The allure of African banks

After leaving his job as Barclays chief executive in 2012 Bob Diamond has re-emerged as the latest investor to show confidence in Africa’s banking industry.

Collins Rudzuna

Diamond quit his job amid a storm over manipulation of the benchmark LIBOR interest rate. Rather than fade in shame, he quickly partnered with Ugandan entrepreneur Ashish Thakkar to set up Atlas Mara, an African focused fund that invests in the banking sector.

The two put US$20 million of their own money and raised US$325 million in an initial public offer in December 2013. Now they have made their first major acquisition, a 50,1% stake in BancABC subject to regulatory approval.

The BancABC deal, under which Atlas Mara will also acquire BancABC controlling shareholder ADC, is worth a staggering US$265 million which will be settled in cash and shares.

BancABC which is dually listed, in Botswana and Zimbabwe, has operations in Botswana, Mozambique, Tanzania, Zambia and Zimbabwe.

This regional footprint is reportedly one of the key attractions for Atlas Mara which intends to have Africa-wide operations.

Other acquisitions made by the company include 9,1% of Union Bank of Nigeria and a near-closed deal involving a controlling stake in the commercial banking arm of Development Bank of Rwanda.

About 38% of BancABC’s profits come from Zimbabwe, and in a way Atlas Mara’s investment is a wager placed on Zimbabwe’s banking sector.

Other investors have also placed their bets and taken a positive view on Zimbabwe in the recent past. Mauritian based AfrAsia Group invested US$9,5 million in Kingdom Bank, supported a US$20 million rights issue and also promised liquidity support to the local institution.

UK based Barclays plc injected US$7,7 million into their local subsidiary in 2011, Ecobank put US$10 million into what was then Premier Banking Group and African Century underwrote a US$10 million rights issue for NMB.

Further to African Century, three foreign investors; FMO, Norfund and AfricInvest in 2013 injected US$14,8 million into NMBZ Holdings.

What is the attraction for the investors to a sector that many consider overbanked one may ask? Market players have often decried the lack of liquidity as a hindering factor to the sector’s development.

Other issues include the lack of a lender of last resort, an incapacitated interbank market, liquidity problems and high operating costs.

For foreign investors, the attraction in Zimbabwe and other African countries actually lies in the potential profits that can be made in tackling all these problems. Lack of capital in particular is a hurdle that can easily be overcome by investors like Atlas Mara.

Their access to first world capital markets allows them a platform which they can use to garner support for capital raising, a privilege that local investors can only dream about.

Given this advantage, first world investors are also excited by the untapped potential that lies in many African markets. According to the World Bank, barely a quarter of Africans have bank accounts. Viewing all these as prospective customers shows that the upside is immense.

The downfall of course is that there is a reason why African financial markets lag behind their developed world peers. Income levels are typically lower in Africa and most people have little use for a bank.

Their meagre earnings go from hand to mouth, leaving nothing for savings. Upside potential touted by investors is therefore in reality limited by the lack of effective demand for banking services.

The mitigating factor is that the inflow of capital through investment into banking will itself be one of the factors that can influence Africa’s development, uplift livelihoods and create its own demand for banking services.

Capital that flows into African banks will ultimately have to be deployed into households and businesses that want to borrow.

A lot of these businesses are emergent small enterprises that have potential to grow into full-fledged businesses taking advantage of hitherto untapped business potential.

Even the bigger established businesses create downstream demand for support services which fosters growth. In the end, if the interest by foreign investors in Africa’s banking industry can be fully exploited; it can be the gateway for much needed capital for the wider economy.

Perhaps lured by the prospect of earning much higher lending rates on loans with a shorter tenure, bankers have certainly shown more interest in deploying, capital to Africa than investorsin other sectors.

Business and personal loans in capital starved markets like Zimbabwe usually attract much higher interest rates than in first world countries.

Mortgages in the first world usually have tenure of at least 25 years and interest rates below 5% per annum.

In Zimbabwe tenure can be as low as 10 years and interest as high as 25%! Bankers can take advantage of the arbitrage opportunity by raising capital in the first world and deploying it in Africa at margins unheard of in their own markets.

The catch of course is that operating costs and credit risk is much higher, leaving only those with a high tolerance for risk to participate.

In Zimbabwe for example industry average non-performing loans are above 15% of total loan books.

Time will tell if the foreign investors that have put faith in Zimbabwe’s and other African banking sectors will be vindicated for their brave moves.

It is up to local businesses to take full advantage of the investments and make good on the downstream benefits.

Without providing vindication for those that have put money into African banks, the flow of investors will be short-lived.