The rise of Africa’s financial services sector in recent years has been remarkable. From a relatively underexplored and underinvested sector a mere decade ago, today, this sector is considered to be one of the continent’s brightest prospects. This is due to the fact that financial sector development has been on the agenda of African policymakers for some time now as (aside from profitable opportunities for investors) continued development of this sector has the potential to transform the lives of millions of people across the continent. For instance, access to credit by the SME/the more informal businesses has the ability to provide jobs, create safety networks and, ultimately play a role in reducing poverty.
With this in mind, various policy reforms over the past decade have contributed to an environment more conducive to financial sector development and, where Governments have made progress in introducing much needed regulatory frameworks, information systems and regulatory institutions – all aimed at enabling and facilitating further development of this sector.
The transformation, however, is not something that will happen overnight, in a week, a month or a year. And, while most African countries still lag behind the rest of the world in the adoption of banking and insurance products, this creates substantial scope for continued future development. Thus offering profitable opportunities for investors who are willing to take on some risk and are innovative – as their success will depend of their ability to devise new products, or new ways to deliver their product offering that suits the nature of both the targeted markets and consumers therein, across the African continent.
To scope the current state of the FS sector in Africa, below I have outlined highlights for the banking and insurance industries in these sectors, alike.
Accounting for Africa’s ‘unbanked’ population
The banking sectors of a number of sub-Saharan African (SSA) countries have exhibited significant growth in recent years.
One of the contributing factors in this regard pertains to the rapid rise of pan-African banks. Banking industries across SSA are highly concentrated, with the top four banks usually accounting for the majority of total banking sector assets within a particular country. The growing presence of subsidiaries of major global banks on the continent will ultimately improve the availability and quality of financial services in recent years; however, the focus here has largely, but not exclusively, been on high margin corporate businesses as opposed to the growing retail including financial inclusion for lower income households and the ‘unbanked’ sectors of economies. Presently, the international banks with the largest footprints across Africa originate mostly from the United Kingdom (UK), France and the United States.
Added to these subsidiaries, large banks from well-developed financial markets on the African continent have in fact made the biggest impact. As a result, financial sectors across the continent stand to benefit from gains in efficiency, innovation and financial deepening. Some of the larger African banks include; Ecobank (with its roots in Togo) that has the biggest presence in Africa and rendering banking services in 32 countries by 2013, the United Bank for Africa (domiciled in Nigeria) that operates in 19 countries across Africa, Standard Bank who has a comprehensive presence within 18 African countries and, Barclays Africa Group that delivered banking services in 10 African countries by 2013 including through the Absa brand in South Africa.
Despite strong banking sector growth, however, a large proportion of the African populace still does not make use of formal financial services. The fact that the reach of commercial banks – in terms of branches and ATMs as a proportion of the population – remains well below global averages is certainly not helpful in this regard.
That said, commercial bank branches and ATMs are costly and most efficient in areas with high population density and are thus not really suited to serve the large ‘unbanked’ populations – which are widely dispersed over large areas. To bridge this gap, banks operating on the continent have started to explore alternative operating models, including mobile and online banking, mobile branches and using third-party agents, such as supermarkets and/or post offices, etc. wherever accessible and appropriate.
Reassuring (future) penetration in African insurance markets
The insurance market in Africa on the other hand is under-developed as – apart from South Africa, Namibia, and Mauritius – all countries have very low penetration ratios. According to Swiss Re, the total value of Africa’s insurance premiums was just shy of $70bn in 2013, down 2% from the $71.35bn in 2012. This means that Africa’s share in the global market was only 1.5%. The poor performance of Africa on a global stage is particularly noticeable if South Africa is excluded, as South Africa accounted for nearly 74% ($51.6bn) of all African insurance premiums in 2013, with the other 53 countries contributing $18.3bn, which is then only 0.4% of the global insurance market.
Low insurance penetration in Africa is mainly because most of a lack of awareness and the fact that most Africans are still too poor to afford insurance. Typically, access to insurance only starts to increase quickly in the upper middle income brackets, but with most Africans still just struggling to meet their basic food and other day-to-day needs, insurance is still a long way off for the majority of Africans. It’s for this – according to an article by Imara – that insurance companies in Africa traditionally target only the richest 5% of the adult population. Even in South Africa, which has a well-developed insurance market, less than 30% of low-income adults have insurance.
Additionally, other key determinants of an insurance sector in any particular country are income levels, political stability, the depth and sophistication of the financial sector, the level and volatility of inflation, culture, and the capacity of companies to innovate.
Africa’s insurance markets, however, are gradually changing. A few African countries already have fairly high income levels and therefore sizable middle classes, which is spurring the development of insurance, and the most recent growth in the volume of insurance premiums in Africa has been among the highest in the world over the past few years.
Africa’s ‘uninsured’ or underserved insurance markets present a burgeoning of opportunities for not only large foreign and African insurance companies, alike, but also for micro-insurers to sell low-cost products to the lower income bracket. Additionally, the advent of mobile money has also brought a new dimension to Africa’s insurance industry, where buying insurance on a mobile phone is an exciting growth area as it offers a more affordable way for Africans, especially in remote regions, to gain access to insurance products. The successful rollout of such products or services, however, does require the cooperation of telecommunications companies, banks, and insurance companies.
Overall, the non-life segment will continue to dominate in the short term, however, as Africans’ incomes grow and consumers become more financially savvy, there will be more and more opportunities in the life segment as well.
Historically, the main reason for the low level of financial inclusion on the continent pertains to low income levels in general. And, the second most significant barrier to the use of formal financial services relates to the distance that needs to be travelled so as to access such services.
However, with rising incomes and a rapidly growing middle class, an increasing number of financial institutions have woken up to the massive potential that lies within Africa’s one-billion-plus consumer base. These financial institutions have also been spurred to reconsider the way in which they do business and embrace innovative strategies so as to – go beyond the realm of ‘traditional banking products’ per se and – shape products to fit African consumers’ rising financial sophistication needs.
Should banks be able to tap into the large ‘under/unbanked’ and ‘uninsured’ populations across the continent, it could lead to a significant increase in new deposits and premiums, respectively. Also, even at lower profit margins, the benefits associated with leveraging economies of scale should contribute to returns on the bottom line. So, while not without challenges, Africa’s financial services sector presents compelling investment opportunities.
Author: Bisi Lamikanra, Partner & Head Management Consulting, KPMG Nigeria and FS Africa
Image: A customer conducts a mobile money transfer in the central business district of Kenya’s capital Nairobi REUTERS/Thomas Mukoya