Role of Banking R
While donor funders have played a pivotal role in providing financing for small farmers who require working capital to purchase quality seed and fertiliser in order to improve their chances of a successful harvest and a better yield, for example, governments and regulators could stimulate demand further. Money is created in urban areas and is needed in rural areas, and access to lending is absolutely essential to unlock the continent.
Fabrice Franzen, Partner and Head of Financial Services Practice for Africa: Bain & Company
The role of banks in emerging markets
Banks have the potential to be a force for good. Unemployment remains a significant problem in Africa and the ability to create jobs is primarily driven by the small business sector. However, many small- and medium enterprises without financial means have difficulty in accessing capital and banks have the ability to channel funds from where they are to where they’re needed.
There’s no point in having a debate on whether fintech is disintermediating banks – it’s happening already. New entrants to the South African banking sector, including Discovery Bank, Tyme and Bank Zero, are all off electronic platforms and we’re seeing a shift to using fintech, electronic platforms and apps which enable banks to be more inclusive using low-cost mechanisms.
There’ll be partnerships between current banks as we know them and fintech providers, and in certain circumstances there’ll be buy-outs to enable established banks to use digital platforms. The two will likely become competitors and in certain areas there’ll be collaboration.
When it comes to cryptocurrencies, the regulatory mindset globally is still quite conservative and many regulators will have to catch up and be more progressive. However, the South African environment is at the cutting-edge of best practice regulation and Basel III requirements must be met. [Note: Cryptocurrencies currently fall outside the banking regulatory environment. Banks can’t facilitate cryptocurrency transactions until regulations have been tabled so that they comply with international Basel III standards.]
“Accepting a ‘co-opetition’ model means banks move from attempting to do everything themselves through a branch network to using cheaper distribution channels.”
While South Africa has done reasonably well to enable access to financial services, the rest of Africa is dominated by large local or regional banks, which have a constrained risk appetite for lending to smaller businesses. In Nigeria, for example, only 20% of the funding needs of small businesses come from banks. The rest is self-financed and sourced from community funding, placing severe constraints on growth. Banks could do more to transfer funds throughout the system and not just to the top of the pyramid.
Banks have a role to play, but they need help. By increasing the balance sheets of development finance institutions, governments can encourage the supply of capital from the private sector. Public-private partnerships are needed to take the first tranche of risk.
A “co-opetition model”: technology and banking for increased financial inclusion
The combination of increasing risk appetite from banks, fintech innovations and partnerships between banks and telecommunications firms, large utilities or retailers looking for new revenue sources is beginning to create a co-opetition model for financial services.
This co-operative competition means banks, technology and telecommunications firms will still compete, but will also co-operate where they need each other, and it’s a recipe for greater financial inclusion. Accepting a “co-opetition” model means banks move from attempting to do everything themselves through a branch network to using cheaper distribution channels. For example, in Kenya, Safaricom’s M-Pesa and paperless banking service M-Shwari have partnered with KCB Bank and the Commercial Bank of Africa following the realisation that the relationship’s a symbiotic one: M-Pesa has millions of customers and KCB can provide access to funding beyond a small mobile wallet.
Interesting partnerships between banks with capital and telecommunications companies with low-cost distribution models and access to a diverse customer base have broadened the reach of financial services. Telecommunications companies have innovative means to assess creditworthiness and break the barriers of traditional risk assessment through data usage analysis by gauging how often customers buy data and in what amounts. However, banks continue to have established advantages, including access to relatively cheap deposit funding, as well as IT, compliance and risk management structures, and traditional funders will continue to play an intermediary role for the foreseeable future.
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