Africa can prove a complex market to navigate for major private banks, due to its regulatory environment and the omnipresent risk of political turmoil. The last year has seen financial heavyweights like UBS and Credit Suisse downsize their operations on the continent. With this in mind, what is the future of private banking in Africa?
Rising wealth in Africa suggests bright future for private banking
Wealth data business Wealth-X’s 2019 High Net Worth Handbook predicts that Nigeria will see the world’s highest growth in its HNW population in the next five years (compound annual growth rate of 16.9%.) Knight Frank’s 2019 Wealth Report meanwhile forecasts that there will be over 400 more billionaires in Africa by 2023.
Standard Chartered Private Banking, for one, sees validity in this outlook. Demir Avigdor, Standard Chartered’s head of Africa and Europe says: “We expect that the growth in ultra-wealthy populations in Africa will outpace that of Europe and North America over the next decade, with the number of HNWIs growing by 30% in Africa.”
Julius Baer also sees a lot of green lights on the continent. Its Southern Africa head Raoul Korn says: “We believe the next five years offer great potential for stronger GDP growth, increasing foreign direct investments, lower inflation and lower unemployment rates.”
Unequal future in African countries
One oft-repeated mistake is to view Africa as one entity, as opposed to a collection of varying markets, presenting a range of different prospects.
For example, softening oil prices have caused those countries reliant on exports to experience relatively weak growth.
Nigeria is the largest economy in Africa, but has historically been dependent on oil, as referenced in an HSBC research note in July 2018 that raised concerns for the country’s economic progress. HSBC departed Nigeria around the same time as UBS did in the November.
In contrast, the likes of Rwanda, Ethiopia and Kenya’s economies have thrived in recent years, with GDP growth rates well over 5%.
Is the future of private banking in Africa in the hands of local firms?
Ethiopia had 800 high-net-worth individuals (HNWIs) in 2017 according to Knight Frank’s Wealth Report, a number forecast to rise by 100% up to 2026.
This can be attributed to current prime minister Abiy Ahmed, who has instigated sweeping reforms to Ethiopia’s economy, opening it up to foreign investment. This has yet to extend to the banks though: its two state-owned banks and 18 licensed commercial banks are all majority-owned domestically.
Staying in East Africa, neighbouring Kenya’s economy has been one of the fastest growing on the continent over the last three years, with GDP forecasted to grow 6.1% in 2019. HSBC shut their office in Nairobi in 2014, and it has attracted little interest since. This is a void that local firms will be keen to exploit.
Complex client portfolios and regulation
Clients with disparate portfolios and a tricky regulatory environment make the future of private banking in Africa look a hazy one.
South African Nedbank‘s head of strategy, Rufaro Mucheka, says: “We are seeing an increasing number of diaspora or repatriates of African descent returning to the continent, starting new ventures. The fact that these individuals have worked and invested in, sometimes, more than one overseas jurisdiction does create complexity in their financial profiles.”
Mucheka also notes that the majority of South Africa’s HNWIs are entrepreneurs who seek diversification from local, political and economic risks by spreading their wealth across borders, also making for complex portfolios.
To the point of European banks downsizing their operations in Africa, Mucheka concludes that the regulatory environment is a determining factor in European firms vacating, leaving a gap for native banks to fill.
“For institutions like Nedbank, we understand the regulatory landscape and compliance challenge, and we can fill the gap left by these banks.”