Africa has the most profitable banking sector in the world and its massive unbanked population is creating enormous opportunities for incumbent banks and fintech companies alike.

The continent has the world’s most profitable banking industry – its banks had an average return on equity (RoE) of 21.61% in 2021 (based on 24 African countries) compared with 15.69% in 2020 (based on 36 countries), according to Bankscope, the banking database. African banks are faring well in a global context – banks worldwide had an average RoE of only 13.44% in 2021. 

In South Africa – the country with the most sophisticated financial sector in the region – the combined RoE of the country’s major banks increased to 17.6% during the first half of 2023 compared with 16.9% for the same period in 2022, on the back of strong earnings growth, according to PwC. 

However, only 43% of sub-Saharan Africa’s population has a traditional bank account, according to the International Monetary Fund. In some African countries, the rate is even lower: in the Democratic Republic of the Congo, it is only 26%, Angola 29% and Ethiopia 35%, according to BPC, a fintech company. Sub-Saharan Africa’s banked population has jumped from only 23% of the population in 2011 but most Africans still do not have a bank account, creating a massive opportunity for incumbent banks and neo-banks, including fintechs. 

Overall, it is estimated that around 360mn adults in the region do not have access to any form of bank account – roughly 17% of the total global unbanked population. One of the underlying problems for financial inclusion on the continent is the low urbanisation rate. Cash is king in Africa – over 90% of all payments and transactions are made via cash and sub-Saharan Africa also has low credit and debit card penetration rates at 3% and 18% respectively.

Financial services providers are trying to gain access to the masses through mobile feature phones and increasingly through smartphones. Already sub-Saharan Africa is the world’s fastest-growing mobile phone market and it has the most developed mobile money market in the world. In 2022, the region had 287mn mobile internet users – expected to rise to 438m by the year 2030 – according to GSMA, the mobile network operators’ association. Over the next five years 4G adoption in the region is anticipated to more than double to 45%.

The mobile money revolution is disrupting established banking in Africa. Fintech and paytech start-ups have been spawned in a number of countries – including Kenya, South Africa, Nigeria and Egypt – and are among the first ‘unicorns’ produced in the region. The Covid-19 pandemic has led to a lot more e-commerce and accelerated the digitalisation of African banking and financial services. Between 2020 and 2021 the number of tech start-ups in Africa tripled to around 5,200 companies, according to McKinsey. Just under half of these are fintechs.

Sub-Saharan Africa remains the global epicentre of mobile money, with 763mn registered accounts or almost half of all registered accounts globally, according to GSMA. In 2022 the number of new registered accounts in the region jumped by 109mn – 59% of all new accounts worldwide. The region accounts for over half of global accounts active on a monthly basis. With $2.3bn transacted per day, it accounts for two-thirds of all mobile money transactions globally. 

However, while Kenya and Ghana have extremely high mobile money uptake (87% and 82% of GDP respectively transacted via mobile money in 2021), most African countries are still under-penetrated (around 5% of GDP transacted through mobile money). This creates a massive opportunity for mobile money growth.

Sub-Saharan African is also the most expensive region in the world to send remittances in. In 2022, the average cost of sending $200 to Africa was 8.5% of the amount transferred against less than 6% globally, according to the World Bank. Sending money to some African countries – including Angola, Botswana and Namibia – can sometimes cost as much as 20% of the amount transferred.

African banks are costly to run, with an average cost-to-asset ratio of between 4% and 5%, almost twice as high as the global average, according to McKinsey. The high costs and charges indicate that the region is ripe for more competition from fintech companies and ‘neo-banks’. Incumbent banks have started to feel under threat by the disruption and are attempting to innovate rapidly or acquire fintech companies. Challenger banks or neo-banks, they fear, are better placed to help countries' underserved communities achieve financial inclusion. 

Neo-banks are fintech firms that offer apps, software and other technologies to streamline mobile and online banking. These fintechs generally specialise in particular financial products, such as savings accounts. Neo-banking is popular in Africa, as it offers customers an array of services and features that were previously inaccessible, such as sending money to family and digital lending.

Established banks in Africa are in the process of becoming tech companies with a banking licence. Banks in Nigeria, Kenya and South Africa are among the leaders in banking innovation on the continent. A lot of infrastructure gaps exist – many people have a mobile phone but they do not have a smartphone. USSD technology has enabled person-to-person and person-to-business financial transactions to take off. Agency banking is also enabling financial services companies to reach unbanked populations in rural areas.

Agency banking is a type of branchless banking that allows the traditional banks to extend their network of branches and services in a cost-efficient manner through authorised agents. Agents remain the backbone of mobile money in sub-Saharan Africa. The region had 10mn registered agents in 2022, up 13% on the previous year, according to GSMA. Around $224bn was digitised by agents in the region in 2022. Mobile money agents have more than one hundred times the reach of ATMs and more than two hundred times the reach of bank branches. 

