Africa’s banking systems have played a significant role in the continent’s impressive transformation, thanks to the integration of robust risk management and resilience measures.

In March, the global financial system faced pandemonium due to the unexpected collapses of Silicon Valley Bank and Signature Bank in the US. This, combined with a run on some banks, sparked fears of a global contagion. The banking industry, having just recovered from the Covid-19 pandemic, was ill-prepared for another crisis. However, swift action by governments and regulators prevented an unprecedented meltdown.

In contrast to banks in the developed world and most emerging markets, the banking industry in Africa remained relatively unaffected during the recent financial crisis. This can be attributed to the shift in the way African banks operate. Previously, they were heavily influenced by their global counterparts, with decisions and strategies being dictated by Western capitals.

However, in recent years, African banks have taken a more independent approach, allowing them to navigate challenges more effectively while still maintaining connections to the global financial system. This increased autonomy has provided African banks with the necessary flexibility to withstand economic turbulence.

“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 per cent increase compared to the previous year. The industry also saw a combined return on equity rise to 17.1 per cent compared to 15.9 per cent 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 per cent growth from $3.4bn in 2021. In Kenya, the nine listed banks cumulatively posted $1.3bn in profits last year, a 25 per cent increase from $1bn in 2021.

Strong earnings growth
The performance of banks in Africa highlights that domestic factors such as political instability and macroeconomic upheavals are more significant threats than global shocks. In South Africa, despite complex operating conditions, a volatile macroeconomic context, and a strained local economy, banks managed to achieve strong earnings growth. This success can be attributed to the diligent efforts of management teams in understanding the operating environment and adjusting their strategies accordingly, as stated by 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

Banks in Africa have successfully built resilience mechanisms to withstand global crises. Regulators have implemented risk-based regulatory mechanisms to ensure industry stability. Banks have also adopted growth-focused strategies with strong internal safeguards. As a result, the industry has become highly 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 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 has faded. Barclays Bank has exited the continent while Standard Chartered Bank has downscaled operations. Banks like Standard Bank, Ecobank, Bank of Africa, Access Bank, and Absa Bank have crafted a Pan-Africa strategy, disrupting the status quo.

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 per cent 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.

In Africa, banks have learned valuable lessons from both the 2008 global financial crisis and the disruptions caused by Covid-19. One significant lesson that differentiates the African banking industry from the West is the importance of addressing non-performing loans (NPLs). While banks in the West still engage in risky lending practices, African banks approach lending with a greater degree of caution.

According to a report by McKinsey, banks in Africa have an average loan-to-deposit ratio below 80 per cent and a loan-to-asset ratio of less than 70 percent. This indicates that African banks tend to invest in lower-risk assets, such as government securities, during periods of high inflation. While this approach demonstrates caution, it has helped banks stabilize their profitability. Due to the constant awareness of potential crises, especially external ones, African banks have maintained a somewhat conservative stance compared 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 recognize the importance of investing in technology, digitalization, and innovation to build resilience. Cyber-attacks have targeted the continent, resulting in significant financial losses. A report by Group-IB reveals that between 2018 and 2022, banks, financial services, and telecommunication companies in 12 African countries lost $11m from 30 attacks. To combat this ongoing risk, banks have invested in robust core banking systems to enhance security and operational efficiency. These systems have also helped address internal fraud. Additionally, digitalization and innovation have transformed the banking sector, driving growth and improving customer experience.

The deployment of digital transformation in areas like mobile, online and internet banking, as well as innovations such as artificial intelligence, robotics, and the internet of things (IoT), has resulted in significant benefits. One of the key advantages is the increased reach and customer penetration achieved through the expansion of banking channels. This development has played a crucial role in closing the financial inclusion gap. Currently, over two thirds of adults on the continent have access to formal financial services, a substantial increase from the mere 23 percent recorded just 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 such as rising inflation, weakening currencies, rising interest rates, fiscal constraints, and debt burdens pose significant threats. These risks are particularly challenging for banks as they have the potential to impact growth, profitability, and overall stability. “Banking is always a risky business and risk is not where you expect it. Domestic disruptions are ever-present dangers,” says Rossouw.

The banking industry in Africa is actively working towards disentangling itself from its Western counterparts but remains united in its focus on environmental, social, and governance (ESG) factors and sustainable finance. Despite being the lowest polluter globally, Africa is disproportionately affected by climate change. As a result, banks in the continent are facing pressure to integrate ESG considerations into their operations, risk management, and investment decisions. This includes supporting renewable energy projects and providing socially conscious lending to 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.

Banks in Africa must remain vigilant despite their current confidence in weathering crises. The dynamic nature of the banking industry, both locally and globally, means that a financial earthquake is always a potential threat. The extent of damage for African banks will ultimately be determined by the epicenter of the crisis.