Africa offers huge returns on investment for foreign institutions
A cocktail of an under-developed banking industry, favourable macroeconomic conditions and return on equity forecasts of up to 45%, means sub-Saharan Africa is now a highly attractive proposition.
The potential for growth in sub-Saharan Africa’s banking sector over the coming few years seems phenomenal. And foreign institutions, particularly those from western Europe looking to expand outside their sluggish home markets, are well-placed to take advantage.
Much of this potential stems from the fact that the continent, the world’s poorest, is starting from such a low base. There is plenty of scope for the under-developed banking industry to expand.
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Positive outlook
Macroeconomic conditions are also favourable. Sub-Saharan Africa has mostly come through the financial crisis strongly. The International Monetary Fund expects real gross domestic product to increase 5.5% this year and 5.9% in 2012, substantially faster than in Western economies.
Such growth is already propelling the financial sector. While western European banks are lowering their return on equity targets to about 10% to 15%, those in Africa can hope for a lot better. Mozambique’s biggest lenders made gains of 30% to 35% on their equity last year and are confident of doing the same in 2011. Some of oil-rich Angola’s are doing better still, delivering returns of 45% or more.
Fewer risks
Another attraction is that these levels of return can be made without lenders taking big risks with their liquidity. Mozambique’s main banks have capital-to-asset ratios of about 16% and loan-to-deposit ratios of less than 80%.
In addition, operating in the region does not require much expertise beyond retail banking. Since debt and equity capital markets are small or non-existent, corporate banking mostly involves providing vanilla loans or trade finance facilities.
Given all this, and the rapidly rising demand for consumer and corporate credit, many bankers and analysts expect the number of lenders in Africa to grow.
Foreign institutions have an advantage over local ones when it comes to this, thanks to their far greater financial clout. Few Mozambican investors, for example, have the $50m many think is needed to set up a profitable bank in the country. But for most western European and even some Asian and South American institutions – many of which are looking to Africa as trade between their local markets and the continent grows – such sums amount to petty cash.
