Why Invest in the Banking and
Financial Sector in West Africa
ECOWAS-Japan Business Forum
28-29 October 2015
Tokyo, Japan

Introduction
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A large body of evidence now exists which shows that financial sector development can make animportant contribution to economic growth and poverty reduction. This is especially likely to betrue in developing countries, whose financial sectors are likely to be particularly underdeveloped,
and without which economic development may be constrained, even if other necessary conditions
are metFinancial sector development can stimulate long-run growth through its impact on capital
accumulation and on the rate of technological progress.
Access to financial services can reduce poverty through the same channels that affect overall
growth: by increasing investment and productivity resulting in greater income generation, and byfacilitating risk management thus reducing vulnerability to shocks.
However, the poor in developing countries often do not have access to ongoing, formal financial
services, and are forced to rely instead on a narrow range of often risky and expensive, informal
services. This constrains their ability to participate fully in markets, to increase their incomes and tocontribute to economic growth.
In some countries, semi-formal channels such as microfinance institutions play a role in providing
financial services to the poor, as do institutions such as postal banks, development banks and credit
unions. But all these institutions are reaching only a minority of the bankable population. So awidening of financial services provision by private sector institutions (particularly commercial
banks) in the formal financial sector is necessary to tackle this problem on an adequate scale.

2. Overview of Sub- Saharan Africa’s
Banking & Financial Sector•

Financial sectors on the African continent remain to a larger extent underdeveloped, whilebanking industries continue to dominate the landscape in terms of total assets and services.
Nonetheless, financial sector development has been on the agenda of African policymakers
for some time. Various policy reforms over the past decade have contributed to an
environment more conducive to financial sector development. Governments have madeprogress in introducing much-needed legal regulatory frameworks, information infrastructure
and regulatory institutions. As a result, the depth and coverage of financial systems, whenmeasured by the ratios of broad money volumes of bank deposits and private sector credit toGDP, have improved over the past two decades.

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Nevertheless, Africa’s financial sector continues to be less developed compared to otheremerging market regions.
However, Africa enjoys certain key advantages that will enable the continent to equal or evensurpass at least some of its emerging market counterparts in terms of financial sector
development in the coming decade and beyond. Most African financial markets are open to
new entrant including foreign players compared to other emerging market economies. The
growing presence of subsidiaries of major global banks on the continent has undoubtedly
improved the quality of financial services in recent years; the focus here has largely, but not
exclusively, been on high margin corporate businesses as opposed to retail banking sector.
However the largest markets, Nigeria and South Africa are dominated by large local players.

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Over cont’d
The continent has also often been at the forefront of new technological advances and other
innovative methods to reach new customers and simplify access to banking, especially in more rural
locations. However, more than anything else, Africa represents massive financial sector growthpotential due to the fact that the market is still largely unsaturated. According to the World Bank,
only 34 % of adults in SSA had deposit accounts with commercial banks in 2014. Africa’s
flourishing middle class, forecast to triple over the next two decades, further supports the massive
potential that lies within Africa’s growing consumer base. Indeed, with real GDP per capita in many
African countries having climbed past the critical $1,000-level, a rapid expansion in retail banking isforeseen in coming years. The World Bank projected retail banking in SSA to grow at a compound
annual rate of 15% between 2013 and 2020, bringing the sector’s contribution to the continent’s
collective GDP to 19% from an estimated 11% in 2009.To do so however, institutions willcontinually need to embrace innovative strategies so as to shape banking products to fit
consumers’ rising financial sophistication needs as well as to tap into the continent’s mCont’d• The banking sectors across sub-Saharan Africa remain
highly concentrated. According to the World Bank’s Global
Financial Development database, the three largest banks
held 78.2% of the total banking sector assets on average
across sub-Saharan African countries in 2011.This statistic
increased to 91.2% when the five largest banks wereconsidered.
• Although the banking sector remains highly concentrated
at an aggregate level, there are subtle but significant
differences in relation to financial sector development
between countries and within regions. Below we briefly
consider financial development in Africa from a regional
perspective, while also highlighting key banking sector
developments in country-level case studies.

