Roaring To Life: Growth and Innovation In African Retail Banking


Monday, August 13, 2018   14.54PM   /  By Mckinsey & Company


Africa’s banking markets are among the most exciting in the world. The continent’s overall banking market is the second-fastest-growing and second-most profitable of any global region, and a hotbed of innovation. The retail banking sector in particular is a locus of new business models, emerging in response to challenges including low levels of banking penetration, heavy use of cash, sparse credit bureau coverage, and limited branch and ATM networks.

In this fast-growing, complex market, there are vast differences in performance between leading and lagging banks.

This report focuses on the drivers of these differences—and explores five themes that separate winners from losers:

1. Draw the right map. Geography matters. About 65 percent of African banks’ profitability (measured by return on equity, or ROE) and 94 percent of their revenue growth, are attributable to their geographic footprint. Importantly, there is a shift underway in exchange rate-adjusted revenue pools towards North Africa, East Africa, and West Africa, and away from South Africa and Central Africa. There are also huge variations in growth and profitability at the country level, with nations such as Côte d’Ivoire, Ghana, Kenya, Mali, and Morocco featuring positively.

2. Right segments, compelling offers. Our research indicates that 70 percent of the growth in Africa’s retail banking revenue pools to 2025 will come from the middle segments, defined as individuals with annual income between $6,000 and $36,000. The mass market—individuals earning less than $6,000 per annum—will account for just 13 percent of this revenue-pool growth, but it is the fastest-growing segment and one to watch. Whichever segments banks choose to serve, it is critical that they develop compelling propositions targeted to those consumers.

We surveyed 2,500 customers across six African countries, and found that price and convenience are the leading factors in customers’ choice of bank, followed by service.

There is also huge room for growth in meeting unmet needs for borrowing, saving, investing, and protecting: fewer than 20 percent of African banking customers hold products such as lending, deposits, insurance, and investments.

3. Leaner, simpler banking. Africa has the second-highest cost-to-asset ratio of any region in the world, at 3.6 percent—and this has worsened in the recent past. High margins have tended to protect African banks from a dramatic worsening of cost-to-income (CTI) ratios, but margins are likely to come under pressure in the years ahead. In response, banks must act now to create simpler, leaner banking models. It can be done:

This report spotlights eight banks in Africa that have made dramatic improvements in cost-to-asset ratios, through a combination of end-to-end digital transformation, sales productivity, and back-office optimization.

4. Digital first. Some 40 percent of the African banking customers we surveyed prefer to use digital channels for transactions, roughly the same share as those who prefer branches. In four of the continent’s major banking markets, the share of customers who prefer digital channels is significantly higher than the share preferring the branch channel. Banks can adopt one of four distinct digital strategies:

The first is to digitally transform their existing operations, to increase their share of digital sales and transactions to beyond 60 to 70 percent on each measure, as Kenya-based Equity Bank has done. Second, banks can partner with telcos or fintechs to deliver mobile financial services to their clients at a cost below that of the branch network. An example, also from Kenya, is MShwari, the mobile-based loans application formed in partnership between Commercial Bank of Africa and Safaricom. The third digital strategy is to build a digital bank from scratch—as Nigeria’s Wema Bank did in launching ALAT,  Africa’s first fully digital bank, in 2017.

Finally, banks can build an ecosystem or platform of non-banking services. Alipay in China and the Commercial Bank of Australia have applied this approach at scale in areas such as travel and hospitality (Alipay) and home-buying (CBA).

5. Innovate on risk. African banking still has the second-highest cost of risk in the world, not least because of a paucity of credit bureaus, combined with immature risk management practices in many banks. A number of exciting innovations in credit risk management are emerging, however. Bank-telco partnerships like M-Shwari are one example: the platform delivers 80,000 consumer loans per month, but just 1.9 percent of its loan book is nonperforming.

Another option is partnering with fintechs like Jumo, which aggregates data and algorithms to enable its partners, such as Barclays Africa and Old Mutual, to grant 50,000 loans per day between them. A third approach to credit risk management is the use of payroll lending to secure repayments. One example is Letshego, which has more than 340,000 borrowing customers across 11 African countries.

Such innovations on risk will help unlock the consumer credit opportunity in Africa: today only 17 percent of African banking customers have consumer loans, compared to over 97 percent with a transactional product. Technology makes rapid progress in many of these themes attainable. Robotics are offering ever-cheaper ways to automate processes; machine learning can process massive data lakes to support higher sales productivity or improved credit assessment; mobile technology is continually reducing the marginal costs to serve customers; and cryptocurrencies raise the potential for very low-cost payments processing.

We are privileged to be part of the exciting growth story of African banking.

This report draws on the experience of our partners and colleagues serving banks across the continent. It also draws on McKinsey’s Global Banking Pools research; a proprietary database of the financial performance of 35 of Africa’s leading banks; a survey of executives from 20 banks and financial institutions across Africa; and the broad-based survey of 2,500 customers mentioned above.

Africa’s retail banking markets are ripe with potential and present huge opportunities for innovation and further growth. The following pages offer an up-close tour of those opportunities, in all their richness and diversity.


Proshare Nigeria Pvt. Ltd.



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