African retail banking’s next growth frontier..
Revenue could pick up significantly in the next five years. The region’s winners are likely to emphasize a few key themes—such as going digital first or making banking leaner and simpler.Globally, the banking industry is facing disappointing returns and sluggish growth. For seven consecutive years, its return on equity (ROE) has stayed in a narrowly defined range, between 8 and 10 percent—a level that most consider the industry’s cost of equity. In 2016, ROE was at 8.6 percent, down a full percentage point from 2015. Moreover, the industry’s global revenue growth rate slowed to 3 percent in 2016, down from an annual average of 6 percent over the preceding five years.
Africa’s banking sector provides a refreshing contrast. Its markets are fast growing and nearly twice as profitable as the global average. Although competition is heightening and regulation is tightening, there is still much room to grow: Africa’s retail-banking penetration stands at just 38 percent of GDP, which is half the global average for emerging markets.
Africa’s banks face challenges aplenty, including low income levels in many countries, widespread use of cash in most economies, and poor coverage of credit bureaus. But some banks are already tapping the opportunities inherent in these challenges. For example, they are harnessing Africa’s widespread mobile-phone coverage to create low-price offerings and innovative distribution models. Driven by such innovation, African retail banking’s revenue growth could accelerate significantly in the next five years.