The African Business Review Jan-Feb 2014 | Page 14

to withdraw from them when they already have a presence there. The
risks incurred often seem disproportionate to the stakes given the small
size of these markets.

Over-rated risk, under-estimated profitability

While the African environment is certainly more challenging than
some others, the risks it involves are very probably over-rated – and
should at any rate be assessed in the light of the banking sector’s actual
performance record. With the exception of reputation risks (connected
with compliance risks), the risks mentioned above primarily entail a
high level of profit volatility – and yet rebound effects generally offset
the impact of bad years. First and foremost, even though social and
political instability is higher in Africa than in other regions of the
world, it rarely reaches the extremes of Liberia, Sierra Leone or Somalia
– situations in which the economy effectively collapses. A number of

A number of countries have experienced serious
disturbances in recent years, yet ultimately these
troubles have had little impact on the medium-term
profitability of their banking sectors.
countries have experienced serious disturbances in recent years, yet
ultimately these troubles have had little impact on the medium-term
profitability of their banking sectors (Table 1). The African financial
sector’s ability to bounce back shows that African economies are highly
resilient to this type of crisis: profits are volatile, but the rebound effects
compensate for periods of poor performance. The two most recent
examples in West Africa, Mali and Côte d’Ivoire, are telling. While

Côte d’Ivoire experienced serious troubles from December 2010 to
April 2011, preceded by a period of high uncertainty and followed by
a time of significant instability – including three months when banks
were closed – its banking sector broke even overall in 2010 and saw
a significant rebound effect in 2012, more than offsetting the poor
performances of 2011. Mali’s case illustrates this point even more
effectively: the main banks continued to record excellent levels of
profitability in 2012, during the year when the crisis reached its height.
With respect to the business environment, although this may be a
disincentive to investment, it cannot constitute a crucial barrier for an
investor. A sub-standard business environment tends to increase entry
costs and add inconvenience – especially in terms of bureaucratic red
tape – but is not liable to endanger the business as such. The higher
operating expenses incurred are easily offset by the margins achievable
in these markets (see box 1), as evidenced by African banks’ cost to
income ratios – which turn out to be only slightly higher than the
global average 1.

The very good levels of profitability achieved by the various
African banking sectors confirm the mismatch between the reality of
the risk and its perception, demonstrating that in all cases the profit
margins more than outweigh the risks incurred. Average return on
equity (ROE) in Africa was 19% for 2007–2010, compared with just
11% in Europe, despite the higher capitalisation levels of African
banks3. These profitability levels are among the highest in the world
(see figures 1 and 2). The African subsidiaries of the major banking
groups are often among the most profitable subsidiaries: some countries
– especially those that appear the most risky (Guinea, Madagascar,
Chad, etc.) – can deliver ROE in excess of 25–30% for several years
in a row. The same applies to the average return on assets (ROA)

Table 1 : Socio-political crises and banking sector profitability, 2007