OPPORTUNITIES FOR FINANCIAL SERVICES IN SUB-SAHARAN … · Sub-Saharan Africa excluding South Africa Wealth and thereby financial services opportunities are proportional to relevant

OPPORTUNITIES FOR FINANCIAL SERVICES IN SUB-SAHARAN AFRICA

Canback Consulting

ABOUT THE AUTHOR

Dr. Staffan Canback is the managing director of Canback Consulting. He is based in Boston.

Canback Consulting

Canback Consulting, a member of The Economist Group, is a global management consulting firm serving the world’s largest companies. This has taken Canback to 89 countries since the founding in 2004.

The basis for the firm’s work is predictive analytics, applied with high resolution, and informed by on-the-ground market observations. Canback has five practices: Strategy, M&A Due Diligence, Sources of Growth, Corporate Finance, and Performance Improvement.

For more information, visit www.canback.com

OPPORTUNITIES FOR FINANCIAL SERVICES IN SSACanback Consulting

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This note looks at opportunities for financial services companies in sub-Saharan Africa (SSA) outside South Africa. We anticipate strong growth in select countries and cities.

To understand the nature of this growth, we look at 1) GDP growth, 2) the current branch infrastructure by city, 3) where wealth is and where it will be, and 4) risks. The paper is intended to give a general overview of the opportunities.

Countries are usually described by national GDP. However, it is more useful to look at income among those people that can afford a product or service. Therefore, we describe SSA through the lens of GDP attributable to the middle and upper classes—relevant GDP (exhibit 1).

Nigeria is by far the largest but holds only moderate growth prospects. Countries like Kenya, Cote d’Ivoire, and Ghana have excellent growth prospects, but start from a fraction of Nigeria’s base. SSA’s relevant 2019 GDP is 155% of South Africa’s, while SSA’s annual growth is expected to be 5.0% versus South Africa’s 1.9%.

GDP AND ITS EVOLUTION

In research, one can strive for general, precise,

or realistic findings. The three cannot be maximized

simultaneously. This trade-off is commonly referred to as the Horns of the Dilemma.

This note mainly aims for generality, secondarily for

precision, and lastly for realism.

Precision

Realism

HORNS OFTHE DILEMMA

EXHIBIT 1: GDP GENERATED BY MIDDLE CLASS AND ABOVE

Source: Canback Global Income Distribution Database, SSA edition

Generality

Sub-Saharan Africa excluding South Africa

GDP (USD billions) GDP growth '19-'29


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EXHIBIT 2: GDP GENERATED BY MIDDLE CLASS AND ABOVESub-Saharan Africa excluding South Africa

Wealth and thereby financial services opportunities are proportional to relevant GDP, and thus this gives an indication of the size of the prize.

An even better lens is to look at relevant GDP by city (Exhibit 2). SSA cities (pop. > 100,000) make up 52% of SSA’s relevant GDP, but only 25% of the relevant middle- and upper-class population. In fact, as cities are hubs for surrounding areas, we estimate that they cover 70% of relevant GDP.

Source: Canback Global Income Distribution Database, SSA edition

With this in mind, it is not surprising that financial services branches already are widely dispersed. Exhibit 3 shows the current number of international* financial services branches.

The map gives a good sense for where the financial services sector does well. Note the high density in West Africa and the emerging density around Lake Victoria.

Adding cash machines (ATMs) and money transfer outlets paints a similar picture (not shown). *By “international” we mean any bank or insurance company with branches in more than three countries, ranging from Togo’s Ecobank to France’s Credit Lyonnais.

FINANCIAL SERVICES BRANCHES

GDP (USD billions) GDP growth '19-'29


• 357 cities with >100,000 inhabitants• City circle areas proportional to

number of branches• Red cities have no branches

• 2,577 branches in total• Lagos largest with 264 branches

*Branches of international banks and insurersSource: Canback Global Income Distribution Database, SSA edition

GDP among relevant socioeconomic classes and the current branch structure paint a compelling picture. But even better would be to understand where wealth resides.

Exhibit 4 shows this. It estimates wealth by country by combining income distribution data (from the Canback Global Income Distribution Database) and Piketty's findings on the relationship between income and wealth to estimate net wealth. It also projects the 2019-2029 wealth growth by quartile.

Wealth has been assigned to all people except those of the marginalized class (the poor) which are assumed to have zero wealth. Since the marginalized class is large in all SSA countries this reduces the wealth estimate. Wealth has also been assigned to common goods such as public investments.

WEALTH

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EXHIBIT 3: INTERNATIONAL FINANCIAL SERVICES BRANCHES*Sub-Saharan Africa excluding South Africa


EXHIBIT 4: MONETIZABLE WEALTH BY COUNTRY IN 2019Sub-Saharan Africa excluding South Africa

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Finally, risk has to be considered. Exhibit 5 shows the economic risk profile (others are better qualified to assess political risk).

We measure risk as the volatility of constant GDP, exchange rates (inflation-adjusted), and inflation. These are statistically folded into two dimensions: market risk and financial risk.

ECONOMIC RISK

Wealth equals assets minus liabilities. This means that those can be, and are, much larger than wealth. But in the end, wealth is what drives the size of the financial services opportunity.

Nigeria overwhelms other countries and represents 32% of SSA’s total. Unfortunately, its future wealth growth is expected to be low, as was also seen in the GDP projections. East and French-speaking Africa represent better growth opportunities.

• Circle areas proportional to country net wealth

• Colors indicate wealth growth 2019 - 2029 - Red = 1st quartile growth (high) - Light red = 2nd quartile growth - Light blue = 3rd quartile growth - Blue = 4th quartile growth (low)

Source: C-GIDD SSA edition, Thomas Piketty (2013): Capital, Canback analysis


Source: Canback Global Income Distribution Database

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EXHIBIT 5: ECONOMIC RISK IN SUB-SAHARAN AFRICAExcluding South Africa

This note paints a quantitative picture of the opportunities for financial services in sub-Saharan Africa.

Nigeria represents the largest opportunity, but with moderate growth and high risk. Kenya and Senegal (to pick two examples), on the other hand, will see high growth by any global standards, at a moderate to low risk.

Financial services companies differ in geographic strengths, risk appetite and in many other ways. Only a strategic review taking these factors into account and matched against the market opportunities will yield insights on what to do.

CONCLUSION

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Dr. Staffan Canback

Ivan Izus Torossian

Teddy Purnomo

Arshad Abba

Caleb Darsch

Francisco Maciel

Shuyuan Hu

Canback Consulting

Email: [email protected]

OPPORTUNITIES FOR FINANCIAL SERVICES IN SUB-SAHARAN … · Sub-Saharan Africa excluding South Africa Wealth and thereby financial services opportunities are proportional to relevant

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