Banking In East Africa: Beating Economic Headwinds

Kurt Davis Jr.
Written by Kurt Davis Jr.

It is windy in the desert and you can feel the breeze coming down from the Sahara.

The current headwinds, faced not only by South Africa and Nigeria but also other emerging markets including China and Brazil, are the product of a protracted commodity price downturn and, to be fair, some bad economic decisions.

Positioning local economies to be more competitive and effectively more diversified should be the focal point of leaders. East African countries and leaders have understood this logic and their economies roll forward with strong banking sector performance in the face of these slower African times, albeit buttressed by three factors: higher economic growth, more mature financial inclusion measures, and a stronger prevailing relationship with the private sector.

Economic growth outperformance

The International Monetary Fund (IMF), in its October 2015 World Economic Outlook report, predicted that economic growth in sub-Saharan Africa will slow 5 percent in 2014 to 3.8 percent in 2015 with a slight rebound to 4.3 percent in 2016. Countries across the region have introduced measures to curtail the impact of the fiscal stress and currency volatility. Ghana and Nigeria, for example, tightened monetary policies to combat currency declines – Nigeria receiving some pushback from business owners and economists. Kenya, Uganda and Tanzania followed suit with less enthusiasm.

Resource-dependent exporters, including Angola, Nigeria and Zambia, have adopted fiscal austerity programs to steady their economies and the public mood in the short term. These countries also adopted reforms to reduce dependency on commodities. But a return of commodity prices may be necessary in order for the governments to fund their strategic economic realignment.

Yet little data suggests a change in direction for commodity prices. The lingering effect will be a growth rate of 4.3 percent for the sub-Saharan region. As host to numerous commodity dependent economies, the Economic Community of West African States (ECOWAS) and the South African Development Community (SADC) are expected to achieve economic growth of 4 percent and 3 percent respectively in 2015 and 4.7 percent and 3.1 percent respectively in 2016.

The East African Community (EAC) is home to newly emerging commodity players. Recent discoveries of oil and gas in Ethiopia and Tanzania are far from becoming the primary drivers in the local economies, especially in this price environment. Kenya and Uganda are still working to push a pipeline over the finish line. Djbouti and Ethiopia are in the same competition. All in all, East Africa has depended on economic diversity and local entrepreneurship to keep the economic pace in the past decade. The EAC accordingly will expand faster than its peers with a growth rate of 6.1 percent in 2015 and 6.6 percent in 2016

The financial inclusion norm

Advancing financial inclusion has been at the heart of the banking growth strategy. Account penetration in sub-Saharan Africa has risen significantly since 2011. More than 40 percent of adults now have an account at a formal financial institution compared to 24 percent in 2011, which was half the global average at the time.

Banks and other deposit-taking institutions, including cooperatives, dominate the financial infrastructure of sub-Saharan Africa, with microfinance institutions playing a significant role in expanding services to low-income earners. Backed by private capital, especially from private equity groups, pan-African groups have helped to push the growth in presence and access.

Despite its dominance, brick and mortar banking is quickly succumbing to mobile money, intriguingly supported by the same private equity groups. More than 20 percent of adults are reportedly using a mobile phone to pay bills or send or receive money compared to a global average of less than 5 percent.

According to the World Bank, Kenya leads with mobile money account ownership at nearly 60 percent, while Tanzania and Uganda have rates of around 35 percent. In Somalia, Tanzania, and Uganda, more adults have a mobile money account than accounts at financial institutions. In Kenya, more than half of adults who pay utility bills use a mobile phone to do so. And, in Tanzania, almost a quarter of those receiving payments for the sale of agricultural products do so into a mobile account.

All the statistics indicate that East Africa regulators have been successful in pivoting East Africa towards a cashless society. Crucial steps have been taken to better regulate and promote mobile banking in the region. In conjunction with private investors, the banking sector should see continued improvement in regulatory, managerial and physical infrastructure. Innovations from the technology sector also require that banks strategically adapt their product portfolios and offerings to better serve as value adds for customers who have access to multiple outlets for financial solutions.

Private sector support: infrastructure investment

Local East African banks have begun to fund infrastructure investments in the region, using structures ranging from concessions and private-public partnerships to equity investments, syndicated loans and infrastructure bonds. Bank lending generally plays an important role in both the public and private aspect, providing access to debt for local and foreign participants.

Public borrowing in Kenya accounts for 85 percent of the bank lending for infrastructure finance. It approaches 90 percent in Ethiopia but is less than 60 percent in Tanzania. Statistics suggest no precise trend other than the prevailing ability of banks to meet both the needs of public and private investors across all sectors, not just infrastructure. Local bank lending is also backing small, medium and large real estate and retail companies.

Oh…and equity markets

Sub-Saharan African equity markets plummeted 20 percent-plus in 2015. The drop should not be as significant in 2016 but it depends on commodity price performance. Currency volatility and restrictions as well as austerity plans will also push the needle right or left in the midst of the turbulence. In this environment, East Africa’s predominantly oil-importing members are, nonetheless, positioned to outperform in the equity markets for sub-Saharan Africa.

A lower import bill, less currency volatility (excusing some management mishaps) and comparatively more foreign investment (versus the rest of sub-Saharan Africa) will also bode well for the region’s growth and performance. It is hard to ignore how the integral parts of the system – the banks – do not benefit from that prognosis.

Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at

About Kurt Davis Jr.

Kurt Davis Jr. is an investment banker with private equity experience focused on Africa and the Middle East. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at