Banking Africa’s Underbanked

Access to savings and credit is essential to achieve growth in small business and entrepreneurship. For developing countries this is especially important. Growth in the financial sector helps stimulate economic growth and alleviate poverty. While many developing regions across the globe have made sizeable economic gains, Africa’s slow rate of development continues to be an area of concern. In their recent working paper, “Resolving the African Financial Development Gap: Cross-Country Comparisons and a Within-Country Study of Kenya,” Franklin Allen, Elena Cartelli, Robert Cull, Jun Quian, Lemma Senbet and Patricio Valenzuela shed light on the appropriateness of Africa’s rate of development while analyzing potential solutions to growing its financial sector.

According to the authors’ analysis, wide gaps exist between Africa’s expected and actual levels of savings and credit. Using a benchmarking exercise comparing countries in Africa to other developing nations, the authors found that for African countries, the average ratio of liquid liabilities to GDP (a standard measure of savings) was two-thirds its predicted level, at 30 percent. No other developing countries had levels below 40 percent. Likewise, when looking at the ratio of private credit to GDP, countries in Africa scored an average of 17 percent; other developing nations had ratios of 33 to 40 percent. The authors contend that these results “point to a systematic under-performance relative to fundamentals that have been associated with banking sector development in the rest of the world.”

Raising the question of why Africa’s savings and credit statistics differ to such a degree from other regions, the authors attempt to identify factors possibly driving this divide. The results from both country and firm-level data indicate that physical proximity to financial service providers has a much steeper impact on development in African countries than in other developing countries. In fact, the largest differences in savings and credit, on a country-by-country basis, appear in areas with low population density.

To determine the role bank penetration may ultimately play in the development of Africa’s banking sector, the authors also analyzed the business strategy of a pioneering bank in Kenya, Equity Bank. The authors’ research demonstrates that Kenya’s domestic banks have the largest presence in underdeveloped and underbanked regions. Non-government owned domestic banks have outpaced their competitors in bank branch expansion, growing their footprint by over 80 percent from 2006 to 2009. Equity Bank has led the way, more than doubling in size from 44 branches to 112 during the same time period. By employing strategies such as speaking local languages in its regional banks, Equity Bank has been able to successfully reach the rural customer base that foreign banks typically overlook.

The data in the study suggest Equity Bank has been able to grow its branch footprint and profitability simultaneously through its culturally specific expansion strategy. Its assets, deposits, and number of customers grew exponentially from 2006 to 2010, making Equity Bank Kenya’s fifth largest bank.

The authors conclude that although financial development in Africa has trailed other developing regions, addressing factors unique to Africa such as population density will be instrumental in expanding the banking sector and spurring economic growth. The success of domestic African banks such as Equity Bank in serving low population density areas demonstrates one method for realizing financial sector growth in developing African nations.

Feature Photo: cc/ (kenteegardin)