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Mobilising Africa's untapped potential: although some of the best returns on investment in the banking sector anywhere are to be found in Africa, the majority of Africa's working population remains unbanked. This enormous sector is still largely untouched. But now, the entry of private investors into the 'poor' end of the market is set to change all that. Dianna Games reports.

Only one or two families out of 10 in sub-Saharan Africa have bank accounts compared to nine out of 10 in the US. And to date, little effort has been made to focus on bringing the continent's largest market segment into the mainstream financial sector.


Private sector domestic and foreign banks have concentrated their efforts on the higher end of the market, including the corporate market, which is generally regarded as being more profitable and carrying less risk. Most foreign banks have been reluctant to extend branch networks outside any of the major cities, and have offered limited retail banking.

While state-owned banks have played an important role in providing the bulk of access to banking services in the rural areas and smaller cities, they have often been more of a constraint to economic growth than a contributor.

They have typically tended to suffer from politically motivated, under-performing loan portfolios, poor management, excessive staffing, and inadequate regulation. In many countries their accumulated losses have been a drain on their government owners.

But, for all this, the large state-owned banking franchises remain an attractive proposition for investors who want to get into African markets, or expand existing reach, but who may be reluctant to develop green-field operations.

It is expected that most of Africa's remaining state-owned banks will be sold within the next five years due to government recognition of the need for improved performance and delivery as well as agreements with multilateral institutions regarding financial reform.

This has provided an important opportunity for investors to enter the market, particularly those who are committed to the underserved and yet potentially lucrative micro, small and medium enterprise market.



One interesting entrant into this market is Africa International Financial Holdings (AIFH), a US-managed private equity fund which is working closely with microfinance experts in bidding for majority stakes in privatising banks in Africa.

Although the fund is relatively new, the fund managers--Massachusetts-based WPA Inc--are not, WPA is a specialised consulting firm whose professionals collectively have more than 50 years experience in bank restructuring and commercial banking in the US and Africa.

WPA President Wendy Abt says that many international banks and domestic financial institutions perceive that the retail and SME segments of the market are unprofitable. This has resulted in the concentration of effort on the higher income earners and corporates, which has left the majority of Africa's economically active people unbanked.

"AIFH's investors believe that making basic deposit, payments, and credit services widely available in Africa can be a good business." Investors in AIFH include HSBC Investment Bank Holdings plc, European Investment Bank, International Finance Corporation, and FMO, the Dutch development agency.

AIFH is looking at opportunities in seven African countries. It has already made a bid for a stake in Zambia National Commercial Bank and is a bidder in the Afribank privatisation in Nigeria, in which the 34% stake relinquished by the liquidated core investor, Banque Internationale Pour l'Afrique Occidentale (BIAO), is up for sale.

The Fund's goal is to acquire seven to 10 banks with significant branch networks over the next three years and to transform them into efficient, large-scale retail banks serving all customer segments, including informal sector micro enterprises and low-balance retail customers.

Abt says the experience of microfinance programmes is that low-income people in Africa and elsewhere are responsible users of credit. This experience, however, has not been applied on a large enough scale by NGOs to have a substantial impact.

"While small scale microfinance programs have shown that financial services can be provided to the poor on a self-sustaining basis, existing programs don't have the capital and infrastructure to reach as much of the population as could benefit," says Abt. "Banks have the capital and infrastructure to make a real difference."


In most of its target countries, AIFH has joined forces with a leading global microfinance organisation, the Consultative Group to Assist the Poor (CGAP), a consortium of 28 development agencies working to build financial systems for the poor. CGAP was established by the major donor countries and leading microfinance practitioners, and provides resources in around 60 countries.


Both organisations have extensive experience in the global banking sector and ready funds and expertise at their disposal. AIFH has the largest pool of private equity capital committed to commercial banking on the continent at present, while CGAP has a proven track record of helping to build financial services for the poor in developing countries.

Elizabeth Littlefield, CEO of CGAP says: "Access to financial services such as savings accounts, small loans and the ability to move money from urban markets to rural relatives can transform the lives of low-income families. It enables them to create a cushion for emergencies, to build assets, to increase income and take advantage of opportunities."

"The early experiments with NGO-based microfinance proved conclusively that low-income people in developing countries value financial services, will pay the full costs for getting those services, and make excellent credit risks.

"This demographic represents a huge potential market that has hardly been tapped. We now have a major opportunity to show that these essential financial services can be provided on a large scale and can be commercially viable."

CGAP will join AIFH in developing business plans for retail financial services, including microfinance products, in banks the Fund is acquiring. Each bank will provide its branch network and technology infrastructure, while CGAP will design and implement strategies to roll out microfinance products, along with local technical partners wherever possible.

Abt says that given the current and potential markets in the region, banks that are willing to target small enterprises and lower-income retail customers will have a distinct comparative advantage.

"By leveraging existing retail branch networks and developing high-volume retail deposit and loan products for rural and urban lower-income clients, we can directly tackle the central growth opportunities in these markets. Our partnership with CGAP will make a big difference in helping Africans exercise their right to economic participation."
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Title Annotation:An African Business Special Report
Author:Games, Dianna
Publication:African Business
Geographic Code:60AFR
Date:May 1, 2004
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