Business and Finance

The rise of African banking

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Africa’s banking industry has gone through huge changes during Jacko Maree’s career. The former chief executive of Standard Bank believes the future for banks on the continent looks promising, but says they will have to adapt to regulatory changes and tap new types of clients. Interview by Paul Wallace.

Jacko Maree has witnessed enormous changes in African banking during the course of his career. The continent’s financial industry has matured particularly rapidly since 2000, thanks to high economic growth and deepening trade links with the rest of the world.

Standard Bank, of which Mr Maree was chief executive from 1999 until March 2013, exemplifies this shift. In 2000, the South African lender, Africa’s biggest, had less than $30bn of assets. Today, its balance sheet stands at roughly $165bn.

The race to South Africa

Although Standard Bank has a wide presence across Africa, much of its growth over the past 15 years has taken place in its home market. Since it ushered in universal democracy in 1994, South Africa’s economy has expanded significantly, increasing by 150% in dollar terms.

The ending of apartheid opened the country up to foreign investment. As Mr Maree states, it became a more acceptable place for the world’s companies to do business. In the banking sector, international investment banks and portfolio investors rushed in, and the capital markets flourished. Monthly equity trading volumes on the Johannesburg Stock Exchange climbed tenfold to R340bn ($33bn) between the late 1990s and last year. Turnover of foreign exchange and bonds also rose dramatically.

“From the mid to late 90s, South Africa’s banking system changed a lot,” says Mr Maree, who remains at Standard Bank in a role managing key client relationships. “For one, all the big global investment banks entered the wholesale market. With that came the development of all our traded markets. There was a huge increase in liquidity and sophistication.”

As well as bolstering its wholesale banking services to compete with foreign firms, Standard Bank in the late 1990s and early part of Mr Maree’s tenure had to reconfigure its retail operations. It was not alone. All of South Africa’s four main banks – a group comprising Absa, FirstRand, Nedbank and Standard Bank – had to adapt to the emergence of a black middle class. “The branch networks were inappropriately positioned to deal with this,” says Mr Maree. “A lot had to be done to make retail banking relevant to what was a very differently configured economically active population.”

Banking the masses

South Africa’s big four banks still draw criticism for not servicing the poorer sections of the population enough. Some point to the rise over the past decade of African Bank and Capitec, two lenders specialising in unsecured loans to the likes of junior civil servants, as evidence of that.

Mr Maree insists that while such an argument may have been justified 15 years ago, the large banks, having invested in new branches, ATMs and mobile banking products, can no longer be accused of neglecting the country’s masses. “If you look at their networks and use of technology today, I don’t think you can say it is still true,” he says. “Standard Bank effectively services a huge number of customers that previously weren’t in the banking system.”

Standard Bank has long had an international strategy, deciding to venture abroad almost as soon as it was sold by Standard Chartered in 1987 to become an independent institution. One reason was that its executives felt South Africa, despite being Africa’s leading economy, would not offer enough opportunities on its own to meet their ambitions. “South Africa is a small country,” says Mr Maree. “It has less than 1% of the world’s gross domestic product. It has similar issues to, say, the Netherlands or Switzerland, countries with sophisticated banking systems but small domestic markets.”

Standard Bank set up offices in Europe, Asia and Brazil. But Africa was always a core part of its plans. While its three main rivals all had ideas about expanding into the rest of the continent, none was as bold at Standard Bank, which now has subsidiaries in 17 African countries aside from South Africa. “In the late 1990s, there were not that many big banks and foreign investors talking about Africa,” says Mr Maree. “We were definitely a pioneer in that regard.”

The attitude of foreign investors towards sub-Saharan Africa has evolved markedly since then. Thanks to strong commodity prices, rising consumer demand and improvements, albeit from a low base, in governance and the quality of institutions, the region has grown quicker in that period than anywhere bar emerging Asia. Banks have been among the main beneficiaries. “A few megatrends have powered an improvement in many countries,” says Mr Maree. “That’s meant greater opportunities for banks.”

