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Digital journeysMarch 3 2014

MINT banks face fresh challenges

The early 2000s were all about the emerging economies of Brazil, Russia, India and China. Now attention is shifting to the up-and-coming countries of Mexico, Indonesia, Nigeria and Turkey – the MINTs. And with rapid economic growth predicted, retail banks in these countries will be under enormous pressure to keep up.
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MINT banks face fresh challenges

As retail banks in the developed world rethink how they offer and sell their products, the economic rising stars are in a similar position, but for different reasons. In the West, banks are struggling with channel saturation; too many expensive branches and ATMs at a time when the digital channel is the only one set to grow. Meanwhile, developing economies are having to balance their growing physical distribution network against their digital channel to avoid the same mistakes.

But in the up-and-coming MINT countries of Mexico, Indonesia, Nigeria and Turkey, distribution is just one of the problems that these rapidly growing economies face. Regulatory controls, a high unbanked segment and a growing need to lend are all problems that countries with fast-growing economies will soon come up against. The long-term economic prospects of these countries hinge on the banking sector being up to the challenge.

Mexico’s strong reforms

Mexico has already set in motion reforms to reinvigorate its banking industry. Proposed by Mexican president Enrique Peña Nieto, the legislation will target Mexico’s financially conservative banks – those that boast high capital levels but are not as willing to lend as much as their high-capital counterparts abroad. This kind of reform is precisely the kind of push the Mexican banking industry needs to propel it into growth in line with MINT projections, although analysts predict it will take time for the reforms to have any real effect.

Having greater access to lending is something Mexico sorely needs. As much as 40% of the population has no current account and the credit that is crucial to drive the economy is not freely available. On top of this, banks in Mexico have been highly risk-averse, lending only the equivalent of 26% of gross domestic product (GDP) compared with Brazil, where the figure is more than double that, and Chile, where it is closer to 100%.

Mexico’s banking sector is currently dominated by units of major global banks: US bank Citi’s Banamex brand, Santander Mexico, HSBC Mexico and Spain’s BBVA, which controls about 20% of the lending market. There are clear signs, however, that the banking industry is on the right path. HSBC Mexico has entered a partnership with a microfinance company to provide seed financing to small companies, enabling smaller businesses to grow and expand. The bank has also invested in data analysis tools to drive sales.

Indonesia’s poor penetration

The penetration of the banking industry is a major hurdle in Indonesia, with the World Bank placing more than half the population in the 'unbanked' segment. For the economy to progress at the projected rate, there will have to be a big increase in the spending of the middle class and a greater effort by the banks to get more people banking. In terms of the ratio of loans to GDP, Indonesia is at 31%, relatively low among Asian countries.

Indonesia over the next few years is likely to be a good place to be a banker. Increased competition between banks will cause many to grow their workforce by up to 10%, according to a survey from PwC. This kind of growth is a good sign if the country is to become one of the century’s key economies.

While IT is expected to be a huge expense for Indonesian banks in the next few years, finding the talent may not be so simple. If Indonesia’s newly empowered Financial Services Authority commands the banks to put serious investment into their core banking systems, this could become a major obstacle to growth due to the scarcity of qualified IT professionals in the region.

Nigeria’s infrastructure issues

According to Godwin Emefiele, chief executive of Zenith Bank – Nigeria’s largest bank by Tier 1 capital – “the Nigerian banking industry is coming of age”. But the industry is far from mature. Financial inclusion in the country is a huge issue, with only 24% of the population holding a formal bank account, according to the World Bank.

With Nigeria’s banking infrastructure still massively underdeveloped, making banking services available to people is one of the biggest challenges the country faces. In 2013, for example, First Bank of Nigeria was forced to shut down almost all retail operations for four days while it carried out upgrades to its core banking system. In many aspects, infrastructure problems are all but out of banks’ control. Energy production and distribution remains a big problem in the country, with many banks still having to provide their own electricity.

Nigeria does have a strong strategy to get people using digital channels and remove the cost of cash. The Central Bank of Nigeria enacted a policy by which the country would begin moving away from cash. It says this policy will modernise payment systems “in line with Nigeria’s Vision 2020 goal of being among the top 20 economies by the year 2020” and hopefully lay the groundwork for Nigeria to become a major world player.

Tech-savvy Turkey

Turkey is the only MINT country whose economy is not dependant on commodities. A high level of consumption means that the country’s banking industry is in good health, bolstered by a youthful population very open to credit and spending.

Mahmut Akten, a coordinator for retail banking at Garanti Bank, says: “Having a young population is key for good growth in the coming years. Our young people do not have the same aversion to credit as some of the older generations.”

The rise of the digital channel is also important for growth in the banking industry in Turkey. While branches are still widely used for routine transactions predominately by older generations, the banks are expected to adopt a more Western approach and move towards a branch network that gives financial advice, with day-to-day transactions pushed into the digital channel.

The branch network is still not at capacity though, according to Mr Akten. “With 40 million people [52% of the population] still unbanked, the initial contact for many of these people will be through the branch," he says. “The largest problem Turkey is facing is how to convince people to use the bank. I expect technology to play a big role here.”

BRIC comparison

When looking at banks in the MINT countries, it is hard not to draw parallels between the banking sectors in the already-established BRIC economies of Brazil, Russia, India and China, which have recently gone through rapid growth that is only now beginning to slow.

The temptation for MINT countries to model their banking industry on that of China will be high, particularly Turkey, with its high demand for credit. China’s credit binge is starting to show signs of strain and there are expectations that over the coming years Chinese banks will be subject to much tighter regulatory controls in an attempt to rein in the industry.

The MINTs must be careful to maintain more measured growth and not allow the industry to overextend itself.

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