One of the world’s largest untapped markets is the banking system in Africa. Currently, only about a quarter of adults have bank accounts at formal financial institutions. Many domestic banks have begun to start up all over Africa. They face two major problems, a lack of infrastructure and short-term returns. The reason why a good amount of the big international banks (such as Citi) have stayed away from banking in Africa is that in order to develop this market there needs to be a network of branches opened wherever they want to do business. Large banks will usually not go into a new place until the per-person GDP of the area is $10,000 dollars. If they want to tap into the market of people who don’t have bank accounts they need to go into poorer regions, which is too risky for them. This is why regional banks are the ones putting their own networks together. It is risky, but they really have no choice if they want to do business domestically. Starting from scratch requires a good amount of capital and a group a very patient investors to be successful. The investors need to be patient because the returns in the short-term will be very little compared to the possible returns of the long-term. These regional banks take a bottom-up strategy in that they have to build their infrastructure by collecting deposits locally and meeting with clients face to face.
The regional startups do have one advantage over the larger, older banks. And this is the technology that they are starting with. Companies such as MasterCard have made it extremely easy for a bank to set up a credit card business. The startups have to purchase all the modern technology in order to be competitive. The advantage of this is that the regional banks have to buy just one level of technology, while big international banks have to piece together their “legacy system” together that has been around since the 1960’s. A banking-technology firm estimates that the regional banks will only have to pay 30% of their income to costs such as technology. This is in sharp contrast to the major international banks that average out at paying around 50% of their income.
So, do you think that this “boom” in domestic banking startups is good or bad? Is the lack of infrastructure in Africa going to be the demise of these banks?
I think that the ground-up approach of local entrepreneurs in Africa is the only way banking will take off. And by "Africa," I mean impoverished regions of Africa. Much of Africa is more developed and banking is no new phenomenon. The large banking corporations will not incur the risk of investing in impoverished African nations and therefore start-ups will be the only option. The shaky infrastructure will prove to be a challenge to these entrepreneurs but I believe it is a necessary risk to take. Increasing a country's savings rate increases growth in the long run.
ReplyDeleteThis is a great opportunity for many small businesses who want to expand their services to other areas in the country. With the expansion of cell phone use, e-commerce has the potential of taking off in these areas. The problem of mobile payment system is something these smaller banks could provide to these small businesses. I also see the potential of increase in savings for families. Having the money invested in a savings account will help them earn interest and having the potential to invest in assets that are earning a higher rate compared to inflation could have great benefits. Banks will also be able to loan more money out with fractional reserve banking, which increases economic growth in these areas.
ReplyDeleteArguably the biggest problem facing developing countries is the lack of capital and financial institutions willing to borrow to the most impoverished. Without any form of collateral, the extreme poor have to pay exorbitant premiums on small loans or take the money and run. With such a strong incentive for people to bail on their loan payment, no wise creditor is willing to risk losing their principle in these less developed areas. Microfinance loans offer a possible solution to start small-scale lending and borrowing mechanisms that the impoverished are able to pay back. Also by giving the loan to a group of people instead of a single person, the borrowers self select to only form up with those who won't cheat on their loan. Unfortunately there has been some recent criticism about the actual effectiveness of these loans. Some economists have found empirical evidence that suggests that the money borrowed isn't used by (1) people who really need it and (2) not being used to grow the economy/end the cycle of petty entrepreneurs.
ReplyDeleteI do think that this increase in banking start-ups is good. Recently Africa has seen great economic growth recently, catching the eye of many investors. With time Africa's banking system will expand. The Economist has a great article talking about Africa's banking system.
ReplyDeletehttp://www.economist.com/news/finance-and-economics/21572768-across-africa-banks-are-expanding-their-returns-arent-continent-dreams
ICT Works posted an article discussing how Bitcoins are going to reinvent banking in Africa within the next year. Considering the fact that Bitcoins are a completely new kind of digital currency that doesn’t come with the rules, regulation or history of your standard banking system. Furthermore, this new currency doesn’t rely on any capital investment to use – no payment gateways or processing fees – just pure digital capitalism.
ReplyDeleteBitcoin immediately looks interesting considering the challenges facing payment systems across Africa.