Tough environment

Banking in sub-Saharan Africa is far from easy, however. Not only is its population poor, but the financial infrastructure in many countries, including legal systems and regulation, is weak. For South African banks, coming from what is easily the continent’s most sophisticated economy, with a first-world financial system, expansion into the region can be problematic.

Standard Bank’s experience testifies to these challenges and the difficulty of breaking into what are typically fiercely competitive markets. Its consumer and small business banking operations outside of South Africa made a $30m loss last year. And in Angola, which it entered in 2010, it is not yet profitable.

Mr Maree says that foreign lenders going into sub-Saharan countries cannot expect to become major retail banks overnight. Plenty of patience and investment are needed before they can win much market share. Often, the best option is to concentrate initially on wholesale banking. “In South Africa, we tend to be all things to all people,” says Mr Maree. “But when we go abroad, we naturally choose businesses in which we think we can compete. Almost always, we’ve found that, unless you make an acquisition, you have to start off with corporate and investment banking. Only later, once you are better known and have your infrastructure up, can you really aspire to compete in retail banking.”

In the few years before 2010, Standard Bank set its sights on the major emerging markets. In 2007 it bought banks in Argentina and Turkey, and two years later took a 36% stake in Russian investment bank Troika Dialog.

The financial crisis forced a rethink, says Mr Maree. Standard Bank has since sold up fully in Russia and only retains minority stakes in Argentina and Turkey, while its Brazilian bank has been scaled down.

Yet, linking Africa to outside investors, not least those in developing markets, remains crucial to Standard Bank. In late 2007 it sold a 20% stake to Industrial and Commercial Bank of China (ICBC), the world’s largest lender by assets and Tier 1 capital, according to The Banker’s Top 1000 ranking. The landmark $5.5bn transaction demonstrated China’s interest in Africa and gives Standard Bank the ability to work with the increasing number of Chinese companies investing on the continent.

First-mover advantage

Mr Maree believes the tie up with ICBC will prove highly beneficial to Standard Bank in the long term, as will its decision to refocus almost solely on sub-Saharan Africa.

Many of its South African competitors have been criticised for being too slow to move into the region or, when they have, not going beyond southern Africa. Catching up with Standard Bank is proving tough – FirstRand, South Africa’s second largest lender by capital, has seen attempts to buy banks in Nigeria and Ghana collapse in the past three years.

Banking in sub-Saharan Africa can be very lucrative. Established lenders in countries such as Nigeria, Angola, Ghana and Kenya – in all of which Standard Bank has full banking licences – routinely make returns on equity of more than 20%. Mr Maree sees little reason for such levels of profitability to dip much over the next few years. But he thinks that banks will have to start doing more to tap small and medium-sized enterprises, which are growing quickly throughout African but remain underserved by financial firms. “A lot of multinational lenders, out of necessity, tend to focus on the bigger corporations and state owned enterprises,” he says. “But much of the opportunity lies with the mid-sized corporate market.”

In the wholesale market, regulatory changes could pose several problems for African banks, says Mr Maree. One of their main challenges will be adapting to Basel III’s net stable funding ratio, which will force them to match the tenor of their assets and liabilities more closely. Given their reliance on short-term deposits for funding, they will have to innovate to ensure they are still able to finance Africa’s hefty infrastructural needs.

“With regulatory changes requiring a greater proportion of longer dated funding, some parts of wholesale banking will become more difficult,” says Mr Maree. “All African countries… have huge infrastructural needs. But it’s becoming harder for banks to finance long-dated assets such as ports or railways on their own balance sheets. So, to address the investment needs, plenty of creative banking structures will be required.”

Jacko Maree was the chief executive of Standard Bank from 1999 to 2013 and won The Banker’s Lifetime Achievement Award in 2013.

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