Competition between banks, both local and international, for a stake in the rapidly growing markets in Africa is heating up.
But the drive is not without risks and challenges, according to industry players and analysts.
The growing and financially underserved populations of many African nations provide potential new sources of revenue for the industry at a time when the economies of developed nations remain stagnant.
The rise of the middle class is perhaps one of the most compelling developments in Africa in recent years, according to Diana Layfield, chief executive for Africa at Standard Chartered. She was speaking on the sidelines of the Ernst & Young Strategic Growth Forum on Africa earlier this month.
The bank, which operates in 37 markets in the region, said in October that it intends to double revenue from its Africa business over the next five years. The continent already contributes 8%, or $1.59-billion, to the group's revenue, which grew to $19-billion last year.
Layfield said the emerging middle class on the continent is driving the sustainability behind the African growth story roughly one in three people now have access to disposable income and require increasingly sophisticated financial products and services.
"It's [no longer] about a few people handling a resource economy; it's about having a meaningful consumer class."
Tough challenges
Challenges to working on the continent remain tough, she said. There are the well-known problems such as political risk, governance issues and the infrastructure deficit, particularly on the energy front, which help to stymie intra-Africa trade, keeping it below 15% of the region's total trade.
There is also a problem of access to finance, she said, particularly when it comes to the development of a vibrant small, medium and micro- enterprises sector.
Related to questions of access is the issue of identification and identity verification, she said. In many countries, financial institutions find it challenging to verify who people are and where they live.
Furthermore, in some countries, there are no established legal rights regarding land tenure or, because of some countries' positions on land rights, people cannot fully own title to their home or property, Layfield said.
"There are some things at a political and informational infrastructure level that need to be fixed."
South African banks
But matters such as these have not hampered South African banks. Absa announced at the end of last year that it was buying up the Africa business of its parent Barclays, which has a presence in 12 countries, including Kenya, Ghana and Uganda, for R18-billion.
Standard Bank has cut operations in Latin America and other emerging markets to focus on growth in major African countries such as Nigeria. First Rand has bought the Merchant Bank of Ghana for slightly less than R750-million.
Nedbank has aligned itself with Ecobank, which was first established in Togo, and has converted a loan of $285-million into a 20% stake in its partner, which gives it access to 35 African countries.
But these moves come at a cost, according to Tom Winterboer, financial services leader for South Africa and Africa at the advisory firm PwC. He said expansion in Africa requires a lot of investment, particularly in information technology, and it is often dollar based, which adds to the expense. It can also be "executive management intensive", taking up a great deal of time and effort on the part of banks' leadership.
Local banks are not only competing with each other but also with international companies such as Standard Chartered and HSBC, and, in some cases, local banks have the government behind them. In Angola, the state owns a stake in seven banks, Winterboer said.
The rating agency Fitch warned last week that, although diversifying in Africa could enhance South African banks' prospects in the long term, a "significant increase in exposures to other African markets could weaken their credit profiles.
"If the banks expand too aggressively in newer markets, they risk building up asset-quality problems and costs," the agency said in a statement.
"The operating environment is often more challenging than in South Africa and the risks for retail banking can be magnified due to a lack of, or nascent, credit bureaus," Fitch added.