African banks have become masters of managing risk

Africa is a continent that has undergone a remarkable transformation and this is in no small measure down to building resilience and rock-solid risk management into the heart of its banking systems


In March, the global financial system was in a state of pandemonium. The unexpected collapses of Silicon Valley Bank and Signature Bank in the US coupled with a run on some banks ignited fears of a global contagion. Having just recovered from the ravages of the Covid-19 pandemic, a crisis was the last thing the banking industry was prepared to confront. Luckily, swift action by governments and regulators averted a meltdown of unprecedented magnitude.

Conspicuously, while banks in the developed world and in most emerging markets were gasping for breath fearing for the worst, the banking industry in Africa remained largely unperturbed. It is not hard to see why. For years, banks in Africa operated at the mercies of their global counterparts with the pulse and direction being set in western capitals. Over the past few years, however, the matrix has changed, with banks in Africa walking their own path. Though still connected to the global financial system, disentangling themselves from the modus operandi of western banks has given banks in Africa the leverage needed to weather storms.

“African banks are prioritising their strategies on serving the needs of their clients,” says Jannie Rossouw, Professor at Wits Business School at the University of the Witwatersrand in South Africa. Essentially, this means that instead of domesticating western banks strategies, banks in Africa have made deliberate moves to develop solutions that meet the needs of their clients. This, for instance, explains why mobile banking is thriving in the continent and remains one of the tools for success in driving financial inclusion.

That banks in Africa no longer shiver when global counterparts get a cold is evident. Amid the global fears of a meltdown in March, banks in Africa were enthusiastically releasing their 2022 financial results.

The common denominator was mindboggling profits, particularly among tier one and tier two lenders. A case in point is South Africa, the continent’s biggest banking market. In 2022, the industry returned combined headline earnings of $5.5bn, a 16.1 percent increase compared to the previous year. The industry also saw combined return on equity rise to 17.1 percent compared to 15.9 percent in 2021.

It was the same in Nigeria and Kenya, two other major banking markets. In Nigeria, nine listed banks recorded combined non-interest incomes of $4.5bn in 2022, a 26.7 percent growth from $3.4bn in 2021. In Kenya, the nine listed banks cumulatively posted $1.3bn in profits last year, a 25 percent increase from $1bn in 2021.

Strong earnings growth
The impressive performance is a pointer to the fact that for banks in Africa, domestic factors like political instability and macroeconomic upheavals pose bigger threats as opposed to global shocks. In South Africa, PwC contends that banks managed to deliver strong earnings growth against complex operating conditions, a volatile macroeconomic context and a local economy under strain. “The results of the major banks reflect the intense efforts of management teams to take the pulse of the operating environment and calibrate their actions accordingly,” notes Francois Prinsloo, PwC Africa Banking and Capital Markets Leader.

Banks in Africa are today well capitalised and are subject to a well-developed system of supervision

The ability for banks in Africa to withstand global crises boils down to deliberate efforts to build watertight resilience mechanisms. The heart of this has been regulators being quite uncompromising in putting risk-based regulatory mechanisms into the core of policing the industry. This, coupled by banks’ internal strategies focused on growth pursuit intertwined with rock-solid rail guards, has seen the industry become quite stable. “Banks in Africa are today well capitalised and are subject to a well-developed system of supervision,” says Rossouw. Determination to build resilience mechanisms has taken many forms. Apart from capitalisation and omnipresent regulators, a period of mergers and acquisitions and consolidation has seen the emergence of a banking industry that is today dominated by Pan-African lenders, highly competitive homegrown banks and lenders serving niche market segments in their respective countries.

The era of multinationals controlling the market and implementing strategies developed in western capitals, some of which do not resonate with local needs, has faded away. Multinationals like Barclays Bank have exited the continent while Standard Chartered Bank has substantially downscaled operations, opting to focus solely on key markets and profitable business segments like corporate banking and serving high-net-worth individuals. In their place, banks like Standard Bank, Ecobank, Bank of Africa, Access Bank, Absa Bank among others have managed to craft a Pan-Africa strategy, thus disrupting the status quo in most markets.

Strong capital positions
Banks in Africa have also become extremely guarded on the aspect of risk management procedures. The result has been strong safeguards in terms of core capital, reserves and liquidity ratios. With tier one ratios averaging 15 percent in Africa, it shows that capital positions are strong and are similar to the global average. Besides, the need to guarantee soundness in asset and credit quality, disciplined cost management and pursuing a diversified portfolio has also become paramount.

