Roaring to life: Growth and innovation in African retail ...

Authored by:Mutsa ChirongaLuis CunhaHilary De GrandisMayowa Kuyoro

Global Banking February 2018

Roaring to life: Growthand innovation in African retail banking

1Roaring to life: Growth and innovation in African retail banking 1

Contents

Executive Summary 3

Overview: African banking’s next growth frontier 6

Chapter 1. Draw the right map 15

Chapter 2. Right segments, compelling offers 22

Chapter 3. Leaner, simpler banking 29

Chapter 4. Digital first 36

Chapter 5. Innovate on risk 47

Conclusion 53


Africa’s banking markets are among the most ex-citing in the world. The continent’s overall bank-ing market is the second-fastest-growing andsecond-most profitable of any global region, anda hotbed of innovation. The retail banking sectorin particular is a locus of new business models,emerging in response to challenges including lowlevels of banking penetration, heavy use of cash,sparse credit bureau coverage, and limitedbranch and ATM networks.

In this fast-growing, complex market, there arevast differences in performance between leadingand lagging banks. This report focuses on thedrivers of these differences—and explores fivethemes that separate winners from losers:

1. Draw the right map. Geography matters. About 65 percent of African banks’ profitability (measured by return on equity, or ROE) and 94 percent of their revenue growth, are attribut-able to their geographic footprint. Importantly, there is a shift underway in exchange rate-

adjusted revenue pools towards North Africa, East Africa, and West Africa, and away from South Africa and Central Africa. There are also huge variations in growth and profitability at the country level, with nations such as Côte d’Ivoire,

Ghana, Kenya, Mali, and Morocco featuring positively.

2. Right segments, compelling offers. Our re-search indicates that 70 percent of the growthin Africa’s retail banking revenue pools to 2025will come from the middle segments, defined asindividuals with annual income between $6,000and $36,000. The mass market—individualsearning less than $6,000 per annum—will ac-count for just 13 percent of this revenue-poolgrowth, but it is the fastest-growing segmentand one to watch. Whichever segments bankschoose to serve, it is critical that they developcompelling propositions targeted to those con-sumers. We surveyed 2,500 customers across

six African countries, and found that price andconvenience are the leading factors in cus-tomers’ choice of bank, followed by service.There is also huge room for growth in meetingunmet needs for borrowing, saving, investing,and protecting: fewer than 20 percent of Africanbanking customers hold products such as lend-ing, deposits, insurance, and investments.

3. Leaner, simpler banking. Africa has the sec-ond-highest cost-to-asset ratio of any region inthe world, at 3.6 percent—and this has wors-ened in the recent past. High margins havetended to protect African banks from a dramaticworsening of cost-to-income (CTI) ratios, butmargins are likely to come under pressure in theyears ahead. In response, banks must act nowto create simpler, leaner banking models. It canbe done: This report spotlights eight banks inAfrica that have made dramatic improvementsin cost-to-asset ratios, through a combination ofend-to-end digital transformation, sales produc-tivity, and back-office optimization.

4. Digital first. Some 40 percent of the Africanbanking customers we surveyed prefer to usedigital channels for transactions, roughly thesame share as those who prefer branches. Infour of the continent’s major banking markets,the share of customers who prefer digital chan-nels is significantly higher than the share prefer-ring the branch channel. Banks can adopt oneof four distinct digital strategies: The first is todigitally transform their existing operations, toincrease their share of digital sales and transac-tions to beyond 60 to 70 percent on eachmeasure, as Kenya-based Equity Bank hasdone. Second, banks can partner with telcos orfintechs to deliver mobile financial services totheir clients at a cost below that of the branchnetwork. An example, also from Kenya, is M-Shwari, the mobile-based loans applicationformed in partnership between CommercialBank of Africa and Safaricom. The third digital

Executive Summary

4 Roaring to life: Growth and innovation in African retail banking4

strategy is to build a digital bank from scratch—as Nigeria’s Wema Bank did in launching ALAT, Africa’s first fully digital bank, in 2017. Finally, banks can build an ecosystem or platform of non-banking services. Alipay in China and the Commercial Bank of Australia have applied this approach at scale in areas such as travel and

hospitality (Alipay) and home-buying (CBA).

5. Innovate on risk. African banking still has thesecond-highest cost of risk in the world, notleast because of a paucity of credit bureaus,combined with immature risk managementpractices in many banks. A number of excitinginnovations in credit risk management areemerging, however. Bank-telco partnerships likeM-Shwari are one example: the platform deliv-ers 80,000 consumer loans per month, but just1.9 percent of its loan book is nonperforming.Another option is partnering with fintechs likeJumo, which aggregates data and algorithms toenable its partners, such as Barclays Africa andOld Mutual, to grant 50,000 loans per day be-tween them. A third approach to credit riskmanagement is the use of payroll lending to se-cure repayments. One example is Letshego,which has more than 340,000 borrowing cus-tomers across 11 African countries. Such inno-vations on risk will help unlock the consumer

credit opportunity in Africa: today only 17 per-cent of African banking customers have con-sumer loans, compared to over 97 percent witha transactional product.

Technology makes rapid progress in many ofthese themes attainable. Robotics are offeringever-cheaper ways to automate processes; ma-chine learning can process massive data lakes tosupport higher sales productivity or improvedcredit assessment; mobile technology is continu-ally reducing the marginal costs to serve cus-tomers; and cryptocurrencies raise the potentialfor very low-cost payments processing.

We are privileged to be part of the excitinggrowth story of African banking. This reportdraws on the experience of our partners and col-leagues serving banks across the continent. Italso draws on McKinsey’s Global Banking Poolsresearch; a proprietary database of the financialperformance of 35 of Africa’s leading banks; asurvey of executives from 20 banks and financialinstitutions across Africa; and the broad-basedsurvey of 2,500 customers mentioned above.

Africa’s retail banking markets are ripe with po-tential and present huge opportunities for innova-tion and further growth. The following pages offeran up-close tour of those opportunities, in alltheir richness and diversity.

Nairobi, Kenya

1 The Phoenix Rises: Remaking the Bank for An Ecosystem World, McKinsey Global Banking Annual Review, October 2017.2 African currencies typically depreciate over time versus international currencies such as the US dollar and the euro. When the im-pact of currency movements is considered, the growth rate projected for 2017-22 of 8.5 percent is reduced to 4.5 percent.

3 These figures and growth rates are in fixed US dollars. If past and projected depreciation of African currencies are considered,growth rates would be lower.


Globally, the banking industry is facing disappoint-ing returns and sluggish growth. For seven consec-utive years its ROE has been stuck in a narrowlydefined range, between 8 percent and 10 per-cent—a level that most consider the industry’s costof equity. At 8.6 percent for 2016, ROE was downa full percentage point from 2015. Moreover, the in-dustry’s global revenue growth rate slowed to 3percent in 2016, down from an annual average of 6percent over the preceding five years.1

Africa’s banking sector provides a refreshing con-trast. Its markets are fast-growing and nearly twiceas profitable as the global average. Although com-petition is heightening and regulation is tightening,there is still much room to grow: Africa’s retailbanking penetration stands at just 38 percent ofGDP, half the global average for emerging markets.

Africa’s banks face challenges aplenty, includinglow income levels in many countries, widespreaduse of cash in most economies, and poor cover-age of credit bureaus. But some banks are al-ready tapping the opportunities inherent in thesechallenges, for example harnessing Africa’swidespread mobile-phone coverage to createlow-price offerings and innovative distributionmodels. Driven by such innovation, African retailbanking’s revenue growth could accelerate signif-icantly in the next five years.

Africa’s fast-growing, profitable banking marketsGlobal media reports are more likely to highlightAfrica’s social and political problems than its riseas a business market. Yet the reality is that thecontinent is in the midst of an historic accelera-tion that is lifting millions out of poverty, creatingan emerging consumer class, and propellingrapid economic growth in many economies. Re-

flecting this broader economic progress, Africatoday is the second-fastest-growing bankingmarket in the world, taking both retail and whole-sale banking together. Between 2012 and 2017,African banking revenue pools grew at a com-pound annual growth rate of 11 percent in con-stant 2017 exchange rates. We expect theAfrican banking market to remain a growth leadergoing forward, growing at a rate of 8.5 percentover the next five years.2

Africa is also the global banking industry’s sec-ond-most profitable region: the ROE of its banksin 2017 stood at 14.9 percent, second only toLatin America and comparable to other regionssuch as Emerging Asia and the Middle East (Ex-hibit 1). The ROE of African banks was more thandouble the 6 percent achieved by banks in devel-oped markets. African banks’ profitability in 2016was marginally higher than in 2012, driven by im-proved margins—although these gains werelargely offset by higher risk costs. Indeed, as wewill see later, African banks increased their mar-gins by 0.9 percentage points over this period to6.8 percent, while globally, margins remained flatat 3.8 percent.

In terms of size, Africa’s banking market is todayapproximately $86 billion in revenues before riskcost. Our projected growth for Africa banking rev-enue pools of 8.5 percent a year between 2017and 2022 will bring the continent’s total bankingrevenues to $129 billion. Of that total, $53 billionwill be in retail banking—up from $35 billion in2017 (Exhibit 2)—an absolute growth in retailbanking revenues of $18 billion.3

Another notable feature of Africa’s banking land-scape is the staggering growth in the number of

Overview: African banking’s nextgrowth frontier


8.0 7.0 9.0 2.0

15

0 0 1.0

25

10

4.0 5.0 6.0 3.0

5

20

Latin America

Africa

Middle EastDeveloped World

Emerging Asia

Eastern Europe

Exhibit 1

Size of revenue pool 2017, $ billionReturn on equity, 2017%

Banking revenue pool CAGR 2017-22E1

%

1 Client-driven revenues before risk cost; constant 2017 exchange rates. Source: McKinsey Global Banking Pools

Africa’s banking market is the second-fastest in terms of growth, and the second-most profitable

2012-17WholesaleRetail 2017-22E

76(59%)

51(59%)

53(41%)

10.3

12.1

8.4

8.6

35(41%)

31(61%)

20(39%)

2022E

86

2012

51

129

2017

456171Banked adults Million

298

4823Bancarization rate % of adults

35

8.5% p.a.

11.0% p.a.

Exhibit 2

Africa banking revenue pools before risk cost1

$ billionCAGR%

1 Client-driven revenues before risk cost; constant 2017 exchange rates. Source: EFInA; Finscope; FSD Kenya; McKinsey Global Banking Pools; World Bank Findex

Africa’s banking revenue pools are projected to grow 8.5% per year until 2022, with similar growth rates in retail and wholesale


people becoming banked. As of 2017, there arealmost 300 million banked Africans, up from 170million in 2012. By 2022, we project 450 millionbanked Africans. By 2022, close to half ofAfricans will be banked, compared to just overone-third today.

African banking is a rich tapestry of 54 countrymarkets. Below, we look closely at the differenttypes of markets.

A varied geographic landscapeAfrica’s banking markets show stark differencesin size, infrastructure, bancarisation (or bankingpenetration), and use of digital, to name but afew variables. We have identified four archetypesamong African banking markets—each withmarkedly different per capita income, bankingpenetration, revenue growth, profitability, and fi-nancial infrastructure (Exhibit 3).

The first is the relatively mature market, whichincludes countries such as Egypt and SouthAfrica, with higher GDP per capita and asset pen-etration. These markets have higher branch pen-etration—17 branches per 100,000 adults, versusthe African average of five. They also have highercredit bureau penetration of 22 percent of adults,double the African average. Retail banking tendsto be a higher share of the revenue pool in thesemarkets, and more sophisticated financial ser-vices such as asset management and mortgagesare also more prevalent. This is partly becausethe share of adults earning more than $5,000 perannum is higher at 51 percent on average, versus15 percent for Africa as a whole.

