stable political system through various reform measures, the need to manage risks associated with political uncertainties will be increasingly reduced. However, what banks should take into consideration is that they'd better move quickly: banks interested in building a sizeable customer base in this frontier market should make a move before it is too late and less worthwhile to them (in other words, before everyone jumps on the bandwagon).