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Banks in EA pin hopes on technology and partnerships to catalyse growth
East Africa’s commercial banks are pinning their hopes for growth in 2016 on technology and increased investment in small and medium-sized enterprises as lenders avoid raising fees and commissions to maintain to retain customers.
Regional banks’ finances suffered battling 12 months of high interest rates, soaring inflation and weakening currencies last year.
But even with a dip in profitability, market analysts forecast a positive outlook for the banking sector in 2016, lifted by the growing vibrancy of the SMEs, increased investment in technology and the strategic partnership with telecommunications companies to ensure product innovation and control of operational costs.
“We have seen reliance on technology from the financial sector. More banks are leveraging on technology to grow deposits, improve customer relations, issue advances and loans as well as transfer funds,” said Daniel Kuyoh, a senior investment analysts at Alpha Africa asset managers.
“The trend will see stronger growth on non-interest income for the banks that have a technology offering to its clients. We have also seen the emergence of peer-to-peer lending platforms to access credit and these firms are disruptive forces in the financial sectors, as they directly impact banks’ lending,” he added.
According to Eric Munywoki, head of research and business development at Sterling Capital Ltd, technology has improved service delivery across the banking sector with tech-driven revenues accounting for between 30 and 40 per cent of the total revenues.
“The cost-to-income ratio has improved. This is a positive trend and will continue to contribute to the sector profitability as well as shape its competition landscape,” said Mr Munywoki.
The decision by the US Federal Reserve to raise its interest rate by 25 basis points, according to analysts, could choke the growth of regional banks by weakening the regional currencies and fuelling inflationary pressures.
“Fed rate hike could have an impact on the local/regional interest rates in event of excessive capital,” said Mr Munywoki.
“In order to counter the challenges, this could call for contractionary monetary policy,” he added.
According to Mr Kuyoh, the financial sector had already priced the increase in Fed rate and the risk departments had already performed stress tests on different scenarios and what the impact would be on their balance sheets.
“I think that consecutive or a surprise rate hike would be the game changer and have more adverse effects than this first hike. The effect on local currencies would require responses from central banks and would of course affect how banks price their loans and credit offerings,” he said.
It is argued that the region’s banking sector is facing competition beyond the traditional banking model owing to the rapid penetration of mobile phones and innovation.
The new sources of competition include the telcos, which can now roll out mobile banking services, deposit taking microfinance institutions and the less formal savings and co-operative societies.
“Technology is critical. There are some things, which cannot be done without investment in technology,” said Johnson Nderi, a corporate finance and advisory manager at ABC Capital Ltd.
According to Teddy Pole, an investment analyst at AIB Capital Ltd, the fastest growing banks in East Africa are those with fast adoption of Alternative Banking Channels (ABCs), leveraging technology to shape banking products and effectively service large amount of people in a manner that positively impact their cost-to-income ratios.
“These banks use technology as a tool to simplify access to banking in an affordable manner especially in the rural areas where the majority of the population live with low but growing income levels and are engaged primarily in agriculture,” said Mr Pole.
According to consultancy firm Deloitte, banks are looking to technology to help simplify the banking experience for customers and to increase the speed with which new products can be brought to the market.
“Technology will be at the centre of almost everything banks do in the areas of growth, innovation, compliance and operational efficiencies,” said Deloitte.
The increased adoption of technologies and usage of ABCs have enabled most banks to lower their cost to income ratio while reaching out to the unbanked population.
Retail banks are embracing new technology, which has seen some of them start shifting transactions from branch to online or mobile channels to save on costs.
The explosion of growth of smartphone technology has created a new distribution channel that has left lenders searching for a mobile strategy that can make online banking available on small devices.