The second archetype market is the fast-grow-ing transition market, which covers countrieslike Ghana, Cote d’Ivoire, and Kenya, wherebanking penetration is ahead of the curve.These are competitive retail banking markets,with high levels of mobile banking and other in-novations. The growth rate is relatively high inthese markets, with an annual average of 14

percent between 2011 and 2016. Profitability isalso the highest in this archetype, with ROE at17 percent in 2016.

Third are the sleeping giants such as Angolaand Nigeria, large markets where banking pene-tration is lower than would be expected at theirincome levels. Notably, the sleeping giants are alloil exporters. The prominence of oil in a nationaleconomy often steers banks away from lendingmore to other sectors, or to the consumer mar-ket. In these markets we also see credit bureaucoverage of only three percent—the lowest of thefour archetypes—and less innovation in arenassuch as mobile money.

The final archetype is the nascent market,which includes countries such as Ethiopia andTanzania, where both GDP per capita and assetpenetration are still low. These markets presentthe biggest challenge for foreign players seekingpositive returns; indeed, some nascent markets,such as Ethiopia, restrict or prohibit entry of for-eign banks. However, some nascent marketshave very large populations—for example, around100 million in Ethiopia and 60 million the Demo-cratic Republic of Congo—and are fast growing,and thus represent outsized potential for banksthat can negotiate regulatory approval to enter,and create winning business models.

A competitive landscape, with clear winnersWithin this challenging and varied landscape,competition in the African retail banking land-scape is increasingly fierce. In this environment,some banks are proving to be true African lions—standing head and shoulders above the rest interms of profitability, revenue growth, efficiency,and credit control. Others are struggling.

No trade-off between profitability and growth inAfrican bankingWe analyzed the performance of 35 of Africa’slargest banks in the continent’s key markets over afive-year period from 2011 to 2016. One of the


most striking findings is that there is no trade-offbetween profitability and growth in African banking.Banks in the top quintile of ROE achieved 37 per-cent ROE over this period, roughly four times the 9percent ROE achieved by banks in the bottomquintile (Exhibit 4). The top-quintile banks in termsof ROE grew revenues at 23 percent per annum,almost 2.5 times the 9 percent of banks in the bot-tom ROE quintile. It seems the traditional view of atrade-off between ROE and growth is a myth, at

least in Africa. Banks can set ambitious goals forboth profitability and market share growth.

Perhaps less surprisingly, the top-performing bankson ROE were also impressively lean: their averagecost-to-income ratio over this period was 40 per-cent, versus 57 percent for bottom-quintile banks.They also manage risk better—their average creditloss ratio, at 1.1 percent, was exactly half that ofthe low performers. There will of course be varia-

5,500 0

9,500

20

6,500

40

10

50

120

100

90

80

70

60

290

110

500 0

30

1,000 3,500 2,000 3,000 4,000 2,500 1,500 5,000 4,500 6,000

Zambia Uganda

South Africa

Mauritius

Ghana

Algeria

Tunisia

Kenya

Zimbabwe

Nigeria

Morocco

Democratic Republic of the Congo

Ethiopia

Angola

Tanzania

Senegal

Botswana

Mozambique

Egypt

Namibia

Côte d’Ivoire

Exhibit 3

2016 assets ($ billion)

Banking penetration% of GDP, 2016

Nominal GDP per capita$, 2016

Asset CAGR 2012-16 <8%

Asset CAGR 2012-16 >13%

Asset CAGR 2012-16 8%-13%

Nascent markets

Transition markets

Sleeping giants

Relatively mature

Source: IMF; McKinsey Global Banking Pools

Africa’s banking markets can be grouped into four archetypes


tions based on a bank’s geographic spread, butthese figures can help Africa’s banks benchmarkthemselves and set aspirations.

Five challenges, five winning practicesWhat drives the stark differences in performancewe noted earlier between the top- and bottom-quintile banks? Winning banks in Africa display oneor more of five winning practices, and these prac-tices are direct responses to five specific chal-lenges that all African banks face (Exhibit 5).

Fragmented market. Africa is a continent of 54countries, leading to some inevitable fragmentationof the banking opportunity. We estimate that thetop five banking markets in Africa—South Africa,Nigeria, Egypt, Angola, and Morocco—account for68 percent of the total banking revenue pool, com-pared to over 90 percent for the top five regionssuch as North America, Latin America, MiddleEast, and Emerging Asia. For Africa, this meansthat the remaining 49 countries represent only 32percent of the revenue pool. Furthermore, Africa’sbanking markets exhibit high variation in growth

and profitability. It thus becomes extremely impor-tant for banks to draw the right map—the first ofthe winning practices we believe will be crucial tosuccess in the coming years.

First National Bank (FNB) is arguably the best-per-forming retail bank in the continent’s largest retailbanking market, South Africa. First Rand, FNB’sparent company, had an ROE of 25 percent in2016, compared to the county’s other “big four”banks, which had ROEs of 14 to 15 percent. FNBhas been relatively selective in its expansion intoother markets. For example, they have a top-fourpresence in neighboring Namibia and Botswana,and have also expanded to three other promisingmarkets—Ghana, Zambia, and Tanzania. In eachcase, they have successfully brought their digitallyfocused proposition to customers; in Zambia, forexample, they grew their market share from 0 to 8percent within the five years of entering the market.

Large low-income population. While African in-comes are rising steadily, its population on averageremains poor by global standards. Fully 85 percent

1.1

2.2

40

57

23

9

37

9

Exhibit 4

Bottom quintileTop quintileGrowth and profitability for top- and bottom-performing banks

Average ROE2011-16, %

Revenue CAGR2011-16, %

Average cost-income ratio2011-16, %

Average credit-loss ratio2011-16, %

Source: SNL; McKinsey analysis

On average, there is no trade off between profitability (ROE) and growth; top-quintile banks outperform on both


of individuals have incomes below $5,000 a year—compared to 80 percent in Emerging Asia and 49percent in Latin America. The implications aretwofold: first, banking revenue pools are relativelyconcentrated in the middle- and higher-income

segments; second, African customers have astrong need for affordable financial solutions, whichpoints directly to the second winning practice inAfrican retail banking: targeting the right segmentswith compelling offers.

Challenges Winning practices

513

1717

32

689892 91

100

8580

4962

5

3.6

1.7

4.0

2.02.6

1117

79

13

100

Exhibit 5

Draw the right map

Risk innovation

Digital Þrst

Top 5 markets as % of total, 2017

Adults with credit bureau coverage, 2016, %

Bank branches per 100,000 adults, 2015

Fragmented market

Right segments, compelling offers

Percent of population with less than $5,000 income,1 PPP2

Large low-income population

Leaner, simpler model

Cost-to-assets, 2016, %

High-cost models

Low credit bureau coverage

Low branch penetration

NorthAmerica

Africa EmergingAsia

LatinAmerica

MiddleEast

1 Weighted average of countries included in McKinsey Global Banking Pools database; population = total population (including children) in households earning less than $5,000 (PPP adjusted) per annum.

2 Purchasing power parity. Source: IMF; Canback Income Distribution Database; McKinsey Global Banking Pools; McKinsey Global Payments Map; World Bank

Five for five: For each of Africa’s banking challenges, a winning practice applies


Nigeria’s GTBank is a good example of this secondwinning practice. The bank’s average ROE of 30percent between 2011 and 2016 outperformedNigeria’s other top five banks, which posted ROEsof 11 to 22 percent. GTBank has had great suc-cess in Nigeria’s affluent segment, based on highservice levels. It has been rated best in class interms of CSAT, a measure of client experience. Fo-cusing on the higher-income segments has alsoenabled GT to keep their branch network smallerrelative to those of their competitors. The resultsare compelling: GTBank has almost doubled cus-tomer numbers from 4.7 million in 2012 to 8.6 mil-lion in 2016, and grown market share from 10 to12 percent in that time.

High-cost models. African banks benchmark poorlyon productivity. The cost-to-assets ratio for Africanbanks is second-highest in the world at 3.7 per-cent. (Latin American banks are at 4 percent.)African banks generally have more manual pro-cesses, more tellers, and more cash-related costsrelative to international peers. Indeed, acrossAfrica, more than 90 percent of all transactions arecarried out in cash. The only region with compara-ble cash usage is Emerging Asia. (By way of aglobal benchmark, cash usage is 41 percent inNorth America.) The high cash usage adds costs tothe African banking system. The third winningpractice in African banking is therefore the movetoward leaner, simpler banking.

Poland’s mBank is a good example of the leaner,simpler bank. It was the first fully Internet-basedbank in the country, and now has more than fourmillion retail clients, and a six percent marketshare. mBank aspires to be a “paperless bank,”and to “simplify, streamline, automate, and digitise”all processes. As an example, customers can se-cure loan approvals in 30 seconds through mobilephones, or discuss mortgage options with salesagents on Skype. mBank has also achieved highlevels of self-service on mobile channels, with 55percent of clients logging in via the mobile app in2017, almost double the 28 percent that did so in

2015. Simplicity seems to be paying off formBank—in 2016 and 2017, it sustained a cost-to-income ratio of 46 percent, compared to a 2016CTI ratio of 58 percent for the overall Polish bank-ing industry.

Very few bank branches. Bank branch coverage inAfrica is by far the lowest in the world. There arejust five branches per 100,000 adults compared to13 in Emerging Asia and 17 in Latin America or theMiddle East. On the other hand, mobile penetrationis very high; winning banks therefore need to take adigital-first approach to distribution.

Kenya-based Equity Bank is a good example ofdigital-first. Equity has achieved high shares oftransactions (66 percent) and loan sales (85 per-cent) on the mobile channel. The bank partneredwith a telco, Airtel, to deliver Equitel, a mobile vir-tual network operator that gained two millionclients within 18 months of launch. At the sametime, recognizing the continued dominance ofcash, Equity Bank developed a network of30,000 agents. This allows the bank to deploy avariable-cost form of physical distribution to en-able clients to cash in and cash out—as opposedto using branch and ATM infrastructure, whichcomes with a large fixed-cost component. Be-yond simple cash in and cash out with agents,Equity Bank clients can open accounts, pay bills,and make deposits.

In Nigeria, Diamond Bank partnered with mobileoperator MTN in 2014 to launch its “Y’ello” prod-uct, a bank account that provides financial andlifestyle benefits through mobile banking. There are30,000 Diamond Y’ello agent locations. In threeyears, Diamond gained seven million new cus-tomers through this partnership.

Low credit bureau coverage. Only 11 percent ofAfrica’s population have their credit informationrecorded by private credit bureaus, compared to17 percent in Emerging Asia and 79 percent inLatin America. This puts a major brake on con-sumer lending and creates a need for alternative


consumer credit models, and points to our fifthwinning practice: risk innovation.

Kenya’s Commercial Bank of Africa partnered witha telco, Safaricom, to deliver M-Shwari, a productthat, among other things, offers loans through themobile channel, leveraging telco data for underwrit-ing. M-Shwari processes 80,000 loan applicationsdaily, with an average ticket size of $32 and an av-erage loan duration of 30 days. M-Shwari enjoys anon-performing loan (NPL) ratio of 1.9 percent, ver-sus an industry average of 5.3 percent.

■ ■ ■

How fast Africa’s retail banking penetration in-creases in the years ahead will depend on howbold its banks are in innovating to overcome thechallenges they face. In our base-case sce-nario, retail banking revenues across the conti-nent will grow at a compound annual rate of 8.5percent between 2017 and 2022. If more banksemulate the winners and roll out low-cost modelsand innovative partnerships, growth will be evenfaster. In this aggressive growth scenario, weproject an increase in the banked population offive percentage points per year, versus the his-toric rate of three percentage points per year. We

also see potential for growth in consumer financeas more innovation occurs in underwriting tech-niques. As a result, in this aggressive growth sce-nario, we expect retail banking revenue growth toincrease to 12 percent a year (2017 to 2022) ver-sus our base projection of 8.5 percent per year.Attaining this higher growth trajectory will requiremore innovation, and for more African banks toenter the ranks of the “winners.”

