Banks in Africa have the highest returns on capital in the world, and the potential in other sectors is equally huge. But, writes Brian Caplen, China is so far ahead in the investment game on the continent that it may be difficult for rivals to catch up.
By 2025, Chinese firms will be earning $440bn in annual revenues from their African operations, up from $180bn today, according to a recent study. That’s equivalent to the GDP of Nigeria, Africa’s largest economy.
Chinese firms dominate the continent’s infrastructure and they handle 12% of industrial production. They are also strong in services, real estate and trade. Nearly one-quarter of 1000 firms surveyed by McKinsey Africa said they covered their initial investment within a year while one-third recorded profit margins of more than 20%.
Banking is no exception to this trend. The Banker’s Top 1000 World Banks ranking for 2017 shows that African banks have the highest returns on capital in the world at 27.42%. Most other regions fall in a 13% to 16% range.
It is not difficult to figure out why. Africa’s markets for basic banking products – such as savings and deposit accounts, credit cards, car loans, and so on – are nascent and underexploited; populations are large, young and growing; the opportunity is there to do a big leap in banking infrastructure and go straight to mobile banking, with all its cost efficiencies (think Kenya’s M-Pesa).
Here, too, the trend of China taking the initiative while some Western banks retreat is much in evidence. Barclays, whose roots in Africa go back to 1925, announced last year the selling down of its 60% stake in its Johannesburg-listed subsidiary, citing concerns about the continent’s volatility and the regulatory burden of owning the shares.
Heading in the other direction, China’s leading bank, Industrial and Commercial Bank of China, has for 10 years had a 20% stake in Africa’s largest bank, Standard Bank. Standard Bank’s return on capital is 31.47%, whereas the average for western Europe is a measly 6.47%.
On top of this, Africa is on course to complete the Tripartite Free Trade Area (TFTA) later in 2017, creating a free-trade zone stretching from Cairo to Cape Town, and giving intra-regional trade a big boost. For the 10,000 Chinese firms operating in Africa – 90% of them private – this will provide another welcome boost to business. Chinese business has at times been criticised for being too aggressive in Africa, for buying up large tracts of agricultural land and for not developing the local workforce. But these companies have also shown a lot of entrepreneurial flair in exploiting opportunities that Western firms have been unable to capitalise on.
By Brian Caplen