The surprising place where banks are thriving (and it’s not the USA)

The traditional bank has been under threat for years amid new technologies that have changed the way consumers manage their money and pay for things.

In the U.S., branches have been closing at a rapid pace — 1,771 in 2017, according to a National Community Reinvestment Coalition study — as they exit less-profitable rural areas and try to lower costs, boost profits and regain trust in the aftermath of the financial crisis.

But according to a report published this week by McKinsey, a consultancy, one area of the world where the banking industry is flourishing is Africa. The continent is the banking industry’s second-fastest-growing market and second-most-profitable region.

McKinsey says that in 2017, banks in Africa had a return on equity — a measure of profitability — of nearly 15%, second only to banks in Latin America and more than double that achieved by similar institutions in developed markets in Asia, Europe and the U.S. Further, Africa’s banking industry is also likely to grow at a faster annual rate over the next five years compared to its counterparts in developed markets: 8.5% in Africa vs. about 4.5% for banks in advanced countries.

“Global media reports are more likely to highlight Africa’s social and political problems than its rise as a business market. Yet the reality is that the continent is in the midst of a historic acceleration that is lifting millions out of poverty, creating an emerging consumer class and propelling rapid economic growth in many economies,” the authors of McKinsey’s report say, adding that its banking industry reflects this achievement.

African banks are doing well because they are innovating in how they are meeting huge unmet needs among African consumers, according to Mutsa Chironga, a partner in McKinsey’s office in Johannesburg, South Africa, and one of the authors of its report.

For example, Chironga pointed to Kenya’s Commercial Bank of Africa (CBA), one of that country’s top-performing banks in recent years. CBA has partnered with Safaricom, a cellphone network, to create a phone-based, low-cost service for small loans and payments (the average is about $30). On the back of this service and others like it, CBA has expanded its customer base from 3 million to 17 million over the past five years.

Nigeria’s Wema bank launched the country’s first fully digital bank in 2017. It targets younger customers by making it easier for them to achieve their financial goals using their phones. The youth market is an underserved segment in Africa’s largest economy, where more than half of the population is younger than 30. Nigeria is the continent’s biggest producer of oil.

“African banks are innovating the banking business model in much more fundamental ways than banks from some developed countries,” said Chironga.

Customers do business at an Equity Bank in Nairobi, Kenya, in February. Banks are flourishing in Africa. AFP