Our analysis and experience suggest winners inAfrica’s retail banking landscape will focus on oneor more of the following winning practices:

1. Draw the right map

2. Right segments, compelling offers

3. Leaner, simpler banking

4. Digital first

5. Innovate on risk

The remainder of the report explores each ofthese drivers of success in African retail bankingin greater detail.

Johannesburg, South Africa

4 These figures and growth rates are in fixed US dollars. If past and projected depreciation of African currencies are considered, thegrowth rates would be lower.


Chapter 1. Draw the right map

Geography mattersWhere you are in Africa matters—in a big way.Our analysis of 35 leading banks, and the differ-ence between top-quintile and bottom-quintilebanks in terms of growth and profitability, re-sulted in some striking insights.

Ninety-four percent of the difference in revenuegrowth between top- and bottom-quintile banksis determined by the markets they operate in;only 6 percent is attributable to gaining marketshare in those markets (Exhibit 6). Furthermore,65 percent of the differences in profitability be-tween top- and bottom-quintile banks is at-tributable to the stark differences in profitabilityacross markets, with the remaining 35 percentdriven by banks’ performance versus peers intheir market.

Because “drawing the right map” matters somuch, we looked into which countries and re-gions of Africa’s banking market offer the greatestprospects for banking growth and profits.

Pinpointing the Africa banking opportunity In the opening chapter, we noted that we expectAfrica’s banking revenue pools to grow at 8.5percent a year between 2017 and 2022, bring-ing the continent’s total banking revenues to$129 billion (before risk cost). Of that total, $53billion will be in retail banking—up from $35 bil-lion in 2017, an absolute growth of $18 billion.4

Three quarters of the $18 billion in absolute retailrevenue growth will be concentrated in 10 coun-tries. In absolute terms, the greatest growth will bein South Africa, which will account for $4 billion, or

65%

35% 6%

94%

100% 100%

Exhibit 6

ROE% 2011-16

Growth, in revenue CAGR% 2011-16

Difference in performance

between top- and bottom-quintile

banks

Geographicfootprint

How a bankcompetes

Source: McKinsey Global Banking Pools; McKinsey analysis

For Africa’s leading banks, geography drives outperformance in growth and profitability


well over one-fifth of African retail banking growth(Exhibit 7), by 2022. Other leading growth marketsinclude Egypt, Nigeria, Morocco, Ghana, andKenya.

Stepping back to look at Africa’s 30 largest bank-ing markets gives another perspective on varyinggrowth and profitability dynamics (Exhibit 8).Three of the 11 largest banking markets—Algeria,Cote d’Ivoire, and Kenya—have shown strongprofitability through the cycle, delivering ROE

above cost of equity (COE). These markets arealso projected to grow by 5 percent per annum ormore, adjusting for currency, for the next fiveyears. Three additional large banking markets—Morocco, Ghana, and Egypt—have also grownby 5 percent per annum or more, but have nar-rowly missed returning their cost of equity. SouthAfrica, the largest market, has slightly outper-formed its cost of equity, and is expected to growat a steady 2 percent in currency-adjusted terms.Markets such as Angola, Tunisia, and Nigeria

South Africa 4.0

Kenya

2.4

0.5

Morocco

Ghana 0.9

0.8

1.2

Nigeria

Egypt 2.5

Total Africa 17.8

Tunisia 0.3

4.3

Tanzania

Rest of Africa

Côte d’Ivoire

Angola 0.3

Algeria

0.2

0.3

100

15

22

7

13 62%

5

2

4

2

2

3

2

24

Exhibit 7

Absolute retail revenue growth,1 2017-22EFixed $ billionCountry

Share of total Africaincome growth%

1 Includes only client-driven revenues Source: EIU: IMF; McKinsey Global Banking Pools

Africa’s top !ve retail banking markets will account for 60% of growth up to 2012


have had returns well below COE, and are pro-jected to grow at 4 percent or less. Finally, Tanza-nia, while fast growing (11 percent per annumcurrency adjusted growth), has also fallen short interms of profitability.

There are other fast-growing, profitable Africanmarkets like Mali and Ethiopia, along with a groupthat show strong growth (6 percent or more) butwhich have failed to return their COE; these in-clude Uganda, Mozambique, and Senegal. All told,profitability after cost of capital across Africa’sbanking markets ranges from -20 percent to +20percent, and growth ranges from -1 to 15 percent.

These varying growth rates are resulting in amarked rebalancing of Africa’s retail banking rev-enues (Exhibit 9, page 18). Adjusting for actual(2012-17) and projected (2017-22) exchange-rate movements, it becomes clear that NorthAfrica will have grown dramatically from 24 to 30percent of currency-adjusted revenue pools overthe decade between 2012 and 2022. Similarly,dramatic increases are seen in East Africa (8 to12 percent over the same period). A milder in-crease is seen in Francophone West Africa (3 to5 percent), which benefits from both high GDPgrowth rates and a currency that is pegged tothe euro.

10

15

10

0

-25-1 15

-5

11 13 16 3

25

9 8 7 2 4 1 5 0

-10

6

20

12

-20

5

14

Tunisia

Burkina Faso

Zimbabwe

Senegal

Mauritius

Algeria

Gambia

Swaziland

Togo

Lesotho

Egypt

Ethiopia

Size of revenues

Mali

Ivory Coast

Morocco

Botswana

Uganda

Sierra Leone

DRC

Angola

Kenya

Rwanda Benin

Zambia

Tanzania Nigeria

Namibia

Ghana Mozambique

South Africa

Exhibit 8

Profitability after cost of equity,1 2012-17%

Revenue before risk cost CAGR (variable $), 2012-17%

1 ROE after cost of equity has been deducted. Cost of equity = local 10-year bond or equivalent + (average bank beta * average Sub-Saharan equity risk premium)

Source: Central Bank Reports; McKinsey Global Banking Pools; PWC Valuation Survey

Growth ranges from -1% to 15% in Africa’s top banking markets, with wide variability in economic profitability


Adjusting for currency, the big loser in terms ofbanking revenues will be South Africa, which ac-counted for 37 percent of the African revenuepool in 2012, and will account for 26 percent in2022. This reflects not only real economic growththat is slower than the rest of the African conti-nent, but also steep depreciation in the SouthAfrican Rand over this period. Foreign investors in

South African financial services companies thatare listed in London, such as Barclays PLC andOld Mutual PLC, have been selling down their in-vestments in part because they need to returnhard currency returns to UK investors, even whilethe South African economy’s growth relative tothe rest of Africa and the world diminishes. Read-ers should note that at the time of writing, South

Ghana

Morocco

Egypt

Ethiopia

Zambia

Algeria

Cote D'Ivoire

SouthAfrica

Nigeria

Tanzania Angola

Kenya

Mozambique

Tunisia

Senegal

Exhibit 9

Banking revenue before risk cost1

Variable $ billion

Share of revenue before risk cost, 2012-22

%

South Africa2

North Africa

Southern Africa

Anglophone West Africa

FrancophoneWest Africa

Central Africa

East Africa

4

7

24

118

7

7

30

30

12

7

6

5

7

26

13

28

13 14

37

3

80 86 108

2012 20173 2022E

1 Client-driven revenues before risk cost. 2 South African client-driven revenues are materially higher than accounting bank reported revenues. 3 Partial-year estimates.Source: McKinsey Global Banking Pools

North, East, and West Africa will gain revenue share at South Africa’s expense


On average, banks in Africa with significant regionalor pan-African footprints have not performed as wellas their domestic peers. Average ROE in 2016 forthe 13 regional banks in our sample was 8 percent,compared to 13 percent for the 26 domestic banks(Exhibit 10). Furthermore, domestic banks grewfaster between 2011 and 2016—their average rev-enues increased at an annual rate of 20 percent,compared to 14 percent for regional banks.

For a few reasons, it is unsurprising that cross-bor-der banks attain lower ROEs than domestic players.Cross-border cost synergies are limited, especially inretail banking, as each country requires some form ofphysical distribution. Furthermore, pan-African bankshave to deal with multiple markets developing atvarying speeds, with different regulators, and various

infrastructure challenges. This heterogeneity makes itvery difficult for pan-African banks to effectively con-trol their operations and deploy coherent businessmodels in all the markets they serve.

There are of course many strategic reasons for beinga regional bank—including pursuing growth opportu-nities, diversifying earnings risk, and creating a net-work for cross-border corporate clients. More thanhalf (55 percent) of bank executives we surveyed7

said geographic expansion was “somewhat” or“very” important to their growth strategies, account-ing for 10 percent or more of their projected growthover the next three years. However, our analysis is avivid reminder that banks need to tread carefully inselecting markets for expansion, and then develop aprofitable cross-border operating model.

Cross-border banking

20

14

13

81.6 x 1.4 x

Exhibit 10

ROE% 2016

Growth, in revenue CAGR% 2011-16

Regional/Pan-African

banks

Regional/Pan-African

banks

Domestic banks

Domestic banks

Note: Number of banks: domestic (26); regional (13).Source: McKinsey Global Banking Pools; McKinsey analysis

Domestic banks have outperformed regional banks in terms of both profitability and growth

7 We conducted a survey of banking executives 20 financial institutions from across Africa in the fourth quarter of 2017, asking for their per-spectives on the retail banking opportunity in Africa. Eighty-five percent of respondents were from banks, and 15 percent from nonbank at-tackers. Thirty-five percent were from Southern Africa, 25 percent from East Africa, 20 percent from West Africa, 15 percent from Angola,and 5 percent from an international (non-African) bank operating in Africa. The respondents were typically the heads of retail, or in somecases, the CEO of the bank.


Africa was undergoing a political transition, whichcould reverse some of the recent trends of slow-ing growth and depreciating currency.

■ ■ ■

Drawing the right map is a fundamental step forwinners in African retail banking. Beyond this, win-

ners and losers within markets will be determinedin large part by how they answer the followingquestions: Are we competing in the most attractivesegments? And do we have a compelling proposi-tion for the customers in that segment? It is tothese questions that we turn next.

Lagos, Nigeria

6 Adults in Africa’s 20 largest banking markets.7 Respondents were spread across income segments; 77 percent were urban and 23 percent rural; and respondents were splitequally between male and female. Approximately 50 percent of the sample were employed, 40 percent self-employed, and 10 per-cent unemployed.


Opportunities in segments—particularly middle-income To pinpoint opportunities, African banks need tounderstand not only the relative growth of differ-ent markets but also the dynamics of customersegments. In 2017, just 15 percent of Africa’sadult population had an annual income above$5,000. But this proportion is growing steadily,as is Africa’s overall population—with the resultthat the number of Africans6 earning $5,000 ayear or more is expected to increase from 140million in 2017 to 175 million in 2022.

As some banks (for example, Equity Bank) havedemonstrated, there is also considerable oppor-tunity to serve the large majority of Africansearning below $5,000. We expect the bankedpopulation in Africa to swell by more than 150million people, from nearly 300 million in 2017to 450 million by 2022, and much of this growthwill be at levels of income lower than $5,000per year. Finally, Africa’s affluent consumers,though they make up only one percent of thepopulation, have significant and fast-growingspending power.

Our analysis of banking revenue growth for fourspecific customer segments—mass market (in-come below $6,000 a year), core middle($6,000-$12,000), middle ($12,000-$36,000),and affluent (above $36,000)—shows that thebulk of the absolute growth in banking revenueswill be driven by the middle and core middlesegments; together, they will account for 69 per-cent of absolute revenue growth between 2017and 2022. Add the affluent group, and 87 per-cent of growth will come from the top three seg-ments (Exhibit 11). We should note that thegrowth rate is fastest in the mass and core mid-

dle segments—approximately 11 percent and 13percent respectively.