3. The Structure of West Africa’s
Banking & Finance Sector•

The West African banking and financial sectors are mainly concentrated in Nigeria,
Ghana and the West African Economic and Monetary Union ( UEMOA), which
compromises mainly former French colonies and one Portuguese Speaking
countries ( Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal
and Togo).

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In general, the Central and West African (CWA) region is characterised as having
the lowest median in relation to private sector credit as a percentage of GDP. A
potential opportunity for investors!

Cont’dNigeria
The banking sector in the region’s largest economy, Nigeria, has undergone
substantial transformations over the last ten (10) years. Following the 2005-06
consolidation, Nigeria’s banking sector experienced rapid credit growth, as banks
expanded their service offering and started entering the untapped retail sector.
However, a large share of the credit originated from high risk investment
activities, such as margin traders focusing on equities and oil importers nothedging their positions. This meant that, in contrast to most of its African peers,
the Nigerian banking sector proved especially susceptible to the impact of the
global financial crises. The Central Bank of Nigeria took various steps in an
attempt to rectify the situation. Firstly was to address corporate governance andremoval of boards and CEO’s. The CBN also fixed and ensured adherence totenure limits for the board and Chief Executive, which resulted in changes at UBA,
Zenith Bank etc. This included a guarantee on all interbank transactions andpension deposits as well as setting up the Asset Management Company (AMC) toswap all NPLs with tradable zero-coupon-

The West African Monetary &Economic Union ( UEMOA)•••

The financial system in the West African Economic and Monetary Union (UEMOA) remains primarily
bank-based. The banking sector comprises 106 banks and 13 financial institutions, which together
hold more than 90 percent of the financial system’s assets (about 54 percent of GDP end-2011).
Five banks account for 50 percent of banking assets (see Figure 1). The ownership structure of thesector is changing fast with the rapid rise of foreign- owned (pan-African) banks.
This contributes to higher competition but also rising heterogeneity in the banking system, withlarge and profitable cross- country groups competing with often weaker country-based (andsometime government-owned) banks. Nonbank financial institutions are developing quickly,
notably insurance companies, but remain overall small. More detailed analysis on the banking
system is presented in the section entitled “The Banking Sector.”
Microfinance institutions (MFIs) represent a small but rising share of the financial system andcontribute strongly to improving access to finance2 by lower-income households and small andmedium-sized enterprises. The UEMOA has 759 registered MFIs. Sixty-one entities are classified aslarge institutions with assets or deposits above CFAF 2 billion and are supervised by the Banking
Commission. These account for 90 percent of the MFI sector’s assets. Although significantly smaller
than the banking system—MFIs’ total loans amount to about 8 percent of total bank credit—more
people, particularly in rural areas, have accounts at MFIs than at banks, which helps raise overall
access to the financial system from 5 to about 15 percent of the population.

UEMOA cont’d•

As the banking hub of francophone West Africa, Cote d' Ivoire accounted for
27.6% of total banking sector assets within the West African Economic andMonetary Union (UEMOA) region in 2012. The banking sector consists mainly ofFrench and Nigerian subsidiaries in addition to state-owned banks. Althoughrelatively well capitalised, the Ivorian banking sector also suffers from credit risk in
the form of comparatively high NPL ratios, partly a consequence of the postelection conflict during 2010, when banks temporarily seized operations.
Authorities in the WAEMU region are considering the establishment of a financial
stability fund to support the financial system during times of crises, such as
experienced in Ivory Coast recently.

Ghana••The Ghanaian banking sector is fairly well developed in an African context. The sector
comprises 28 ‘Class 1’ commercial banks. Of these, 12 are domestic-owned while theremaining 15 are foreign- owned. ARB Apex Bank functions as a ‘central bank’ for the Rural
and Community Banks (RCBs), and is financed by the Rural Financial Services Project (RFSP)of the Ghanaian government.
Total commercial bank assets increased by 32.8% y-o-y to reach GH¢36.2bn by end-2013.
One year later, commercial bank assets had increased by 42.2% y-o-y to GH¢51.4bn, partly
driven by a 41.6% y-o-y increase in gross advances.

