Banking

South African bank Absa has expanded into several other African countries, bringing leading-edge technology and first world banking services to areas where they were never available before. Elvira van Niekerk spoke to Absa bank's Peter Gordon, head for Absa's International Operations.

South Africa's banking and financial sector is probably the best developed on the African continent. It is therefore no wonder that most of South Africa's leading banks are venturing outside the country's borders to start operations in other African countries.

"The reason for this is very simple. The South African retail banking industry is over banked, and there is - apart from GDP growth - limited potential within the country's borders," says Gordon.

"Accessing first-world markets as an African based bank can be problematic as the South African sovereign rating impacts on the cost of raising offshore. Absa Bank does have operations in first world countries, but we specialise in niche products mainly tailored for emerging markets of which we have first-hand knowledge," continues Gordon.

"Where we can expand, and where we see significant potential for us is in commercial and retail banking on the rest of the continent."

Gordon explains that many European banks have been present on the African continent for many years. He points out though that many of these banks focus mainly on wholesale banking, and not so much on commercial and retail.

"In the case of Absa, we have been particularly successful in assisting in the privatisation of banks where skills and technology are desperately needed. Tanzania (NBC) and Mozambique (Banco Austral) are good examples," says Gordon.

Challenges

Africa has many issues counting against it when it comes to investment and the availability of money, including issues such as political instability, war, economic hardships, infrastructural shortcomings and health problems such as HIV/Aids

Gordon is of the opinion, however, that the banking and financial sector in Africa has huge potential in spite of these challenges.

"Firstly, to establish a reliable and profitable banking industry in a country, there needs to be political stability. Look at Zimbabwe. The banking industry is very well developed, but because of the economic and political situation in the country, inflation and interest rates have soared. Needless to say, high inflation and interest rates kill the industry," stresses Gordon.

The next challenge is that there must be proper legislation and regulations in place.

"If the central bank of a country is not independent, we will think twice before establishing a presence"

"As many of the large commercial and retail banks have being or are still owned by Government, there tends to be a lack of proper corporate governance. Bad loans and inefficient banking practices are very much in evidence."

In most cases where Absa Bank stepped in, the banks were on the verge of collapse. This is evident from Absa's experience in Mozambique, Zimbabwe and Tanzania.

"It is a huge risk to a country if their banking system is on the brink of failure. However, situations can be turned around, and Absa's banks in Tanzania and Mozambique are evidence of this."

"With investor friendly legislation, it makes it a lot easier to run a bank at maximum efficiency. For example, by running the entire bank's operations from Absa's head office in Johannesburg, we are able to maximise on both skills and technology. Some Central Banks have a fear of allowing a bank's back-office to be run from another country. This limits the ability to share services between operations and is certainly becoming a norm internationally. India leads the way in providing back office services, particularly to the large American and European banks," explains Gordon.

"By allowing us to centralise our systems, our Tanzanian clients have access to the latest banking technology."

He recalls that before Absa stepped in, it took 20 days for cheque clearance, and real-time banking was not heard off.

Gordon admits though that turning a previously state-owned bank around to a profitable business operation is a challenge. "We will not commit to retaining a massive branch network, however, experience has shown that, with added efficiencies, rural \ banking in Africa can be profitable - it's a matter of adapting to the local customer needs.

Fears are often expressed about job security - a profitable well run bank gives far more security than offered under a nationalised operation.

"The lack of infrastructure - telecommunications and power generation also present their challenges.

"As we use the latest satellite technology to link our operations across Africa, we are not totally dependant on local communications. Power generation can be a headache but back- up generators are a God send. This makes banking in the remotest areas possible," says Gordon.

Skills development and training is critical.

"In all of the countries where Absa operates, the general level of education is high. However, it is important for us to transfer specific banking skills to our people through ongoing training and skills transfer.," explains Gordon.

Another challenge facing African financial institution, according to Gordon, is that of globalisation and resultant international legislation.

"There is a perception that it is easy to launder money in Africa. It is therefore of utmost importance for banks in Africa to implement proper risk processes and maintain a high level of corporate governance. This can be expensive to implement, but the industry needs to do it if it intends growing in the future," he stresses.

The Future

Gordon believes the future for the banking industry in Africa is looking good.

"All the multi-lateral agencies are keen to involve themselves in Africa making it a lot easier to fund large development projects.

"However, the most important aspect of success is that the people of Africa are extremely willing and keen to develop - be it in banking and financial or other industries.

"With development initiatives such as the New Partnership for Africa's Development (Nepad), and the commitment of Africa's people, the banking and financial industry in Africa is looking positive in spite of the many challenges facing it," concludes Gordon.

ABSAs stake in African Banks:
National Bank of Commerce (NBC), Tanzania - 55%
Banco Austral, Mozambique - 80%
Bank Windhoek, Namibia - 36,6%
Commercial Bank of Zimbabwe (CBZ), Zimbabwe - 26%