The relative growth of different income segmentswill vary significantly by region. In North Africa, weproject that the middle and affluent segments willexperience the greatest absolute revenue growth,while the core middle and middle segments willdominate growth in both East and West Africa. An-glophone West Africa will also see significant rev-enue growth in the mass segment, while SouthAfrica will see most growth in the middle segment,followed by equally strong absolute growth in thecore middle and affluent segments.

Compelling offers To compete effectively, banks will need to de-velop compelling value propositions. Those withclear value propositions tend to outperform peersin their respective markets on growth and prof-itability. But what is a compelling value proposi-tion? What do customers want?

Our customer research,7 which covered 2,500banked adults in six African countries, providessome guidance. When we ask clients to state thereason for choosing their main bank, three fac-tors stand out (Exhibit 12, page 23).

First, price was selected by 25 percent of respon-dents—unsurprising given Africa’s relatively largeshare of low-income households. Capitec’s price-and simplicity-focused value proposition hashelped it gain significant share in the SouthAfrican market. According to our retail bankingcustomer survey, 57 percent of Capitec’s cus-tomers said pricing was their primary reason forselecting the bank; this compares to percentagesranging from 23 to 33 percent for the other “bigfour” South African banks.

Chapter 2. Right segments, compelling offers


Convenience is an equally important factor inbank selection, also chosen by one in four cus-tomers surveyed. Of those, four-fifths described“convenience” as banks with a nearby branch oragency, and the remainder defined it as a greatdigital banking offer. Equity Bank is a prime ex-ample of a bank with a compelling offer in therealm of convenience, delivered through a30,000-strong agency network, as well as a mar-ket-leading mobile banking offering.

The third-most cited factor in bank choice is ser-vice. Nigeria’s GTBank has had great success inthe affluent segment based on its reputation forgreat client experience, delivered by professional,courteous, and responsive staff.

Cross-sell opportunities: savings, credit, andpaymentsA further finding from our survey is that approxi-mately 95 percent of respondents—all of whom

14

5

3

8 22

3 15 12 5

11

13

9

69% ofretail growth

Total

Af!uent

Middle

Core middle

Mass

19

44

25

13

9 18 5335100

4 9

2 6

Exhibit 11

Revenue growth, 2017-22EFixed $ billion

Share of growth%

CAGR%

Revenue, 2017 Growth, 2017-22

Note: Afßuent annual income = >$36,000; middle = $12,000-$36,000; core middle = $6,000-$12,000; mass = $0-$6,000.Source: Canback Dangle; McKinsey Global Banking Pools; McKinsey analysis

The middle banking segments will account for 69% of retail banking growth until 2022


were already “banked”—had a transactionalproduct, confirming the idea that new bankingcustomers typically start with transactional prod-ucts (Exhibit 12).

That said, cross-sell opportunities abound acrossthe continent. As we see in Exhibit 12, only 17percent of banking customers our sample had alending product, while 15 percent had a deposit

product, 13 percent insurance, and 9 percent aninvestment product. These four product cate-gories therefore represent important growth op-portunities for banks.

To put another lens on the cross-sell opportunity,we see that the number of products per customervaries considerably across countries. It is highestin South Africa, at approximately 2.9 products

Lending2

Transactions1

Investments5

Insurance4

Deposits3

17

95

9

13

15

25

20 25

12

11

9

8

5

4

Convenience

Service

Pricing

Employer requirements

Referrals

Brand

Products and services

Security if bank closes

Digital banking

Physical network

Exhibit 12

Reason for choosing main bank % of clients

Clients with product% of clients

1 Current/checking account, savings account, bank account linked to debit card, nonbank prepaid card2 Credit card, mortgage, renovation loan, car loan, unsecured personal loan, overdraft account3 Time deposit, foreign currency savings/time deposit4 Life insurance, health insurance, auto insurance, home insurance5 Securities (equities and bonds, mutual funds, margin account, pension/retirement Source: McKinsey Global Banking Pools

Price, convenience, and service are most important to banking customers; cross-sell opportunities abound


per customer, roughly 2 in Morocco, Kenya, andAngola, and as low as 1.7 in Nigeria and Egypt(Exhibit 13). These numbers suggest there aresome countries where product penetration couldbe significantly higher. For example, Morocco andEgypt have a higher per capita income thanKenya, but fewer banking products per customer.It also interesting to note that higher-income seg-ments seem to be underpenetrated in countriessuch as Kenya and Morocco.

Which product areas offer the greatest opportuni-ties in revenue terms over the next five years?Deposits—both from transactional and savingsaccounts—will be the single-largest contributor toretail banking revenue growth in Africa, contribut-ing approximately $11 billion to absolute revenuegrowth between 2017 and 2022 (Exhibit 14, page26). We estimate that deposits are likely to growat compound annual rate of at least 11 percentbetween 2017 and 2022. This rapid growth is

Annual income South Africa Nigeria Egypt Morocco Kenya Angola

1.75

2.92

2.65

4.30

3.87

1.73

1.36

2.18

1.42

1.91

1.22

1.69

1.73

2.12

1.98

1.69

2.06

2.43

2.41

1.98

2.20

1.95

1.99

1.42

2.94

2.54

2.06

1.83

>$36,000

1.99

$12,600-$36,000

2.63

2.06

$3,600-$12,600

<$3,600

Total

1.60

2.30

1.69

1.67

13.4 5.9 13.0 8.6 3.5 6.8

Exhibit 13

GDP per capita Purchasing power parity, $ million

Number of bank accounts per banked customer% of respondents ranking1

Source: McKinsey Africa Retail Banking Consumer Survey, 2017

On average, African banking customers hold just over 2 banking products, but there are signi!cant country variations


driven partly by the expected increase in thenumber of Africans who are included in the bank-ing system. It also reflects the relatively high costof funding in Africa—interbank rates can be 10percent or more in most African markets—whichmakes deposits a relatively lucrative product.

The next-largest area of growth is mortgages (ap-proximately $4 billion of growth), followed by con-sumer finance ($2 billion), and payments ($1billion). Interestingly, in our survey of executives

from 20 leading African banks and financial insti-tutions, consumer finance was rated as the num-ber one opportunity among the major productcategories. It was selected by 55 percent of ex-ecutives, well ahead of payments and current ac-counts, selected by 30 percent of executives.Consumer finance is significantly underpene-trated in Africa. As we discuss in Chapter 5, ad-vances in credit assessment—driven bydigitization and the use of broader types ofdata—should fuel growth in the category.

Mortgages

33.3

2017

ConsumerÞnance

2022 Payments

Deposits

9 6611

53%

9

48%

50.31-22-3

26.6

14.0

11.0

16.8

10-11

5.3

4.53-5

3.4

3.4

Exhibit 14

Africa retail banking revenue before risk cost, 2017-22E

Fixed $ billion

CAGR, 2017-22E

%

Mortgages

Payments

Consumer Þnance

Deposits

Source: Canback Dangle; McKinsey Global Banking Pools; McKinsey analysis

Deposits and consumer finance are the fastest-growing businesses


Cash usage is still extremely high in manyAfrican countries, but the push to digital pay-ments has begun. The volume of cashlesstransactions in Africa grew by 13 percent perannum between 2014 and 2016, driven by theimproved availability, reliability, and security ofelectronic channels. This made Africa theworld’s second-fastest-growing paymentsmarket after Asia-Pacific; Africa also has thesecond-highest revenue per cashless transac-tion.

To sustain this momentum, Africa will needfaster roll-out of point-of-sale (POS) infrastruc-ture, which supports around 70 percent of thecontinent’s retail electronic payments. Al-though the volume of POS transactions in-creased at an annual rate of 14 percentbetween 2012 and 2016, the number of POSdevices increased at only 5 percent a yearover the same period.

Payments are still dominated by banks, but asizeable opportunity outside banking hasemerged as a result of disruptive digital inno-vations. For example, Nigeria-based fintech

Paga allows customers to make money trans-fers and online shopping payments via theirmobile phones; since its launch in 2009 it hassigned on nearly six million active users. Mo-bile money application M-Pesa, launched byKenyan mobile operator Safaricom in 2007,today has over 26 million customers. Newerplayers include Nigeria-based Paystack, whichenables users to make payments via socialmedia. Banks have responded with their owninnovations, such as South Africa-basedFNB’s GeoPayments application, which allowspayments between any users within 500 me-ters of one another; it has gained 1.5 millionactive users since its launch in 2012.

International remittances are an adjacent andprofitable line of business. We expect theAfrican international remittance market tobounce back in 2018 after currency devalua-tion in markets such as Egypt and Kenya put itunder pressure in 2015 and 2016. Formal re-mittances are forecast to reach $66 billion in2018, up from $61 billion in 2016. Of that,more than 80 percent is made up of remit-tances from outside Africa.

Payments and remittances

Cairo, Egypt


Chapter 3. Leaner, simpler banking

Though African banking as a whole is enjoyingbuoyant growth and profits, there is a wide gapbetween the leaders and the rest of the industry.If more banks are to achieve healthy profitability,they will need to make significant gains in pro-ductivity. In fact, we see productivity as the nextfrontier of improvement for African banking—withdigitization, sales productivity, and back-office ra-tionalization as the key thrusts.

Some progress on costs, but more work needed African banks have made progress in reducingtheir cost-to-income (CTI) ratios in recent years.Among the African banks in our global sample,

CTI ratios fell from 56 percent in 2011 to 52 per-cent in 2016. This is lower than the global aver-age of 59 percent, and significantly better thanthe average for banks in North America and Eu-rope. It is also in line with CTI ratios in otheremerging markets, such as the Middle East (47percent in 2016), Latin America and Caribbean(48 percent), and Asia-Pacific (50 percent).

Africa’s reductions in CTI are encouraging, butonly tell part of the story. The reality is moresobering: Africa’s improved CTI ratios have beendriven by widening margins (measured by in-come-to-assets ratio) rather than by consistent

Cost-to-income ratio %

Cost-to-assets ratio %

Margins, income-to-asset ratio %

30

75

45

60

15

0

52.2

58.8

201615

53.4

60.160.1

55.0

12

56.0

2011

59.3

54.7

14

60.760.8

13

53.9

0

2

4 3.5

12

2.3 2.3

2016

3.63.5

15

2.2

14

3.6

2.2

13

2.3

3.5

2.3

3.3

2011

3

9

0

6

13

3.8

6.6

3.8

2016

6.8

15

3.7

14

6.6

3.8

6.4

12

3.8 3.8

5.9 6.4

2011

Exhibit 15

Global average Africa average

Source: SNL; McKinsey analysis

The decline in Africa’s cost-to-income ratio is due to rising margins rather than improvements in cost-to-assets

1

2

3

4

5

2011 2012 2013 2014 2015 2016

Global Average

Africa

Middle East EuropeAsia-PaciÞc

US and Canada

Latin America and Caribbean

+0.1

+0.3

-0.2

+0.10.0

-0.3

-0.44.04.04.04.0

4.24.4

3.3

2.9

2.8 2.8 2.82.7

2.6

2.01.91.8

2.0

1.7 1.71.71.71.7

2.32.32.32.2 2.2 2.3

2.0

2.2

3.5 3.5 3.53.6 3.6

1.71.81.81.8 1.8

Exhibit 16

Cost-to-assets by region,1 2011-16%

Change,2011-16% points

1 Local currency ratio, weighted by $ income for each year. Note: Banks in sample (947): LatAm and Caribbean (6); Africa (35); US and Canada (625); Middle East (19); Europe (142); Asia-

PaciÞc (120) Source: SNL

At 3.6%, African banks have the second-highest cost-to-asset ratio in the world


progress in improving productivity, as measuredby cost-to-assets (Exhibit 15, page 29). In fact,at 3.6 percent Africa has the second-highestcost-to-assets ratio in the world. Eventually,margins will fall in Africa as they are doing in therest of the world. African banks should thereforenot be complacent. They need to improve theirunderlying efficiency.