For banks in Africa, lessons from the 2008 global financial crisis and Covid-19 disruptions have been vital. One key lesson, which sets the industry apart from the west, is the threat posed by non-performing loans (NPLs). Though banks in the west continue to dip their fingers into risky instruments, in Africa lending comes with a high degree of caution.

A report by McKinsey shows that in Africa, the average loan-to-deposit ratio is below 80 percent and loan-to-asset ratio stands at less than 70 percent. This is a pointer to the fact that banks in Africa continue to invest in lower-risk assets like government securities during high inflationary periods. While it reflects restraint, the benefit for banks has been stabilising profitability. The high levels of operational mindfulness to the ever-lurking threat of crisis, particularly external, has made banks in Africa remain somehow conservative in contrast to their global counterparts.

Though Africa’s approach has been quite innovative, it comes with limits. For instance, while the crypto industry was among the leading clients for the collapsed Signature Bank, which held $10bn in crypto deposits by January 2021, for African banks touching crypto would amount to dancing with fire. “Being conservative has been an asset for banks in Africa because it has protected them against contagion,” notes Rossouw.

Fighting cyber-attacks
African banks also understand that to become resilient, investing in technology, digitalisation and innovations is crucial. Evidently, the continent has become an easy target for cyber-attacks. A report by Group-IB, a Singapore-based cybersecurity firm, shows that between 2018 and 2022, banks, financial services and telecommunication companies in 12 African countries lost a staggering $11m from 30 attacks. The ever-present cyber security risk has forced banks to invest in robust core banking systems to deter attacks and improve operational efficiency. This has also helped in tackling the ever-present menace of internal fraud. While these systems have been critical in securing the back office, digitalisation and innovations have transformed the face of banking in the pursuit of growth and customer experience.

Deploying digital transformation in areas like mobile, online and internet banking and innovations such as artificial intelligence, robotics, and the internet of things (IoF) has brought about massive benefits. Top on the list is increasing reach and customer penetration by expanding banking channels, a development that has been instrumental in closing the financial inclusion gap. Today, over two thirds of adults on the continent have access to formal financial services compared to a paltry 23 percent as recently as a decade ago.

Digital transformation and innovations have also aided in increasing the speed of serving customers. On this, a majority of banks can now boast that over 80 percent of transactions are being performed on digital platforms. The ripple effect has been cutting down on costs associated with bricks and mortar and increasing efficiencies by reducing manual processes.

“We are reinforcing our digital uptake by creating e-commerce links. The use of cash is significantly reducing as people make digital payments and that for us is the biggest take-off,” said James Mwangi, CEO of East Africa regional bank Equity Group. Granted, proactive measures by regulators and internal strategies by banks have made the industry in Africa largely immune to global contagion.
This, however, does not mean the industry is free from dangers. Currently, and going into the future, the industry is becoming increasingly worried by domestic disruptors cutting across worsening political and macroeconomic fundamentals. In West Africa for instance, political instability, including coup d’états, are spreading fast. The impacts are widespread disruption to banking operations.

Banks in Africa continue to invest in lower-risk assets like government securities during high inflationary periods

Apart from political risks, macroeconomic factors have also become major sources of threats. These include rising inflation, weakening currencies, rising interest rates, fiscal constraints and debt burdens, among others. For banks, these risks continue to be minefields with potential not only to impact on growth and profitability but also on overall stability. “Banking is always risky business and risk is not where you expect it. Domestic disruptions are ever-present dangers,” says Rossouw.

Though the banking industry in Africa has witnessed deliberate attempts to disentangle itself from its western counterpart’s hooks, it remains united on the aspect of environmental, social and governance (ESG) and the push for sustainable finance. Globally, Africa is the lowest polluter. Yet, the continent is bearing the brunt of climate change. For this reason, banks in the continent are under pressure to incorporate ESG factors into their operations, risk management and investment decisions. This has also meant embracing sustainable finance and socially conscious lending practises like funding renewable energy initiatives and assisting small and medium-sized businesses with positive social impact.

This, in effect, brings about the pressure for banks to walk away from lending to ‘dirty’ sectors like fossil fuels that have traditionally been huge clients with great returns. South Africa’s Nedbank, for instance, has announced it will stop funding new thermal coal mines by 2025 and halt direct funding of new oil and gas exploration as it plans to phase out fossil fuel exposure by 2045.

Though today banks in Africa are confident of weathering any form of crisis, they cannot afford to drop their guard. The fluidity that characterises the banking industry, not just in the continent, but globally means that a financial earthquake is always a distinct possibility. For banks in the continent, the magnitude of destruction now solely depends on the epicentre.