Magazine article African Business

Mobilising Africa's Untapped Potential: Although Some of the Best Returns on Investment in the Banking Sector Anywhere Are to Be Found in Africa, the Majority of Africa's Working Population Remains Unbanked. This Enormous Sector Is Still Largely Untouched. but Now, the Entry of Private Investors into the 'Poor' End of the Market Is Set to Change All That. Dianna Games Reports

Magazine article African Business

Mobilising Africa's Untapped Potential: Although Some of the Best Returns on Investment in the Banking Sector Anywhere Are to Be Found in Africa, the Majority of Africa's Working Population Remains Unbanked. This Enormous Sector Is Still Largely Untouched. but Now, the Entry of Private Investors into the 'Poor' End of the Market Is Set to Change All That. Dianna Games Reports

Article excerpt

Only one or two families out of 10 in sub-Saharan Africa have bank accounts compared to nine out of 10 in the US. And to date, little effort has been made to focus on bringing the continent's largest market segment into the mainstream financial sector.

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Private sector domestic and foreign banks have concentrated their efforts on the higher end of the market, including the corporate market, which is generally regarded as being more profitable and carrying less risk. Most foreign banks have been reluctant to extend branch networks outside any of the major cities, and have offered limited retail banking.

While state-owned banks have played an important role in providing the bulk of access to banking services in the rural areas and smaller cities, they have often been more of a constraint to economic growth than a contributor.

They have typically tended to suffer from politically motivated, under-performing loan portfolios, poor management, excessive staffing, and inadequate regulation. In many countries their accumulated losses have been a drain on their government owners.

But, for all this, the large state-owned banking franchises remain an attractive proposition for investors who want to get into African markets, or expand existing reach, but who may be reluctant to develop green-field operations.

It is expected that most of Africa's remaining state-owned banks will be sold within the next five years due to government recognition of the need for improved performance and delivery as well as agreements with multilateral institutions regarding financial reform.

This has provided an important opportunity for investors to enter the market, particularly those who are committed to the underserved and yet potentially lucrative micro, small and medium enterprise market.

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PRIVATE INVESTORS ENTER THE SECTOR

One interesting entrant into this market is Africa International Financial Holdings (AIFH), a US-managed private equity fund which is working closely with microfinance experts in bidding for majority stakes in privatising banks in Africa.

Although the fund is relatively new, the fund managers--Massachusetts-based WPA Inc--are not, WPA is a specialised consulting firm whose professionals collectively have more than 50 years experience in bank restructuring and commercial banking in the US and Africa.

WPA President Wendy Abt says that many international banks and domestic financial institutions perceive that the retail and SME segments of the market are unprofitable. This has resulted in the concentration of effort on the higher income earners and corporates, which has left the majority of Africa's economically active people unbanked.

"AIFH's investors believe that making basic deposit, payments, and credit services widely available in Africa can be a good business." Investors in AIFH include HSBC Investment Bank Holdings plc, European Investment Bank, International Finance Corporation, and FMO, the Dutch development agency.

AIFH is looking at opportunities in seven African countries. It has already made a bid for a stake in Zambia National Commercial Bank and is a bidder in the Afribank privatisation in Nigeria, in which the 34% stake relinquished by the liquidated core investor, Banque Internationale Pour l'Afrique Occidentale (BIAO), is up for sale. …

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