The trend line is also worrying: Africa’s cost-to-assets ratio is going in the wrong direction (Ex-

hibit 16). In all other regions, with the exceptionof Europe, productivity as measured by cost-to-assets improved over the last five years. But thenEurope is at already less than half Africa’s level.Africa is falling behind on productivity, and banksneed to act to arrest the decline.

Three levers to improve productivityOur analysis, together with our survey of Africanretail banking executives, points to three mainlevers for improving productivity.


End-to-end digitizationThe first lever is the digitization of customer jour-neys, which includes migrating transactions andsales from physical to digital channels, and au-tomating processes from end-to-end. Nearlythree-quarters (74 percent) of the executives in oursurvey identified these two elements as among themost important ways to increase productivity.

Africa’s banks have a long way to go, as digitalsales and transactions remain a very small propor-tion of the total (Exhibit 17). Just 16 percent ofAfrica’s banking transactions in 2016 were digi-tal—compared with 55 percent in Latin America

and 82 percent in Asia-Pacific. Similarly, just 4percent of African banking sales were digital in2016, compared to 18 percent in Asia-Pacific.

Banks can take number of actions to drive thesenumbers higher. The first step, of course, is tomake services available on digital channels; thencomes the work of educating clients about digitalchannels, pricing digital transactions attractivelycompared to those in physical channels, provid-ing rewards programs for increased use of digitalchannels, and so on. Progress can be dramatic ina short period of time: McKinsey’s Finalta bench-mark on digital in banking shows that the five

20

5

20

10

15

40 75 50 90 80 60 0

55 85 45 5 15 65 70 10 0 30 25 35

US and Canada

Latin America Africa

Asia PaciÞc

Europe

Exhibit 17

Share of total sales that are digital,1 2016 %

Share of total transactions that are digital,2 2016 %

1 Core products include current accounts, deposit accounts, credit cards, unsecured personal loans, non-life insurance, and mortgages.

2 Financial transactions include all customer-initiated third-party payments and inter-account transfers, including set up of standing orders and direct debits. Actual subsequent automated transactions are excluded.

Source: Finalta; SNL

Africa’s banks still have room for growth in digital sales and transactions, relative to other regions


most improved banks globally on share of digitalsales improved this measure by seven percent-age points per annum over a five-year period.

Automating core processes from end-to-endmust run in parallel with growth in the share ofdigital sales and transactions. McKinsey analysissuggests most banks run about 600 processes.However, automating the top 20 processes islikely to capture 45 percent of the benefits of digi-tization. Processes that typically offer dispropor-tionate rewards from end-to-end automationinclude account opening, mortgage onboarding,personal loan applications, credit card issuing,cash handling, and basic client inquiries, such asbalance requests.

Frontline productivityNearly one-third of the executives we surveyedtagged improvements in frontline productivity,leveraging analytics and data as a priority. Africanbanks are often below emerging market bench-marks on measures such as on cross-selling, ac-quisition rates, and active accounts as apercentage of the total. Advanced analytics andfrontline productivity can help banks meet andexceed these benchmarks.

We have seen several successful approaches. Abank in Kenya launched a series of data-drivencross-sell campaigns that achieved conversionrates of around 20 percent, about five times theprevious rate. The same bank introduced a sim-pler cross-sell process at onboarding, resultingin an increase in the number of products sold atonboarding from 1.5 to 2.5. Banks in SouthAfrica and Kenya have introduced specialists tosupport frontline staff in selling more sophisti-cated products, such as investments and insur-ance. A Nigerian bank introduced aservice-to-sales initiative encouraging all staff inthe branch to turn simple enquires or tellertransactions into opportunities to surface clientneeds and introduce sales opportunities.

A final emerging trend in raising frontline produc-tivity is personalization in marketing. Here, banksuse advanced analytics to predict the “next-bestproduct” for each customer. They then offer per-sonalized product features; in the case of a loan,for example, a personalized interest rate and loanamount. The best banks globally will also makethe offer on a digital platform, with a customizedmarketing message. For example, having ob-served the client searching home-renovationsites, the message might read: “Hi Kwame, readyfor your next home renovation? You're two clicksaway from a loan of $5,300 at an exclusive inter-est rate of 12.5 percent.”

Consolidate head- and back-office costsMany African retail banks have excessive back of-fices in branches, often with as many staff in thebranch back office as there are in the branchfront office. The staff often labor under paper-heavy, manual processes. Furthermore, relative tobenchmarks, African banks often have a highershare of their total staff in support functions suchas IT, risk, marketing, HR, and finance.

First, African banks need to consolidate opera-tional processes in “factories,” from their currentdecentralized presence across branches andproduct lines. This source of synergy, long cap-tured by banks in the developed world, is notused to its full potential by African banks. Sec-ond, demand management and process re-design can eliminate redundant steps that bringlittle value to clients. Third, technologies suchas robotics and artificial intelligence (AI) can de-liver striking benefits. Robotics can be used toautomate most repetitive operational tasks atlittle cost, while AI-enabled chat bots can han-dle up to 50 percent of client communication incall centers.

Finally, banks can do more to optimize non-staffcosts. An example is the use of building space.Many banks have multiple “head offices” in one


city—and often in the more expensive parts oftown. Consolidating the number of head offices,reducing square meters used per person throughinitiatives such as open-plan seating, and shiftingto lower-cost locations, can all contribute to re-

ducing costs. Another example is procurement incategories such as IT, where virtualization cansave 30 to 50 percent of data storage costs, andmarketing, where return on marketing investmentoptimization can deliver 15 to 20 percent savings.

7.7 8.13.0

7.99.713.215.3

6.4 5.89.6

5.77.07.17.5

3.9 3.79.6

3.84.24.24.6

4.7 4.3 4.64.05.14.95.5

4.8 5.0 4.64.94.44.96.0

6.1 5.8 4.65.26.17.85.7

1.3

2.4

1.00.91.20.90.8

1.4 1.2 1.31.01.9

1.31.30.3

1.1

1.5

1.8

-0.1

7.5

0.5

0.8

Cost-to-assets trend%

0.26

14 15 CountryCTI 2016

16 13 12 2011 14 15 CountryCTA 2016

16 13 12 2011

32 3555

34384448

50 50 5548525760

53 53 5542525155

58 57 7053575463

70 67 7063666689

61 61 7052626467

3954

3023474746

40 31 3527505356

CapitecBank

KCBGroup

CBA

ZenithBank

UBA

EcobankNigeria

BanqueMisr

Banque Extérieure d’Algérie

NorthAfrica

WestAfrica

EastAfrica

SouthAfrica

29

26

11

12

22

14

15

13

Exhibit 18

Cost-to-income trend%Region Bank

CTI/CTA reduction, 2011-16 % points

NOTE: Ecobank, UBA, Zenith, KCB, and Capitec CTI ratios as published in the banks' annual reports/results; Banque Misr, Bank Extérieure d'Algérie, and CBA CTI ratios, and all individual bank cost-to-assets (average assets), calcu-lated using bank annual report/results data extracted via SNL. Central bank data used to calculate country averages.

Source: Bank annual reports and results presentations; Central bank supervision reports; SNL; McKinsey analysis

A number of African banks have achieved material step changes in productivity

10 https://www.capitalfm.co.ke/business/2015/04/banks-spend-sh5bn-to-lay-off-900-staff-in-the-past-three-years/


Showing the way: Africa’s productivity leadersA number of Africa’s leading retail banks canserve as real-world examples of how these ele-ments can lead to step changes in productivity.Our analysis identified eight banks across thecontinent that reduced their CTI and CTA ratiossubstantially between 2011 and 2016 (Exhibit 18,page 33); most ended up with CTI and CTA ratiossignificantly below the average in their homecountries. Not all of these outperforming banksused all three levers: most were able to drive upproductivity by focusing on just one or two. Thissuggests that even for top performers there maybe further potential for improvement.

Consider Nigeria’s Ecobank, which reduced itsCTI ratio by nine percentage points in a singleyear—from 61 percent in 2015 to 52 percent in2016—by focusing on headcount reduction,changes in procurement practices, and closureof branches. These were part of an explicit pro-ductivity improvement program the bank devel-oped in response to worsening macroeconomicconditions and declining earnings. Staff numberswere reduced from 10,000 to 6,800 betweenJanuary 2016 and September 2017, while 50branches were closed (in part to complete post-merger integration following Ecobank’s 2012 ac-quisition of Oceanic Bank in Nigeria). Ecobankalso took an innovative approach to reskillingstaff that had lost their jobs; for example,Ecobank partnered with Uber to train 1,500 laidoff drivers as Uber drivers. The bank appointeda new procurement team that renegotiated sup-

plier contracts and signed on new suppliers—re-sulting in a reduction in procurement costs of 40to 50 percent.

A second example is Kenya Commercial Bank(KCB), which reduced its CTI ratio by 12 percent-age points—to 48 percent—between 2011 and2016. KCB started with a restructuring programin 2011, which included a reduction in director-level posts from 22 to 7, and the release of 120staff.10 In addition, KCB has been pursuing digiti-zation through automation of front- and bank-endprocesses, and investment in digital channels.For example, with the introduction of mobilebanking, loan applications skyrocketed. New loandisbursements increased to nearly four million in2015, up from a historical average of approxi-mately 200,000 per year. Although the loan val-ues are small ($25 to $30), they contributesignificant revenue, and are cost-effective as thebank has reduced loan-processing time fromthree days to 60 seconds.

■ ■ ■

African banks face a productivity challenge. At3.6 percent, their cost-to-asset ratio is the high-est of any region in the world, and has worsenedin the recent past. While African banks’ produc-tivity challenge is masked by high margins fornow, this will not always be the case. Eventuallymargins will fall. Banks need to take action now,to become significantly more productive—andseveral trailblazers are already showing the way.

Luanda, Angola


Chapter 4. Digital first

Africa’s retail banks have compelling reasons toembrace digital transformation. Firstly, Africanbanking customers are among the most enthusi-astic adopters of mobile and digital channels ofany developing region. Second, a number of dis-ruptive competitors, including numerous mobilemoney players and digital attackers such asTyme Bank in South Africa or Alat in Nigeria, areemerging and posing a threat to revenue share.Third, advances in technology are raising thebar—and the opportunity—for innovation; theseinclude increased affordable computing powerfor processing big data; the rise of artificial intel-ligence and machine learning; robotics loweringthe cost of automation; and blockchain. Finally,ecosystems, which have emerged most notablyin China, are likely to become more of a featurein the African economy, and banks will need tohave the digital sophistication to play a role asthey develop.

In thinking about digitization in banking, it is im-portant to first understand the voice of the cus-tomer; with this in mind, this chapter discusses afew insights into the behavior of the African bank-ing consumer with respect to digital, and thenoutlines four approaches banks are taking in digi-tal innovation.

African banking consumers have embraced digitalAfrica’s banking customers are more connected,more “online” than their counterparts in manyother developing countries. Our research findsthat 52 percent of urban Africans regularly usethe Internet—the same proportion as urban Chi-nese, and well ahead of urban Brazilians (45 per-cent online) and Indians (24 percent). The largemajority of African Internet users access the webvia mobile devices—and most of them are young.

One-quarter of urban Africans are online at least10 hours a week.

