The rising middle class, aka ‘Black Diamonds’ and the need for financial inclusion is driving force in Africa's growing financial services industry. And to reach the growing middle classes, financial institutions need to mobile themselves out of branches and reach out to Africa's savvy consumers.
The rise of Africa’s financial services sector in recent years has been staggering.
According to the World Economic Forum, the growth of Africa's financial services industry in the last few years has been remarkable. From a dormant sector less than ten years ago, financial services are considered one of the continent’s biggest economic growth areas. This increase is in part due to financial sector development being on the agenda for many African policymakers (aside from profitable opportunities for investors). And, continued development has the potential to transform the lives of millions of people across the continent. For instance, access to insurances, secure banking, and access to credit for emerging entrepreneurs can provide jobs and a steady income to allow individuals to escape poverty.
Policy reforms in the past decade have created an environment conducive to financial sector development, and Governments have made progress in introducing much needed regulatory frameworks, information systems and regulatory institutions – all with the purpose of enabling and facilitating further growth.
Transformation, however, does not happen quickly. Most African countries still lag behind the rest of the world when it comes to the adoption of banking and insurance products. The Organization for Economic Co-operation and Development (OECD) suggests that financial services typically make up 20-30% of total service market revenue and about 20% of the total gross domestic product in developed economies, this creates substantial opportunities for sustainable growth. Growth which will prove profitable for investors who are willing to take on some risk and are innovative in their approach to financial services. Success depends on the ability to create new products, and use innovative ways to deliver products to the target markets across Africa.
The banking sector in many sub-Saharan African countries has demonstrated significant growth in recent years. A contributing factor is the rapid rise of pan-African banks, although the top four banks usually account for a majority of total banking sector assets within a particular country, the growing presence of subsidiaries of the main global banks will ultimately improve the availability and quality of financial services.
Although the banks that have made the biggest impact at the large banks from well-developed financial markets on the African continent. Because of this, financial services providers across the continent stand to benefit from gains in efficiency, innovation and financial deepening. For example Ecobank (with its roots in Togo) that has the biggest presence in Africa and had banking services in 36 countries, the United Bank for Africa (from Nigeria) operates in 19 countries across Africa, and Standard Bank has a presence in 20 African countries.
Despite strong growth in the continent’s banking sector, a significant proportion of the African population does not make use of formal financial services. The fact that the reach of commercial banks, in terms of branches and ATMs,
remains well below global averages is a contributing factor and the reason why financial services need to become innovative in reaching consumers. For example, some, banks are operating mobile and online banking platforms, mobile branches and using third-party agents such as supermarkets to reach customers dispersed over vast geographical areas.
African insurance markets
The insurance market in Africa, on the other hand, is under-developed. South Africa accounts for almost 80% of all premiums in sub-Saharan Africa, and the country has an insurance penetration rate (the total value of insurance premiums as a proportion of GDP) of about 13%, well above the developed world average. Of the rest, Kenya is among the most advanced, with a penetration rate of 3%. Nigeria, in comparison, is about 0.3%, even though it is Africa’s largest economy.
Low insurance penetration in Africa is mainly due to lack of awareness, and that many Africans are too poor to afford insurance. Typically, access to insurance only starts to increase quickly in the upper middle-income brackets, but with most Africans still just struggling to meet their basic food and other day-to-day needs, insurance is still a long way off for the majority of Africans. It's for this reason that insurance companies in Africa traditionally target the richest 5% of the population. Even in here in South Africa, with its well-developed insurance market, less than 30% of low-income adults have insurance1.
Of course, other key determinants of an insurance sector in any particular country are income levels, political stability, the depth and sophistication of the financial sector, the level and volatility of inflation, culture, and the capacity of companies to innovate.
Africa's insurance markets, however, are gradually changing. A few African countries already have relatively high-income levels and therefore sizable middle classes, which is spurring the development of insurance products, and the recent growth in the volume of insurance premiums in Africa.
Africa’s ‘uninsured’ presents a myriad of opportunities for foreign and African insurance companies, but also for microinsurers to sell low-cost products to the lower income bracket. Additionally, the rise of mobile money has added a new dimension to Africa’s insurance industry. Buying insurance from a mobile phone is an exciting growth area as it is an affordable way for Africans, especially in remote regions, to access insurance products. The successful rollout of such goods or services, however, does require the cooperation of telecommunications companies, banks, and insurers which can prove challenging in developing nations.
Historically, the reason for the lack of financial inclusion in Africa is due to the low level of income, the second barrier to the use of formal financial services is the distance that needs to be travelled to access services.
However, with rising incomes and a rapidly growing middle class, an increasing number of financial institutions have woken up to the potential that lies within Africa’s 1.2 billion consumer base. These financial institutions have also been forced to reconsider the way in they do business and embrace innovative strategies and go beyond ‘traditional banking products’ and shape products to fit African consumers’ ever-changing, financial sophistication needs.
Should banks be able to tap into the massive ‘under/unbanked' and ‘uninsured' populations, it could lead to a significant increase in new deposits and premiums. Also, even at lower profit margins, the benefits associated with leveraging economies of scale should contribute to returns on the bottom line.