Africa's banks are doing what U.S. banks aren't: Winning

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. In fact, the continent is the banking industry's second-fastest growing market and profitable region. There was a loss of 6,008 bank locations in the lower 48 U.S. states and the District of Columbia between 2008 and 2016, according to the NCRC. 

Here's what you need to know about African banks' success story. 

Learn more: Best current CD rates

HOW WELL ARE THEY DOING?

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 expected 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. 

WHY ARE AFRICAN BANKS THRIVING?

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 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 last 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 under 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," Chironga said. 

CHALLENGES — OPPORTUNITIES, TOO 

Getting to grips with Africa's banks can be a challenge because it is a continent of 54 countries with stark differences in size, infrastructure, social cohesion, digital penetration and other variables. About 85% of Africa's population earns less than $5,000 per year. There are also big gaps in corporate governance rules and regulatory oversight, according to a report published by Moody's, an investment research firm.

But Africa's banking sector also represents a massive opportunity.

Today, approximately two-thirds of Africans remain "unbanked" — not served by a bank or similar institution. By 2022, McKinsey thinks that close to half of all Africans — about 450 million people — will be using banking services in some form.

"Africa: too big to ignore," says the website of Atlas Mara, an Africa-focused financial services firm started by former Barclays bank Chief Executive Bob Diamond. 

HOW CAN YOU INVEST IN AFRICAN BANKS?

American investors can purchase stocks in most of Africa’s major banks listed on the continent’s various stock exchanges: the Johannesburg Stock Exchange, the Nigeria Stock Exchange, the Nairobi Stock Exchange in Kenya. 

Several leading American investment banks — J.P. Morgan, Morgan Stanley, Goldman Sachs — also operate directly in the region, and these firms will offer investors access to investment opportunities in banking across multiple geographies, whether in South Africa, Morocco, Egypt, Kenya, Ghana or the Ivory Coast, according to McKinsey's Chironga.