Given how digitally savvy they are, it is no sur-prise that African consumers express a strongpreference for mobile and Internet banking overtraditional branches. In our survey of 2,500 bank-ing customers in six African countries, we lookedat which channels clients prefer for specific bank-ing activities (Exhibit 19).

The first conclusion is that a significant share ofconsumers prefer digital channels for transac-tions (38 percent), servicing (24 percent), andsales (20 percent).11

Second, in some segments and for some activi-ties, digital channels are preferred to the branchchannel. For example, for transactions overall,branches have the overall edge, with 43 percentpreferring branches, and 38 percent favoringdigital. But customers in the two higher-incomesegments prefer digital. More than half (53 per-cent) of customers in the affluent segment pre-fer either Internet or mobile channels, comparedto 26 percent that prefer the branch. The storyis very similar in the middle market, where evenmore customers (55 percent) prefer digitalchannels over the branch (28 percent). Middlemarket customers are also the biggest fans ofdigital channels when it comes to sales—45percent prefer Internet or mobile, compared to40 percent favoring the branch. The branch isclearly far from dead, but we see a preferencefor digital channels in certain segments and forcertain activities.

Third, among the digital channels, the future isclearly tilted towards mobile. Two to three timesas many clients prefer mobile to Internet channels

11 Transactions in this context include making a payment or transferring money. Service includes balance inquiries, changing accountdetails or passwords/PINs, resolving technical problems with Internet or mobile banking, and complaints about products and ser-vices. Sales relates to opening an account or receiving advice on complex products.


across transactions, services, and sales. Mobileis also preferred to Internet banking across seg-ments. This is consistent with data that showsthat relative to Africa’s population of 1.3 billion,there are just over 1 billion mobile connections inAfrica—some Africans, of course, have more thanone mobile connection.

Regional differences in client preferences for digi-tal channels are also striking. Almost 40 percentof Africans prefer digital channels for transac-tions, compared to 43 percent that prefer thebranch (Exhibit 20, page 38). Interestingly, in fourof the six countries surveyed, more customersprefer digital channels to the branch for transac-

Call centerATMBranchMobile Internet

Transactions1

Overall

Afßuent>$36,000

Middle$12,600-$36,000

Mass<$3,600

43 17 6 6 14 71 5

556231010727 431318262924 6

6

755129581515 649239 73

828

11

104035101075125616284312

518 57 9 102711

2

Core middle$3,600-$12,600

Servicing2

Digital = 38%

Digital = 53%

Digital = 55%

Digital = 24%

71070101859166

Sales3

Digital = 20%

Digital = 45%

Incomesegments4

3

2

2

1 33 44

Exhibit 19

Q: Please indicate which channel you prefer for speci!c banking activitiesPercent of total consumers

1 Includes payments, money transfer, etc.2 Includes balance inquiries, changing account details or passwords/PINs, resolving technical problems with internet

and mobile banking, complaints about products and services, etc 3 Includes opening an account, advice on complex products (e.g., investments, life insurance, mortgages) etc.4 Annual income, $. Source: McKinsey Retail Banking Customer Survey 2017

Four in ten African banking customers prefer digital channels for transactions; with higher percentages in higher-income segments


tions. For example, in Nigeria, 59 percent of cus-tomers prefer digital, compared to 15 percent thatfavor branches. Digital channels are also preferredto branches for transactions in South Africa (56percent of customers versus 27 percent), Angola(45 versus 40 percent), and Kenya (43 versus 33percent). Conversely, customers in Morocco andEgypt show little preference for digital.

Responding to digital disruption While there are variations based on geographyand level of assets, the overall picture shows thatAfrican banking customers are enthusiastic aboutdigital banking channels. The question that fol-lows is whether banks will be able to answer thecall and provide these services. This questionshould be foremost in the minds of banking exec-

Call centerATMBranch

0.9x

3.9x

2.1x

1.1x

1.3x

0.3x

0.1x

Kenya

1

Africa 2

174311 27

49

Digital = 38%

10 15 25

142732 24

369 40 15

23337 36

3

314

10786 5

646 12

2

2

Nigeria

Angola

Morocco

South Africa

Egypt

Exhibit 20

Q: Please indicate which channel you prefer for transactions1

% of total consumersDigital-to-branch ratio

1 Credit and money transfers. Source: McKinsey Retail Banking Customer Survey 2017

Four in ten African banking customers prefer digital channels fortransactions, and four major countries’ customers prefer digital to branch

Mobile Internet


utives across the continent, as digital disruptersfrom outside the traditional banking arena are ac-tively seeking to capture the opportunity—as areseveral innovative bricks-and-mortar banks. In-deed, fully 50 percent of African banking execu-tives in our banking executive survey cited digitalas their number one priority, and an additional 40percent cited it as “very important.”

The level of urgency is high. Banks need a rapid,robust response to digital disruption. We see fourapproaches open to African banks: end-to-enddigital transformation, partnering for digital reach,building a new digital bank, or building anecosystem.

End-to-end digital transformationEnd-to-end digital transformation has two pri-mary objectives: a significant upgrade of cus-tomer experience and a radical reduction incosts. To get there, banks must embark on afar-reaching digitization of customer journeysand other bank processes.

In its end-to-end digital transformation, LloydsBank, in the UK, focused on ten customer jour-neys, using agile delivery, deploying cross-func-tional customer journeys, and empoweringproduct owners with P&L responsibility. Lloydsalso modernized its IT architecture to extend theuse of microservices, and cloud environments.The results were dramatic. Between 2014 and2016, the number of customers using Lloyds’ mo-bile channel grew from five million to eight million.Customer experience (as measured by Net Pro-moter Score) also improved rapidly, from 44 per-cent in 2011 to 59 percent in 2015. Finally,Lloyds’s cost-to-income ratio fell from 55 percentin 2012 to 49 percent in 2015.

Closer to home, Kenya’s Equity Bank successfullypursued its own digital transformation, introduc-ing digital products and platforms including theflagship Equitel mobile banking and telephone

service. Equity provides a full range of bankingproducts on its digital channels; for example,Equiloan, a small-size, short-duration loan avail-able on mobile phones. Like Lloyds, Equity alsofocused on digitizing certain customer journeys—for example, customer onboarding—on an end-to-end basis. In addition, Equity Bank migratedcustomers to digital channels, launching cus-tomer education programs in branches to on-board customers onto the mobile channels, andrapidly expanding the network of merchants whohad point-of-sale payments acceptance devices,so there were more places for customers totransact digitally.

The results of Equity Bank’s digital transformationare dramatic (Exhibit 21, page 40). By December2016, Equity Bank had moved two-thirds (66 per-cent) of its transactions to the mobile channel,from just 46 percent a year earlier—an increaseof 141 percent, given total transactions them-selves significantly rose from 207 million to 344million in the same period. For the Equiloan prod-uct, Equity moved 85 percent of loan disburse-ments to digital channels, from 75 percent thepreceding year. This represented an annual in-crease in loans disbursed in the digital channel of207 percent. In both transactions and loans dis-bursed, the mobile channel is far eclipsing thebranch and other channels at Equity Bank. Banksacross Africa can look to Equity Bank as an ex-ample of how quickly these metrics can beshifted.

Our experience suggests three main success fac-tors for end-to-end digitization. The first factor isfundamental but often overlooked: a robust digitalstrategy that is a top priority of the bank’s leader-ship. Leadership needs to be intricately involvedin crafting the strategy, and then serve as rolemodels and ambassadors for the transformation.Second, digital transformation requires true ex-cellence in execution, often based on the intro-duction of agile methodology. ING in the


Netherlands is the seminal example of how to in-troduce agile into an organization at scale. Third,successful digital transformations depend onadapting or adding to a bank’s existing IT sys-tems in multiple ways; for example, introducing alibrary of microservices or APIs, using cloud com-puting at scale, and leveraging technologies suchas robotics and artificial intelligence.

Partnering for reach and innovationThe second response to digital disruption in-volves a bank partnering with a telco or a fintech

to transform its reach and accessibility to cus-tomers, and in product innovation. Partnershipscan make sense for banks seeking a cost-effec-tive model to serve low-income segments. It is aless resource-intensive option, making it a suit-able play for a bank facing constraints in financialresources or talent.

Commercial Bank of Africa (CBA) is a high-endbank in Kenya that focuses on the corporatesector and high-income individuals, with a high-touch service model. CBA decided to enter the

63

207

344 million207 million100% =

Merchants

Agency

Equitel(mobile

banking)

Branch

ATM

Mobile

Branch

100% = 6.3 million 2.3 million

December2016

December2015

December2016

December2015

18

66

11

25

15

3

6

7

46

85

75

15253

-18

21

141

-14

26

Exhibit 21

Volume of transactions %

Loans disbursed%

CAGR%

CAGR%

Source: Equity Bank Þnancial reports and website; press articles

Equity Bank is rapidly migrating both transactions and sales to digital channels


mass market, but with a low-cost model. Theresult was a partnership with Safaricom,Kenya’s largest mobile network operator, andthe launch of M-Shwari in 2012. M-Shwari com-bines interest-bearing savings, payments, andmicroloans. The account is issued by CBA, butmust be linked to an M-Pesa account (M-Pesais a mobile wallet offered by Safaricom) in orderto withdraw and deposit funds. M-Shwari inno-vatively solved three challenges banks oftenface in serving the mass market—all throughthe power of the mobile phone as a channel forfinancial services.

Cashing in and cashing out. Withdrawals and■deposits must be done through M-Pesa viaSafaricom’s network of 130,000 agents. Thus,the cost of payments and cash remain vari-able to CBA, which is spared the huge fixedcost of deploying an extensive branch networkand hundreds of tellers to serve the transac-tional needs of Kenya’s mass market.

Onboarding and KYC. Onboarding onto M-■Shwari is a seamless process for existing M-Pesa clients. They simply find the M-Shwariapplication in the menu of their M-Pesa ser-vice and apply. The account is activated within30 minutes. CBA cross-references existingKYC records collected by Safaricom and M-Pesa with the national ID system.

Credit scoring. Credit scoring is done using a■combination of transaction history and telcousage data. M-Shwari offers a 30-day loan withan average loan size of $32, and a 7.5 percentfacilitation fee. Application is via phone; if ap-proved, the loan can be disbursed in seconds.M-Shwari can process 80,000 loan applica-tions daily, and has kept nonperforming loansto a creditable 1.9 percent; in consumer fi-nance this ratio can easily reach 7 to 8 percent.

The results of this partnership have been impres-sive. Total registered M-Shwari users have climbed

from 2.9 million in 2012 to 17.3 million, an annualincrease of 56 percent. Total deposits connectedto the product have grown on average 100 per-cent per annum (2012-16) to reach $90 million.

CBA was one of the best-performing banks inKenya between 2012 and 2016 (Exhibit 22, page42), with growth of 23 percent per year during theperiod, second only to Bank of India, which has asmall presence in the market. Profitability at CBAhas also been robust, with ROE averaging 25percent—among large banks, only Equity had ahigher ROE during the period. Non-interest rev-enues have grown 21 percent per year, and profitbefore tax has surged to $76 million after remain-ing below $50 million the preceding four years.While CBA’s performance cannot be solely at-tributed to M-Shwari, the innovative productclearly had an important role.

Elsewhere in Africa, Nigeria’s Diamond Bankforged a partnership with MTN to launch the Dia-mond Y’ello account in 2014. The service offersfinancial, telecom, loyalty, and lifestyle benefits,and allows Diamond to reach unbanked and un-derbanked customers in Nigeria at reasonablecost. Financial products offered include an inter-est-bearing account; microloans; transfers, de-posits and withdrawals, and bill payment.