As mobile money players expand into broader financial services, they require access to a banking licence. However, amid a regulatory push for consolidation, these are hard to secure. Many mobile money players are being forced to turn to incumbent banks to support their product agendas. The rate of partnerships between banks and mobile network operators is increasing – with 62% of mobile money players that offer mobile-enabled credit doing so in partnership with banks, according to the Boston Consulting Group. 

The next big leap in banking and financial services in the region is the introduction of blockchain technology that can exponentially accelerate trade on the continent, including cross-border trading. It could be a real catalyst to the implementation of the African Continental Free Trade Area, for example, and is vital for the transformation of pan-African banking systems. 

Currently cross-border transactions in Africa are using the Swift system, which usually takes three to five days to settle and is costly. Blockchain technology introduces transaction finality in a matter of minutes for a reduced cost. It has the potential to be an enabler of cross-border trade and remittances, as long as there is interoperability between the commercial and central banks’ blockchain platforms.

Many African banks witnessed a jump in post-pandemic profits of 30% – or even 40% – between 2021 and 2022. The continent’s biggest bank, South Africa’s Standard Bank Group, reported a 33% surge in profits from ZAR15.73 ($0.87) per share to ZAR20.87 per share for the year to the end of December 2022. It put the rise down to higher credit card and insurance transactions, as well as higher interest rates.

However, in all African geographies – except Kenya – RoE still remains one to two percentage points below pre-pandemic levels, according to McKinsey. The decline in profits can be partly attributed to a fall in fee margins because of increased competition and digitalisation. 

Many international banking groups pulled out of Africa following the global financial crisis of 2007 to 2008. For example, Barclays exited the continent, while Standard Chartered Group substantially downscaled its operations. In their place, banks like Standard Bank, Ecobank, Bank of Africa, Access Bank and Absa have managed to craft a pan-African strategy.  

Four different pan-African groupings are emerging in Africa. The first is the South African banks, led by Standard Bank, Absa and Nedbank, which in the past have developed pan-African networks to reflect that country’s historic influence over the rest of the continent. However, appetite for further international expansion now appears limited.

The second grouping is the large Moroccan banks (Attijariwafa, BCP and Bank of Africa, previously BMCE), which have used their sizable domestic operations as a launch pad for expansion into the continent, with a focus on francophone and Arab countries. However, this expansion has stretched their balance sheets and analysts now expect a shift in focus towards integration.

In contrast to these two groups, Nigerian banks are showing greater appetite for acquisitions, partly driven by sluggish growth in the domestic market. Access Bank, Guaranty Trust Bank and United Bank for Africa (UBA) are all spreading their wings beyond the country in an attempt to build an Africa-wide banking network. UBA has operations in 20 African countries, while Guaranty Trust has subsidiaries in nine African countries.

The fourth group is the Kenyan banks: they are also keen to expand into neighbouring markets, partly owing to pricing regulations that have limited their profitability in their core domestic lending operations. Kenyan banks Equity Group, KCB Group and DTB Group have actively grown their regional reach.

A number of other African banking groups are expected to join the trend of improving their scale in other African countries to diversify risk and earnings. Pan-African banks have penetrated markets such as trade financing that were once exclusive to foreign lenders. They have opened foreign currency accounts and are able to meet clients’ import and export needs. 

Pan-African financial institutions such as Attijariwafa Bank and Afriland First Group have partnered with Chinese banks so that they do not have to depend on Western banks for their correspondent banking. Others have expanded outside Africa and started operations in cities such as London, Dubai, Paris and Beijing. These overseas subsidiaries are able to act as correspondent banks for other financial institutions in Africa.

South African banks with sizable operations across the continent are seeing the benefits of geographic diversity in the region, resulting in record contributions to earnings growth and a higher growth rate relative to their South African operations. The IMF is forecasting economic growth for sub-Saharan Africa of 4% next year compared with 1.8% in South Africa alone. 

African banks remain small in a global context. For example, four banks in the Gulf Cooperation Council region – with a population of 55mn people – are bigger than any single bank in Africa – with a population of more than 1.3bn people. Qatar National Bank is the largest bank in the Middle East; its total assets are 60% greater than the biggest African bank, South Africa’s Standard Bank Group.

Africa’s banks are the most profitable in the world but they have still not managed to return their profitability to their pre-pandemic levels. The high returns are attracting many neo-bank start-ups and fintech companies, in particular in the paytech space. African banks are being forced to innovate to head off the competition or to expand into other corners of Africa to diversify their earnings.