Conclusion
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The countries of the ECOWAS zone offer very attractive opportunities for investors who are considering
investing in the banking and financial services industry within the sub-region. The region is endowedwith huge oil and gas deposits and a host of other natural resources.
Apart from the natural resources, the sub-region has experienced sustained and robust economic
growth in the past decade, averaging over 6 %.
The below listed, not exhaustive by any means presents an excellent opportunity for investors:
Large proportion of population that is unbanked
A large proportion of the adult population does not have access to banking services in Africa (only 34 %of the adult population have a bank account 2014 World Bank estimates
Use of mobile phone technology:
The emergence of mobile technology as an alternative to more traditional banking has allowed forservices to be provided to lower income households often residing at distant rural locations. This wasmade possible by the rapid diffusion of affordable cellular technology on the African continent.
The rate of cellular phone penetration in West Africa is reported at 80 %. This could massively beunleashed if the Nigerian market reaches its full potential.
The presence of Pan African Banks
The presence of subsidiaries of major global banks on the continent has undoubtedly improved theavailability and quality of financial services in recent years. However, large banks from well- developed
financial markets on the African continent have made the biggest impact in this regard. As noted above,these banks mostly have their origins in South Africa and Nigeria. According to the EIB: “at least nine
SSA-domiciled financial groups operate banks in seven or more other SSA countries.”

Cont’dStandard Bank, Africa’s top bank by assets, has a comprehensive
Africa presence with the company operating in around 17 SSA
countries. The company remains focused on its African strategy,
and has indicated that it no longer has ambitions to buy or build
commercial operations outside of Africa. Standard Bank’s
affiliation with the Industrial Commercial Bank of China (ICBC),
following ICBC’s purchase of a 20% stake in Standard Bank inearly 2008, remains a strategic advantage in terms of tapping
into Asia’s growing presence in Africa. Similarly, in July 2009,FirstRand Group formed a strategic partnership with China
Construction Bank (CCB), with the intention to align two leadingbanks on two strategic continents to facilitate banking
opportunities in the China-Africa corridor.

Cont’d
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The banking sector in West Africa continues to witness increased growth.
The growth of West African banks remain solid in 2014, with an expansion in the balance sheets of the first 50 banking
institutions in the zone by 10 % against 6.8 % in 2013 and 15.1 % in 2012. The growth of Ecobank, which retook the firstplace regionally reflects its regain of form: last year, the Group’s profit exploded by 167 %, after a 2013 marked by massive
provisions, without doubt occasioned by the acquisition of the Nigerian bank, Oceanic Bank. The combined balance sheet ofthe first 50 banks in West Africa is USD 252. 5 billion.
West Africa……………………………. USD 252.5 billion
East Africa………………………………USD 84.5 billion
Southern Africa………………………..USD 730.8 billion
Central Africa……………………………USD 36.1 billion
Apart from the solid performance of the banking sector in the sub-region, there are a number of other reasons why afinancial investor should consider investing in the sub-region:
A market of nearly 330 million people and a rising middle class
A sub-region that has witnessed solid economic growth over the past decade (The ECOWAS region made up of oil exporters,
oil importers, landlocked and coastal countries has a market of about 332.7 million consumers and recorded a strong growthof 6.3% in 2014, as against 5.7% in the previous year despite falling global commodity prices and the public health crisis. The
region had a combined GDP of more than USD 650 billion in 2014. Regional GDP is expected to grow by 7.1% in 2015: higher
than the global growth rate (3.1%) for the same period and above that of advanced economies (2.0%).

Cont’d••••An improving business climate (For 2015, ECOWAS boasts of 4 countries (Benin, Cote d’Ivoire,
Senegal and Togo) among the top 10 improvers globally, who are making the biggest
improvement in business regulation over the past year. Several regulatory reforms that apply
to an economy’s business during their life cycle, including start-up and operations, trading
across borders, and paying taxes, continue to be implemented by Member States to in orderto make their countries, and the sub-region by extension, investor-friendly. Ghana continues
to be a top performer in the sub-region.)
Sustained efforts have been undertaken by ECOWAS Member States to harmonize legislation
to facilitate investment
Regional efforts in ensuring cross-border banking supervisory oversight have proven crucial inensuring financial and banking stability