Diamond Bank’s number of customers trebled to12 million between 2014 and 2017. Seven millionof the 12 million had joined through the mobilechannel, a clear demonstration of Y’ello’s impact.Similar to CBA’s experience with Safricom’sagent network in Kenya, Diamond Bank bene-fited greatly from access to MTN’s 50,000-agentforce in Nigeria. There were also benefits forMTN’s 58 million customers—including cheapercall rates for MTN-Y’ello users, and the opportu-nity to earn loyalty points by transacting onY’ello. By 2017, Diamond Bank had reached aremarkable level of 80 percent of overall transac-tions through digital channels.


Building a digital bankA third response to digital disruption is to createa standalone digital bank—that is, a bank wheremost transactions, sales, and servicing is donethrough digital channels. Digital banks typicallyhave a very limited branch footprint, relying in-stead on digital channels and partner merchantor agent networks for distribution.

The digital bank option is most relevant for uni-versal banks seeking to disrupt the market with anew brand without changing their own; or forbanks seeking to accelerate their digital transfor-mation without the cumbersome challenge ofdoing so on their legacy IT platforms. A digitalbank can rapidly be designed and launchedwithin 12 to 18 months, without having to com-pete with other priorities, and is usually staffed bynew, specialist talent.

ALAT, Africa’s first fully digital bank, waslaunched in May, 2017 by Wema Bank in Nige-ria. ALAT targets the youth segment based onthe three pillars of convenience, simplicity, andreliability. Customers need never enter a bankbranch: they can open an account via mobilephone or Internet in under five minutes. Debitcards are delivered anywhere in Nigeria withintwo to three days, free of charge. ALAT alsopromises “no paperwork”: photos of KYC docu-ments can be uploaded via mobile app or web-site. Products include simple, automatedsavings plans that are goal-based and earn an-nual interest of 10 percent—triple the typicalbank rate. Wema/ALAT was named Nigeria’s“Best Digital Bank” and won “Best Mobile Bank-ing App” in Nigeria in the 2017 World FinanceDigital Banking Awards.

22 21 20 19 18 17 16 15 14 13 11 10 9 0 -1 3 7 1 -2

32

28

24

23 27

16

-26 24

20

2 12

0

8 26

8

4

30 29 28

12

25

Prime Baroda

Stanbic CFC

CBA

I&M

GTBank

Citi

Housing Finance

Diamond Trust

Bank of Africa

National Bank of Kenya

CTB

Equity

Co-op

Ecobank

BarclaysKenya

Family

StandardChartered

Bank of India

Exhibit 22

Average return on equity, 2012-16%

Revenue before risk cost, 2012-16 %

Source: Annual reports; McKinsey analysis

CBA has been a leader in both growth and profitability


Another example is Air Bank, in the Czech Re-public, launched in 2011 with the goal of becom-ing “the first bank that people like.” The bankaims for transparency and simplicity. There is aone-page price list with no small print, no hiddenfees, and just five basic products—a current ac-count, a savings account, a debit card, and loanand mortgage offerings. There are 34 stylish,cashless Air Bank branches in high-profile loca-tions across the Czech Republic, most open from9am to 9pm, seven days a week. With its innova-tive but simple approach, Air Bank became prof-itable within three years of launch and captured 4percent of the market within five years.

Building or joining an ecosystemMcKinsey's 2017 Global Banking Annual Reviewwent into depth about “platform companies” thataggregate multiple producers of different prod-ucts or services to make it easy for consumers topurchase them, typically on their smartphones.Platform companies such as Uber, Amazon, andAlibaba are blurring traditional industry bound-aries, creating “ecosystems” in areas such ashousing, education, healthcare, B2C market-places, travel, and hospitality.

Platform companies that orchestrate theseecosystems will become the de facto interface forcustomers across multiple services; and financialservices players are at risk of being reduced towhite-label manufacturers for the platform player.Already, in China, digital attackers managed $6.5trillion in transactions in 2015, five times the leveljust two years earlier, and exceeding the $6 tril-lion in offline point-of-sale transactions handledby traditional banks in 2015. Similarly, digital at-tackers increased their share of the unsecured

lending market in China from 1 percent in 2013 to25 percent in 2016.

Alipay, which builds on Alibaba's ecosystem, is a“one-stop lifestyle app” that gives customers ac-cess to several services, including travel, hospi-tality, taxis, and mobile payments at merchants.Alipay grew from 100 million users in 2012 to 451million users in 2015. In the same period, Alipaygrew transactions from $0.3 trillion to $1.8 trillion.Alipay commands 48 percent market share of on-line payments, and 68 percent market share onin-store mobile payments.

Banks seeking to participate in the ecosystemeconomy can take one of several approaches.They can participate in an existing ecosystem asa provider of financial services, such as pay-ments, credit, or savings. More ambitiously,banks can orchestrate providers involved theend-to-end customer journey in a particular area;in housing, for example, the journey would in-clude searching for property, obtaining finance,moving services, renovations and more. Bankssuch as Denmark's Danske and Australia's CBAhave taken this approach. Finally, and most ambi-tiously, banks can seek to build their own ecosys-tem, and coordinate the partners required acrossmultiple ecosystems.

■ ■ ■

Digital transformation is a must for Africa’s retailbanks. Customers prefer digital. Disruptive com-peting offers are emerging in country after coun-try. The technologies to accelerate digitaltransformation are readily available at increasinglyreasonable costs. Retail banking leaders nowneed to decide which path to take in their digitaltransformation, then execute.


To succeed in their digital transformation, Africa’sincumbent banks must strive to emulate thespeed, dynamism, and customer-centricity of dig-ital players. In other words, they require a highdegree of organizational agility—the ability toquickly reconfigure strategy, structure, processes,people, and technology toward value-creatingand value-protecting opportunities.12

Previous McKinsey research has shown that 70percent of “agile” companies rank in the top quar-tile in terms of organizational health, as measuredby McKinsey’s Organizational Health Index (OHI)(Exhibit 23). This translates into significantly bet-ter operational results compared to traditional

peers. For example, an agile organization’s aver-age time to market is one month versus 12 fortraditional companies; productivity is 30 percenthigher at an agile company than a traditionalcompany; and employee engagement is one-thirdhigher.

In 2015, inspired by companies such as Google,Netflix, and Spotify, ING initiated a shift to anagile model. ING’s own executives define agilityas “flexibility and the ability of an organization torapidly adapt and steer itself in a new direction.It’s about minimizing handovers and bureaucracy,and empowering people.”

The role of agile in digital transformation

1-90%

+20 pts

+27%

Exhibit 23

Distribution of agile companies by quartile of Organizational Health Index1

%Time to marketMonths

Employee engagement%

Productivity%

AgileTraditional

70

12

60

100

80

127

25

5

Topquartile

Middlequartiles

Bottomquartile

1 Organizational health as measured by McKinsey's Organizational Health Index (OHI) Source: McKinsey Corporate Agility KIP; McKinsey Organization Practice

Agile companies demonstrate superior organizational health and financial performance compared to non-agile peers

12 “How to create an agile organization,” McKinsey & Company, October 2017


In developing its agile model, ING focused on the“delivery” part of the organization; that is, on thepeople that make digital and non-digital “products”for customers. They excluded sales, support func-tions, and operations. The bank established about350 nine-person multidisciplinary “squads” thatcomprise a mix of marketing specialists, productand commercial specialists, user-experience de-signers, data analysts, and IT engineers—all fo-cused on solving a specific customer problem. Thesquads are organized in 13 “tribes,” each with anaverage of about 150 people.

Each tribe has a mission. For example, the mort-gage tribe might have a mission to help customer'sfind, finance and move into their dream homes, withpeace of mind, speed, and a great experience. Thetribe will then have a number (e.g., 15) squads de-livering products that relate to that mission. Eachsquad needs to deliver a product every quarter. Andevery quarter, there is a ceremony where the tribeleads explain the accomplishments of the squads intheir tribe, what the tribe will focus on for the nextquarter, and any dependencies the tribe has onother tribes.

ING has already improved time to market, boostedemployee engagement, and increased productivity.13

Adopting the agile approach has helped ING positionitself as the leading mobile bank in the Netherlands.The bank releases software on a two-to-three-weekbasis, rather than the previous five or six times ayear. Customer satisfaction and employee engage-ment scores are up several points.

13 “ING's agile transformation,” McKinsey Quarterly, January 2017.

Casablanca, Morocco


As large numbers of African households have en-tered the consuming class for the first time, andbusinesses across the continent have grown theirfootprints, banks have expanded their loan booksrapidly. But credit risk management practiceshave lagged behind, across the major steps ofthe credit value chain, including defining risk ap-petite, underwriting, loan monitoring, and collec-tions. Nonperforming loans (NPLs) are thus asignificant issue for Africa’s banks. Some banksare now taking decisive action to improve theircredit risk and rein in NPLs.

African banks trail other regions in credit risk Despite the buoyant performance of Africa’sbanks, they have the second-worst cost of risk inthe world, at 1.8 percent of assets in 2016—upfrom 1.4 percent in 2011. Only Latin America’sbanks have a higher risk cost, at 2.8 percent ofassets. The uptick in African banks’ risk cost isparticularly concerning given that banks in mostother regions have reduced risk cost over thepast five years (Exhibit 24).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2011 2012 2013 2014 2015 2016

Global Average

Africa

Europe1

Asia-PaciÞc

US andCanada

Latin America and Caribbean

-0.7

-0.5

0

-0.2

+0.3

-0.3

+0.4

1.1

1.7

1.00.9

0.80.9

1.41.4

0.8

0.40.40.4

0.80.8 0.70.7

1.1

3.3 3.0

2.6

1.9

2.8

1.8

2.8

1.8

0.5

0.7Middle East

0.6

Exhibit 24

Credit risk cost, 2011-16%

Change,2011-16% points

1 Italy, Greece, Portugal, and Ireland contribute to Europe’s NPL Source: McKinsey Global Banking Pools

African banking’s cost of risk is second-highest among global regions

Chapter 5. Innovate on risk


Africa also has the second worst NPL ratio of anyregion, at 5.1 percent of all bank loans. Reflectingthe recent slowdown in several of the continent’slargest economies, African banks’ NPL ratio hascrept up by 0.7 percentage points over the pastthree years.

A five-year view reveals strong geographical differ-ences both on current risk cost and the trajectory indifferent parts of Africa. Between 2011 and 2016,banks in West Africa experienced a sharp increasein risk cost—from 2.3 percent to 4.1 percent. Theincrease reflects declining demand for commoditiesand reduced oil prices that have put a strain oneconomies, resulting in high NPLs. East Africa, too,has seen risk cost roughly double to 1.7 percent. In2016, for example, the Central Bank of Kenya tight-ened supervision of lending practices in nation’sbanks, a move that saw three banks go into re-ceivership. North Africa also saw cost of riskroughly double to one percent, with high NPL ratiosresulting from several major corporate bankruptciesin the oil, real estate, and maritime transportationsectors—but the situation is improving. In SouthAfrica, the risk cost and NPL picture actually im-proved in the five years to 2016, thanks to thecountry’s recovery from the 2008 financial crisis.

A new approach to credit risk managementOur survey of African banking executives showsthat better credit risk management is a key priorityfor banks—including making improvements in creditmonitoring, adjusting risk appetite, and strengthen-ing credit underwriting. Forty-three percent of exec-utives said better credit monitoring was the mostimportant area to strengthen, while 38 percent citedbetter credit underwriting, and 19 percent said ad-justing risk appetite was most important.

The survey also shows that banks across Africahave implemented a wide range of credit under-writing innovations in recent years. The most com-monly adopted innovations are the use advancedanalytics, including machine learning (cited by 63percent of respondents), and the use of nonbank

data (52 percent). Fully 47 percent reported usingsocial media data in their credit underwriting, while37 percent use telco data. To manage and miti-gate credit risk losses effectively, banks must con-tinue to innovate and implement improvementsacross the credit value chain.

We see three main avenues for innovation forbanks seeking to profitably serve the growing con-sumer lending opportunity in Africa:

UnderwritingTo improve underwriting, banks can partner withtelecom operators to gather additional data on theircustomers’ airtime purchase and consumption pat-terns. Advanced analytics models can draw on cus-tomer data from both external and internal sourcesand provide input for improved underwriting.

At least three Kenyan banks are taking this route.CBA, Equity Bank, and Kenya Commercial Bank(KCB) have each partnered with a telecom com-pany to use borrowers’ mobile data, voice ser-vices, and mobile money usage as an indicatorof their income and ability to repay. This has al-lowed the banks to underwrite loans for themass markets with credit loss rates well belowthe industry average.

Other innovations of note include the use of retailstore purchase data to run digital credit assess-ment (DCA) for loan underwriting. A Central Ameri-can bank used granular purchase data—includingthe location of purchase, the mode of payment,the item bought, and the price paid—as an indica-tor of borrowers’ income and ability to repayloans. This helped the bank unlock growth in anew lending market, and reduce its credit lossesby 30 percent.

In India, a nonbank financial institution used cus-tomer data such as age, marital status, residenceownership, total credits to account, balance fluc-tuations, and obligations to build a sophisticated


underwriting model that determined the total creditit should underwrite for each customer.

Payroll lendingSeveral African banks are offering loans to salariedemployees of governments or reputable compa-nies, under a signed agreement to deduct the loanpayment from the employee’s pay, at the time theemployer pays it to the employee. The maximumloan tenure for these “payroll” or “scheme” loans istypically determined by the borrower’s employmentstatus (i.e., whether they are on a permanent or afixed contract) and their years to retirement age.The loan amount is usually calculated according tothe client’s “affordability”—some fraction (e.g., 50percent) of the client’s disposable income after taxand other deductions. The interest rate is typicallynegotiated between the bank and the employers.

Several banks and microfinance institutions arenotable examples. Access Bank in Nigeria, whichissues loans of up 75 percent of an employees’net annual salary, achieved a remarkably low NPLratio of 2.14 percent in 2016—compared to an in-dustry average of 14 percent in West Africa. Let-shego, headquartered in Botswana, issues smallerloans across 11 African countries, and its 2016NPL ratio was just 3.2 percent. Bayport offers pay-roll lending in seven African countries, and two inLatin America.

Portfolio monitoring and collectionsOther African banks are proactively managingcredit risk and the collections of NPLs. An EastAfrican bank that was experiencing high NPL ra-tios and high NPL growth—caused in part by his-torical debt that had gone into arrears—tookaction by instilling proactive credit managementpractices across the credit value chain—helpingthe bank reduce its credit risk cost by 50 percentand double the amount recovered. Key steps inachieving these outcomes included:

Improving credit monitoring and portfolio con-■trols. The bank segmented clients in early ar-

rears to prioritize them efficiently, and ensuredthat the strongest collectors were assigned tothe largest loans. The bank also expanded itsearly arrears team and strengthened their ca-pabilities; improved its process for acting onearly arrears; and made greater use of auto-mated SMSs and emails to encourage cus-tomers to make repayments.

Enhancing collection strategies. The East African■bank boosted the size and capability of its NPLrecovery team, and engaged external debt col-lectors. It also improved the cadence of NPL re-covery to improve performance; for example, itintroduced a daily “check in” and “check out” forits recovery team, to review daily accomplish-ments and priorities. Finally, an incentive pro-gram for the recovery team recognized andawarded the highest collectors on a weeklybasis. Beyond this example, there have beensignificant advances in collections stemmingfrom the profusion of customer touch points—e.g., digital, SMS —and analytics that pinpointwhich customer profiles to contact, and thetype, timing, and tone of the contact. LatinAmerican banks, in particular, have some of themost technologically advanced collections tech-niques to be found in emerging markets.

■ ■ ■

Africa’s banks have performed poorly on risk cost.They have seen cost of risk rise from 1.4 to 1.8percent between 2011 and 2016, a level that issecond only to Latin America at 2.8 percent. Allother regions, bar Asia-Pacific, saw risk costs de-cline in this period. This rise in risk costs has coin-cided with huge opportunities for African banks inconsumer finance, as discussed earlier. Innovat-ing on risk therefore becomes critical—in under-writing, monitoring, and collections. Data andanalytics are opening new possibilities for prof-itable business models, especially when com-bined with the use of mobile as a channel forconsumer lending.


Africa’s banks need to keep a close watch onchanging regulations and strengthen their compli-ance processes. Across the continent, regulatorsare increasing the volume, frequency, and en-forcement of regulatory changes—leading manybanks to rethink their revenue-generation models.In our executive survey, senior managers ofAfrican banks identified capital adequacy, con-sumer protection, and know-your-customer (KYC)regulations as the areas most likely to impactprofits over the next five years. Recent bankingregulation in Africa has focused on five categories(Exhibit 25):

Anti-money-laundering/KYC. The Central Bank■of Nigeria introduced anti-money-launderingregulations in 2013, with enforcement in 2017.South Africa’s Financial Intelligence Centre Act(FICA) was updated in 2016 to ensure bankshad sufficient controls to prevent money laun-dering and the financing of terrorism.

Increased consumer protection. In 2016,■Kenya capped interest rates at four percent-age points above the central bank’s referencerate while requiring that deposit rates must beat least 70 percent of the central bank refer-ence rate.

Reduction of public-sector deposits. In 2017,■the government of Tanzania directed that bil-lions of shillings held in commercial banks byministries, public corporations, and local gov-ernment authorities be immediately transferredto the Bank of Tanzania. Under Ghana’s Public

Financial Management Act 2016, the govern-ment set up a unified structure of governmentbank accounts, enabling consolidation andoptimum utilization of government cash re-sources.

Increasing capital adequacy. In 2017, Tanzania■increased the capital adequacy ratio (CAR) by2.5 percent to 12.5 percent and 14.5 percentfor core and total CARs respectively. Nigeria, in2016, increased CAR to between 15 and 16percent for systemically important banks.

IFRS9. Under this new accounting standard,■banks will have to recognize credit lossessooner than under previous reporting stan-dards. While South African banks are adopt-ing IFRS9 in 2018, most African countries arestill in preparation mode; Kenya banks, forexample, have been granted a five-yeargrace period

We analyzed the impact of some of these regula-tions in the countries where they have been ap-plied, to gauge potential impact (in the absenceof any mitigating actions by the banks). For ex-ample, Kenya’s capping of interest rates in 2016provides a taste the impact of increasing con-sumer protection: in the first half of 2017, Kenyanbanks saw their income from interest fall by a re-ported 16 percent and profits decline by 11 per-cent.14 If unmitigated, the impact on Kenyanbanks’ ROE could be as high as 4 to 4.5 percent.Also if unmitigated, We estimate similarly high im-pacts of regulation related to reduction in public

The regulatory scene

14“Interest rates cap shaves Sh26bn off banks’ income,” Business Daily Africa, September 12, 2017.


0.7-1.0

4.0-4.5

4.5-5.0

4.5-5.0

1.0-1.5

Exhibit 25

Anti-money laundering (AML)/KYC

Nigeria: Central Bank of Nigeria AML regulations

South Africa: Financial Intelligence Centre Act

Tanzania: Anti-money laundering declaration of foreign currency and bearer negotiable instruments 2016

2017

2016

2016

Kenya: Interest rate caps for loans and deposits

South Africa: Interest rate and fee caps

Egypt: Interest rates on loans to SMEs should not exceed 5%

2016

2016

2016

Tanzania: Ministries to hold deposits at the Bank of Tanzania

Ghana: Public Financial Management Act 2016 consolidated government cash resources

Nigeria: All government revenue, collections, and payments to be made through the single treasury account

2017

2016

2016

Tanzania: Increase in CAR by 2.5% to 12.5% and 14.5% for core and total CARs

Ghana: Minimum capital requirements for commercial banks trebled from 120 million cedis (~$27 million) to 400 million cedis (~$90 million)

Nigeria: Increased CAR to 15%-16% for systemically important banks

2017

2018

2016

South Africa: FRS9 Financial Reporting Standards became effective in South Africa in January 2018

2018

Increasing consumer protection

Increasing capital adequacy requirements

Complying to IFRS 9 standards

Reduction of public sector deposits

Category Examples of regulationImpact on RoE%

Source: Regulator websites; McKinsey analysis

Regulators are tightening policies on AML, consumer protection, public deposits, capital adequacy, and reporting standards

deposits, and increased capital adequacy re-quirements. A lower impact, in the range of 1 to

1.5 percentage points of ROE, is expected fromAML/KYC and IFRS 9 regulations.


Africa’s banking markets are roaring to life. Theywill grow robustly over the next five years, and asa group, Africa’s banks are the second-most prof-itable on a global level. At the same time, Africa’sbanking markets continue to present a set ofchallenges—including large numbers of low-in-come customers, high usage of cash, and lowlevels of physical distribution—and are also highlyvaried, from the relatively advanced markets ofSouth Africa and Morocco, to the nascent mar-kets of Ethiopia and DRC.

Against this complex backdrop, there is a cleardelineation between the winners and the also-rans. Leading banks are significantly outperform-ing their peers in terms of growth and profitability,

and are characterized by their focus on one ormore of five themes: drawing the right map; se-lecting the right segments and offering compellingpropositions; offering leaner, simpler banking;putting digital first; and innovating on risk.

If more African banks were to focus effectively onthese themes, we would expect retail banking togrow at 12 percent per year, versus the baselineprojection of 8.5 percent. We look forward to thisfuture of greater, more widespread innovation andgrowth in Africa’s banking markets. The technolo-gies that enable this growth have never beenmore widely available, and the market needs re-main as large as ever.

Conclusion

54 Roaring to life: Growth and innovation in African retail banking

For more information about this report, please contact:

Mutsa ChirongaPartner, [email protected]

Luis CunhaSenior Partner, [email protected]

Hilary De GrandisEMEA Banking Practice Manager, [email protected]

Mayowa KuyoroConsultant, [email protected]

Acknowledgements

The authors would like to thank the executives from 20 leading banks and financial servicescompanies across Africa who were interviewed in the research leading up this report. Your time andinsights were invaluable.

We also thank Mayuree Chetty, Siongo Kisoso, Marianne Mbatha, Caroline Mutuku, and GavinThompson, who played an extensive role in the research and analysis in the report. MichaelCharnas and his team at Catalyst did an excellent job conducting the customer survey in six Africancountries. Colin Douglas and Paul Feldman provided invaluable writing and editorial support.Thanks also to Vuyisile Sisulu and Natalia Quesada for designing and producing the cover image,and Derick Hudspith for overall design of the report.

We thank several other colleagues in the McKinsey Banking Practice and Africa Office, whoprovided input and advice on the report, in particular, Jalil Bensouda, Jacob Dahl, Kwaku Debrah,Chika Ekeji, David Entwisle, Ahmed Fjer, Simonika Govender, Levente Janoskuti, Francois Jurd deGirancourt, Omid Kassiri, Szabolcs Kemeny, Matthieu Lemerle, Susan Lund, Stefano Martinotti,Rogerio Mascarenhas, Claudia Meek, Munya Muvezwa, Mayven Naicker, Edward Porter, EnricoRisso, Sebastian Schneider, Yassine Sekkat, Sechaba Seilalia, Tawanda Sibanda, Shenin Singh,Tebogo Skwambane, Frederick Twum, and Yassir Zouaoui. Finally, thanks to our publishing andexternal relations team: Matt Cooke, Bonita Dordel, Nadine Moodie, and Monica Runggatscher.

Global Banking Practice February 2018Copyright © McKinsey & Companywww.mckinsey.com/clientservice/financial_services

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